Q4 2021 Dream Office Real Estate Investment Trust Earnings Call
Good morning, ladies and gentlemen, welcome to the Dream Office REIT Q4, 2021 conference call for Friday February 18th 2022.
During this call management of Dream office, REIT may make statements containing forward looking information within the meaning of applicable securities legislation.
Forward looking information is based on a number of assumptions and is subject to a number of risks and uncertainties. Many of which are beyond dream office Reits 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 in <unk> filings with securities regulators, including its latest annual information form and MD&A.
Filings are also available on Dream office reached web site at Www Dot Dream office REIT doxey of late.
Later in the presentation, we will have a question and answer session.
To queue up for a question press star one on your telephone keypad.
Your host for today will be Mr. Michael Cooper, Chairman and CEO of Dream Office REIT. Mr. Cooper. Please go ahead.
Thank you operator, and good morning to everyone today on with Gordon Wadley, the Chief operating officer and J J.
Chief Financial Officer, I'm going to make a few comments and turn it over to Gordon.
And then Jay when Jay has done will be answered your questions.
Just as a.
Point of view.
We own all these buildings that have been barely used for two years coming up on March 13th and.
They are in tremendous shape.
We.
To renew tenants, we're doing some new leasing.
But we are losing some tenants some or downsizing in summer and Theres, some bankruptcies, but overall to be at the level, we're at where there's been hardly any use of our buildings for such a long period of time is remarkable.
With omicron.
It delayed the reopening once again, it's been very very frustrating, but I would say the surprise to me is how fast everything is opening right now and it looks like.
I see banks planning on opening in March and the city of Toronto call people back for Tuesday.
We're now going to start to get real information about what the future of office usage, but I would say that we've seen a lot of information where theres going to be a heavy reliance on office use as part of winning company strategies and we're quite confident.
With all of the Dream groups.
<unk> and Toronto, including 212 King.
I've really been shocked by how many large tenants are looking for new space and it's really surprising given all the new supply. So obviously.
There continues to be a lot of demand for best in class space and.
I think that's actually pretty interesting sign like the all the new buildings are going to be full and there is demand for more so we think that's very encouraging.
We have and we will continue to make our buildings exceptional boutique office buildings and throughout the two years of the pandemic, we made tremendous progress and I think that.
Once the city opens up people will be very surprised happily surprised.
How much better their buildings are now, particularly on Bay Street and some of the other things we're doing.
We're hoping that within the next month or so we'll finalize the decarbonization program, which is going to be a real first in the country in many many ways.
Hi.
In addition to Decarbonize they were expecting to have best in class connectivity, we're going to have very healthy buildings, and we will have ultra low carbon emissions for existing buildings.
We continue to make development progress on our development at $2 50, Dundas, we're advancing the site plan that's already zoned and.
That's ability to have 150000 square feet of office and 350000 square feet of residential right at the corner of its one building in the corner of Dundas, The University, which is an incredible location for the hospitals governments schools cultural.
We're very excited that that will be a successful building.
200, <unk> is progressing very well, we expect to be able to build 2500 residential units. In addition to the current office building.
And we also expect to be able to report progress on where we are over the next quarter or two.
And at 212 King.
As maintenance way through the zoning process, we're clearing up some issues narrowing the issues with the city. We are asking for one 1 million square feet of office and residential for this is perfectly located project. So it's a very big project and it's a big deal for the city as well as for US so that when taken a little bit of time, but thats totally predictable what I would say is that these do.
Elements provide our future growth.
Our portfolio.
And then what it would be great about it is they will continue to increase the quality of our building from the very high level.
The quality of our real estate from the already excellent quality that we have and we will be able to add at a reasonable price.
We continue to be laser laser focused.
Our exceptional Toronto portfolio, we continually improve it.
And while we're doing that we're reducing shares outstanding which means that every shareholder owns more of the business than they used to.
With that I'll hand, it over to Gordon.
Well, thank you Michael I hope everyone's doing well and I'm glad to have an opportunity to connect with you all today.
The impact to the reopening efforts caused by various public health shutdowns related to armor crime. The team navigated through the headwinds and we saw some real positive momentum and a variety of key aspects of our business.
Q4, 2021 represented the first quarter of positive absorption since the pandemic began.
We referenced on our last call that we felt optimistic we would close the year higher quarter over quarter on committed occupancy and we did that by about 150 basis points from $88 five to close to 90% we.
We executed on a number of large deals both new and renewal and what also helps is that we've seen some material improvements to occupancy tours and deal velocity in Western Canada, just for reference for everyone. At the beginning of 2021, our current committed occupancy was under 70% for Western Canada and through our leasing efforts, we were able to bring.
That up to approximately 78, 6% specific to our noncore markets.
Regardless of armour crime and despite what you read in the news and various social media Hotcakes. It was a very active year leasing for Toronto, and specifically Dream office with both direct and sublet space being absorbed market wide. We did approximately 550000 square feet of deals in 2021, but of equal importance, our rents held up very well across the board.
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Net rents have continued to be strong and in line with our business plan at pre pandemic levels. We've also seen steady growth in any of our performance and achieved net rents for deals being completed versus budget.
On average were almost 5% over budget portfolio wide on in NAR basis, and seen a positive spread of approximately 10% for net rents in our core portfolio with rents now averaging over $35 a foot.
For some additional context, we completed approximately 80 deals across the portfolio. We did one transaction over 80000 feet and we did three deals over 30000 feet. These.
These key indicators to us support our optimism that deals of scale are getting done and companies are making major commitments to their office accommodations.
All of this with the reality that our rates have been very resilient to our guidance.
Testament to the quality and location of the buildings we own.
It's also a testament to the efforts of our operating team and ultimately staying true to our asset and capital strategy, which I'll touch on a little bit more shortly.
Like most of our peers, we worked through supply challenges and construction delays and we've managed well and are poised to complete our final touches on the phase III collection early this year and we've completed $3 57 and on pace to complete 366 based on time and on budget.
Feedback from tenants and brokers alike on these projects has been tremendous.
We really look forward to showing you the completed product and hopefully we'll get a chance to walk you through in person very soon.
The optimism on our base Street offering is further supported by the 12 deals that we did specific to that project with some strong rents over $40 on average I want everyone to keep in mind that we're replacing rents on phase III and the low twenty's and high teens on new space.
These are a new class of boutique assets that don't compete with large towers, they're low rise walkable. They both small private floor plates, all new base building systems and showcase a level of luxury finishes that are very unique to our market.
Our current pipeline, we are actively negotiating and trading paper on 2009 deals over 250000 square feet, which we hope to complete no later than Q2.
There's a lot of press and focus around shadow vacancy in the state of the sublease market in Toronto. This has not been an issue or something we're seeing in the REIT currently in our portfolio. There's only about 100000 square feet of sublet space available totaling less than 2% of our portfolio nationally.
<unk> continued to be very strong for our team at just over 98% for the year with our average Walt in the portfolio with just over five years.
Leasing and operating metrics aside we made tremendous strides in the back half of 2021 pertaining to our ESG operating and sustainability strategy.
We mentioned on our last call that we're working hard to secure a viable aggressively rating.
We're pleased to report that in Q4, we had among the highest first year Grisby score historically in Canada at 91.
We also had the country's top sustain Olympics score.
And basically standard.
As a rating a global rating, it's a Morningstar company that raised the sustainability of listed companies based on their environmental social and corporate governance performance and applies a risk rating to this regard were ranked in the top 10% globally.
In addition, we were recognized by Green lease leaders as platinum for a standard office lease we were a lead signatory to UN PRA and also committed to net zero asset managers, which stemmed from <unk> 26, and represents the largest organization of asset managers globally Committee to net zero targets by 2050 or in our case.
Better.
When we made our commitments and set our position among these global leaders in ESG. We also publicly made some of the industry's most aggressive commitments to being leaders in ghd reductions and de carbonization of our assets as part of our net zero goals Dream office is committing to net zero scope, one and two and select scope three GHT emissions by 2035.
We believe sincerely that real estate can be developed and managed to make positive impacts and make our communities more fair.
Real estate is responsible for about 40% of global greenhouse gas emissions and our teams Shirley believes and are working tirelessly toward reducing the growth of carbon emissions from our properties and reduced our overall emissions dramatically never.
<unk> never been more urgent to act to support a sustainable and climate resilient future.
This initiatives initiatives isn't something new for our team and we've been working hard to be leaders in environmental stewardship for years.
That thing, we've always had a high confidence that there'll be accretive financing opportunities on the horizon.
True to this expectation, we recently announced in Q4 that cid's partnering with our team to significantly and rapidly decarbonize at least 19 of our assets under management.
We will do so over the next five years.
We will use the low interest long term facility to finance baseline incremental accelerated and net new capital projects.
These projects are projected to include chiller retrofits installation of heat pumps solar power heat recovery ventilation systems and numerous led upgrades.
The beneficial financing terms and rates help us support the additional capital expenditure in such a short period of time.
As part of the initiative will be creating approximately 500 jobs during the life of the program in all phases of the project cycle Dream has already begun the process of Decarbonising and modernizing each building already.
We estimate in the first year of the program will reduce our carbon footprint equivalent to removing over 600 cars from the road.
Mitigating 350 homes energy use.
Or or planting the equivalent of 46000 trees annually.
The aggregate scope of work for all these projects although growth great for the assets and our clients is also a major catalyst for us to rollout an additional new program very important to our team and important to the community.
Our social procurement initiative, we announced late last year ensures we opened our tendering process to include under representative underrepresented diverse and equity seeking groups by mandating contract Awards.
The offer in our operating goals to support those in our community who may not typically have an opportunity or exposure to work at an institutional scale for large projects.
For us it's not only the right thing to do but there is real value as increased pool of proponents mitigates, our supply chain risk increases competitive pricing and create new business opportunities. Most importantly, it creates new business opportunities for groups, who may not have had exposure to this scale up work in the past.
The metrics, we've identified to create real impact in and around the communities, we build and manage the targets focus on how much money, which we would be spending anyways is directed directly to capable and qualified companies that are often overlooked by large corporations.
Additional targets ensure that we diversify our project teams at every level.
Our initiatives established the read as a clear leader in this area with deep and meaningful goals. As a result, it will help us create a more diverse and resilient supply chain for all of our projects and equally give meaningful merit based and fair opportunities to those in the community we serve.
We spent the better part of the last two years, taking our incredible well located assets in downtown Toronto, and transforming them into a new standard of boutique luxury.
And this commitment to decarbonization and community stewardship takes our offering even further to ensure we will exceed the highest levels of sustainability and responsible operating standards, our clients and our stakeholders have come to expect to come in.
And I'll turn it over to Jay.
Thank you Mark good morning.
For the second year in a row, our operational results have been significantly influenced by Covid variance and multiple rounds of Lockdowns in Ontario.
Notwithstanding our buildings and parking garages have remained mostly empty for two years, we feel our operational and financial performance have shown a lot of resiliency during the course of the pandemic.
On the quarter, our <unk> per unit of <unk> 40 was flat year over year, and we were <unk> <unk> higher for the year.
In General terms, we lost five per unit from lower occupancy onetime lease termination income and other items and we gained <unk> through income pickup of two completed redevelopment projects accretion from CIB and higher income from our dream industrial investment.
Our net asset value per unit ended the year at $31 49.
Up 2% from last quarter, and 10% year over year to categorize the composition of annual gained 4% just from the increase in value of our dream Industrial REIT holdings, 3% from the fair value increase of our income properties, 2% increase from retained positive free cash flow and 1% from the reduced unit.
From using our normal course issuer bid.
Including our $1 per unit of distributions that would imply a 13% total return our stock price performance for the year was 24%.
For 2022, we will once again share our internal model, assuming a normalized state that is exclusive of any potential acquisitions dispositions and you've announced unannounced major capital initiatives.
We also want to highlight that the usual Colgate caveats that budgeting for office buildings remains challenging when we still do not know when our economy will reopen how it will reopen and how perspective and existing tenants will behave.
Just prior to the most recent honor crimes area, we were seeing good leasing velocity and weekly increases in parking revenue in October and November .
It is unfortunate that the latest shutdown has delayed our recovery by approximately three months. We are optimistic that those positive indicators will resurface again, while we achieve sustained normalized states, we will see our forecast as a balancing act between optimism and the time it takes to progress to normalization.
So for our internal forecast, we are projecting diluted <unk> per unit of $1 60, or an increase of approximately 3% from 2021.
We expect to see low single digit same property NOI pick up across our portfolio with weighted average occupancy relatively flat versus 2021. This.
This means that we expect some leasing <unk> in Q1 to be filled up in the mid to latter half of the year, We think downtown Toronto will end the year in the low 90 percents on a committed basis in our other markets will be north of 80% committed.
We are anticipating our average debt to gross book value for the year to be in the low 40 with ample liquidity to execute on our identified capital projects and any new opportunities that may arise.
Pre COVID-19 our debt to EBITDA target was eight times, which we achieved and we hope to re approach that target when the pandemic is over <unk>.
Liquidity is currently in very good shape, we successfully refinanced $500 million of debt. This year at a weighted average rate of about $2 two 8%.
Interest rates have sense increase at the beginning of the year.
Currently we only have $60 million of expiry to refinance in 2022.
We're not forecasting or relying on any dispositions as a source of liquidity. However, we will continue to remain opportunistic to reasonable offers on noncore assets.
Our dream industrial restate is over $430 million at fair value based on todays trading price or almost a third of our market cap.
I've been fortunate to benefit from strong industrial fundamentals and significant increases in the rents and value over the course of the pandemic, while we await office tenants that returned to work. We think industrial rates will continue to benefit from the same factors that contributed to the outperformance over the past few years. So we're content to continue to maintain a meaningful Amish.
Ownership of DIR for investment purposes.
In terms of capital projects, we have completed 357 day in 9100 Sherwood over the past two years on time and on budget in 2021, we will have two smaller redevelopment projects.
66, <unk> was moved into development in the first quarter. We are looking at a complete modernization of this property with new energy efficient Mechanicals washrooms common areas and LEED gold certification we.
We are also looking at similar project for 67, Richmond, which is another small 50000 square feet building for later this year.
We think both of those buildings will be very desirable for high end tenants, who may be interested in occupying an entire building our phase III, which coincides with the completion of our base III capital program and in other buildings and also the alleyway by mid year.
We will continue to progress on pre development work at <unk> in 2200 Eglinton.
Our current trading price of just over $25. If we assume fair value on our extreme industrial holdings and assets in the other markets at book value or downtown Toronto portfolio of $3 5 million square feet is trading at an implied price per square foot of approximately $500.
We have been consistent in our message that the intrinsic value of Prime office is higher and we will be more valuable over the long term.
We have maximized our unit repurchases under the normal course issuer bid program in 2021 and expect to do so again in 2022 as we believe this is easily the best use of our capital today.
We are optimistic that on the other side of this pandemic are well located and modernized office portfolio will return to very high occupancy high rents.
We will have fewer units outstanding at the start of the pandemic and enhance the value of many of our assets. We think this will translate to a great upside on both <unk> and <unk> per unit for the foreseeable future I'll turn it back to Michael.
Thanks, Jay Thanks Gordon.
At this point, we'd be happy to answer any questions.
Thank you.
We will now begin the question and answer session.
You have a question. Please press Star then one on your Touchtone phone, if you wish to be removed from the queue. Please press the pound sign or the housekeeping there.
There will be a delay before the first question that is announced.
If youre using a speakerphone you may need to pick up the handset first before pressing the numbers. Once again if you have a question. Please press Star then one on your Touchtone phone.
And our first question on line comes from Mr. Scott Thompson from CIBC.
Thanks, Hello, gentlemen.
Good morning, and congratulations on a good quarter.
I'm wondering if you could give an update on the sort of broader project at the Golden mile.
How you guys are putting in with it.
Sure.
The Golden mile. It's actually incredible areas. It's about 100 acres of land there theres about six or seven owners of land on the north side, although right.
Victoria Park. There is one of them is out that's all included in our new zoning that allows residential.
We expect that.
Some of them have made deals, it's all coming together, but they'll probably be about 20000 units approved.
And that should be a pretty large area.
Scarborough, which has a lot of large areas, but it's going to be one of the first majors major scale redevelopment.
We're getting very close to the city, we're working very closely with them plus the other landowners as there's a lot of things we're trying to do not just on our sites, but with the others.
To create a wonderful community and I expect by the end of the year, we'll have our zoning and we'll be in good shape in 2023.
That's a $1 5 billion project and.
It's fantastic that we have a lot of experience doing large communities large scale developments that we've done in Toronto and across other places. So we're excited to get going on that one.
Thanks, Michael maybe a quick one for Gordon just on 250 done that you do have a.
A tenant in there that's fair.
Fairly sizable have you have you made arrangements for them too.
Move to protect potentially another space within the portfolio.
Yes. Good question, Scott, we've been dealing with them fairly regularly we have to keep in mind that the group. That's in there is.
Component of the province, and their mandate as public health. So as we kind of get through the public health crisis, We think we'll get a little bit more clarity around that.
Around that that vacant, but we are actively working with the group and in good communication in the province has always been a really good partner of ours.
What's the ideal timing on that that project to get it.
Get shovels in the ground.
Yes, ideally the end of 2023 early 2024th at the latest as our ideal ideal time.
That's great. Thanks, that's helpful I'll turn it over.
Thank you.
Thanks Scott.
Our next question online comes from Mr. Mike argue this from day shutdown. Please go ahead.
Mr. Michael like that.
Everybody.
I was hoping you could just give us a little bit more color on the deep retrofit program.
I think you said 19 buildings over five years.
Perhaps you could just give us a sense of the capital spend number one and then second of all how youre thinking about the economic return on that capital.
Just in the context of the favorable financing rates.
Hi, Mike It's Jay I'll start on just a quantification of the capital and in Guar will jump into the details of the retrofit program.
I think the good part about this program is a lot of the work that we're doing is already incorporated into what we started on phase III.
So for example, we're doing redevelopment in two of the building so 366 60.
67, Richmond, So a big component will be incorporated those projects will probably be between $10 million to $12 million, we have 10 million probably left to spend on phase III.
And even before Covid, we've been incorporating a lot of work into it as well.
In terms of the returns that are similar to our analysis on Bay Street.
We have some room right now on additional rounds of tenants are getting a better building.
A big component can be amortized into the additional rents because it's common areas washrooms elevators.
And the tenants do you think it's a great return for what they are paying.
So we're getting a pretty good return on that as well. So one thing I do want to caveat is.
We're finalizing this.
Very first de carbonization long the Canadian infrastructure Bank, it's not done yet.
But we had good good news this week, we just finalize everything this involves having consultants to greet all the work that we're doing in advance they have to take a look and be satisfied of the work that we've done what were completed but.
So there is sensitivity Mike around the financials I think Canadian infrastructure Bank will want everybody to know the details as soon as were finished because they would like to do more of these.
Overall keep in mind that as we Decarbonize. The building is a significant reduction in energy costs. So we've got that savings to the tenants and to the extent that we have savings were allowed to charge them and in addition to that we're getting that superior building, which will benchmark us against better buildings for operating costs.
So we'll be able to recover a bunch and we're also hoping that this will also help validate higher higher rents. So there is all kinds of contributors, but we do not we're not in a position to reveal the return on equity court that don't talk about the return on equity.
We will talk and we will give a quick overview on the scope.
We put it in depth into five buckets, Mike. So we're promoting conservation we're finding building operational efficiencies we upgrade for efficiency.
We select low carbon fuel sources, we installed renewable power generation photovoltaics wind power things like that solar.
And then we procure high quality offset for whatever remaining footprints, we need to get to our <unk> reduction targets. So then we really break it down again into five kind of micro sub categories. So we do a lot of mechanical and electrical upgrades HVAC efficiency fuel switching.
Connectivity EMS, we do a lot of envelope work.
We're actively working on right now we started so we do facades roofs windowing.
Transportation, we get a lot of credit for EV Chargers and bike infrastructure. If you haven't been a 30 athlete lately, we've got a partnership with Tesla and number of EV Chargers.
<unk> renewable energy is a big component of our reduction strategy around rooftop solar and then the aesthetics common area improvements.
People forget when you use a faucet or a toilet or those low flow what are the outputs on that syncs even.
<unk> operating standards what materials, we're using.
The paper towels as electricity things like that so we've been doing this for the better part of two years and now its announced game time, and we're putting all our efforts together and we're going to start unwinding. The strategy. This year. So we're really excited.
Okay.
That sounds great. Thank you for that and then are the can you just remind me is this long term capital and like what's the permanent facility.
Yes.
It will be long term.
But the bulk of it the bulk of the work the bulk of the work, though Mike we're targeting to get completed within the next five years is it fair to say that with the longest term debt we have yes, yes.
Okay.
That's helpful. Thanks, very much okay, I'll ask one more before you turn it back and give everybody else a chance.
Just wondering we learned earlier this week I think it was you got a new.
Well I guess, a renewed 10% shareholder.
And I was just curious if youre able to comment with regard to any dialog with this party in the queue.
Are you able to comment on whether there are happy quite shareholder if theres going to be.
<unk> been active in spend to their enrollment thank you.
We've got a lot of significant shareholders.
Sandpiper now August is the only one thats got over 10%.
All of the significant shareholders of acquired the stock because they like what it what the company owned and I think Thats. The case here I don't expect any activism.
But who knows.
We do value all of our shareholders. We are happy to have artist as a shareholder we were happy to have sandpiper as a shareholder.
We don't discriminate discriminated against any shareholders.
I appreciate the color thanks, I'll turn it back.
Thank you.
Our next question online comes from Mr. Mark Rothschild from Canaccord.
Thanks, and good morning, everyone and Chase comment you mentioned the implied value of the downtown Toronto Office, and I think I'm not sure if it's Michael or someone's spoke about that you're open to selling non core assets in other markets can you talk about if there's a market to sell those assets at the <unk> value now and its something <unk>.
You're likely to do over the next year and.
In regards to your thoughts about maybe.
They'd be surfacing value and getting people to recognize the value in downtown Toronto office.
Sure.
So we don't as I say, we don't really rely on the dispositions. So it is not in our forecast, but I think the activity has picked up a little bit I understand our team had been trading paper with.
They are mainly domestic local buyers.
For assets in Saskatoon, and there was some interest in Calgary.
I don't know the reason behind some of the deals, but I think maybe oil prices have increased.
If people are interested in the assets, especially that we manage them in a way that occupancies are higher they have.
Positive free cash flow said last year that one of our goals was to get the occupancy as high as though we could get financing for these assets. So they weren't going to hurt our business, we were able to do that with some of the assets are secured against our lines. So we're quite patient I think.
Carrying value of our IP value of all of these assets are fair. So if we do transact it should be approximate.
Those values, yes, I mean, I think the <unk>.
Number is about 80% to 82% of our value is in downtown Toronto, and then we've got Sussex and.
2200, Eglinton, which are in the GTA and they're both great assets that are long term assets and then outside of that we've got two buildings in downtown.
<unk> June and we're doing pretty well with Saskatoon square.
In Regina we've redone the building there it's got a long term leases.
So thats a great building to hold or sell in Calgary, we have the Kensington property is a very small property would be a great development side I think it's actually quite well leased.
Barkley is in downtown Calgary, and then I think the only other building we have is in Kansas City.
And.
We are open minded none of those buildings are.
Viewed by Us as Super GOR. So if we see the right deal we would act on it or keep it just depending on the economics.
Okay, Great and maybe just one more question.
Dream Office has bought back units over the past few years.
And industrial industrial has done extremely well.
While the unit price might be off slightly just of late but is there a maximum amount that you would be comfortable with with industrial representing of the market cap of our dream of Gem office or is that not a number that really matters.
Actually never thought about it I would say that if dream.
Dream Industrial goes up at.
That represents more of our company, we like that we.
We certainly don't want to go down so it represents less so we're just totally focused on the value what I would say is.
Or is this really created dream industrial REIT.
Just talk about where you are in office right. When you have this we've always today, it's an investment.
Pretty pleased that we've owned it as long as we have we bought more occasionally we sold 1 million shares once.
But dream industrial has been a very valuable moderating investments through Covid. So it's worked out very well, but once again, if there was a reason to do something differently. It as an investment then we'd be open to it.
Okay, great. Thanks, so much.
Thank you. Our next question online comes from asylum gentlemen from Cormack Securities.
Thank you operator, and good morning, everybody.
My first question is around HTM and law firms are among the biggest employers all debt.
Clones compete with other forms in terms of getting good employees and a big part of that competition has been additional work from home.
That would be the bottom even discussions.
Has that impacted leasing in any way.
Yeah.
So you were breaking up a little bit but was your question.
If there has been a trend towards work from home around law firms.
Yes.
Yes, so so I think it's almost universally.
Across during the pandemic a lot of companies, we're looking at their accommodation plants.
We're starting to hear and we're starting to see.
People coming back to the office, we're starting to hear some hybrid models, but no one dramatically reducing their footprint.
Especially along based street.
For Us on Bay Street, our floor plates are really small we don't compete with the big law firms.
So we get a lot actually a good component.
Of our tenancies on Bay Street are small boutique law firms that we've either just recently renewed our we're in active discussions with to maybe take a little bit more space.
Or extend their lease so.
We're quite a view in our portfolio to due to the big downtown core.
Law firm exposure I mean, what I'd say about this is.
Not everything is about work from home I think with the law firms you are seeing is.
Their associates are getting offered New York rates.
To work for New York firms and sit in Toronto. So they are really struggling to keep people.
And they are very always been very focused on costs I think they're very busy they can't hire people. So they've got their own decision to deal with I think we're seeing banks trying to rationalize space.
<unk> their space, that's not as much of a work from home while the work from home may help them reduce their cost, but the thing to keep in mind is it's the companies that are growing.
Our absorbing space and what I find amazing is despite all the talk most of those are technology companies. So they are looking for 400000 square feet or 600000 square feet. If there wasn't work from home it might be a little bit more I don't know we don't know all we know is that.
Is that when people talk to us about sort of old era businesses.
Using less space a lot of it is just to reduce costs and we're seeing new Ara businesses.
Growing leaps and bounds and needing.
Basically.
That's what I'm, saying earlier Theres all these new buildings coming there, mostly full and we're seeing all these new tenants that are saying, we need half a million square feet and it's really huge.
Just take a look at who need the space and you can see that it's not old company, that's new companies.
That actually makes a lot of sense, Michael when considering these new constructions also will come in significantly higher so that's kind of been yockey.
Just looking at Q4.
Five buildings in Dallas.
Portfolio, which makes up 70% occupancy I was which I think is a great opportunity.
<unk> much.
Historically can you give any color in terms of what's been a challenge with these properties.
Do you see that contributing towards broader 70% goal for 2022.
90%.
Yes, you were breaking up a little bit at the end, but you were talking about vacancy pockets in some of our abilities. I think what's interesting is we intentionally put online.
Press release.
Holding back some space I think around 40000 square feet.
As we reposition some of those buildings are on Bay Street, So that when we do get the work done we can attract high end tenants and there'll be some high end restaurant offerings coming in.
And then the other vacancies that were looking at leasing up right now I think a lot of it has been delayed a little bit with the Omnipod <unk>, but.
Turing activity everything else is normalizing and if we see the same indicators that we saw in October November I think we are quite optimistic that we'll see some good velocity in the industry.
Just want to point out to everybody that condominiums in Toronto and not as good locations as our buildings are selling for $500 a square foot at a brand new ones, we're talking about having an implied value of $500 a square foot for office.
I think we're quite confident theyre going to have lots of leasing but I also think we're quite confident that downtown Toronto is going to continue to thrive and the types of properties. We have are literally trading at land value.
Thanks, Mike and Michael.
My last question is with all the time goes on.
Thank you.
Understanding the engagement.
Occupancy 90 question Mcmeen.
Mcmahon by the <unk>.
Multiple finding that tends to be nimble and vendors.
<unk> being up.
Typically it's about 4% to six months when we get our commitments. So we will get a commitment will have a firm deal. There's always usually typically a four to six months extreme period to get the space ready.
And then we start cash flowing on the unit.
Typically after that can you also mentioned how often it usually takes from the time you meet a tenant or start talking to renewal until the deal is done the deal cycle or a deal can can take anywhere from 60 to 120 days on average just from the start you have to negotiate the lease you have to go through a scope of work.
There's a lot of variables that you have to consider that go into doing the deal even in the hottest markets. So we baked in some timing.
From commitments to to when it starts to cash flow.
That's actually great color, thanks, gentlemen, and congrats on a great quarter with buying back.
Thank you very much.
Thank you. Our next question online comes from Jenny Mall from BMO capital markets.
Hi, good morning.
I want to have a focus over to George.
It looks like the floating rate debt has crept up to almost one quarter I know flexible.
Given the potential for that.
How do we think about that piece.
Yeah.
Hi, Johnny as Jay Good question, we've been tracking the interest rates closely I think on average.
Cost of debt would have been probably 75 basis points higher versus.
Just a couple of months ago, we've monitored it so our credit facility is variable. We're currently about 75%, 25% variable. We do we don't really have a lot of covenants. We have many ways of getting liquidity if needed. So we're quite comfortable and we run a lot of sensitivity. They the other variable components of that are.
Actually on Atlanta.
Done that 2200, Eglinton it gives us more flexibility.
In terms of the timing of construction. So we have the opportunity of layering on construction debt without taking on.
A large penalties.
But right now 70 525, we're comfortable with we'll monitor it and then when we get the.
The other.
The green facility that will be fixed so that will reduce the waiting it out a little bit.
Okay, so to sum up youre fairly comfortable but probably won't be going any higher than that 75. Five you mentioned, yes, we even looked at potentially fixture fixing it over the course of the last month or so what's happening is the banks are making and quite a few raises so right now.
The economics that it makes more sense to keep it variable, but we are watching that ratio.
Right right Okay great.
I also wanted to dig into the parking revenue trend.
<unk>.
Numbers are.
But what would you say is the utilization right now and what's the gap to full potential and also a second part of my question is has there been any changes in the parking space.
Okay.
Okay. So just conceptually full parking is about 10% of NOI and five are contractual behind the leases five are transient which is just gate revenue I would say utilization.
It's been a bit of a roller coaster October it was looking pretty good it was probably over 50% 60, 70, and then it trended down.
While close to zero by by December and then now we are.
Coming up so for example in our garage as right now we have three Florida.
I'm pretty well occupied <unk>. So if you want to take that as a simple ratio thats, probably two thirds, there's a fixed component of our operating costs are already garages.
I'd say that optimistically, we're hoping dug the garages will be pretty full by the time somebody rolls around in terms of the rates.
My personal feelings are that the rates are probably be higher once things stabilize because there will be more demand for parking I don't know how many people are going to be comfortable with taking public transportation, but currently there is availability in the garages were probably more keen on having a fault and to push the rates today.
Okay. So the 10% that clinical potential where would you say.
Q4 <unk>.
In Q4.
Oh.
Would say out of the 10% we're probably around.
4% to 5%.
Okay.
And when you take the.
5% contractual eye ball parking contracts as individuals are those tied to leases with certain tenants.
Thanks Glenn.
Those would be leases.
Okay. Okay. I was just thinking about what the average user it might be closer towards that theyre not necessary.
Thank you Sir.
Okay.
Those are tied to leases at market terms that adjust every year okay.
Okay, Okay great.
And then.
I have a bit of a technical question on the accounting side.
As far as the impact on.
On your DCF calculation it looks like the market rents has gone up a bit.
In Q3 actually I think it's Uh huh.
Thank you Liz.
About $44 in the last couple of quarters, and that's up about $30 range. It looks like the bottom end.
I think your assumptions went up from $10 $31. So I'm wondering if that was the big driver.
The change in what drove that I.
I guess Q2 Q3.
On that one we will have to take a look and get back to you can I call you offline.
Yes that sounds good.
That's it for me then I'll turn it back.
Yes.
Thank you. Our next question on line comes from Sam Damian <unk> from TD Securities.
Thanks, and good morning, everyone.
Just maybe first for court perhaps.
When you look at the committed occupancy in place occupancy is a very wide gap today at about two 5%.
Is there something there that.
That seems unusual.
Should that play out for the balance of 2022.
There is a bit of a good conscious and theres a bit of a spreads because we've done a couple of large pocket deals that don't start paying rent until kind of mid year Q3.
Western Canada, we did a 30000 square foot deal with a tenant SaaS Square then we did a deal at $6 55 star.
Starts later in the end of the year and that was a big deal that was about 50000 seats Sham.
And that was a deal where we took the expiring rents from $17 a bottom up to $30. So that's why there's a bit of a spread between committed and.
And in place.
So that gap should narrow over the course of the.
Correct.
Correct Okay.
Maybe just looking at the development projects.
Planning is getting pretty pretty finalized here approvals are coming through.
You talked about two Dundas, starting late next year maybe.
How are you preparing the balance sheet to accommodate the funding for one or more projects.
Balancing that against obviously your buyback activity.
Yes.
Other capital sources would you be considering.
We have discussed having partners in the projects potentially in addition, we think that with the completion of the.
Rezoning the value will be appreciably higher as well 'twenty. If you wanted to aggregate is really interesting because it's not one building, it's a whole series of buildings. So.
It's fully approved the value will be quite high and that increase in equity will be more than enough to fund.
Each phase if we'd like to do that so that one is pretty easy $2 50, Dundas again, there's lots of value. There. The trickier one is $2 12, king, but because that just a huge building you got to build it all at once we have a partner there already.
But it's too far away to actually plan the financials.
Okay. So so all of these are.
Her keepers.
Getting the approvals and looking to sell the site youre keeping these proceeding with the development potentially with partners.
Over time do you feel like you've got the balance sheet to be able to do what you need to do.
Yes, we think so we think so for sure.
Okay.
Maybe one for Jay.
When you look at the IRS evaluation process.
Yeah.
What what does that process due to the NOI.
For valuation purposes relative to with the NOI actually was in 2021, specifically thinking about.
Both occupancy, but also adjustments for normalizing parking. So for example, what would what would be the net adjustment on the parking side too.
To bring the I don't buy up some stabilized number from where it was.
Yes.
Sure I can talk about the valuation conceptually and then we can drill down.
It's been a big topic, because if you look at it there's a lot of private comps the.
The valuation methodology looks at a variety of factors <unk> direct comps if you'd etfs they look at.
Data points on the private trades as well.
Have a large portion of our portfolio appraised every single year and generally their methodologies consistent with how we would do it internally for accounting purposes.
So I would say that during COVID-19 .
There is probably more of a focus on near term fundamentals, though when you look at the underlying assumption. So for example occupancy rents parking.
It's hard to push the values up significantly to try and reconcile with the private space, but at the same time, we've been doing the leases or the leases are coming in at a pretty high rents. So when you take a discount on parking or are you, taking a discount on potentially a downtime of 4% to six months I would tell you pick up that leasing velocity again, while you would.
Typically view as probably present value that as a deduction, but at the same time. If your income is stabilizing against cap that's a much bigger value. So while we're seeing that is the reason why you see sort of the values. They fly over the quarters. When we are replacing the tenants with the renewals or the new leases are coming in the high <unk> and then when you have a good value and they were offsetting.
With some of the maintenance capital and just downtime from parking and leasing so you sort of end up back in the same place, but the private buyers are obviously seeing much better value for the long term.
It sounds very simple okay.
Thanks very much.
Thank you. Our next question on line comes from Mr. Matt Korn from there.
National Bank financial Please go ahead hey.
Hey, guys just a quick follow up on the 2200 Eglinton is there a residual office or even I guess commercial real estate component of that and the residential would that be rental maybe early days or condos.
So firstly, there's 165000 square foot existing office building.
And it's.
It's pretty fully leased I mean, I don't remember, if it's 82 or whatever but it's well leased that building will remain.
And this is just for as a reminder, this is a 16 acre site. So theres a lot of land there and most of the development is not that high rise it's fairly mid rise.
We are hoping to be able to come up with ideas that will make it economically very attractive to do apartment rentals and we would look at a con condos to manage cash or whatever but through our impact business. We have come up with some really wonderful ways.
Financing buildings that provide the government with some of the benefits they're looking for for their major major initiatives. So so it's too early but we need to get it approved first but we are talking to governments now on different ideas on how to.
Make it rental and make it rental that include some affordable that would make it very attractive for the owners as well as for the community absolutely would make sense in that area.
And then on Bay Street.
I'm, saying this asking us somewhat selfishly because they walk by it every day I'm going to walk into the office, but.
What is the timeline in terms of the sort of the facade work as well as getting some of those new really interesting restaurants that you guys have spoken.
Into the base because at this point there is a lot of scaffolding and has that impacted.
The leasing on the office component are people willing to lease the space on renderings at this point.
Good questions, Matt So theres two big facade projects that we have underway right now so a 330 <unk>, which is a complete re facade, we're replacing the whole front that's tied to a retail deal that we're working on on the ground floor.
And we have another pocket of strategic vacancy that we're holding off for higher rents and then the other big component of the facade projected 80, Richmond and Richmond should be done in the next 15 to 30 days.
We have some <unk> that were waiting to do when the weather gets a little bit warmer, but those will be done.
The retail deals that are on Bay Street and in our Alleyway project those.
Those are actively being worked on right now they are in the final stages of the planning and costing and we plan on starting the construction on that within probably the next 30 days.
So we're excited to Tom Bill all of that and we're targeting.
This summer too to announce and showcase in person at least one of those large retail deals.
Okay looking forward to it.
Last one for me on <unk>.
The cadence of occupancy throughout the course of the year.
Jay.
Are there any known vacates versus some of that lease up or is it.
Pretty much leasing vacant space and maintaining existing tenants in place.
A lot of it's black block and tackle.
Actually for 2022, I, just heading into it even pre COVID-19 , we the two large ones. We're at 74, Victoria that wasn't passports office and then phase III here in our head office threat 30 Adelaide.
We address the 74, Victoria in 2020, so I think that were expiring in 2007, we got them to 33.
And then state Street, unlike more probably talk about it in more detail, but we did address a significant portion of it but there'll be.
Probably timing lags from.
The new leases and then as we talked about earlier, the fixed string and commencement, yes. So state Street, Matt If you remember they expire this year there are about 225000 feet. So we have commitments on.
On about 185000 of that 225000 feet.
Even in advance of the natural expiry. So we've addressed a really good chunk of it.
They had two sub tenants that we renew directly and then we're working on a direct deal Thats that's conditional right now.
For a very large pocket of the balance so we'll only have about one floor left thats actively being marketed so so that's that's how we've addressed state Street J mentioned 74, Victoria.
Last year, we redid the whole building.
Okay fair enough. So that was a good outcome on state Street.
Just to be clear state to state Street is keeping a significant amount of the space correct and then they had some sub tenants and we're dealing with the balance, but it's your turn out quite well.
Okay perfect.
Thank you.
Our next question on line comes from <unk> from RBC capital markets.
Thanks.
Good morning.
Commented a bit on this in Europe in your release, but as we get closer to full reopening.
And.
What sort of feedback are you getting in your conversations with tenants.
Terms of how they are planning to use their space maybe differently.
Pandemic World.
What are some of the surprise.
Just by the way.
We talked about it more with analysts and we actually do with Dennis for whatever that means what are you hearing from them, it's pretty broad.
Some tenants are taking a little bit more space and some are taking a little less it's almost 50 50 and.
To Michael's point earlier, the tech companies that we're often dealing with.
They are looking to expand and they are taking more and then some of the professional services firms that were dealing with independent boutique firms, maybe they're taking a little bit less but theyre doing blends and blend and extent and we're working with them kind of longer term on some pockets, but it's pretty much 50 50 across the board. What we're finding is people don't know how they're going to.
Our office space in the future I mentioned that the year ago, and I keep in touch with furniture manufacturers.
They aren't doing anything thats different.
We have discussions about maybe have groups of people working together, but not all open but I actually think that most people are thinking about it wanted to come back and once they.
No how the space will be used they would do something amazing.
Amazingly enough, we're not seeing a change in the way that people are using space or how they want to lay out the space as of yet.
Got it.
Helpful.
I guess just comment Jamie maybe coming back to your comments on the same property NOI outlook for the year.
And then you mentioned that the weighted average occupancy is going to be coming in relatively flat.
Im just curious how that same property NOI breaks out between the downtown Toronto and the rest of the portfolio.
Yes, when we look at the SaaS, we think this year it should be quite consistent so we'll see.
Minor increases in both markets.
Yeah.
Okay.
Just last one for me on the 2022 maturities, you've obviously made some good progress.
What can you share with us just in terms of the spreads and how those are coming in.
On the leasing spreads right.
Yeah. So so we're seeing the AD.
Average net rents.
By about 10% on what we're seeing on pre negotiations and deals that were conditional on so we're seeing a good uptake on that.
<unk> right now for deals that are closing early in the year are flat or up a bit.
But 2022 were in pretty good shape like we've addressed about 75% of our expiring revenues and.
We're keeping on top of it just trying to be a bit more specific the two large pockets that we talked about earlier are probably going to be the biggest drivers of that and.
74, Victoria that was over 200000 square feet and you have a spread of 33 over 2007 on that but I think thats about 20%.
As we get through State Street, and put together the various pockets, we think we're going to get quite a nice lift once everything is filled so consistently when we execute on new leases is about close to 30%.
And the other markets.
And our disclosure, we just roll them to market. So overall I think for the year, we will probably be in the high teens to 20% overall.
Got it.
Highlight I've got one more.
Just in terms of some of the.
You mentioned tenants expressing interest in <unk>.
Some of your new projects could you just expand on that like what types of tenants are.
Contacted you in terms of some of the projects underway.
Yes, so so.
It ranges on phase III, we get some professional services firms that are quite interested in having a full floor on Bay Street that's appealing.
Technology, we've been getting a lot of calls on tech users.
No.
We announced publicly about $2 12, King and we are going in for a rezoning and approvals we've gotten 15 calls.
From large tech tenants.
Bullish on that corner.
The corner King in Simcoe.
That are looking for space. So a lot of tech firms that are growing and expanding a lot of co working we get a lot of call from co working.
In the market as well too, but it's been predominantly tech groups that are leading the charge.
That's great I will turn it back.
Thank you.
Thank you.
Our final question comes from Mario <unk> from Scotiabank.
Good morning, guys.
You made it.
I made it.
Got it.
Working from home.
Today I suspect the connection would've been stronger as far as working from Jarvis.
So those are.
Michael I wanted to come back to your comments on on land values.
Mentioned.
Condos or selling a system on a square foot.
You are unemployed 500 would be losses in the market today.
What would you say the differential downtown.
And land values.
Office and residential peripheral.
Global square footage turns the company.
So I wanted to clarify a bit we're sitting at 30 Adelaide, It's a 400000 square foot building, if we rezoned and we could probably get $1 1 million square feet here around 65000 square feet.
So at $500 a foot.
400000 square feet is worth $200 million, if we were to rezone it.
At $1 1 million square feet at $108 a square foot, it's worth what the building is.
Currently in the implied stock market and it will be worth more than that on Bay Street.
Their historic buildings, you wouldn't be able to do that so I was talking more about that as kind of building.
720 basis 55.
A lot of these buildings like we saw at $2 50 Dundas.
So much more money, if we do something new with that so what I was trying to say was.
We can tell you with confidence how every office has been a function and how many people work at home or those things. We're confident there'll be a lot of people to work from offices. What I was trying to say was just with the value of what's going on in downtown Toronto I don't know if it's known.
We were chosen to do the key site bid this week.
A $3 5 million square foot development beside that we own a one 3 million square foot development. So we're pretty tuned into what's happening and we can see just how valuable Toronto is so I think on these calls everybody has this.
Our vision about whats happening on office rents whats happening where people work from and what I was trying to say was there are other alternatives and the difference between $500 a foot.
The implied value of 500 foot for Congress presence when we bought.
One when we let Adelaide place, we paid $212 million in 2019 was seven two cap and I think it was about $300 a foot and.
And across the street they were building the Shangri La and they were getting about 900 to 1000, a foot and I just thought I would buy this building for $300 a foot shangri-la against 1100 a foot.
Because the comparative value was amazing and today I think Meredith comparative value continues to be amazing the differences.
We're seeing buildings like Blackstone bought Liberty village building at $925 per square foot.
And it has no further development I mean, we didn't see that back there in 2019, if you think about it in 2009, we stepped up bid to buy the first big building coming out of the global financial crisis at $300 a foot or maybe.
40% of our condo price today, we're trading at $500 a foot, which is one third of condo prices and at the same time, we are seeing.
Liberty village at $925, a foot, we're seeing Royal bank place at $800 a foot. So we're pretty comfortable that this company will do well.
Whichever way things sort of rollout was office space demand, but we're pretty excited about the existing use and sort of as we get through some of the redevelopment there'll be lots of more opportunities. So.
We are single mindedly focused on reducing the shares outstanding I since I think since 2016, we sold 140 of 172 buildings, we still have a 32, we've reduced our shares outstanding by.
About 60%, 50%, 55%. So we've been single mindedly focused on creating a business that has incredible assets with wonderful use.
We're decarbonising now, we're making the boutique buildings, but we also have a lot of buildings that have a lot of value for other uses as well so that's where our confidence comes from and.
And over the value of the business over a longer period of time.
100% next quarter.
I did want to ask you on that.
The key announcement earlier this week so congratulations on that.
It's really early but to what extent alright can you talk about the range of potential implications for green losses.
Pat.
Proposed development.
Oh, that's a really interesting question.
Look this is a site that sidewalk labs have been working on it.
Big site.
A very important site.
And.
There is a tremendous number of competing goals.
The Ah <unk>.
Governments have been trying to achieve including our high purchase price as well as a lot of social goals. So.
Our bid was.
We were incredibly fortunate to be able to.
Have some of the leading architects in the world, particularly Sir David <unk>, who has not done a project in Canada. He was knighted for his work and a lot of his work has to do with accessibility and.
Diversity.
He does a lot of affordable housing I think what's the name of the deal we did the African American.
Museum of history, the Smithsonian This guy is a legend.
And.
Yeah.
He doesn't do a lot of these kinds of projects. We were very fortunate that he saw on us a business.
That.
With focus on trying to bring.
Real big.
Goal of getting an economic return and getting stuff done for the community. So you helped us with every all the consultants helped us and we put together a real combi.
A combination of great social benefits as well as what we think will be a great economic return I say all of that because we have about.
Now I think it's a couple hundred thousand square feet of commercial space.
Some of those uses are social which will be really exciting we're trying to create some real business opportunities for underrepresented groups. There is some commercial space, but at this point.
We havent done any work with dream office for opportunities there, but.
It is interesting that we're seeing so many big tenants, who knows what will happen I'm not sure about key side, but.
Our work on impact is definitely spreading into what we're doing in office I think that as we are getting developments like <unk> do you want to exit and that has been an amazing benefit that we are so focused on impact of getting it rezoned.
I think we're going to see more and more opportunities for office to incorporate the impact framework on what they do and get benefits from it that could lead to more opportunities to build buildings.
Was that a clear answer.
Yes, no that's good.
That's great.
I have a couple more of them. It just email to you and you have some good time to more airports.
But it's here now, but maybe one last one for me.
When you think about the future.
Really.
Really focused on development redevelopment going forward in terms of creating value.
So when we think about.
212, King $2 50.
Yeah.
Frankly, we are trying to underwrite.
We need to equip the potential value creation, there relative to what.
That will be derived for us today.
Those two comparator.
Those three poodle, how are they valued within the right for us.
And what are the benchmarks to increased volume.
For us overtime.
It's really early to determine what the ultimate value would be after developing the assets.
But firstly with you take 200, Eglinton 438 University and our share of $2 12, King the value of those three assets would pretty much double the size of our office portfolio.
That's how big they are there they are close to $2 5 billion in total.
Our share at this point.
With it there is definitely a significant increase in value from getting the zoning and I don't think in my mind any of those sites reflect the full ready to go value.
But in addition to that.
There is additional.
<unk> value so very simply what we use is if you spend $1 million on a piece of land. If you read the owners we were too once you finish the validation work be worth four so we're probably if I had to guess, 25% to 30% of the way to recognizing value, let's say on $2 50, Dundas considering it zoned.
If you look at 2200 exiting we're not even close and $2 12 gig.
That one we may not get as much of a margin its incredible building, but it's going to be a bit tough to build but there were still carrying it at.
The 212 king value.
So if you're asking how many dollars I don't want to say a number I'm only thinking that we might have a smaller denominator them.
So on a per share basis it'll be meaningful.
Yes that makes sense okay.
Well I think we just set a new record for the longest Dream Office Conference calls this has been going on for more than 20 years I'm kind of shocked that today of all days its the longest one but thank.
Thank you for your interest we could have sat here for the rest of the day, but.
We're done now.
We're looking forward to seeing you in person soon all the best.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.