© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good afternoon, ladies and gentlemen. Welcome to the Dream Unlimited Corp. Third quarter 2018 Conference Call for Wednesday, November 14, 2018. During this call, management of Dream Unlimited Corp. will 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. Mr. Cooper, please go ahead.
Thank you. I like to welcome everybody to our third quarter conference call. Today I'm with Pauline Alimchandani, our CFO, who will speak to our financial results. After Pauline, I'll outline the operating and value proposition of our business. Pauline?
Thank you, Michael. On a standalone basis, in the 3 months ended September 30, we generated earnings of $13.6 million down from $19.2 million in the prior year. The decrease was primarily due to lower contribution from our Western Canada Land & Housing division offset by higher earnings from our investment in Dream Office and the fair value gain associated with the Obico expropriation. As part of our business planning exercise, which we undertake at this time annually, we have updated our 2018 reforecast and anticipate generating pretax income of just over $100 million on a standalone basis. Overall, we consider this to be a solid result considering our reduced Land & Housing margin and having almost no condos in occupancy this year. We continue to generate solid earnings from our reoccurring income assets. All else equal, we view our business to be more valuable today than when we went public in 2013, despite our lower earnings from Western Canada as a result of owning more highly sought after reoccurring income assets and an irreplaceable development portfolio in Toronto. In terms of overview by division. From our asset management division, total fees earned from the Dream Publicly Listed Funds were $27.1 million year-to-date, fairly stable to $27.8 million in the prior year. The slight year-over-year decrease was due to lower acquisition activity in the period offset by an increase in base fee earning asset as in the prior year Dream Global completed the $900 million investment in the Merin portfolio in the Netherlands. On a year-to-date basis, net margin from asset management was $22.5 million, a decrease of $6.8 million due to development fees that were earned in the prior year that were not reoccurring to the same magnitude in the current period. On the overall, our asset management business continues to generate solid income for our business and we believe there is a very high multiple attached to the quality of earnings generated from this business. In the third quarter, Dream Office generated net income of $41.4 million or $8.5 million at Dream share. This quarter, Dream Office successfully secured a 15-year lease at 357 Bay Street in Toronto with WeWork. 357 Bay Street will be the first property that is entirely dedicated to WeWork in Canada and will serve as their headquarters and national flagship location. At the end of the quarter, we had over $500 million invested in the Dream Publicly Listed Funds representing roughly 55% of Dreams total market cap. Year-to-date, we have received $14.9 million in distributions on our collected investments in Dream Office, Dream Alternatives and Dream Global. We have purchased $75.3 million in Dream Office, and $12.2 million of Dream Alternatives units year-to-date. Moving to urban development. Our Toronto and Ottawa urban development division generated negative net margin in the third quarter. We anticipated marginal income from this division in 2018, as we have limited inventory available for occupancy. Our only condo project to occupy this year, O, the first building at Zibi in Ottawa, is on track to commence occupancies by mid-November and is comprised of 71 units. Our income properties generated $1.8 million of NOI in the third quarter, in line with the prior year. Upon the expropriation of Obico, which happened during the quarter, any operating income from this site was classified within investments and other income. Year-to-date, we have incurred approximately $37.5 million of development spend on our condo and mixed-use projects, all of which is project financed. The majority of this spend relates to Riverside Square, which is 912 units and Canary Block 16, 187 units, which will occupy in 2019 and are 99% presold. At September 30, our condo projects consisted of 1,700 condominium units or 751 units that are share in various stages of preconstruction or active construction. Approximately 97% of these projects are either sold or presold. In addition to these projects, we have an additional 10,000 condominium or multi-family units and 3 million square feet of retail and commercial space in our development pipeline, of which 4,800 units and 2.1 million square feet are at Dream's share. Our pipeline includes the following projects: West Don Lands, future phases Zibi, 31A Parliament in the Distillery District, Block 13 in the Canary District, Port Credit and the Frank Gehry designed Mirvish-King West development, all of which are currently in active planning stages. With respect to Obico, in the 3 months ended September 30, we received a notice of expropriation from the city of Toronto for our 73-acre commercial site and accordingly ownership of the property was deemed to be passed to the city of Toronto. Last Friday, the company received an offer of compensation from the city in amount of $48 million in respect of the site pursuant to Section 25 of the Expropriations Act. The company has accepted the consideration in order to repay the outstanding first mortgage obligation of $21.9 million, but we have the right to claim additional compensation as provided for under the act. Based on the consideration offered, we recorded a fair value gain of $7.6 million in the statement of earnings for the 3 and 9 months ended September 30, and a receivable for the proceeds owing. We intend to pursue a higher amount of compensation under the act in respect of Obico. At the point of final settlement, for which the timing and outcome are uncertain, we may record additional gain in the statement of earnings. Moving to Western Canada. Overall, net margin from our Western Canadian development divisions, which are inclusive of lands, housing and retail and commercial development generated net margin of $0.8 million, a decrease of $13 million from the prior year. The decrease was primarily due to the reduction in lot and housing occupancies in the current year offset by $0.4 million increase in the NOI generated from our income-producing properties as they approach stabilization. With continued challenging market conditions in Western Canada, and increased pressure from government policies, we are closely monitoring customer demand, pricing trends and inventory supply across the division. We are seeing slower absorption rates and have adjusted our sales expectations for 2018 accordingly. We continue to secure presale commitments ahead of commencing any new developments. As of today, assuming no material change in market conditions, we expect our earnings from the Land & Housing division to increase once again come 2020, as we commence earning income from landfills in Providence, our most valuable land position in Western Canada. Dream shares CMC's -- CMHC view that the Saskatoon, Regina and Calgary markets will recover more meaningfully over the next 2 years. Even so we expect a proportion of income driven by Western Canada to decrease over time due to the increased diversification of our business and growth in recurring income generating assets. Our most significant recurring income assets are our positions in the Dream REITs, our asset management contracts and our income-producing properties. Our recurring business more than supports all the costs of our operating platform. With respect to land, year-to-date, we have incurred negative net margin in the land division compared to a profit of $12.5 million in the prior year due to lower volumes. Year-to-date, the housing division has realized losses of $4.3 million as fixed overhead was not absorbed by the level of housing occupancies in the period. We currently expect to achieve approximately 740 lot sales and 20 acres sales in 2018, a change from prior guidance of 880 to 920 lot sales and 10 acre sales. The decrease in lot sales guidance is due to slower market conditions, primarily in Saskatchewan, however, our revenue or fund increased acre sales is expected to provide a positive offset. In 2018, we expect to generate between $20 million to $25 million of net margin from our combined Land & Housing operations. Year-to-date, we have utilized $13.8 million of capital to repurchase shares under our NCIB at an average price of $8.57 per share. We continue to see good value in repurchasing our own shares with available capital, maintaining our strong liquidity position and financial flexibility and continue to be active in the market. At the end of the quarter, we had up to $166.6 million of undrawn credit capacity compared to $133.1 million last quarter and $123.1 million at the start of the year. We expect our liquidity position to further increase at year-end as the majority of our lot sales and activity is expected to occur in the fourth quarter, and we expect to receive the cash consideration related to Obico. All in all, we feel good about the diversity of our business and how we are managing our balance sheet and liquidity as our results this quarter show the impact of our capital repositioning from Western Canada to Toronto, and to stable less resource intensive income generating assets. That being said, we are currently in the planning stages for Providence to come online in 2020, at which point we expect our Land & Housing margin to once again become a more significant contributor to our business. I will now turn the call back over to Michael.
Thanks, Pauline. Now we're right in the vortex of a large shift in our company and an even bigger shift in our operating environment. From a high level, I think that generally prime real estate is becoming more valuable and everybody wants to own or use prime real estate. As values have increased and everyone wants the same thing, there is tremendous pressure to reduce the cost by using less space for every activity and increase the quality, whether it is office space per person, turnover industrial buildings or smaller homes and condominiums. As a result, greenfield developments have much increased density or put another way, for any given amount of people that will live in our developments, less land is required. People have rented apartments, live in condos, town houses and small single-family homes. The community retail center will be smaller, with the same acres but smaller CRU tenants than they used to have. Small amounts of office space and commercial space will be included in the communities. 20 years ago, 10,000 people needed about 800 acres to create a community. Today we wouldn't even use half of that. We're seeing the tenants in office space using less space per person, but want better buildings with better amenities, and unlike a few years ago, tenants are actually willing to pay so that their employees have a good experience. In the urban centers, real estate is still valuable, developments are mixed use to capitalize from a highest value of every possible square foot. Last week CMHC produced our housing starts for the first 10 months of the year. In total, starts are down 3% nationwide with multifamily actually increasing over the prior year. However, single-detached housing following a decade old trend were 14% down, which is the lowest level since the global financial crisis. Detached housing makes up only 25% of our nationwide starts. Over the last 3 years, we've made substantial changes to the composition of our business. We have more recurring revenue derived from management contracts, we have $500 million of shares with public companies, with A-Basin, a renewable energy, the Distillery and other income properties. In my view, these assets are worth about $1.4 billion on their own, not including any development assets. The public stocks include our share of Dream Office, which on a consolidated basis is about $700 million of office properties, primarily superb properties in the downtown core. In addition to building and acquiring interest in income properties, we've grown the value of our operating assets, including asset management segment from growth and managed entities, and even more so from earning fees from developing buildings. We anticipate future growth in our asset management business from these development fees. We have also invested significantly in land in downtown Toronto. Over the last couple of years, construction costs and development charges have increased very rapidly. Yet land prices are at an all-time high. The reasoning is that condo prices have escalated quickly, so has office rents. All of our land in Toronto, which is a lot, has increased in value. We have a 500,000 square feet in the Canary District, 335,000 square feet in the Distillery, 500,000 in West Don Lands, 500,000 at our site adjacent to Sidewalk Labs and the water, another 400,000 -- 450,000 square feet at Gary among many others. These lands are all irreplaceable and very valuable. We believe that we will create very profitable mixed-use developments that will include in all or in part retail commercial condos and purposed-built rental, which will contribute to our recurring income. The distillery continues to improve. We own a 50% interest in the 400 square foot property. We have recently achieved our approval to expand the distillery onto our site at 31 Parliament -- 31A Parliament. The commercial component is 300,000 square feet, which will increase the Distillery by 75%. This component includes 240,000 square feet of office and about 60,000 square feet of retail. We have entered into a 100,000 square-foot lease with an office tenant and working on a couple more, which will bring us to 75% preleased. In addition to the commercial space, we have approved to build a 49 story residential building on top of the commercial, which will commence in a couple of years. Among other developments, we are pleased with the progress of the Zibi project and National Capital Region. We have our first residents moving in, we have a contract with the first our commercial tenant, which is 60,000 square-foot office use. By next year we will have many of the public parks and squares open and we will introduce the project to the community. With 2,500 residential units and 1.2 million square feet of income properties, we will create a very valuable and desired community in which we will own assets that generate recurring income. Over the last few years, every level of government has introduced legislations that makes it more difficult for the middle class to own their own homes. As said earlier, single-family homes are now at 25% of all new homes. With massive increases in developmental charges, land transfer tax, the cost of homes has increased. In addition, the federal government introduced stress tests in the beginning of the year to make sure that homeowners have an adequate cushion to manage increasing interest rates. However, with rates increasing and returning to more normal rates, this cushion still remains and has made it impossible for normal people to qualify for mortgages. This is another factors leading to smaller homes and condos. With immigration increasing, the need for places for people to live is growing and the ability for people to afford purchasing places is declining. This leads a significant increase in the need for rental housing. In 2019, we'll begin construction of 3 rental projects. The first 750 units in the West Don Lands in Downtown Toronto, about 120 units in Zibi and a similar sized building in Saskatoon, our second apartment building and our successful Brighton community. Based on our progress of these projects, if they go well, we have land to grow purpose-built rental almost infinitely. Western Canada's weakened recently, in Saskatchewan we have to deal with dramatically increased levies: a new sales tax, which adds 3% to the purchased price of a new home, which is the first you cannot cover; and of course the stress test that very few buyers can pass. As a result, single-family homes in our markets are down this year. Year-to-date, single-family homes are down in Edmonton by 3%, 11% in Calgary, 33% in Saskatchewan and 48% Regina. Multiple starts are a random story with Calgary increasing 12%, Saskatchewan increasing 27%, Edmonton down 23%, and Regina down 34%. What this means is that a measurement of our success, based on measuring single-family lots sold, is no longer a meaningful measurement. Multifamily retail commercial and everything else is sold by parcels of acres. We are seeing more demand for parcels and less for single-family lots as a function that changes the market dynamics. We are working on our strategic business plan as Pauline had said, which will provide further info -- which will provide us the ability to give further info on our year-end call. One of the things we're looking at is how to more clearly measure our success or lack of. We are considering metrics to show how much profit we are generating per acre and how many acres we are using, and a lot less focus on lots or other types of use, just how many acres and how much profit. Hopefully, we'll be able to drive more meaningful metrics for 2019. In Western Canada, we have had success developing over 500,000 square feet of retail development on our lands. We're already over 90% leased. We will be introducing new projects as the current projects are completed. These projects help us use up land and also make each development profit. As mentioned above, we're starting our second apartment building in Saskatchewan and Brighton. In 2019, we hope that we will have similar success building apartments as we have had with building out retail developments. We've been trying to achieve approval of our Providence land since 1997. We finally did it in 2018. The CMHC statistics referred to above show that Calgary is the only market with increase housing starts this year in Western Canada, and our land is exceptional so we expect very strong profits once we start. The Ring Road is under construction 24 hours a day and will open in October 2020. We decided that we cannot properly introduce the development until the Ring Road's complete. Once Ring Road is complete, we can have our creative homes ready to day they cut the ribbon on the highway and on people's first drive on the new road, they could take the Cloverleaf exit right into our development and see our creative homes. We have also received approval for Coopertown this year, and we're expecting many more approvals over the next 9 months. Even though the market is slow, these approvals are very meaningful because it allows to start new developments whenever we think the conditions are right. They also add value to our lands. Over the last couple of years, most of our holdings have been successful attaining some levels of approvals. To sum up, conditions are weak in the Prairies and it's hurting our profitability. We have very good lands, and we are progressing with approvals. Providence will contribute to our profitability quickly, while we may delay investing in other communities where we already have land under development. We will continue to increase our development activities of retail and purpose-built rental, to add profit to our acreage developed and increase our safe recurring income. We have made serious changes to how we manage in Western Canada over the last 3 years. Between 2013 and 2015, we were net investors in Western Canada to the tune about -- of about $42 million in total. That means taking into account all of our serving -- servicing, acquisition of lands, less our collection and the capital. We will pay credit through development of income properties. We invested net $42 million more in Western Canada. However, between 2016 and the end of this year, we expect to have generated about $140 million of free cash flow or conversion development land into income properties in cash over those 3 years. Between 2013 and the end of 2015, with a book value of our land by $150 million to $600 million -- by about $150 million to a total of $600 million. In the last 3 years, we have reduced the book value of our land to about $575 billion, but we've also been able to repatriate 25% of the book value of all of our lands in cash. We will continue to manage our Western Canadian lands to produce cash for other investments. Over the last 3 years, we have taken cash from Western Canada and acquired Dream Office, which -- Office units, which are basically office building in downtown Toronto, which have lots of upside, and we have acquired prime development land in the core of Toronto, that has also gone up in value and will result in further profits, either in cash or recurring income as we develop. I hope that this provides the backdrop to understand the changes that we're making in the business that is leading to the ownership of higher-quality assets and a higher percentage of income-producing assets. We'll have more information in February once our -- the board approves our plan for the future. And now we would be very happy to answer your questions.
[Operator Instructions] And our first question is from Dean Wilkinson of CIBC World Markets.
On the relative discount for Dream in terms of book value and more importantly, NAV versus where you're seeing, say, Dream Office and the alternatives fund, would you have a higher propensity to increase the share buybacks at Dream proper right now? Or how you're thinking about that?
Propensity? I've never had a propensity.
Desire to do so.
Thank you. You know what we bought $200 million worth of Dream Office instead of buying back stock. And as a result of buying $200 million of stock with $100 million of debt on it, we made a 30% return on the capital plus we made income, and we think there's a lot more money to make. If we were to buy back stock, we would own a lot more Western Canada that's producing half the profits that it would have 3 years ago. So look, I mean, look I'm not a big believer. We bought Dream Office, we bought back a lot of stock, we made a fortune. We're more focused on the liquidity at Dream Unlimited, and we're more focused on having the right asset mix and we've got all the time in the world to buy back stock. Having said that, I think we bought back about 1.6 million of shares this year, and we'll continue to buy back stock like we always have. But we're not selling off good assets to own -- look we're not going to sell off an income-producing property that we think will just be good for 10 years to buy more of something that is transactional.
No, fair enough, that makes sense. Do you have an upper boundary of which you're comfortable going in the ownership of both Dream Office and Alternatives?
I think that's because we're so involved in Dream Alternatives we wanted to own a lot. And we'll probably increase it a bit, but we're not pushing that. On Dream Office, we're pretty much own 25% now, and we're happy with that. That's an important part of our future. I think Dream Unlimited could buy a few shares. They've reduced most of the stock that they were going to buy, so I think we'll own a little bit more in the future, they'll have a little less shares outstanding, but I don't think it's going to change dramatically.
Okay, that's good. And Pauline, you've said $100 million pretax income at the Dream standalone level. What do you think the effective tax rate you're going to be looking at for this year is going to be?
I wouldn't say it would be anything but normal. I would use the regular corporate tax rate.
Regular corporate tax rate?
Of 26%.
26%.
Yes, 26%, yes. Some of the taxes may be deferred on some of the gains, but I think a safe assumption is to use the corporate tax rate.
Perfect. And then just on the Obico property. Is that the land that they took for the line 2 extension for the LRT?
Yes -- no, it's for the yards of service, the line 2, the Bloor-Danforth trains. They need to get trains there that have the air conditioning.
The trains, okay. And how does that process -- like they just came and just said here $650,000 change in acre...
Well, basically what they do is they take your land and they say, screw off. They just screw you. Okay, so that's what they do. So they're in the process of doing that now. Let me give an example, if we wanted to buy this land from them, there is no way they would sell it to us for less than $200 million. So there you go. So throughout what happens is, we will bring all the horses and all the men to fight them and get the best price we can. I feel really bad for all the people in Edmonton who have been screwed over by these guys, but this is what they do. So like it's really a joke because if you're in Milton or Georgetown or somewhere else in this Greater Toronto Area, it's going to cost you $500,000 to $600,000 to pay development charges on a piece of industrial land. This is 73 acres of industrial land they are saying it's worth $600,000. Think about this, there is no development charges for industrial in Toronto. So if you compare this land from Milton and you got the land in Milton for free, it's the same price as this this. There you go, boom.
Yes, no, no, the number I just -- I had to to read it 3 times to make sure I got that right. Like $650,000 an acre is -- if it had another 0 behind it, I would have said, oh, that's okay, but so...
Yes, everything that's in the world [indiscernible].
I guess this is just a negotiated process.
It's not a negotiated process. They don't negotiate and they do whatever they want to do. Then they say, "do you have the courage to take us on?"
So how will -- how long does that -- could that just go on indefinitely and it's -- you just -- it's the old Boston College Hail Mary, we'll get what we get out of it and just...
We are not putting a number in our balance sheet if that's what you're asking. Look the process is, they took our land on August 10, they gave us an offer last Thursday. You have 2 choices, you can accept the cash in full for the land or you can take the cash and disagree with them. They will pay our cost to disagree with them, we now put together numbers that are different than theirs and then there might be some talking, it might go -- then it can go to mediation, then it can go to a government body and I think it could be sued from them, so we're working through. But that -- how long it could be? It could be a year, it could be 6 years.
Our next question is from Mark Rothschild of Canaccord.
In regards to Providence, sounds like there's some good progress there. And you mentioned, 2020 is the year where you expect to have some lot sales. Is that something that you have material confidence in? And is it possible to give some indication based on the plans you have now, what extent the lot sales be over the first couple of years and what should we expect to see happen in 2020?
So firstly the land is approved and we could start it for next year, but we went there to take a look at it, and with all the construction that's going on, you really can't get to the lands. So we didn't there was a way to really show it to anybody. So we're just deferring it for a year. So what we would plan on doing is, we would plan on doing some more work next year, selling in the spring of 2020, so that the builders could have show homes ready before the road opens. I think we're looking at something like 150 homes -- lots a year in the first year.
And would that ramp-up from there? Or is that the pace you'd expect for the first few years?
No, it will ramp-up. Everything is -- yes, let's see, I'm just looking now, yes we'd be at 400 within 18 months by 2022, but it's pretty hard in this environment to predict but that's the goal.
I understand. And then with regards to A-Basin, and obviously, you're doing some expansion there. To what extent was this quarter impacted by -- I know there's some seasonality as well, but is it somewhat off -- is part of it off-line because of the work they're doing? And just want to understand where we should look at and maybe think about as we head into next year?
So the 3rd quarter is June 30 to September 30, it's the only quarter where we're not open at all. I think I'm not even sure how it went. I don't even pay attention to it because it's not indicative of anything. But it's reasonable that we would've had more expenses because if we had more people working to get the new terrain open. So the helicopters flew in, the towers and we towed a 20,000 ton building up to the top like it took a lot of effort, but it's all ready to go, we got our approvals on the lift and soon as we have the snow for the beavers, we're going to be able to open it up, and it looks great. So was that complete answer?
It was as complete as I was going to get.
Well, I mean...
I'll give you. What do you want?
No, that's good. I'm just joking.
So I just want to point out, Mark, that if you look at net operating income it's up, the net margin does include depreciation, so as we spend capital that includes some noncash expenses in there. So I would focus on the NOI line item for performance.
[Operator Instructions] Our next question is from Sam Damiani of TD Securities.
So just first one for you. So guidance for net margin to $20 to $25 million in the Land & Housing business, does that compare to the $60 million that was achieved in 2017? To make sure...
2017 actual they had just over $50 million. That's -- yes, so that would be about half of 2017.
Right, okay. And for 2019, is there any outlook you have in terms of lot sales at this point?
I think that what we found this year -- so what happened was we kind of hit 500 housing lot sales in 2015, 2016, 2017, got better our expectation was that 2018 was going to get better still, and what we saw with these stress tests was it just slowed to a grind. So what does it mean -- what that means is -- sorry, and our view wasn't distinct, everybody else share the same view. So what it means is, all the people we deal didn't use up all of the lots they expected to use in 2018. So we go to 2019, they have to use up some lots before the buy more. That's not quite true in Brighton, but in most of markets that's the case. So it's a pretty fickle environment, but based on what we are seeing, it should be a little lighter next year in lots. Although this year we're doing pretty good on parcels, and we'll see if you come up with some good ideas for parcels next year as well.
And I noticed there is a -- I think $66 million of assets held for sale. What exactly is that?
That's our Tamarack retail office in Edmonton.
And what stage is that sale process at right now?
We are in the LOI stage.
Good. So just back to the lots, sorry, I noticed the sales price average -- sales price was down a bit in Q3. Just curious if that is around market forces or purely result of the mix?
I -- we haven't sold very many lots year-to-date, but I would think it's just more lot mix as opposed to anything related to market and what we've sold year-to-date.
Last one for me. I noticed that fee earning assets went up by above $300 million quarter-over-quarter. I'm just curious if you could shed some light on what was behind that.
It was global and industrial purchases.
And our next question is from Greg Reiss (sic) [ Brett Reiss ] of Janney Montgomery Scott.
The stress test, is there any political pressure you see building to roll those back since it sounds like they're very draconian?
So the way the stress test works is, their view was there was artificially low interest rates. So people may be able to afford -- maybe buying houses they couldn't afford in normal times. So the way they did it was, they said if you borrow money on your mortgage, they'll add 200 basis points to correct for that. We've had a number of increases in interest rates but they haven't reduced the cushion as we get more to normal. So that's made it really tough. The other thing that's happened is, the market that had issues were like Vancouver and Toronto, and these stress tests are national. So the markets that we're in have very affordable housing, I don't think there's much of an issue, but they've got caught up in it. I think there is political pressure and I think it's really affecting municipal government's revenue in terms of levies and land transfer tax and I think people are getting frustrated. But it would have made sense to me if they would've said, if the current rate is 20 basis points below normal as they raise rates they would reduce this cushion and if they raise rates 200 basis points it would disappear. But they didn't do that and I think that as rates come up that's going to be worse and worse. I mean they should change it, it makes no sense.
Right, right. Now on the expropriated property. The money that is due you, you're able to get it and use it, you don't have to hold it in escrow pending the other remedies in the legal system you choose to pursue?
No, we get to use all of that little bit of money.
Okay. I'm sure there are other examples of this happening. Your desire to get greater compensation, is it a even playing field or you're, kind of, paddling the canoe upstream on additional compensation?
No, no. It's -- the way the laws work is that if the government needs something for better good and a private citizen is deprived of ownership, the laws are pretty favorable for the owner and I would say that expropriations used to be much more sensitive to the fact that a private group lost something for the public good. I think at this stage, we're seeing, what I would like to call, it's kind of like a mean spiritedness within the city bureaucrats. So the laws are still positive for the person who loses the property. It's just -- it's very difficult to actually do it without a third-party intervening -- helping. So we think we'll do fine.
And we do have a question from Sam Damiani of TD Securities.
Some sort of -- just asked, but just wanted to know have you seen any precedent of the City of Toronto taking this kind of tactic with an expropriation before?
Yes. I was with somebody who said on average -- and don't quote me, this was somebody else saying it, that they start at 1/3 of the value. But that's only -- that was somebody who's been involved in a lot, that's their typical way, but I don't know what that means. I just think that what it -- so look here is the point. The point is that somebody's running a business or somebody has a house or we have a piece of land, I do not believe that the city tries to compensate you because it's the right thing to do. I think what they try to do is see if they can take your land for much less than it's worth. So it's very typical to have to go through many, many stages and time to get what's rightfully yours.
And we have no further questions.
I'd like to thank everybody for listening in, and I think we have a lot more for you in the new year. So thanks a lot. We look forward to chatting. Thank you.
Thank you, and thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.