Dream Hard Asset Alternatives Trust
TSX : DRA.UN

Dream Hard Asset Alternatives Trust

November 14, 2016 19:17 ET

Dream Hard Asset Alternatives Trust Reports Strong Q3 2016 Results, Year Over Year Growth and Increased New Investment in Downtown Toronto Development Projects

TORONTO, ONTARIO--(Marketwired - Nov. 14, 2016) -

This press release contains forward-looking information that is based upon assumptions and is subject to risks and uncertainties as indicated in the cautionary note contained within this press release.

DREAM HARD ASSET ALTERNATIVES TRUST (TSX:DRA.UN) ("Dream Alternatives", "we" or the "Trust") today reported its financial results for the three and nine months ended September 30, 2016.

The Trust reported adjusted funds available for distributions ("AFAD") per unit of $0.12 and $0.33 for the three and nine months ended September 30, 2016, respectively. AFAD increased $0.01 per unit from the prior quarter, or approximately 6%. Compared to the prior year quarter, AFAD increased $0.03 per unit, or approximately 36%.

"We are pleased with our third quarter results and with the Trust achieving strong AFAD of $0.12 per unit, as a result of our asset repositioning activities since inception," said Michael Cooper, Portfolio Manager. "We continue to make meaningful progress in repatriating the equity in the legacy portfolio, having repatriated $194 million of equity or 26% of the legacy portfolio at or better than net asset value ("NAV") over the past two years. While challenging economic conditions are impacting the current performance of the co-owned office properties, we are pleased with the overall performance of the Trust's portfolio, with strong offsetting results from all other segments. As we continue on the path of sourcing and executing on compelling investment opportunities for the Trust, we are doing our best to mitigate impacts to value as we transition to a portfolio of desirable assets for the long term that will provide for meaningful growth in NAV per unit over time. On this front, we are excited to add the iconic Lakeshore East Development project as a new investment for the Trust and believe the project represents a fantastic opportunity to develop one million square feet of residential and mixed use space and be a part of shaping a new waterfront community for Toronto. We expect to continue to transform the Trust's portfolio through active asset management, our expertise, relationships and sourcing new and profitable development opportunities."

Increased New Investment in Exceptional Waterfront Development Site in Downtown Toronto & Update On Other Projects:

Subsequent to the quarter end, the Trust successfully secured an $11.5 million investment in a development partnership for a 37.5% equity investment in the Lakeshore East Development, a 5.3 acre waterfront property in downtown Toronto located at 351-369 Lakeshore Boulevard East. The Trust's Asset Manager, who will also act as co-developer, owns a 12.5% equity interest in the development partnership. Great Gulf Residential, an award winning builder and developer of new homes and condominiums in the Greater Toronto Area ("GTA") with 40 years of experience, is the residual third party partner/co-developer. The Lakeshore East Development represents an exceptional waterfront development site. The property is planned for a mixed-used development with potential for over one million square feet of density across three development blocks bisected by an extension of Queens Quay East to Cherry Street, which will include LRT transportation running through a dedicated centre lane. The site is subject to several policy and planning initiatives designed to shape a new waterfront community for Toronto. The Trust anticipates that the development time line will be in the range of eight to ten years, inclusive of the pre-development and re-zoning process. The anticipated returns on the development are within the Trust's strategy to pursue NAV accretive opportunities over the long term. Value creation to the Trust is expected to begin to occur as planning milestones, such as the completion of re-zoning, are met over the next two to three years.

Earlier in the year, the Trust invested in two high-rise residential condominium development projects, Church/Wood Residences and the Mutual Street Development, both located in downtown Toronto, Ontario. Including these projects, altogether in 2016, the Trust has or expects to advance almost $19 million of new investment in condominium/mixed used development projects in downtown Toronto. This is in addition to the $129 million of assets advanced to Empire-related development projects or debt in the GTA at September 30, 2016. The Empire projects continue to progress exceptionally well and further details are included below.

The aforementioned development projects are key drivers of future growth for the Trust and are expected to generate attractive returns on equity (measured by pre-tax IRR) of between 15-20% and strong future cash flows as milestones are achieved.

Key Operating and Transactions Highlights in Q3 2016:

Residential Development Holdings:

The two Empire residential development projects continue to progress well and as at September 30, 2016, were 95.8% sold on a cumulative basis, up from 95.6% last quarter and 87.6% from December 31, 2015.

Empire Brampton - Project is Fully Sold Out; 49% of Sales Closed

The Empire Brampton low-rise project continues to progress well with 100% of the 685 units sold, almost half of which had closed by the end of the quarter. This compares to 91% sold and 30% closed as at December 31, 2015 and 87% sold and 20% closed as at September 30, 2015, respectively. The project is anticipated to be completed in phases commencing in the second quarter of 2017 with the last phase being scheduled for completion by the first quarter of 2018. Cash distributions are expected to commence in the second quarter of 2017. Given the advanced stage of the development, the Trust recognized a $3.1 million fair value increase during the third quarter commensurate with a decrease in the project's risk profile as it advanced steadily to completion and payout.

Empire Lakeshore - Construction on schedule; sales progressing exceptionally well

The Empire Lakeshore high-rise condominium development project continues to progress on schedule, having successfully secured both the construction loan and mezzanine debt financing in the second quarter of 2016. Sales continued to progress exceptionally well with 94% of the 1,285 units sold by the end of the third quarter of 2016, compared to 86% as at December 31, 2015 and 79% as at September 30, 2015. A limited selection of exclusive premium terrace units were recently released for sale which are expected to have strong demand and generate higher profit margins. Construction is now at ground level and the project is expected to be completed in phases from the fourth quarter of 2019 to the second quarter of 2020.

As at September 30, 2016, approximately $129.0 million of the Trust's assets were advanced to Empire-related development projects or debt representing approximately 12.6% of the Trust's assets in percentage terms.

Lending Portfolio:

During the quarter, approximately $9.0 million of legacy loans were repaid, resulting in 74% of the total original loan portfolio being repatriated, compared to 69% as at December 31, 2015. The overall loan portfolio continues to be very liquid with a weighted average term to maturity at September 30, 2016 of 0.85 years.

Renewable Power:

As at September 30, 2016, the construction of five of ten Ontario Ground Mount Solar projects was completed. During the third quarter of 2016, the Trust closed on the first tranche of term financing on four of these projects for approximately $21.6 million of 19.5 year non-recourse debt, representing a loan-to-value ratio of approximately 74%. The impact of the hedge settlement costs associated with this first tranche of term financing resulted in an effective interest rate of 4.9%. Financing for the remaining six projects is expected to be completed by early 2017.

During the third quarter of 2016, the three additional wind turbines in the U.K. which were previously under construction were completed and became operational. At September 30, 2016, the Trust had $130.9 million of renewable power assets and $49.6 million of related project financing.

Income Properties:

The Trust is currently undergoing a review of select non-strategic income properties with the intent of redeploying equity towards more value enhancing transactions with the goal of transforming the Trust's portfolio, subject to market opportunities and conditions.

Earlier in the year, the Trust sold its 60% interest in 2010 Winston Park Drive in Oakville, Ontario for gross proceeds of $11.8 million and netted $4.2 million of proceeds, after repayment of the associated mortgage.

Key Financial Highlights of Q3 2016:

Renewable power segment: AFAD for the three and nine months ended September 30, 2016 were $2.2 million ($0.03 per unit) and $6.4 million ($0.09 per unit), respectively, a significant uplift when compared to the comparative prior year results of $0.5 million ($0.01 per unit) and $0.8 million ($0.01 per unit), respectively, and contributed significantly to the Trust's overall year over year quarterly increase in AFAD as more operating assets were acquired in 2016 and as certain assets that were previously under development became operational. We expect the remaining projects that are currently under development to transition to income producing by the end of 2016. Once the projects are fully operational and all permanent project financing is in place, we expect approximately $0.10 per unit of annual AFAD contribution from our renewable power investments on a stabilized basis. The expected 12% yield on a stabilized basis, which is based on a return of cash flows over stabilized equity, is conditional upon the receipt of anticipated future financings. The operational results for the three and nine months ended September 30, 2016 are within the scope of management's expectations.

Lending portfolio segment: AFAD for the three and nine months ended September 30, 2016 were $3.5 million ($0.05 per unit) and $10.3 million ($0.14 per unit), respectively, up slightly from the comparative prior year results of $3.2 million ($0.04 per unit) and $9.2 million ($0.13 per unit), respectively. AFAD from our lending portfolio increased by approximately $1.1 million ($0.01 per unit) in the nine months ended September 30, 2016. For both periods, the year over year increase was driven by a net increase in lender fees and lower allocated expense.

Development and investment holdings segment: AFAD (excluding one-time disposition gains) for the three and nine months ended September 30, 2016 were $2.2 million ($0.03 per unit) and $6.2 million ($0.09 per unit), respectively, compared to prior year results of $1.7 million ($0.02 per unit) and $4.5 million ($0.07 per unit), respectively. AFAD for the three months ended September 30, 2016 increased by $0.5 million relative to the prior year due to the commencement of cash distributions relating to completed retail developments, interest earned on an additional advance in the Empire Lakeshore residential participating mortgage investment made during the first quarter of 2016 and additional fee income earned.

Income properties segment: AFAD for the three and nine months ended September 30, 2016 were $4.0 million ($0.06 per unit) and $12.5 million ($0.17 per unit), respectively, down from the comparative prior year results of $4.8 million ($0.07 per unit) and $13.8 million ($0.19 per unit), respectively. The decrease was partially due to the sale of a non-core co-owned office property and lower in-place occupancy in our co-owned office portfolio, a portion of which relates to temporary down time at 219 Laurier Ave. W. in Ottawa where vacant space representing approximately 3.5% of total owned Gross Leasable Area ("GLA") is being prepared for lease to a new long term 15-year government tenant, for which rent will commence in the third quarter of 2017.

Management of the Trust has previously communicated that certain of the co-owned office properties with Dream Office REIT (TSX:D.UN) may not be strategic to the Trust. While we have no office exposure in Alberta, the cash flow and value of the co-owned office properties are not immune to the ripple effects caused by weakness in oil prices, slower job growth and new supply. In February 2016, Dream Office REIT announced a strategic plan which involved a target to sell $1.2 billion of non-core assets out of a pool of $1.9 billion that they believe will realize attractive pricing in the private markets relative to IFRS values. A portion of the disposition pool identified by Dream Office REIT includes some of the Trust's co-owned office assets, namely in the suburban GTA. We intend to work closely with Dream Office REIT to maximize value from the portfolio and will consider all opportunities that benefit the Trust and align with our long term strategy.

NAV per unit was $9.44 at September 30, 2016, and was unchanged from June 30, 2016. Fair value increases within the Trust's Empire residential development holdings, in particular the Empire Brampton project, were recognized as a result of these developments progressing towards completion and meeting important project milestones. The residential development projects are expected to provide attractive profits to the Trust upon their respective completion dates, within approximately two to four years, and are expected to contribute to growth in NAV per unit. A decline in the fair value of our co-owned office properties and increased depreciation on renewable power assets offset these fair value increases in the quarter.

Since the inception of the Trust's NCIB program in December 2014, the Trust has purchased for cancellation 1.9 million units for a total cost of $11.0 million.

Since 2014, the Trust's asset manager, Dream Asset Management Corporation ("DAM"), has purchased an aggregate of 5.0 million units for a total cost of $28.0 million in the open market for its own account, representing approximately 7% of total units outstanding.

Selected financial and operating metrics for the three and nine months ended September 30, 2016 are summarized below:

Three months ended Nine months ended
For the periods ended September 30,
2016
September 30,
2015
September 30,
2016
September 30,
2015
Consolidated results of operations
Total income $ 24,836 $ 20,282 $ 72,551 $ 62,788
Adjusted total income(1) 21,416 19,914 64,347 60,181
Net income 2,801 3,193 2,015 14,638
Net operating income ("NOI")(1) 13,005 12,111 39,782 37,464
Adjusted EBITDA(1) 12,544 6,883 33,951 27,566
AFAD(1) 8,672 6,386 23,843 19,740
AFAD excluding after tax disposition gain(1)(2) 8,672 6,386 23,843 17,418
Annualized AFAD return on average Trust net assets(1) 5.2 % 3.6 % 4.7 % 3.6 %
Annualized AFAD return on average Trust net assets excluding after tax disposition gain(1)(2) 5.2 % 3.6 % 4.7 % 3.3 %
Trust unit information
Distributions declared and paid per unit 0.10 0.10 0.30 0.30
AFAD per unit (basic and fully diluted)(1) 0.12 0.09 0.33 0.27
AFAD per unit (basic and fully diluted) excluding after tax disposition gain(1)(2) 0.12 0.09 0.33 0.24
Units outstanding - end of period 72,271,291 73,214,376 72,271,291 73,214,376
Units outstanding - weighted average 72,230,136 73,354,691 72,264,834 73,502,974
As at September 30,
2016
June 30,
2016
Consolidated financial position
NAV per unit(1) $ 9.44 $ 9.44
Total contractual debt payable(1) 310,914 308,238
Total assets 1,021,778 1,017,722
Cash 17,402 13,470
Debt-to-gross asset value(1) 30.4 % 30.3 %
Three months ended Nine months ended
For the periods ended September 30,
2016
September 30,
2015
September 30,
2016
September 30,
2015
AFAD per unit
Income properties $ 0.06 $ 0.07 $ 0.17 $ 0.19
Lending portfolio 0.05 0.04 0.14 0.13
Development and investment holdings 0.03 0.02 0.09 0.10
Renewable power 0.03 0.01 0.09 0.01
Trust expenses, net(3) (0.05 ) (0.05 ) (0.16 ) (0.16 )
AFAD per unit $ 0.12 $ 0.09 $ 0.33 $ 0.27
AFAD per unit excluding after tax disposition gain(2) $ 0.12 $ 0.09 $ 0.33 $ 0.24

About Dream Alternatives

Dream Alternatives provides an opportunity for unitholders to invest in diversified hard asset alternative investments, including real estate, real estate loans and infrastructure, including renewable power, managed by an experienced team with a successful track 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 reposition and grow its assets to increase the value of its business and its distributions to unitholders over time. For more information, please visit www.dreamalternatives.ca.

Footnotes

(1) Non-IFRS measures - Please refer to cautionary statements under the heading "Non-IFRS Measures" in this press release.
(2) The after-tax disposition gain on the Castlepoint development, during the nine months ended September 30, 2016 was $2.3 million (net of tax of $0.8 million).
(3) Trust expenses represent costs not allocated to the other operating segments, such as general and administrative costs and income taxes, and are net of interest income earned on our cash balances.

Non-IFRS Measures

The Trust's condensed consolidated financial statements are prepared in accordance with International Financial Reporting Standards ("IFRS"). In this press release, as a complement to results provided in accordance with IFRS, the Trust discloses and discusses certain non-IFRS financial measures including adjusted total income, net operating income ("NOI"), adjusted EBITDA, adjusted funds available for distribution ("AFAD"), AFAD excluding disposition gain, AFAD per unit, segmented AFAD per unit, annualized AFAD return on average Trust net assets, annualized AFAD return on net assets excluding, after tax disposition gain, debt-to-gross asset value, net asset value ("NAV") per unit, total contractual debt payable and AFAD per unit excluding after tax disposition gain as well as other measures discussed elsewhere in this release. These non-IFRS measures are not defined by IFRS, do not have a standardized meaning and may not be comparable with similar measures presented by other issuers. The Trust has presented such non-IFRS measures as Management believes they are relevant measures of our underlying operating performance and debt management. Non-IFRS measures should not be considered as alternatives to net income, total comprehensive income or cash flows generated from operating activities or comparable metrics determined in accordance with IFRS as indicators of the Trust's performance, liquidity, cash flow and profitability. For a full description of these measures and, where applicable, a reconciliation to the most directly comparable measure calculated in accordance with IFRS, please refer to the "Non-IFRS measures and Other Disclosures" in the Trust's Management's Discussion and Analysis for the period ended September 30, 2016.

Forward-Looking Information

This press release may contain forward-looking information within the meaning of applicable securities legislation, including statements relating to our objectives, strategies to achieve those objectives, our beliefs, plans, estimates, projection and intentions, and similar statement concerning anticipated future events, future growth, results of operations, performance, business prospects and opportunities, as well as statements regarding our plans and proposals for future development projects, including projected sizes, density and uses; development timelines and anticipated returns on current and future development projects; our anticipated investment in development projects at year end; and timing of financing of our renewable power projects. 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's control, which could cause actual results to differ materially from those that are disclosed in or implied by such forward-looking information. These risks and uncertainties include, but are not limited to: general and local economic and business conditions including foreign exchange rates, employment levels, mortgage and interest rates and regulations, regulatory risks, environmental risks, consumer confidence, the financial condition of tenants and borrowers, local real estate conditions, adverse weather conditions and variability in wind conditions and solar irradiation, reliance on key clients, partners and personnel, the uncertainties of acquisitions and new projects, inflation and competition. All forward looking information in this press release speaks as of November 14, 2016. The Trust does not undertake to update any such forward looking information whether as a result of new information, future events or otherwise. Additional information about these assumptions and risks and uncertainties is disclosed in filings with securities regulators filed on SEDAR (www.sedar.com). These filings are also available at the Trust's website at www.dreamalternatives.ca.

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