Q3 2023 Dream Office Real Estate Investment Trust Earnings Call

Okay.

Welcome to the team off the Street third quarter 2023 results Conference call for Friday November 10 2023.

Please be advised that all participants are currently in a listen only mode.

France is being recorded.

I think in your presentation there'll be an opportunity to ask questions.

And the question queue you May Press Star then one your telephone keypad.

Should you need assistance during the conference call imaging on the operator good question Jeremy.

During this call management, a dream office suite statements containing forward looking information.

Within the meaning of after the securities legislation.

This information is based on number of assumptions and is subject to a number of risks and uncertainties. Many of them that should be on people off the streets control.

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.

And the dream up streets filings with Securities regulators.

Including its latest annual information form and MD&A.

These filings are also available in <unk> suites website Www Dot came off the street thought Chi.

The host for today will be Michael J Cooper, Chairman and CEO of <unk>. Mr. Cooper. Please proceed.

Thank you very much I'd like to welcome everybody to our third quarter conference call today, Andrew J J, the CFO and board Wadley CLO.

Some opening comments before I turn it over to.

Hey, Good board.

Over the last 18 months, we've seen some massive changes in interest rates and economic activity in the housing market and generally in the economy number one number two.

As a result of Covid it changes the workforce, we shouldn't see any real changes in how office buildings you. So.

Joe It's really remarkable because overall larger segments of the economy are doing quite well.

But I would say that real estate generally and office buildings, specifically on the wrong side of the big trends. So I mean, it's very frustrating.

It makes it difficult.

But I think our business is doing very well getting through this.

<unk>.

Things are getting better.

How long it will take but the equilibrium level.

It will be much more desirable for owners of buildings and what we have now.

So what we see the last 90 days is about a 10% decrease in the number of people downtown.

It's been an incredibly slow recovery, but.

We are seeing a solid recovery, we're seeing lots of interest at retail downtown the use of the retail stores, we see more people on the premises.

We're actually seeing lots of tours.

And can.

We talk a lot about tours over the last couple of years.

Lots of tours, but we havent got lots of leasing and I think what we're seeing now is we have lots of doors.

Lots of leasing.

We have lots more tours and lot more Nathan so effectively I think we are seeing a lot of progress it's very expensive.

But the run rate of the leases that we're doing now.

Glad to have great day building, it's a lot better than vacancy we burn off the cost relatively quickly and are building a good shape. The expectation is that over the next two or three years, we will see decent rents and less cost and that's what we modeled on September six we put out our numbers, saying that over the next.

So the next three years, we're shipping the same cost of deals as we have now.

After that we're looking at.

It maybe half way to where we were half the weight increasing occupancy to wherever you were and the company starts to look really good we don't know if its three years or not but I think we're weathering. This.

Really you need time.

Quite well.

Other thing I would point out and leased office space in 1992.

Thinking about that.

Wait you really can't wait to do a transaction even more expensive on the one hand, but the other thing was the economy generally wasn't much worse shape. So we see a lot of business is growing it's a very positive sign for our business. So I think the economy generally is much healthier than it gets drawn 1992, even though the environment.

The environment right now is where do we see a lot of years. So we're happy to answer questions later, but.

I'd like to turn the call over to Jay and then Gordon.

And then Jay.

People with some more detail specific about our business and we're happy to answer your questions after that or that's great. Thanks, Michael I hope everyone's doing well just to piggyback on that.

A lot of what Michael was saying none of us in the industry or even through the headlines and I don't think there's been anything more polarized and then the impact of value slower than anticipated return to the office and negative sentiment around office space to noncore, but predominantly D&C class assets I'd say Toronto has fared much better and we're quite optimistic here.

To date with about 614000 square feet leased already.

To give some perspective, we're on track to exceed last year's full year leasing velocity of 659000 square feet and we've got another 240000 square feet of deals that are conditional or under advanced negotiations and we still have almost two months to go to close out the year. So on a gross leasing perspective, we've been outpacing 2020.

<unk>, which for some context was our best year since 2019.

Our reputation and ability to manage coupled with our well located assets assets has helped us secure some of the best covenants.

For arguably some of the biggest deals in a very very competitive sub market. We are pleased to announce that we've been able to secure infrastructure, Ontario.

Just renewed all of the year for Devry University Sedco hedge fund administrators headquarters of 'twenty, Toronto, IC IC I think headquarters for full building at $3 66, a street and were conditional on a renewal for one of our largest tenants.

From an income perspective, we're seeing a very healthy spread of 17% on a day to expiries whilst for the large scale deals completed year to date have a weighted average lease term of seven years, which is almost two and a half years higher than the market average.

From a performance perspective, the Canadian office market over the last three years can best be described as dislocated.

For example, in one performance metric season improvements or an indication of stability such as overall vacancy rates of absorption and other metrics such as the amount of new vacant space, arriving on the market trends upward and alternative rate any errors and income metrics also fluctuate due in large part to cost.

Couple this with growing interest rates softening cap rates, there's definitely been some challenges in the sector not seen since the great financial crisis.

Up until the end of Q3. This pattern remains just deal velocity like Michael said absorptions tours were all up significantly year over year, but to be clear any art continued to see material pressure when inducements construction costs commissions and overall cost increases to transact.

As a result, we've seen average enyart compressed coming in at around $17. However, average net rents continue to be remained strong and consistent underwriting anywhere from 30% to $35 a foot.

Overall and competitive vacancy this quarter stabilized across all classes of Toronto sits at about 17, 5%.

It's buoyed largely by a low vacancy in the class a assets, although the vacancy rates themselves did not see much movement quarter over quarter in the city are managed in REIT properties saw positive absorption and we're doing about 600 basis points better than market with a current committed occupancy in Toronto of almost 89%.

This is supported by some key deals, including chocolate athlete place for 12000 square feet as I mentioned before IC IC bank for about 40000 feet and we also did Io for about 200000 square feet at 408 University, that's gonna see them extended until 2030.

A lot of commentary has been made about the 'twenty year highest sublet space, which currently makes up about 30% of the total vacant space in downtown Toronto specific to our business those sublease space only makes up about 2% in our portfolio today.

The cost to improve streets has grown dramatically over the last three years I'll be honest with everybody gone are the days when you can simply induce with basic carbon ceiling tiles tenants are so much more sophisticated in their expectations for a suite.

Ceos had been replaced on tours by HR and facility managers.

<unk> centre is each frac quality CAC video helps and smart building software as well as the basketball furniture systems and wellness rooms.

All of these cost drivers are seen any RSP compressed on average by about 20%.

This is all coinciding with materials and soft cost increases.

And some supply chain and procurement challenges to deliver.

I am however, very proud of our team to date as we often self perform that work and have consistently delivered on time and on budget. This reputation has been a real catalyst catalyst for us in helping us win deals and outperform the market.

As a result, we've earned almost 400000 in net fees and mitigating and those 600000 in third party fees, which we ended up with GE.

We've had some very very cautious optimism with the additional 240000 square feet of LOI is a traditional deals and very active negotiation, which we hope to report on in subsequent quarters.

One key driver to our future success as retail fashion the past few quarters, we've been highlighting the negotiations and prospect of completing four marquee deals on our main Street collection path to say, we've completed all of them we welcome Daphne.

Ask me cocktail alloy bar and now Chopsteak has newest concept that Adelaide place.

Your major retail deals with some of arguably candidates top restaurant tours and when all said and done will total over 52000 square feet.

But the high cost of retail transactions and our strategy with retail finalized we're optimistic leasing costs on a net basis would come down.

This net new absorption with average rent close to $70, a square foot and annualized NOI impact of an additional $4 million.

These are all in our most desirable meli, that's finishing off and final supporting our thesis of bringing an elevated and all new experience of boutique luxury to the court has positioned us well for tenants flight to quality and really helping us drive value and your security offerings that often appeal to candidates, Tom covenants and most discerning tenants.

I'm kind of quality more so than phase III.

I'd say no one in the real estate market today is immune to the impact of rising interest rates and it's become more challenging lending environment today than three years ago.

Since a historical low of 40 basis points in the mid twenties.

And year government of Canada bond yield and cost of debt has risen by more than 330 basis points.

Lenders are actively reviewing their office loan exposure and are becoming more selective based on properties location and quality and really taking consideration really putting into addition to covenant of worse.

They are evaluating tenant profile, some leases very carefully and loans our size more conservatively.

Getting back to my previous point on any art compression tenants two are much more sophisticated in their demand and they are acutely aware of their own balance sheet and liquidity position.

And many are trying to push traditional tenant costs to the landlord on transactions to induce them when their tenancy.

This is having a real impact in this high interest rate environment, we're seeing this all over the sector.

Our downtown Toronto Dominion occupancy continues to be very resilient and our pipeline is strong.

We will continue to support healthy cash flows that our buildings.

<unk> wise, we had large commitments with the federal provincial and municipal government as well as Crown horse.

With a premium location asset quality and leasing prospects for a retrofitted downtown assets.

Fundamentally we continue to improve and leverage our strong vendor relationships to ensure that our balance sheet is well protected through what we believe will be a trough in the lending market.

We're renewing our largest tenants and have done so with I O I lacked state Street Federal government and were conditional with our last big large tenant for material blend and extend more to come on this next quarter when we can announce.

Some of the macro challenges in the sector I really couldn't be more pleased with how the whole teams navigated through some evolving challenges to the industry their efforts and dedication to not only our company, but to our clients is what I'm most proud of.

At the end of the day, it's a combination of having irreplaceable assets, coupled with the quality high character of the team. The people that we have operating and leasing. These buildings that really gives me the greatest confidence closing out 2023, and going into 2024, inspite of whatever headwinds or macro challenges with pace.

I'm going to turn it over to my friend, Jay Thanks, everyone and thank you Gordon and good morning.

Our third quarter ethanol per unit were 35 cents, which was flat year over year included in <unk> was approximately one cent of nonrecurring restaurants startup costs and one of our joint ventures on Bay Street.

Accounting rules require us to expand feed cost upfront, but we won't be able to recover from a kind of over the term of the lease.

We expect our fourth quarter ethanol per unit to be relatively flat from Q3, we think the total portfolio occupancy will be up about 75 basis points I've committed leases take effect towards the end of the year. This is offset by timing of temporary free rent period and higher interest expense.

We expect 2023 voyeur comparative property NOI growth to remain in the low single digit range.

We will provide our 2024 forecast on our fourth quarter conference call in February.

Our comparable property NOI was up $1 2 million or four 4% compared to the same quarter last year. It was largely the result of a five 4% of higher rental rates on re leasing and 80 basis points of higher occupancy in downtown Toronto.

We have been monitoring the situation that we work out for you.

<unk> closely and.

Public release, they stated an intention to reject the leases at certain locations, which have been largely nonoperational.

E filing show that the authorized the rejection.

Expired leases in downtown Toronto, none of which are 357.

Did they remain operational in the building and they are current on their rent payments.

Continuing to learn the situation closely.

Our net asset value per unit decrease from 34 71 in Q2 to $34 42 in Q3, primarily attributed to $17 million of fair value decreases across our portfolio.

Where properties are valued under the direct happening third quarter cap rates were five 7%, which consisted of 353, 4% apply for downtown Toronto is seven points on the 3% applied for other markets year over year, our cap rates increased.

Five basis points in downtown Toronto.

Data points and other markets.

Our operational and help to relieve some of the upward pressure on cap rates year over year, our weighted average embracing command rents increased by approximately 75% and we used secured 614000 square feet of leasing this year and ethics, 18% higher rents on expiring.

In addition to continuing to track observable easing of market data, we intend to thoroughly appraised approximately 25% of our portfolio each year.

At the same time, our lenders also perform their internal analysis and they engage their independent appraisers to value our assets prior to mortgage refinancings.

This year, we have successfully completed our refinancing program.

Aggregate, we were able to finance $250 million of mortgages for $278 million at a weighted average term of four six years and interest rate at six 3%.

This is a reflection of our portfolio quality and our strong relationships, we have with our lenders.

Our carrying value for income producing portfolio is a proximately $460 per square foot.

First is implied trading price up about $250 per square foot and in addition, we have $3 3 million square feet of residential density so not sure where the carrying value of about $80 per square foot.

Currently we're seeing replacement cost for new office buildings over $1100 per square foot.

So it's very difficult to donate supplies.

At the same time, we continue to see strong population and job growth in Toronto, So that bodes well for the location and quality of our buildings.

We think we have one located real estate in a very high growth city. So that went off the sentiment in the market improves unit holders are well positioned for attractive returns.

Our Q3 leverage ratio increased 50 basis points from last quarter to 48, 8%.

2200, Eglinton, we haven't faced with centre court to jointly develop the first 1000 condos.

We anticipate the launch in early 2024 and that goes well, we have a blueprint to monetize future phases not long after.

At June 12, King, we jointly own Atlanta Assembly of three small heritage buildings with our partner and a very well okay. The area.

We achieved this year to create 875000 square feet of incremental residential density and a 190000 of nonresidential density can potentially facilitate higher end hotel and retail offerings.

We have already H E B R E market insight and we'll provide an update if we have more information on our next call.

I turned 50 Dundas, we think the recent removal of federal and provincial tax on purpose built rental housing will have a material positive impact on development returns.

This project will be attractive to institutional investors and we all look for opportunities to sell down our interest in bringing in external capital.

In addition to the already dog developments, we are working on other ways to reduce risk.

Well go to the highest and best use of certain assets or opportunistically sell assets improve our balance sheet with that I'll turn it back to Michael.

Thank you Jay.

I did want to revisit a word that gorguze about dislocation.

There's a lot changing in the office market. We've had a lot of tours recently, we had a session where we had 45 lenders do a tour at most of our buildings in an hour and.

They were really impressed with the buildings that have approached us to work on either renewals or putting up new money.

Tours with other tenants with other lender separate from that.

And the buildings look great and people are really like them and I think they have a long valuable life.

And we're just going through a very.

Difficult time for the sector, but we're excited about the future of what we own so with that we're happy to answer any questions.

Thank you.

Well now begin the question answer session did trying to question queue. You May Press Star then one on your telephone keypad.

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Speakerphone, please pick up your handset before pressing any keys.

So we are drawing a question please press star and chip.

For the moment, it's called <unk>.

The first question comes from Mark Rothschild Canaccord Genuity. Please go ahead.

Thanks, and good morning, everyone.

Maybe.

For Gordon just in regards to the occupancy it sounds.

Sounds like the committed occupancy is materially higher than the current in place, which is already higher than the market.

Should I infer from your work that you are saying that in place.

To get to closer to 90%.

In the next two years around 2024, alright, I don't want them misunderstand, what you're saying.

Yeah. Good question Mark.

It's in line with what we're saying we're going to see probably committed occupancy.

At or around 90%, we're thinking kind of by 2025.

But currently committed as a bit of a lagging indicator because those are committed occupancies, where we have deals where we're either building the space for them now.

We have full commitments with them, we're just doing the work and it takes a little bit of time for that to occupy so we think by 2025 that underpin a trend up to your point yeah.

Clarify so next quarter, we're going to be able to close quite a bit I think around 60% and typically it takes off his action towards that end of the year.

Extreme periods are longer and we're continuously replacing tenants with churn. So there is higher growth.

But we feel pretty good about our committed occupancy, but the downtime in between tenants preparing our space is typically about six months to do that here.

And presumably you're just making sure I fully get that Theres no material lease expiries that would offset that over the next year and a half that you're aware of at this point.

See retentions, but a little lower of late than historically so you.

Do you think that by 'twenty five it'll be.

Closer to what's not at 90%.

Yeah, Mark So there is a table in our MD&A that shows the leases expiring and our analysis has been secured already I think as of quarter end, we were at 37%.

We are working on a number of leases that will bring that average up in Q4 in terms of major expiry. There is one larger one towards the end of next year, we're working on at the actual.

Expenses for that space, but is it a higher number by the time that we begin the year.

Okay great.

Since I have you you spoke about a couple of different.

Areas, where you can generate liquidity or reduce leverage due to selling other assets.

What extent are any of these near term actionable items that we should expect maybe in the next three.

Three to six months something like this happening or are these just potential longer term ideas.

Mark.

We're just going through our budgets now and.

This is a difficult time, because we're still working what the plan is for next year, but in the near term. We don't have anything right now that's actionable three to six months, we definitely good when you're setting up.

What it is we want to look at bringing in capital and so we're looking at putting capital into partners in some of our developments we mentioned.

About a quarter of the.

Edwards inside we bought our partner Infor.

And we're looking at 250 Dundas.

So look to see whether it makes sense to sell any assets, whether it's at western Toronto.

We're just telling you. This is what we plan on doing or not.

We don't have any specifics.

Okay, great. Thanks, I'll turn it back.

The next question comes from Laura Martin.

Calmar designate please go ahead.

Thanks, Good morning, everybody.

Michael You mentioned you know conversion rates on tours are going up do you happen to have sort of any any numbers, even rough just to give us an idea of what conversions look like versus maybe the past 12 or 18 months.

Yeah, we've seen it go up to the question one we've seen it go up a little bit more kind of converting about 25% of the tourists right now.

But the philosophy of the tourism picked up dramatically.

Since probably Q2.

We've seen dramatic uptake sat in our downtown portfolio and what's given us a bit of optimism as we started to see some more tours in a tertiary markets like Calgary and.

Toronto suburb Mississauga as well.

Okay, and I guess, what would sort of be a normalized conversion rate on tours.

Usually if they're touring and it's at scale.

Probably probably being around the 33%.

Range.

Okay. So you guys arent aren't too far behind and that's what's nice to hear.

And then I won't spend too much time on the rework thing, but just wondering if you'd had any inbounds on on 357 days from any potential.

Tobacco.

So firstly.

Everybody asks us about we were like we have access to something.

We.

They go through like 400.

Or hunter H filings to find out everything so as long as people want to ask questions.

Able to answered with the same information that's available to you.

We work has been very consistent that they feel is important to them.

Yes.

And they've got a fair amount of people in the building and it looks like you're getting more people in it. So we're pretty comfortable with the building and are paying a fair amount of rent and it's a very desirable building, but I don't think we are.

Like we're not getting inbound from anybody saying they want to lease the building otherwise under contract with somebody else, but we argue in some other people that they'd love to manage the operation.

So we need to do.

Okay Fair enough and then maybe just on the Q1, two king what would sort of be a what do you think would be kind of a realistic price per square foot.

On that given sort of the little bit of a cooling off.

Some of the demand for land and development density.

We don't know what's happening is 212 King is probably among the very best sites in the city because it's right at the border of the financial core and key west.

That's the good news.

What we're seeing on the development side is smaller projects are in favor of larger projects that that's about.

About $1 1 million square feet and I know there's people that are looking at it I'm trying to figure out how do they manage risk on such a large project. So it could be a two groups. One department wanted to condos in the same building but.

You know we're waiting to see we don't have a lot of insight for you.

Fair enough. Thank you so much for the color.

Sure let me take that backlog, we're seeing some deals being done now I had relatively good sites you know definitely in the top quartile.

Between 106 hundred $35 a foot.

So there's deals happening.

I'm, just saying that the Mega sites are harder to do now where maybe a couple of years ago people want to do the biggest like possible now.

Managing risk through looking at three or 400000 square foot site is more attractive than a million square foot thick.

Okay, great. Thank you.

Yeah.

The next question Sampson insurance universe of corporate Securities.

Please go ahead.

Thank you operator, good morning, guys.

Got it.

What size of monks, but just going back to 24 D C.

Here's some color on the communications you have them they take them in symptoms of new wins, and what you're seeing in terms of the box office bombs in the space utilization needs.

Yeah.

Yeah, No. That's a great. That's a great question. So 2024, we're actively speaking with all of the expires to Jay's point you know, we're hoping next quarter, we'll be able to talk about a large renewal.

We've been working.

Working with some tenants for the most part we've seen it it's probably a 50 50 ratio of tenants that are growing and tenants that are downsizing. So you know with this one large tenant we're dealing with that now that were conditional line, they're actually growing.

A little more than a third of their footprint.

And they really liked the flight to quality until they're there they're moving to other locations and into this one which is good.

<unk> got a lot of.

A lot of other groups probably in the same vein that are downsizing a little bit. So if you're a 10000 square foot tenant we're seeing some downsizing to above 7500 square feet. These are more so for professional services firms, we're seeing a lot more like private law firms, you know fund managers and things like that in our portfolio, we're seeing them downsize a little bit, but we feel pretty.

Good because they're taking long commitments, they're doing five seven.

Sub 10 year leases.

But back to your question is about 50, 50, downsizing and and growth.

And then how they're building their space you know, we're seeing a combination almost an equal combination and post perimeter offices and that NASA motion concept space.

Okay.

Thank God. So does this also mean that from your side in terms of fees negotiations had been held and do a bit more.

I'll keep it short compared to like what you would have done I guess.

Yeah, you're asking about the capex and the leasing costs, which is interesting because of how the market moves so quickly that we're evaluating our strategy.

I'm pretty sure you have definitely gone up, but we think that keeping the buildings full.

Yeah. The tenants to your last question they want a great space for an employee more people are coming in but.

Office environment has changed they like more meeting rooms more open space concepts. So a lot of that money has been going into opening up a lot of its space, which creates more value and variety of environment in the buildings.

We're contemplating for example.

You could be getting cash or free rents, giving out free rent has a much lower opportunity hostile we'll explore ideas to work with the tenants work with their business plan by the daytime alleviate our capital pressures as well sorry, and one interesting thing that we're seeing in an observation.

When youre seeing tenants and there's so much fluidity in terms of growing and shrinking in size, there's a new cost, but not a landlord not a lot of landlords are talking about but I think it hits everybody and that's how you're shuffling the tenants in the building if a tenant is getting bigger you sometimes have to make accommodations with other tenants to move them.

Relocate them, there's always cost associated with that and then how you mentioned those costs is how you measure any ours and often they go in there too. So I think that's a different cost pressure that a lot of landlords are feeling and I haven't heard too many times to many people talk about it but it's a real cost of a transaction today more so than I've seen it kind of 20 years.

Oh, that's amazing colleague base.

No when you when you talk about that and actually going out from your current portfolio. What are you seeing them go with him. This morning, too hard, but I think last April up all that I've taken notes without intolerable ballpark.

We haven't seen too.

If we've lost tenants it's huge it's.

It's usually because they've gone into sublet space and it'll be you know net net quality it will be the same.

The satellite space as everybody knows on the call is dramatically more affordable. So we're seeing some people absorb some of the sublet space because it's got more flex pentair.

In terms of years and then also in costs are.

But we haven't seen many people leave the quarter to one of the suburbs are or.

Or vice versa see it spread as a matter of people coming from the suburbs into the car.

Awesome.

So most of the color I'll turn it back.

Thank you very much.

The next question comes from Sam Damiani TD Cowen go ahead.

Thanks, and good morning, everyone maybe.

Maybe just to start off talking about.

Dispositions in the leverage ticked up in the quarter.

How are you thinking about your target leverage over the next number of years with the dispositions you've got in mind.

And how that might impact the ability to sustain the current dividend.

Yeah.

First I'll talk about the leverage down.

We're going to look for opportunities to Delever.

We don't have the precise data yet because we were working through an idea to bring in partners on joint ventures, but.

If we weren't able to execute on any of the three projects that will have a positive impact on our leverage and also without sacrificing yield because that is more for development density.

We don't have a target on that unless we can.

Predict what we can do but our goal is definitely to take the leverage down over the course of the next year I think by February when we get to 2024 forecast will be able to give a clean number.

Leverage and liquidity are definitely top of mind.

And I guess your current thoughts on how the distributions.

It gets affected by all these.

Ideas.

Hum.

You know, we're looking at the whole business I mean, I think the market says that were yielding too much we're committed to the dividend. It's a board decision will look at everything but right now it doesn't feel like the stock market is working very well with the valuation of $250 a foot. So we'll look at it.

With the board, but I think what GE and I referred to both individually as well.

We're doing a deep dive on all of the assets different ways to go forward to surface value.

And we're having a meeting we just had our board meeting yesterday, but a lot of the board meeting was talking about the things. We're looking at for December. So we'll have a lot more information for year end.

Okay, Great and look forward to that for sure I guess in February.

And then I guess it was been talks a little bit already but you know there is a lot of leases rolling next year I guess, one large one at the end of the year, which hopefully next quarter, we get some good news.

But.

Aside from that one are you guys feeling pretty good about 2024 lease rule.

Yeah, I would say so you know we're still working through some some deals they're taking a little bit longer to get done, but the one thing I'll say about our team is they're engaged with absolutely everybody directly with their broker so.

There won't be any surprises.

Okay, and then last one for me we've got a lot of discussion on the increased cost of leasing, which you know in past cycles has been purely a function of the vacancy in the market, but this time around it seems more like.

Tenants are demanding a different thing from their office space I'm just wondering what your thoughts are on how that evolves as well some bought since you wouldnt leasing markets. Once again, taking up a second or so leases that cost of it's sitting up into the space going to stick or.

Are there other landlord costs going to drop to more favorable levels.

Yeah, I think Sam we spoke led to September six we spoke about earlier.

We feel that we're not in the equilibrium, we're spending more per square foot now that will be over the long term.

But the value of a tenant today, it's pretty good. So if it gets thing you like $55 gross.

Waiting 12 months it gets hard to strike.

Alright, so if you forego that $55 spend so much that's 55 Bucks is $5.50 per square foot, we're not going to make it up so we kind of go with the market on the Ti I think a lot of key item driven now I've talked to the gone up since the Covid started and there's clearly a lot more negotiating power from the tenants.

Made a comment that was picked up in the globe and mail about a bunch of buildings that were obsolete what I really focused on was.

I think we'll see more and more buildings being torn down with apartments being built the city is focused on this I don't think they want to make a universal Paul on how.

Any building can be torn down and the office can be replaced but I think what we see is the supply of office space will be coming down.

We're not seeing a lot of new buildings being built we're seeing more people coming back to work.

And we're seeing companies a lot of companies are growing so I think that the market is likely to get better based on things that are not changing let alone. If we start to see interest rates coming down and economy, flatlining, but actually growing so yeah, there's no doubt that.

The focus that we're doing is to make sure that we keep our buildings full as possible through this trough and as we come out of it we would expect that.

Would revert in the numbers, we use are very simple halfway between where we were in 2019 and where we are now seems to be.

As good an estimate as anything.

Very helpful. Thanks, very much.

Yes.

Once again, if you have a question piece that's star then one.

The next question comes from Matt <unk> with National Bank Financial. Please go ahead.

Good morning, guys.

Continuing along that line of discussion.

74, Victoria Street, and 137 Young Street.

Pretty short weighted average lease term.

How do you think about leasing in the context of your view that again some of these buildings, probably the highest and best use.

Some residential to them.

When you renew tenants in place at that building.

The ability and intent to be rebuilt rebuilt a platelet pizza.

Yeah, that's a great question, Matt and I was.

Uh huh.

Answered on an earlier question at least enough back towards the end of next year.

In November our Gordon and the team are actively in discussions with a couple of times.

Longer term.

The resulting potential and again.

The ground floor, and it's doing very well and we actually bought six eylea number here back to protect our development right. What we're really doing is really contemplate that.

Capital, we need to put into that building and as you know what the value is but there is a couple of prospects and different uses and well located and we're seeing good demand specifically on the education side.

And also I think in building up our government tenant as well it was a it was a pass for office and other agencies.

Within the building at the same time, we think there's opportunity to extend the lease.

And so there's a lot of options.

On the table and we're just working through all the plans to come out with the best scenario for us.

Matt.

One thing that you think about that building. It has both residential and commercial density. So I was referring earlier about the ability to.

Not have to replace office space definitely doesn't require it. So what are the things. We're working on now can take longer than next month is looking at the various choices without building a determining what's the highest return, but there are lots of choices.

Apparently you're sticking with existing tenants and some of the people we're talking to now.

Okay makes sense and then just a quick accounting one because I think 366 day comes in next quarter or is there going to be any straight line contribution in Q4 or will it be just the kind of the first three quarters of the 'twenty 'twenty four and then will convert to cash rent.

Upon kind of totally taking is that a question for me.

[laughter].

Uh huh.

Not only that.

Got it.

Joe.

Later half of next year, not this year and so.

So depending on which side of the building, we're working with them on creating a really beautiful.

Office environment for them.

I know in the latter half of next year and out.

As always because reported revenue and income when it makes economic occupancy so when's the building comes out of that.

The income will come in it will also not into comparable property NOI numbers, but it will be a total NOI.

Okay fair enough, so I don't be a straight line contribution.

Okay. Thank you.

Yeah.

This concludes the question and answer session.

I'd like to turn conference back over to Mr. Cooper for any closing remarks.

Thank you very much I'd like to thank everybody for listening and asking questions or call Jay Board and I are always available. If you have any follow ups and we look forward to speaking to you at the year end quarter conference call in February. Thank you very much.

Okay.

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