Dream Residential Real Estate Investment Trust

Welcome to the DREAM Residential REIT Fourth 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 zero. 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 www.dreamresidentialreit.ca. Your 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 3.7% and within our guidance that we had set at the beginning of 2024. Comparative properties NOI margin was 52.9% compared to 52.1% 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 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'm 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 Residential's 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 2.4% for the quarter and 3.7% 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 0.8% higher than Q4 2023 and 3.5% 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 93.4 percent 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 94.4 percent 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 0.8 percent higher than the preceding quarter and matched our Cincinnati region assets with 3.0 percent annual in-place rent growth. Portfolio-wide, rents increased 0.5 percent from Q3 to Q4 and grew 2.2 percent 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 grown 17 percent over the same period from IPO through the end of Q4 2024. Leasing conditions across the United States are challenged and likely to remain subdued in the near term. During Q4, DRR leases decreased 2.3% on expiry. However, renewal tradeouts rose 4.6% for a blended 1.4% 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 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 31st, 2024, diluted funds from operation was 17.3 cents and 70 cents 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 NYA margin at 52.9%. This compares to $6.2 million and 51.9% in the prior year quarter. On a comparative properties basis, NOI increased 2.4% 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 IHRS 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 five basis points quarter over quarter to 5.84%. Net debt to net total assets was 33% and largely consistent quarter over quarter. On December 31st, 2024, we repaid $15 million in mortgages at Coles 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 1 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 2. We will pause for a moment as callers join the queue. The first question comes from Jonathan Kelcher with TD Cowen. Please go ahead.

Thanks. Good morning. First question, and I guess you're 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'll just sort of run the portfolio as is, as the strategic review plays out?

Hi, Jonathan. We're 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're normally watching markets, watching transactions, looking at opportunities, we continue to do that. But I think it's fair to say we're 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 more challenging leasing conditions entering 2025, can you maybe expand a little bit on that and which markets you're seeing that in?

Good morning, Jonathan. This is Scott. I think what we're 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're seeing that across the country, but more pronounced in the Sun Belt and in our market DFW. So, we see some of that being seasonally impacted, and then we see the outlook as the macro deliveries sort of transition to more of a demand mindset. I think we'll see those conditions change.

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

It's very market by market. And so I would say most analysts would say it's 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'm 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, you know, as Brian mentioned, we're undergoing a strategic review, and we wanted to have flexibility, you know, going forward depending on which path we choose. So, you know, putting in our credit facility gives us that additional flexibility to pursue a potential strategy. So as noted, that's why we didn't Repay those marketers. We constantly monitor the market. So depending on how the year goes we will continue to evaluate that Okay, and what and what sort of difference in rates The line versus what you would have been able to do Sure, so if currently the the credit facilities act around six point one percent if we were to place five five or five your financing it probably be about fifty basis points and So 5.5%, 5.6%. Okay, thanks.

I'll turn it 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'd be able to shed any light on the transaction liquidity market in Dallas or Cincinnati and whether you're seeing a good return atmosphere for liquidating any apartments, if that was a path you're 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's lots of capital that wants to be in this asset class. It's very defensive. It's very safe. The markets are nuanced, meaning that there's certain capital that wants to be in in Texas or Oklahoma or Ohio, and so there's different levels of transactions in 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're seeing all of that, and we're watching it closely, I would say, you know, there's There's 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're watching that to try to answer your questions as best I can.

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

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

That makes sense. And Brian, maybe just, you know, this is probably a tricky question, but putting a Paul's Corp hat on here, you know, how does this market look from a development perspective? And if you were to make a development work right now, how, you know, how do you think about it?

Sure. Developments are very tough to make right now. Developments, there are cost pressures on land, on labor, on material, meaning that they have continued to rise. There's inflationary pressures in those areas, and there's quite a bit of pressure or headwinds, barriers to entry for development from a financing standpoint. A 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're 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 building permits have dropped off a cliff. This is a cyclical business. We're in a cycle where we're 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's very expensive, and the renter pool or the renter demographic continues to grow. That's why, you know, I previously said that it's 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're 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, you know, the range of strategic alternatives you'll be looking at. So what are those alternatives you'll be looking at? I mean, is it the outright sale of the REIT? Are you looking to sell some assets in chunks? I mean, exit some markets, capital recycling? Like, what is the preferred way of these alternatives right now?

I think our press release said what we're prepared to say. We're looking at everything. We're 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're looking at kind of all alternatives. We wanted to announce that we're taking a hard look at that because that's 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're continuing to operate the business. Okay.

Thank you so much. I'll turn it back.

Once again, if you have a question, please press star, then 1. 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've 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's why you're 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's a good question. I mentioned that we've been in discussions on JV opportunities, and that is true. That strategy is not off the table. I'd say it's still a possibility, but we have broadened the review to kind of look at all the possibilities. We're not narrowly focused on just JVs, but we're looking at everything, but that is certainly something that continues to be an option.

Okay. And just, 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 weren't quite hitting the threshold. How should we think about suite renovations this year? Is it more focused on Cincinnati? What's 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. And we're generally, over the normal course of business operations, looking to renovate about 50 suites in Cincinnati in 2025.

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

Correct. We have taken a pause there. Yeah. And, you know, we can certainly undo that pause when the time is right, but we're pleased with the $300 tradeouts that we've seen in Ohio, and we'll continue to work there.

Yeah. Okay. Thanks a lot. I'll turn it back.

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

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

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

Yeah, no, very, very helpful. Thank you for that. And then, again, going back, I know, obviously, we've kind of, you know, touched on this already on the call. But just as it relates to the transaction environment, if we look back a few years ago, in the more kind of immediate post COVID area, it did seem like there was a lot of 1031 capital that had maybe, you know, rotated out of lower cap rate markets, California's Northeast, and was, you know, really looking for a home in the maybe higher yielding markets, specifically in the Sunbelt. You know, in your, you know, 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?

Yeah, Kyle, I'll start and let Scott elaborate. But I think we're 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're in are attractive to a number of investors that are coming out of other markets. So whether it's a 1031 rotation or it's just kind of a normal just 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's 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.