Mr. Michael Cooper reports
DREAM HARD ASSET ALTERNATIVES TRUST REPORTS SECOND QUARTER RESULTS, SUBSTANTIAL PROGRESS ON DISPOSITION OF LEGACY ASSETS AND CONTINUED PORTFOLIO REPOSITIONING
Dream Hard Asset Alternatives Trust has released its financial results for the three and six months ended June 30, 2017.
For the three months ended June 30, 2017, the trust's net asset value (NAV (1)) per unit was $8.79, up 10 cents from last quarter. The increase relative to the prior quarter was driven primarily by market value adjustments recognized on the trust's investments in its downtown Toronto developments, which more than offset international financial reporting standard fair value losses on non-core co-owned office properties and investments in the Villarboit retail income-producing and development-holding properties (Villarboit investments), pursuant to completed or pending dispositions. In the second quarter, as part of its NAV calculation, a non-IFRS measure, the trust recognized a market value adjustment of $25.2-million attributable to the following development investments: Mutual Street Development (IVY condominiums), Church/Wood Residences (Axis condominiums) and 351-369 Lakeshore Blvd. East (Lakeshore East development). Under IFRS and in the trust's condensed consolidated financial statements, these development investments are accounted and reflected at cost and considered equity investments. This favourable market value adjustment was a result of the trust identifying market trend progress and/or the achievement of development milestones in relation to these equity investments. The trust has included this market value adjustment in its NAV calculation to better demonstrate the value of these assets since acquisition and/or to incorporate the achievement of development or sales milestones. The trust has made substantial progress toward investing in assets with higher growth potential, including its development investments in downtown Toronto, and expects that these development investments will be a key driver of future growth for the trust.
"The trust has made exceptional strides in delivering on its disposition program in 2017 ahead of its initial target, which was to be executed over a period of two to three years," said Michael Cooper, portfolio manager. "During the second quarter, the trust closed or entered into contracts to sell 14 income properties, which are considered non-core to the long-term strategy. The trust also entered into an agreement to sell its Villarboit investments. The sale of the Villarboit investments represents the last of the trust's underperforming legacy assets that we intended to recycle. With the completion of these sale transactions, the trust has successfully aligned itself to meet its longer-term strategy to reinvest capital to generate higher value and cash flow to unitholders. On this front, the trust has already executed on development investment opportunities in 2016 and 2017, which contributed to a $25.2-million market value increase within net asset value (or 35 cents per unit) in the second quarter, with further value creation expected to be generated in future quarters from these and other development investments. We intend to continue to grow the trust's NAV while generating enough AFAD [adjusted funds available for distributions] to cover current distributions over the next four years."
For the three months ended June 30, 2017, AFAD (1) of nine cents per unit was down two cents per unit when compared with the same quarter in the prior year, although year-over-year results are not comparable due to $142.5-million of completed income property dispositions year to date, pursuant to the trust's previously announced asset repositioning program. The trust has substantially completed its disposition strategy announced earlier this year and continues to identify and execute on opportunities to redeploy capital into higher growth and yield investments. Over the past year, the trust has repositioned its portfolio toward development assets with significantly higher-growth potential than assets disposed or expected to be disposed of, which includes its non-core co-owned office properties and Villarboit investments. As a result of such repositioning activities, AFAD per unit is expected to be lower in 2017 relative to 2016. However, management believes that upon execution of its strategy, the trust's portfolio will not only generate enough AFAD per unit cumulatively over the next four years to sustain the current distribution level, but also generate market value gains as development milestones are achieved. As the trust's portfolio continues to shift toward owning more development assets, growth in NAV per unit is expected to be a more useful measure of value creation.
Increase in NAV over the prior quarter driven by downtown Toronto development sites
NAV per unit of $8.79 as at June 30, 2017, increased 1.2 per cent from $8.69 per unit as at March 31, 2017. The increase in NAV resulted primarily from a market value adjustment of $25.2-million in equity-accounted investments, an important element that the trust has included in its NAV calculation to address the reduction in risk profile as each project progresses toward completion and/or to reflect information from recent market transactions that indicate a change on the equity investment value (subject to internal and independent third party appraisals). Equity-accounted investments are otherwise reported at cost, inconsistent with the trust's other directly held development investments, which are reported at IFRS fair value within the trust's financial statements. The trust believes that incorporating a market value adjustment is a more useful measure to value these development assets that would not ordinarily be captured within IFRS and the trust's financial statements.
The market value adjustment was attributable to the following equity investments: IVY condominiums, Axis condominiums and the Lakeshore East development. In calculating the market value adjustment on the equity-accounted development investments, on a going-forward basis, the trust intends to obtain independent third party appraisals annually or as significant development milestones are achieved. For those projects in active development or construction, the trust intends to use the discounted cash flow methodology in determining the market value adjustment on a quarterly basis. The aggregate market value increase for both IVY and Axis condominiums amounted to $10.8-million (representing a 172-per-cent increase relative to the aggregate equity-accounted investment of $6.3-million at June 30, 2017) and was the result of using a discounted cash flow approach with a discount rate of 12 per cent, similar to the methodology utilized to value the Empire high-rise condominium residential developments. Both IVY and Axis condominium sales programs were launched in late 2016/early 2017 and are 100 per cent sold with expected completion dates in 2020. Key assumptions in valuing both projects include, but are not limited to: the risk and timing of expected cash flows; and the successful completion of the projects on time and on budget. The projects are expected to continue to generate market value increases on a quarterly basis, as they continue to advance closer to their completion dates. IVY condominiums is currently being co-developed by Dream Asset Management Corp., the trust's asset manager. Axis condominiums is currently being developed by Centre Court Developments, a well-established Toronto developer with eight high-rise residential projects in various stages of development, representing over 5,000 homes and $1.5-billion of development value.
The Lakeshore East development, a 5.3-acre waterfront property in downtown Toronto, had a market value increase of $14.4-million (representing a 121-per-cent increase relative to the equity-accounted investment of $11.9-million at June 30, 2017) based on favourable market trends and comparative market transactions and an independent third party appraisal at quarter-end.
There were no market value adjustments recorded on the trust's equity investments in Port Credit West Village Partners LP or the trust's equity ownership interest in two properties, 6035 Bathurst St. and 388-390 Dupont St. (Plaza development) as there have been no significant milestones or market transactions since the acquisition date to indicate a market value adjustment as at June 30, 2017. As development milestones are achieved and/or market trends change, the trust also intends to fair value these investments. For additional details on the trust's equity-accounted investments, please refer to page 19 of management's discussion and analysis.
The trust's development holdings (including equity-accounted investments) are expected key drivers of future growth with the trust targeting attractive returns on equity (measured by pretax internal rate of return) of between 15 to 20 per cent and strong future cash flows upon completion. The targeted returns on the development are within the trust's strategy to pursue NAV accretive opportunities over the long term.
Substantial completion on the disposition strategy for non-core Dream Office properties
Year-to-date completed and pending non-core co-owned income property sales include 14 assets for total gross proceeds of $282.0-million. During the three months ended June 30, 2017, the trust entered into agreements to sell its ownership interests in nine non-core co-owned income properties for total gross proceeds of $139.5-million. The transaction is expected to close in the third quarter of 2017, subject to customary closing conditions, financing arrangements and consents. The trust also closed on the sale of its ownership interests in five non-core co-owned income properties as previously announced for gross proceeds of $142.5-million, which included $4.8-million in the form of units of publicly traded securities of the purchaser. The net proceeds on the sale of these income properties were $44.7-million after the repayment by the trust or assumption by the purchaser of mortgages, closing adjustments and transaction costs. If all pending dispositions are completed, the expected cumulative equity repatriated in 2017, before transaction costs and closing adjustments, for both closed and pending transactions, would be approximately $132.9-million. The trust has already identified or executed approximately $125-million of reinvestment opportunities in 2017, including development investments in Toronto and Ottawa, Ont., and in the renewable power portfolio.
Update on Empire residential projects in the Greater Toronto Area
At the end of the second quarter, 87 per cent of the units within the Empire Brampton low-rise project, which are fully sold, had closed compared with 61 per cent closed as at Dec. 31, 2016. An important development milestone was reached during the second quarter as distributions commenced with the trust receiving cash distributions of $10.0-million from the Empire Brampton project. The timing of the remaining $25.1-million of cash distributions remains unchanged from the first quarter with the majority of the balance expected in the third quarter of 2017 (estimated completion date for the project) and the rest of the balance to be released over the next two years.
The Empire Lakeshore high-rise condominium development project continues to progress on schedule. The trust has recognized a further fair value increase of $1.9-million on the Empire Lakeshore project during the second quarter of 2017 as the project continues to advance steadily to completion and payout.
Since the trust's inception, $32.3-million of cumulative fair value gains have been recognized on the Empire projects. At June 30, 2017, the aforementioned Empire projects had an IFRS fair value of $90.0-million, net of the aforementioned cash distribution that was received during the period as return of capital.
Other operating highlights in second quarter 2017
For the three months ended June 30, 2017, the income properties portfolio contributed AFAD of four cents per unit, down two cents per unit when compared with the same period last year, driven by lower net operating income (NOI (1)) primarily resulting from the sale of $142.5-million of non-core co-owned office properties year to date. The decrease was slightly offset by the acquisition of both 10 Lower Spadina Ave. and 49 Ontario St. as the trust increased its ownership of these two properties to 100 per cent early in the first quarter of 2017. Once all pending sales are closed, the trust's core office income property portfolio will consist of: a 50.1-per-cent interest in Sussex Centre in Mississauga, Ont.; 10 Lower Spadina Ave., 49 Ontario St. and 349 Carlaw Ave. in downtown Toronto; and six industrial properties in Regina, Sask., co-owned with Dream Industrial REIT. At June, 30, 2017, these properties had an IFRS value of $157.3-million. In addition, the trust will continue to own an interest in London City Centre, in London, Ont.
For the three months ended June 30, 2017, AFAD of three cents per unit for the renewable power portfolio decreased by one cent when compared with the same quarter in the prior year. During the six months ended June 30, 2017, the trust closed financing on six Ontario ground-mount solar projects for gross proceeds of approximately $32.7-million of 19.5-year non-recourse debt. While the additional project financing will result in decreased AFAD contribution from the segment, the net impact after considering the repatriation of equity from permanent financing proceeds is expected to have an improved return on equity on a total portfolio basis. The trust is targeting to achieve an 11-per-cent to 12-per-cent annual yield on expected stabilized equity of approximately $65-million. Subsequent to June 30, 2017, the trust has acquired the remaining non-managing interest in the wind power projects located in the United Kingdom, increasing the trust's ownership to 100 per cent (from 91 per cent), and also acquired 13 additional wind turbines for a total purchase price of approximately $4.1-million.
AFAD of four cents from the lending portfolio has declined by one cent when compared with the same period in the prior year. The decline results from a decrease in upfront lender and loan extension fee income compared with the prior year. During the quarter, approximately $9.0-million of legacy loans were repaid, resulting in 89 per cent of the total original loan portfolio being repatriated, compared with 80 per cent at the beginning of the year.
Development and investment holdings
AFAD of three cents per unit for the three months ended June 30, 2017, from development and investment holdings remained relatively stable compared with the same quarter in the prior year. During the second quarter, the trust invested a total of $3.8-million for a 40-per-cent equity ownership interest in Plaza development composed of two properties located in downtown Toronto at 6035 Bathurst St. and 388-390 Dupont St. Subsequent to June 30, 2017, the trust acquired a 40-per-cent ownership interest in a partnership for $5.5-million with an investment in two properties at 25 Imperial St. and 374 Dupont St. both located in downtown Toronto. These properties are all currently income-producing properties, and both investments are expected to have attractive redevelopment potential in future years. These investments are in line with the trust's long-term strategy to diversify its portfolio into higher-growth development assets.
Trust expenses, net
AFAD of five cents per unit for the three months ended June 30, 2017, from trust expense, net, decreased by one cent compared with the same period in the prior year. The decrease resulted from lower income taxes during the period.
Normal course issuer bid
Since the inception of the trust's NCIB program in December, 2014, to Aug. 11, 2017, the trust has purchased for cancellation 2.2 million units for a total cost of $13.0-million, which includes 300,000 units purchased year to date in 2017 for a total cost of $1.8-million.
Selected financial and operating metrics for the three months ended June 30, 2017, the year ended Dec. 31, 2016, and the three months ended June 30, 2016, are summarized in the attached table.
CONSOLIDATED RESULTS OF OPERATIONS
June 30, 2017 Dec. 31, 2016 June 30, 2016
Total income $14,511 $26,380 $25,043
Adjusted total income (1) 19,183 20,131 22,274
Net income (loss) (7,241) (15,379) 2,847
Net operating income (NOI) (1) 12,533 11,809 14,160
Adjusted EBITDA (1) 1,621 10,815 12,969
AFAD (1) 6,427 7,183 8,166
Annualized AFAD return on average
trust net assets (1) 4.2% 4.4% 4.9%
Trust unit information
Distributions declared and paid per unit 0.10 0.10 0.10
AFAD per unit (basic and fully diluted) (1) 0.09 0.10 0.11
About Dream Hard Asset Alternatives Trust
Dream Alternatives provides an opportunity for unitholders to invest in hard asset alternative investments, including real estate, real estate lending, real estate development and infrastructure, including renewable power, managed by an experienced team with a successful record in these areas. The objectives of the trust are to provide predictable and sustainable cash distributions to unitholders on a tax-efficient basis, and expand and reposition the portfolio to increase both AFAD and NAV per unit over time.
(1) A non-international financial reporting standard.
We seek Safe Harbor.
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