Good morning, ladies and gentlemen. Welcome to the Dream Unlimited Corp second quarter 2019 conference call for Wednesday, August 14th, 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. Later in the presentation, we will have a question and answer session.
To queue up for a question, press star then one on your telephone keypad. Your host for today will be Mr. Michael Cooper, CRO of Dream Unlimited Corp., and Ms. Pauline Alimchandani, CFO of Dream Unlimited Corp. Mr. Cooper, please go ahead.
Thank you very much. Good morning, and welcome to the Dream Unlimited second quarter conference call. Today's call, I'm with Pauline Alimchandani, who's going to make the presentation. When she's done, Pauline and I would be happy to answer questions. Pauline.
Thank you, Michael, and good morning. Overall, the first six months of 2019 have been a productive period for the company. At June 30th, Dream's total equity on a standalone basis increased to CAD 9.56 per share from CAD 9.33 at December 31st, 2018. A notable stat this quarter is that our reoccurring income business, comprised of stabilized income-generating assets and asset management, increased to 50% of our book equity per share. Our urban development segment, which includes our Toronto and Ottawa development assets, has increased to 10% from 8% since the beginning of the year. Our Western Canada community development segment declined to 40% from 45%, a trend that is expected to continue as we continue to repatriate capital from the division to reinvest in our assets in Toronto and within our reoccurring income segment.
In the six months ended June 30th, earnings before income taxes on a Dream standalone basis decreased to CAD 38.3 million from CAD 49.8 million in the prior year due to lower fair value adjustments on financial instruments of CAD 2.1 million, a gain on disposition of an asset sold in Toronto in the prior period of CAD 9.4 million, higher interest expense of CAD two and a half million, in addition to a one-time net gain of CAD 12.6 million on the acquisition of Dream Alternatives in the prior year period. These were partially offset by CAD 3 million of increased earnings from our investment in Dream Office REIT and CAD 8.1 million higher net margin generated from our operating segments.
In the six months ended June 30th on a consolidated basis, the company recognized a loss before income taxes of CAD 48.2 million, compared to earnings before income taxes of CAD 120.1 million in the prior year, due to adjustments relating to the Dream Alternatives Trust units, partially offset by higher margin earned from our operating segments and increased equity earnings from Dream Office REIT. Within our reported consolidated results, Dream Alternatives Trust units held by other unit holders are treated as a liability on the statement of financial position of Dream, and accordingly are fair valued each period under IFRS, generating losses as the trust unit price increases. Fair value losses on the Dream Alternatives Trust units were CAD 85.9 million in the current period due to the unit price increasing from CAD 6.24 at December 31st, 2018, to CAD 7.68 at June 30th, 2019.
This compared to losses of CAD 34.4 million in the prior year, due to the unit price increasing from CAD 6.33 to CAD 6.89 in the prior year six-month period. Results in the comparative prior period also included a one-time net gain on acquisition of control of Dream Alternatives of CAD 130 million. One of our primary objectives over the last few years has been to build a safer and more valuable company. In doing so, we have grown our pre-tax recurring income to almost CAD 50 million year to date, which is up 14% over the prior year. 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, which is the driver of the Canadian economy.
Arapahoe Basin has benefited financially from our capital investments, and its income is growing and non-correlated to any other of our development business lines. Finally, we have received many approvals in Western Canada, which improves the value of our lands while we wait for market conditions to once again support increased volumes. Our urban development investments in Toronto and Ottawa offer incredible opportunities. As of June 30th, we had approximately 12,000 residential units and 3.6 million sq ft of retail and commercial space in various stages of planning, pre-development, and construction.
This included nearly 1,700 residential units and half a million square feet of commercial space under development or having achieved a sales launch, with the remainder held in our future development pipeline. Of our condominium projects in our inventory, which have achieved market launches to date, approximately 99% of these units have been pre-sold, including Riverside Square and Canary Block condominiums. In addition, there are 750 purpose-built multi-residential units at Block A within the West Don Lands development, which we expect to construct beginning in the fourth quarter of 2019. Our pipeline includes future phases of the West Don Lands, Zibi, the Distillery District, Block 13 in the Canary District, and our recently approved and renamed Brightwater development in Port Credit, to name a few. We are committed to building the best communities, which will translate into increased value for shareholders over the long term.
As we build rental and commercial properties within our communities that we intend to hold for the long term, our recurring income sources will continue to increase. As of June 30th, Dream owned CAD 536 million in the Dream publicly listed funds, inclusive of our units in Dream Office REIT, Dream Alternatives, and Dream Global, which accounted for over 65% of our market cap and generated over CAD 11 million of distributions year-to-date. Although the environments in which our land and housing divisions operate experienced softer market conditions through 2018, which has continued through 2019, we have continued to generate solid earnings in Dream due to the strength of our other business lines. Given the diversification of our business, we expect income driven by Western Canada to represent a smaller proportion of our earnings and book value per share relative to our historical results.
We expect 2019 will be the lowest level of earnings contribution to date for Western Canada within our financial results. We would expect this will once again increase when Providence comes online, which is currently expected to be 2021, although is subject to a number of different factors. In the near term, we have reduced our overhead costs and have minimal other carrying costs on our lands in Western Canada so that we are ready and able to act opportunistically as market conditions improve. On the vertical building side, we started our first 120-unit multi-family apartment building in Brighton this quarter, and we are seeing good value from building rental and commercial properties on our Western Canadian lands.
Since going public in 2013, our book equity per share has increased by a compound annual growth rate of 17%, which is quite positive considering the decline of activity in Western Canada and the growth in our other segments. I will now briefly review key results highlights by operating segment for the first six months ended. In the six months ended June 30th, our stabilized income-generating assets reported NOI of CAD 19 million, up CAD two and a half million from the prior year, driven by an increase in contribution from the recently expanded A-Basin and partially offset from lost income from our Obico property, which was expropriated last year. A-Basin has continued to grow in popularity over the last 15 years. Last ski year marked the first year we had over 500,000 skier visits.
This year, we surpassed 590,000 skier days, driven by our newly opened ski area expansion and a favorable snow year. Our net operating income for the first half of the year was CAD 13 and a half million, which was a three and a half million CAD increase from last year. At June 30th, Arapahoe Basin had a book value of CAD 29.4 million at depreciated cost on our balance sheet. we believe the fair value of this asset is significantly higher. In the six months ended June 30th, our asset management division generated net margin of CAD 16 million, up from CAD 14.1 million in the prior year. The increase in net margin was driven by growth in fee-earning assets under management and transactional activity.
In the six months ended, our share of equity income from our 24% investment in Dream Office REIT was CAD 15.2 million, up from CAD 12.2 million in the prior year. Dream Office REIT's net income was generated from rental income, its share its income from its investment in Dream Industrial REIT, and fair value increases to investment properties in Toronto, which was partially offset by interest expense and fair value losses on financial instruments. Year-to-date, the company's investment in Dream Office REIT generated cash distributions of CAD 7.3 million. Within Urban Development, we had several notable accomplishments during and subsequent to the quarter.
Year-to-date, we have incurred net losses of CAD 1.2 million from our Urban Development division, which is really as a result of our fixed and operating costs, which were offset only by a limited number of activity in the period, with only 49 condominium unit occupancies, which related primarily to Riverside Square. By the fourth quarter of 2019, we expect 300 units that are shared to occupy primarily relating to Riverside Square and Canary Block. We do not generate much income from our Urban Development business year-to-date, the projects we have in our pipeline are advancing well and will generate meaningful profits in development management fees over the next few years. Our specific milestones this quarter included securing our first commercial tenant at Zibi, our 34-acre waterfront development along the Ottawa River in Gatineau, Quebec, and Ottawa, Ontario, with the federal government of Canada.
The 15-year leases were approximately 155,000 sq ft of office space located in the heart of the site with unparalleled views to Parliament Hill. In addition to this building, we have over 450,000 sq ft of retail and commercial space in various planning and development stages at Zibi. We also reached an important financing milestone on the first block of our purpose-built rental community in the West Don Lands neighborhood in Toronto. Through CMHC's Rental Construction Financing initiative. The federal government announced the investment of CAD 357 million at 100% for the first block slated for development, which will comprise of over 750 rental units, including 30% affordable. We also reached an agreement with the City of Mississauga to facilitate the advancement of municipal approvals for our newly named Brightwater development, formerly referred to as Port Credit, which is a significant milestone for the project.
In Western Canada Community Development, we incurred negative net margin of CAD 4.3 million, with 87 lot sales and 52 housing occupancies year-to-date. This compared to negative net margin of CAD 6.7 million in the prior year, with 98 lot sales and 104 housing occupancies year-to-date. The decrease in negative net margin relative to the comparative period was really the result of lower overhead costs and higher cost recoveries achieved in 2019. In terms of our balance sheet, we had up to CAD 127.7 million of undrawn credit availability on Dream's operating line and margin facilities. At the end of the quarter, our debt to total asset ratio on a Dream standalone basis was 36.2%, up from 34.9% at the beginning of the year.
In the first six months of 2019, our debt ratio increased slightly due to CAD 32 million of combined purchases of units in Dream Office REIT and Dream Alternatives, and borrowings on our developments on a cost to complete basis. We anticipate through recycling capital with the sale of non-core assets that we will lower our debt ratios as debt is repaid with net proceeds. We are focused on maintaining a conservative debt position and have ample excess liquidity even more before considering unencumbered or under-levered assets. In and subsequent to the six months ended June 30th, CAD 1.5 million subordinate voting shares were purchased for cancellation for CAD 11.6 million under our Normal Course Issuer Bid. Dividends of CAD 5.3 million were declared and paid on our shares in the six-month period. On the overall, it has been a productive first half of the year for Dream.
Our book equity per share continues to increase. We have strong financial flexibility, which we expect to increase further once we execute a non-core asset sales, 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.
Thank you, Pauline. At this time, we'd be very happy to answer any of your questions.
Thank you. We will now begin the question and answer session. If you have a question, please press star then one on your touch-tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then one on your touch-tone phone. We have our first question from Mark Rothschild with Canaccord.
Thanks, and good morning, everyone.
Good morning.
Michael, one thing you've spoken out for a while is that even though the shares might be below net asset value, there's more important or other uses for cash flow, free cash flow that you would have, whether it be the balance sheet for other investments. Where do you feel that the company is right now in regards to your goals, and in regards to the balance sheet as far as the consideration of being more active in buying back shares?
Mark, that's a great question. I don't think I ever said what was important, not important. I think the issue's always been that we've got to put our money where it's most significant over the longer term. My view has been buying back stock is a significant part of our long-term plans, but we can do more or less at different times. I think, if you take a look at how we've gone from 2% ownership of Dream Office to 27%, or how we built up a business in downtown Toronto, or what we've done in asset management with that and other things. I think now we're invested primarily where we want to be, and I think as we get cash, buying back stocks will be much more significant going forward.
The only thing I would say is we're also very focused on making sure the company is very well-capitalized. I think at this point, buying back stock is becoming a more significant use of capital, provided we've got the safety that we want.
Okay, great. Any update on the Obico settlement? I know you said it might take a while.
It's Obico. It will take a while. We think that the luckiest we could be is to have some type of progress by 2021. It's going to be a long time from now.
Okay, great. Thanks. Just one last question. In regards to Providence, are you still optimistic that you can have lot sales next year? To what extent can that grow in 2021?
I appreciate that question. Right now, what's been happening is that in order to start that development, there needs to be some water servicing provided by the City of Calgary. It looks like that's a few months delayed, so we'll probably be into 2021 rather than the end of 2020 to start Providence. We don't view that as meaningful. It's just one of the obstacles along the way. Everything else is on track.
Okay, great. Thank you.
Thank you.
Thank you. Our next question is from Sam Damiani with TD Securities.
Thanks. Good morning. Just over to A- Basin. Just to be clear, from looking at the MD&A, do you see NOI on this asset being up year-over-year on the next ski season with the Ikon pass despite the budgeted decline in traffic?
Okay, let me try to walk through this. We did a deal with Vail Resorts in 1997, where they basically received a commission for generating skiers for A- Basin. In this current year, about 60% of the skiers came from Vail passes or lift tickets. Generally, those are very low yielding for us. They're low yielding, and they stress out the ski area on important days. We've been trying to figure out how to manage this. What we've done is we've ended the relationship with Vail. I think there's something like 25,000 free skier days for Vail employees. They're so huge that they've overwhelmed our ski area. What we've done is we no longer have unlimited passes of any kind from Vail. They're all gone. Instead, we're going to be promoting our own ski passes.
With Ikon, we've agreed to have up to 7 days of skiing for the expensive pass and 5 days with the basic pass that are restricted. What I was trying to say in the press release that may not have been clear is we're projecting 25% less skiers, but with the increase in yield, we expect a significant increase in profit.
That's clear. It wasn't clear from the press release if it was just fiscal 2019, so half of the last season, half of the new season.
Oh
go forward. Okay.
That's a good point because ski people measure it from August 30th to August 30th. We do go back and forth. The fourth quarter is pretty small, the contribution. Even though on a fiscal basis it should be much improved next year.
Okay, fantastic. On that asset, I don't know when the last time you got an appraisal on it or, for some reason, had to put some debt on it or whatever. Is there any third-party indication of value of it? Also, what is the undepreciated cost, if that's something you'd be willing to disclose?
The book value is something like CAD 27 million or CAD 28 million, I think. What do you mean by undepreciated cost? You're saying what our total cost is?
Yeah. Have you booked depreciation over the years? What's your gross cost?
We buy snowcats every year. We buy one a year, and they get depreciated over four years. I'm not sure how meaningful a number it is. It's not really like a building.
No. Yeah.
I'm not sure. We probably depreciated CAD 20 million of value over that time.
Has there been an appraisal, or would you consider getting an appraisal just to provide?
No, we're pretty confident we know the value. We don't need an appraiser to tell us.
Okay.
I think that what you're seeing now with the way the industry is, actually, Vail just bought a ski group. I think it's called Peak Resorts or something like that, and it was announced in the last 60 days. I think that was nine or 10 times EBITDA, but if you take a look, there's some issues there. Generally, the low end is nine or 10 times, and above 15 is rare. Probably between 10 and 15 is reasonable for a ski area.
What was the last 12 months for Arapahoe Basin?
Pauline?
We had CAD 13.5 million year to date. I suspect that third quarter is always a loss for us. With the fourth quarter and the new pass, it's a little hard to forecast, but I would say probably by the end of the year, we'll be up slightly from where we are year to date.
Okay.
If that helps.
That's very helpful. Thank you. Just moving over to Toronto. What would be the next condo project that will be launched in terms of sales, and when do you think that'll take place?
We've launched most of them. Right now, we're looking at doing apartments. We've got 31A Parliament that we want to do as an apartment. That could start next year. Block 13, we haven't decided if it's a condo or apartment. Most of the condos that are ready to go, we've already sold. I can't think of which one is upcoming. Mirvish, we're still working on, but I'm not sure of the date on that. Mirvish is probably the next most likely one.
Mirvish. Would you say a year or two out?
Yeah.
Just switching over to the management contracts. You've enhanced the disclosure a little bit, clarified or whatever, on the incentive fee for Global and Industrial. Just wondering if you, I guess, give us an indication as to what the rationale for that enhanced disclosure was. Should we take it as some sort of an indication of a desire to potentially terminate the contracts at the expiry?
No. To be totally honest, in Global, it was a bit confusing. I didn't realize that management income paid from properties that are co-owned with POBA went through the related party note, and it made it harder than I thought to identify what the original cost was of the assets. It's not an issue in Industrial, it's an issue in Global. That came up late last year. We've been talking about it since. It wasn't actually easy to calculate it, so we thought we would put it in. I actually had assumed that it was easier to calculate, but that was an error.
Okay. My last question
Sorry, Sam, I'm not sure if I'm clear with you. When POBA pays Dream any fees, it's in the related party disclosure under Dream Global REIT. I hadn't realized that the related party disclosure included amounts from a separate third party. As a result of that, it made it hard to use that as the metric to determine what the asset cost was. We realized that, and then we started to look and say, "You know what? We should just come out and say precisely what it is," so that it was easier for people to understand.
Clear. Last question, just on Western Canada. The lot sales were basically flat year-over-year. Is that the new up? Are you a little bit more constructive about the outlook for Western Canada from current sales volumes?
There's a lot of different moving parts out there. I think that the economies have been pretty stubbornly difficult. I think we're seeing a little bit of decline in standing inventories, which is positive. The stress tests are hurting. We're not quite confident as to exactly what normal is right now. Overall, they're doing okay. The provinces housing's been hurt bad, and our expectation is it'll pick up. We just aren't expecting it to pick up in 2019 or 2020.
Okay.
That might be yes. That might be yes for your question of, is this the new up?
Okay, exactly. Is the cost structure within the company, out West, is it changing at all, or have you finished making changes to the cost structure on the development side out West?
Pauline, do you want to address that?
Yes, I think that we went through some changes earlier this year. The full impact of that won't be seen until 2020. The overall overhead costs, on an annual basis, have declined by about CAD 10 million.
Thank you.
Thank you. As a reminder, if you have a question, please press star, then one. Our next question comes from Brett Reiss with Janney Montgomery Scott.
Hi, Michael. Hi, Pauline.
Hi, Brett.
Morning.
Yeah, it's basically almost a follow-up from Sam. Do you have any employment growth metrics over the next five years in the western cities where you have the bulk of your permitted housing lots?
You mean anybody's forecast on what growth is expected to be?
Right. If employment goes up, the people have to live somewhere. I guess the next two years it doesn't look too good. Is there any visibility beyond two years?
Look, I mean, people do their numbers, and they generally revert to the mean. This has been a pretty protracted period of low economic activity in Western Canada. Personally, I use all five of the banks, put out provincial forecasts, and they're available to anybody who goes onto their website. In addition to that, CMHC has some forecasts. They generally only go two or three years. Even if you look at those, you'll see that generally they're positive, although there's a couple of outliers who are quite negative. Net net, the consensus is that it is improving out West.
Okay.
The consensus has been wrong for five of the last six years.
Okay. With respect to the pre-sold condo units in Toronto, is it similar in the States? People will put down a down payment, and if so, what % of the purchase price is it?
The down payment ranges from 15% to 25%. It's not like the U.S. In Canada, the person who signs it is liable to close. In the U.S., like in Colorado and California, they can just walk from it. Generally, in the United States, if people don't pay anything more than their deposit, they can walk. In Canada, they're responsible. We have very low levels of people that aren't able to close or won't close.
Okay. Just in case winter comes to the Toronto condo market, is it because of what you just described? If a buyer does walk, you've got about a 15%-25% cushion on a markdown of the price because you keep the down payment?
Number 1, that's true. Number 2, it would be more than that because generally, condos are worth more than when we sold them. I think that there's quite a good cushion. The thing that we really look at is what's the value as a rental property, whether that's an individual property that somebody's renting out at CAD 4.50 a square foot or a whole building. The rental property values are another way of confirming that the underlying value is pretty good, even if somebody doesn't close.
When you look at the rental values versus the market values of your 12,000 units, how does that look?
We think that rentals are very competitive with condos. With a condo, you might make a little bit more money during the construction period. With the apartments, it looks very desirable for the increasing returns over time. As rents go up by 2% or 3% and you've got decent financing on it, you get decent growth, and you're building to a number that is higher than the interest rate. You get a decent cash return plus growth, and they look pretty attractive.
Right. If things continue to heat up between the U.S. and China on the trade war, is the pricing of Toronto condos dependent on Chinese capital flowing into that market?
No, the Chinese capital's reduced to almost zero, number one. Number two, just when I read the news, prior to 1997, when Hong Kong became under Chinese rule, prices in Vancouver went up a lot. I think that we could see, even though there's a 15% tax in Ontario and B.C. for foreigners buying places, I think we could see some significant new demand out of Hong Kong over the next few years. I would say China is probably a net positive for Toronto real estate. I think it's a big concern more for agriculture and other industries. I think you'll see people leaving China coming to Toronto.
Great. Michael and Pauline, thanks for answering my questions. Appreciate it.
Thank you.
Thank you. I have no further questions in queue. Mr. Cooper, do you have closing remarks?
Yes, I do. I'd like to thank everybody for their continued support of the company or at least continued interest. We're quite excited about the changes that we're making and quite excited about the future. Please follow up with Pauline and I if you have any further questions, and we look forward to speaking with you all soon. Thank you very much.
Thank you, ladies and gentlemen. This concludes today's conference. We thank you for participating. You may now disconnect.