Stock Analysis: Dream Impact Trust

If you’ve spent any time on the tiny sub-community on Twitter that discusses small cap Canadian stocks (and don’t feel bad if you have, because Lord knows I’ve spent WAY too much time there), you’re likely well aware of the Dream group of companies.

(Seriously, Canada small cap Fintwit is tiny. There’s maybe 100 guys in the whole damn country who are interested in such nonsense. We’re almost all on a first name basis. It is simultaneously the lamest and coolest group I’ve even been a part of)

If you’re not familiar with Dream, let me half-assedly explain the whole structure. There’s the asset manager, Dream Unlimited Corp (TSX:DRM). It manages all the underlying assets while taking large ownership stakes in those positions.

You might also have heard of DRM because some people have made a lot of money from it. Here’s the stock chart:

That’s a mere 28.8% annual return over the last five years, and the stock basically did nothing for the first three of those five years. Not bad.

Dream manages all sorts of different kinds of real estate. There’s Dream Office REIT (TSX:D), which owns office towers that are mostly located in the GTA. Dream Industrial REIT (TSX:DIR.UN) owns, you guessed it, industrial real estate. There’s also Dream Residential Trust (TSX:DRR.UN) and if you need my help telling you what it owns it’s probably time to log off the internet forever. Dream Equity Partners takes a private equity approach to real estate, owning assets in Europe and multi-family property in the United States.

Last and certainly not least is Dream Impact Trust (TSX:MPCT.UN), which is what I’ll mostly be writing about today. The trust (which I’ll refer to as Impact for the rest of this post) is essentially an ESG fund’s wet dream. It focuses on a more humane way to invest in real estate, seeking to deliver solid financial returns while decreasing its carbon footprint, creating affordable housing, and helping out disadvantaged communities.

The ESG stuff is all fine and good, and I do appreciate what the company is doing there. But to be honest, it’s far from the most important part of this thesis.

The Skinny 

There are a number of moving parts with Impact.

Let’s start with the income portfolio. This consists mostly of various properties in the GTA today, with properties some properties in Ottawa thrown in. Assets mostly consist of office and retail properties today, which span 1.3 million square feet and 1,359 rental properties. Note that Impact has partners in many of these properties. Here’s a summary of the income portfolio as it stands today:

Next is the development portfolio. Impact has various projects on the go today, with occupancy for many projected to be in 2023 or 2024. There are also more longer-term projects that the company has that are mostly in the planning phase today.

Marque projects include:

• Zibi in Ottawa, which will include more than 500 residential units and more than 100,000 sqf of commercial space when all phases of current construction are done by 2023. Zibi also has potential for 1,255 additional residential units and nearly 2M square feet of commercial space. Impact owns 50% of Zibi

• WDL Block 8, a Toronto property that consists of 770 residential suites and 4,000 square feet of commercial space. Impact owns 25% of this property and it is slated to begin collecting rent in 2023

• Impact also owns 25% of WDL blocks 3/4/7, which consists of 855 units and 32,000 sqf of commercial space. This is another asset it plans to hold for the long-term

• Impact owns 23.3% of Bridgewater I & II, which consist of 311 residential units and 98,000 sqf of commercial space. They plan to sell their interest in this property in 2023 when it is completed

These are just a small smattering of projects. Here’s the full list:

There is also a small lending division inside the company. We’ll ignore it because it’s tiny and doesn’t look likely to be around much longer.

At first glance, Impact’s balance sheet looks downright impeccable. It has just recently surpassed a 20% debt-to-assets ratio. But that ratio doesn’t include project specific debt that is tied to specific properties. When we include that, the debt-to-assets ratio is a much closer to average 54%.

One last thing of note: Impact recently sold $30M of debentures in a private placement to Fairfax Financial. These pay a 5.5% interest rate and are convertible to shares at $7.755 each. I can’t say for sure why Fairfax did that deal, but can speculate it’s likely because of all the stuff that’s coming next.

Valuation

Dream Impact Trust spends a lot of time on its price-to-NAV discount, mostly because it doesn’t actually earn enough to cover its distribution.

In fact, Impact is the only REIT I’ve ever seen that doesn’t disclose FFO and AFFO numbers to unitholders. That’s automatically a red flag.

I dug a little deeper and I’m not overly concerned. As it stands today, the $0.40 per share annual distribution (which translates into an almost 7% yield) is not sustainable based on the assets the REIT currently owns. Duh. But nobody really cares about the company’s standing today with all the development projects on the horizon. The payout will be sustainable once these start adding to the bottom line in 2023 and 2024.

Impact earned $21 million in net income in 2021, or $0.33 per share. However, this factored in fair value adjustments on development projects. There’s also additional costs for these development projects that are included in the overall financials.

The problem with valuing Impact on a price-to-income perspective is so much of the company’s value is tied up in the development portfolio. As these development assets turn into income producing assets, they’re projected to essentially double the REIT’s net income to approximately $40M by 2025. Today’s P/E ratio looks terrible. But the future looks quire reasonable.

Remember, Impact has a market cap of $375M today. So you’re essentially buying for less than 10x 2025 earnings. I realize that sounds a little like the valuation of a tech company (you won’t believe how cheap AirBnb is when compared to 2028 earnings! he said, right before he gagged), but I think I can predict GTA and Ottawa rents with a greater degree of certainty than I can predict a tech company’s earnings. So I take those numbers with a grain of salt, but I also think they’re believable.

The NAV discount is where the company really shines today. As it stood at the end of 2021 — Impact only updates their NAV at the end of each calendar year — the NAV is $9.31 per share. The current market price is $5.80. That gives us significant upside on that metric alone.

Impact also predicts its NAV will be significantly higher when its current development cycle is done. NAV will stand at $800M in 2025 compared to just over $600M today. Assuming zero additional share buybacks between now and then — which is unlikely, since Impact has reduced the share count from 72 to 65 million over the last few years — we get a NAV of $12.31 per share. Add in $1.60 per share in distributions over the next four years, and the total return potential for this investment starts to look pretty good.

Naysayers will undoubtedly chime in and say there’s no way Impact will trade at NAV despite adding mostly residential assets to its portfolio, a real estate asset class that tends to trade at a much higher valuation than retail or office space. So let’s be conservative. Let’s assume the same NAV discount exists at the end of 2025 as exists today. We’d then get the following result:

Price today: $5.80Price in 2025: $7.87 (64% of a $12.31 NAV)Distributions: $1.60Total value: $9.47Total return: 63.2%Total CAGR: ~13%

I think a 13% CAGR is a reasonable base rate expectation for this stock over the next 4-5 years, with additional upside very possible if a few things go right. The base return expectation says the share price will languish at a steep discount to NAV. What if it doesn’t, and the two numbers become much closer to each other? Or, what if Impact continues buying back significant portions of its stock? Another 10% reduction in shares outstanding will do good things to NAV.

I see a world where a 20%+ CAGR is very possible over the next few years. There are caveats, of course. Impact has to execute on the development portfolio. GTA real estate has to continue to cooperate. There’s additional risk with all the partnerships Impact has with the parent, Dream Unlimited. And so on. But overall I really like the risk/reward ratio today.

Oh, by the way, Dream Unlimited owns 29% of Impact. They’re confident in Impact’s future.

The bottom line

The more I read about Impact, the more I realized its right in my wheelhouse. It’s an under valued, under appreciated, and under followed REIT that nobody has really paid attention to. Hell, up until like six months ago it had the terrible name of Dream Hard Assets Alternatives Trust, which sounds like something my buddy who’s into uranium and gold stocks would salivate over. Most people literally don’t realize this company exists.

This is the kind of stock you buy, tuck away for a while, and then rediscover 1-2 years from now as they get the market’s attention after executing well on the development program. You might get impatient waiting, but I think it’ll be worth it.

Disclosure: Author owns shares of Dream Impact Trust and Dream Office REIT