DREAM Unlimited Corp
TSX:DRM
Earnings Call Analysis
Q3-2023 Analysis
DREAM Unlimited Corp
Dream Unlimited Corp has reported a solid improvement in their recurring income segment, with revenue and net operating income capturing $44 million and $13 million, marking an upswing from the previous year's figures. This growth has been largely fueled by the company's strategic move to bolster its asset management platform, which has proven effective with year-to-date revenues and operating income climbing by $30 million and $10 million respectively.
Revenue attributed to asset management and development contracts showed a notable jump to $47 million from $36 million in the past year, prompting expectations from management for these figures to continue their upward trajectory as they pursue new opportunities in this area.
The Development segment has been particularly robust, securing $89 million in revenue along with a $16 million net margin, which significantly supersedes last year's results by $68 million and $18 million correspondingly. The uptick was driven by Western Canada's dynamic sales, totaling 400 lost sales in the third quarter. Future commitments indicate a promising pipeline with prospective revenue pegged at $117 million.
Despite positive notes in revenue, adjusted earnings before income taxes reveals a stark decline to $4 million for the quarter with a substantial $67 million decrease when measured against the same period from the previous year. This contraction has been attributed to several factors, including fair value losses on investment properties, increased interest expenses on variable rate debt, and occupancy metrics from the prior year at Canary Commons.
Dream Unlimited is adapting its business model, pivoting away from the volatile single-family market by selling more to institutions like schools and utilities, and amplifying its construction of rental units to leverage favorable returns. The company is capitalizing on the current debt market conditions, where they can borrow at potentially low-interest rates of 4.5, thus maximizing their rental income growth and returns.
This year has seen a significant expansion in Dream Unlimited's asset management business, with efforts underway to grow it even further. The company has engaged with global institutional clients but notes a temporary freeze in capital availability for new ventures. Nonetheless, there are optimistic signs for this groundwork translating into solid deals in 2024.
Urban development strategies, particularly in Toronto, face uncertainties due to spiraling construction costs and fluctuating interest rates. The company acknowledges a 'patchy' condo market and states that about half of their planned projects have started, with a watchful approach towards project viability and cost efficiency. Moreover, they are intent on devising strategies to lower capital expenditures and leasing costs for a sustainable business model, even amidst challenging times.
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Welcome to the Dream Unlimited Corp third Quarter 2023 Results Conference Call for Wednesday, November 15, 2023. [Operator Instructions]. 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 and is contained in Dream Unlimited Corp's filings with securities regulators, such as its latest annual information form and MD&A. These filings are also available on Dream Unlimited Corp's website at www.dream.ca.
Your host for today will be Mr. Michael J. Cooper, President and Chief Responsible Officer of Dream Unlimited Corp. Mr. Cooper, please proceed.
Thank you, operator, and good afternoon, everybody. I'm going to have a conference call in the third quarter, but with so much volatility, we thought it was a good idea. And we have a chance to tell you more about our business and answer questions. Also this quarter, we took the information from our September 6 Investor Day and created our first effort on a supplemental information package. We would let your feedback as we'll continue that for the year-end, and then I think we'll advance further for Q1. So any feedback is appreciated.
To start, Deb will speak about our results. I'll give some commentary, and then we'd love to answer questions afterwards. Deb?
Thanks, Michael, and good afternoon. So as Michael said, yesterday, we published our supplemental information package for the first time in an effort to provide investors with better insight into how we evaluate our various business lines. The supplement is a work in progress, and we'll continue to add disclosures in future quarters and welcome feedback on the context. Now I'll provide a brief overview of our results by operating statements for the quarter.
In the third quarter, in our recurring income segment, we generated revenue and net operating income of $44 million and $13 million, respectively, up from $34 million and $10 million in 2022. Year-to-date segment revenue and net operating income increased by $30 million and $10 million over last year. The increase was primarily driven by growth in our asset management platform and completing buildings in our multifamily rental pipeline.
Included in revenue for the 9 months ended September 30 is $47 million related to our asset management and development contract in Dream Industrial REIT, Dream Office REIT, Dream Residential REIT and our partnerships, up from $36 million in 2022. We expect these revenues to continue to grow over time as we actively pursue new asset management opportunities. This quarter in our Development segment, we generated revenue and net margin of $89 million and $16 million, respectively, up by $68 million and $18 million from the prior year. Q3 results were largely driven by the timing of our sales in Western Canada as we achieved 400 lost sales this quarter. As of today, we have commitments for an additional 66 lots and 5 acres for the fourth quarter, in addition to 231 lots and 71 acres already committed through 2025 as disclosed in our supplemental information package. These committed sales represent $117 million in revenue.
On a consolidated basis, we generated adjusted earnings before income taxes of $4 million for the quarter and $66 million year-to-date. Down by $67 million from the 9 months ended September 30, 2022. The amounts are adjusted for equity accounted pickup of Dream Office REIT and a one time net gain on land settlement which recorded in 2022. Decrease from year-to-date 2022 adjusted earnings before tax was due to fair value losses on investment properties, higher interest expense on variable rate debt and prior year occupancies at Canary Commons.
Earnings for development can significantly vary quarter-to-quarter given seasonality and the timing of occupancy. This was partially offset by strong lot sales activity in Western Canada and higher base fees from our growing asset management platform. We have maintained a strong liquidity and manage risk with $305 million in liquidity and conservative leverage ratio of 36% on an adjusted stand-alone basis. As of today, we hold interest in Dream Office REIT, Dream Impact Trust and Dream Industrial REIT at 33%, 35% and 12%, respectively, in place of the senior management holdings.
On an annualized basis, we received $16.5 million in cash distributions from the trust. As of November 13th, the market value of our interest in the trust was $148 million, approximately 20% between current market cap. We remain committed to maintaining a conservative debt position and may use excess liquidity to purchase additional units through our NCIB and fund potential new investments.
So now I'll turn it back over to Michael.
Thanks, Deb. I mentioned that it's actually quite volatile . So I thought I add some comments as to how our business is changing. In Western Canada, we continue to build lager communities. But I think the bigger change is that we're selling more parcel sites, some to the typical buyers, we're building condos, but we're selling more to institutional uses like schools and utilities and other people that need land as part of a growing community. So in the way we become a lot less subject to the changes in the single-family market.
The other thing that's changing is we're building a lot more rental units and the returns there are quite good. Our current plan is to continue building all of what we set out to because we own the land need very little equity and we're building to 6 caps. And with today's debt rate, we can probably borrow at 4.5 when they're finished. So -- they are great properties, and they've got good growth in the rents. So we've got a good spread. So Western Canada is looking very good, and we expect it to be stronger over the next few years than it has been in the last few years.
Our asset management business increased quite a bit this year. We've been in the process of trying to grow it much more. We've been out seeing a lot of institutional clients literally all over the globe. And we've gotten quite a bit of traction in terms of conversations that we started. But it seems that a lot of the sources of capital are relatively frozen in terms of making new decisions.
So we hope that in 2024, a lot of the groundwork that we've done this year, we'll turn into completed transactions. [indiscernible] properties in Western Canada, we're actually building income properties and growing our portfolio everywhere. And it's adding a lot of value to our business. So primarily, it's apartment buildings and the density [indiscernible] and that's kind of a big part of our business. It's going to continue to become a big part of our business. And when you put those 3 groups together, our income, income assets, our asset management and our Western Canadian Land and Housing business, that's a major portion of our business.
In regards to urban developments in Toronto. It's been a lot more uncertain construction costs are higher than they've been here before, while we're seeing reasonable pricing everywhere else in the country. So construction costs are very high. Interest rates have been changing quite a bit. We'll see where they settle. They're down a lot in the last 3 weeks. We're hoping that they come down a lot more. And with the right interest rate, we can proceed with building versus build rental.
The condo market has had -- it's a bit patchy. And again, for us to move forward on development, we have to have presales, to build condos. Condos is a lesser part of our business, but we still have a portion of condos. And right now, about half the projects that were planned on starting -- have indeed started. So we hope that we can turn some of those projects, but we're going to be very cautious. In addition, we wanted a stake Dream Office.
And as everybody knows, Office has gone through the most changes of any sector over the last few years. We're quite pleased with the buildings we own, how we take care of them, and now as the team is focused on is how do we reduce our CapEx and leasing costs, have a sustainable model even through a difficult times we have now. And I think we're going to get there. And I think we're looking at the liabilities for the long run. But in the shorter term, we want to be very careful what we do with the capital.
The Impact Trust is where most of our development. A lot of the development in Dream [indiscernible] it is based in Dream Impact Trust and $1 billion of income assets or development assets that turn income assets or a condo that is majority sold, a majority price fixed and all of the billions of assets require a further equity. Beyond that, we have another $250 million for communities, both Zibi and Brightwater. Those would have land loans and have the opportunity to build the new buildings.
And they're not going as quick as we would like, but the product is great. So we're watching those closely. Another $250 million is some cost investments in others at the land loans and great sites like Quayside, Victory Silos and [indiscernible]. So amazing assets, but we're watching our capital very closely as the developments, we want to make sure they're profitable enough to proceed, and we want to make sure we have enough funding. And I guess, with the changes in the market in the last year, that business has been hit. But impacted off is still a small portion of the overall Dream Unlimited business.
If I had to say how Dream Unlimited is doing, generally, it's doing quite good, 7.5 or 8 out of 10, even though some of the businesses are challenged, and we'll get through them. But overall, we're really quite pleased with how the business is doing. We like the liquidity. And as I said about office and Impact, we have really good assets throughout the business.
I'd be happy to answer any questions anybody could have.
[Operator Instructions] Our first question is from Mark Rothschild with Canaccord Genuity.
Western Canada residential clearly is doing well. In regards to your land development there, do you expect the lot sales to pick up again in the next year or 2? And maybe as far as the multifamily residential development that you're doing, which is kind of a new thing, at least in Western Canada, how big do you want that pipeline to get? And how much are you willing to invest in development in that area over the next couple of years?
All right. I mean, quite honestly, this year, we were very conservative about how much land we serviced. In terms of [indiscernible] there was more useful we serviced a bit extra. So right now, we're planning on not serving as much for next year. What we don't want to do is have our builders with a lot of inventory. So I think where we are now is that we expect to be next year and a matter that we expect it to pick up. On the second part, we're finishing our second apartment building in Brighton, it's 120 units, and we're starting our third building. The math is pretty simple. I think between the land and cash we need about $5 million. Our land is off of 2.5% or 3%. So we're hardly investing any money to build in Western Canada. So we expect to do another building a year that too. We're also doing some townhouses and single family.
So I think we're going to get to 200 units a year or more. And I think by next year at this time, we'll have started our first building in Calgary. And there, I think we can do another building a year. So we're probably looking at 300 or 400 units of purpose-built rental to build in Western Canada and the amount of capital is very, very small.
Okay. Maybe just moving on to a different area. The asset management business is something that you didn't address too much in your comments [indiscernible] in many other areas. Obviously, with the Summit transaction, that business grew quite a bit. Do you see a likelihood of additional opportunities to do transactions of that size? Are you even close to that size over the coming year? Or is that really just -- should we look at that as maybe just an opportunistic transaction that came up and maybe it will come again, but I look at that as kind of unique.
We thought Summit was a very valuable company, and that is trading relatively well, but it wasn't trade, but what it was worth. The issue with the public companies are. A lot of them are trading not well, but there nowhere near their IFRS value. That I think is very difficult to execute a transaction. So to buy a public company you got to have the stars aligned and some did. But you've seen a lot of companies do strategic reviews that go nowhere and it's probably not worth as much as the company needs to sell them. So I would say it's a very unique transaction. We are busy looking at things now, but I'd also say, when you think a $1 billion transaction was a big one. $6 billion is huge. I think it's the largest asset management transaction in real estate in Canadian history. So don't model one year.
Okay. Fine. And maybe just one last question for me. You have been slowly active on the share buyback program. Is that something that you would like to consistently do over the next year? Or is it maybe there was some extra liquidity now? Or you thought the share price was good opportunity? Or is this just something that we should expect at a modest pace continue over the next year or 2?
Starting January 1st, you have to pay a tax when you buy back stock. And I have a hard time paying that tax. I mean it's only 2%, but I wouldn't expect to fund in early January, I think we're going to have to get used to all the new taxes and decide what we're prepared to do. So I would think, generally, buying back stock be one of the ways to use capital. But I don't think we're going to be buying back as much stock as we used to. I don't -- I mean if we paid $100 million, it's $2 million tax I guess we can do it, but don't love it. But also, we're really focused on liquidity as we get through this tough time. So we thought we bought some this year. I would definitely buy some more next year, but 300,000 unit 700,000 units, something like that. But I'm saying we don't understand, that's the right magnitude about $1 million.
[Operator Instructions] Our next question is from Sam Damiani with TD Collins.
Just on a similar line of questioning, does the company today have enough liquidity to meet its needs and wants, I guess, over the next year or 2?
Yes, It has them -- it has enough liquidity under any security -- any set of activities we've tested on.
Okay. Good. And just on a related question, here we are, whatever sort of 5 months after the Dream Office SIB. I know there's lots of ins and outs and lots of things moving around within Dream Unlimited. But at a high level, how was that $100-plus million used within the company?
I think it was used 100% to pay down debt.
Okay. And if you had another $100 million come into the company for whatever reason, would it also go to pay down debt?
Yes. First, we use it to pay down the housing line because we can only draw that down. We put it into construction. We paid down construction debt and our line construction debt less.
Got you. Okay. And then you did talk about impact and the economics of rental development. The company did put out a press release a few weeks ago following the GST PSD rebate announcement. Can you give us, I guess, a sense today as to how likely it is the company will start construction of some of those 1,300 units over the next few months?
We're working very hard to see to get the document finished for the [indiscernible] flat. That's a big project. And if everything is waited today, we would [indiscernible] that a immediately. I mentioned that we started in [indiscernible] and in Calgary our expectation will start next year. We have a couple of sites in Ottawa. One in Ottawa, one in Gatineau I'd expect we'll start the one in Gatineau. And in Ottaw,a, we're planning to start it, but it's totally dependent on interest rates -- interest rates are important because of what it does to the project returns, but it's really important, too, is the debt service coverage. So the higher the interest rates, the low the amount of debt you can get and a larger amount of equity.
And what we find is, even the extra interest that you pay with higher interest rates doesn't affect the returns that high over 10 years. What really hurts the amount of equity you have in a project. So in all our projects, what we're looking at is how much capital is required to build the building. And in some of them, higher debt eliminates the potential to build right now. But as far as the 1,300 units, I think we'll start 1,300 next year.
Okay. Great. And last one for me is on the Western Canada lots. Last year, the fourth quarter was a huge quarter. I don't know if it was 80% of the year's volume in 1 quarter. But of course, this third quarter was a very big volume quarter. How should we think about the fourth quarter in the context of the committed sales that you've announced yesterday?
I do want to check that. I think we took some of those are for this year. So we've done the majority of our presales. I think we got 66 presales for launch now for the balance of the year and 5 acres and the other part will be possessions of how we were building. So there's still some to come, but the third quarter was most of it.
That concludes the question-and-answer session. I'd like to turn the conference back over to Mr. Cooper for any closing remarks.
I'd like to thank everybody, unfortunately, after the reporting season I have lost my voice. If it wasn't the case, I would have provided more introductory remarks, but when I get it back I'd be happy to follow up with everybody. Thank you very much.