Q4 2019 Earnings Call
Good morning, ladies and gentlemen, and welcome to the Dream Office read yearend 2019 conference call for Friday February 21st 2020.
During this call management of Dream up the Street May make statements concerning forward looking information within the meaning of applicable securities legislation.
Forward looking information, it's based on a number of assumptions and the subject to a door number of risks and uncertainties.
Which are beyond dream up its reach control that could cause actual results to differ materially from both are disclosed it or implied by such forward looking information.
Additional information about these assumptions risks and uncertainties, it's contagion Dream office reach filings with securities regulators, including its latest annual information form M.D. Today. These filings are also available dream up this reach website at Www Dot Dream off the street that see a later.
For the presentation, we will have a question answer session. The queue up for a question press star one of your telephone keypad.
Your host for today will be Mr., Michael Cooper Chair and CEO Oaktree buckets right. Mr. Cooper. Please go ahead.
I think very much operator.
Welcome everybody to I Dream offices.
Sure and conference call I mean, we're changing the CFO and Gord wildly the chief operating officer, we'd like to begin with J., providing some prepared remarks, then ive a few comments and then after that three of US we're happy to answer your questions. Okay. Great. Thank you Michael good morning.
In the fourth quarter, we recorded I thought Bob are you know 40 cents, which was in line with our internal expectations and one set of up Q4 in 2018.
Overall, we're pleased with our 2009 full results our leverage declined from 45% to 37.6% due to over half a billion of asset sales and despite having less assets and lower leverage our AFFO per unit increased one sat for the year.
Our exposure to downtown Toronto increased from 68% to 83% as we sold approximately 2 million square feet of assets and other markets, we were able to overcome lower leverage and lower yields by generating higher compared a property NOI growth of 12.2% for the year, reducing our DNA expenses.
The extra fees from our property management and construction business.
Net asset value per unit at year end with $26.70, an increase of 3.5% over last quarter at 6.9% for the here.
Thank you for our portfolio saw increased the value of 62 million of which 28 million our from capital investments and 34 million attributed to fair value increases through higher I know why.
We also realize our share of net income from our dream industrial reinvestment up 21 million, which is accounted for under the equity method and the county based on current value of approximately $14. The fair value of these units are worth over 60 million or one dollar per unit relative to the book value of our balance sheet.
Our weighted average capitalization rate used to determine at fair value of the income property did not change. This implies a 2019 Colo return of 11% to unit holders based on the audited fair value of the company and cash distributions.
2020, we will provide the following high level guidance, assuming a steady state that's exclusive of potential acquisitions dispositions and unannounced major capital initiatives.
We are expecting diluted FFO per unit of $1.60. We expect comparative properties I know I have approximately 3% consisting of 5% increase in downtown Toronto, primarily attributed to higher rents offset by negative 5% in our other markets to reflect contango market challenges and some of our remaining assets in Western Canada, particularly as the Scott.
One.
We are working through these assets and if we are able to solve some of them, we will be able to improve both that return profile and the comparative property and online in 2020.
We are anticipating our average leverage for the year to below be below 40%.
Within the other market segment. There are approximately 75 million of assets that we're currently working actively on the leasing and asset management front in the near term in preparation for sale, but we are currently not making any predictions or targets on disposition volumes in 2020.
With regard to leasing at year end, we have 46% of the 157000 square feet expiring in downtown Toronto. This year already addressed not rents in the mid Thirtys per square feet. We expect to have most most of the expirees in downtown Toronto for 2020 committed by mid year.
We're also 82% leased on 2020 Expirees for other market segment.
Late in the fourth quarter, we renewed 185000 square feet leads at our only building in the United States are five additional years with net rents comparable to expiring.
This was important renewal for us as our debt is currently locked up in the commercial mortgage backed securities ball until 2021, so adding five year. Some term will help preserve the value and liquidity of this building.
As announced in prior quarters, we will be making significant investments in our properties over the course of 2020.
We turned over 357 base, we work in November and they are currently working on their construction of extreme.
We expect to collect and NOI starting in November we understand that we work as leasing the billing to enterprise clients. So we would expect to have a credit worthy tenant occupying the space. Similarly in 1900, Sherwood and rich I know, we expect to finished our construction obligation by mid year, and we'll turnover our space to tenants construction, if it out program and the.
Oh, I should commence from the new space in the summer of 2021.
In aggregate, we have spent 33 out of the 55 million allocated to these redevelopment as of the ended the fourth quarter. Both projects are currently on time and on budget.
We also announced a 50 million dollar investment in base rate earlier this year to enhance our lobbies washroom facades lighting program and the alleyway today, we have completed all of our designed to have commenced construction we plan to substantially complete the green collection based rehabilitation this year.
In January we repaid our last tranche of the 150 million unsecured debentures. We currently have about 90 million drawn on our line with $240 million illiquidity and $280 million on time of unencumbered assets, we have significantly cleaned up our capital and debt structure over the past two years, we have only one small mortgage maturing in two.
2020, and minimal refinancing our interest rate risk over the next three years.
Our balance sheet is in good shape that support our capital and development initiatives and we will continue to look for opportunities to improve our assets to the best in class standard and deliver solid long term results for our unit holders now I will turn it back to Michael with his thoughts.
Thank you Jay I don't has been a couple of minutes talking about them.
Our macro view on valuation and maybe why there is.
Some very significant.
Differences views about what the by the company is and then I wanted my spending a couple of minutes I just going over our entire portfolio.
On October 52008, the us bad came out and announced emergency interest rates.
Yep.
We're such.
A tremendous decline in order to keep the economy going deceptive overnight fed rate of 1.5% today. The target is 1.5% to 1.75% 12 years later, so I think that.
What's really been happening were last 12 years is.
Something's changed and the cost of money is a lot less than it used to be growth. There's a lot harder to get that he used to be and people trying to figure out.
What is a fair return given the risk so when I look at it will we start with is.
You know if you use us treasuries as the risk free rate, we're at 66 times cash flow for risk free and there's no upside or downside in nominal dollars.
So I think those main question is how much of a premature people gap from 66 times cash flow as they take on more risk what we've seen and how we run our businesses.
We think that even at a at high prices at it seems historically.
High quality assets that produce predictable income that have some upside are a much better by today than assets that have unpredictable income. So I would say that today is not a data by cheap assets because what we've been seeing is cheap assets get cheaper high quality assets have tremendous value.
We're seeing rents going up.
And.
We don't see the tenants choking on it.
Red used to be the second highest cost of most tenants and now after people and now there's a lot other costs that are way up there too. So we're we're seeing that rental rates downtown Toronto gone up theres lots of reasons for it but the most important thing to me is.
I don't think it is affecting tenants ability to run their business attract people and grow given the rents. So we think there's a big backdrop for increasing rental rates.
To the level. They are now and to continue to go so do you do so.
What we are seeing is that the rental rates are significantly higher than a year ago five years ago, and I've mentioned before last year. The first year, we've exceeded 989 rents. So I mean, we probably have something like 1% rental rate growth over the last 30 years just occurred in the last 18 months.
We think it's the right thing to doing only fair to provide our tenants with incredible space incredible buildings that.
Make it easier for them.
To attract people run their business and treat their clients well.
So thats why what were doing is really focusing on how to create better and better experiences in our buildings and a lot of cases, the rents are more than double what they were just four or five years ago, and we want our tends to have a good experience having said that.
We believe that we're getting well rewarded for the money, we're putting into the buildings right. Now we're focused on nine buildings eight buildings on base Street and it's very small work. Some of these buildings your smallest 30 or 40000 square feet, we're expecting that by the end of this year the work will be done.
Got private and public lane lays connecting the buildings.
We're upgrading everything in the buildings and we think for this to block area downtown Toronto, we're going to create some it's really special for our tenants plus for the rest of the city. We're working now with retail tenants that I think are going to be really exciting and animate. The space. This isn't just space that will be.
Accessible from basically to Richmond. This is a space will be accessible from our private languages, and we're going to create something that.
We hope to see you at and hopefully we'll have something for you at spring a 21 and.
When we look at or other buildings in downtown Toronto.
For three University, we're looking at some very very interesting new uses on the ground floor upgrading it that the 700000 square foot building at a really great location and we expect the rents to continue to rise there and our tenants enjoyment to continue to increase.
36, Toronto and 20, Toronto's big buildings reps side.
30, Adelaide 74, Victoria, six Adelaide East I think with a 1.1 million square feet within 100 feet of each other and that's going to be a real target of upgrading in the future.
Downtown Toronto is where most our buildings are.
And.
We're pretty much full I think we're going to stay full and by making special buildings and special opportunities things, we'd like to think of is like landmark.
Buildings.
We think wouldn't get great brands when economies, good and we can keep in the pool when the economy isn't.
When we looked at I think what's that Jay 85% of our value.
Yes, as most of it within the walking distance.
So then I just want to go over the other buildings that we have and.
We've got two buildings in Calgary, One is Kensington House, which is where dream unlimited head offices out west that is.
Very interesting part of Calgary, There's currently of building under construction just behind it.
That really the valley the land is exceeds the value the building and we think that's a great opportunity we've got Barkley square.
Which was the best building when you combine location and quality, it's got a big parking garage on it plus two office buildings is relatively well leased.
I think that Thats, a building that will probably keep but if there's anybody on the phone that wants to buy it was good price would sell it.
Then we got parking garage and three buildings and Saskatoon and those ones, we're working on and.
We hope to sell them over time.
We've got a beautiful building a region has got an 18 year lease I think we're building into an eight cap.
If we put 3.5% dead on for 50% that's going to be something like 14 running rate.
And there's been no capital is required we would have happily sell that at the price if we can do better than.
So it's kind of returns we'd sell it we just did a five five year lease for our loan building in the states that building, we would have sold other than the fact that it's part of a collateral a CMBS security with the huge penalty. We celebrate that comes up in September 2021, So we will sell at them.
And.
That's everything we want to try to Toronto.
Now we also in Sussex Center, which is to block South of square, one where Oxford announced a new city of 30000 people. There's also a new train station and not building I think around it is 30 buildings of 60 stories or more for residential so we like that building because there's a lot happening there and the values going up.
I think we were really seeing increasing rental rates, increasing occupancy and we think there's a lot that we can do with it.
The other building we have in the GTH is 16 acres Edmonton emerged Mount we've referred to this many times, it's in the Golden miles study area.
We're working with the city. There is 100 acres, there that will be rezone residential and mixed use on our site, we're expecting to get.
We got 165000 square foot off citizens play well leased and we're expecting to get approval for at least 2400 apartment units as well that's going be a major undertaking I like it because it's probably like 15 buildings that we can do it piece meal and not take very much risk as we build up the residential on the newest public transportation.
And.
That's all of our other category when we look downtown we got to 50 done Das approved which we're really excited about.
That building has really interesting because it's kind of at the Nexus of some of the culture parts of the city. The universities. The government. It's on the subway and we think it's to be attracted to a lot of people as an apartment and we think the office space is going to be really valuable as part of the hospital district.
To 12 game, we're working very aggressively to get ready with next 60 90 days there will be unveiled publicly as part of our process with the city and.
We're looking forward to showing it to everybody it's going to be an exceptional building and one that I think will add a lot of value to our company.
So I mean I'm pretty pleased that.
We can talk about our portfolio matter of minutes.
The last comment I want to make is this one about what our company's worth and.
As I said earlier.
The multiple and higher quality assets is double or triple the multiple on lower quality assets.
Our assets I think are among the.
Highest quality commercial assets in any Canadian retail.
It's also very concentrated downtown Toronto is what our book value were.
I'm just given this do you guys as suggestions of way to look at the business.
Word about $570 a square foot based on our book value. Our book value is basically based on historical precedence when our appraisals.
Where we're trading now.
At $19 a foot the stock would be worth $45, a shared $1000 a foot.
51 at $1100 its 57.
So that's the leverage we have to them or underlying market.
But I would suggest that.
As Jay So eloquently speaks about comparative property, plus point zero zero or minus point zero zero, its really missing the point the real point is.
What's downtown Toronto worse.
When you've got high quality income reasonable growth.
And the US treasuries are trading at 66 times cash flow the average risk free rate around the world is probably 1% was trading at 100 times cash flow. So the question is if you want to own a significant part downtown Toronto.
What expected return do you have and I think that we put our money where our motors.
And bat bought back in excess of 50 million shares from the company.
I personally dream unlimited of but hundreds of millions dollars a stop.
And.
We don't think the company's overvalued, but were.
Totally open to you all deciding what you think it's worth.
Okay.
And now I'd be happy to answer questions.
Thank you will not begin the question and answer session. If you have a question. Please press star one of your telephone keypad, if you'd like to be removed from the Q. Please press deposit side with the hash key there may be a delay before the first question. This announced if you had a speakerphone. Please pick up your headset first before dialing.
Once again, if you have a question. Please press star 100 telephone keypad.
Yes from Canaccord, we have Mark Rothschild. Please go ahead.
Thanks, and good morning, everyone.
Good morning, Martin regard.
For 250 done that and the project on 10 curious give a little bit more colour on the timing of actually getting going further on development than what you'd actually.
And on being investing.
More material not the money and getting.
Element going.
Great.
We would say between 18 and 24 months, we'll get the site plan approval and get our Drawns Don construction costs.
Tendered and we'll probably do some of the leasing on the office component and we view that we'd probably start construction between 18 and 24 months, but until then went up to spend a lot of money.
On Edlington I've mentioned, a few times that it's the Golden Mouse study area.
That means that the city is looking at how that land should be used so it's not as if it's just our application. It's all part of how the city works on it there probably a year behind where they thought they would be.
But I think we would expect that within 18 months or so.
The overview of that area should be complete.
We put an application and for our site. It will obviously be behind that but we're hoping that we can.
Get some work done with the city at the same time as they're doing the overall plan.
So I would say, we're probably two and a half years away from starting there.
Okay. Thanks.
Quite a bit of time before youre going to need to invest money Andy's project.
What.
And with the unit price, where it is a stock buyback something that was still a potentially be considered or alternatively are you, saying opportunity to acquire properties and Dow path Rocco.
Well that's a good question the person I would say is.
We have not made any decision to stop buying back stock, we'll we'll see what the stock does well see how the company goes but that's potentially use of cash and.
I mean, we are looking at buying some properties.
I don't think people realize how impossible it is.
To buy downtown Toronto properties at prices that.
We're comfortable with unless there's something about the future or strategic how it fits with us, but I mean, we're currently looking at a number properties.
Okay, great. Thanks.
Thanks.
From do started we have Mike mosquitoes. Please go ahead.
Thanks for taking my questions, maybe just on the back of marks question on the stock buybacks and no real significant use of capital for the next.
Couple of years.
How do you marry the drip program with dream industrial on buying more stock there versus buying more dream offer stuff.
How do you look back.
Yeah.
I would say that for years, we've been saying that dream industrial isn't necessarily a strategic investment for us.
Most of our shares of a zero cost base, which means every dollar proceeds is taxable.
The only time, we participate an equity issue is one at $8.75. We thought that was a strategic one to get the stock going in.
Turns out to.
I worked out pretty well I.
I don't see us by more dream industrial I mean, I think we could sell some.
Yes, just.
Mike It's Jay we did identify.
Number of uses for the cash or the next couple of years, There's obviously a base street redevelopment program or finish up with the construction.
The 357 day knocking on your Sherwood. We're also looking at other opportunities as Michael mentioned within the core of the core to upgrade those assets as well we're trying to stagger. It. So we'll have a huge amount of construction and ongoing at the same time.
Dream industrial units from they provide a pretty good return us over the last couple of years why are the best performers and it's really nice without the need for cash they are providing a pretty good capex for yields from my perspective, but there are some units that we have that we've been collecting through that trip that anytime if we need a cash we can't sell up little bit and the pinch so there's a.
Flexibility, there and we're pretty excited with what they're doing with their business. Okay. Appreciate that my my question wasn't so much on the with the long term attention is where I was just looking I think you guys are still subscribed on.
Second the drip correct.
Yes, right. So I guess just given marks question on the Dream office.
NC Ivy and re upping on the IR through the trip just curious how you balance those two.
Oh.
You know BT to be blunt about it we went into the drip to support the IR.
So that they had more.
Cash.
And we stayed on the drip rapid do we get a discount but weather I mean, I would you say, it's an arbitrage we're getting.
Premium to the market value.
And we don't need the cash, but but that would know shares as Jay was saying we'd be happy to sell them, but I don't see any reason why would come out of the drip it's kind of it.
It's an easy way to get a bonus and then we can you to keep the stock sell the stock it's up to us okay.
Fair.
Just a JV on that to 50 done dash.
Maybe if you could just walk us through your valuation of that asset at December 30, Onest and how thats treated and now that you've got conditional zoning.
How you'll be looking to value at that.
Either at the end of Q1 or subsequent to that as the condition on the zoning approvals with it.
Sure.
As both of you know we got zoning.
Generally I believe the 21st so as of year and.
It was recorded on our books as the income properties as as.
That was the highest and best use at the time, we're actually working through both the underwriting sort of a long term development as well as engaging a third party appraiser to value the property so by our Q1.
As always we'll have a couple of data points to use to derive the fair value of the asset with a with additional density in the development potential.
Okay.
Got it.
And then.
If I just one more question free please on British pound bag when can I just noticed that you guys moved it from held for development to other.
So I guess clearly, it's not a downtown trial asset, but theres the reclass two other and from future property held for development does that.
Alter or signal anything with respect your desire to be a participant in the development long term I mentioned stuff, you're pretty bullish, but just curious on the request. Okay. So I mean, there as nothing is really.
Do with that just just as you recall earlier in last year, we had a couple of different segments, we had Ottawa Montreal. So theres no buildings. There we had North York Evista Saga. So we have half a building left and given that all the rest of the assets can be summarized fairly quickly by Michael I also it's only seven Hooper said, we just speaker.
For simplicity of our disclosures are reporting how we look at the business is really downtown Toronto and then we have the other markets. So that was really the intensive it due to simplify the disclosures.
Longer term, we expect develop on on the site, we can do and phases or all at one but it doesn't really have anything to the disclosure.
Got it and okay before I turn it back and just say the simplicity of your business on disclosures as isn't really beautiful thing.
Our prospective appreciate it.
Okay.
Capital markets, we have Jenny. Please go ahead.
Thanks, Good morning.
Good morning.
So Michael Glazer your comments about the the value of the stock and look at a price per square foot basis, how do you reconcile that with the book value that that is being carried at and then and then maybe talk about what needs to happen at least from the IRS standpoint to really see a material change in the late you look at.
Is it is a cap rates and market transactions is it just NOI growth maybe expand on how you reconcile those two numbers.
I'd start with I don't need any reconciliation.
So I don't it's been anytime on it I think that.
The way the IRS numbers are calculated our historic and institutionalized and.
We have a process and it is what it is.
Then there's portion.
That I believe which is that the value of high quality things have changed dramatically from what they were in the not reflected but Jay probably has a more technical answer.
Thanks, Michael I.
I agree with Michael by that we did we do reconciling thats part of my job her job sorry.
I like to say like.
In the year, 44% of our assets were externally uprate, whether for financing evaluation purposes. So we have to use those that data points for its pretty audit and our quarterly statements.
So they were pretty transparent and how the assets are valued most of them would be under direct cap methodology and then the assumptions that use once again or disclose and they are market actually if we look at the brokers reports. So some of those assumptions. Yes. It is just basically a reflection point of.
Where things are at in terms of the discovered that the cap rate and the market rent, but overtime as rents do go up the values, where go up I think it's tough to reconcile versus the price per square foot today.
Okay, Yes, Thats fair.
And then going onto some of your downtown properties I mean, the occupancy rate is is pretty high but there's a handful of buildings, where it looks like there is some room to be hat is that related to just leasing fiction or is that related to the.
Some of the redevelopment you're doing along the base recorder and when should we see the with gas close.
That's a great question.
I don't believe there's any space that we have that we couldn't lease if we wanted to what we decided do is maybe wholesome space off until the adjoining space as available there's a number of space, where we think we combine.
Locations, we can do much better over the long term, so I think that.
Pretty much every vacancy is strategic.
Okay. So I know you said same property NOI growth this year from downtown trial would be driven by rent growth. So so is this occupancy lift sort of a 2021 event then after you're done with the work you're going to be street.
Some of them may actually carry out longer term out after this year, but just just on that if you look at the expiry table in them DNA left.
That's a 5% of the properties role in 2020, so the pickups not going to be high this year, but rents are continuing to go up and these strategic big hits are actually tied to other spaces are coming up.
And most of them are on the ground floor or the retells sections in the downtown Toronto. So we have bigger plans for those longer term.
Okay.
Then it looks like you've made very good leasing progress on 2021 still early in the year just wanted to get some insight on whether or not that's being driven by tenant who are very keen on keeping their space is is it just you guys rather picking what's known right now and rolling over the tenants who is really driving that the renewal.
Renewal at the leasing and the timing.
So its gord wadley speaking thats a great question.
It's a lot of people wanting to get ahead of the curve rates are growing at such a high rate.
We've done some government deals we've done a number of private sector deals along base Street for the people that really covered the value that that Michael is talking about and seeing what we're doing to buildings.
So we've been able to lock in a lot of deals earlier.
And then predominant predominantly it's just people trying to retain their space, we're seeing a lot of year and a half early blend and extend.
And it's been positive over the course of the last couple of quarters just to jump in 2021 there is.
Attendant large tenant to exercise or renewal option at the last one but that was flat the rest of the ones that we're doing our our at market or above okay.
So is it fair to say that for the downtown Toronto tenants that that having access and being able to commit space is more important than the pricing of the space.
I would say, yes, being able to have a well located address in the downtown core Toronto is driving a lot of these early decisions and they're not as price sensitive.
And our they are the renewing for 510 year terms that are trying to back that out and how you guys balancing that with getting good morning inboard speak.
Yes.
So so they are obviously trying to Max out the terms that they can.
We're looking at where being a lot more pragmatic and how we're approaching these leases were looking at them if at that shorter terms on some for full floors. Because we really think we can at the rate that the market is growing right now we really think over the course. The next 235 years, we can capitalize and we've seen such a positive change on renewing tenants.
On pastry collection expiring at $21 and seen average growth and then that rent up to about $40. So it's.
We don't where it's not saying that we don't want to do 10 year deals, but we want to be more thoughtful on on the deals that were locking in just a lot point on that we're putting a lot of capital and base Street. So we think that once the work is done and we could probably get a better left so some of those spaces it might be more strategic to do shorter term halls exactly.
Great.
Good color and port Congrats on the promotion and look forward hearing more from you.
Thank you very much appreciate it.
Thanks.
From TD Securities we have Sam Damiani. Please go ahead.
Thank you and good morning, just following that could you just give us an update as to what extent leasing.
Is already starting to reflect the redevelopment of the pastry properties like or that leases being done and that would go a rich.
Yes and.
We're we're well ahead of the curve and our asset our asset thesis is working.
The important thing to notice is we're getting average net rents over $40.
They expire at $21.
But that also includes the Cam increase for us on recovering some of these improvements so we're still seeing the demand.
And we're having a tremendous amount it.
Absorption and needs in these opportunities Sam I think it's a really should question because we had a thesis that if you look money to these buildings, we get well rewarded for.
We are getting rents.
Now that exceed the rents we planned on for when it's finished.
We can't really tells how much of that is based on the fact that they see what we're doing and they see our plans and they're paying a sport and how much of it as the market.
So I remember that we did a significant lease I.
I think was at 65000 square feet on Richmond, two years ago, we got.
Uptick from $21 to 27 lots of high fly high fives and.
I think we'll get more than 40 today, so that was mistake.
So we can't really tell.
But I stick with part that our tenants are paying us a lot of rent and we want them to have a good experience in our buildings.
And you would you be willing to share a little bit off the inducements side, how are those sort of structural qualify for several year lease.
So what I would say over the course of the last year, our landlord work costs.
Per square foot or down close to about $10 were down about.
We're down were down about 40% to 50% on what we're paying the other thing I'd say is we're paying brokers less to a lot of these tenants or try to do things direct.
That cost has gone down so on and any our basis, we've seen our any our.
Or any ours improve by almost $8 a foot.
Which is up about 35% year over here.
You know I've been doing this a long time.
And the market conditions were having now it's really exceptional so.
We are.
Trying to be concerned are locked down as much spaces, we can a much higher rents because who knows what it's like in the future, but I do feel as this.
There's been a lot of changes in Toronto, and we've got a higher rents for a lot longer so we're pretty excited about it.
We're also appreciative.
Okay, great. Thank you just back to 250 done.
There's still work to be done, but obviously I thought of time. It fully attempt to proceed on redevelopment is there like our our or return.
On investments that you're sort of hoping or planning for.
The final numbers are finalized.
Excluding the sort of demolition of existing properties.
Uh huh.
So what I mean, it looked really she becomes what do you say you're starting values. So is on our books for $41 million. So.
Pick a number you say, it's worth and I'll tell you the IR, but generally at a reasonable value for the density.
We should be mid teens as an IR from there.
But having said that I think what we're really looking at is we can get.
Going back to the thesis about thinker between 66, and 100 times cash flow for risk free once we build this new building.
It will be among the highest quality.
It's an unknown phenomena location they'll be almost no capex for the first 10 years, which makes it higher and higher quality and we'll be doing is will be building, an incredible building and getting it at a discount including getting a huge profit on the land. So you know your IR our numbers grade to be getting paid to promote there's no promote so it's.
Not as important but I would say that you use your math abuse lets say 40 or 50% Iraq for four years, you end up getting a building a lot cheaper than if he had to buy it and as we said before it's very hard to buy anything so I know, what you're getting at but.
Use 14, or 15, I would say off of a decent land value.
Any thoughts that you are willing to share with on land value.
Right now.
So what's happening now is.
People are buying land.
And.
At market and their racing to go to market and most time its condos for a lot of other people who might have land at like 50 or $60 a square foot.
You say market might be 200 for residential.
There are deciding what they want to build an apartment or a condo and they're looking at the long term returns and.
If you have land at $60 a foot and somebody says markets 200. When you go to the bank you show 200, So I would say when people are going to the banks are probably showing.
You know, 12% 13 present IR ours on average based on fair fair value for the land it helps them get the financing.
I think a lot of people are trying to do assemblies, where they're able to get lands less expensive by the time to get approval.
But you asking for specific question to put in a model I'd probably say.
You know without pushing the envelope, it's not for sale were knocking at 100 bids, but I think the residential probably were 200 foot and commercial maybe 100 to flip maybe 120.
Hi, Thanks, that's helpful. Thank you.
From Scotia Bank, we have Marios Sir Please go ahead.
Hi, good morning.
Just to maybe on the operational side, and specifically focusing on 2021 and the uptick and Weve Expirees can you can you talk about whether there's any chunky Susan.
36.
Explorer downtown Toronto.
Sure.
Yeah within that number I as I mentioned before.
One agenus questions. There's a large tenant that had to exercise their renewal option that were that was flat that was around 230000 square feet. The rest of it is theres a pocket I think at hourly plays that was around 46000.
There is another one around 70000, but otherwise the rest of its pretty pretty small and allied tenants. As Gordon mentioned are trying to get ahead of sort of expiry and locked out certainty. So right now we're working with them. So you'll find that will probably be able to lease up most of the space six month to your in advance at the minimal.
Great, Okay, Im assuming no meaningful change in market rents over the next 12 months.
Fair comment to make.
2021 same store NOI growth should be.
Meaningfully above your expectations for 2020.
That's correct bolt on on rents and probably on the.
The demand square footage is a lot higher so you could do the math on not yet.
Okay, and then just maybe shifting gears Barclay Ari for US valuation can you just walk us through.
If at all do in terms of hard you report.
Value brief on Im pleased to ramp versus market rent. So we're doing over two.
Your estimation of market rent.
It was operable, 3.5% quarter over quarter, So Q4 versus Q3 and consistent with the increase.
In the reported book value per unit. So can you just kind of walk us through.
What renters report to the 26, everybody today and how you think are both showing the mark to market.
In that number return.
Sure maybe I'll spend some time walk through the valuation methodology, we do on asset to asset basis. So I believe most or all of the properties and downtown Toronto are valued on her direct tab methodology, which you take the stabilized NOI or red numbers over the cap rates.
Keep in mind that we do have to reflect the existing leases in place. So you can't cap, what we think its market rent on day, one because you have to acknowledge that there is existing wall to each of the buildings. So over time, what happens if we make adjustments for leases mature over the next let's say five to seven years and then.
We also assume inflations in the market rents as well so over time, depending on the Walt profile of every single building you realize the pick ups and that's basically the methodology.
Got it okay.
Just to clarify or 250 done does the highest and best use.
December 31st wondering team was was offers because you.
Receive who's ordering or partner, that's correct, there's no incremental value in density that.
All right.
Okay, and then in terms of.
Our capital recycling within the Dream entity Dream office was in active during the quarter by Bar agreement limited was pretty Arcturus perfect was buying more points. So can you kind of walk us through how you do sorry.
Which are pretty bars.
Your next and we're going to kind of a subsequent unsecured debenture redemption Embarcadero decision in Q4 for Dream offers.
You know I actually think that.
There is an issue about priorities I think.
There's different businesses different boards different management teams.
I think.
Based on having a 15 or 20% premium to in a b.
We kind of felt a little bit intimidated about continue to buy back the stock.
From Dream a number its perspective, we were quite happy to buy the stock. So that's I don't know if you're aware of it but dream unlimited got a bunch of money recently.
So that was a pretty good use was to flip it out of dream global in into Dream office, and that's worked out pretty good.
I think we're really were huge believers and dream office.
In February 2016, we put out an announcement, saying, we're going to really changed the company and.
You know I'm not sure I think we had some good ideas of the time, but underlying it I don't know that we thought it no completely but what we're doing ones, we're going to the highest quality assets, we had and shutting all the rest and we just keep buying it back so I think that if I would.
Be critical I would say, we probably should it continue buying back stock under and Dream office, but we got a little bit gunshot because we started at $15 and around 31, we sort of thinking like Wow.
No. It shareholders' money are you sure issue are you sure, but I think that we're open minded to buy in the future, we'll see where it goes I mean, the stocks, but on a bit of a tear in the last 72 hours.
Yeah.
$50 before toward pharma girl for sure.
Last question just on.
I appreciate it from the disclosure.
Some of things that you've done.
Person on the energy sorry.
For the past several years can you can you maybe quantifying real quantify.
The impact on your gross rent per square foot.
Turning to the savings achieved from your energy initiatives and what.
Might look like going forward in terms of.
Benefits to the.
[music].
Sure.
Just had a background yes. He has been more of a focal point for investors we've been doing long time.
Not to sort of.
Make checklist, but we thought was there anything to do and provided economic benefit.
Though it's interesting enough for the first time in 2020 at within our management goals.
We have it yes, GE sections. So there's a number of them with regards to building efficiencies.
But two of them as I go we're targeting water energy consumption reduction of 2.5%.
Theres a couple initiatives, it's kind of hard to quantify a blended per square feet reduction on the operating costs. One example, with one of our largest assets out of they place.
We we reduce the utilities.
I, almost say, 20% and I had an impact about a quarter to 50 cents per square foot on additional rights Hassan initiative. So what happens all the tenants in the building or expecting together refund.
At the year end adjustments. So we're keeping our tenants happy we're hoping to environment and I just creates more room on additional rent so we could.
Look at various capital initiatives that can improve the sort of the look and experience of the building at the same time really optimize how we look at energy.
Yes, I prefer to win win for one more question for you and your door 60 gardens.
For for over 2020.
How much lease termination incomes report putting that if any are.
While we do not forecast lease termination.
Okay.
Thank you.
From RBC capital markets, we have probably Burke. Please go ahead.
Thanks, and good morning, just Michael you mentioned, it's tough to buy but you are looking at a number of properties can you maybe just comment on that disconnect and maybe the types of sellers that are okay.
The buyers are more interesting.
The sellers are people on properties.
They are being offered prices be on anything they ever dreamtopia. So thats why they would so.
What's interesting is.
The buyers are everybody.
And I would say one area is.
Extremely high net worth individuals.
Who have strong cash flow from other businesses are looking to buy real estate because it seems a lot better than a treasury bill.
Theres pension funds.
That want more.
You know if you think about downtown drawn on when you look at.
Oh immersion Cadillac and.
A few others Allied us, there's really not that many people who own downtown Toronto and there's a lot more people that we'd like to so you got private equity you've got pension funds, but I would say that's interesting is just how much high now ultra ultra high net worth money is looking for downtown Toronto.
Got it and just your comments on that on I guess, the the number of properties or you've got a lot under review.
What sort of volume are you looking at.
Well, it's all small.
You know for though at a 40000 square foot building or 60000 square foot building that would be great.
Okay.
And just the comments on rents going higher for longer just what's your sense of perhaps when this month from your perspective, when that momentum may start to slow.
And perhaps how new supply may factor into that.
Nick we're living in a time of unprecedented demand for everything in downtown Toronto meeting office space or.
Residences and stuff so.
I have no idea when it changes I just look at the Companys and I've been really quite pleased that the increase in rental rate really hasn't changed people's behavior, we don't see them, reducing their space. We don't see the movie the suburbs anything more more people come in downtown so it looks to me like it is healthy and companies operate with Ford.
45 and $50 rents.
So I don't know if we peaked and we flattens out like we gapped up or if it grows a 3% a year from here I have no idea, but I don't see anything that looks like it's gonna be difficult on the rents I think the new buildings are getting exceptional rents I.
I mentioned before there's not that many landlords in downtown Toronto, they're all well capitalized. So the guys were building new buildings are getting tremendous rents and I don't think that that's hurting us in any way if anything I think it's all but at this point.
And I'm not concerned about them maybe to a certain extent the space, they're giving up but I think it's really quite surprising how much space has been leased and nothing's been given up.
Right.
Just last one from me at.
Apologize if this was somewhat asked earlier, but at 250 done. That's can you just provide some color on the range of costs for that project.
The bit early but just trying to get a sense. There and then whether this is something that treatment undertake on its own.
Easy to answer the second question, yes.
We will do it ourselves I think there was some comment about 2200, Edmonton, we're gonna do that ourselves we're not looking for partners.
The first question how much of the costs.
A lot.
So we're probably looking at I mean, generally I think that might cause 800 Bucks a foot all in at fair value, but.
That would probably be included $200 a foot for land, so $600 for soft costs construction T.I.s everything including.
Residential or maybe office office might be but cheaper Jay you have a comment.
What we're actually philosophy I think we're talking various construction managers trying to get.
Yes, playing going on there I think you're probably in the right ballpark. It really depends on when this is built out what construction costs are at that time, but I would use Michaels numbers as a rough guide.
Sorry did you indicate at what point you might actually start construction on that.
Yeah, we think that will be up as interest our construction.
Within 18 to 24 months.
Okay got it.
It's very much.
Thank you.
And we have no questions at this time, we'll turn it back to Mr., Michael Cooper for closing remarks.
We are exhausted. Thank you all for your interest.
Feel free to follow up and we look forward to seeing you were speaking to you next time. Thank you.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for joining you may now disconnect.