Dream Residential Real Estate Investment Trust

Welcome to the DREAM Residential REIT 4th Quarter 2024 Results Conference Call on Thursday, February 20, 2025. Please be advised that all participants are currently in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star then 0. During this call, management of DREAM Residential REIT 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 Residential REIT'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 Residential REIT's filings with securities regulators, including its latest annual information form and MDNA. These filings are also available on DREAM Residential REIT's website at .dreamresidentialreit.ca. Your home address is located at the top of the screen. Our host for today will be Mr. Brian Pauls, CEO of DREAM Residential REIT. Mr. Pauls, please proceed.

Good morning everyone and thank you for joining us today for DREAM Residential REIT's fourth quarter and year-end 2024 conference call. Speaking with me today are Scott Schuman, our Chief Operating Officer and Derek Lau, our Chief Financial Officer. The REIT continues to deliver stable operational performance. For Q4 2024, comparative properties NOI growth was 2.4%. For the year, comparative properties NOI growth was .7% and within our guidance that we had set at the beginning of 2024. Comparative properties NOI margin was .9% compared to .1% in the prior year comparative quarter. Top-line revenue continues to be impacted by current operating conditions while we focus on managing controllable costs. FFO per unit was .3% 17.3 cents and compares to 17.7 cents in the prior year. We continue to prioritize our balance sheet strength. We ended 2024 with a net total debt to net total assets ratio of 33% and a weighted average term to maturity of 4.8 years on our mortgages. Overall liquidity is approximately $60 million. We completed 196 suite renovations in 2024 which included commencing work in Cincinnati. This is below our initial target as we pivoted toward tenant retention and maintaining occupancy. We have now paused renovations in Oklahoma and will also pause in Dallas. Overall I am very pleased with the REIT's operational and financial performance which has been largely consistent with expectations. There continues to be a disconnect between our trading price and the intrinsic value of Dream Residentials portfolio. With our year-end results we have announced that the REIT has commenced a strategic review process with a goal to maximize value for our unit holders. We are committed to evaluating and exploring various alternatives to achieve this result. In light of this decision we will not be providing formal 2025 guidance. I will now turn it over to Scott to provide an operations update for the quarter. Scott?

Thank you Brian. We are pleased to report a net operating income of $6.3 million for the fourth quarter of 2024 and $24.9 million for the calendar year. This achieves the mid-range of annual guidance and represents comparative property NOI growth of .4% for the quarter and .7% over the year. Peak supply, economic tension and winter seasonality have broadly restrained near-term revenue growth but DRR's active and disciplined spend management practices improved operating margins 100 basis points quarter over quarter and 30 basis points year over year. Our team is pleased with the leadership from our community directors and the resilience from our sustained property performance. Comparative property revenue for the year grew .8% higher than Q4 2023 and .5% higher than calendar year 2023. DRR portfolio average daily occupancy over calendar year 2024 stabilized even within three basis points of calendar year 2023 finishing at .4% on December 31, 2024. Average daily occupancy during Q4 improved 24 basis points compared with Q4 2023. DRR's Oklahoma communities led our other markets with .4% occupancy rate at quarter end and averaged over the trailing 12-month period. Our Oklahoma assets also led in quarter to quarter rent growth at .8% higher than the preceding quarter and matched our Cincinnati region assets with .0% annual in-place rent growth. Portfolio-wide rents increased .5% from Q3 to Q4 and grew .2% up from $1,156 last year to $1,181 this year. As a frame of reference spanning more than two and a half years since DRR went public, apartment list national rent indices for U.S. multifamily rents have remained flat from May 2022 through December 2024. DRR in-place rents have been flat since December 2021 and will continue to be flat since December 2024. Leasing conditions across the United States are challenged and likely to remain subdued in the near term. During Q4, DRR leases decreased .3% on expiry. However, renewal tradeouts rose .6% for a blended .4% tradeout. We prioritized renewing residents as reflected by Cincinnati's 63% renewal rate and Oklahoma's 58% renewal rate. Dallas Fort Worth community's renewal rate remained below 50% as the team completed 40 value-add renovation suites to close out the year. We reduced value-add work in 2024, completing 56 suites during Q4 and 196 suites over the year. Net renovation returns improved during the fourth quarter on $99 million in lease premiums. However, sustained returns trailed our target band of 12 to 16% for the year. As a result, construction paused in Dallas Fort Worth and Oklahoma City. Value-add work does continue in Cincinnati. Renovation tradeouts on 35 suites in Cincinnati averaged more than $300 and pushed investment returns into the upper portion of our desired target band. The macro pipeline of new apartment deliveries is projected to drop 20% in 2025 and 60% in 2026. DRR assets are exceptionally well positioned for the upcoming shift from high supply to high demand. It is my pleasure to turn things over to Derek Lau, our Chief

Financial Officer. Thank you, Scott. Good morning. For the quarter and year ended December 31, 2024, diluted funds from operation was .17.3 and $0.70 per unit respectively. This compares to 17.7 cents and 70.5 cents in the prior year quarter and period. For the fourth quarter, net operating income was $6.3 million with NOI margin at 52.9%. This compares to $6.2 million and .9% in the prior year quarter. On a comparative property basis, NOI increased .4% year over year. Interest expense was $1.9 million and G&A expenses was $1 million, which includes higher payroll related expenses totaling approximately $140,000. The IRS value of our properties is $400.5 million and compares to $396.4 million in Q3 2024. The increase in fair value reflects $4.1 million of building improvements and a $0.6 million fair value gain. During the quarter, we externally appraised six properties or approximately 31% of our portfolio by fair value. IFRS NAV was $13.39 per unit and compares to $13.47 per unit in Q3 2024. IFRS cap rates increased slightly by 5 basis points quarter over quarter to 5.84%. Net debt to net total assets was 33% and largely consistent quarter over quarter. On December 31, 2024, we repaid $15 million in mortgages at Colts Crossing and Ashton Glen using our previously undrawn credit facility. The REIT has no upcoming mortgage maturities in 2025 or 2026. At the end of 2024, our liquidity was approximately $60 million comprising $5.5 million in cash and $55 million of availability on our credit facility. As Brian has noted, we will not be providing annual guidance as a result of our ongoing strategic review. Thank you and I will now turn it back to Brian. Thank you, Derek. We would now like to open the call to questions.

We will now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. We will pause for a moment as callers join the queue. The first question comes from Jonathan Kelcher with TD Cowan. Please go ahead.

Thanks. Good morning. The first question, and I guess you are not going to answer a lot on these, but on the strategic review, as you sit here now, I guess, can we think about just sort of a pause in terms of looking at new acquisitions that you will just sort of run the portfolio as is as the strategic review plays out?

Hi, Jonathan. We are continuing to run the business. We continue to evaluate opportunities in light of our liquidity and basically run the business as normal. So as we are normally watching markets, watching transactions, looking at opportunities, we continue to do that. But I think it is fair to say we are looking at the company as a whole and want to make sure anything we do is going to be added value.

Okay. Fair enough. And then I guess in the press release you talked about a more challenging leasing conditions entering 2025. Can you maybe expand a little bit on that and which markets you are seeing that in?

Good morning, Jonathan. This is Scott. I think what we are experiencing at the end of 2024 and in the early stages of 2025 is indicative of peak supply, longer periods of time to lease suites, slightly higher concessions, and we are seeing that across the country, but more pronounced in the Sunbelt and in our market DFW. So we see some of that being seasonally impacted and then we see the outlook as the macro delivery sort of transition to more of a demand mindset. I think we will see those conditions change.

Okay. And that is sort of the back half of this year?

It is very market by market and so I would say most analysts would say it is the back half of this year or the first half of 2026 in Dallas Fort Worth.

Okay. And then last question, I guess just for you, Derek, I am just curious as to why you repaid the mortgages with a lot of credit instead of refinancing them.

Hi, Jonathan. So those became due January 1st and I think as Brian mentioned, we are undergoing a strategic review and we wanted to have flexibility going forward depending on which path we choose. So putting in our credit facility gives us that additional flexibility to pursue a potential strategy. So as noted, that is why we did not repay those mortgages. We constantly monitor the market so depending on how the year goes, we will continue to evaluate that.

Okay. And what sort of difference in rates? The line versus what you would have been able to do?

Sure. So if currently the credit facility is at around 6.1%, if we were to place five, five or five-year financing, it would probably be about 50 basis points. So 5.5%, 5.6%.

Okay. Thanks. I will take that for the back.

The next question is from Roger Lafontaine with Nugget Capital Markets. Please go ahead.

Hello, everyone. Thanks for taking my question. In regards to the strategic review, I was wondering if you would be able to shed any light on the transaction liquidity market in Dallas or Cincinnati and whether you are seeing a good atmosphere for liquidating any apartments. If that was the path you are going to choose or are you able to shed any information on the strength of that market? Thank you.

Thanks, Roger. We do watch these markets very closely. There is lots of capital that wants to be in this asset class. It is very defensive. It is very safe. The markets are nuanced, meaning that there is certain capital that wants to be in Texas or Oklahoma or Ohio, and so there are different levels of transactions and cap rates, but there certainly continues to be transactions and interest in our type of properties, in our properties specifically, and in portfolios. So we are seeing all of that, and we are watching it closely. I would say there is not as much liquidity and transaction volume as there once was a few years ago. However, this is a very, very resilient asset class, and so we are watching that to try to answer your questions as best I can.

Thank you very much. The next question is from Syrum Frenovass with Cormark Securities. Please go ahead.

Thank you, Arbita. Good morning, guys. Just going back to a comment on the color in terms of, are you seeing a lot more competitors or players doing more of repositioning in this market versus buying your product?

Yeah, I say we are seeing a lot of new product coming into the market, as Scott mentioned in his remarks. We are seeing some trades within the market. We are seeing lease-ups. We are seeing some positioning of capital, looking for opportunities where there may be a new project that is in lease-up that is struggling to get off a construction loan into permanent loan. So there are transactions that are opportunistic like that, but then there are also a lot of transactions that are just kind of strategic, where people are buying into markets where there is maybe less competition than there was before. So we are seeing more of a normalized market than a hypermarket that we have come out of, but there is certainly a lot of long-term interest in this asset class. We obviously love it. We have been in it a long, long time and believe in our assets, our IFRS values. So I would say although we are in an inflection point where we have got pressure from cap rates and some supply, it is a very healthy asset class.

That makes sense. Brian, maybe just a question. You are putting a Paul's Corp hat on here. How does this market look from a development perspective? If you were to make a development work right now, how do you think about it?

Sure. Developments are very tough to make right now. There are cost pressures on land, on labor, on material, meaning that they have continued to rise. There are inflationary pressures in those areas and there is quite a bit of pressure or headwinds, barriers to entry for development from a financing standpoint. Construction loan standpoint, not only just being available, finding a construction loan, but the cost of that loan as well. So a tremendous amount of equity is required. The return on that equity for new construction is not that attractive. So we are coming off of a surge in supply, but Scott mentioned this, that behind that surge is a pretty significant dearth, a reduction in supply. New starts, new billing permits have dropped off a cliff. So this is a cyclical business. We are in a cycle where we are working through new supply and behind that is likely to be very low supply, but the renter demographic seems to be quite healthy. Buying homes in the United States is difficult. It is very expensive and the renter pool or the renter demographic continues to grow. So that is why I previously said this is a pretty healthy asset class because the future is good for rental properties, but it is kind of lumpy to get there.

Thanks for the call, Ryan. We are going back.

The next question is from Himanshu Gupta with ScotiaBlank. Please go ahead.

Thank you and good morning. So on strategic review, I mean, you mentioned the range of strategic alternatives you will be looking at. So what are those alternatives you will be looking at? I mean, is it the outright sale of the REIT or looking to sell some assets in chunks, I mean, exits of markets, capital recycling? Like what is the best way of these alternatives right now?

Himanshu, I think our press release said what we are prepared to say. We are looking at everything. We are looking at the entire company. The goal is to narrow the gap between where we trade and what our intrinsic or NAV value is. We believe that gap is too wide and so we are looking at kind of all alternatives. We wanted to announce that we are taking a hard look at that because that is a big priority for us.

Fair enough. And Brian, have you put any of the properties on the market for sale?

We have. None of our properties are held for sale. We are continuing to operate the business.

Okay. Thank you so much. I will be back.

Once again, if you have a question, please press star then one. The next question is from Brad Sturges with Raymond James. Please go ahead.

Hey, guys. Not to belabor the point on the strategic review, but I guess I just want to understand, I guess you have gone through a process the last few quarters in terms of looking at potential for JV opportunities. Is it fair to say that that appetite at the moment has been still a little bit subdued and that is why you are pivoting to a little bit more of a broader review? Or how should we think about that part of the strategic review in terms of related to the joint venture opportunity you have been pursuing?

Yeah, Brad, it is a good question. I mentioned that we have been in discussions on JV opportunities and that is true. That strategy is not off the table. I would say it is still a possibility, but we have broadened the review to kind of look at all the possibilities. We are not narrowly focused on just JVs, but we are looking at everything. But that is certainly something that continues to be an option.

I apologize. I missed a little bit of your preamble, but just on the renovation activity, I think you noted that you plan to slow it down because some of the returns you were getting last year were not quite hitting the threshold. How should we think about suite renovations this year? Is it more focused on Cincinnati or what is the target volume this year?

Thank you, Brad. Our value add construction really has been reflective of the larger rental market and our decisions there. But we are still seeing very favorable returns in our Cincinnati asset. We are generally, over the normal course of business operations, looking to renovate about 50 suites in Cincinnati in 2025.

And just to confirm, you are effectively slowing down or halting in the other two markets in terms of renovations?

Correct. We have taken a pause there. We can certainly undo that pause when the time is right, but we are pleased with the $300 tradeouts that we have seen in Ohio and will continue to work there.

Okay. Thanks a lot. I will turn it back.

The next question is from Kyle Stanley with Desjardins. Please go ahead.

Thanks, morning, guys. I understand no guidance just kind of given the strategic review, but based on your commentary, it is probably relatively safe to assume similar performance as maybe what we have seen in the last quarter or two in the year ahead.

I think, hey, Kyle, it is Derek. Just given Scott and Brian's comments on the market, it is a little more challenging. So I think on a comparative properties and a wide basis, it will probably be a little lower than last year. So that is one piece. Interest expense is probably largely the same, maybe slightly higher because we are putting two mortgages on the same thing. In terms of G&A, between Q3 and Q4, that might be a good run rate going forward. This is all assuming the normal course of operation, so it excludes any potential outcomes or work on the strategic review. I hope that is helpful.

Yes, very helpful. Thank you for that. Again, going back, obviously we have touched on this already on the call, but as it relates to the transaction environment, if we look back a few years ago in the more immediate post-COVID area, it did seem like there was a lot of 1031 capital that had maybe rotated out of lower cap rate markets, California, Northeast, and was really looking for a home in the maybe higher yielding markets, specifically in the Sunbelt. In your trafficking of the transaction markets in the last little while, have you seen any instances where you might see some of that 1031 capital looking for a home?

Yes, Kyle, I will start and let Scott elaborate, but I think we are still seeing rotation of capital into target or strategic markets for various investors. For example, some may be coming out of California for various reasons. It could be exposure to environmental risks like the fires or insurance costs, those kinds of things, governmental regulations, but the markets we are in are attractive to a number of investors that are coming out of other markets. So whether it is a 1031 rotation or it is just kind of a normal geographic investment rotation, we are seeing interest in these markets. So that continues while, as I mentioned before, the transaction volume is lower than the times that you mentioned. There is still lots and lots of investors and lots of capital that wants multifamily long-term as a long-term investment. But Scott, you may add to that. I think that summarizes it. Okay. Thanks, Kyle.

Okay. Thanks very much.

This concludes the question and answer session. I would like to turn the conference back over to Mr. Pauls for any closing remarks.

Thank you, everyone, for participating in today's call. We look forward to speaking again soon. Take care.

The conference is now concluded. You may disconnect your lines. Thank you for participating and have a nice day.