Impact : Dividend Cut + Development = Recurring Income Growth
Dividend Cut
Dream Impact has slashed the 0.40 cent dividend down to 0.16. The dividend cut is not a huge surprise given MPCT's combination of high yield, over extended payout ratio, creative cashflow strategies (DRIP/Management Fee Share Dilution) and the fact that the dividend was a return of capital and not generated by cash-flowing properties.
The high yield was slowly cannibalizing/diluting the equity and supressing NAV growth. Investors received a high tax deferred yield but the NAV has been flat/declining for a long time.
The book value of MPCT has declined from $9.5 in 2014 to $8.25 in 2023.
Dream Impact has adjusted the dividend to 0.16 to make it a sustainable dividend directly linked to the cashflow generated by stabilized recurring revenue assets. This is an important step in the transformation process into a more traditional residential reit. It removes the unsustainable high yield stigma while enabling recurring income asset growth.
TD comments that the dividend cut makes Dream Impact closer to its residential apartment reit peers however the large development pipeline still makes MPCT unique.
Dream Impact is likely to experience higher than typical growth over the next few years with GLA +50% in 36months. This is what makes Dream Impact such an interesting opportunity.
Development Pipeline Powering Growth
TD's projection of Dream Impacts SQFT growth is impressive.
Dream Impacts projecting 2.5X increase in NOI by 2026 through the recurring income development pipeline.
Residential Occupancies and units have been increasing quickly highlighting the strength of the residential assets and the growth of the development pipeline.
The commercial properties have not been as strong but include a few properties designated for development with lower occupancies.
Discount to NAV
The discount to NAV looks very attractive with a 21% space between the current discount to NAV and the average discount to NAV for MPCT.
The combination of sustainable growth and urban Toronto/Ottawa assets at a large discount seem very appealing to me.
The Las Vegas 100% NAV Write Down
I did not expect the reit to do a $50M write down of its 10% interest in the Las Vegas Hotel/Casino. They still own the 10% interest in the property but do not control the property.
This investment is an issue for management as it is a legacy asset purchased in 2018 that does not fit into the ESG narrative and is not controlled by management. Writing it down from NAV allows them to claim that they are 95% ESG NAV and helps with ESG marketing efforts.
I do believe the investment isn’t doing great as management has not been positive about it but I do no believe it is a 100% write down. I suspect when this sells in the future it will generate a surprise gain and until then it is swept under the rug.
Updated Valuation
The hotel write down reduces the value of the Development and Investment Holdings asset class. The recurring income asset class represents $5.14/Share significantly higher than the $3.60 current price. This valuation implies a 30% discount on the recurring income assets + paying nothing for the development pipeline.
Dream Unlimited Updates
Dream Unlimited recently revealed on its Q4 Earnings call that it invested $27M to purchase an additional 12.5% of the Distillery District increasing its ownership from 50% to 62.5%. Cooper commented that as all of the developments complete in the area the overall value of the area will increase significantly.
Dream Unlimited's plans to purchase additional shares of MPCT and D.UN to increase recurring revenue for DRM from $88M to $100M. Rather than running share buybacks Cooper is leaning to purchasing shares on the open market to increase revenues and take advantage of such large public discounts.
"We remain committed to maintaining a conservative debt position and may use excess liquidity to fund potential new investment opportunities as they arise as well as purchase additional units of Dream Office REIT and Dream Impact Trust." -Deborah Starkman CFO Dream Unlimited Q4 Earnings Call
Dream Impact : Value Creation
Dream Impact has achieved impressive results with two key assets highlighted in green : 49 Ontario acquired for $47m, rezoned +800,000 sqft creating a $93m value increase and Victory Silos rezoned for 1.3m square feet creating a $72m value increase.
This newly created value will help Dream Impact finance and execute on its development pipeline to scale recurring income assets quickly.
Conclusion
Dream Impact has ripped off the band-aid and killed the two skeletons in its closet by slashing the unsustainable dividend and using accounting magic to greenwash the NAV and make its struggling las Vegas hotel investment "disappear".
I do not view the dividend cut and hotel write down as signs of a failing business model but as strategic decisions to move forward and double down on a high quality residential pipeline and successful residential portfolio.
The residential portfolio fundamentals are strong and developments are completing on time. Dream Impact continues to acquire strategic landmark projects successfully at Quayside / LeBreton / Zibi highlighting a strong working partnership with the government and a ten year runway for development.
The recent value creation wins with 49 Ontario and Victory Silos highlight managements skill and unlocks a large amount of capital to power growth. Dream Impact will use a combination of refinancing and joint venture partnerships to leverage this newly created value. Looking forward to seeing Dream Impact continue its transformation through 2023 and believe it offers an attractive risk reward at the current price and it has positioned itself well to succeed.
I view the current fair value to be approximately $7/share with a target fair value of $8-10 as the $500M development pipeline is completed.