TD REPORT Q3 2024 Q3/24: EXPECTING AN IMPACTFUL YEAR AHEAD
We see increasing potential for successful execution on accretive and high-quality rental residential developments with affordable components that attract government-supported financing and construction cost savings. The upcoming year represents one of significant potential, with key milestones on developments (19 Ontario St, Quayside) and the balance sheet (over $300mm of debt maturing in 2025). Impact: SLIGHTLY POSITIVE MPCT remains active on both the offensive and defensive fronts. On the former, Dream and MPCT are eligible under CMHC's new “Frequent Builder” program which expedites approval applications for affordable rental developments. Recent policy changes (e.g., Toronto reducing development charges for projects with affordable components) have helped some applicable projects to become economically viable. For MPCT, this means that construction commencements are now anticipated within 12 months at 49 Ontario St (currently 100%- owned; 800,000sf, costing $700mm) and within 18 months at Quayside (12.5%-owned). Financing discussions for 49 Ontario St. (including potentially bringing in partners) could be finalized by the end of 2024. On the latter, MPCT completed $32mm of dispositions in Q3, paid off its revolver, and ended the quarter with $24mm in cash. Debt-to-assets remained 39.7% (consolidated) and increased to 67.5% (proportionate) due to dev't spending and FV losses. Of MPCT's $1.14bln of debt (proportionate), $122mm was refinanced in Q3, and remaining 2024 maturities of $26mm are well underway. Of the $321mm maturing in 2025, $195mm is in active discussions and mgmt. expressed confidence in addressing the balance. Q3 development transfers to IPP included 98,000sf of retail/commercial space at Brightwater (23%-owned, link), which is currently 57%-leased to tenants including Farm Boy, LCBO, Rexall, and BMO (see Figure 5). The remaining spaces are a mix of at-grade retail and second-floor office/professional space. MPCT's rental residential same-property occupancy reached 95.4%, while further lease-up at Aalto II, Common at Zibi and Maple House (targeting H2/25 stabilization) pushed total occupancy up to nearly 88% from 71% in Q4/23. Rental residential NOI exceeded $2mm in Q3, and we forecast $7.5mm for FY2024 with further significant growth in 2025. Our Target Price rises to $4.25 reflecting MPCT's improved outlook for activating new developments, offset by continued balance sheet/liquidity pressures and a slightly reduced NAV/unit estimate (to $18.00 from $19.00). Our forecast reduction reflects a lower commercial NOI run-rate. (...cont'd on pg 4.)
Our Investment Thesis With a robust development pipeline focused on building high-quality assets largely in the GTA and Ottawa areas, we see a long-term path to meaningful growth across Dream Impact's portfolio. Recent liquidity enhancing initiatives (e.g. 100% distribution cut in Feb. '24) have strengthened the balance sheet and liquidity, helping the REIT to complete its current projects and move more projects into its active developments.
Forthcoming Catalysts Activating new developments on attractive terms Active rental residential developments reaching completion and meet targeted stabilized yields. Potential success on asset dispositions Q4/24 Results Base Case Assumptions Interest rates evolve generally in-line with TD Economics' outlook. All maturing debt is successfully refinanced. Continuation of Dream's development program. Upside Scenario Visibility improves on MPCT's ability to reinstate its cash distributions. Interest rates decline more quickly than currently anticipated. Market conditions improve and accelerate Dream's development program. Downside Scenario Difficulties are experienced in refinancing maturing debt. Interest rates rise further or stay elevated for longer. Market conditions weaken and delay