Q4 2024 Dream Office Real Estate Investment Trust Earnings Call
Good morning, ladies and gentlemen, welcome to the Dream Office REIT Q4, 'twenty 'twenty four conference call for Monday February 24th 2025. During this call management of Dream Office REIT may make statements containing forward looking information within the meaning of applicable securities legislation forward looking information is.
Based on a number of assumptions and is subject to a number of risks and uncertainties. Many of which are beyond dream office reach control that could cause actual results to differ materially from those that are disclosed or implied by such forward looking information.
Additional information about these assumptions and risks and uncertainties is contained in dream office reached filings with securities regulators, including its latest annual information form and M. DNA. These filings are also available on Dream office reached web site at Www Dot Dream office REIT Dot C. A.
Later in the presentation, we will have a question and answer session to queue up for a question. Please press star one on your telephone keypad.
Speaker Change: Your host for today will be Mr. Michael Cooper Chair and CEO of Dream Office REIT. Mr. Cooper. Please go ahead.
Speaker Change: Thank you very much and welcome everybody to Dream officers fourth quarter Conference call.
Speaker Change: Gordon water widely the Chief operating officer, and JJ I'm, the Chief Financial Officer before they speak I just wanted to say a couple of things including <unk>.
Speaker Change: We're very pleased to have met.
Speaker Change: Of that about 60% of our entire debt coming up in 2025 and virtually all of that has now been taken care of in terms that we're pleased with.
Speaker Change: In addition, we've made progress on the sale of 430 universities now that one is firm.
Speaker Change: On the capital side things are going very well.
Gordon: On the leasing side Gordon will share some success stories with you regarding 74.
Gordon: In terms of releasing of it.
Gordon: How many deals we've been leasing.
Gordon: And generally the new statistics that are out show that on peak days of downtown Toronto, We're now up to 80.
Gordon: 86%.
Gordon: Yeah.
Gordon: Just there's been a huge increase.
Gordon: Non drop down and the work from home.
Gordon: <unk>.
Gordon:
Gordon: Over.
Gordon: Five years since.
Speaker Change: Pardon me, ladies and gentlemen, it appears we have lost connection to our speaker line.
Please standby, while we reconnect thank you for your patience.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Pardon me. This is the operator I have reconnected the speaker line and we'll continue please proceed.
Gordon: Thank you operator, I'm sorry about the connection of Gordon do you want to continue.
Gordon: Yeah. Thanks, Michael it's really nice to be with everyone again today.
Speaker Change: You know as you know downtown is continuing to experience one of its highest vacancy rates in its history as of today currently stands at almost 20% across all classes.
Speaker Change: This is due to the potential for even more space entering the market as tenants either rightsize or expire.
Speaker Change: This obviously makes a difficult operating environment for commercial space in Canada.
Speaker Change: All that being said our team continues to get deals done and find very creative opportunities to maintain and grow our occupancy.
Tours have picked up year over year due in large part to no new supply in the pipeline coupled.
Speaker Change: Coupled this with the fact that we greatly improved our assets during a trough market and as we discussed on previous calls we've made an effort and effort to invest and isolate quick rent ready suites to catch demand and compete on timing.
Speaker Change: As a result, our portfolio continues to lead the market on shared numbers of transactions.
Speaker Change: And this year, we did more total deals than any of the previous four years.
Speaker Change: From a pure volume perspective, 2024 marked our most active leasing year in terms of deal velocity since pre COVID-19.
Speaker Change: This past year, we did 114 deals total of which 54 were direct new deals and 60 renewals totaling over 635000 square feet.
Speaker Change: The 114 deals completed this year was higher than the 98 and 2023 for 780000 feet and the 93 and 2022 for 600000 feet.
Speaker Change: Notably rental rates remained strong and increased across the board with net rents holding steady in Toronto at 30 to $35 a square foot aligning very well with their business plan.
Speaker Change: Ultimately, yielding a 20% spread against expiring rents.
Speaker Change: However, it's important to note that we continue to see the combination of higher material and labor costs, along with increased commissions, which are new deals compressed net effective rents to the mid teens in Toronto.
But on the flip side. This was offset by our renewals that performed much better than budget with any errors in the mid to high twenties.
Speaker Change: Our committed occupancy in downtown Toronto, which constitutes the vast majority of our assets stands at just under 85% to close out the year.
Speaker Change: This includes the drop in occupancy quarter over quarter due to the known vacate we had of 206000 feet at 74, Victoria <unk>.
Speaker Change: Of which we were able to successfully mitigate and renew 64000 feet and I'm also really excited to talk a little bit later on the call about all the commitments and things we have going forward with that asset.
Speaker Change: From a macro perspective. This compares favorably to the overall market class a occupancy at 83% and the B and C class occupancy at 72%.
Speaker Change: Our team has excelled and tenant retention moving tenants throughout the portfolio to accommodate their fluctuate fluctuating size requirements are great.
Speaker Change: All of this is a large law firm tenant from 438 University that we moved to Adelaide place and signing a large media tenants at 30, Adelaide, which is a full building. So we can start relocating some tenants over 74, Victoria and fill that asset way ahead of plan.
Speaker Change: We have accomplished our ground floor retail goal of back filling all retail vacancies with premium restaurants. Some of the best in the city all of which will be opened by this quarter.
Speaker Change: Late last year, we launched our modified suites program renovating it furnishing over a dozen units good existing structures at a low cost.
Speaker Change: Since their completion last September several of these modified suites have already been leased and a few are in the process of being leased.
Speaker Change: As we move into 2025, we now have a selection of renovated model and modified suites within the base Street collection that should drive leasing and have greatly improved tour velocity.
Speaker Change: These suites, coupled with our 100% completion of retail and the core has been a real catalyst for our uptick in tour activity and gives us the optimism to continue to hit our guidance in the years to come.
Speaker Change: Regarding absorption occupancy and ultimately NOI growth.
Speaker Change: The one thing I'm really excited to talk to you about is last year, we identified the 206000 square feet of government departure at 74, Victoria, We identified this as a major risk they.
Speaker Change: They expired at the end of 2024 and in that short period, we renewed 64000 square feet of this space at very high rents with minimal capital investment and we're very pleased on the call today to share that we've also secured an additional commitment of 55000 feet as well as another conditional at least for another 50000 feet.
Speaker Change: And we're in negotiations for an additional floor as well I want to emphasize that in a market, where b and C. And overall stock is sitting bacon. Our team is proactively leased 170000 feet.
Speaker Change: In less than six months, taking over an asset that has been 23% occupied at the lease expiry to what we think is going to be closer to 80, 690% in a very short period of time by all industry accounts. So I'm really proud of the team's efforts on all of this work.
Speaker Change: We expect to see the continued lease up of Adelaide place and our base Street assets along with the improved tour traffic at 67 Richmond's Cup.
Speaker Change: A couple of these with our retail being 100% leased to new restaurants, we're very confident NOI will continue its growth trajectory car guidance.
Speaker Change: Given market uncertainty, we use a bottom up approach to forecast property level cash flows by reviewing suite conditions tenant profiles and renewal likelihood in the next 18 to 24 months beyond 2026, we rely on broad market assumptions, we anticipate average in place downtown occupancy to dip to 81% in <unk>.
Speaker Change: Thousand twenty-five before rising up to the high Eighty's and.
Speaker Change: In 2026, and stabilizing above 90% in 2027 <unk>.
Speaker Change: Despite having a very strong year of leasing at 2024 were being cautiously optimistic but feel we're in good shape for 2025 with a good portion of renewals already addressed.
Speaker Change: We're targeting approximately 275000 feet of speculative leasing in Toronto made up of new deals and renewals this year to hit our committed occupancy goal of high Eighty's for.
Speaker Change: For some context, we've done about 550000 feet over the past two years on average so I feel really good about our forecast a further support.
Speaker Change: The team is actively working on over 30 deals in Toronto currently representing about 300000 feet. These are very active prospects in various stages of negotiations and we'll have more exciting news to come on these and subsequent quarters.
Speaker Change: Based on the criteria I feel we're very well positioned to meet our guidance and hope to see additional improvements as the year goes on.
Speaker Change: Look we all recognize the costs associated with closing deals have risen significantly.
Speaker Change: <unk> tenants increasingly expect turnkey office space from landlords, including Dream office.
Speaker Change: We're accommodating this demand by offering cash inducement packages to cover fit up.
Speaker Change: Capital costs, ranging from 75 to $125 a square foot.
Speaker Change: Or by completing these upgrades speculatively to enhance leasing velocity.
Speaker Change: <unk> commissions have also escalated with landlords, providing higher commissions two of dice brokers to direct their deals to our buildings.
Speaker Change: The one silver lining to the increased costs as the associated increase lease term that comes with it often by simply spreading the cost and amortization to the tenant.
Speaker Change: As such we're seeing our average watts for the portfolio grow and they are now a very healthy almost five and a half years on average this outperformance of market.
Speaker Change: Given the costs and emphasize emphasis on liquidity.
Speaker Change: We will always remain a hypersensitive on covenant always.
Speaker Change: We work in lockstep with our debt team and lenders to ensure we have the appropriate security and guarantees to support the costs, but in short term value and stable cash flows for our assets.
Speaker Change: We remain very cautious and thoughtful with all of our capital expenditures ensuring that every dollar is allocated towards driving more leasing activity and maintaining the life and safety of our buildings. So our tenants have a great experience.
Speaker Change: Reflecting on our past decisions, we're very pleased that we upgraded most of our properties prior to Covid.
Speaker Change: As they are now well positioned and well located to capitalize on an office market recovery.
Overall, we're pleased with the progress our team has made in maintaining the portfolio's occupancy and rental rates, we look forward to the coming year, where we anticipate an improvement in the office leasing environment, which ultimately should translate to higher occupancy rates and improved cash flows.
Speaker Change: I want to close today by sharing that we've made substantial progress in a very challenging operating environment by successfully renewing and replacing loans, which Jay is going to speak about shortly divesting noncore assets and always maximizing leasing opportunities and absolutely every way we can.
Speaker Change: Our business is now more secure with increased liquidity and we'll continue to seek strategies to enhance business value and manage risks effectively in 2025 and beyond I honestly couldn't be more appreciative of our teams' efforts I'm always very grateful for our clients' commitment to us and I want to thank you all for your interest and support and the good things we're doing.
Speaker Change: A dream office and I'm going to turn it over to my good friend Jay Jay.
Speaker Change: Thank you God Hi, everyone. Good morning, I'll start off by giving an overview of our financial results and then share some insights on how we're forecasting our business for 2025, we.
Jay Jay: We reported diluted funds from operations of 72 cents per unit down from 75 cents per unit in the fourth quarter of 2023.
Drop was mainly due to higher total interest expense of about seven cents, which is partially offset by lower tenant provisions of three cents and higher EF all from our investment agreement industrial REIT units of one set.
Jay Jay: Included in the 72 cents or roughly seven cents of nonrecurring cash adjustments with four reported in our MD&A line item other income and <unk> income from sold properties.
Jay Jay: Our total 2024, our reported <unk> per unit was $2.98, which is about 4% higher than 2023 is if we exclude all the nonrecurring income items during the year. The recurring <unk> was around $2 88, which is on the higher end of the guidance. We gave in February 2024.
Jay Jay: $2.80 or $3.90.
Jay Jay: It'll compare to property's NOI was flat compared to the same quarter last year or 2% higher for the year relative to 2023. Similarly, we have delivered S. P NOI that aligns with our forecast.
Jay Jay: Managing through another challenging year in the office sector, we're pleased to deliver stable financial and operating results exceeding the midpoint of our communicated guidance.
Jay Jay: Our net asset value per unit was $59 47.
Jay Jay: About 3% from Q3 of $61.24.
Jay Jay: The decrease includes $39 million of fair value write downs on investment properties.
Jay Jay: During the year, we externally appraised at $894 million or 41% of our income portfolio.
Jay Jay: In addition to the valuation process as part of our quarterly reporting lenders also internally review values engaged third party appraisers as part of their credit approval process over $800 million of properties were reviewed appraised last year as part of the refinancing program, which also supports our carrying values.
Jay Jay: In addition to meeting our financial targets, we're happy to have executed on several key initiatives to reduce the risk across our business.
Jay Jay: 2025 was a significant year for refinancing as we had 744 million mortgage and credit facility come in it.
Jay Jay: This represents almost 60% of our total desktop web.
Jay Jay: We're pleased to announce that to date, we've refinanced were received credit approval for 711 million.
Jay Jay: Million of maturing debt without any pay downs.
Jay Jay: It was attractive to the REIT.
This includes the 375 million revolving credit facility that expires in September of this year for which we've received conditional approval for extension to September of 2027.
Jay Jay: We're in advanced negotiations for the remaining $30 million of mortgages and expect this to be completed in a few months.
Jay Jay: In 2026, we have $165 million of mortgages maturing across six properties at a weighted average interest rate of four 8%.
Jay Jay: Based on the cash flows of these assets, we think the loan to value is quite conservative and we're very confident in our ability to refinance these loans.
Jay Jay: Overall, we feel great that we've been able to address all of the refinancing risks in our business for at least two years.
Jay Jay: On January 24th we announced the sale of 438 University for gross proceeds of approximately $105 million or about $327 per square foot.
Jay Jay: Part of the transaction, we were able to secure additional benefits for the REIT, including relocating tenants at 438 University two other buildings in our portfolio and securing rights to uncover our building at 250, Dundas, which is one of our best development sites.
Jay Jay: We also earn a property management contract of our feeds for Dream office for at least three years.
Jay Jay: These benefits are worth at least $20 million.
Jay Jay: We're closing the transaction this week and we will use the proceeds to pay out that $69 million of mortgage and pay down part of our revolver.
Jay Jay: This quarter, we also announced the potential conversion of our 126000 square feet Office building ethics, all six fourth Avenue in downtown Calgary into a brand new 166 unit rental apartment building.
Jay Jay: We're in the process of relocating several office tenants within 606 fourth to the adjacent building at four four for seventh Street that we also own.
Jay Jay: So this means we end up with a substantially full office building and the new apartment rental.
Jay Jay: We think we can achieve a 6% development yield on apartment project, but more importantly, this conversion that reduces leasing and financing risk ethics 064.
Jay Jay: And also it improves our overall income profile and quality of our portfolio in Calgary.
Jay Jay: We're currently finalizing the grant and government financing, we're in advanced stages of securing a grant of up to 11 million from the city of Calgary to complete the conversion.
Jay Jay: Also in the process of securing government financing for a 10 year loan and we are looking at bringing in a partner on the project.
Jay Jay: Further reduced our risk and equity requirements.
Jay Jay: We're excited about the project and look forward to providing updates over the course of the year.
Jay Jay: We will continue to look for opportunities and.
Jay Jay: Our strategy is to reduce risk in our business and find creative asset management and leasing strategies to improve our income profile yeah.
Jay Jay: The office sector remains a complicated sector to model and forecast, we're seeing touring activities improve since the new year, and we think that will benefit from a better leasing market over the next 24 months.
Jay Jay: And approve rents in occupancy and a reduction in tenant inducements, we think it's still difficult to predict occupancy and NOI for 25, well we've shared the key assumptions we use in our model.
Jay Jay: Or it has spoken extensively about our occupancy projections. So on a steady state basis, assuming no transaction activities, our model expects to produce between $2 65 to $2.70 of recurring F O per unit in 2025.
Jay Jay: We expect our comparative properties NOI to remain flat to positive low single digit growth in 2025.
Jay Jay: After the close of 438 University, we expect to deploy cash proceeds to repay the mortgage on our credit facility outstanding.
Jay Jay: And we expect leverage to improve by 200 basis points.
Jay Jay: We'll continue to look for opportunities to continue to reduce debt and improve the occupancy.
We expect 11 million of DNA and to maintain our $1 per unit of annual distributions.
Jay Jay: The Asian programs at our best buildings are substantially complete so we don't expect to have significant capital outlays over the next three to five years and these buildings are well positioned to improve occupancy in a competitive market.
Jay Jay: We look forward to providing more updates on our progress over the course of the year.
Michael Cooper: You for listening and now we'll turn the call back to Michael to answer any questions that you may have.
Jay Jay: Operator can you please.
Speaker Change: Let them ask questions.
Speaker Change: Absolutely we will now begin the question and answer session to join the question queue. You May Press Star then one on your telephone keypad, you will hear a tone acknowledging your request.
Speaker Change: If you are using a speakerphone please pick up your handset before pressing the keys.
Speaker Change: To withdraw your question. Please press Star and then two we will pause for a moment as callers join the queue.
Speaker Change: And your first question today will come from Mark Rothschild with Canaccord. Please go ahead.
Mark Rothschild: Thanks, and good morning, everyone I'm not sure. This comment is more for God or for Michael.
Speaker Change: Spoke about tourists being up and some optimism on improving occupancy.
Speaker Change: When you when you make these comments just about your portfolio, where do you think this is reflective of some improvement in the market overall and maybe just expand on how you see the market evolving over the next year.
Speaker Change: That's regard.
Mark Rothschild: That's great question Mark.
Mark Rothschild: Inevitably if we're getting more tours.
Mark Rothschild: Any broker worth their salt would be showing other buildings as well too. So I think the more traction we're seeing it's probably safe.
Mark Rothschild: Safe to say that it's picking up predominantly.
Mark Rothschild: Predominantly market wide.
Mark Rothschild: You know a lot of the tours that where we're seeing our on our base III collection.
Mark Rothschild: 30 day for example has seen the biggest uptick in tourists I think we attributed to meal has been completed.
Mark Rothschild: But we also have four deals that were currently working on at 330 day right. Now we don't know if that's one building in isolation, but the brokers and the managing directors that I speak to throughout Canada.
Mark Rothschild: They say Toronto is a is picking up right across the board for tours in general.
Speaker Change: Okay, great. Thanks, and maybe just one for Jay with the debt that's coming coming up more in 2026, it's not like there's going be a problem with refinancing the debt, but can you just talk a little bit more about the key.
Mark Rothschild: Costs that you would expect based on current rates.
Speaker Change: And.
Speaker Change: Maybe if you are you planning on upsizing, the debt to pull out of capital or how will that impact. The overall balance sheet. What are the targets. There yeah. Great question. So mark you're right. They're just five us very small mortgages. So I don't think Ltvs certainly the issue there if anything we could look for opportunities to finance, a we said that the weighted average interest.
Speaker Change: Rate expiring is 4.8, interestingly Cora has been dropping that as a benchmark. If we look at five year debt today. It's typically the spreads of 225, well see where that goes we still have a couple more months, but if you were to lock them in today its probably in the low fives five in a quarter it would be safe.
Speaker Change: Yes.
Okay, great. Thanks, so much.
Speaker Change: And your next question today will come from Sam Damiani with TD Cowen. Please go ahead.
Speaker Change: Thank you and good morning, everyone.
Speaker Change: First question just to clarify I go out on the sort of.
Speaker Change: This guidance and outlook that you provided where those on on committed basis are in place.
Speaker Change: Yes, just what gives you the confidence to meet the 81%. This year and then I think you said high eighty's mixture.
Speaker Change: Yeah, it's on a committed basis Sam and.
Speaker Change: It's just pure numbers like where we gotta do about 275000 square feet of new leasing from this point now till this point next year.
Speaker Change: We've got some renewals world in the pipe just on average if you take out in aggregate the last three years of.
Speaker Change: Gross leasing we've done we've done 600000 feet per annum. So based on what everything I'm seeing in the pipe. We've got 30 deals for about 300000 feet that we're trading paper on now.
Speaker Change: I feel really good about our about hitting those numbers yet so to clarify Sam Gores commentary was on committed occupancy.
Speaker Change: And our guidance that we provided the way we model is because we track against our in place NOI. So the metric we use internally as weighted average in place occupancy, we think that will be relatively fly across 2025, and our market, but we're gonna be seeing improvements on leases signed so we typically already have two to 300 basis points.
Speaker Change: Spread but towards the second half of 2025, we expect velocity that pick up and position us well for a 26, yeah and if a deal gets done today to Sam I think we've talked about this before but if a deal gets done today.
Speaker Change: It usually doesn't commence until 810 or 12 months. After once you work in the free rent or how you structured the deal so to Jay's point like we will get the deals done.
There's a bit of a downtime until the NOI picks up so that's that's that's exactly how we laid it out for everybody.
Speaker Change: Okay. That's helpful. Thank you and just on the beliefs expiry in the U S. This year well can you shed some light on where your expectations are there yeah sure just for everybody's benefit to at least say I was talking about is 185000 square feet at our building in Kansas City.
The lease is matures in December of this year are the rents in place are about $18. So the annual annualized NOI is about three and a half U S.
Seeing a touring and utilization pick up in the states you could probably read some of that in the reports Kansas City is one of those markets that we're seeing an increase in activity.
Speaker Change: We're actively working on a couple of different paths right. Now one is a renewal for a partial portion of them with existing tenant that wants to be there. We also have perspective tenants to have orders also reached out to us on our space and we've been actively working with a broker thoroughly. It's interesting. We also have some unsolicited interest to acquire the building for.
Speaker Change: Tenant usage, so we feel pretty good right now that we have a two to three options to look at that we're going to continue to work on it over the next.
Speaker Change: A quarter or two and we'll probably report our progress in the summer for you guys.
Speaker Change: So it sounds like.
Missing from those options as it was 100% renewal of the space, but with the existing tenant is that accurate. Yes. That's right. So it was consistent with a lot of the financial service users in the states. They have a review of the operations downsize, though those conversations are fluid so, but they do you want to be in the building and the mark.
Speaker Change: They just don't need as much space as they did before but for US we have the option to say hey, what's.
Speaker Change: What's the best path for us to realize the best income and value for the building. So we think we'll have opportunities to consider both our leasing and disposition path.
Speaker Change: Okay.
Last one for me is I guess callable question on I guess for Capex for 2025, I think you've provided that with some detail last year.
Speaker Change: Through the numbers and then you did say that would decline about 200 Bips. This year I'm. Just wondering if you have a year end debt to EBITDA target.
Speaker Change: So we're certainly looking at reducing at a if we see opportunities to delever through asset dispositions at a good value. We'll look at that internally, we're looking at a debt to EBITDA in the 11th but were always hoping to do better and now there's two parts of the equation and one is to reduce debt we have been very good on our capital.
Speaker Change: The other is to.
Speaker Change: Increase the EBITDA. So if the leases are signed.
Speaker Change: That's great because even though our in place EBITDA for 2025, it's still a bit higher you'll see that come down in 'twenty six.
Speaker Change: I think just any any other thoughts on capex numbers for this year in total yeah sure.
Speaker Change: Well most of our buildings as we said are have their program is substantially complete we allocated some and then we also have some pre development work at 6064. So a general rule of thumb is about our in our portfolio of dollar to $2 per square foot per year.
Speaker Change: And I think we're gonna be comfortable within that Gordon mentioned, we're doing a bottom up approach and we look at the Capex reports across every single building every single major component.
Speaker Change: So based on that I think most of the larger items have already been their trust over the past five years. So we're pretty confident in this estimate for at least three years.
Speaker Change: Great. Thank you I'll turn it back.
Speaker Change: And your next question today will come from surrounds sort of us with chroma Securities. Please go ahead.
Alberto: Thank you Alberto.
Speaker Change: Good morning, guys.
Speaker Change: Just wondering if I had been expecting any major.
Speaker Change: And he uses that could probably either expire or are you kidding me.
Speaker Change: Yeah. Thanks for the question side. So on the last question from Sam If you are.
Speaker Change: Haven't heard it the one at Overland Park, Kansas City is a larger one and with regards to the rest we don't have a lot of maturity. So if you look at our MD&A disclosures over 50% have already been addressed and with the remaining tenant Expiries I don't think anything has over 20000, so it's quite manageable and relatively small or pause.
As a space come compared to last three four years now.
Speaker Change: Everything Jay and say Jay saying is.
Speaker Change: Accurate you know just for some extra context for.
For you cite.
Speaker Change: Two of the deals that we're actively negotiating over 50000 feet.
Speaker Change: And and we've got another couple of pockets that are over 20000 feet. So theres some pretty skills scale deals.
Speaker Change: That should help us move the needle to hit our guidance.
Speaker Change: That's good color. Thank you for that.
Speaker Change: And part of your question for you you mentioned increasing touring activities this year.
Speaker Change: When looking at the space.
Speaker Change: Can you give me some color on the kind of thing.
Speaker Change: These are these properties is already in downtown are they moving in from outside can you give some color about it.
Speaker Change: Yeah, so they're predominantly downtown tenants, we're still seeing a lot of professional services firms.
Speaker Change: One group, we're not seen as much as we used to as tech firms are we usually keep track of who's coming through the buildings, we're not seeing a ton of tech come through it's mostly professional services firms government still is quite active.
Speaker Change: In the market.
Speaker Change: The province, being one of the most active groups.
Speaker Change: And and law firms, we always see a steady stream of law firms either partners, leaving for bigger firms to start their own firms and base streets, a perfect portfolio for them because they can get a full floor for about 5000 square feet on some of these assets so mostly professional services firms site.
Speaker Change: And gentlemen, going when it comes to these 10 cause pieces.
Speaker Change: Can you differentiate your portfolio versus the larger big full plants out there in the market.
Speaker Change: Where do you see that these are more specific these dealer could be smaller tenants horses.
Speaker Change: The largest piece is meant clinic, let's.
Speaker Change: It's a pushback of slots.
Speaker Change: Yeah, that's a great that's a great point, yeah, so our portfolio our core portfolio.
Speaker Change: <unk> to the smaller tenants you can go to a building in one of these AAA towers, where your 5000 feet on a 30000 square foot floor plate or you can get your own floor plate from five to 7000 square feet come off the elevator getting your space and have a faith Street address with dream. So I think that's a compelling feature.
Speaker Change: For everybody and the other thing that we've we've done a good job we're talking about a bottom up approach is we were been very pragmatic with our capital. So we've been improving our model suites and quick rent ready suites. So when tenants come they're not looking at something in base building condition, they're looking at something that's improved.
Speaker Change: That they can see themselves in and it also helps us compete on timing, so when all things being equal and Theres. Another landlord at the table, our suites are ready to turnover quicker and often we're able to catch our tenants as a result, so its been a pretty fruitful program for us.
Speaker Change: And actually on that program, but I'm just thinking you know what have you done that's coming in and it goes to the auction. They can probably designer then customize it could be it will use so how are you guys thinking about this.
Speaker Change: Waters, we pulled out and let's say it doesn't it comes and it doesn't you know you know.
Speaker Change: I'm bit of customization and debt.
Speaker Change: Does that increase decrease lead time always thinking about that.
Speaker Change: So.
Speaker Change: Yeah, Great question. So so about 40 years ago, we started our in House project management, and our self performance team for construction and.
Speaker Change: And these groups like we we have internally architects.
Speaker Change: <unk> people that can work and quickly improve space.
Speaker Change: He spoke for tenants. So it's been a it's been a great differentiator for us oftentimes. They go in we have one conversation our team can go and self perform the trades and get the work done much faster than if we took it to a G. C ran a process so.
Speaker Change: It's really helped us it's been a competitive advantage.
Speaker Change: And when we're planning these model and modified suites, we usually top designers get their feedback.
Speaker Change: And and and just go ahead and perform yeah. One other observation to that is out.
Speaker Change: While we know this is the larger tenants actually want more of a customization, they're committing for a longer period of time for a lot more square footage.
Speaker Change: And a lot of our base streak and boutique buildings tenants often make decisions closer towards the lease expiry and then when they are looking for space. They often want something thats plug and play so to gorge point, our designers have a lot of experiences with <unk>.
Speaker Change: Smaller tenant requirements, it's more functionality of this space, how many employees could it could be in there and then you have your common things that you need like kitchen Washrooms all of that so the design.
Speaker Change: Is uniquely tailored to the smaller tenant sizes, but they often.
Speaker Change: It meets their needs and they were ready to sign within two to three months.
That makes sense.
Speaker Change: And then my last question is more on a broader transaction market.
Speaker Change: Guys mentioned that you're going to see a dip in occupancy down and then probably the coffee heading towards 26.
Speaker Change: You know how is the private market seem that's why you're seeing a lot of people know actually what we're trying to do the math and trying to get a call. If you have transactions.
Speaker Change: Yeah. Good question, we think that this smaller buildings tend to have more markets you have high net worth purchasers.
Speaker Change: That market is fairly liquid the larger class b buildings are tougher to sell though what we found interesting is a lot of the buildings that we installed in our health <unk> Science district, they have unique users.
Users for those building. So for example, two years ago, We sold 720 Bay to a user for a conversion and this building that we sold for 38 University was also two of those tenants use.
And oftentimes there are synergies with these transactions because we're able to relocate the tenants. So at the end of the day when we add up all the value together the pricing is good.
Speaker Change: So, we'll see but oftentimes they transaction market follows up with the cash flows and the occupancy. So if we see improvements there are the interest rates are also lower now than they were two years ago. So hopefully it's throwing all of it a little bit, but we're focused on keeping the buildings occupied if they're occupied theyre attractive to both investors and.
Speaker Change: Purchasers.
Michael Cooper: Thank you for that color Jay and thank you guys I'll turn it back thanks.
Speaker Change: Take care.
Speaker Change: Your next question today will come from <unk> with CIBC. Please go ahead.
Speaker Change: Thanks, Good morning, just.
Speaker Change: Firstly following up on the occupancy outlook high Eighty's by by 2026.
Speaker Change: So it sounds like that's basically predicated on what's under discussion or are you factoring in any expectations for them just to broader market recovery on the back of RTL than just the passage of time.
Speaker Change: Yeah. Good question Smedes it's.
Speaker Change: It's a combination of both.
Speaker Change: Like our pipeline is pretty robust right now the team is working on some good deals and as Michael said.
Speaker Change: When he started off the call utilization the utilization has been picking up to 86% on peak days and we're starting to see.
Speaker Change: That continued to grow a little bit as more time goes on and one thing to keep an eye on is we'll probably have a new government at some point this year, what's their mandate going to be and the federal government. In every major market makes up a pretty large portion of the denominator in terms of office space. So you know depending on what that return office.
Speaker Change: And Dave is going to be I think it's gonna help spur even more on non peak days Mondays and Fridays.
Speaker Change: But it's a combination of both our leasing targets and our optimism and people coming back.
Speaker Change: Right and it does sound like tours that picking up and just leasing volume myself generally like so when would you expect tea ice to start to come down is that more of a 'twenty 'twenty six improvement in.
Speaker Change: What do you think market vacancy should be to cause ti's to start to inflect downwards. So that's a great question I actually spoke about this with with an investor last weekend.
Speaker Change: It's interesting usually a landlord's market starts to turn at about 90%. Once you start getting in the mid nineties, you'll have a little bit more leverage to push back on some of these.
Requests.
Speaker Change: That being said you know while there is still vacancy in the market and while there's still uncertainty around unit prices. So materials labor all these different things with what's going on from a macroeconomic perspective, I think there's still some uncertainty in the market also to brokers are getting paid more and brokers.
Speaker Change: Getting paid as much like taxes, they never go back down once they hit a certain hurdle. So I foresee that cost always kind of staying where it is and just with the uncertainty around unit costs for materials things like that.
Speaker Change: I suspect.
Speaker Change: They will continue on a per square foot basis to stay relatively high.
Speaker Change: For at least another 18 months to 24 months and then once the general overall.
Speaker Change: Market occupancy starts to tighten a little bit.
Speaker Change: Then you'll probably see better any ours.
Speaker Change: Okay.
Speaker Change: And then just lastly, curious if how if and how does the sale of 438 University.
Speaker Change: That informs your overall fair values is that much to read too far values for the balance of your portfolio.
Speaker Change: Yeah. That's a good question. So in the prepared remarks, we said that for Ifr S accounting valuation cycle reappraised, 41% of our portfolio. This year and then in addition for that for financing are we almost did the equal amounts.
Speaker Change: So the way the appraisers look at it is on a discounted cash flow basis over 10 years and the values are quite sensitive to the reversionary cap rates.
Speaker Change: And there is expectation that especially you get through the next two years or so there is a normalization to the office market.
Speaker Change: On 438, I think it was important to point out that in addition to the just of $105 million, where we got $20 million of incremental benefits and those aren't real value because if we move tenants from one building.
Speaker Change: Another that was all about $1 million of NOI, so to us are that.
Speaker Change: That was quite meaningful and if you looked at the forward projection of our NOI at 438 University. The cap rate would have probably been a at a high fives, but with that said, though I mean, the second part of it is that there was other data points of our assets sold not only by US for example, some in 'twenty Bay are there.
Speaker Change: Other assets sold to users and those were very attractive cap rates and of course, but overall, we acknowledge that the investment market is tough it'll be interesting to see what we'll follow the appraisers quite closely with all of these data points coming in Oh, well, we'll be tracking them to see how they are reflecting that in our assumptions, but thus far right now what we're seeing is rents are holding.
Speaker Change: If anything and rents are probably going up a bit higher ti as I reflect it but you kept the rent. So you can take the present value of it he is.
Speaker Change: You're building as long as they can maintain high occupancy, which is what we've seen are the values will hold.
Speaker Change: Got it.
Speaker Change: That's all for me. Thank you turn it back.
Speaker Change: Your next question today will come from Tommy <unk> with RBC capital markets. Please go ahead.
Speaker Change: Thanks, everyone.
Speaker Change: Just coming back to the conditional or the leasing done at 74, Victoria when would those conditional leases take effect and then to clarify did you say that one of the tenants was relocating from 30 Adelina I may have misheard that but just some clarity there would help.
Speaker Change: Yeah, what we're potentially going to where we're going to move one tenant from 30 Adelaide over 74, Victoria.
Speaker Change: That lease would start towards Q4 of this year.
Speaker Change: The balance of the leases would start probably.
Speaker Change: The tenant would be in place by the end of the year, but start cash flowing by the end of next year.
Speaker Change: And then the other prospect that we're working with for another floor.
Speaker Change: I would probably see rents commence towards Q3 or Q4 of next year as well too.
Speaker Change: But I would say that we've got a tenant to take the space and 30 out of late that we're moving so that'll be placed.
Speaker Change: Okay, Yeah that was actually the part of the next question so that helps.
Speaker Change: And just coming back to the Calgary office conversion.
Speaker Change: What can you share perhaps in terms of the timing of when.
Speaker Change: That project.
Speaker Change: Could could start and then the total expected cost do you have that sure I'm just at a high level things are still moving right now, but generally speaking, we're hoping to us commence on the redevelopment construction portion.
Speaker Change: By the end of this year and the conversion itself will probably take a 18 to 24 months.
Speaker Change: So that's the timeline that we're working with for Q3 2027 occupancy commencement.
Speaker Change: With regards to the cost I'm, just very high level, because we're still working through some things, but our expectation is that the hard and soft cost.
Speaker Change: We'll come around 70.
Speaker Change: $70 million are but we will get the grant from the city and for the financing. It's interesting based on the metrics, we're able to potentially targeted at hanger alone around 60 million. So there's very little equity.
Speaker Change: That's required but nevertheless, we're looking at bringing a partner to share in the risks of this project right now it's looking good but.
Speaker Change: We're focused on really just improving occupancies in both buildings and we're excited because we will have one full office building and then one for hopefully a residential rental and I think you guys. All know residential is doing quite well in Calgary and were excited too.
Speaker Change: To bring in our residents into downtown Calgary.
Speaker Change: Great. That's helpful and just maybe to clarify does that 70 million aggregate cost that you quoted for hard and soft that excludes the land.
Speaker Change: The value so it's exclusive.
Speaker Change: Excluding sometimes okay.
Speaker Change: Last one just on the relocation of the tenants at 438 University and 250 Dundas I believe.
Speaker Change: Can you remind us when that takes effect.
Speaker Change: Yeah. So one of the relocations from 438 takes effect next year that'll take place.
Speaker Change: We've got another tenant from 438 that would take effect.
Speaker Change: Next year as well to potentially smaller tenant at Adelaide place and then at $2 50 Dundas the benefit of the deal is we have a fully unencumbered redevelopment site now we had a large tenant that was in that building.
Speaker Change: That didn't have a right to.
Speaker Change: That we didn't have a right to terminate or do a demo with them.
Speaker Change: As a portion of this sale, we now have the flexibility to do that so that tenants about 45000 square feet. We're actively speaking with them about opportunities to move them in the portfolio and we also got a handful of other smaller tenants at $2 50, Dundas that were in various stages of talking to to move in the portfolio as well too.
Speaker Change:
Speaker Change: So yes, it's been quite a quite a benefit for us that 438 deals.
Speaker Change: Great. Thanks, very much I will turn it back.
Speaker Change: And your next question today will come from Matt <unk> with National Bank Financial. Please go ahead.
Matt: Morning, guys.
Speaker Change: Just just quickly back to the residential conversion math can you give us a sense as to what you'd expect kind of a yield on cost wise and then.
Speaker Change: So do you have other opportunities similar to this and would you entertain keeping the residential within dream office or sell it or find another vehicle for it.
Speaker Change: Sure, Matt I think in the prepared remarks, we said that we like to target a 6% yield now interestingly. We also said that we're looking at relocating some tenants.
Speaker Change: From <unk> into our adjacent property that we also owe that 6% does not include any of the potential income that we can transfer so that's upside.
Speaker Change: With regards to.
Speaker Change: Like I do think having a residential income.
Speaker Change: Definitely our improve our income profile, if not in Calgary, but for the whole REIT.
Speaker Change: And the cap rates are quite attractive as well, but.
Speaker Change: We'll decide closer to the completion day, what's best for Dream Office, if we wanted to keep it or sell it.
Speaker Change: No I don't think there'd be any grade with within the Dream group. So we have a third party partner, we'll keep it together we'll sell it.
Speaker Change: Okay and other opportunities within the portfolio or is this the kind of one off I can see of other athletes in Calgary, but they're gonna hubs.
Speaker Change: Yeah. So this would probably be a unique one we have two other assets in downtown Calgary wanted the adjacent office building that will be well occupied afterwards and the other is Kensington a house, which is also a fully occupied but those down the road that might be a good redevelopment candidates.
Speaker Change: Residential the reason for that is there's a couple of things have to work right. One is we really focus on the floor plate and a $6 six floor has a very functional floor play to for a residential conversion. It also has a parking lot parkade.
Speaker Change: Which is important as well and I'm sure he'd Google that you could.
Speaker Change: Tell that but right now the anchor tenant in places Canadian Western Bank and a post merger with National Bank. We don't know what their strategy is will be but for us.
Speaker Change: We're trying to proactively reduce the risk of the building to having a drop in occupancy. So I think this is a really good outcome, but if theres opportunities down the road two for conversions, where it makes sense not only in Calgary, but other parts of our portfolio will certainly look at it.
Speaker Change: Fair enough.
Speaker Change: And then just on net rental income this quarter. It came in a bit better than we were expecting was there anything I know you mentioned there were some onetime items, but I don't think they're necessarily in that figure, but also 74, Victoria would it have been kind of.
Speaker Change: Two thirds out of this quarter or was there some timing delay in terms of the departure no 74, Victoria is 200000 square feet, our maturity, but we re leased 64000 square feet in the rest of it I think the lease correct me if I'm wrong going out November the first right. So.
Speaker Change: Two out of the three months in the quarter, we would have seen a reduction.
Speaker Change: In terms of net rental income yeah, you're right. The the income from sold properties and the other income line items would have been the items that were flagged that would be higher than 8%.
Speaker Change: Otherwise the other thing that we could think of as a mellow lease some of the restaurants are taking commencement so theyre paying rents.
Speaker Change: And soon enough $3 66 bay, but that most of that should still have been in a straight line, but the.
Speaker Change: Don't flow into NOI, starting next quarter.
Speaker Change: Okay and last one for me just in terms of the timing longer term.
Speaker Change: No that's it.
Sounds like you're going to be in transition in 'twenty five.
Speaker Change: I would assume given what you said on your occupancy guidance that youre going to start to see it in ethical from regaining lost ground.
Speaker Change: Not all but in two.
Speaker Change: 2027, really kind of a year of stabilized kind of back.
Speaker Change: And then you know what normal occupancy, but you should see the full earnings implications of the leasing that you're expecting to do that.
Speaker Change: Think about this I think our general trend is probably right, though timing we're hopeful that's sooner in 'twenty six 'twenty seven one thing to think about it is we've been able to increase rents across our portfolio. Despite the drop in occupancy since COVID-19, what's happening is our NOI guidance weak.
Dave: Dave on a comparative basis.
Speaker Change: Is flat or higher and we typically been able to hit that each year.
Dave: Despite the drop in occupancy.
Speaker Change: Interest expense, where we're getting hit.
Dave: Auto loans that had been maturing at low interest rates, we're getting the same amount and that's great because our incomes high.
Dave: But the spreads on the benchmarks are about in total 250 to 300 basis points higher. So if I think we guided on our Q3 call just on Adelaide place alone that could be a $4 million a year now when I say that whats interesting is when you get through the cycle, what's becoming sort of headwinds right now could become tailwind.
Dave: The future and a couple of years and we're already seeing that that the benchmark is dropping and if we can refinance it maybe not as low as before but even if you can refinance these loans are about four to five per cent will see support on the interest expense savings and that's quite meaningful.
Dave: Okay makes sense. Thanks.
Speaker Change: Your next question today will come from Lauren Calmar with discharge <unk>. Please go ahead.
Lauren Calmar: Thanks, Good morning.
Speaker Change: Or maybe just flipping back one last time to the guidance side of things.
Speaker Change: What does that assume in terms of retention is it basically the one known non renewals.
Speaker Change: Kansas and everyone else kind of release.
Speaker Change: Well, it's a combination so the one known nonrenewals.
Speaker Change: Non renewal.
Speaker Change: With U S Bank, Yeah, that's one.
Speaker Change: And overland Park and the rest just assumes we retain a just a little over 60% of the tenants that we have in place and.
Speaker Change: We've already recovered or a good majority of that renewal.
Speaker Change: Net new or renewals outside of Overland Park don't make up a big component of our of our guidance. It's a new leasing that we have to do and on the new leasing targets for this year, it's about 275000 feet.
Speaker Change: Which is less than we've done in the past few years so.
Speaker Change: So I feel pretty good about it and learn.
Speaker Change: Okay.
Speaker Change: And then can you maybe give us a little insight into the conversion rates, how that's been trending over the last couple of years.
We're just sort of expecting it to go obviously tour activity is is up a bit more space at detour.
Speaker Change: It makes me a little more tougher to convert I would assume.
Speaker Change: Yeah, so two two or conversion rates because theres so much.
Speaker Change: You still there yes.
Speaker Change: Yeah, So tour conversion.
Speaker Change: There's so much.
Speaker Change: Supply is.
Speaker Change: It's around 20% as the supply starts to tighten.
Speaker Change: You'll start to see conversion rates get a little bit better, but as a whole we track it were around 20% of our tours.
Speaker Change: Convert to actual deals a little more than that convert to offers.
Speaker Change: But wildlife offers are going.
Speaker Change: It's a competitive environment with other landlords, so I'd say, we're around 20% for two of convergence.
Speaker Change: Do you see that trending higher presumably in the next couple of years and if so how do you kind of see it trending.
Speaker Change: I do see it trending higher so the more absorption there isn't the market as a whole.
Speaker Change: Opportunity there is so when a tenant is touring with lower with lower vacancy.
Speaker Change: There's a higher chance that they're going to commit.
Speaker Change: So it's really just kind of market driven and we just keep tracking it.
Speaker Change: Okay, and then maybe just one last quick one would it be fair to assume that the cost per square foot to renovate.
Speaker Change: Or to create these models modified suite to be in that 75 to 145 range per square foot.
Speaker Change: Yeah, I think you got it now that is to convert something about some base building two to sort of turnkey space and how we think about the economics on that is once you do that conversion often a tenant's wouldn't really asked for a much of an inducement package and if you do the conversion we think the physical.
Speaker Change: So that is at least 10 to 15 years and they sign a five year lease.
Speaker Change: It might be a bit softer for the first five years, but they're really strong for me of your six to 10. So if you do a DCF on that it looks very attractive not to mentioned that.
Speaker Change: Not giving up too much of opportunity costs, and a downside having occupancy means that you're paying for the additional rent, but further to that that's assuming that the space is a raw condition, a lot of our space across base free and boutique or in.
Speaker Change: Semi cap modify suite initiatives. So if you reduce the spend by half of what you just said that makes economics look very good.
Speaker Change: Oh, Okay that are that is great color. Thank you so much.
Speaker Change: Excellent.
Speaker Change: Once again, if you have a question. Please press star and then one.
Speaker Change: And your next question today will come from Mario <unk> with Scotiabank. Please go ahead.
Speaker Change: Hi.
Speaker Change: Good morning.
J the guidance that you offered for the year excluded any transaction activity.
Speaker Change: Hi to Kansas like what's the like.
Speaker Change: We have internally that.
Speaker Change: But you are attaching to be able to monetize value in 2025, whether it's traditional IPP or substantial residential density.
Speaker Change: Yeah. That's a good question and I'd say, that's a question we get on our call each February but I got to say that our we don't forecast. It. One is just we have 26 buildings are and it's hard to forecast transactions Ah and in this type of market.
Speaker Change: Also say that each year, we've been able to monetize at least one building thus far so we're actively seeking and hence why we're giving guidance without any transaction activities, but we'll have to look at each one individually to see what that does for the income the value of the cash flows where it makes sense.
Speaker Change: I think we're good.
Speaker Change: And what are you.
Speaker Change: Do you think is the catalyst for a broader market transaction volumes to pick up.
Speaker Change: It's coming down is it clarity on the economy.
Speaker Change: Yeah, I think you answered it rates occupancy economy sentiment on the investment volume so all of that when people feel better a divestment market well.
Speaker Change: Pick up as well.
Speaker Change: Okay.
Speaker Change: Just maybe for Gore just talking about the economy has there been any change in behavior with respect to the escalated U S tariff discussion.
Speaker Change: The potential implications for businesses and the economy.
Speaker Change: Yeah, there hasn't been a ton we've had one or two tenants take a bit of a wait and see approach until like we had one or two deals that were supposed to do a firm up in February that they wanted to take a bit of a wait and see approach till April just to see what that impacts, but it hasn't been as material as many have speculated.
Speaker Change: Okay.
Speaker Change: Got it Okay and then just a clarification question on the on the big space in the portfolio today Dream office essentially paying for all of the additional rent.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Yep.
Speaker Change: Yes.
Speaker Change: Before we get a good GOR.
Speaker Change: They dream stake.
Speaker Change: All of our companies that are paying at no interest.
Speaker Change: Marcus.
Speaker Change: Okay.
Speaker Change: I think we have time for one one more question if there's any if not guys. Then please just feel free to.
Speaker Change: Reach out to Jarrod, if theres anything else after.
Speaker Change: Sure.
Speaker Change: Showing no further questions. This will conclude our question and answer session I would like to turn the conference back over to Mr. Cooper for any closing remarks.
Michael Cooper: Thank you everybody for participating.
Michael Cooper: We were happy to answer any questions throughout the day as you may need.
Michael Cooper: Thank you again for spending your time with US we look forward to talking in the future.
Michael Cooper: Right.
Michael Cooper: The conference has now concluded you may now disconnect. Your lines. Thank you for participating and have a pleasant day.
Michael Cooper: Okay.
Michael Cooper: [music].
Michael Cooper: Yes.
Michael Cooper: [music].
Okay.
Michael Cooper: [music].
Michael Cooper: Okay.
Michael Cooper: Yeah.
Michael Cooper: [music].