Q4 2022 Dream Office Real Estate Investment Trust Earnings Call

Okay.

Good morning, ladies and gentlemen, welcome to the Dream Office REIT fourth quarter Conference call for Friday February 17th 2023. During this call management, All 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 reached 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.

Uncertainties is contained and Dream office REIT filings with securities regulators, including its latest annual information form and MD&A.

Billings are also available on new markets with web site at Www Dot Dream office REIT.

Scott C. A later in the presentation, we will have a question and answer session queue up with your question. Please be sure to press Star one one on your telephone keypad.

Your host for today will be Mr. Michael Cooper Chair and CEO of Dream Office REIT. Mr. Cooper. Please go ahead.

Alright, Thank you very much and welcome everybody to our.

Year end conference call.

I wrote a report to the board and referred to.

It feels like Groundhog day over and over again in the office sector.

I'm here with a gourd and they'll deal with the financials and the operations I just wanted to talk a little bit about some of the strategy and other opportunities we're seeing.

Last month, we closed the sale of 728.

Hi.

Using value was at the health Science building.

We're pleased with the sale.

We'd like the building I think the delta is going to perform well and whatever.

Warm over the long term.

You know what you're good at Liberty.

This quarter of a million square foot building is about a quarter.

We happen to discovery district, and I think it proves out that business.

The discovery district at additional value.

We're just other office buildings, it's not a commodity so we have another 750000 square feet, they're putting to if you've done that and we think that's pretty exciting.

In addition.

We own about 26 million shares of Dream industrial.

And it's been doing very well, it's about $400 million of investment in liquidity and that's a pretty exceptional asset for dream office.

Why did you wanted to Edmonton, we mentioned that.

It's been a we've received approval for about $2 5 million square feet of residential density for the most part in addition to the 165000 square foot office building.

Basically the density is divided into four phases of about 600000 square feet. Each were in discussions now with the developer we know very well for them to develop condos on the first phase.

Yeah.

After cost.

The entity, probably at about $70, a foot with $2 5 million square feet.

That's about $175 million plus the 165000 square foot office building.

So once we get all the zoning done once we get make progress on it.

The $110 million book value could become $200 million and Thats.

Additional $2 a share basically.

The bakery collections coming along great and Gordon has a lot of updates on it.

But just a couple of other examples 74, Victoria zoned residential that's where the passport opposite the federal government's attempt there it's all young street right in between.

Between the King and Queen subway stop and we could build a significant residential building there. If we decided to go ahead with that.

30 out of late it's interesting because if we can eliminate.

The requirement to replace the office space, which seems rational given the desire for housing, it's probably worth $300 million just as a residential development.

So we see lots of value with office buildings are basically collection is going to be.

Occupied with other.

All other work will be done the restaurants to be in place I think it'll be very exciting and.

Office buildings are doing very well.

And we've got lots of opportunities to get extra value out of our company aside.

That's a general overview I'm happy to answer questions at the end.

But gentlemen, you guys want to start yours your comments.

No problem, Thanks, a lot Michael.

Well good morning, everyone that scored wildly speaking first and foremost I hope, you're all keeping really well.

You get a chance to connect with you today and share some of our work.

The team has completed not just in Q4, but over the course of the year.

I look forward to sharing some of the big news in the key milestones regarding our asset plants as Michael mentioned, we've now fully completed our phase III collection, and we're quite proud of it.

Since we pushed well past the public health crisis, our team has been working in unison with existing tenants, new tenants and prospects to ensure a seamless transition back to our buildings.

That being said the return to office rebound many expected has been a bit tempered when you measure it by traditional indicators kinder occupancy and net new absorption. However on our team Theres real optimism when looking at future commitments tour activity trailing occupancy and like Michael mentioned new retail.

On the cost side, we're seeing some stabilization stabilization on materials, and finishing trades, which we feel positions stream office very well in the years ahead.

Anecdotally in the 13 years that I've worked at Dream, we've never printed more parking passes or security access cards than we did over the course of the last two quarters in 2022.

From a macro perspective overall vacancy in Toronto has stabilized to approximately 14% across all classes. This is a level not seen since the great financial crisis.

From our perspective vacancy in our core portfolio as built in lockstep with market dynamics, taking us to an overall currently committed rate that's slightly better than market at approximately 88%.

Despite some of the industry challenges and what you're reading the news and social media, we're starting to see some material improvement.

As the most active year of leasing for Dream office in the last three years with rents holding up very well on the just over 700000 square feet of deals we completed during the course of 2022.

That's in contrast to the 480000 square feet of deals we did the year before that.

And we continue to see really positive momentum and some increasing activity going into the spring with a number of prospects and some conditional deals totaling almost another 100000 plus square feet.

Closing out Q4, we completed approximately 25 transactions for almost 180000 square feet.

And over 110 are over 110 deals for almost 700000 square feet for all of 2022.

For some additional context, we did seven transactions over 25000 square feet and this is important we did another four transactions over 50000 square feet. So from our perspective material deals of scale are getting done and companies are making big commitments.

They are taking a little bit longer and the tenants are much more pragmatic with their capital outlays and they're ultimately being much more prudent with their balance sheet, given the uncertainty around inflation and their cost of capital.

Our rates have been very resilient and we saw average net rents up 8% versus budget, but given some of the cost pressures any ours remain largely flat year over year.

We've seen a market marked improvement net rents and Thats, a real testament to the quality and the location of the buildings that we own.

The efforts of our operating team and ultimately staying true to our asset and capital strategy.

Our construction and development team has managed very well and I can now officially say today that we've completed all of our major work on eight buildings that make up our base III collection.

In conjunction with World class Hospitality and hotel designer Paolo Ferrari, We've completed seven lobbies 112 bathrooms, eight re facades and dramatically upgraded all key all key base building components, including elevators HVAC mechanical and in addition, all of this we further continue to dramatically.

Our carbon footprint and partnership with the Canadian infrastructure bank toward our goal of being net zero by 2035, I want everyone to keep in mind, that's almost 15 years earlier than the commitments announced by our federal government.

I look forward to getting an opportunity to tour anyone on this call is interested it would be great to walk you through in person and share firsthand all the great work. Our team has done we're really proud of it.

On our last call. We mentioned, we are close to announcing a number of best in class retail and hospitality concepts that align with our bold vision for Bay Street collection, we've worked very hard to create a new class of asset known as boutique luxury and the core of the financial district, and adding these curated retail amenities and partnership with some of the Globe's top restaurant tours.

And place makers.

We believe will make our core assets very appealing.

Executing on our hospitality strategy has been a major catalyst to attracting and retaining some of Canada's most discerning companies.

And we've seen this over the course of the last year with 25 office deals done on Bay Street collection at an average net rent of over $38 a foot.

The past few quarters, we've been highlighting the negotiations of completing some marquee deals. We're very proud to say today that we've completed four deals with arguably Canada's top restaurant tours that total over 30000 square feet and two more conditional.

When completed this will total approximately 45000 square feet of total retail absorption at average rents close to $70 a square foot and annualized NOI impact of an additional $3 million.

These are all in our most desirable assets completing and supporting our goal of bringing an elevated and all new experience of boutique luxury that is totally unique to <unk> financial Corp.

We're very proud to share today that we are bringing needless to Toronto, we are working very closely with owner cost us <unk> <unk> and his team <unk> has grown from its roots in Montreal and is now one of the most sought after restaurant brands globally.

This is an absolutely incredible experience not just for our buildings not just for our tenants and not just for the financial Corps, but I really believe there'll be a great draw for the city and our team is very proud to be working with cost us and the team at <unk>.

Also today, we want to share we've re imagined our concept.

Our alleyway project.

We partner with Charles Cabooses Ink Entertainment group to open an incredible new concept based street that will have an elevated outdoor urban oasis in the alleyway. This is an amenity that's been missing state in downtown Toronto, Inc's long history, as a food and entertainment and Presario is an absolute game changing addition for the financial.

Court and is an exciting feature that everyone can share at on the base reflection.

We're also very proud to say that we have won a Toronto and one of Canada's best restaurants, joining our portfolio with allo at Adelaide place as well as a premier alma coffee restaurants.

We have two more incredible offerings also under contract that should close next quarter and allow for an extra 15000 square feet of net new retail absorption.

Quarter over quarter, we remain relatively flat on a current and committed we're off by about 20 basis points on an apples to apples basis I want everyone to know on this call that two of the large deals that we anticipated to close in Q4 are still conditional on some lagging municipal approvals, which we feel confident we'll get.

We have some very cautious optimism with the addition of 150000 square feet of LOI is unconditional deals and very active negotiation. We will report on these in subsequent quarters.

Even going into this quarter, we secured a very important multi floor deal in additional key renewal that retains to large tenancies at 20% and 36 trial as a portfolio. We recovered 100% of expiring revenues in 2022 and are already firm and committed.

Over 80% of expiring income in 2023.

And the current pipeline, we are actively negotiating and trading paper on over 14 deals in RFP responses for 300000 square feet across both portfolios. There is a lot of press and focus around shadow vacancy and the state of the sublease market in Toronto to be honest with everyone. This hasnt been an issue or something we're seeing in the current.

And our portfolio Theres, just around 75000 square feet of space available for sublet or put differently, it's less than one 5% of the portfolio nationally.

In Saskatchewan in Calgary, Occupancies flat, we saw Princeton tower, our current committed occupancy went from about 76 to $78 eight.

Tours and activities in those markets have picked up we've recently received and are responding to numerous rfps.

With all levels of government.

Our current committed occupancy is hovering around 88% in our core portfolio.

For additional context, if we didn't sell 720 Bay, our current committed we'd be closer to 90 collections continue to be very strong at over 99, 5% for the year. Our average what's in the portfolio are still quite high at just around five three years.

Operationally and of Great importance I also want to update on our ESG goals achieved this past year Dream office.

While the Dream organization has always emphasized the importance of being good corporate citizens, we're making it an absolute priority to increase transparency as more than ever investors want to know how businesses are incorporating ESG principles into their operations and in unison. How we're building on our early successes in this arena.

Over the course of this past year, we highlighted some of our accomplishments, which included a reduction in energy and water consumption waste management greenhouse gases emissions as well as a number of highlights unemployed development and the diversity of our workforce, we've rolled out our social procurement policy late in 2020.

One, which we are lot 20% of contract awards to equity seeking groups and remain on target for the goals that we want to achieve we established a diversity inclusion and investment team to ensure that our entire workforce has every equal opportunity to succeed and also the trades contractors and service providers.

Align and share their inclusivity policies with us. This is to ensure everyone. We deal with is doing their parks to be leaders in inclusion.

One core goal was to improve on our national leading Graysby score that we secured in 2021, which is often regarded as the leading sustainability benchmark in our industry. We think this will be a valuable communication tool for our tenants and investors both private and public.

In 2022, we were able to successfully increase our score to 92 out of 100, making us the top performer nationally and the third best in North America, while maintaining our five star rating.

We're also continuing to work toward our goal of additional Green building certifications for our properties and were named in 2022 platinum by Green lease leader.

When upgrading our assets, we've put a real focus on improving consumption metrics and data ghd and carbon utilization associated with our overall net zero strategy.

Variables are at the absolute forefront of what we hope will separate us from our peers as a landlord and a leader we have a tremendous opportunity and responsibility to influence and improve our carbon footprint and internal line with a growing sustainability demands of our clients.

We all work really hard on implementing our ESG strategy throughout our portfolio.

Being a good community and environmental Steward is absolutely core to our business and as tenants become much more sophisticated in their commitment to the environment and the community we want to be ready to share strategies be a resource and ultimately partner to make very meaningful contributions to support support sustainability in the environment.

Overall, our goal is to be recognized as one of the top sustainable reach in Canada, and we look forward to sharing our progress over the coming quarters.

In closing and ultimately I feel really good about our portfolio the quality improvements that we've made to our assets both at an operating and aesthetic level put us in a very strong position as tenants continue to figure out what their long term plans are around their specific op accommodations or.

Our biggest partners and tenants all three levels of government have been really great champions of the work, we're doing around environmental and community stewardship.

I would say to everyone physical assets aside I really couldnt be more pleased with how the team has navigated through some of the evolving challenges to the industry.

Their effort their dedication to not only our company, but to our clients is what im candidly most proud of.

At the end of the day. It's this combination of having irreplaceable assets, coupled with the quality high character team of people, we have operating and leasing those buildings that gives me the greatest confidence going forward into 2023. Thanks, So much everyone I'm going to turn it over to Jay.

Thank you God, Hi, everybody happy Friday.

2022 was certainly an interesting year.

We typically like to provide our internal forecasting commentary on our February call.

Last year at this time, we're really looking forward to the other side of the pandemic. So we can improve our occupancy with very high rents.

Soon after the conference call office somehow became even more complicated sector.

While we have past Covid, we're now facing an uncertain economic environment persistent inflation high interest rates and lack of clarity over to return to work policies by tenants navigating similar economic challenges Thats us.

Despite all of that we think the business held up very well this year and deliver stable results and we are also very well positioned to improve long term income quality and value.

On the quarter, we reported <unk> 37 per unit of <unk> and comparative properties NOI plus 0.1%. We are happy to see that this was the first quarter since the pandemic that we have reported positive CPE NOI.

Quarter over quarter adjusted for the sale of 720 Bay, we improved our in place occupancy by 20 basis points as Gordon had mentioned in his remarks, we are seeing good signs of turning velocity. Early this year. We are also finishing up construction of fully committed retail and restaurant space. We are optimistic that this will drive momentum on the leasing for the office component.

<unk>.

For 2023, our internal forecast calls for <unk> between $1 $48 45.

We are projecting low single digit positive CP NOI from an income portfolio based on high Eighty's in place occupancy in downtown Toronto, and low 80% occupancy in the other markets by the end of 2023.

We also forecast slight inflation in DNA and mid Ninety's <unk> per unit from our agreement industrial investment based on the guidance there management team provided on Wednesdays conference call.

Excluding one time termination fees, our 2022 <unk> will have been approximately $8 50.

The estimated decrease in <unk> relative to 2022, and our current forecast is primarily attributed to higher year over year interest expense for.

For context, we started 2022 with all in variable rate of two 3%, which has increased to $6 six by the end of the year and our mortgage refinancings for seven to 10 years in 2023 is expected to be in the high fives.

We estimate that the increase in interest expense will be approximately $5 million or 10 cents per unit.

We are already in advanced negotiations for many of our mortgages due in 2023 and are confident that we will achieve reasonable terms on a refinancing we intend to keep leverage in the low to mid <unk> with ample liquidity to manage operations and capital programs over the next few years by 2024, we intend to reduce debt to EBITDA below 10 times.

Our net asset value per unit for Q4 was $31 36 based on a stabilized income cap rate of $5, one for downtown Toronto and seven six for other markets.

Which is consistent and the cap rate surveys movements from appraisers and brokerage reports.

This implies $600 a square foot in downtown Toronto in $225, a square foot in other markets, which we feel very comfortable with.

Five properties are 25% of the properties by fair value to third party appraisers in the fourth quarter. In addition perform detailed evaluation analysis on our remaining assets consistent with the methodologies used in the appraisal process based on observable market inputs seven.

720, <unk> with a unique asset because we closed the sale on January 30, yet so the valuation to first the sale price of $135 million and we recognized the gain of $20 million against the previous carrying value.

We would like to mention that the <unk> valuation exercise is designed to capture a reasonable fair value estimate in accordance with accounting standards through the lens of average market participants we believe that the buildings in our portfolio are very unique and have significant embedded value and alternative uses because of their locations are attributes.

A Prime example is our base III collection, which is so unique because it is incredibly difficult to buy such well located land to build small heritage buildings as at replacement cost would be astronomical we.

We have invested significant capital on both the interior and exterior to elevate the standard to best in class luxury boutique offerings for smaller tenants want to phase III address where the very high end working space, we have leased up the retail spaces with world class restaurants, and believe that the area will become a great destination for lunch and after work of events the combo.

Nation of location side and the capital we had invested creates a very high barrier to entry against comparable new supply.

Another example is 720 Bay, which Mike will address in his opening remarks.

This was previously value added office income property, but has proven to offer higher and better use the occupiers in the health Science and Education District, the transaction proved out the liquidity and the value in a more challenging investment market otherwise, but we believe we have other assets such as $6 55 base $2 50 done that in the 438 University.

That also share similar attractive attributes to the growing health care and education industry.

Across our portfolio, we have identified approximately 305 million square feet of incremental residential density across three sites, which will benefit significantly from positive immigration and population trends in Toronto.

Over time, we think there are other opportunities across our portfolio to explore incremental residential exposure for our REIT as well.

Lastly, our 26.

$26 6 million Dream industrial units are currently worth $450 million in carrying value of 400 million of trading value, which approximates half of the market cap of dream office, depending on the metric used.

We remain optimistic over the fundamentals of the industrial sector and Dream industrial is very well positioned to continue outperformance as illiquid securities. They also provide dream office with a great investment good margin underlying attractive yield and flexible liquidity on demand.

Collectively we think our re offers patient unless theres, a very compelling opportunity to invest and own a collection of difficult to replace assets that will grow in value over time.

Diversified means.

So thank you for your interest and we look forward to reporting our results over the course of 2023.

Now I will turn the call back to Michael.

Thanks, Scott Thanks, Jay now we'd be happy to answer your questions.

And thank you we will now begin our question and answer session. If you have a question. Please press star one one on your Touchtone phone if you wish to be removed from the queue. You can also press star one one.

Using a speaker phone please pick up the handset first before pressing the numbers. So once again with your question. Please press star one one to enter the queue. We have our first question from Lorne Kalmar with Desjardin. Please standby while I open your line for you.

And your line is open.

Hey.

Hi, Lauren.

Fair enough.

Jay maybe just one quick housekeeping technical question on the <unk> guidance that you gave does that exclude DIR.

What do you mean by excluding the <unk> guidance includes all the components DIR DNA and all of the <unk>.

Function.

Outlined are in the range of $1 $40 45.

Okay perfect. Thank you.

And you guys clearly have some good visibility on all of these restaurants set to come on stream.

Can you maybe provide some color on sort of the cadence of how theyre going to come on stream in terms of timing.

Yes, no problem. It scored speaking we are one of the restaurants are still more information to come and we want to be respectful.

To the announcements by our partners, but one of them, we're expecting to come on just at the beginning of the summer and.

The other one is looking towards the end of the year.

We have another one at.

So two in the summer towards the end of the year and another one as early as May.

Okay, perfect Thats very helpful.

And then the base III collection you guys are done obviously occupancy is still well below where it was pre.

Pre pandemic, although granted they are far from the only buildings, what's the sort of outlook for the leasing on those assets.

Good question its actually Jay mentioned that tours are up dramatically this quarter and a couple of our buildings, where some of the residual work was taken a little bit longer.

We've had a number of tourists one of our buildings 80, Richmond just as an example, we had a few vacant.

Bacon floors, there we're trading paper on 70%.

Some of that vacancy right now and we removed this gasoline scaffolding just after we got back from holidays.

We feel pretty good about it.

330 day as well too there were some residual vacancy there a lot of it was driven by construction, but with the announcement of <unk> with the <unk> done.

On the building as well we've seen a huge uptick in tours and the feedback just on the common areas.

Lee from from prospects has been really positive. So we feel good about the absorption and the guidance, we're giving for the balance of the year.

Okay, Yes, I saw the largest they look great and then maybe just last quick one from me any known non renewals in the portfolio of significance.

No.

We'll announce next quarter, but we were able to.

To be in a pretty favorable position with our largest expiring.

The tenant and give back a little bit of space.

We were able to take the space that they gave back do a long term deal, which with a major U S National Bank.

And then the tenant that was expiring renewed longer term on the balance of the space. So our biggest.

Expiry for the year, we've been able to address.

Fantastic I'll turn it back.

Okay. Thank you we have our next question from Sarah <unk> with core Mark Please standby while I open your line for you.

Your line is open.

Thank you Brenda and good morning, guys.

Congrats on good morning Walter.

Just looking at.

Do you stick into lung panel question in terms of.

All of these music, especially on basically coming up.

On the visa collection and you do all these stores and you know when people are looking at these properties.

Prospective tenants toward that end.

There were two kind of let's say look at alternative options within the downtown core.

Or would they be comping the collection, but.

That's a really that's a really great great question. So the benefit for US on Bay Street collection as we we have small average sized floor plates and we do we don't directly compete with the AAA Newbuild towers that have big 30000, 25000, 40000 square foot floor plates are large floor plate size.

This is from just over 5000 square feet. So the type of tenants that we're seeing especially this quarter, our financial services firms law firms and professional services firms and the feedback that we're getting from people as they like the idea of having a base Street address which is probably Toronto or candidates most high profile.

<unk> address or street, having a base street address and having their own floor. In these newly renovated buildings. So theyre not directly copied it on it on an apples to apples basis.

In terms of.

Rent, we still compete on a gross basis lower than those AAA towers.

But people that want to have a base street address people that want to have their own floor.

We're probably the most viable option for them and to be honest, it's mostly been financial services firms and professional services firms that have been coming through and looking at our assets.

Let's take one I'm, probably going to sound like we're expecting to go when I see those Budd.

Are you also seeing pens.

And then so rather than the pandemic. These go for these larger fleets are you seeing them kind of downtime when that pay a smaller <unk> Mellon probably open a satellite office some reference bulbs to kind of aid people getting back to the office are you seeing from brands like that coming in.

Not a ton, but we did have one example to close out the quarter, where we had one tenant that was in a large institutional AAA tower I think they were in about 11000 square feet. There they felt pretty small their occupancy needs were compressed so they did a full floor deal with.

Asset 80, Richmond for just over 5000 square feet, but there hasnt been that many more data points.

In terms of people really giving back that much space to be honest in my experience I think for the most part.

That's taken place over the course of the last 24 months.

I don't think we're going to make too much.

Yes that probably makes sense. Thanks Scott.

And then just switching on to dispositions.

For any b.

Michael can you guys comment on what.

A final thought.

The buyer looked like Glencore thats more institutional investment kind of buyer was more user related.

Well, it's it all it.

It was the health Sciences.

Business.

Alright, okay.

In terms of.

And the prospects of further let me let.

Let me, perhaps gets put on mute.

Just a couple of cleanup.

Sure.

We sold 140 buildings between 2016 2019.

720, <unk> with an outlier.

A few non core buildings that we've been open to selling for years.

And I think we sold one recently in SaaS, we tune, but generally we're pretty happy with our portfolio and the way it's constructed.

So we're not that anxious to be selling assets now.

Okay.

Thanks, Michael.

So I mean, just thinking about the residential density you guys mentioned.

The current portfolio.

Is that something you would look to develop within the REIT or within the broader but would it be within the Gartner group assumption.

I think that.

Whatever portion of it gets developed within the Dream group will be in Dream office, but we are looking at bringing in partners potentially to $2 50 Dundas.

So that we could manage to own our share without leveraging up.

Yes.

That makes sense. Thanks for the color Michael I'll turn it back.

And thank you. Our next question comes from Mark Rothschild with Canaccord. Please standby, Sir while I open the line for you.

And your line is now open.

Thanks, and good morning, everyone.

Michael you went through a bunch of different items the value of that.

In some cases or in most cases don't really generate income now and probably don't get much value from investors.

With that arent Dream later, Jim are limited.

To what extent does that matter in the near term does that do.

Consider maybe looking to monetize some of that in hours, you're just saying that there's a lot of value there that over time will be surface. Then you just have to wait.

I don't know I mean, we have a long term view of Dream office, which we always have with regards to 'twenty 200, and again, we're in the process of creating the ability to use that density and I mentioned that we are working with another developer.

<unk> developed.

<unk> developed the first quarter of it.

Of all of those things I think we want to maximize the value on our own balance sheet I don't think we're looking to.

I don't think would be the 30 Adelaide Street East REIT.

I think we wanted to have a vibrant portfolio and.

We're going to stick I think with what we've been doing I mean, I think the strategy is.

Maybe bringing another developers do a little bit less than we would have done three years ago ourselves.

We're bringing in part through other developers and then.

With the cash that we've raised I think we're going to be buying back shares a little bit more aggressively than we have recently.

But I think we're doing what we're going to do.

Okay, Great and then maybe just one question for Gordon the rental rates that you guys seem to have held them pretty well while vacancy has increased.

To what extent is this flowing through into net effective rents and how is that changing and is it just the phase III, they're holding or is it really just occupancy is slipping, but rents are hold are staying firm.

No that's a good question Mark.

Rents like I mentioned year over year, we're up about 9% on a net rent basis.

Any rs are flat they are down actually probably about one 5%.

Versus what we had in the budget and the biggest driver for that is just in costs, so material cost improvement cost and the other thing Thats caught.

The whole market.

As broker commissions.

The cost of freight brokers have gone up quite significantly as an industry standard over the course of the past year as well too.

Occupancy for the most part lagged a little bit as I mentioned before in completing the work it took a little bit longer in terms of getting some of the scaffold and things down but the deals that we are in active negotiations with right now the over 150000 feet.

The rents are tracking better than.

And then the 98, 5% increase in net rents we had year over year.

On a net basis and any Rs and to be honest with you Mark any ours are looking a little bit better to just because we are seeing a bit better pricing on finishing trades.

Okay, great. Thanks, so much that's helpful.

Youre welcome.

And thank you we have our next question from Mario <unk> with Scotiabank. Please standby.

And I will open up your lines shortly and here you are your line is open.

Hi, good morning, everyone.

Sure.

Once it get back to the residential density the $3 5 million square feet that was highlighted across three sites does that include 200, Edmonton or is that above and beyond that.

Good morning.

Sure Jay.

But Michael I did highlight 74, Victoria and other ideas in his remarks, so I would say that the three five.

On the three identified sites, which are in our disclosures, but there is potential upside in the future.

Okay.

In terms of.

200 <unk>.

The value creation is pretty substantial the numbers seem to make sense to us.

Anyways in terms of the upside.

How should we think about the recognition of that.

$65 million or so that you highlighted those value creation over time.

The key.

Events that.

Do you see that filtering into your book value overtime.

Sure ill make an attempt at that so as of Q4.

Our carrying value actually stayed pretty flat and there's a couple of reasons for that we have to go through a pretty thorough process.

With the evaluation process and why was.

This was originally appraised by the day.

Lender. It did include the expectation it will be resolved.

So obviously, it's derisked, but we're still working through a couple of subdivision plans what should be done by mid year and that will give us better clarity on the various phases.

So we could work out their pro forma and ultimately the value is derived from the <unk>.

<unk> profit of these developments over the phases. The other thing we did was when we did the valuation in December we had an independent broker do the assessment of our site based on what they could see AD monetization value and we felt within the range as well so even though we thought it was a conservative value based on observable data.

That was the carrying value booked now Michael it's Ben.

You mentioned that you were talking to.

Various developers on opportunities.

$78 net was mentioned when those conversations crystallize some of that value will definitely be in.

And our carrying value over time, depending on sort of how these projects are laid out so I do anticipate that over 2023, you'll probably recognize value.

And between the quarters and probably go up in stages.

And between 110 to 200.

<unk>.

Okay, and then just a follow up question, either one or two conference calls ago.

How should we think about the four phases. There the timing can you just lay out how should we should expect to see that evolve over the next whether it's over four years eight years 10 years.

No I don't know if its not like that.

Yes.

Every.

Input for rental has been changing.

And each government is trying to deal with the affordable housing their own way and encourage rental their own weight, so that needs to settle down.

I think we're looking at starting the first phase in 2020 for subsequent phases to start pretty quickly thereafter, so, but we don't have enough information I think a lot of the industry is uncertain about what the inputs are but I think it'll become much clearer over the next 16 to 18 months.

Got it okay.

And then.

Just coming back to another.

During the call in your.

There. So it appears that alternate uses for buildings.

In that market.

So have a higher value than just straight traditional office.

Yes.

Is that something that you plan to do yourself.

So <unk>, which was a different approach that's being planned for yourself or are you kind of highlighting that the market is there for some pretty aggressively priced additional dispositions.

We're not looking at selling anything at $2 50, Dundas theres opportunities related to.

The hospital is also schools.

Or how do we redevelop that.

438 University, there's quite a lot of long leases and same thing at 655 Bay I think the point, we're trying to make is they are not commodity buildings and if youre looking at what the value of the building as though it would seem to have a different value, but I mean, if somebody offered you what youre houses worse.

You would be stupid to sell it because all you have to do is get another house or something so I mean, it's kind of tiring, but no. We are not looking to dispose of all our assets and beat the 30 at ALLETE Street East St.

Okay.

And then maybe one last housekeeping question.

For JA.

Quarter on quarter change in the cap rate.

How much of that would've been.

Well to the reclassification of some play day.

So we back it out actually and then 720 Bay is carved out at 135, and then the remaining portfolio in downtown Toronto, I think went up about 40 basis points.

Ed.

Think on the carrying value I think you can buy it back if we had a gain of about $20 million you could probably derive the cap rate that 720 <unk>.

Okay.

Okay. That's it for me thanks, guys.

Thank you. Our next question is from Jason <unk> with CIBC capital markets. Please standby I will open up your line.

And your line is open.

Good morning.

You mentioned the repositioning of some of the some of your assets specifically in other markets is there any timeline on that and I know you mentioned youre not focusing on dispositions, but have you been able to gauge what the appetite is like in the private market.

Okay.

So in noncore markets as what you are asking Jake yes.

Yes.

I mean.

We sold Princeton tower.

Towards the end of last year.

To a private buyer and there was some interest on some of our other assets I think in Calgary, when we're looking at our asset strategy.

We're in discussions all the time looking at what the highest and best uses we've got some really good located assets in Calgary.

So we're looking at different repositioning strategies, there right now and I think we're going to have some more information on that one going over the course of the next two quarters. Yes, just just for example, Kensington House.

In Calgary on the Bow River it will be a great development residential site down the road.

Head office in Calgary, There right now 606 is quite interesting to us got it tax parkade.

<unk> City Hall.

We're looking at ideas explore everything theres been a lot of.

Sort of activity on the conversion side in Calgary recently, so we're exploring that in Kansas City right now we do have a lease.

With a bank, but long term, it's actually is a.

Relatively nice residential district.

Next Costco so.

We're being pretty proactive on asset management, it's still early days, but we're turning over all the rocks on every single building we can.

Great. Thank you.

And then last question I noticed you've touched already a little bit, but so tenant.

Movements increased quite a bit I understand that the year over year comparison isn't quite as useful given the government renewals in 2021.

Could you provide a bit of color on when you expect those to look like through 2023.

Yes, that's a really good question and I'm glad you're pulling out the government deals because it's there's a difference in what we're seeing in the private and the public sector uncompetitive deals. So.

We're seeing a lot of tenants that are trying to push.

Capital cost us. So it's typically we would budget $50, a square foot or $60, a square foot and landlord work tenant improvement allowances, we brought that up about 20% to 25% just looking just to protect ourselves on scope creep and.

And cost variables.

We're getting a lot of people that are <unk>.

Looking at getting some other term free rent or some in terms of free rent.

Depending how you look at it impacts <unk> as well too and a lot of that is capital preservation just on the part of the companies. So they can build a bit of a war chest I think everybody we talked to you and everybody.

Sure.

As quick to say they are still not 100% convinced what the next eight to 12 months are going to look like.

Everybody is being really prudent with their own capital and to be honest with EG like everybody has a different cost of capital we have a different cost of capital than some tenants do so it just becomes an exercise and capital preservation and for good tenants I sit right beside J and right beside Michael So on big tenants in deals of scale, we're always.

Talking about making sure we've got good covenants.

Great deposits to backstop any of the risks of putting more money into the deals, but we're seeing it and I suspect. This is a trend that we're probably going to see towards the end of 2023 as well.

Okay. Thanks, that's helpful I'll turn it back.

Got it thanks Jake.

And thank you.

Once again, if you have a question you can enter the queue by pressing star one one we have our next question from Matt <unk> with National Bank Financial Please standby, we'll open your line.

Your line is open.

Hey, guys.

Just.

We've got about two to three years left on a pretty fulsome development cycle in the city of Toronto with regards to office.

But with what Youre doing on 720 Bay and some of the proposals from your peers, who own the offices where the.

New developments will have residential and sort of 50% of the existing office space on the site.

Do you foresee after this supply pipeline that we may actually see a reduction in the amount of office space in the city.

Matt That's a great question I think that.

What we're going to see us.

Slowing up of new development, and I think we're going to see obsolete buildings, having different Houston. So as an example, 720 <unk> will not be in the office market with the new owner. So 250000 square feet will be gone I think we'll see continued demand for some new buildings good demand for interesting buildings, like we own and more and more.

These will be obsolete will be turned into something else. So.

10 years from now we may have less office buildings, but still have some new ones fair.

Fair enough and then you mentioned with regards to the city and zoning that some require replacement.

That standard across the board. If you have office assets that you would like to have some replacement of office or can you build your residential in the quarter.

Currently you need to replace the existing auspice. However.

I think that there may be an openness to considering changing that as the housing needs are very very high and there is no need for old office buildings. So that's what we're working on we'll see how it goes but I expect that will be similar to what happened with that.

Sort of the downtown industrial buildings SDK.

Bailable to use in different ways.

Okay Fair enough and then Jay just a quick follow up I think Mario asked the question with regards to I for us versus.

Michael's $200 million.

On 2200, Eglinton did I hear you correct that you had $110 million of incremental value for density in that and then maybe more broadly to other projects is that the only one where you're kind of carrying density value in the existing valuation and the rest are treated as kind of pure office assets or how should we think about your outlook.

For us on that front.

To clarify the 110, where the carrying value and.

If the value is 200.

I guess, they're at 90 would be the incremental we're going to have a lot more information over the next couple of quarters and ultimately, we're probably going to package all that up and bring it to external entrees, Sir again and to say that Hey. This is what we can do with the first two phases. For example, this is the site density in the subdivision plan and they will use that information.

Formation now that they have more clarity to provide a value.

Either Q1 or Q2.

The other side that has.

<unk> done that because we had the rezoning completed we had appraisal for that as well.

That one is held.

The value.

We have a we have financing to support that as well I think everything else is.

Valued as a traditional office for now.

Okay perfect. Thanks, guys.

And thank you.

We have our next question from Sam Damiani with TD Securities. Please standby.

And your line is open.

Thanks, Dan and good morning, everyone.

Mike and touring activity in the last month or two.

Sam.

I think it's.

Largely attributed to the fact that we got the scaffolding down and the construction we've been marketing had been up phase III collection, the better part of the last two years now that a lot of it's down it's finished and presentable a lot of the pent up tours people are seeing that they are walking it and are most influx of tourists have been in that sub.

So we're starting to see a lot more of that.

And just carrying off to the end of last year, we saw as an industry a real pickup in tour. So I think people are starting to figure out they are starting to get people back to the office there.

They are starting to figure out what their long term accommodation plans are and there is.

We've been speaking to my peers at different companies there.

They are all seeing the same thing just more people walk in the street and I think for us where we've seen the biggest uptick in tours is because we finished the work and they are now much more presentable.

Perfect that's helpful and I'm not sure if it was your comment quarter or Gs, but.

It was mentioned that there is a high barrier to entry or you've created a high barrier to entry on you're basically collection.

Wonder if you could expand on that a little bit in terms of what exactly happened.

Yeah sure. So Sam if you think about big office building to buy a piece of land.

You have a development program and they have hard and soft costs. So, let's say hypothetically it becomes a $1000 a square foot.

Pro forma for a new development with phase III is so unique because.

The location center ice so it's very hard to acquire land in that area.

I think our average building size, there is 10 or 12 story or sometimes even lower.

You wouldn't typically buy a piece of land to build a small building because the development pro forma either not economical otherwise you're left with a very high price per square foot. So that's the second one third given the physical attributes of these heritage buildings and the capital that we have put in to make an exception on the inside and the outside and we are tracking a uni.

<unk> class a tenants and that team has always been that if youre a high revenue generating.

With fewer employees by high revenue per employee you want your own phase III address you want your own elevator Bay in your own brand and your own floor in that location you don't really have a lot of other auctions.

Lastly, you've got the restaurant and retail and then any and when that's all done and you have an entire.

We'll take our vibrant community that is hard to replicate elsewhere. So I think the combination of those four factors create a pretty high level.

And what other landlord in the downtown market would be would you see as your closest competitor on the base of the collection.

Hello.

So for example.

Yes.

Alright.

Bill.

Yes.

Yes.

Hallmark is similar in some ways, but they're not in the core.

And Theres a couple of individuals like the Flatiron building and stuff like that so there isn't really one that you can participate in the public market, but what I would say to add to what Jay was saying is.

The value of these smaller special buildings is very high and we've seen that.

For a long long time that a 60000 square foot building that special.

Special trades.

At multiples of what commodity building trade for.

That's very helpful.

And the last question just to clarify a comment I think you made in your opening remarks talking about again the boost recollection. You mentioned there is 25 deals 38 Bucks a foot on average.

What was the GLA on those deals in total and does that 38 dollar.

Average include any retail space.

Yes.

It didn't include the retail space Sam.

On average probably the gross absorption on that 25 on those 25 deals.

Just probably around.

About 75000 square feet.

Throat at end.

They've been great like some renewals, we did one and only use it it gets blended in but we did one net new deal at 80, Richmond, where the rents were approaching.

North of $45, a square foot just to start and a pretty strong NAR.

So we're starting to see renewals were doing well, but the net new deals.

Haven't seen any paper come in less than $35 a square foot at the start and we've been able to push rents up to average at least $38 a foot.

And there are some thank you will and that.

Yes, there is some just for your teams and there is some renewals blended in that 25 deal number.

Of course, yes.

Thanks very much.

You got it.

A reminder, if you have a question you can enter the queue by pressing star one one our next question is from Tommy <unk> with RBC capital markets.

Please standby.

Your line is owed money.

Thanks, Good morning, just on 'twenty 200, Eglinton and now coming back to that you mentioned that you're in talks with the developer.

What's your sense of how much of that you might look to actually monetize this year and then I'm just curious as well how many parties have you been in talks with or that may be expressed interest in the site for the residential.

I think that we will monetize none of it this year, if we're going to monetize any of it might be half of the first phase.

We have spoken to a few very few but these are people we would partner with.

And we pretty much know, who we're comfortable working with so.

We wanted to develop a bunch of it ourselves Edward Alright.

Develop some of it with others.

Got it and then just maybe just one extra question on that on that is.

Is there a mix that you have in mind, yet for the condo versus rental or is that sort of all part of it the <unk> planning.

Everything is changing our initial intent what's developed but all of the departments, but.

It doesn't make a lot of sense right now hopefully it will.

Things settle down.

Yeah.

Bringing a partner for half of the first space.

As condos.

Okay.

Just.

Couple of housekeeping items.

Jay on the Buck 40 to 145, Thats a full guidance.

Our buybacks factored into that or could there be some upside to that range.

Yes, no our internal forecasts.

Do you factor in buybacks, though.

We anticipated.

He is going to have the capital allocation sensitivities, though when we ran the numbers as we gave a range.

Without the buybacks given that Theres, only 2 million shares left to buy back and it's all subject to pricing of course.

It would likely stay within the range anyway. So right now if you do some buyback there's accretion so youll probably be on the higher end of the range.

Okay, and then just lastly.

I think I know the answer to this but just on the high 80% occupancy.

Guidance for the year.

That was on a committed basis.

In place.

Okay in place sorry in place the high 80% by the end of the year.

And downtown Toronto, low 80 than other markets. So right now there is a spread as we commented on prior calls a lot of it just the timing of these large restaurant deals they are in their fixture.

Furnishing period at <unk>, all of that come online probably towards the second half of the year.

Year, and then there'll be some leasing in addition to that so hopefully a lot of the buildings are.

By the end of the Q4.

Great. Thanks, very much I'll turn it back.

And thank you.

We have no further questions in queue I will now turn the call back over to Mr. Cooper for closing remarks.

Thank you very much I appreciate everybody spending time with us today.

Jay Gordon I are available anytime to answer further questions. Once again. Thank you for your support and we look forward to speaking to you next quarter and maybe in between all the best.

Bye bye.

And thank you. This concludes today's conference. Thank you for participating you may now disconnect.

The conference will begin shortly to raise and lower Johan during Q&A you can dial one one.

[music].

Okay.

Okay.

Sure.

Okay.

Okay.

[music].

Okay.

Okay.

[music].

Okay.

Yes.

[music].

Okay.