CA - Dream Unlimited: Multiple Catalysts Despite Canada's Rate Hike

Summary

• Dream expects continual revenue growth as the company seeks more asset management opportunities in 2023.
• The company has risen from managing equity valued at $1.4 billion in Q1 2022 to $18 billion by December 31, 2022.
• Dream's sustainability action plan is for the company to achieve net-zero carbon emissions by 2035.
• Canada's interest hike to curb inflation is likely to weigh in on homeownership sales.

Real estate manager/developer, Dream Unlimited Corp ( DRUNF ) reported Q4 and FY 2022 results indicating improved performance. The recurring income revenue gained 19.44% (QoQ) at $43 million and 45% (YoY) at $168 million. Net operating income rose 40% (QoQ) at $14 million and 58.4% (YoY) at $64 million. The company cited robust results from the Arapahoe-Basin, multifamily housing portfolios, and Toronto's boutique hotels.

Thesis

Dream is pursuing new asset management opportunities in both the public and private investment segments to grow its business and improve financial performance in 2023. Investments in Western Canada are also paying off with the company seeing an increase in lot sizes, rents, and the profitable yield on costs. The company also has its eye on its net-zero carbon emission by 2035 on its infrastructural agenda which is giving it a competitive edge over its peers.

Impact investing has led Dream Unlimited Corp to expand its capital cover to more than $3.2 billion after its total assets first hit $2 billion in the FY ending December 2018. It is interesting since Dream until recently was only considered a residential and income-generating residential investment. Now the company owns close to 34,000 units with an annualized shareholder return of 19% accrued over the past 4 years.

Positive Performance

Back in 2020, Dream's commercial/ retail gross leasing area stood at 11.9 million square feet. In its Q4 2022, earnings call, Dream announced that it had 84 million sq. feet of commercial space (an increase of more than 605% in commercial space under management in just 2 years). Despite the inflationary concerns in both the US and Canada, Dream stated that it had sold over $800 million worth of condos since June 2020 during the Forma event, terming it the biggest launch in the company's history.

DRUNF is down 32.37% (YoY) but is up 8.23% ((YTD)) on positive earnings. Dream Industrial REIT ( DREUF ) has also lost 14.35% (YoY) but gained 27% (YTD) much higher than DRUNF. Also, the REIT's dividend rate is at a high of $0.53 ((FWD)) on a yield of 4.86% against Dream's $0.31 ((FWD)) dividend rate and 1.45% ((TTM)) dividend yield. In its Q4 2022, Dream Industrial stated that European rents in the quarter shot up 20% (Y/Y) with cap rates at 75%. This rental increase as well as other earnings made Dream Industrial grow its annual revenues by 23.2% (Y/Y) to $408.7 million in the FY 2022. The revenue was almost thrice the amount realized by DRUNF in 2022.

Once again, Dream noted positive results from its Arapahoe Basin that contributed to the strong revenue performance. In Q1 2022, the adjusted EBITDA generated from A-Basin stood at $9.1 million with net earnings up 5.13% (YoY) at $8.2 million. The other main recurring income asset segments in the company include asset management, stabilized properties, and dream impact trust. Overall, Dream's revenue increase was largely attributed to contributions from its multi-family rental units in the GTA and Ottawa. The Distillery District in Toronto was another focal point.

New Asset management opportunities

Dream had an outstanding FY 2022 regarding asset management. As of Q1 2022, the company was managing equity valued at $1.4 billion from institutions as well as high-net-worth customers. By December 31, 2022, assets under management rose to $18 billion indicating the rapid client acquisition strategy adopted by the company. These assets also include a 63% stake in the industrial/ residential rental properties and 31% assets managed outside Canada. As of Q4 2022, Dream's assets earning fees surged 22.2% (YoY) from $9 billion in 2021 to $11 billion.

Other than the acquisition of Dream Industrial REIT, the company has seen significant growth in the number of public and private vehicles under its management. There exist other development pipelines such as over 20,000 condominium rental blocks and up to 4 million square feet of gross leasable area ((GLA)).

Dream has a development hub in Toronto's east-end location that houses the Canary Commons. This establishment contains the Canary District, West Don Lands, the Distillery District, and Lakeshore East/ Quayside developments. Among the properties found in the Distillery District are boutique hotels where Dream increased its position from 50% to 62.5% worth $27 million. By the end of 2022, about 88.9% of the 395,000 square foot land was occupied thereby becoming an essential driver of recurring income.

Other assets are held through the company's entities such as Dream Impact Trust ( DDHRF ), Dream Impact Fund, Dream Office REIT ( DRETF ), and Dream Residential REIT ( DRR.U:CA ). In Q4 2022, Dream's contracts with the aforementioned partners in relation to asset management rose 11.6% (YoY) to $48 million. Revenues are expected to continue growing as the company seeks more asset management opportunities in 2023.

Tapping into Western Canada's potential

Of vital focus is the impact of Western or Upper Canada on Dream's sales in FY 2022. Western Canada is about 2,703,000 square km and provides sizeable lots and acres for development. Recent statistics showed that about 20% of residential estates in Western Canada were owned by investors. Dream develops land and in particular residential properties in the region that have higher lot/ acreage sales on annual basis. The $27.4 million growth in Dream's adjusted EBITDA was largely contributed by multifamily residential properties in Upper Canada.

The fiscal year 2022 saw Dream obtain 858 lot sales down 10.5% (Y/Y) and 39-acre sales, up 290% (Y/Y). It stated in its earnings call that these sales were obtained in "Brighton, Alpine Park, and Meadows communities in Saskatoon, Calgary, and Edmonton." From Western Canada, Dream already has an additional 420 lots and 23 acres in additional secured commitments that are expected to increase earnings in 2023.

ESG Focus

We are living at a time when many real estate companies are growing their focus on environmental, social, and governance ((ESG)) frameworks. The commitment towards addressing climate change has become a necessary facet of conversation with investors expecting to hear of plans to reach net-zero greenhouse gas ((GHG)) emissions. The situation is not different in Canada. In 2022, Dream released its Action Plan for a net-zero carbon emissions framework by 2035 lowering its target by 15 years from the deadline of 2050 set by many global companies.

In the sustainability report, Dream indicated that it had more than $6 billion in net-zero real estate communities within its development pipeline. This forms a dominant portion of its impact investing segment. Still in 2022, the company announced that the partnership between the National Capital Commission ((NCC)) and the Canada Housing Mortgage Corporation (CHMC) selected it to develop phase 1 of the project dubbed "Building LeBreton" in Ottawa Ontario.

In the press release, Dream stated :

In the fourth quarter, the city of Ottawa's planning committee approved two towers at our LeBreton Library Flats site, granting us an exemption to the city's 25-story height limit. The 31 and 36-story towers will deliver 608 rental units, including 250 units designated as affordable, and will be the largest net-zero carbon residential community in Canada upon completion in 2026."

Risks to be considered

There was a 10.5% (YoY) decline in Dream's lot sales in Q4 2022. The decrease points to the rise in inflation (in Q4 2022) with clients opting to buy other properties. Additionally, Dream may face higher construction costs that are passed on to the clients thereby limiting revenues, especially for new builds into 2023.

January 2023 saw the Bank of Canada hike the policy interest rate by 0.25% to 4.5%. This increase was the 8th increase since the beginning of 2022 indicating the bank's determination to deal with inflation. However, while Canada's inflation rate dropped to 5.9%, the rising interest rate will weigh on potential homeowners and clients holding mortgages. This situation will likely see a reduction in homeownership into the year.

On a positive note to shareholders, Dream's board of directors approved a 25% annual dividend increase per subordinate voting share and class B share (from $0.40 to $0.50). The dividend will be payable on March 31, 2023. At the moment, the company's liquidity is at $300 million up from $214 million recorded in Q1 2022.

Bottom Line

Dream Unlimited delivered positive results in Q4 2022 and FY 2022. The company rose from a small equity base to command liquidity valued at $300 million. Strong earnings were attributed to progressive outcomes in the A-basin, multifamily portfolio earnings in both the US and Canada with higher sales in Western Canada topping the chart. However, the company is facing market headwinds due to the rise in interest rates that has led to the growth of mortgage rates. Dream noted a 10% (YoY) decline in annual lot sales that was partially offset by an increase in acre sales. I would recommend a hold rating for the stock and I expect it to perform at the same pace as its individual entities awaiting policy rate stability.

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