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Good morning, ladies and gentlemen. Welcome to the Dream Unlimited Corp. Second Quarter 2019 Conference Call for Wednesday, August 14, 2019. 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.'s website at www.dream.ca. [Operator Instructions] . Your host for today will be Mr. Michael Cooper, CRO of Dream Unlimited Corp.; and Ms. Pauline Alimchandani, CFO of Dream Unlimited Corp. Mr. Cooper, please go ahead.
Thank you very much. Good morning, and welcome to the Dream Unlimited Second Quarter Conference Call. Today's call, I'm with Pauline Alimchandani, who's going to make the presentation. And when she's done, Pauline and I would be happy to answer questions. Pauline?
Thank you, Michael, and good morning. Overall, the first 6 months of 2019 have been a productive period for the company. At June 30, Dream's total equity on a stand-alone basis increased to $9.56 per share, up from $9.33 at December 31, 2018. A notable stat this quarter is that our reoccurring income business, comprised as stabilized income-generating assets and asset management, increased to 50% of our book equity per share. Our urban development segment, which includes our Toronto and Ottawa development assets, has increased to 10% from 8% since the beginning of the year. And our Western Canada community development segment declined to 40% from 45%, a trend that is expected to continue as we continued to repatriate capital from the division to reinvest in our assets in Toronto and within our reoccurring income segment. In the 6 months ended June 30, earnings before income taxes on a Dream standalone basis decreased to $38.3 million from $49.8 million in the prior year due to lower fair value adjustments on financial instruments of $2.1 million, a gain on disposition of an asset sold in Toronto in the prior period of $9.4 million, higher interest expense of $2.5 million, in addition to a onetime net gain of $12.6 million on the acquisition of Dream Alternative in the prior year period. These were partially offset by $3 million of increased earnings from our investment in Dream Office REIT and $8.1 million higher net margin generated from our operating segment. In the 6 months ended June 30, on a consolidated basis, the company recognized a loss before income taxes of $48.2 million compared to earnings before income taxes of $120.1 million in the prior year due to adjustments relating to the Dream Alternatives trust unit, partially offset by higher margin earned from our operating segment and increased equity earnings in Dream Office REIT. Within our reported consolidated results, Dream Alternative's trust unit held by other unitholders are treated as a liability on the statement of financial position of Dream, and accordingly, are fair valued each period under IFRS, generating losses as the trust unit price increases. Fair value losses on the Dream Alternative trust units were $85.9 million in the current period due to the unit price increasing from $6.24 at December 31, 2018, to $7.68 at June 30, 2019. This compares to losses of $34.4 million in the prior year due to the unit price increasing from $6.33 to $6.89 in the prior 6-month period. Results in the comparative prior period also included a onetime net gain on acquisition of control of Dream Alternative of $130 million. One of our primary objectives over the last few years has been to build a safer and more valuable company. In doing so, we have grown our pretax reoccurring income to almost $50 million year-to-date, which is up 14% over the prior year. Over the last few years, our asset management business has become more valuable through increased and diversified key streams. We have increased the quality of our land by owning significantly more in the best locations in Toronto, which is the driver of the Canadian economy. Arapahoe Basin has benefited financially from our capital investments, and its income is growing and non-correlated to any other of our development business line. Finally, we have received many approvals in Western Canada, which improves the value of our land while we wait for market conditions to once again support increased volumes. Our urban development investment in Toronto and Ottawa offer incredible opportunities. As of June 30, we had approximately 12,000 residential units and 3.6 million square feet of retail and commercial space in various stages of planning, predevelopment and construction. This included nearly 1,700 residential units and 0.5 million square feet of commercial space under development or having achieved a sales launch, with the remainder held in our future development pipeline. Of our condominium projects in our inventory, which have achieved market launches to date, approximately 99% of these units have been presold, including Riverside Square and Canary Block condominium. In addition, there are 750 purpose-built multi-residential units at Block 8 within the West Don Lands development, which we expect to construct beginning in the fourth quarter of 2019. Our pipeline includes future phases of the West Don Lands, Zibi, the Distillery District, Block 13 in the Canary District, and our recently approved and renamed Brightwater development in Port Credit, to name a few. We are committed to building the best communities, which will translate into increased value for shareholders over the long term. As we build rental and commercial properties within our communities that we intend to hold for the long term, our reoccurring income sources will continue to increase. As of June 30, Dream owned $536 million in the Dream Publicly Listed Funds inclusive of our units in Dream Office REIT, Dream Alternative and Dream Global, which accounted for over 65% of our market cap and generated over $11 million of distributions year-to-date. Although the environments in which our Land & Housing division operates experienced softer market conditions through 2018, which has continued through 2019, we have continued to generate solid earnings in Dream due to the strength of our other business lines. Given the diversification of our business, we expect income driven by Western Canada to represent a smaller proportion of our earnings and book value per share relative to our historical results. We expect 2019 will be the lowest level of earnings contribution to date for Western Canada within our financial results. We would expect this will once again increase when Providence comes online, which is currently expected to be 2021, although is subject to a number of different factors.In the near term, we have reduced our overhead cost and have minimal other carrying costs on our lands in Western Canada so that we are ready and able to act opportunistically as market conditions improve. On the vertical building side, we started our first 120-unit multifamily apartment building in Brighton this quarter, and we are seeing good value from building rental and commercial properties on our Western Canadian land. Since going public in 2013, our book equity per share has increased by a compound annual growth rate of 17%, which is quite positive considering the decline of activity in Western Canada and the growth in our other segments. I will now briefly review key results highlights by operating segment for the first 6 months ended. In the 6 months ended June 30, our stabilized income-generating assets reported NOI of $19 million, up $2.5 million from the prior year, driven by an increase in contribution from the recently expanded A-Basin and partially offset from lost income from our Obico property, which was expropriated last year. A-Basin has continued to grow in popularity over the last 15 years. Last ski year marked the first year we had over 500,000 ski year visits. This year, we surpassed 590,000 ski year days, driven by a nearly open ski area expansion and a favorable snow year. Our net operating income for the first half of the year was $13.5 million, which was a $3.5 million increase from last year. At June 30, A-Basin had a book value of $29.4 million at depreciated cost on our balance sheet, although we believe the fair value of this asset is significantly higher. In the 6 months ended June 30, our asset management division generated net margin of $16 million, up from $14.1 million in the prior year. The increase in net margin was driven by growth in fee-earning assets under management and transactional activity. In the 6 months ended, our share of equity income from our 24% investment in Dream Office REIT was $15.2 million, up from $12.2 million in the prior year. Dream Office REIT's net income was generated from rental income. It shares income from its investments in Dream Industrial REIT, and fair value increases to investment properties in Toronto, which was partially offset by interest expense and fair value losses on financial instruments. Year-to-date, the company's investment in Dream Office REIT generated cash distributions of $7.3 million.Within urban development, we had several notable accomplishments during and subsequent to the quarter. Year-to-date, we have incurred net losses of $1.2 million from our urban development division, which is really as a result of our fixed and operating cost, which were a par fit only by a limited number of activity in the period with only 49 condominium unit occupancies, which related primarily to Riverside Square. By the fourth quarter of '19, we expect 300 units that are shared to occupy primarily relating to Riverside Square and Canary block. While we do not generate much income from our urban development business year-to-date, the projects we have in our pipeline are advancing well and will generate meaningful profits and development management fees over the next 2 years. Our specific milestones this quarter included: Securing our first commercial tenant at Zibi, our 34-acre waterfront development across along the Ottawa River and Gatineau, Québec and Ottawa, Ontario with the federal government of Canada. The 15-year leases were approximately 155,000 square feet of office space located in the heart of the site with unparalleled views to Parliament Hill. In addition to this building, we have over 450,000 square feet of retail and commercial space in various planning and development stages at Zibi. We also reached an important financing milestone on the first block of our purpose-built rental community in the West Don Lands neighborhood in Toronto. Through CMHC's Rental Construction Financing initiative, the federal government announced the investment of $357 million at 100% for the first block slated for development, which will comprise of over 750 rental units, including 30% affordable. We also reached an agreement with the City of Mississauga to facilitate the advancement of municipal approvals for our newly named Brightwater development, formerly referred to as Port Credit, which is a significant milestone for the project. In Western Canada community development, we incurred negative net margin of $4.3 million with 87 lot sales and 52 housing occupancies year-to-date. This compared to negative net margin of $6.7 million in the prior year with 98 lot sales and 104 housing occupancies year-to-date. The decrease in negative net margin relative to the comparative period was really the result of lower overhead cost and higher cost recoveries achieved in 2019.In terms of our balance sheet, we had up to $127.7 million of undrawn credit availability on Dream's operating line and margin facilities. At the end of the quarter, our debt to growth -- our debt to total asset ratio on a Dream stand-alone basis was 36.2%, up from 34.9% at the beginning of the year. In the first 6 months of 2019, our debt ratio increased slightly due to $32 million of combined purchases of units in Dream Office REIT and Dream Alternatives and borrowings on our developments on a cost to complete basis. We anticipate to recycling capital with the sale of noncore assets that we will lower our debt ratios as debt is repaid with net proceeds. We are focused on maintaining our conservative debt position and have ample excess liquidity even before considering unencumbered or underlevered assets. In and subsequent to the 6 months ended June 30, 1.5 million subordinate voting shares were purchased for cancellation for 11.6 million under our normal-course issuer bid. Dividends of $5.3 million were declared and paid on our shares in the 6-month period.On the overall, it has been a productive first half of the year for Dream. Our book equity per share continues to increase. We have strong financial flexibility, which we expect to increase further once we execute our noncore assets sales, and we have increased our reoccurring income sources. Despite lower earnings in Western Canada, our business and balance sheet are in great shape. With that, I will now turn the call back over to Michael.
Thank you, Pauline. At this time, we'd be very happy to answer any of your questions.
[Operator Instructions] And we have our first question from Mark Rothschild with Canaccord.
Michael, one thing you've spoken about for a while is that even though the shares might be below net asset value, there's more important or other uses for cash flow, free cash flow that you would have, whether it be the balance sheet or other investment. Where do you feel that the company is right now in regards to your goals and in regards to the balance sheet as far as the consideration of being more active in buying back share?
Mark, that's a great question. I don't think I ever said what was important, not important. I think the issue's always been that we got to put our money where it's most significant over the longer term. And my view has been buying back stock is a significant part of our long-term plan, but we can do more or less at different times. So I think if we take a look at how we've gone from 2% ownership of Dream Office to 27%, or how we built up our business in downtown Toronto or what we've done in asset management with that and other things, I think, now, we're invested primarily where we want to be. And I think as we get cash, buying back stocks will be much more significant going forward. The only thing I would say is we're also very focused on making sure the company is very well-capitalized. So I think at this point, buying back stock is becoming a more significant use of capital, provided we've got the safety that we want.
Okay. Great. And any update on the Obico settlement? I know you said take it might take a while.
It's Obico, and it will take a while. We think that the luckiest we could be is to have some type of progress by 2021. So it's going to be a long time from now.
Okay, great. And just one last question. In regards to Providence, are you still optimistic that you're going to have lot sales next year? And to what extent can that grow in 2021?
Oh, I appreciate that question. Right now, what's been happening is that in order to start that development, there needs to be some water servicing provided by the City of Calgary. It looks like that's a few months delayed, so it will probably be into 2021 rather than the end of 2020 to start Providence. We don't view that as meaningful. It's just one of the obstacles along the way, but everything else is on track.
Our next question is from Sam Damiani with TD Securities.
Just over to A-Basin. So just to be clear, from looking at the MD&A, do you see NOI on this asset being up year-over-year on the next ski season with the Ikon Pass despite the budgeted decline in traffic?
Okay. Let me try to walk through this. We did a deal with Vail Resorts in 1997 where they basically received a commission for generating skiers for A-Basin. In 2000 -- in this current year, about 60% of the skiers came from Vail passes or lift tickets, and generally, those are very low yielding for us. So they're low-yielding, and they stress out the ski area on important days. And we've been trying to figure out how to manage this, so what we've done is we've ended the relationship with Vail. So no longer -- I mean, I think there's something like 25,000 free skier days for Vail employees. Like it's a massive -- they're so huge that they've overwhelmed our ski area. So what we've done is we no longer have unlimited passes of any kind from Vail. They're all gone. And instead, we're going to be promoting our own ski passes. And with Ikon, we've agreed to have up to 7 days of skiing for the expensive pass, and 5 days with the basic pass that are restricted. And what I was trying to say in the press release, it may not have been clear, is we're projecting 25% less skiers, but with the increase in yield, we expect a significant increase in profit.
Okay. That's clear. It was clear from the press release, it was just fiscal 2019, so half of the last season, half of the new season go forward. Okay.
That's a good point because ski people measure it from like August 30 to August 30, so we do go back and forth. But the fourth quarter is pretty small, the contribution. So even though on a fiscal basis, it will be -- it should be much improved next year.
Fantastic. And on net asset, I mean, I don't know when the last time you got an appraisal on it, or for some reason, had to put some debt on it or whatever. Is there any indication third-party indication of value of it? And also, what is the undepreciated cost if that's something you'd be willing to disclose?
Now the book value is something like $27 million or $28 million, I think. What do you mean by undepreciated cost? Are you saying what our total cost is?
Yes. If you booked depreciation over the years, what's your gross cost...
We buy snowcats every year. We buy one a year, and they get depreciated over 4 years. So I'm not sure to how meaningful a number it is. It's not really like a building. I'm not sure. We probably depreciated $20 million of value over that time.
And has there been an appraisal? Or would you consider getting an appraisal? Just could you provide any...
Oh, no, we're pretty confident we know the value. We don't need an appraiser to tell us. I think that what you're seeing now with the way the industry is -- well, actually, Vail just bought a ski group. I think it's called Peaks or something like that. And it was announced in the last 60 days. I think that was 9 or 10x EBITDA. But if you take a look, there's some issues there. Generally, the low end is 9 or 10x. And above 15 is rare, so it's sometime between -- probably between 10 and 15 is reasonable for a ski area.
And what was the last 12 months for A-Basin?
Pauline?
So we had $13.5 million year-to-date. I suspect that we -- third quarter is always a loss for us. And then with the fourth quarter in the new pass, it's a little hard to forecast. But I would say probably by the end of the year, we'll be up slightly from where we are year-to-date, if that helps.
That's very helpful. Just moving over to Toronto. What would be the next condo project that will be launched in terms of sales? And when do you think that will take place?
We've launched most of them. Right now, we're looking at doing apartments. We've got 31A Parliament. What we want to do is an apartment that could start next year. Block 13, we haven't decided if it's a condo or an apartment. But most of the apartment -- most of the condos that are ready to go, we've already sold. I can't think of which one is upcoming. Mirvish, we're still working on, but that's -- I'm not sure the date on that. Mirvish is probably the next -- most likely one.
Mirvish. That's, would you say a year or 2 out?
Yes.
Just switching over to the management contracts. You've enhanced the disclosure a little bit to clarified it whatever on the incentive fee for global and industrial. Just wondering if you -- I guess, give us an indication as to what the rationale for that enhanced disclosure was? Should we take it as some sort of an indication of a desire to potentially terminate the contracts at the expiry?
No. I mean, to be totally honest, in global, it was a bit confusing. I wasn't -- I didn't realize that management income paid from properties that are co-owned with [ Polba ] went to the related party note. And it made it harder than I thought to identify what the original cost was of the assets. It's not an issue in industrial. It's an issue in global. So that came up late last year. We've been talking about it since. So it wasn't actually easy to calculate it, so we thought we would put it in. I actually assumed that it was easy to calculate, but that was an error.
Okay. My last question...
Sorry, Sam, I'm not sure if I'm clear with you. When [ Polba ] pays Dream any fees, it's in a related party disclosure under Dream Global. And I haven't realized that the related party disclosure included amounts from a separate third party. As a result of that, it made it hard to use that as the metric to determine what the asset cost was. So we realized that, and then we started looking, say, you know what, we should come out and say precisely what it is, so it was easy for people to understand.
Clear. So last question just on Western Canada, the lot sales were basically flat year-over-year. Is that the new up? Are you a little bit more constructive about the outlook for Western Canada from current sales volumes?
There's a lot of different moving parts out there. I think that the economies have been pretty stubbornly difficult. I think we're seeing a little bit of decline in standing inventory, which is positive. The stress test are hurting. So we're not quite confident as to exactly what normal is right now. Overall, they're doing okay. The provinces -- housing's been hurt bad. And our expectation is it'll pick up, we just aren't expecting to pick up in 2019 or 2020. So that may be a yes. It might be yes for your question of is this the new up.
Okay, exactly. And is the cost structure at -- within the company out west, is it changing at all? Or have you done -- have you finished making changes to the cost structure on the development side out west?
Pauline, do you want to address that?
So yes, I think that we went through some changes earlier this year. The full impact of that won't be seen until 2020. But the overall overhead cost on an annual basis have declined by about $10 million.
[Operator Instructions] Our next question comes from Brett Reiss with Janney Montgomery Scott.
Yes, it's basically almost a follow-up from Sam. Do you have any employment growth metrics over the next 5 years in the Western cities where you have the bulk of your permitted housing lots?
You mean anybody's forecast on what growth is expected to be?
Right. Right. Because if growth -- employment goes up, people have to live somewhere. I guess the next 2 years, it doesn't look too good. But is there any visibility beyond 2 years?
Look, I mean, people do their numbers, and they generally revert to the mean. This has been a pretty protracted period of low economic activity in Western Canada. Personally, I use -- all 5 of the banks put out provincial forecast, and they're available to anybody who goes on to their website. In addition to that, the CMHC had some forecast. They generally only go 2 or 3 years. But even if you look at those, you'll see that, generally, they're positive, although there's a couple of outliers who are quite negative. But net-net, the consensus is that it is improving out west. But the consensus have been wrong for 5 of the last 6 years.
Okay. With respect to the presold condo units in Toronto, is it similar in the states? People will put down a downpayment? And if so, like what percent of the purchase price is it?
The downpayment ranges from 15% to 25%. It's not like the states. In Canada, the person who signed is liable to close. In the U.S., like in Colorado and California, they can just walk from it. But generally, in the United States, if people don't pay anything more than their deposit, they can walk. In Canada, they're responsible. We have very, very low levels of people that aren't able to close or won't close.
Okay. But just in case winter comes to the Toronto condo market, is it because of what you just described? If a buyer does walk, he's got about a 15% to 25% cushion on a markdown of the price because you keep the downpayment?
Number one, that's true. Number two, it would be more than that, because generally, condos are worth more than when we sold them. So I think that there's quite a good cushion. The thing that we really look at is what's the values of rental property, whether that's an individual property that somebody's renting out at $4.50 a square foot, or a whole building. And the rental property values are another way of confirming that the underlying value is pretty good even if somebody doesn't close.
When you look at the rental value versus the market values of your 12,000 units, how does that look?
We think that rentals are very, very competitive with condos. With the condo, you might make a little bit more money in the -- during the construction period. But with the apartments, it looks very desirable for the increasing returns over time. As rents go up like 2% or 3% and you've got decent financing on it, you get decent growth and you're building to a number that is higher than the interest rate. So you get a decent cash return plus growth, and they look pretty attractive.
Right. If things continue to heat up between the United States and China on the trade war, is the pricing of Toronto condos dependent on Chinese capital flowing into that market?
No, the Chinese capital's produced almost 0, number one. Number two, and I just want to read the news. Prior to 1997, when Hong Kong became under Chinese rule, prices in Vancouver went up a lot. I think that we could see -- even though the 15% tax in Ontario and BC for foreigners buying places, I think we could see some significant new demand out of Hong Kong over the next few years. I would say China is probably net positive for Toronto real estate. I think it's a big concern more for agriculture and other industries, but I think you'll see people who leaving China coming to Toronto.
And thank you. I have no further questions in queue. Mr. Cooper, do you have closing remarks?
Yes, I do. I'd like to thank everybody for their continued support of the company, or at least continued interest. We're quite excited about the changes that we're making and quite excited about the future. So please follow up with Pauline and I if you have any further questions, and we look forward to speaking with you all soon. Thank you very much.
And thank you, ladies and gentlemen. This concludes today's conference. We thank you for participating. You may now disconnect.