Q2 2022 Dream Office Real Estate Investment Trust Earnings Call
Good morning, ladies and gentlemen. Welcome to Dream Office Read, Q2 2022 conference call for Friday, August 5th, 2022. During this call, management of Dream Office Read 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 Read's 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 Dream Office Reads filings with securities regulators, including its latest annual information form and MDNA. These filings are also available on Dream Office Reads website at www.dreamofficeread.ca
Later in the presentation, we will have a question and answer session. To queue up for a question, please press 0 then 1 on your telephone keypad. Your host for today will be Mr. Michael Cooper, Chair and CEO of Dream Office Realt. The third you may begin.
Thank you very much, operator, and good morning to everybody. Welcome to Dream Office's second quarter conference call. Today I'm here with Gord Wadley, the chief operating officer, and Jay Jing, the chief financial officer, and they'll speak to the results. I just wanna start with a couple of opening comments on what's happening at Dream Office. Firstly, we're very pleased with the assets that we own. We did a lot of work to reduce support for the O to these assets.
We spend a lot of time improving the assets, decarbonizing the assets, and I think we've got sensational assets that are irreplaceable. The office sector is a complicated sector in a complicated time. So what we are finding now is, like as an example, we'd like to redo our space and make it a little bit more modern.
However, we're nearly not sure how we should change our office space because we're not convinced that how it's going to be used. Now, I've met with a few other CEOs who are in exactly the same position, all of whom want to have at the same amount of spaces they have now, but we're still uncertain. So we've been seeing a lot more people coming downtown. We're really pleased that the demand for restaurants downtown is huge. There's a lot more traffic and we think this is fall would have seen a lot more people. We're still in the same position. We're still in the same position.
So I think things are coming around and we expect that as we head into the fall, we'll see a lot more people in the office and we expect to see some more leasing. We're pleased in the first six months of the year, we've had consistent occupancy and Gord will get into a little bit about some of the delays. Well, we've got some wonderful restaurants that have made commitments to our buildings and we think that not only will they be great tenants but they'll also attract other great tenants. And they'll also attract other great tenants.
So as we look forward, we're still a little bit uncertain what normal occupancy is. We believe it's significantly higher than where we are now. We're not just not certain as to how long it may take to hit the new normal. But we think there's a lot of embedded value in our business. And I think that our valuations of the assets have been pretty conservative over the last two and a half years. And even notwithstanding that, between cash that we're with retaining and the industrial rates performance, we've seen that asset value grow.
and elevated level of hospitality, building quality, and to drive leafs, necessary wrap-up construction to improve our portfolio for the long term. of the
The city of Toronto has seen market vacancy grow and stabilize from pre-pandemic levels of just around 2% to the current levels of about 14% cross-haul classes.
Our portfolio has moved in lots that goes just trend, where our core portfolio relating to current and committed occupancy on average is trending and approximately 99% and approximately 99%
which is up just over 20 days once from last quarter.
Although we saw some positive momentum, there's some tempered optimism, policing, operations and destruction. As our clients, albeit slower than expected, they get to open their doors and come back to work. Or like Michael Sether, diligently planning coming back, potentially in the fallout, delivered in. Coming back, potentially in the fallout, delivered in.
We're seeing some positive variables that indicate improvements to occupancy long-term. As our tours are consistently growing week to week, suddenly space is stabilized, now representing only about 2% of our portfolio. We're seeing some positive variables that indicate improvements to occupancy long-term. As our tours are consistently growing week to week, we're seeing some positive variables that indicate improvements to occupancy long-term. We're seeing some positive variables that indicate improvements to occupancy long-term.
We're tracking already this year to do more sport footage of SOARP in last year and complete a higher number of new lease and renewals.
Net rents are trending quite strong with average 12 over $30 a square foot.
Across all of Toronto, in parallel to this, we're seeing strong in-yards despite cost pressures associated with construction, procurement of deliveries and materials, and the time it takes to build.
In our other Marcus portfolio, current-infinite office that you remain largely unchanged or aylopography in the 2 or more private sector.
We're seeing better tour and dual-lossy as a sketch one where we did about 38,000 square feet in the year. Again, rates in NERs of 16 and 60% are expectedly compared to our budget.
Overall, across all markets, we're quite pleased with how our team has managed communications with existing tenants and clients.
Collections are backed up at pre-pandemic levels over 99% and this is also signified by over 75% of this opportunity, Repench and retreated, from an initial year 2020-22.
Year-to-date, leasing volume has picked up first-class year. As we've done above 343,000 square feet, totally just about 55 deals, both new and renewable. These are all the pre-pandemic rates in any arts.
And I just wanted to note that this is probably already approximately 100,000 square feet more than this one posture.
We have some cautious optimism with the additional 150,000 square feet of otherwise and additional deals to very active negotiation.
which we will report on in subsequent quarters.
One key driver to your future success that I just want to touch on is our curated retail strategy.
For the past few quarters, we've been highlighting the negotiations and prospect of completing four very marketing deals on our base tree collection.
We're very proud to say today that we completed three of these deals.
with arguably Canada's top restaurant tours that total approximately 30,000 square feet.
And we have two additional marital details that are conditional.
Our completed retail heels are not reflected in this quarter's stats and just firmed up. It has few days.
When complete, this will total approximately 50,000 square feet of total absorption at average net rents close to $70 square foot and annualize and allow you to impact just over $3 million. And annualize and allow you to impact just over $3 million.
These are all in our most desirable note, and it will finish off and support our thesis of bringing an elevated and all new experience food tigler tree to the financial report.
The Global Challenges associated with construction have been very well-known all the sides. Our teams worked very hard to supply challenges, mandate a construction shutdowns, and it meant it well and over 95% complete our Basery Collection project with all the bathrooms, all the lobbies, and our future alleyways all complete. And our future alleyways all complete.
We're effectively just finishing up the Fold Lacing Reef Assault Program at 3.30 Bay. The subschedule will be complete at the end of September .
We are all well underway in 365 Bay and tracking quite well to budget for this 40,000 square foot asset. We have been back to the tremendous today and we are receiving a steady and toxic
We really look forward to showing you the intuitive product and hopefully we'll get a chance to walk into a person very soon. So we'll be back to walking through a person very soon.
For 366 Bay has some context, we're looking at spending about $16 million on a $22 million building.
We anticipate a positive value increase upon construction at the end of Q1 2023.
In unison with this project, we're also doing 67 Richmond, which we previously had on the books for about $30 million. We injected about another $12 million in capital, and on completion, we're targeting about a $5.5 yield on adjusted cost base.
We took full buildings offline as these are full deep retrofits for where we were replacing all the building systems, ensuring we meet our GHQ reduction targets, introducing all new control technologies, new lobbies, new bathrooms, and curtain walls to bring in more light penetration and also have a direct bird's-eye view of our Alleyway project and association associated with it.
We often get asked by people on this call regarding 357 Bay. Our client is well into their fit up and doing a great job on what's going to be a showcase location for them. You can see the location for them. We can see the location for them. We can see the location for them.
As context spent about $29 million on time and on budget, took a building that was valued at about $24 million to now over $62 million. And we also dramatically be carbonized and fully removed your 30 tons of asbestos added all new HVAC and mechanical to make this sustainable, clean example of what a premier heritage asset looked like in the court. And it looks like in the court. It looks like it's in the court. It looks like it. And it looks like it.
Being a good community steward is absolutely core to our business. By upgrading our assets, we put a real focus on improving consumption metrics and that of GHG and carbon utilization associated with our overall net zero strategy.
We're actively working with CIB on our $113 million debt facility to dramatically reduce our carbon emissions by 40% over the next three years and adhere to a very lofty goal to be net zero by 2035.
These initiatives are forefront when we hope to separate us from all our peers.
As a landlord and a leader, we have a tremendous opportunity to influence and improve our carbon footprint and in turn align with the growing sustainability demand for clients.
Last year we had the country's best first year Gradsby score at 91, and our team has been working very hard on building on that momentum for year-end with equal or better score."
Also, we have the country's top state and the Linux court and are among the top 10% in this reading globally. And are among the top 10% in this reading globally.
Sustainable Linux is a morning start company that rates sustainability listed companies based on their environmental, social, corporate governance performance, and it effectively applies risk rating.
In addition, we're signatory to UNPRI and we also committed to net zero asset managers, which stem from COP26 and represents the largest organization of asset managers globally.
Please see an operating metric to slide. General public corporations and our government at all levels for the past few years have become much more sophisticated and understand the importance of these ESG verticals. And if such have been tremendous partners, supporters, and advocates, integrate programs into our hard access, making them much more resilient and appealing to very disturbing tasks.
Operating leases are a key component of this commitment.
Let panants are making to the physical space and work environments.
This past quarter I am very proud of the team as we are awarded certified platinum and recognized by Green Lease Leaders Association as having the most sustainable lease and operating standards in all of Canada.
Creating healthy and positive buildings have always been a cornerstone of a dream office approach and a real source of pride for a team. And a real source of pride for a team. And a real source of pride for a team.
As a company, we're very fortunate to have focused on great buildings in your replaceable locations and use their capital in time to improve our buildings.
to a whole new standard of U.T. poetry that focuses on sustainability, hospitality, and community stewardship.
As always, I'd always welcome an opportunity to show or share in person our programs.
and please stay tuned for some very exciting announcements from our new committed retail partners.
With that, I'll turn it over again. Thank you all for the short good morning everybody.
Originally our goal for 2022 has been to minimize the work COVID, so we can manage our business in a more normalized operating state both economically and psychologically.
While that has been true to some extent with COVID coming up less in our conversations, we now find ourselves in a rather uncertain economic environment facing significant supply chain disruptions, high inflationary environment, and rising interest rates.
The return to work for larger users of office space in Toronto has lagged it as a result of the summer and a competitive labor market. However, we are seeing progress in improvements in utilization of both our office buildings and parking varieties.
We believe post-Labor Day will be a meaningful milestone to see increasing activity from both existing and prospective tenants.
We think despite all these challenges noted above, our company has continued to lead to leverage table results over the past few years.
We own a very well-known data portfolio of assets in the outcomes Toronto, and if we take care of them through our modernization and decarbonization of our program, we cannot capitalize on flight quality and have a very valuable and safe portfolio of assets that we will be happy for a very long time. We will be happy for a very long time.
On the quarter, we reported 38 cents of diluted FFO per unit, or flat year over year. We had income contribution from completed development at 1900 Sherwood, higher income from our green industrial reinvestment offset by lower in-place occupancy.
Our interest expenses and drop off of one time you come in a comparative period such as the way subsidy programs.
Our committed occupancy was unchanged border over a quarter at 85%, which consisted of 20 basis points increased in down times around so. And 30 basis points decreased in another market.
We have less than 150,000 square feet of expiry consisting of 33 leases for the remainder of the year, which we feel is quite manageable, especially considering that pair against 150,000 square feet that we are currently in negotiations for. We are currently in negotiations for.
As our data and journal model, we are currently preventing the added effort for unit of approximately $50 or 2022.
We have factored in higher interest rates as we find anything a variable rate or up 200 basis points since January . And also reflected in the timing of each commencement that I haven't tried today. I hope that I haven't tried today.
Now for clarity, we are tracking well against budget on committee occupancy targets of a ground, 90% in Johnson, Toronto, and 80% in other markets.
However, these prospective tenants, most notably the restaurants, have lagged a bit in taking possession of the space due to longer than anticipated fixed-screen periods.
Cosmic defiance means disruption then elevating construction costs.
We like to highlight that, believe the size of this quarter, we're at a very healthy spread of 48% higher than the expiry rate in Toronto, and we are getting record runs on our retail and restaurant spaces, which have not yet been reflected in the results.
This means for the purpose of modeling, some of the budget is NLI that was originally and specifically in the second half of the year will be recognized in the first half of 2003, which will contribute favorably to statewide cash flow and value. This is the statewide cash flow and value.
Our Q2 nav was $32.83, which is relatively flat quarter over quarter.
Given the backdrop of interest rate and capric sensitivities, we reviewed our valuation assumptions in each other's quarter.
Under the direct half method, our downcast Toronto assets for 82% of our portfolio by fair value, is using a stabilized half rate of approximately 4.8%. And marked rents of just over $31.
Our cap rates remain comfortably within the midpoint of ranges, but latest published, broker, and producer cap rates surveys. And our final uses of the year today have inspired and published market rents.
When we reconcile this methodology to discount cash flow models and latest available private market trade data, we think our high-risk values are quite reasonable.
Our balance sheet remains very safe. We have $145 million of patch and availability on our credit facility and $113 million available on the Canadian Infrastructure Bank facility that can be used for building retrofit and CHD emission reduction programs.
We think we have ample liquidity and resources for all operational capital needs for the foreseeable future.
For the remainder of the year, unsurprisingly, our focus is to lead space. Because that is a driver in Alice for cash flow, Trip wheel, self- friend interest included.
We are encouraged that the building capital we invest across base street and starting to show fruition. And the restaurant meets the weed size, what significantly increased rent, value and content yield across our portfolio. The value and content yield across our portfolio.
We intend to offer similar type of improvements across all of our capital initiatives, including two smaller development projects that reached 66 a.n.c. diongeration.
We are conscious to prove our value in the current capital and every dollar invested on behalf of our unit holders.
Beyond leasing and value at capital, our NCIB program is renewing in August and we intend to continue to repurchase our units on an opportunistic basis, given the disconnect between implied valuation versus the price required for to grow the new property today.
Overall, we'll remain cognizant over the challenges of managing a commercial office business. But we just want to say that we remain very committed to the company because we see significant value in our ethics. We remain quality in our ethics.
Operator, we're happy to take any questions now.
Thank you. We will now begin our question and answer session. If you have a question, please press 0 then 1 on your touch-tone phone. If you wish to be removed from the queue, please press 0 then 2. If you're using a speaker phone, please pick up the handset first before pressing the numbers. Once again with your question, you can enter the queue by pressing 0 then 1. Once again with your question, you can enter the queue by pressing 0 then 1.
And we have our first question from Siram Shernivas with Carmack Securities.
Thank you, Alberta. Good morning guys, and my first question for God.
God in terms of the back to office momentum, what are your information terms in terms of plans heading into the call? As well as generally in terms of office utilization rates, how has it been looking for Q2 and right now post quarter?
Yeah, that's a good question. You broke out a little bit on there, but I think you asked.
What we've been seeing and what kind of trends we've been seeing from our tenants when they were turned to work. As the first part of the question. Yeah. Yeah. Yeah. Yeah.
Yeah, yeah.
Effectively, what we've seen is a lot of our private sector tenants. We've seen a bit more of an appetite on them working with us to understand what our back-to-work policies are, the improvements that we've done so they can communicate from with their tenants, get them on board and feeling comfortable about coming back. And we've seen a big difference to be quite candid with you. We've seen a big difference at the occupancy levels of our private sector tenants versus our public sector tenants.
You know, our private sector tenants were probably seen in just over about 50 or 60 percent occupancy ratios based on people coming through doors, checking through. Our public sector tenants is a bit of a different story. It's a bit of a lower occupancy ratio. But what we've been doing is communicating with them, working with them. What we're hearing at the federal and provincial levels, we'll start to see a lot more traction after Labor Day and getting people back into the office. So...
Really for us, just in communicating what our operating protocols are, putting them on paper, sharing them with their tenants, so they can in turn share them with their clients and their staff so people feel more comfortable getting back. And then doing a lot of tours and walking them through and showing them the improvements that we've done around UV technologies and the HVAC, the elevators, and just raising the overall comfort level. So right now, I'd say private sector tenants 50 to 60% back in the office.
Public sector much lower, but we're pre-opinistic that the public sector tends to start to come back in earnest.
from September . And then my apologies to the second party, your question. I didn't quite get because the government brought up.
I think you answered my question because it was basically on utilization rates. So I think there was a good color. Just probably being back on the public side, would you say that number is closer to what, 30 to 40 percent I guess in terms of occupancy?
Yeah, you know, it's really department driven.
I'd say that's a really good number to say if it's a lot of back office. I'd say it's lower to about 30% right now, but we have some clients facing public sector tenants that is at a much higher occupancy level. So it's really department specific. If you're working in finance or revenue for the federal or provincial government, it may not need to be in as much. But if you're working for Passport Immigration.
infrastructure, they generally seem to be a little bit more. That makes sense. Thanks for the call. My last question I get was for J. J, you know, last quarter you kind of guided in terms of occupancy means or maybe nothing in Q4 and you guys are for occupancy means fairly stable for the rest of 24 and 22.
Is that something you're doing? There's no, do you see any ten, any ten, leaving?
Thanks for the question. So most of our maturities happened in the first half of the year. For the rest of the year, in my prepared remarks, I said we only had 150,000 spread across 33 leases. So the point there was it's quite manageable, one, and two, there's a lot of leases block and tackle. So we feel like we can address most of them and we can stabilize committed occupancy around 98%, which was our original goal.
And that is really what we see as a driver of value and cash flow looking out into 2023. So we're quite optimistic today about that. Just on the inflate occupancy where we're a bit lighter are comments where that's kind of sort of taking up it longer than previously or through COVID in terms of taking the space and getting their pictures done. So what we're seeing now is a lag or a bigger spread between inflates and coming to occupancy around 200 days.
Thank you. Our next question comes from Mark Rothschild with Canacorgenuity.
Thanks, and good morning, everyone. Maybe just to start and maybe just for Michael, if you could expand a little bit on the capital program as far as how you look at whether you want to sell more assets or buy back units and you have some projects going on with investment properties, how you look at that over the next year.
I think we started a lot of programs.
with the idea of creating excellent buildings and we're continuing with that. On the development front, we pretty much delayed things a little bit because we don't really want to put the capital into it now. We're still bullish on buying back stock.
And I think that we've got the liquidity to do that and we've got other sources of liquidity if we need it. So I would say we're not looking to do any acquisitions. We're probably spending less money on our existing buildings than we planned, but the key things will continue with.
New developments, we'll take a look. 2200 Eglinton is coming along. And we could bring in a partner there if we choose. And that could help with liquidity and also development. But for the most part, we want to see just continue with what we've been doing.
Okay, great, thanks. And it does sound like there's some good leasing going on. The TIs were up in the quarter. To what extent is that a trend or is that maybe just some specific leases this quarter? Obviously, any different quarter could jump around.
Yeah, that's a good question. How do you feel about getting taken into travel?
The cost in the TI's have been higher due in large part to construction costs. Jay has touched on it in his remarks a little bit, but construction costs kind of quarter over quarter have escalated quite a bit for materials. And not just procurement of materials, it's securing trades and executing on time. And that's been one of the biggest factors that we've seen. We've had to put a little bit more money in the deals just to try to accelerate and get the space built in time.
But it's just a combination of materials and getting people to do the work as well too. It's proven a bit of a challenge that I think all of them works for dealing with right now. But it can call them works for dealing with right now.
So is it more to do with, from what you're saying, more to do with just the cost of getting things done and not so much as a change in or increased demands from tenants?
Yeah, I'd say it's more cost-and-getting, getting things done. And to be honest with you too, Mark, tend to have a little bit more leverage with the growing vacancy over the last quarter to the nutritionally-haven that has. So we're starting to see a little bit more requests on potentially free rents, in-term free rents as well, too, which sometimes will be taken into the deal of a little benefit to you.
Okay, great. Thanks so much.
Thanks so much.
We have our next question from Matt Kornak with National Bank Financial.
Good morning guys. With regards to the property you have for sailor and the process of selling in Saskatoon, can you give us a sense as to who the buyer is and also what the NOI impact would be from the sale of that if it is I think of sir.
Sure, it will be domestic buyer, but the source of the capital may be from outside the country. It's a private buyer and it's strategic for them. And in terms of the impact on the financials, the cap rate will be between a 7 to 8, but if you want to talk free cash flow because there's a lot of capital commitments to it, you're looking at more like a 2.
Yeah, sorry, 7 to 8 on in place. Or is that a stabilized number? Because it looks like most of the occupancies that you've disclosed are. And you've disclosed are.
A little lower in that market. Oh, seven days would be the inflate board order annualized. Oh, seven days would be the inflate board order annualized.
Okay, fair enough. And then on 67 Richmond, did that contribute to NOI at all in Q2 or was it already vacated throughout most of the quarter?
Very, very, phenomenal. That was basically, we had been planning for this building to become our next HUD project for over a year now, and it was just fortunate that the Tenant Police was coming up, and we already had approved out a couple of test cases with 357 Bay in the capital, we were playing across Bay Street, and once we were seeing strong traction on the retail and restaurant side, it was natural for this to become the next building, and we're quite excited to bring this to the market when it's ready.
and I think Gord said 12 million of cap X associated with the repositioning of that is that correct?
That's correct, Matt.
Okay, and last one, Gord, just in terms of, I missed your commentary in terms of the timing as to when you'd expect the restaurants to be in their space and the space to be fit out. And then maybe as an ancillary question on 357 Bay, do you have a sense as to when WeWork would maybe be fitting out their space? Just in terms of getting that Bay Street corridor looking to its best shape.
Yeah, so both the questions. So we work actively working on their space right now. They anticipate an early Q1 completion date. I was just in there the other day, doing a tour in a most incredible, starting to do a great job, the exterior looks great as well too. And the work we've done is really strong for the building. On the restaurant side, Matt, there's gonna be a couple of different dates. Our partners are pretty particular on when they launch, but we're actively doing the construction.
on one of our very large restaurant spaces right now, we're well underway. And we anticipate that potentially, kind of, summer, fall of next year, we'll be in a position to be opening and cash flowing that space.
Okay, perfect and then sorry, Jay 1 last follow up on the timing of the Saskatoon disposition. Should we expect that to close in the near term? Or is it that far along in the process?
You never know what's trying to sell a building today, but we're hopeful that we can wrap up the rest of the paperwork and see if it's probably 30, 60 days.
Okay, perfect, thanks Ed.
We have our next question from Scott Thompson with CIBC.
Thanks and good morning gentlemen. Just wondering what impact you're seeing from the text slowdown in terms of current tenants. Either looking to downsize or put space up for sublies.
Yeah, so in our portfolio, Scott, it hasn't changed too much really since the beginning of the pandemic. Most of our larger tech tenants, we've already had discussions earlier in the past two years, so I don't foresee us getting any surprises internally from the slowdown. But just as some general market color, you know, I am hearing and seeing that there will be some more subletting space.
coming on in the financial court and the king west region from from some tech users. But for the most part in the financial court the buildings that we don't I think we're going to weather whether the text slowed down quite well just because you know we don't have as much exposure and we've just been consistently and constantly communicating with them and one of our larger tech tenants were actually well underway on on doing a blend and extend as well so.
we foresee that we're not going to see much specifics of agreement. And Gordon, have you seen a change in tone and volume of discussions with prospective tenants?
I guess either in tech or other industries.
Yeah, you know, I want to be cautiously optimistic about how I say this. So, tours have picked up a little bit, but to be candid with you, Scott, deals are just taking longer. And there's not the same sense of urgency there was to get deals over the goal line and complete deals as there were that we were seeing before 2020. Like, I think there's activity there. People are still coming through the door. They're very keen on seeing what we've done and how we can.
to get a sense of what we're doing so they can start to plan ahead on what their occupancy decisions are because it's just taking a little bit longer overall. because it's just taking a little bit longer overall.
And maybe sort of a follow-on on that putting aside the retail leasing component of new leases.
Can you comment on expected timing of closing the gap between in place and committed occupancy?
Yeah, we Jay and I were talking about this yesterday and what we're seeing from.
in place to commit it. We're hoping...
kind of by next summer. We'll be in a position where we'll see that that closing a little bit for us and our forecast and how we've been looking at theaters. We've been.
pushing the deals out probably two to three months. It's usually taking 60 to 90 days more to get these deals commencing. You get the deal done, but it's 60 or 90 days more to do the fixturing and other things. So it's taking a little bit longer. So the gap right now is probably two to three months more than we've traditionally seen and we're hoping things stabilize in terms of the labor and trade market a little bit more towards next summer and we're in a position where we can see time to completion at cash flow.
close the gap a little bit. Just only to you metrics, I think, the by year end, you'll see some meaningful progress on getting the end play occupancies up. And it's always gonna trail a little bit on any of these three sort of signs from over the next year or so. But a lot of the leads have been committed. And so the staff by two four will be pretty good. And then you'll scratch with you that you can come pick up and keep on Q2. By next summer, or hopefully our commit occupancy will be a lot harder and that you.
you should probably see a nine handle on the insight as well. All right. Thanks, Gordon J. And actually, maybe just one more for J. Are there any other major properties? I mean, I think sort of like 40 to 40,000 square feet plus that you're considering taking offline for redevelopment.
At this rate, no. I think we're pretty much close to getting through the rest of the base three assets. We will be doing capital programs on a selective basis and trying to leverage our CIV program as well to be carbonized as building. But for our entire building remodernization and redevelopment, I think that would probably be the last one for a while.
Okay, thanks, Jens. It's very helpful to turn it back. Thank you.
Thank you. As a reminder, if you have a question, please press 0, then 1 to queue up with your question. We have our next question from Mario Saric with Scotiabank.
Hey, good morning guys. Maybe an operational question for Gord, maybe a bit more detail, but I'm curious if Dree keeps stats on the percentage of tenants on your lease renewals that are kind of expanding versus contracting versus maintaining lease renewal. I guess the occupancy stands will highlight the trend, but just that, they're curious to see if there's more color on that front tenants, you can separate out between public versus private tenants and so on.
Yeah, not a good question.
Yeah, no, it's a good question. We don't perceive.
keep stats necessarily on that. What I can say is, you know, a few of our bigger tenants, as people know, State Street and other groups, had downsized a little bit. What we're seeing from the government is that it's basically kind of a wait and see, stay in place. We're seeing some shorter term renewals as is until they're in a position to make occupancy decisions. So, public sector, for the most part, we haven't seen very much downsizing.
Some of our larger tenants earlier on in the pandemic and then as we saw in the course of the last year, we saw some marginal downsizing. One or two tenants, we saw a private sector, we saw a little bit bigger downsizing. But we're starting to see some tenants grow as well too. We've got a lot of smaller tenants in our portfolio. So we're starting to see a lot of private sector tenants, maybe take an extra thousand square feet. Maybe take an extra thousand square feet.
to put another boardroom, maybe do some exterior perimeter offices. So it's a mix at this point, Mario, and I'd be shooting in the dark, I gave you a specific number. But if I could give you any real color, it would be that our public sector tenants are for the most part just kind of staying at it.
Right, so it would be fair to say that the large antennas may be a maplibus space, but you're at your average 5,000 square foot access protection tape.
which is kind of the bread and butter of the portfolio. You're not necessarily seeing contraction. Like that's kind of going from 5,000 square feet to 3,000 square feet. They're going from 5,000 to zero or growing the other way.
Exactly, you said it exactly right. The 5,000 square foot tenants, they were previously going from 5,000 to zero, or they're picking up another 10-15%.
Ready?
Okay and then maybe shifting over to kind of capital allocation on the NCIB would it would be fair to say that going forward given where leverage is and maybe concerns over cap rates moving up broadly speaking in this space.
that the NCIB is going to be more directly tied to asset dispositions, whether that's direct assets like the WINS-Askatoon or Dream Industrial Units, for example, or do you see yourself using liquidity today if the enterprise remains below $20?
Yeah, thanks, Mario. Yeah, we're working on it quite carefully, so we're quite comfortable with the position we are today. We obviously have a couple levers to pull. I mean, the trained industrial units have been great to us over the past two years, fantastic fundamentals. But we have said many times it's not strategic. But just having them around is a good support as backstop liquidity, and we can also margin them.
and they develop an uncovered asset pool. We do not have any restrictive covenants that prohibit us from having an uncovered pool. We have a Canadian infrastructure bank program to cover a lot of the capital. So we are quite comfortable with the liquidity to use. But at the same time, we are open to selling assets outside of the core. I mean, we're in progress of selling a smaller building, but there may be others. So we think we have a lot of levers to pull. And it's just the entire program itself we estimate to be around.
$60 million. So it's not going to be a huge use of capital. So I think over the next year, we're quite comfortable with the liquidity and how we navigate it for the purpose of anti-IV.
Thank you, Robert. And then, you know, how do you think about, I think Michael mentioned that you could have a potential bringing in a partner at Egonton in Birchdown. So how do you think about potentially sacrificing some long-term value creation if you bring in a partner in today as closely like two years from now for liquidity to execute on the MCID, which is more tangible in more short-communiture. How do you think about the short-term versus long term as a capital allocation against the equation?
So, 2200 Eglinton is... Oh, go ahead, Jay. Oh, okay. Maybe I'll start again. Jump in. 2200 Eglinton, we're working through the final phases of the rezoning right now, and the good thing about that development site is it could probably be split into six to eight phases, so we have a lot of flexibility in terms of when to bring in a partner and so we'll see what other measures we can do so in the time Wharton requires.
and for whatever the first phase, let's call it. And I think it's also residential, so that has a broader appeal right now with different sources of capital. If we could get good value for it, I think that's a win-win in terms of monetizing a good value on our books. It'll help you lever the balance sheet a little bit, and as you said, we'll be able to use that as a source of liquidity for Diane's JB.
Yeah, I was going to say that it would get good value now because we're so far advanced in the rezoning. And that project is probably a $1.6 billion project in total. So owning half is still a major development and is probably more accessible for us than 100%.
it would get good value now because we're so far advanced in the rezoning. And that project is probably a $1.6 billion project in total. So owning HAP is still a major development and is probably more accessible for us than 100%.
Maybe my last question, and there may not be an answer to this, but...
It goes mentioned that the goal was to get to nut zero by 2035. Is there any way today to think about the cost of doing so in relation to the confer value of the building?
Yeah, that's a really good question. I think even the four D's initiatives were announced. I think we were quite through and looking at ways to make our building more packed with descendants of all these initiatives include decarbonization. And we look at effective programs in order to how we will look at any traditional capital program, which would expect to get good financial returns in addition to...
making our building more green. So on one hand we've already got good needs certification and water certification across a lot of portfolios because we've been doing it for the last five years. The CIB program was important because first of all it's a great source of debt in order to fund it at the 25 year on secure program and it's aligned in a way that the more GHD we reduce in the buildings the lower the interest rate will be. So it's a very attractive source of capital and making our buildings better and...
facility as well as is being aligned with the attendance will have a pretty effective program that can deliver pretty good IRRs.
Yeah, I think it was Scott that mentioned a little bit about closing the gap from commitments to occupancy. And what we're seeing with this GHG program and what we're doing in the building is that it's helping us with our absorption and we're winning business as a result of having this program, showcasing this program, and the feedback that we've been getting from government tenants and also to from very sophisticated private sector tenants that have these ESG verticals as a component of their business.
is that it's a deciding factor in a lot of what we're doing. We're also seeing, you know, albeit it's a little bit high level right now, but we're also seeing people not only are willing to get earlier, but they're willing to pay more and be a part of it. And they like the reporting that we're doing, they like the awards that we're winning, and the way that we showcase it to them is they're a partner in the building, everybody benefits from the shared success that we have through this program. And to be candid with you, it's helping us win some.
factor in a lot of what we're doing. We're also seeing, you know, all of you that sounded a little bit high level right now, but we're also seeing people not only are willing to get it earlier, but they're willing to pay more and be a part of it. And they like the reporting that we're doing. They like the awards that we're winning. And the way that we showcase them is their apartment in the building. Everybody benefits from the shared success that we have through this program. And to be candid with it is helping us win some great key business.
Good, thanks for calling. We have our next question from Tommy Burr with RBC Capital Markets.
Thanks, good morning. Just coming back to 2200 Eglinton. I just wanted to maybe, I don't know if you have some, you know, maybe some color on top of me. The zoning is that likely before your.
And then now you mentioned the discussion around bringing in some partners, but I'm curious, you know, our talks already in progress on that and any colleague can share their review.
Sure. How will that Michael talk about the progress of the discussion with partners? You broke up on the first part, but I think you were asking about the status of the rezoning. We're hopeful or optimistic we'd be able to get clarity on that before year. And we're just working through some final milestones with regard to section 37 in some of the community benefits. Is it not that we'll be a Phil Stopper, but we just need clarity on that. And things have moved a bit slow over the summer, so we're optimistic we'll be able to get re-doning Hannah.
and really good value out of the site. Michael, do you want to cover the partnership aspect?
Okay, well on the rezoning we expect that by the end of the year we'll be in good shape. On the rezoning we still have the site plan to go. With the site plan we haven't gone far enough on the pricing and pro forma.
So we've had some very brief conversations, but we don't have numbers to show anybody yet until we're finished with his zoning. So this might be something for next year. So this might be something for next year.
Okay, and sorry Michael, just on your comment on the site plan. If the zoning is successful, we receive by your end, presumably you would then mark the value on that process or you have to wait for the site plan approval.
That's the J question. I think that the value would be pretty reasonable at that time. But Jay, when do you mark them up?
I think if you get rezoning, you certainly had one of the models. So then what I would do is I would punt that question to the appraisers and they would go through all the analysis. Other models, often that in the gold model. So they would probably look at the similar sites and their progress with the other landlords and derive a value. But the first markup we did, we were pretty far along and financing with one of the key models. So because we got offered a piece of that, that was higher than the book value, so that was probably a good indication it would work more.
We do think once again re-knowing it treats another significant amount. So it's likely worth more. And gradually you build up over time to a completed site. And then, well, as Michael said before, we'll think of a throat hormone, an ETF-based system to see what would be that in Thomas' value, complete a present value to today. So, over time, we expect that to gradually take up over to the next year or so.
Okay, just on the 2023, that maturity is very large, and I believe a chunk of it relates one problem, but just any thoughts on plans for the refinancing of that baby, any.
possible consideration of a hedge. I'm just curious starting thinking about next year's rules. Yeah, you're right. Next year, the biggest asset is actually our head office. We're sitting in there right now. We're already starting some conversations with the vendor. They're good. There's good appetite because the building is well-leased, it's well-located, and also they like the sponsorship. So we're quite confident we'd be able to get pretty good terms on the fact that...
With regards to your question on whether to hedge the rate, we've had these primary statements since January 1st, because I mean, we were looking at swapping potentially a portion of our fund, especially at that point in time when the rate is in the mid-tooth, and interestingly enough, all those funders, we talked to multiple, who are saying that the fixed rate would probably be around a quarter and a half, so they were baking in 67 raises. And then when the war began, we called the funders again, and nothing really changed, so we thought that was quite interesting. We did every financing within the scoters for our building.
or point nine. For the building next year, I think typically, five references to go, no fix, the curve has inverse. So I think it'll be interesting to see what's like the 10 year rate would be. But now obviously lock and change. So a lot has changed in 2022. I bet every single month we'll get a data point. So by the time we have these conversations next year, I would say it might be different, but we'll be prepared to make a best decision on the mortgage. We'll talk about that.
Okay, and just to clarify, I think the extraordinary rates of about 4%
For this filming I don't have an off-hand, but it sounded about right because is there a high-freed or forced?
Okay. And then just lastly, Jay, I just want to clarify, maybe we just not entirely clear on my end in terms of when it came through, but did you say $1.50, that's $1.50 for your Apple fold guidance this year? And then you can also just expand on and employ first up in a library.
Okay, yes, it is 150. S-TN-L-I-GRO, I think for the year, we'll probably be slightly negative single digits. And as we said before, it's only income pushed to next year. So we're so quite well from both S-TN-L-I and S-S-L, and hopefully occupancy in 4,043. Okay, great.
Great, thanks very much. Bye, and we'll turn it back.
We have our next question from Jenny Ma.
Thanks, good morning. Just had a couple more questions with regards that $50 guidance to Gaye Jay. You mentioned that you're faculty in some higher rates that presume that's on the floating. Did that factor any expected future increases just what we've seen to date?
I would say it's mostly today, though we try to follow the news, but it's really hard to kind of speculate what will be announced at the next round of meetings. So I think all in, we assume the slender rate on the facility is mid to high fourth, which is what we're seeing today, and it also factors in the refinancing of the one property that we talked about earlier with POMI. OK, so if I'm hearing you correctly, to the extent...
not to include any major capital allocation decisions on this position. You'll also watch this call in questions related to the
Okay, great. So it looks like, you know, you mentioned earlier that you're looking at using liquidity to continue to buy back units. And I'm just wondering given where the floating rate is at and potentially moving to, you know, we think about that, would it be fair to look at the yield on the units sort of as a proxy on the cost of the equity and comparing the two numbers and thinking about how you would allocate capital?
That's one metric that we look at. We also really look at the value of the intrinsic value of the real estate. And on the liquidity, we would certainly factor in the cost that...
both in terms of the impact to FFO in addition to debt to EBITDA and debt to gross book value. So we're cognizant of all those factors. Ultimately we think the business and the portfolio is incredibly valuable. I think it's been a tough run for being a commercial office landlord, but I think we're seeing a lot of positive indicators as well. And what we're seeing is probably pretty good to stabilize cash flows and value over the next run, not to mention that
Replacement cost is running even higher. And we're sitting in a building today that's on an implied base just trading the stock market around $150. And the car is all being built across the street. Or we're looking at right now, it's calling for $1,500. So we look at our data, we look at drugs, so we look at employment numbers. We feel pretty good about office building while located ones that don't require a lot of capital or our well maintained. And we want the old morning.
Great, that's helpful. I guess my next question is, well, you look at the floating-day debt component, it's pushing 30%, so I know you mentioned you weren't speculating on interest rates, but would you be comfortable having that creep a little bit higher to fund unit buybacks, or is there some sort of unofficial feeling on that number where your comfort level goes down? Well, that number where your comfort level goes down.
We don't really have a feeling per day, but we are very aware of not taking on too much variables interest rate. We run the audit and specificities as a risk management exercise within the company. Just going back to the Army's question, we look at swapping it. We don't think in a economic way it really makes sense because we would just be paying today's rate starting off in January . But what we really want to focus on is looking at what the impact of any future increases would have on how we know the company.
position. Is there any debt on that asset?
Yeah, actually, that's not the only problem that I've been a challenge for us. So, this data is actually just a bit more than the office self, which is very that our breath that will be transacted at our breath. So, the proceeds of all that will be used to be levered the balance sheet together.
Okay, do you have the right handy on that?
The rate on the deck? Yes.
I think it's probably in the mid-I-3. Okay.
I think it's probably in the mid- I agree. Great. Thank you very much.
Thank you. We have our next question from Scott Thompson with CIBC.
I had a follow-up on refinancing but it was covered in the discussion with POMI so I'll withdraw. I'll withdraw again.
Thank you.
And we have no further questions at this time. I will now turn the call back over to Mr. Michael Cooper for closing remarks. Thank you very much. Appreciate everybody's interest. Lots of questions. We'll try to continue to provide you with good information to understand the company. What I would say is our view of the assets are very valuable. I don't believe that the yield on the distribution is a good metric to look at.
the value of the buildings. As far as floating rate debt, if we wanna have less floating rate debt, we would fix it. So I don't think that's a capital allocation decision. So I think that will matter to the debt in a way that we're comfortable with. I think Jace Point is that right now when you fix the debt, you end up locking in a pretty high interest rate and I don't think we feel it helps much. But we'll watch and pick our opportunities and the interest rates will move around a lot, even as of today. But we're quite bullish about the business in the long term.
and we just need people to come back to work. But I do thank you all for your interest in the company, and we look forward to...
Proving out the results. Thank you very much.
Thank you, ladies and gentlemen. This concludes our conference. We thank you for your participation. You may now disconnect.