© 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 morning, ladies and gentlemen. Welcome to the Dream Unlimited Corp. Fourth Quarter 2018 conference call for Wednesday, February 27, 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. Mr. Cooper, please go ahead.
Good morning, and thank you for joining us for our year-end conference call. I'm here with Pauline Alimchandani today, the CFO. To begin with, she's going to provide you with an update on the financials. I'd be happy to give you some of my views on what's happening in the business. And then, we'd be happy to answer your questions. So, Pauline?
Thank you, Michael. Overall, 2018 was a solid year for Dream on a standalone basis, as we generated $109.3 million in pretax earnings and an increase in book equity per share of 11% relative to the prior year, which is a positive result considering the meaningfully lower contribution from Western Canada and having minimal condominium units available for occupancy this year.Relative to the prior year, pretax earnings decreased only slightly, by $7.3 million, primarily due to lower margin from Western Canada, partially offset by increased contribution from our investment in the Dream Office REIT units and certain transactional and fair value adjustments. We are very pleased that the diversification of our asset base over the last few years has enabled us to introduce a regular quarterly dividend, commencing in the first quarter of 2019, in the amount of $0.10 per share, supported by the growth of our reoccurring income-generating assets. One of our primary objectives over the last few years has been to remain focused on building a safer and more valuable company. In doing so, we have grown our pretax reoccurring income to $82 million in 2018, which exceeds our corporate general overhead and interest expenses by nearly 2x. Over the last few years, our asset management business has become more valuable through increased and diversified fee streams. We have increased the quality of our land by owning significantly more in the best locations in Toronto. Arapahoe Basin has benefited financially from our capital investments and its income is growing and non-correlated to any other of our business lines.Finally, we have received many approvals in Western Canada, which increases the value of our lands, most notably, the recent approval of our Providence community in Calgary. All together, we have a much higher-quality business than when we went public in 2013.Our investments in the greater Toronto area, either through direct investments or indirectly through our ownership in Dream Office REIT and Dream Alternatives, offer incredible development opportunities. As of December 31, 2018, we had approximately 10,000 residential and/or purpose-built multifamily rental units and 1.6 million square feet of retail and commercial space either under construction or in our development pipeline within our sites, which is significantly higher than it's ever been. This includes our Port Credit development, the West Don Lands development, Riverside Square and various spaces at the Canary and Distillery Districts in downtown Toronto. We are committed to building the best communities, which will translate to increased value for shareholders over the long term. As we build rental and commercial properties within these communities, our reoccurring income sources will also increase.As of December 31, Dream owns $457 million in the Dream publicly listed funds, inclusive of units in Dream Office REIT, Dream Alternatives and Dream Global, which accounted for over 60% of Dream's market capitalization and generated over 20 million of distributions in 2018. Our asset management business generated net margin of $33.3 million in 2018, of which $6.4 million included development and third-party related fees.Using any reasonable multiple on our asset management income, it is easy to account for all or most of all of the current market capitalization of the company just through the Dream asset management contracts and ownership in the Dream publicly listed entities. Said differently, the current market capitalization of the company does not account for our Toronto or Western Canadian lands income properties, A-Basin and other assets.Although the environments in which our Land & Housing divisions operated experienced softer market conditions throughout 2018, we continued to generate strong earnings due to the strength of our other business lines. Given the diversification of our business, we expect income from Western Canada to represent a smaller proportion of our earnings in the future relative to the past. For context, net margin from Western Canada in 2018 accounted for approximately 34% of the total net margin of the company compared to 70% in 2013. This year, we advanced a number of important approvals on our Western Canada lands, which makes our lands more valuable now and over the long term.Since going public in 2013, our book equity value per share has increased by a compound annual growth rate of 18%, which is quite positive considering the decline of activity in Western Canada over that time period.I will now focus on a brief overview of results.Net earnings for 2018 on a consolidated basis, including Dream Alternatives, increased to $192 million, up $109.2 million from the prior year due to adjustments relating to the consolidating of Dream Alternatives and increase in share of earnings in Dream Office REIT, partially offset by reduced contribution from the Western Canada Land & Housing business.In terms of asset management, total fees earned from the Dream publicly listed funds were $37.7 million in 2018 compared to $36.3 million in the prior year. The year-over-year increase was due to an increase in base fee earning assets and other fees from the Dream publicly listed funds, slightly offset by slower -- lower acquisition activity in the period.In 2018, net margin generated from asset management was $33.3 million, a decrease of $2.9 million from the prior year due to reduced transaction activity and slightly lower development fees compared to the prior year.In 2018, our Western Canadian development division, which is inclusive of land, housing, and retail and commercial development, realized net margin of $25.2 million, a decrease of $25.8 million from the prior year. The decrease was driven by fewer lot and acre sales and housing occupancies in the period.In 2018, our land division has generated $29.7 million of net margin, with 767 lot sales and 20 acre sales compared to $48.6 million in the prior year on 913 lot sales and 33.5 acre sales.In 2018, the housing division realized losses of $5.9 million on 215 occupancies, as fixed overhead was not absorbed by the level of housing occupancies in the period. Our investment properties in Western Canada generated net operating income of $6 million, an increase of $1.5 million from the prior year due to increased rental income generated from our retail properties under development as they are stabilized or are approaching stabilization, partially offset by the impact of an asset disposition in 2018.Our Toronto and Ottawa urban development division, which is inclusive of condo, mixed use development and income-producing properties, generated [ $1.7 million ] of margin in 2018. While we did not generate much income from our urban development business in 2018, the projects we have in the pipeline are advancing well and will generate meaningful profits and development management fees over the next few years. We are currently advancing significant residential and mixed use projects in Toronto, which will contribute to our future earnings. These include Gehry, Port Credit, West Don Lands and 31A Parliament in the Distillery. We are now also earning development fees in our cost recoveries alongside our third-party partners relating to our -- to these and other projects, which helps us to fund our overhead of running the division, which we believe is very valuable. Over the next year, in 2019, we expect to occupy over 1,200 condominium units, of which 500 are at our share, which are nearly fully sold, primarily relating to Riverside Square and Canary Block 16. Income properties generated $7 million of NOI in 2018, relatively consistent with the prior year. In the 3 months ended December 31, fair value increases on our urban development investment properties were $12 million, an increase of $7.4 million relative to the comparative period, driven by fair value gains at the Distillery District, which was attributable to increases in net operating income.In terms of our liquidity, at the end of the year, we had up to $179.1 million of undrawn credit availability, up significantly from $123.1 million at the end of the prior year. Subsequent to year-end, we amended our $200 million operating line and $225 million non-revolving term facility, extending the maturity dates to January 31, 2021, and February 28, 2022, respectively. We are focused on maintaining a conservative debt position and having ample excess liquidity even before considering our unencumbered or underlevered assets. As at December 31, our total debt to asset ratio on a standalone basis was 34.9%, up slightly from 33.2% at the end of the prior year.In the 12 months ended December 31, 2018, we repurchased 1.9 million Class A subordinate voting shares for $16 million under our normal course issuer bid. We intend to remain active on our normal course issuer bid on an opportunistic basis in 2019. On the overall, it was a very reasonable year for the company. Our book equity per share has grown significantly year-over-year. We have strong financial flexibility, and we have increased our reoccurring income sources. Despite lower earnings from Western Canada, our business and balance sheet are in great shape.With that, I will now turn the call back over to Michael.
Thanks, Pauline. I'm going to try to keep my remarks quite high level. I think the first point is that, currently, on our numbers, half the value of the company is now in the recurring assets, 1/3 is in Western Canada and 17% is in Toronto. Sorry, it's in the Toronto condo and stuff like that, the Toronto development assets. Toronto as a whole, including income properties, as well as developments, is about 30% of the value of the whole business on an equity basis; Western Canada is about 40%; the U.S. is 10%; Europe is 11%; and other, which is Zibi renewals of building and a few other things, about 9%. In this case, we're looking at the value of the contracts allocated to where the assets are.With regards to the overall business, a lot has happened in the last couple years. We've been very active in the way we manage. The main focus throughout has been to increase recurring income, upgrade quality and increase liquidity. So just about the businesses that we're involved in. Three years ago around now, we announced the strategic plan for Dream Office. At the time, we had $7.2 billion of assets and about 170 office properties. We've sold, I think, 138 individual buildings. We're now down to 34. Of the total value, 75% or thereabout -- about 70% is in downtown Toronto, a little bit more in the GTA. The quality of the assets are fantastic. The buildings are full. The rents are going up. And we're doing a lot of work to upgrade the buildings so that they are extremely attractive to tenants, tenants are happy to pay us high rents, and the buildings are worth a lot of money.In global, we started in 2011 with 292 Deutsche Post assets, we're now down to 50. We've grown from $1 billion to almost $6 billion. The business is incredible quality. We grew into the Netherlands. The business is very, very strong. It's developed a heck of a reputation in Europe as a European company. And the overall returns have been good. Just an example, in office REIT, it started on July 3, 2003. From that date till today, excluding the GE transaction, where people got 150% of the initial value 4 years earlier, so ignoring the cash that they got back, just assume -- just ignoring that and looking at the stock price and the yield, it's been between a 12% and a 13% return. I think since 2011, global has been about a 12% return. Dream Industrial has been under the leadership of Brian Pauls, and we've had some strategic changes with growth into the U.S. We're now focusing on capital recycling. I think it's extremely well positioned and it's done very, very well in the last 1.5 years. And over all, it's done about an 8% or 8.5% returns since it went public in 2012. Within Dream Unlimited, a lot more Toronto, a lot more recurring income and a lot more liquidity. So that's basically what we're focused on.In terms of the markets, Toronto is a major force within Canada. It's been doing very well. Office space, I believe, it has the lowest vacancy of any city in North America. There's new development and there's lots of demand. We'll see how balance that stays over the years, but it is very difficult to build an office building. We're optimistic that our building on Bay Street, our buildings in the center of the city are going to continue to be desirable and well leased regardless of the overall market. Industrial in Toronto is very strong. It's very, expensive to buy, but the properties are doing really well, and we bought a couple of buildings last year. We're hoping to buy more this year.Residential in Toronto is very interesting, as the price increases of homes in the 905 went off the charts in 2016 and 2017. And since then, it's been flat to down and activity has really fallen off, I don't know exact numbers, but I believe in January, only 8% of all the housing starts were single-family. The rest were all multis. So that's working its way through. Downtown, the condo market, I think that in 2017, we probably had the most sales of all time. Those are going through construction, but we're probably likely to get to the long-term average number of housing starts this year, and in about a 24-month period, the average price of the condo went from $650 a square foot to $1,000. Construction prices went up. Development charges went up. So the industry has been in flux, but we think it's slightly to get more balanced going forward. And quite honestly, we do not see any evidence of anything other than sort of a more stable market going forward. On the apartment side, we're planning on starting 1,000 apartment units this year. The 75% will be in Downtown Toronto and the balance will be in Ottawa and Saskatoon. We're quite bullish on the purpose-built rental and the dynamics in Toronto look quite good.So we look at Western Canada, I think that everybody knows the commodity business hasn't been great in Canada, the oil business hasn't been great in Canada. And it's been exacerbated by -- I want to watch my comments here, government policies that have completely gotten away of ourselves. So there's been a lot of issues as to why we're not doing better, and then the government, at every level has made it worse. So as an example, in Saskatchewan, in our markets, the levies to develop have doubled during this deep recession. Provincial sales tax has been introduced on new houses. And the stress tests in Ottawa have basically made it so that nobody in Saskatchewan can qualify for a mortgage. So it just seems kind of counterintuitive that with things are a little slow to a lot slow, the government's made it more difficult and made it take longer to get anything done. So that's been pretty tough. What we're seeing is at one point, in Saskatchewan, housing starts for the province were $10,000. I think for 2018, they were probably around $3,500. That's a 65% decline. The consensus estimates on what's going to happen in Saskatchewan is that it'll probably be flat to up over the next 3 years, while in Alberta, the market has been stronger than it has been in Saskatchewan. But it's probably likely to be flat over the next few years. So we're seeing a very different backdrop from the absolute gloom we saw in 2000 to 2013, but we're adjusting it by reducing the capital in the Land & Housing business. We're reducing the capital by selling excess products and reducing the amount of money we put into the ground. So this year, we're going to be reducing our lot inventory by our homes division, and we're going to be selling some of the lots that we've already developed last year, and we will not be spending much money on new subdivisions until the market clears up a bit. We expect to take a reasonable amount of money out of the lands and we expect to reduce our housing capital significantly. And it's been a pretty crummy time, but we continue to make profits every year. So we actually colloquially call it a hibernation strategy, where we keep everything in great shape, we've got great people. We're downsizing or activities, and as the market turns, we'll be in great position to take advantage of all the lands we've got approved over the last couple of years.The only ending comments I have is that my friend, Blake Hutcheson, says business moves at the speed of trust. I would say that it's completely obvious at this point that businesses' trust with the government has been almost destroyed, and I think that's really slowed the ability to get business done. I'd also say that what we're seeing in the real estate businesses is unbelievable competition, whether that's sources have unlimited capital or unlimited skills. What we're doing -- and by the way, I would say, this is by far the most exciting real estate environment I've been in. It's a fascinating time and that tenants and homeowners are paying for quality. So what we're focusing on is continually improving the quality of our assets, being innovative, improving our management, running the business better and, literally, it's in everything were doing, we're looking to increase the quality of what we own. That's my 5-minute overview. And at this point, Pauline and I are happy to answer any questions you may have.
[Operator Instructions] Our first question is from Mark Rothschild of Canaccord.
In regards to the dividend, you've been clear in the past that you've got a plan for the capital going out a few years for all your different projects. What is it that pushed you to, or that led you to input the dividend in place now? And should we look at the use of capital for any other parts of your business differently with the dividend? I realize that there is a growing amount of recurring cash flow.
Well, in part, you answered your own question. I think that the nature of the business is different, so we feel that we're in a great position to be able to support a miniscule dividend. I think the total dividend cost is about $10.6 million a year, so I think that it doesn't really change any of the big-picture stuff. What I would say is we're in constant dialogue with our shareholders. Dream Unlimited was created as a spinoff of Dundee Corp. A lot of the former shareholders of Dundee Corp have been interested in having a dividend for a long time. I've been saying to them that I think we need to reposition our portfolio first. But at this point, we thought we're in great position, and it would be respectful to provide a consistent cash flow to the owners of the company.
Okay, great. And in regards to dividend growth, would it be reasonable to expect that as recurring income rises, the dividend could potentially rise annually or regularly as well?
That's way ahead of our thinking. We're nowhere near there yet. I don't think there's any intention to create an income vehicle out of Dream Unlimited. So the idea is, would there be a $0.02 increase every year, something like that, so people feel comfortable that it's an income business? It's never going to happen that way. But we'll take a look at the choices for our capital in the future as our company changes. So I mean, we might increase it from time to time, but I just don't think that's the way to think of the business. Is that a reasonable answer?
Yes, perfect. And in regards to the lots development, land business, have you given any guidance on, or a range of what you would target for lot sales for this year? And then maybe, in particular, if you can give an update just as far as Coopertown and maybe where you are in Providence, if you're still on the same timelines you laid out previously?
So I'm happy to answer the question the best I can. Unfortunately, I don't have a clue. So how's that for guidance? There have been so many changes out West. The markets are pretty full with inventory, whether that's builders or our home business, our development business. So I think we're really dependent on seeing how the market goes. I would say, for our own internal purposes, we're looking at the same kind of numbers in 2016-2017 maybe, and that's not so much a prediction; I think it's more like that's the way for us to plan our business. We are going to be looking at selling a lot of inventory that we have now, so it's not as if we're spending money in the anticipation of new purchasers. We're going to reduce our capital in the business. We take -- we look at all the banks' provincial forecasts. We look at CMHC. It looks like it's going to get a little bit positive from a really low base in Saskatchewan, so we'll see how that goes. Even when I say that, what I mean is I'm skeptical, but if their growth is there, we'll see better lots than I said. As far as Coopertown goes, we've got about 180 lots in Harbor Landing, plus we have lots in Eastbrook, so we're going to focus on those before we focus on starting Coopertown. With Providence, they're working 24 hours a day getting that road opened. We're planning the development to be ready around then. The City of Calgary has some work to do. It looks like they may not make the timeline they had hoped for. But at this stage, we are expecting sales at the -- during 2020, but we'll see what the city does. But I would say this, I would say our math for Coopertown, when you take a look at how much capital we have in Regina, how much lot inventory we have, it doesn't make sense to spend the capital to start it now until we clear everything out. In Providence, on the other hand, the market looks very good for the product we have, and it looks like there's a really decent margin. So that's an area that we would be happy to invest today, assuming we can get going on it.
Great. And maybe just lastly, in regard to homebuilding, what type of margins should we expect on that business in the near term or over the next couple of years, after just looking at 2018 when it was relatively weak?
It wasn't relatively weak. It was terribly weak.
Okay, sorry.
No, you don't have to be polite with me. Look, what's happening is condos have generally been rising and house prices have been declining, and it's been a very, very tough environment to build houses in Saskatchewan. In Calgary, we're doing okay. Actually, the margins are much better in Calgary. We do have an overhead issue because we're having a lot less houses being produced. We're addressing all of that, and we would expect that this year will be much better than -- 2019 will be much better than 2018 based on the changes we're making in how we manage, reducing the capital in the business, and we think that starting next year, it should be significantly better. However, all of that is subject to having a stable economy, not going down further.
Our next question is from Sam Damiani of TD Securities.
Just on the Western Canada, just to finish that off. You mentioned a couple times about pulling capital out of the business. How much should we expect the balance sheet investment in that business to decline by maybe year-end 2019?
Well, the numbers we're using internally are that we're probably looking at $120 million being generated in cash out of our activities in Western Canada over the next 3 years. We have, give or take, $600 million in land. We also expect to reduce the inventory of houses, and it denigrates that by maybe $30 million, and maybe we'll get a little bit more. So on the capital of the business, we look at over a longer period of 3 years, but other than that, maybe we get another $50 million out this year. Maybe -- Pauline is looking to me like that is an aspirational goal.
Okay. We'll leave it at that. And just one -- just a follow-p with the dividend. What's the approach to normal course issuer bid in light of another dividend that you introduced?
I think it'll be the same. I mean, last year, we bought about 1.9 million units. I think we've been relatively active since the company started. I think we bought back between 8 million and 10 million shares over the last number of years. And I think that if you're an existing shareholder, you've seen our book equity increase by 18% a year, you've seen the shares outstanding decline by a couple of percent a year. And now you're going to get some income as well. So I think that's probably the formula going forward that will be similar.
Okay, that's helpful. And on to the urban side, what is the...
Finally. Finally, that's so [indiscernible] business.
Just wanted to get that out of the way. So what is the next project that will be brought to market in your portfolio?
A very interesting question. Because when we start an apartment, we can't get brought to market until it's finished. So are you excluding apartments?
Yes.
We're probably going to be launching another building in Ottawa, and in Toronto, were doing apartments, but I don't -- we don't have one launching immediately. But I think, by the end of the year, we're looking at a couple of them might get going on.
And would one of those be the Mirvish site?
That is a really good question. Maybe, maybe next year. There's a lot to do on that site. So we'll just -- sorry, go ahead?
No, go ahead.
So if I go slower, if you think about Victory Silos site, that site beside Sidewalk Labs, it's an incredible site. We bought it really cheap. It's gone up in value a lot. We'll probably be able to build 1.2 million square feet on that. And by the way, if I say 1.2 million fast, it's still a lot of space. We think that's going to be among the top sites in the city. But we have a very low carrying costs, and if it takes 5 years until the Feds and the province spend their $1.25 billion on the Don River, plus Sidewalk gets going and builds their Google headquarters like that, it's just going to be fantastic. I think what I would say is, we're not in a rush to take incredible pieces of land and get them to the market. So then you take a look at -- in the Canary district, we have Block 13 left. It was actually the biggest building. But we're right not doing block 12 and 16, which would be a stone's throw away, and then this summer, we're going to start construction on a 750-unit apartment building. So we are not trying to get block 13 to go as fast as we can, just like we've got $0.75 billion project at 31A Parliament that we've got the zoning for and we're just finishing up some stuff, and we've got incredible leasing interest in it. Quite honestly, we've got letters of intent for more than the 300,000 square feet that we are going to be building. Above that, we've got another 43 stores in residential. So we're just trying to make sure that everything we do is going to be as successful as possible, will be as valuable as possible and have as much margin as possible. So when you say, when's the next project, we don't -- we're really focused on the ultimate quality of what we're building and how much money we can make. But if it takes longer, we're quite content for that.
That's helpful. And just in Ottawa, with O, is that -- how are sales progressing at that project, and what is the status of presales at [ Canal ]?
Okay. So at O, it's about 80% sold and occupied. And the balance is still a bit slow. It's been a bit slow, but we knock off a unit here and there, and it's only an 80-unit building, something like that, so it's fine. [ Canal ] is actually doing better on sales and then the pace is good, so we think that by the time it's finished, it will be substantially sold. But what's interesting there is we're doing some work on renovating 3 buildings for commercial use. We're planning on launching a 125-unit apartment there. We've got a condo on the Gatineau side. We're working on an office building in Ottawa. We've got 2 of the major parks getting done this year, 4 of the public squares, and a bridge is being temporarily detoured while the bridge from Gatineau to Ottawa is redone to match up with what we're doing. It's going to be incredible. So over the next 9 months or so, Zibi will be transformed.
And just finally, just a question on A-Basin. The expansion is now open. What is your -- can you tell us what your expectations are for the company here in terms of -- yes, whatever, either NOI or revenue?
Do you know anything?
No.
Well, you should take a look at A-Basin's website or Google A-Basin. The ski area has had an incredible year so far in terms of revenue. Up until this year, we never had a day with $300,000 of revenue in a day. We've now had 7. We put out a press release 10 days ago, saying that due to the incredible demand, as a result of the over $40 million we've invested in the ski area, the natural beauty and terrain of the ski area, we're ending the past arrangement with Vail at the end of this year, because we think we can manage the ski area better and provide our customers with a better experience and generate higher returns by reducing the number of skiers and increasing the yield. So there's big changes at A-Basin and that expansion has been an enormous hit. I was with somebody the other day who was telling me -- an avid skier, who was saying the new terrain is the most difficult, best terrain in any ski area in the world. We've also launched a beautiful little restaurant. You can Google that to. You just Google highest restaurant in North America. It's at 12,450 feet, and it's a bit of an Italian little bistro. They have no running water, but it's off-the-charts cool. So A-Basin is increasing their market share and increasing customer satisfaction. We're having big issues with parking on the highway, and we just have too many skiers on Saturdays, so we're trying to manage how to make -- how to optimize the experience, keep the crowds under control and maximize the profits of the ski area. So it's going great.
And I'm showing no further questions at this time.
Well, I'd like to thank everybody for their time on the call and their continued interest in the business. It's a very exciting business. There's more to come. So thank you very much. Looking forward to seeing you at the Annual Meeting.
Thank you. And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.