Dream Impact Trust

Good afternoon, ladies and gentlemen. Welcome to the Dream Impact Trust fourth quarter conference call for Tuesday, February 14th, 2023. During this call, management may make statements containing forward-looking information within the meaning of the 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 the trust 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 the trust filings with securities regulators, including its final long-form prospectus. These filings are also available on the website at www.dreamimpacttrust.ca. Later in the presentation, we will have a question and answer session. To queue up with your question, please press star 1 1 on your telephone keypad. Your host for today will be Mr. Michael Cooper, Portfolio Manager. Mr. Cooper, please go ahead.

Thank you, Operator, and good afternoon, everyone. Today I'm here with Megan Peloso, our CFO. Last night we released our results that included two difficult decisions and some other exciting progress. Our interest in the Las Vegas hotel is a passive interest, meaning we really don't have much of a say. While the investment went through a thorough due diligence in 2018, with COVID and a very restrictive lending environment in the United States, we are doubtful of the value of the asset, and our board determined it was reasonable and conservative to reduce the equity investment to zero, although we will continue to try to achieve a return of some capital along the way. Over the years, we have maintained a 40-cent distribution, generally we've been able to pay out the distribution and maintain or increase our net asset value. However, with the amount of development we have, the distribution was not generated entirely from recurring income. Some were generated by appreciation on our lands. After dialogue with the board and taking into account feedback from investors, the board decided to size the dividend to match the recurring income more or less generated by our income assets. This decision means that the company will maintain more capital than before, but it does not affect the intrinsic value of the business. During 2022, we added about $100 million of new income properties that included completed developments and new acquisitions. Our apartments that we have bought and developed are performing very well. Over the next three years, we have another $500 million of completed buildings that will change the nature of the trust as we double the amount of income properties. About $300 million of completed developments over this time period are in the West Donlands. These properties are best-in-class, purpose-built rentals and will also have about 500 affordable housing units, an Indigenous health centre, and many amenities for the city and the nearby residents. The other $200 million is primarily purpose-built rental at Zibi, which provides net-zero residences and affordable housing. Subsequent to these developments, we are making some very special and valuable new projects. Victory Silos was acquired for $58 million with a value today of $250 million for an increase of $192 million or $72 million at the trust shares. During the time we've owned this site, Victory Silos has been rezoned for 1.3 million square feet on Toronto's waterfront. It will be an amazing development. 49 Ontario is a site that we acquired for $47 million and we are nearing rezoning for an excess of 800,000 square feet. The value of this site has increased by $93 million and is 100% owned by Impact Trust. We're expecting to develop this site into a purpose-built rental with a partner to manage the equity requirements. In December, we finalized definitive documents to acquire Keysight, the world-class 13-acre site on Toronto's waterfront. We expect to close on the first phase next month. We are very pleased with the progress with governments and anticipate progressing through other approvals relatively quickly as a site is so important to all of the government agencies that we deal with. The assets described that will be completed soon and the longer term developments will create exceptional portfolio of income properties. In addition, our Frank Gehry Design Forma launched in June of 2022 is one of the most successful launches ever with over $800 million of sales at a very high price per square foot. We have fixed 45% of the construction costs already and are finalizing the construction loan, and we've even started construction. Although we have owned the site for five years, with the improvements we have made to the design, our current pro forma is showing the highest profit since we bought the site. Megan, can you provide a review of our year-end results?

Thank you, Michael. Good afternoon, everyone. I'll start by briefly speaking to our financial results, liquidity position, and significant activities in the period. In the fourth quarter, the Trust recognized a net loss of $44.9 million. Results included a fair value write-down on the Trust's investment in the Virgin Hotel of $59.2 million. Excluding this write-down, the Trust generated earnings of $14.3 million, down from $27 million in the prior year. This was driven by the composition of fair value adjustments on commercial properties in each period and higher interest expense, partially offset by an increased income contribution from our multifamily portfolio. As previously disclosed, the Trust has a 10% minority interest in the Virgin Hotel. This investment has always been passive in nature and considered non-core to the Trust portfolio. We originally acquired the investment in 2018 and the intent was always to exit the asset upon stabilization. The hotel was closed for most of 2020 for significant renovations and reopened in early 2021 in an environment with ongoing COVID restrictions. As of period end, we are required to fair value our investment in the hotel. The fair value loss incurred in the fourth quarter was driven by operating performance, near-term financing needs, capital needs, and a contemplated capital reorganization by the hotel investor group, among other factors. At this point in time, the trust has no further capital obligations as it relates to this investment. Should additional capital be needed, we would not intend to contribute further as the hotel is not aligned with our impact strategy. Results on a segmented basis were as follows. In the fourth quarter, adjusting for the fair value loss in the hotel, the development segment generated net income of $0.5 million down from $1.2 million in the comparative period. Income from this segment will fluctuate period to period and not contribute meaningfully to earnings until development milestones are achieved and or project inventory is available for occupancy. Based on the trust's current development pipeline, we anticipate more meaningful income from this segment upon first tenant occupancies at WDL Block 8 in the spring and Brightwater towards the end of 2023. As it relates to our recurring income segment, NOI from commercial properties was $2.7 million in the fourth quarter, down slightly from prior year due to a decline in occupancy rates. NOI from multifamily rental assets was $1.7 million in the fourth quarter, up from $0.8 million in the prior year, primarily due to the timing of third-party acquisitions and the completion of development blocks. In 2022, the trust added an additional $98 million of assets to its recurring income segment, either through third-party acquisitions or block completions from its development pipeline. Based on our current development pipeline, we expect to bring on an additional $500 million of high-quality residential assets by 2026, which will contribute meaningfully to this segment. Included in results for this segment was a fair value gain of $29 million on Fortnum, Ontario, driven by an increase in land value and density, partially offset by a fair value loss of $14.9 million on south-south vendors due to cap rate expansion. Fortnum, Ontario is an 88,000 square foot commercial property owned 100% by the trust, located in downtown Toronto. We've applied for over 800,000 square feet of density on the site and anticipate achieving rezoning by mid-2023. Inclusive of their recently acquired Berkeley Land Assembly, the site was acquired for $47 million compared to its carrying value of $140 million as of December 31st and an appraised value of $160 million. NAV per unit as of December 31st was $825 down from $931 in the prior year. The most significant driver of this year-over-year change was the write-down on the hotel. Approximately 70% of NAV was supported by a third-party appraisal at year-end. That is higher than book equity per unit due to market value adjustments taken on our investments in Lakeshore East, Brightwater, and Hundred Steels. In the period, a market value adjustment of $7 million was recognized relating to 100 Steels specifically. This investment is a leasehold interest in a retail shopping center and future residential and mixed-use development located near the future steel station on the Yonge North subway extension. We believe the site continues to be more valuable given its proximity to the subway line, and we anticipate achieving approximately 1.5 million square feet of GSA once rezoned in 2023. As of December 31st, the Trust had $16 million of consolidated debt presented as current, which related to a mortgage on 49 Ontario and the Trust credit facility. Subsequent to year end, we closed on the refi of 49 Ontario for gross proceeds of $80 million. First, these were earmarked to repay the in-place mortgage in the trust credit facility. In addition, the trust amended its credit facility, reducing the borrowing capacity from $50 million to $25 million and extending the maturity date to April 2025. Upon completion of these two financing activities, the trust had approximately $30 million in available liquidity, up significantly from December 31st. We've also been working through the refinancing of Victory Silos, and have now upsized the in-place loan from $35 million to $150 million. Given the site's increase in value, through the completed refinancing, we will be able to cover the trust equity requirement for Keysight with excess proceeds. The trust has a 37.5% interest in victory silos. Effective with the trust February 2023 distribution, we have revised our distribution from $0.40 per unit to $0.16 per unit on an annualized basis. We believe the revised distribution preserves additional liquidity for the trust development commitments and is better aligned with our strategy. In 2022, we generated roughly $15 million of NOI from our current recurring income assets. By 2026, with an additional $500 million of assets completed from development, we expect stabilized NOI to be over 2.5 times our current level, which will be more than adequate to sustain our revised distribution level. On that note, I will turn the call back over to you, Michael.

Thank you, Megan. Our company now has assets that are over 90% impact. We also have a distribution that is backed by income properties. We now believe that the company is better positioned for our existing investors and also provides more opportunities to attract new impact investors as well. Our asset mix, distribution policy, returns and social benefits can now be marketed to specialized investors and institutions that have a focus on ESG. As we continue to grow our income properties, report on our social good, and progress on our development pipeline, we will work to attract more investors that see the value of what we do in the company. At this time, Megan and I are happy to answer your questions.

And thank you. We will now begin our question and answer session. If you have a question, please press star 1-1 on your touchtone phone. If you wish to be removed from the queue, you can also press star 1-1. There will be a delay before the first question is announced. If you're using a speakerphone, please pick up the handset first before pressing the numbers. Once again, with your question, please queue up by pressing star 1-1. We have our first question from Saram Srinivas with Cormark.

Please stand by while I open your lines. Your line is now open. Please go ahead and state your question.

Thank you, Aupreta. Thank you, Michael. Thanks, Megan, for the comments. I just have a question on the total capex for the Quayside acquisition. Are you guys open now discussing how much that's going to be?

So what we're going to say is that We've got documents with the government. The government's very sensitive. We'll report it afterwards. But it's a small amount of money, and the way we're dealing with it is the Impact Trust is going to acquire 12.5% of Keysight. It also owns 37.5% of Victory Silo. So in order to fund Keysight, us and our partner are refinancing Victory Silos, and The money that is refinanced, since the trust owns a much smaller segment of Keysight, the transactional action results in getting some free cash flow for the impact trust, and that's going to happen in the next couple of weeks. So it's a small investment, but we're averaging down between the two sites.

Thanks for the call, Michael. Just looking at, you know, you guys obviously disclosed the exposure to variable debt on a consolidated basis. What does that number look like if you actually include all the development projects?

Hi, Sai. With our development assets or equity kind of investments, it's just under 60%. But we continue to look through various hedging strategies and work through those. But it was just under 60 as of December 31st.

You know, we have a number of projects that have government-guaranteed debt at very high levels. And that's part of – they're much more like infrastructure assets, As I mentioned when I referred to 49 Ontario, our expectation is that a project like that will bring in another partner, well, bring in a partner to not have too much debt and to be able to own a big chunk of that property for a long time without stressing the balance sheet. So we will be looking more and more at having partners in large sites.

That's great, Michael. Megan, thank you so much. I'll turn it back.

Thanks, Ty.

We have our next question from Dennis Roots with Cornerstone Financial. My apologies. Please stand by while I open your line.

And your line is now open. Dennis, perhaps you're muted on your end. We have Dennis Roots in queue.

Just to be clear, sir, are you on the line? If not, I will move on to the next question. All right, we will take our next question. Our next question is from Sam Diamani with TD Securities. Please stand by while I open your line. And Sam, your line is now open.

Thank you. Good afternoon, Michael. Good afternoon, Megan. Just maybe to start off, you know, with the 16-cent new distribution, could you just give us a sense generally how you arrived at that specific number?

Sure, Sam. Thanks for joining us. You know, overall, when we take a look at what our current recurring income assets can generate NOI-wise as well as what's coming online from that pipeline list, We felt pretty comfortable coming up with the $0.16 distribution in terms of how we were able to sustain that going forward, and that's really the focus. We wanted to make sure that this was sustainable, it's covered by this segment, and then we can really focus on the development profit side to further grow the business. So that's really how we worked into it.

Yeah, so Sam, we pretty much allocated capital to either the income assets or the development assets, and we also allocated expenses. So for the income properties, it could be leasing costs, prorated to venture interests, the G&A, and we got to $0.16. It looks like it's pretty sustainable.

Okay, great. That's helpful. And just on the development spending, do you have a budget for this year and next year in terms of how much the trust will spend on the development side?

Yeah, the guidance that we've given over the next two years is about $45 to $55 million.

And that's an annual number?

That's in total for the two years.

Two years, sorry. And you mentioned West Donlands, first occupancies coming up in the next few months, I guess. Have you started pre-leasing there or worked towards that? And what's your sense as to how... rents are or might be coming in versus pro forma?

We haven't started leasing yet, but we're getting ready. We did a pro forma in 2018, which was based on the 2018 rents in place at the time, escalated by 3%. And the punchline is that today rents seem to be two cents higher than we originally budgeted. But two years ago, we were 20% below. So even though it hasn't been a straight line, it looks as if we're going to do better on rents as well or better as what we budgeted, and we're pretty pleased with that. But it's also interesting because a number that you hear a lot is that rents in Toronto were up 20%, but that's just because they were down 20% the two years before that. So it's actually been exactly where we hoped it would be.

Okay, well done, and thank you, and I'll turn it back. Thank you.

And thank you so much. Our next question. is from David Crystal with Echelon. Please stand by while I open your line. Your line is now open.

Thanks. Good afternoon, Michael and Megan. Just on the kind of capital requirements and sources for the next couple of years, the $45 to $55 million is your share of new equity required for ongoing projects, correct?

That's correct.

And so with $30 million of liquidity pro forma, the 49 Ontario refinancing, do you expect the balance will be from incremental debt or asset dispositions, whether whole asset dispositions are partial?

You know, I mentioned earlier about a victory silos refinancing. I think we're pretty much set up by the end of next month for what we need for the next couple of years.

And so would the Victory Silos refinancing be significant enough excess cash flow over and above the Keysight acquisition to fund that, call it, you know, a $15, $25 million shortfall?

Well, it's not a shortfall, but it's probably in that range. It's going to be finalized over the next couple of weeks. Okay. So, yeah, I think it is sufficient. But, you know, having said that, I mentioned already that we're looking at partners for 49 Ontario. And... We may bring partners into Keysight later, stuff like that. So, you know, we've got a lot of flexibility. I think we are fully invested, but we really like the assets that we have.

And then we want to be invested. On 49 Ontario, does the Q4 revaluation, the increase in value, does that reflect the expected 23 rezoning? Or should we expect more fair value gains there?

We need to wait until we actually have our rezoning accomplished. So there's still, from what we think we do, we think there's still a cushion there.

Okay, so Q4 really was just the Berkeley land assembly and increased land value more so than expected upzoning?

No, I think that the Q4 value would be related to the sort of general expectation of what the rezoning would be reduced by risk. So, once it's achieved, that risk component would be gone.

Okay, fair. And you mentioned 70% of NAV at year-end is stocked by third-party appraisals. What's in the remaining 30%? What kind of assets or what's not included in the 70?

Some of the development assets wouldn't have external appraisals. As it relates to all of our consolidated income properties, 100% of those had appraisals. Then, as I mentioned, Brightwater, Victory Silos, and 100 Seals all had appraisals. From an IFRS or accounting perspective, a lot of the stuff is still a cost that's in development, so something like Zippy, for example. We don't get an external appraisal for that.

So generally, I think we're looking to get like one-third of the properties appraised annually. But then if you're doing a finance, you need to get one. So the 70% is just a result of the activity that we had.

Okay, fair. And then maybe just higher level, can you comment on the broader condo market and maybe the divergence, if any, between core 416 assets and maybe some of the broader GTA trends?

So first was residential, second was commercial?

No, just is there... I mean, obviously, Forma was incredibly successful at a time when there was a bit of turmoil in the residential market, but does that hold through for the entire greater Toronto area, or is there a bit of a divergence in core located assets versus some of the more peripheral?

No, I don't think that's what it is. I think that there's actually been... some good sales in North Young near Finch. There's been some in 905. There's been some good ones downtown. It seems to be a very choosy market. The real estate brokers have a large clientele, and I think they have a lot of influence. And they're choosing which ones they think are winners and losers. So there's been a number of projects that have been very successful, and another number that has been uninteresting. It's not based on geography. I think it's really based on the individual merits of a project and the desirability. So Yonge and Finch seems to be very desirable, and FORMA is. But I think there's been a number of projects that haven't done much, so it's project by project.

Okay, great. Appreciate the color. I'll turn it back. Thank you.

Thank you. As a reminder, if you have a question, you can enter the queue by pressing star 11. Our next question comes from Pranith Promo, who is a private investor.

Please stand by while I open your line. Your line is now open. Please state your question.

Hi. I have a couple of questions. Do you plan to restore the dividend back in the coming years when all the properties have been developed? And the second question is has been active, but not much shares have been purchased in the last year. And you have a fresh one, but what is the criteria for buying back the shares?

Those are two great questions. The first one is we're really focused on sizing the distribution based on the recurring income. And as that grows over time, we would look at the distributions. And I think we would try to increase it as the assets come online. That'll take time. I don't think we'll look at the 40 cents as a significant number. It'll be based on the income that we're producing. So that's on the distribution. On the issue of the normal course issuer bid, one thing that we haven't said is in literally the last 12 months, there's been a lot of changes on inflation, interest rates, construction costs, demand. And we are seeing that there's a lot more volatility. Throughout our whole organization, we've been using normal course issuer a bit much less, favoring liquidity. So when we feel that we have a lot of liquidity, we would use the NCIB. In the meantime, to the extent that we're buying shares, Dream Unlimited would buy it. We want to keep as much cash available within Dream Impact Trust as we can. So we'll do some, but I don't think we're going to try to maximize or anything close.

So is the current dividend based on the current income that you are getting, recurring income that you are getting? So by, like, say in 2025, 26, when the recurring income increases to 2.5 times, so then we expect the dividend to follow it, right? And also the current share price is- So the current- Yes, go ahead.

Apologies. I was going to say, the current dividend or distribution level that we're adjusting to It takes into consideration what we have today plus the $500 million that will come online. And through that stabilization, that's how we backed into the number with something that we were comfortable with. So it already considers that increase in NOI for the future blocks.

Okay. And also, like, currently the share price is trading at almost half value of the net asset value, right? Based on like today's stock price, it has even fallen more. So, yeah, okay, that's good. Thank you.

Just to confirm, no further questions?

Yeah, no further questions.

Thank you. Thank you. Our next question comes from Sid Levin, who is a private investor. Please stand by. I am opening your line. Your line is now open.

Ready to go? Thank you. Hi, Michael. I just wondered if you could comment about, how are you doing?

Good.

How are you doing? Great. I just wondered if you could comment about where the impact trust fits strategically within the dream group of companies.

I really, Sid, I really appreciate that question because we're extremely committed to this business. We own 31%. We're looking forward to owning more. We probably don't talk about it enough, but we're doing a lot of things on each of these developments or income properties that are benefiting the residents and the community. We're also doing a lot of work with the government, and I think what we're doing is really the future of real estate. We basically deal with different levels of government every day of every week, working with them on what's happening in housing and what's needed to sort of create a lot more housing that's both affordable and market. It's a very exciting area to work. I mentioned earlier there's an infrastructure component to what we do, which is at every level there's been a real focus on we don't have enough housing in Canada. We have half a million immigrants. The dollars are insane. It's like to achieve the government's goals between now and 2030 would take two to three times Canada's GDP in capital. So we think this is a really important area area of society to focus on. We think there's going to be money to be made there. But the idea of trying to achieve a lot of goals simultaneously that are important to the government and important to our investors is really exciting. And this year we won the Bretton Flats, and we won Keysight based on our approach. So I think that we probably have a 10-year pipeline now, but we think we're going to be able to – find a lot of other opportunities to create very special projects that improve the communities that we're in. I think you're aware we started a foundation that my family contributes the capital to that works to try to create a bigger safety net for the residents in our communities. So I think we've mentioned that we've done 2,000 breakfasts in the one building of Western Commons where we're testing everything out. We've sent kids to summer camp that are residents in our building, but we've always done it with a larger community. We've got tutorials set up, again, for residents of our buildings plus people in the community. None of that is the cost of the company. That's all coming out of the foundation. We've already heard from senior members of government that the improvements to those communities that we're in is measurable. So I think what we're doing is really important work. We definitely have a long horizon to it. We're definitely interested in reinvesting over time. But I think we're going to see huge opportunities in this business

And so what you're finding though is that in order to capture these opportunities, you find the structure of a standalone impact trust to be the most efficacious?

Yeah, it's an interesting question. I referred earlier to the leverage that we have. It is definitely valuable to have an entity that can provide a covenant for the debt that we deal with. So yeah, it's very important to have itself Sustaining business. I also mentioned we're looking at bringing in partners for some of our bigger developments. But I think, you know, we picked up a third of like $800 million of apartments over the last few years. They're performing really well. Yeah, so it is important, I think, to have a covenant to be able to provide for the developments we're doing.

Okay. Thank you very much.

Thank you for all your support for all our businesses. Really appreciate it.

Okay, thank you.

And thank you. As a final reminder, if you have a question, you can enter the queue by pressing star 1-1. I will stand by to see if we have any further questions. And I see no further questions in queue. I will now turn the call back over to Mr. Cooper for closing remarks.

Well, thank you very much, your operator. I feel like I've had enough remarks. I just want everybody to know that we are committed to making this company successful, to marketing the company, meeting with investors, trying to express ourselves better, and increase the amount of support. For those listening, thank you very much for spending your time with us today, and please feel free to call Megan and I at your convenience. Thank you.

And thank you. This concludes today's conference. Thank you for participating. You may now disconnect.