Q2 2021 Dream Office Real Estate Investment Trust Earnings Call
Good morning, ladies and gentlemen, and welcome to the Dream Office REIT Q2, 2021 conference call for Friday August 6.2021 during the call management of a dream office REIT may make statements containing forward looking information within the meaning of applicable securities laws depletion forward looking information kind of based on a number of a.
And it's subject to a number of risks and uncertainties many of which are beyond Dream office <unk> control that could cause actual results to differ materially from those that are disclosed in or implied by such forward looking information additional information about these assumptions and risks and uncertainties is contained and dream office reached with security.
The regulators, including its latest annual information.
And a M D N a.
These filings are also available on office reached web site at Www Dot Dream office REIT That's D. A.
Later in the presentation, we will have a question and answer the second to queue up for.
A question press. The Star then 1 on your telephone keypad your host for today will be Mr. Michael Cooper share.
And CEO of Dream Office REIT Mr. Cooper. Please go ahead.
Thank you operator.
Good morning, everyone and welcome to the Dream Office Group second quarter Conference call.
The day I'm, a J J of our CFO and boardwalk the our CLO.
Once you've made a presentation, we'll be happy to answer your question.
Over the last 18 months everyone's lives the changed dramatically at the same time.
This quarters become obvious to me that it will take longer than had been expected to get into a new rhythm of anyway.
And People's lives, including work.
1 example of a thought of how to address the different choices people have made around vaccines.
Over the last 6 weeks, we have been researching what our policy could be for unvaccinated people in the office.
Part of the screen search as a result of the hearing from back of the name of employees.
But they aren't comfortable coming into the office, if they will be exposed to the people we're not back from David.
Firstly, we are not medical people.
And we are outside of it.
While I don't believe that that people are.
Much of our much risks of being a lot on back of the people.
Neither of our are neither I, nor our team are in any way.
The talented.
Or have the background the deal with this.
Secondly.
I don't even think of the scientific community shares the same juice.
Thirdly, a provincial government provided no guidance on this issue moving.
Every company to find their own way.
We will be taking a bit slower reported maybe coming back to work mandatory.
We also don't know what the capacity the limits will be so we are assuming that after labor day.
Should be able to have 50% capacity.
As a result.
The people alternating with a week on in the office and a week off from the office through the fall until we know more.
What we decided the blue is the force of timber companies have the.
It will be voluntary.
I don't want to combat the tour in October so that people can get settled at home, it's a part.
Part of it come back the work.
Now, we're also providing from flexibility for work from home.
About the fall even among the 5 day.
Ron.
It will provide.
When you pull the time to adjust to the post Covid world.
Having said that.
With a complete the voluntary come back the work policy, we already have over 70.70 of our people in the office.
For the month of August of encourage people to take a vacation and relax real.
Expect the very busy fall every once in the have the right frame of mind and the energy to do their best work starting after labor day.
We are providing timing flexibility not just so.
People can adjust their life at home on their mental state the return to office.
But also because of a more confident.
The people want to come back war.
And we want them to come back to work on their own.
There's a couple of my observations from recently.
I really believe the people wanted to be.
The fiber.
The thing in each month.
Auto prices are at all time high we.
We have strong interest from potential new tenants for exciting concepts or a retail.
There are more people downtown every day.
And on the summer weekend base the streets are very busy.
So people love with downtown the offers and as soon as they can access it I am confident the downtown Toronto, a private again.
Already of a U S hotel occupancy of Revpar are just about a pre pandemic level.
If you look at airlines.
Airfares.
You'll see that.
They are introducing a significantly more flight.
And the actual cost of those flights are no longer discount there.
So it does look like we'll see a more normal outcome with a little bit more time.
If we look at economies that have opened before us.
We're seeing that activity is returning.
The wild is a slower return to normal Brexit we.
We are seeing that life is returning to normal.
There have been enormous changes of driving labor of our society.
Labor is accepting the scarce and coverage so on a go.
Going to further length.
Anytime I have seen of my career to attract and retain talent.
The government would suggest that people need assistance to help them through this crisis at this time.
The reality of that restaurants, and many other business of a nice unable to open or open up a capacity or a loud too because they can't get them.
Further the <unk>.
Media suggested that the only type of employee or.
Are the ones, who want a stay at home.
More flexibility in their life.
A lower priority.
Now there are and there have already been all types of people.
But while some people may be making a decision to live their life differently. After the last 18 months.
Others have seen the value of being a net financial position and are actually more ambitious than ever.
We have seen the most successful investment banks in the world access the bridge.
Sorry, and the world provide across the board pay increases the entry level staff.
These increases are so much.
At the entry level of analysts at Goldman Sachs with JP, Morgan, where just about being the top tax bracket in Canada.
Matt from your first year out of school.
Closer to home the Canadian banks and law firms have range compensation.
And the real estate the industry every single.
1 of our peers as we do have unfulfilled unfilled positions.
And competition for Calvert is driving up the compensation.
I actually don't think that there's ever been a better time to enter the workforce or.
<unk> early in your career to find jobs and achieve great pay.
And manage an ambitious plan for your career.
And that actually improved.
The time, including right after World War 2.
We are seeing increases in wages and unlike in the previous decade.
Many of you are able to pass these costs through the customers.
All industries, almost all of the industries, so their profitability of and suffering.
As we clearly do not have sufficient skilled labor from the jobs, we have a vacant and real estate banking law service the interesting and likely in just about every field.
It is great that we expect over 400000 of immigrants and lead to help her annually to help us growth.
So given all of the above I'm pretty bullish about the economy and about our city.
With regards to office space all of our tenants of working with us to get ready to welcome a high.
As a percent of their stack backpack of the office after labor day.
Youre not seeing any significant changes to how they want the user office space in.
In fact, I was speaking with 1 of the largest office furniture manufacturer in Canada.
Said that they were very busy.
We're not being asked to make material changes the furniture they produce.
Other than that their clients want more flexible less extensive furniture with shorter delivery times.
Obviously over the years, we may see more changes.
6 of them yet.
Gordon Jay will provide much more detail on the weakening demand.
But I believe you had said in a press release, we are seeing a big increase in tours.
And we're starting to a complete new leases on vacant space.
Now that we are seeing more interest from tenants, we anticipate that the third quarter will be our low for occupancy of this cycle.
With respect of our view of the value of the company. We are very comfortable of the current book value.
<unk> is the increases that we get more back to normal.
The the extent that there have been trades of a downtown Toronto 8 the values of our significant based on cap rate or value per square foot.
Good real estate is hard to come by.
And Toronto continues to have.
Desirable attributes of that makes it a 1 of the top markets for investment in North America.
We've been investing in our buildings in very creative ways, which are attractive to tenants in the community.
Have taken great steps to make our building a more sustainable.
Also working on making the operation of our buildings more inclusive for suppliers and in the community.
We believe our offering a very competitive with our peers and our approach will keep our buildings desirable over the long term.
Often the spill selling around the core or at least $600 per square foot.
As a comparator condominiums in the same vicinity of selling for about 14 of the square foot 14, Bucks a $1400 a square foot.
So the relative value in addition.
We don't just on office buildings, you also own $26.6 million shares of your Dream industrial would.
But you are currently worth about $425 million, which a significant portion of our market cap.
Notwithstanding the current stock price is much higher than it has been in industrial.
We expect debt its outstanding real estate and stock performance will continue.
<unk>.
To accelerate but youll be of great value to the office REIT.
I believe as we have discussed before we also have development assets that are currently produce the income.
But also provide additional value, which is less correlated to the office dynamics.
They include significant residential components.
It is a real to own assets that arent used very much for 18 months.
Of your patterns of change adequately.
<unk> information scarce, but.
But we continue to believe that our business is well positioned.
They need to be successful as we adapt to the new world.
Lord.
Well, thanks, Michael and Hello, everyone.
I sincerely hope you and all of your families are doing really well a cash.
Lee It's no secret the pandemic and the many various states of emergency have resulted in Toronto vacancy to increased over 9% downtown across all classes. This is a level not seen since the great financial crisis.
It's really important to keep in mind that just before the pandemic vacancy was around 2.5% across all classes.
They can see in our portfolio is seemingly moved in lockstep with the market moving from 3% to 9% taking us to an overall occupancy rate of just over 91%.
But that being said there is genuine and real optimism at all levels of our business from leasing operations and construction as our clients open their doors people come back to work and regulations are relaxed.
Due in large part to the national vaccination effort and associated reopening of the economy in our core market of Ontario, We're seeing growth great momentum throughout all phases of our business tours are up dramatically like Michael said sublease space is being taken off the market now represents less than 1.5% of our portfolio of absorption is picking up.
And key deal metrics are very strong in terms of net rents and even any of ours for deals done. This year are all of north of $30 on average.
Other market Saskatchewan in Calgary current committed occupancy grew from 71% to 78% from <unk> started the year. This is due in large parts of those economies being open sooner and coupled with some viable new leasing and expansions to the tune of about 148000 feet and he of ours are up 20% on new deals there and 35% on renew.
<unk> versus budget.
From an income perspective, we're really very pleased with how our teams managed through the Covid pandemic.
Communications with our clients and brokers have helped secure our overall collection ratio of 98% for.
For the most part of the vast majority of existing clients have renewed their leases over the last 12 months as seen by a 75% GLA of retention ratio of mid year for 2021.
New leasing has picked up in Q2 versus a much slower Q1, and our core portfolio and to date, we've done about 250000 square feet I'll, let pre pandemic rates in any of ours.
We also sincerely feel really good about the additional 260000 square feet of LOI and deals and very active negotiation, which we hope to report on in the coming quarters.
1 important variable that supports our optimism is the growing interest in retail leasing Michael touched on it but were conditional on 3 deals for almost 35000 square feet at rates north of $85 a square foot per average in our downtown retail portfolio of.
A lot of that space, just so everybody knows is repurposed or currently non income producing so it'll be viable impact of our NOI in the future.
It's funny 12 months ago, the heartache was with beds and share everyone was talking about beds and sheds.
And of industrial overseeing is the most valuable asset class with bricks and mortar retail often left for dead or a just an afterthought.
But we're really excited about the quality of these deals were working on a concept and the offerings, we're going to provide our clients and the community as a whole. These are potentially landmark transactions that align really well with a base Street collection, and we feel the amenities and cachet of these will enhance the value of of our assets and overall offering even further.
1 thing I also take solace in the fact and this is leasing rents of inducements have remained in line with our business plan that's.
Exceeding rental expectations on a core assets for some recent deals done and outpacing expectations of non core markets, where we see the most demand.
The absorption in the core portfolio was tempered very early due to the lockdowns, but again, but a kin to what we saw a non core markets have been accelerated over the last month.
We're seeing dramatic increase in tours and interest, which we hope to transition and the commitments that we can share.
Aside from leasing and income metrics. The team remains active on pace and very committed to our operational construction and most importantly ESG goals.
As a company, we're really fortunate to a focus on great buildings and unparalleled locations and prior to the pandemic, we used our capital at a time to improve our buildings to a whole new standard a boutique luxury.
Despite the mandated construction closures our team has done a great job and had a head start to make a building sale throughout the pandemic.
We use this time to upgrade many of our assets not just the aesthetically but from all aspects of base building range from HVAC mechanical and structural this is the future proof and really support all facets of that tenants covert coming back to the office, primarily air quality vertical transportation and accessibility.
By upgrading our assets, we've put a real focus improving consumption metrics and data around the HG and carbon utilization associated with a new overall net zero strategy.
These variables a really at the forefront of what we hope will separate us from a peers.
Our team takes real pride that as a landlord and a leader we have a tremendous opportunity to influence and improve our carbon footprint and internal line with the growing sustainability demands of our clients.
We had a corporate goal this year to establish a viable grasp the score and the team worked really hard on implementing our ESG strategy throughout the portfolio.
We're pleased to report that we have submitted our application last month and based on a preliminary assessment hope to secure a strong score of next quarter that separates us from a peer set.
In the end of being a good community and environmental Steward is absolutely core to our business and as tenants become more sophisticated in their commitment to the environment and community, we want to be ready to share our strategies be a resource and ultimately partner to make meaningful contributions to support sustainability and the environment.
This past quarter, our operating lease was the first to be certified gold and recognized by the Green lease leaders Association of Canada.
Also we had some very strong national coverage coast to coast for being the first and largest portfolio in Canada to be well health and safety certified just as a quick reminder of the well health and safety certification as evidenced based third party verified rating to address the post COVID-19 environment.
The well health and safety rating helps guide users of preparing their spaces for reentry.
We're so proud to have achieved a high standard in health and safety at this remarkable scale.
The verification of our operational and maintenance policies communications and engagement and emergency preparedness ensures all of our occupancy all of our clients and all of their staff can feel safe and confident in our buildings emerging from this pandemic, whether it's a boutique boutique heritage building on Bay Street, our 1 of our downtown high rises.
<unk> Adelaide, please we're ready.
In the end, creating healthy and positive buildings has always been a cornerstone of our dream office approach.
Over the pandemic. This has never been as important we feel really strongly and committed that having proactively made investments in new technologies and put in place a extensive measures and protocols to ensure a healthy and safe return of our buildings. We are very uniquely positioned to capitalize on the momentum that we're starting to see in the market.
Going towards the end of the year and far beyond.
As such to be honest with everyone I'm real proud of the team for their efforts and commitments throughout as we transition into the new normal I'll turn it over to James Thank you.
Thank you Bart.
Speaking briefly on our operations financial position and some thoughts on capital allocation going forward.
Our operations on our results to date have been affected by the effects of the pandemic and the multiple state of emergencies in Ontario.
Our buildings a parking garages have remained empty for the better part of 16 months and a decrease in transient parking revenue has been negatively affected our results by over 3 turns this year the.
A majority of tenants or approximately 98% each quarter of paying their rents a retention ratio year to date has been just shy of 70% of both spread and the net effective rents on deals executed have been favorable and in line with pre COVID-19 leasing rates.
The pricing leaves the main challenge has been for US a tour of prospective tenants the seed new spaces and fire of those prospective tenants to be able to commit to new leases when they do not know when they can return to work.
As a core have covered we are quite encouraged that we are finally seeing touring activities resume in our downtown Toronto portfolio and we are optimistic some of those prospective deals will turn into commitments by the end of the year.
We have also completed our development project, a 19 under share within Regina, which will contribute $5.3 million of annualized NOI of starting in the third quarter and we anticipate that post labor day, a parking garages will have better utilization.
Despite these restrictions and the challenges on occupancy of income we're quite pleased our year over year funds from operations per unit was relatively flat.
We have a great portfolio of assets that is very well positioned to come out of the pandemic and our balance sheet is in great shape and can provide a lot of flexibility in terms of how we want to allocate capital over the next year.
We think theres, a tremendous amount of capital available to us in the debt markets due to the quality of our portfolio and a strong relationships with our lenders. We have addressed all expiring mortgages in 2021, which collectively equate to about a $127 million at a weighted average interest rate of about $2.76.
This replaces the 104 billion maturing at a 4.8 so thats a healthy lift of both the balance out of the rate.
We are also in discussions with a syndicate of lenders on a renewal of an upsizing of our secured revolving facility and we anticipate to be able to finalize the extension shortly a comparable terms.
Our net asset value per unit continues to improve.
About a 1% quarter over quarter.
Covid started our NAV increased from just over $27 in March 2020% to $29.9 tenths of this quarter consistent.
Consistent with CBRE cap rates of private market transactions, we haven't all the snow movements in cap rates for downtown Toronto Office building during the pandemic.
We are quite comfortable with using 4.8% cap rate on a stabilized NOI of value our portfolio in downtown Toronto today.
Now to categorize the movements through Covid the increase in our NAV over the entire period, we're up 40% from our investment in dream of industrial REIT.
40% from accretive unit purchases at a average price of $19.30.
And the remainder is coming from retained earnings within our business.
At our current trading price. This morning, just about a $22.20, a sense, if we fair value of our dream of industrial holdings and the assets in other markets at Buck.
I'll touch on a portfolio of about $3.5 million square feet is trading at a implied price per square foot of less than $500.
We think thats, a significant discount to what we consider to be intrinsic value. The appraisals, we see a.
Private market comps for a similar assets of have transacted, we feel optimistic that the leasing of income will normalize as we come out of the other side and that the employees gradually return to the office.
Therefore, we think the obvious use of capital today is for a dream office to continue to repurchase the units under the normal course issuer bid program. It begins later this month, we have ample excess liquidity on our balance sheet.
We can also fund acquisitions with either disposition of non core assets when they happen.
And a bit of our dream of industrial unit.
Happy to take any questions and now I'll turn the call over to the moderator. Thank you.
Yes.
Thank you we'll now begin the question and answer session. If you do have a question from northern 1 on your Touchtone phone if you wish to remove from the queue. Please press the pound sign or the housekeeping.
There'll be delayed to the first question of the amount if you're.
Using a speakerphone you may need to pick up the handset first before pressing the numbers. Once again, if you have a question or the 1.
1 on your Touchtone phone.
And our first question is from John is kind of it's from core Mark Securities.
Good morning, gentlemen, congrats.
Congratulations on a great quarter.
My first question is in terms of the evening.
Absolutely.
You mentioned that the activity is picking up in the June.
So in terms of the lead times on the Kevin will compete well how does it from banks.
I think even in June occupants of the company.
The private market thinking about occupancy and benefit of advertising in the company as such.
Gordon you want to take that question.
Sure the audio wasn't clear, but I think 1 of your questions was how is the touring activity comparing to a pre pandemic.
Gordon I'll take that 1.
Yes, it's a great question. So prepay so pre pandemic, we're probably averaging close to about $25 to about 35 tours a week.
The last week, we had a high watermark.
About the pandemic mid 2007 tourists. So we're starting to get in line with what the tours were during the course of the pandemic.
We're averaging about 5 to 6 tours, a week and the majority of those were virtual tours to resume sending treaty plans those kind of things, but active walking tours over the course of the past week and we will get a releases today have all been north of 25, which is almost in line with the pre pandemic levels.
Thanks Glenn.
The.
Second part of your question Jacob Wallenberg blurred out on the audio was in terms.
The occupancy of the property and how of the private market of thinking about occupancy and the essentially but I think that into a.
You just think of a market.
Yeah sure I think right now it will take the.
Time for some of the tourist to.
The <unk> into commitments, but we are quite optimistic because of the conversations are speeding up Michael dimension that we think Q3 is probably going to be our trough in terms of the occupancy, but just looking at.
Existing renewals and new deals and maybe.
Some expectation that we'll be able to convert some of those leases. We think by year end, we will probably be around where we are at today and then towards the next year, we're quite optimistic that the occupancy is kind of pick up.
That's a great color. Thanks, Ian plenty of my last question is around the lobby with treating mentioned before she.
She leaves about a repositioning the assets in other markets outside of downtown.
And can you get a liquidity.
Can you tell from following the pod pluses to ask me are you seeing more yes, it will be coming out from both market.
Just maybe you can watch items.
Yes, sure that's a good question so in those markets.
A key goal is to drive up the occupancy and getting of the occupancy up Hasnt. Many benefits you get the recoveries on the operating cost.
Make it more desirable for free.
For a private market sales.
We're getting more interest now.
Throughout the summer, but we hope we can probably sell 1 or 2 assets maybe by end of the year early next year.
We can't tell all of the assets 1 of your occupancy is higher.
We have a great group of lenders and there'll be able to give us a pretty good LTV in terms of the property. So on a levered basis, you had those properties now.
A positive cash flow position and also with a pretty attractive financing rates and provides a pretty good lead.
<unk> returned to the company until the day, we are able to sell them. So we sold a lot of assets already we're certainly not concerned at all if we saw of each of the remaining ones that we view as great if not kind of hurt us, but we plan our budgeting a liquidity and debt on the assumption that we don't have we do it's the extra capital.
And the Big LNG. Thank you bottom line glide back.
Thank you.
Our next question is from Sam Damiani from TD Securities.
Thanks, and good morning, everyone.
Gored your comments were very helpful on the sort of of the trends and the addressing the occupancy decline of I know that some of the occupancy decline of the portfolio was due to some redevelopment activity going on but I was just wondering if youre if youre hearing some some of the specific reasons why some of the latest the purchase took place what the.
Tenants are deciding to do or the consolidated space, reducing their space needs of relocating to other other landlords.
And how would you compare some of the tenant's decisions.
Most recently to the pre pandemic.
Yes. Good question. So what we're seeing is a couple so we've got a we've got a private sector.
We've got a good a good roster of private sector clients and we've got some government clients at all levels. So we had 1 or 2 government clients.
Downsize due to funding.
And then also relocate to a suburban locations. We haven't we haven't really lost any tenants the competitive landlords are competitive situations. So what we're seeing is on the government side, we're seeing some pressure in terms of funding.
Which has influenced their decision what we've seen on the private sector side, we've done a couple of larger deals blend and extends.
Get some extra term in exchange for for taking back a little bit of a space.
Space that we do take back is usually quite usable and in some of the space that we've taken back were actually in negotiations with tenants to backfill that space, but the irony I was talking about this with Michael the other the other day. So the irony about some of the space that we got back from the private sector tenants was that we started those negotiations or those discussions even before COVID-19.
So we knew that some of that space.
Would come back and right now, we're just back filling it but on the government side, it's mostly been around the sensitivities on funding and then the private sector side, we've seen some right sizing, but that being said and the same thing we've seen some private sector clients expense, we have a great partner and a client out of Saskatchewan took another 30000 square feet.
From Us we're talking to a few clients on our trauma Street portfolio that are looking to expand and our sublease. It is kind of the general consensus throughout the market, but our sublease.
<unk>.
Of our tenants at a sub leasing are taking their space back off because they're starting to realize that they actually do need the space.
So we've seen that dropped actively being sublet in our portfolio now is just a little under 1.5% so.
That's been a reassuring.
That helps out.
That is helpful.
I also just looking at the lease expiry schedule in terms of the forward commitments that you have today versus let's say a year ago or pre pandemic. It's clear that tenants are waiting longer to make renewal decisions is that dynamic starting to reverse or are you starting to hear from tenants earlier on the boat, but renewals or is that not happening yet.
Yeah, no. That's a good point so we're starting to hear from them and we're starting to hear from their brokers I think brokers have been a pretty good catalyst in the market to try and get these discussions going early.
So we've had a couple of larger tenants, where we're already engaged a bit earlier now.
I think it's twofold I think people are starting to realize that the market is starting to shift so theyre being a little bit more quick and proactive to try to put a deal together now.
So we have been fielding a lot of those costs.
And.
That's kind of what we've been seen in the market today.
Yes.
Okay, that's great and I think thats. It from me now thanks, so much.
Thanks Sam.
Our next question is from Mark Rothschild from Canaccord.
In high volume.
Obviously, the things have worked out really well with a dream industrial and the industrial sector in general.
And it's become as Michael mentioned, a big part of the market cap with a dream office.
The potential continued buyback of units.
To what extent are you comfortable with the industrial steak, becoming an even larger part of the market cap and is there a limit to how much you'd want it to contribute to the REIT or does it really not matter.
Yes.
Thanks, Mark I mean.
We've always said that we hold them for strategic reasons, but not lots of.
Not the strategic but to make money in.
We started buying stock in addition to the first 18 millions of $8.75.
Lastly show a sold 1 million shares of 1 million units.
And we continue to make the decision.
Yeah, but.
We're not overly concerned about.
What happens we hope it's incredibly successful.
It becomes a huge part of the market cap, we think that's a good thing but we.
We don't we're not a pension funds that manages those kinds of things. So we're going to make the decision. We think is right all the time, but we're.
Good day.
Decisions based on weighted.
So with potential additional unit buybacks of GM office.
From what I understand youre, saying it could become a much larger position relative position of Dream office and that's not a problem at all.
Okay.
Okay, Yes.
Great. Thanks, and maybe just 1 of a small question.
When the pandemic started obviously a parking revenue took a big hit.
What are you seeing with the trends in that too.
To what extent do you expect that to come back as employees come back to the office.
Gordon.
Well <unk> has been a little bit slow throughout the summer right now still.
While we did throughout the course of the pandemic as we donated a number of spots as well as the first responders that are in the area people that had been on the frontline with the pandemic.
What we suspect.
Speaking with our clients and talking to them, we should see an uptick.
The at least 30% to 35% over the course of September and October and more of a dramatic uptick.
November and December as the weather starts to get really cold.
We think parking is going to be in great demand I think and speaking with a lot of our clients and facilities managers.
There is a bit of a resonate.
There's a bit of a reservation around public transit still.
With their staff.
So like Michael said, it's a war on talent a little bit earlier, so a lot of our clients are talking about using parking as a inducements and ways to move and when new talent. So.
We feel pretty good about the parking that we have towards the end of the year and going into Q1 of next year.
Okay, great. Thanks, so much.
Our next question from Matt <unk> from National Bank financial.
Hey, guys.
A question for Gordon I guess with regards to.
The lower retention in Q2 did that relate to the tenant the dynamics that you were talking about with the government and private sector.
And was there any sort of a strategic de leasing.
Related to the base street in that as well.
Good good question, so phase III non a lot of day leasing.
We were holding off some occupancy.
On some of our ground level force for these retail deals that we're working on.
That was a bit of a lag the report cash for US we were caught a little bit by surprise by by $110.655 day, which was a government related tenants, where we assumed.
Where we assumed or a renewal and unfortunately, they were they had some of their funding volume.
But we are on that very same space, which represents about 35, just over 35000 square feet.
We're actively negotiating with an existing tenant so we feel like we can hopefully get that backfill bye.
By no later than the end of Q1 of next year, Yes, I'll jump in for a a little bit if you look at retention rates by quarter, it's quite lumpy. We in fact tracking over the probably a lot of 20 quarters and on an annual basis is always going to settle in around the same.
<unk>, which is about between 60% to 70%. We don't think this year will be any different given where the pandemic, though like Q1, we had a higher ratio we had a lot of renewals in fact, the government keeping their space. This quarter was down a bit we expect the rest of the year to a pickup and end up in the same spot.
Ed.
Okay, No that makes sense and then just on Bay Street more generally other than $3.66.
Do you do you anticipate maybe expanding what youre doing there to other buildings or are you happy with kind of the configuration of those and then maybe more generally on Bay Street as well just where are you at in the process of the repositioning of the investment in those assets.
That's a good questions. So we'll start with the repositioning of the asset. So we did have some construction delays that set us back just over 10 weeks.
Where all of the outdoor work so rally weighted on a retail will be done by September some of the finishing works around the lobby the vertical transportation upgrades.
Throughout a few of the buildings will be pushed into early Q1 of the next year.
But we're really happy with the buildings that we've done we can't wait till the day. So we can we can show everyone on the call. We're happy to walk you through but the quality of work has been incredible the feedback from our clients has been incredible and what's been really cathartic for us is.
Not quarter related but we just finished and closed the deal last week at 1 of our phase III collection.
Buildings, where we had expiring rents of $20 and our average net our average net rent in this new building or sorry, 80, Richmond are now over $44. So we've seen a huge lift in the deals or asset thesis is paying off on the deals that we're doing and people are really excited with the quality of the work that we're doing as well too so.
On the actual work itself, we did get a some delays in timing, but we are starting to see a room a real pick up in people seem really excited about the retail all the way as well too which is a great amenity.
Okay, Great I appreciate that color Jay on the lending environment.
A addressed the 2021 maturities looked like some of them were a bit shorter in duration was that the rate driven or is there something strategic to the terms that you went with the refinancings.
A little bit of both some of the lower.
The maturity deals were actually for example, a 20 to 100 Eglinton into 50 does that and on those was I think we're still going through the redevelopment of base that we wanted to keep the Optionality open of the.
The loan to value and the rates were really good.
So that was really the main reason everything else was pretty standard and were going for 3 years again on our credit facility like before.
Okay, and then because of you mentioned it on $2.50 Dundas.
It's been a bit of a trend towards health care usages. That's obviously in close proximity to the hospitals here in Toronto any thoughts as to maybe the Chi.
Changing or approaching more healthcare related tenancies, there, whether its lab space or medical office et cetera.
Well, it's not just.
Of the office space also the residential space, where located this day.
The kids strong general Mount Sinai, the rehab hospital and the Princess Margaret So I think that Theyre strategic relations. We could have when we are talking to the hospitals a boat.
What we can do together 1 of the things that the hospital system health system of Ontario is going through a lot of change right. Now. So we thought it's a good idea to the patient as they sort of make their own changes, but we expect the third would be great opportunities with that building plus the other 3 that we own in the hospital district for through the 38 University 655 day and 720 day.
Okay, great. Thanks, guys I appreciate it.
Our next question is from Mario <unk> from Scotiabank.
Good morning.
Maybe a couple of operational questions for Gordon you mentioned, the public space and I'll look from 1% of of the portfolio ex down from $2.2 a.
At quarter end.
Is there any trend in terms of the type of tenant.
Taking back the space.
And then secondly would you correlate taking back space with decision, making E that kind of.
The siding on kind of the longer term office space needs by taking back the public space or the just simply.
Taking a back of them figuring out what to do.
Most of them.
Yeah. So so we are seeing good question. So we are seeing it's predominantly tech related that we're seeing that had put the sublease space on the market initially and I think when the pandemic hit in fairness to everyone. There's cash sensitivities and cash flow strength that people were being sensitive of and now that people of kind of.
Worked through the worst of it and there is a general sentiment that the worst is over I think people are looking at their longer term plans. What we're hearing is.
There is a real demand on labor.
So they want to be able to attract and retain the labor. So what we're seeing is people when they take their space back they've been working with in conjunction with our construction teams to kind of a repurpose the space a little bit.
Some some zoom specific rooms are some amenity related room in a kind of serves a great purpose for us because they get the sublease space off the market.
And then we also work with them on construction and get some piece of construction as well too. So we're happy to have those conversations our team is working really hard to communicate with our clients.
It's a pretty frequently and the other areas, where we've done quite well.
<unk> noticed over the course of the last few quarters as we had some tenants that were sub leasing space and now we're a direct negotiations with those tenants so space that would've come back to us.
I can think of about 44000 square feet right now of 2 tenants, where we're actively working on extending them directly.
For a longer term than what the natural expiry of wasn't there a sublease. So yes, we're seeing people do it really for a for operational purposes and the overall consensus is that is that.
They want a hold onto their space from a longer term than just 1 minor clarification for humira the 2 points.
2.2% at the end of press release is the amount of space in our portfolio of the sublet the 1 and a half that board is referring to is the percentage of the basis on the sublease market. Both numbers are low interestingly enough both numbers are declining.
Got it Okay, and then just a I think Michael mentioned the war on talent.
Gordon you mentioned, 1 incremental data point in terms of the desire for additional parking.
So whether it's the.
Dream of the answer to your kind of your kind of.
Are there any other incremental kind of a trend what you are seeing that employers are using to really capture the highly coveted talent in the market.
Today relative to what you've seen historically, so clearly a compensation will be 1 but what else is really popping up.
Today that you haven't seen of the possible.
Tom Jaguar of I don't really have a lot of insight on that.
I'm seeing people recruit earlier than people university of careers.
Going directly throughout the industry through linked in a much more aggressive with that used to have you're seeing people offering.
In the states anyways.
Premiums to a prior income like we'll pay a 30% more than your 401, K or whatever it's called whatever your T force in the U S. So yes, we are seeing people getting a much more aggressive on comp I think theyre all strength more aggressive on.
Their workplace, but what is the amazing as were seeing people being very aggressive as well on what they expect from people that they are paying a lot of money too. So they expect them to be in the office and to work very hard GOR JD of any other insights yes.
Obviously compensation of the big part of it but also I think the culture of the workplace youre going to the heat spending a lot of high net work. Each day you wanted the with the people you like.
The other 1 is the experience of the job.
You want to be working a lot of interesting work interesting deals in.
I think they look at it out of the entire package as a whole.
Office space is another 1 they wanted to have ample space to work in good lighting good air.
And they wanted to be in an environment, where.
It's a creates a more of a social experience and just being at work for our 12 hours a day. So I think we look at all of that but.
That's fair I conversations increasing we're trying to keep up at the same time, but we have to give it the entire like a complete experience.
1 data point, we're following and it's evolving as well too.
Is the last expansion fit ups that we've done.
At least 2 of them the last 4.
There has been a real demand for management and kind of executive perimeter offices over the course of the last kind of a 3 to 4 years, it's been open.
A real collaboration space, but we've seen this.
And typically it's been in law firms, where you've seen it but these were a professional services firms where.
Where they wanted to build up some some some offices for their management team, which which has been a bit of a change and we'll keep our eye on it we're hiring.
Okay.
A question just pertains to kind of dream office versus industrial.
You sound pretty bullish in terms of repurchasing Dream office units.
Clinically speaking.
The fulfilling the full in CIB going forward I know in the past or maybe the tax implications with respect to a tolling agreement the Australia.
From a cost efficiency standpoint type of.
Critically, particularly would you be able to do that.
By a dream office units on a tax efficient basis.
Or are there other yeah, we could buy this year's full amount of stock under the NPI be without any tax issues.
And we have a variety of ways of paying for it. So we've got a lot of flexibility on that whether or not.
Dream industrial units help funded or will use other resources you got lots of capital. So that's 1 of the issue.
Great. Thank you.
Our next question is from any law from BMO capital markets.
Thanks, and good morning.
I'm just wondering if you are hearing about any delta related impact on the leasing conversation you'll realize that.
The very much evolving, but we've seen from headline side of the state side of the large employers in terms of pushing back with some of the office. So I'm just wondering in last few weeks has that come up at all of whom the conversations and also a recognizing that you've done a lot of what's your office space to make it to make a case itself.
As a factor at all.
It's a global without getting into the sorry.
Sorry.
We're not seeing anything specific with the delta variance in terms of.
Returning to office plans.
Got that.
People, who are vaccinated are getting more nervous about being around people, who arent and thats, what I was referring to earlier court.
No.
As a good point I was just going to add debt. We spent the better part of 18 months.
Upgrading our buildings and we've been nationally recognized on a couple of different levels.
A far worse for the base building and also with the well health and safety certification like we're looking at as an opportunity to bullet proof of our assets. So as from the market space out the market all of the base building upgrades that we've done all of the filtration.
Of the UV light technology, everything we're doing to mitigate.
The spread of germs and viruses in clean air what we're doing is we're putting that front and center in all of our materials and we've gotten great feedback and.
I think we've come up with from <unk>.
<unk> mission protocol plans throughout our portfolio, we're very vocal with it and.
How we lease space now health and safety to your viewpoint journey of it's a huge component of it and and it's a quarter with everything that we're doing and sophisticated tenants now want to know.
A year ago, it was hedge of a charge and the CFO coming on these tours now its facilities managers and health and safety officers coming on these to US. So we have the arm ourselves with the right information and touch on the key points to satisfy them and I've been real proud of the team to date from what they've done.
That's great to hear.
Conversation have you seen any changes in what theyre looking for in terms of in terms of lease terms or increased flexibility in any way just to.
I guess the guard against the.
Eitan number of unknowns in the next few years.
To be honest no non lately earlier in the pandemic. There is a real focus on on shorter terms flexibilities range determining things like that in deals, but over the course of the last kind of age of 12 weeks, we haven't seen as.
Quite quite a as much push the overall vacancy rate has been declining in the core as well too. So they are slowly being a little bit less leverage in terms of what you can demand on the tenant side.
For these deals so.
It's been trending more towards landlords, a little less towards flexibility over the last the.
Of course of course of the 8 weeks, but we are seeing from a lease perspective, we're seeing much more sophisticated tenants start to really dictate in the schedules.
What their expectations are around performance.
And base building and and how we kind of co manage and help support themselves, yes in terms of the flexibility.
It's been a bit of of the declining trade.
Okay, Great and then moving to sort of the return to office I'm wondering if you guys are formally tracking what your comments intentions.
And finally tracking that and whether.
Whether or not you're seeing any pattern in terms of what the plans of at least that's a stand out like any differences between the government versus private sector tenants or a large versus small tenants any sort of insight there.
Yes, so we're in constant communication.
At some of the highest levels with with the provincial and the federal government, they're a big client of ours and a valued client.
We suspect that we're going to start to see them real.
Re occupying the office is at least a 50% capacity towards Q1 of next year.
Right now it's a lot of.
They are probably in around the 25% certain of our buildings are private sector tenants, especially on Bay Street, because our average sizes.
A little less than 5000 square feet, they've been operating at almost near full capacities.
We've got we've got a number of tenants downtown.
That a private sector that have been throughout the pandemic and when they've been allowed to do a billing their office space.
But I suspect governments, the banks youll see towards kind of Q4 Q1 of the next year. Once there is a little bit more clarity.
Okay, great on the smaller private sector side have you seen some of your tenants or hurt on the streets of some smaller operators who have chosen to go virtually.
I guess, almost all virtual and the like giving back the majority of their space.
Yes, yes, and no and 1 of 1 interesting data point is we've mostly seen it and tenants that are under 500 square feet. So if it was an independent office.
It was a tenant that was a.
Professional services firm medical things like that we've seen we've seen some of those some.
Some of those tenants to choose to work from home temporarily Ironically, we had 1 of the tenants actually come back and do a deal in another building.
After it but for the most part of the smaller offices, where we're seeing them.
The move towards a move towards not renewing their space.
Great. Thank you very much I'll turn it back.
Thanks.
And we have a question from Sam Damiani from TD Securities.
Thanks, 2 quick follow ups.
Jay your comments on the parking revenue.
Your in your introductory comments I think it was 3.
I believe that was a year to date. So can we assume a full return of the parking revenue would boost NOI by both $3.5 million Bucks of annualized.
Yes, Q3s than a bit.
A quiet we think while we hope the utilization picks up after a late labor day, but youre looking at.
1 and change per quarter, so once it's back.
I'll get that pickup interestingly.
I'm wondering what would be the rate and a variety of the post COVID-19 because we think a lot of employers would want their employees to have the parts of the parking passes we think a lot of people would want to drive to work and.
Traffic picking up so we're pretty optimistic about 2022.
Makes sense and then Gordon you mentioned, the sublet stat and thanks for the clarification on that as well, but so if it's 1.5% on offer today and Thats down where it was.
At the peak during the pandemic and what would that have looked like pre pandemic.
Sure.
It was always EBIT pre pandemic it was always kind of floating around 2.2 and a quarter.
So we really haven't had any deviation.
Throughout our portfolio.
And now it's down a 1.5% so.
It hasnt been that many dramatic swings for us on the sublease market.
So you would say, it's actually below pre pandemic levels.
Yes, I would and I think a big reason for that is a lot of our tenants are in around the 5000 square foot range and the.
We're not making these huge swings in terms of.
In terms of their occupancy decisions, so I think.
People are taking early we're taking a wait and see approach and now people are feeling a lot more comfortable about their space. So yes, we weathered the sublet the storm pretty well.
Great. Thanks very much.
Youre welcome.
Once again, a feature of a question or the 1 on your Touchtone phone.
I show no further questions I'll turn it back over to you Michael for closing remarks.
Alright. Thank you so much John I want to thank everybody for their time today.
And for the continued interest in the company and we look forward to having a more to share with you in 90 days.
Thank you very much and enjoy your August.
Thank you ladies and gentlemen that concludes today's conference. Thank you for participating and you may now disconnect.
Okay.