Q2 2025 Dream Office REIT Earnings Call
Speaker #3: Good morning, ladies and gentlemen. Welcome to the Dream Office REIT second quarter 2025 conference call for Friday, August 8th, 2025. During this call, management of Dream Office REIT may make statements containing forward-looking information within the meaning of applicable securities legislation.
Speaker #3: 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 REIT's control that could cause actual results to differ materially from those that are disclosed in or implied by such forward-looking information.
Speaker #3: Additional information about these assumptions and risks and uncertainties is contained in Dream Office REIT's filings with securities regulators. Including its latest annual information form and MDNA.
Speaker #3: These filings are also available on Dream Office REIT's website at www.dreamofficereit.ca. Later in the presentation, we will have a estion and answer session. To queue up for a estion, please press star then one on your telephone keypad.
Speaker #3: Your host for today will be Mr. Michael Cooper, Chair and CEO of Dream Office REIT. Mr. Cooper, please go ahead.
Speaker #4: Thank you, operator. Good morning to everybody. Today, we're doing our second-quarter conference call for Dream Office. I'm going to make a few comments and then turn it over to Gord Wadley, the Chief Operating Officer, and then turn it over to Jay.
Speaker #4: Jay, for the financial update, and then we'd be happy to wer questions. I would say that, what 're seeing now is, a lot more companies calling people back to work and a lot better sentiment about, Office than there has been in, in years and, we know that of, of four of the five major banks in Canada, they're looking for between an extra 200 to 500 thousand square feet each.
Speaker #4: In order to, house the people they're calling back to work. and, you know, 're seeing that the AA, the, the best buildings are quite full.
Speaker #4: We're looking forward to, more and more tenants doing the same thing as the banks. And, we're seeing interest. We had a lot of progress.
Speaker #4: But it does feel as if, finally, we're starting to see a lot more commitment to having employees in offices and companies expanding. So we hope that this will turn into occupancy numbers over the next 6 to 12 months that are meaningful.
Speaker #4: And on, on September 6th, 2023, we presented a model at our investors' day where we showed that for, 2024, 2025, and 2026, we modeled similar rents, occupancy, and, leasing costs as we had at that time.
Speaker #4: And then we started to improve over, 2027 and 2028. Where we got to maybe halfway in between the occupancy we had at the peak before COVID and the low during COVID.
Speaker #4: And since then, the same thing with costs, with leasing. The company looked pretty good as we started to lease back. So, it feels as if we actually may be ahead of what we proposed in the fall of 2023.
Speaker #4: But we're oking to have more concrete evidence rather than just anecdotes. The anecdotes are meaningful. I'd also say that we're seeing, some, anecdotes of new buyers of Office showing up, high net worth individuals, some institutions.
Speaker #4: It's still very early. But I ink there's lots of signs that, that the, the future looks better than the last 24 to 36 months.
Speaker #4: So that's quite encouraging. Gord, do you want to address the specifics?
Speaker #5: Yeah, I will. Thanks very ch, Michael. Well, good morning, everybody. It's, real nice get a chance to connect with everybody today. And, share some of the work our 's been doing year to date.
Speaker #5: Also look forward to sharing some insights, some key milestones regarding our asset strategies. Leasing performance and just generalized property operations. You know, I'd say to Michael's point, none of in the industry are immune to the headlines and hot takes.
Speaker #5: We kind of see in the media almost every day. Traditionally, over the last few years, nothing's been more polarizing than the impact of value. Slower than anticipated return.
Speaker #5: And negative sentiment around Office space. However, I just wanted to reiterate, I feel like this narrative has changed dramatically over the last few quarters with new government mandates, large bank requirements, and large cap companies all over Canada.
Speaker #5: Calling their staff back and publicly disclosing their return to work plans. There's good reason to finally be optimistic in our sector. Our numbers and deal velocity support this sentiment.
Speaker #5: And Jay and I are pleased to share these key metrics with you today. I'm really pleased and, quite proud with how the whole team's been performing.
Speaker #5: To date, we've leased about 57,000 square feet. Which is well on track to exceed our best full year of gross leasing which was in 2023.
Speaker #5: We did 695,000 feet. Another important metric is the shared deal velocity year to date where we're already up to 82 transactions. Which puts us on pace to far surpass our best volume year which was 2024 where we did 104 deals.
Speaker #5: There's another approximately 328,000 square feet of deals that the team's in various stages of negotiations on. And we still have almost five months to go.
Speaker #5: On a gross leasing perspective, we've been outpacing all key metrics in every category going back almost five years. Our reputation and ability to manage coupled with our well-located assets has helped us secure some of the best covenant tenants.
Speaker #5: For arguably some of the biggest deals done this year. In a very competitive submarket. We're pleased to announce that we've been able to secure HDI Gerling for a large blending extend.
Speaker #5: Expanded DBRS Morningstar, who happens to be our largest client at Adelaide Place, did a net new lease for over 40,000 square feet with Streamland at 30 Adelaide.
Speaker #5: And a number of large blending extends throughout the portfolio. Including one with IFDS at 30 Adelaide. All this coupled with improved deal ction on our Bay Street assets and I'm also happy to confirm that we completed two net new I wanted kinda reiterate that.
Speaker #5: Two net new full floor deals at Adelaide Place with Embark and the insurance institute of Canada. And we also leased vacant floors for about 45,000 square et at 74 Victoria.
Speaker #5: I feel like this is a really od segue to highlight two assets where we've made some, some pretty strong progress. The first being 74 Victoria.
Speaker #5: As a quick reminder, we had PSP inform us just over a year ago that they were leaving the building in full. Giving us approximately $200,000 square feet of vacancy.
Speaker #5: Since then, we secured 70,000 square feet direct with another department of PSPC. Completed another 44,000 square feet. And have an active prospect in negotiations for another 45,000 square feet.
Speaker #5: That would take us to $160,000 square feet secured on the approximate $220,000 square feet of vacancy. We're actively marketing our common area upgrades to lobbies and bathrooms.
Speaker #5: They've been really well received, and we've seen a large uptick in tours for the asset. It puts us in a much better position than originally anticipated.
Speaker #5: The biggest improvement I wanna talk about today comes in our most valuable and highest grossing asset from an NOI perspective. Adelaide Place. We will see our NOI go from 15.8 million in 2024 to 17.8 million by year end in 2025.
Speaker #5: For greater context, this time a year ago, we were looking to renew our financing on the property. It was sitting at about 80% occupancy.
Speaker #5: The whole team worked really hard formulating the strategy. We executed on our asset plan, brought in some incredible restaurants. We filled all the retail.
Speaker #5: And proceeded with our model suite program. The results have been astounding. We've leased almost 220,000 square feet in the complex and just under 18 months.
Speaker #5: Effectively raising our committed occupancy by almost 15% in a brief period. We're really appreciative and would like to thank our lending partners, LBBW and TD, they saw the vision, believed in our plan for the asset, worked very closely with us.
Speaker #5: And now as a collective team, we've delivered with very high committed occupancy at 95% approximately and top of market rents for that submarket, all in the high 30s.
Speaker #5: It's been a major success for the REIT and we're grateful to our partners. The last five years, the Canadian Office market can best be described as disjointed.
Speaker #5: Just as some context, while some performance metrics like vacancy rates, or absorption, may show improvement or stability, other indicators such as new vacants based on the market, NERs, and income often fluctuate due to costs, rising est rates, and softening cap rates.
Speaker #5: This combination has created some sector challenges we hadn't seen since the financial crisis. I do wanna say that I honestly el like we're past this and we're starting to hit an inflection point.
Speaker #5: We've seen this trend, trend shift the better part of the last three quarters. NERs have steadily been improving on smaller mid-sized deals. You know, I would say larger deals still are ultra-competitive and, and that's at drives down NERs generally for the whole market.
Speaker #5: But once all those large pockets are off the competitive inventory, couple that with no new supply, NERs are gonna inevitably tighten again. But as a team, we're seeing construction prices and procurement costs level out.
Speaker #5: And this gives us optimism that we're, through the NER trough cycle. It's well behind us. We still feel very strongly that we'll hit our current and committed occupancy guidance by year end, as Michael mentioned.
Speaker #5: An NOI will continue to improve in 2026 and beyond. It's important to note in place occupancy was down marginally by about 80 basis points from 80% to 79.2.
Speaker #5: But this was due only to the fact that we had to proactively take back space from existing obligations short term to do construction, fixturing periods, and make way for much longer term commitments that actually backfilled the vacancy.
Speaker #5: As such, it's important to note that while the committed occupancy is down, while the construction is being completed, our future committed occupancy actually improved.
Speaker #5: Quarter over quarter, our committed occupancy improved 110 basis points from 84.2 to 85.3%. One key component that helps drive our occupancy is retail. I'm proud to say we've leased every single ground floor retail unit in our Bay Street collection and all of the retail we have at Adelaide Place.
Speaker #5: Milos and Daphne have been performing well as expected. And they've been a real catalyst to p drive leasing tours. Other great restaurants like Allo, Sushi Yujin, and Chop at Adelaide Place have also been great amenities.
Speaker #5: And helped the renewed success of our most valuable complex. We just welcomed Florian Trattoria at 80 Richmond and the feedback's been tremendous. And we have a brand new Starbucks on our last unit on Bay Street, which helps fuel our clients and drives the experience.
Speaker #5: All of these great brands are key components. In bringing an elevated experience of boutique luxury to the core, positioning us well for tenants' flight to quality, and really helping us drive value in these curated offerings.
Speaker #5: They honestly appeal to Canada's top covenants and most discerning tenants who covet quality much more so than face rate. Our downtown committed occupancy continues to be very resilient.
Speaker #5: Our pipeline remains strong, which will continue to support healthy cash flows at our buildings. Covenant-wise, we have large commitments with the federal, provincial, and municipal governments.
Speaker #5: As well as Crown Corps. Coupled with our premium locations, asset quality, and leasing prospects, I feel really good about our portfolio. Despite some of the macro challenges in the sector over the last few years, I couldn't more pleased with how the whole team's navigated through some of these evolving challenges in the industry.
Speaker #5: Their efforts and dedication to not only our company, but to our clients is what I'm proud of. At the end of the day, it's this combination having irreplaceable assets, coupled with the quality, high character team of people we have operating and leasing those buildings, that candidly gives me the greatest confidence closing out 2025.
Speaker #5: Thanks, everybody. I'll turn it over to my good friend, Jay. Thank you, Gord. Good morning. I'll be giving an overview of our financial results and then provide an update on how we're forecasting ur business for the second half of 2025.
Speaker #5: We reported diluted funds from operations of 62 cents per unit, which is in line with our internal expectations. Relative to last quarter, FFO was down approximately 6 cents per unit, which consists of a favorable 9 cents from lower interest expense, higher comparable properties net operating income, and lower bad debt expense.
Speaker #5: This was offset by unfavorable 15 cents resulting from a reduction in income from a sale of 438 University, our vendor take-back mortgage on a property in Calgary, Dream Industrial REIT its, and other items including non-recurring GNA and lower lease termination income.
Speaker #5: To provide a bit more context on your year-over-year basis, the weighted average interest rate on our total debt balance increased by approximately 26 basis points as we refinance our mortgages in a higher interest rate environment.
Speaker #5: On an annualized basis, this means we would need to pay about three and a f million dollars or almost 20 cents per unit in higher interest expense.
Speaker #5: This year, we sold 438 University. Our vendor take-back mortgage in Calgary at 5.9 million units of DIR for aggregate proceeds of 182.5 million. Most of those proceeds were used to repay mortgages and pay down our corporate revolver and the transactions were done in a way to help facilitate a tax-efficient outcome for our unit holders.
Speaker #5: As a result of reducing our debt by approximately $170 million, in the second quarter, instead of realizing a decline of 3 cents per unit on higher interest rates, we achieved 3 cents of savings relative to Q1.
Speaker #5: The trade-off of this quarter is 11 cents of in place FFO from this position of assets. We are able to move some tenants from 438 University to another one of our buildings.
Speaker #5: So 5 to 6 cents of annualized FFO will be replenished starting December 2025. So we expect to be relatively neutral on FFO on a stabilized basis.
Speaker #5: But then have lower debt and more liquidity. Our second quarter NAV per unit was $54.56 down $2.84 or approximately 5% from Q1. We recognize that 25 million dollar loss on a sale of 4 million units of DIR during the quarter, as well as 32 million dollars of fair value adjustment on our income property portfolio.
Speaker #5: For additional context in downtown Toronto, cap rates increased by 20 basis points, from 5.69% to 5.89%. However, that movement was offset by increased market rents across our assets.
Speaker #5: Quarter over quarter, our debt-to-gross book value increased 30 basis points. The 51.8 as a result of the fair value adjustments. However, our debt-to-EBITDA remained relatively flat at 11 and a half times.
Speaker #5: Our focus over the next 12 months is to work on improving both the numerator and the denominator in that equation. We have and will continue to look for opportunities to sell assets at a fair price to the REIT to reduce leverage.
Speaker #5: At the same time, once the in place occupancy and NOI improves, we uld see meaningful improvements in EBITDA. Our goal is to be around 11 times in 2026 and then improve from there.
Speaker #5: As noted in our press release, we are pleased to have successfully addressed $741 million of our 2025 debt maturities, which represented 53% of the REIT's entire debt stack.
Speaker #5: Next year, we have mortgages on three buildings and three development sites totaling 165.5 million. For context, the weighted average loan-to-value of the mortgages expiring is approximately 36% as a percentage the most recent appraisals.
Speaker #5: For our income properties, this debt service coverage ratio is about two and a f times. For our development sites, the current debt per density approved is under $30 per square foot.
Speaker #5: Therefore, we are confident in our ility to refinance all our maturities next year. Earlier this year, we announced a redevelopment of our office building in Calgary, 6064th Street, into a new apartment rental.
Speaker #5: Since then, we have achieved several significant milestones including securing a loan for 64 million for a term of 10 years at a rate of 10-year GOC plus 40 basis points.
Speaker #5: We have also signed a funding agreement with the City of Calgary for a grant of up to 11 million dollars upon completion of the project.
Speaker #5: We are in advanced negotiations with a joint venture capital partner to acquire 50% interest and hope to have the agreements finalized in the third quarter.
Speaker #5: We have already relocated 9,000 square feet of tenants into 444 7th, next door, as part of the project, so we can help facilitate our tenants into a new space close by.
Speaker #5: And also improve the occupancy in the adjacent building. We expect construction to commence in the fourth quarter and it will take about two years to complete the redevelopment.
Speaker #5: Once complete, this will transform an older office building that will have nominal NOI into a new residential rental building that is well located in downtown Calgary that can produce three and a half million dollars of stabilized annual NOI.
Speaker #5: We think this project checks a lot of boxes for us in terms of improving the quality and quantity of cash flows. Value and liquidity for the REIT.
Speaker #5: Lastly, we want to update our annual guidance based on the year-to-date actuals and the expected trends for the second half of 2025. Gord has already provided detailed commentary on our committed and in place occupancy forecast.
Speaker #5: We are trending positively to improve NOI in 2026 and beyond. However, due to having to facilitate some of the larger new leases, we had to offer free rent and take space back early from other tenants.
Speaker #5: As a result of the trade-off, we expect our comparative property NOI to remain relatively flat to slightly positive for 2025. And FFO per unit to be between $2.40 to $2.45 per unit.
Speaker #5: In our forecast, we are assuming no investment transactions. And we expect to retain all of our 7.6 million of remaining investments in a DIR units.
Speaker #5: Our portfolio is in good shape to continue to improve committed occupancy as we have substantially completed our renovation program to greatly enhance the look and feel of our buildings over the past five years.
Speaker #5: Our capital allocation priority will remain to fund leases where we get immediate return in income and value. Overall, we think our portfolio and balance sheet will continue to improve.
Speaker #5: And Dream Office is well positioned to benefit as office utilization continues to increase in downtown Toronto. Thank you. And now I'll turn the call back to Michael for Q and A.
Speaker #6: Thank you, Gord. Thank you, Jay. we'd be happy to answer any questions if, people may have today.
Speaker #2: Join the question queue. You may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speaker phone, please pick up your handset before pressing any keys.
Speaker #2: To withdraw your question, please press star, then two. The first question comes from Mark Rothschild with Canaccord Genuity. Please go ahead.
Speaker #7: Thanks. And good morning, guys. i-it's, it's good to see that this amount of space for sublease, declining materially. Based what you've seen historically, you guys obviously have a lot of experience.
Speaker #7: And, , the trends you're seeing now, h-how long should this take or what can look for, for it to, to lead to actual material drops in the market vacancy?
Speaker #5: Wow. I wish I could answer that. A couple of things. Firstly, I think what we're saying is there's a lot of things falling into place for businesses to make decisions.
Speaker #5: That would incorporate using more office space. So that's really good. There's so much uncertainty around Canada's economy, trade with the US, you know, the over-overall profitability of companies.
Speaker #5: We're not really sure what companies are gonna do about, hiring, and spending more money. So you know, the, the macro stuff is good for office.
Speaker #5: We're still waiting to see how companies behave. I said in my initial comments, I'm hoping that within the next 6 to 12 months, we start to see not like anecdotes or anything like that, but actual results where the effective rents come up a bit.
Speaker #5: And occupancy comes up a bit. so I guess we're saying that rather than repeating like we and thers in the industry have said for five years, that tours have increased.
Speaker #5: We're saying we think the leasing's increasing now. So, I, I say 6 to 12 months, we should see some signs. But there's still a lot of uncertainty.
Speaker #5: And w-we don't know what isions businesses are gonna make. Is, is that,
Speaker #6: I think that's the best response I have. I'm just wondering if that's satisfactory to you.
Speaker #5: i-it's satisfactory because it's the best response that ou were able to come up with. maybe, maybe just one more, there's a of talk about back to office companies moving, employees back to the office.
Speaker #5: But, you know, a lot of companies said years to adjust this. It's not like it just started last year. to what extent does, does that, actually move the market, based on what you're seeing?
Speaker #5: Or is a lot of it news? No, it's actually—I mean, I think you're right that there's been a lot of discussions about it and a lot of proclamations.
Speaker #5: I mean, I'm not joking, but I kinda am. Like, in September, everybody's gonna be back for a certain amount of time, and nothing happened.
Speaker #5: But it's changed. And I think that it hasn't just changed because companies have more guts. I think it's changed because companies are saying, "We need to get more productivity out of our loyees in a very difficult time." And if people aren't prepared to do their best work, we don't ed them working for us.
Speaker #5: So I think that's a fundamentally different posture. And, you know, if you go back to 2022, all companies agreed that without more people, they wouldn't be able to grow.
Speaker #5: And there was just a huge you know, almost like gathering of people within companies. And I think that, now it's happening is you gotta get productivity.
Speaker #5: People want their people to be in the office. If don't wanna work, in the office, they can leave. and I think they'll probably have increasingly difficult times getting another job where they can wo-work remotely.
Speaker #5: I think like , the, the, the numbers that came out this morning on jobs, I think it's saying it's 6.9% unemployment. Huge unemployment among young people.
Speaker #5: and it was negative employment in the last, month or whatever. So I, I ink th-th-th-the, the intention of the employers is to come back to work or leave the company.
Speaker #5: So I think that's pretty different than saying we're scared of people leaving, so we'd like you come back to work, but we don't ally mean it.
Speaker #7: Okay, that's helpful. Thanks so much. I'll turn it back.
Speaker #2: Once in, if you have a question, please press star, then one. The next question comes from Sarah Srinivas with CoreMark Securities. Please go ahead.
Speaker #8: Thank you, Alberta. good morning, guys.
Speaker #5: Good morning.
Speaker #8: just looking at the leasing spread over the last eight quarters, they look really healthy with all the leasing activity that's been happening. is it safe to say that over the next 12 to 24 months, when we see that committed occupancy meet that in place occupancy number, we should start seeing those leasing spreads show up in the BNOI?
Speaker #5: Yeah. I, and you're, ou're right. Like we are seeing much better, spreads and improvements on rents kind with Mark's question before. Like we've one, one material piece of data is net effective rents quarter over quarter of were up.
Speaker #5: almost 20 cents. as the big pockets of space roll off and our committed occupancy gets tighter, it's the big pockets of vacancy that cost the most money to do.
Speaker #5: And those deals are the most competitive. In the smaller deals, 5,000 square feet and less, we're seeing a really good trend in terms of net effective rent (NER) and market face rates.
Speaker #5: Our net, our net face rates were all up. by about 17% across, across the portfolio this past quarter. So we feel really good about the trend.
Speaker #5: As committed occupancy comes , the rent and the NOI is gonna come up. Yeah. And side, this is Jay. so if you follow in our disclosures, we actually try to provide some, commentary on the timing of the income, and the rents over the next, 12 to 18 months or so as the committed occupancies take effect.
Speaker #8: That's good, guys. Thanks for the color. maybe just, going back to your comments on, you know, the user space, you know, especially in the mo in the next 24 months.
Speaker #8: You know, there's a lot being said about inventory coming up, supply coming up in the downtown area. But is it also the fact that over the last five years, there's also some of the inventory that's actually gone out?
Speaker #8: And when people do return to work and when we do see utilization rates increase across downtown, the nature of space needed or the amount of space needed for a five-day work schedule would actually be short of what's currently out there?
Speaker #5: I, I think there's a couple of things. You know, in Calgary, there's a lot of convergence from office to residential and those buildings are coming of the, you know, capital.
Speaker #5: The, the, the, the, amount of office in the city. In Toronto, what we're seeing more of is, George Brown College, behind the chorus building, we sold 720 Bay to, a health sciences group.
Speaker #5: The Ontario government's been buying buildings. Hospitals have been buying buildings. So what you're seeing is that once these buildings get bought, they are not going to be open for tenants to rent them again.
Speaker #5: And it's actually millions of square feet. Like there's not going from office to residential; it's going office to institutional. So, I think that's a real trend.
Speaker #5: And I think 're gonna continue to see that. there, there is some potential office to residential conversion. And that could build up. But, I mean, it, is not meaningless.
Speaker #5: I do think that we might see new construction maybe for some of the banks a little bit very slow. I an, the first building wouldn't be ready for in five years.
Speaker #5: what we're looking at is if the banks are at the top end, we're doing a lot of work with governments. And they're leasing from a 74 Victoria's example, Gord and his team has done a great job.
Speaker #5: Going from what we thought would be an office building with, just a good life in it to, I think, is it 80% leased? about 60% updated if we get the other deal.
Speaker #5: Okay. So it's, it's at 60%. and that's really economic space that's ailable for people who want, you ow, less expensive space that's decent. So most of our buildings are kind of, you know, kinda chic.
Speaker #5: Special buildings that appeal to, smaller tenants. And we're looking forward to seeing them starting to commit to more space. And, h, I think it's gonna be like a fall from the banks.
Speaker #5: Governments and work its way down to everybody. And, and, and as that process happens, we expect to see an improvement in the occupancy of our portfolio.
Speaker #5: The NOI of our portfolio at a reduction in leasing cost per deal.
Speaker #8: That is great, Gord. Thank you, Michael. Thanks, guys. I'll turn it back.
Speaker #5: Sure.
Speaker #2: The next question comes from Tal Woolley with CIBC Capital Markets. Please go head.
Speaker #9: Hi. Good morning. just on 606 4th, do a estimated timing for when we might hear a JV announcement?
Speaker #5: yes, Tal. We'll be able to, probably give an update in the third quarter. So in November.
Speaker #9: Okay. Great. and then, any known non-renewals, that you're aware of that aren't in the committed numbers?
Speaker #5: No. We've addressed all our biggest renewals over the course of the 18 months. There's nothing no, no major surprises over 10,000 square feet that we haven't disclosed.
Speaker #9: Okay. Perfect. and then I guess maybe just to turn to the topic of the day too. I, I'm curious, like in the industry, what's the, you ow, there's a lot of talk about, you know, artificial intelligence and the impact on entry-level employment.
Speaker #9: have you seen the industry giving much thought to what that might mean for space requirements? Going forward.
Speaker #5: I mean, we incorporate some some, some digital improvements a little bit of AI more in this place in the space planning and design area.
Speaker #5: We've en a lot of it advancements there. and then also too on the marketing side. AI's been an interesting partner in terms of, uncovering and soliciting the market for, for leads.
Speaker #5: but on, you know, the bricks-and-mortar transaction component, we haven't seen any major any major changes. Yeah. We're trying figure out so AI is having huge penetration in lots of different industries.
Speaker #5: We're not seeing significant changes in real estate with AI. Some of it is in real estate; we have really bad historical data, and that makes it difficult.
Speaker #5: you know, we're hoping that, I mean, to be blunt, I don't see why accounting can't be way more AI, driven. Same with legal. So you know, Dream's not gonna develop those kinds of things.
Speaker #5: But we could benefit from them. I ink for our tenants, they're using it. I think what we're seeing a lot not necessarily from our tenants, but more globally is, well, AI may be replacing some people in a lot of cases just changing the kind of work and, and increasing productivity.
Speaker #5: but it's it, it, it's really frustrating for me that we can't benefit from it more because we really are keen to. But we literally are just, you ow, dealing with people who talk really about great ideas.
Speaker #5: But there's nothing behind them that's functional yet. And that is includes the big accounting firms, you know, consultants and, some of the firms that run large learning, models and sell them and.
Speaker #5: We're hoping it changes, but it just seems like real estate is behind just about everything on how it's contributing to changing our businesses.
Speaker #5: I think you asking more about the tenants. But I'm just volunteering my comments on the real estate industry.
Speaker #9: Yeah. I think I think where I was trying to go is, yeah, like at do you, you know, like yeah. I mean, most of the stuff I've been ading has really been talking entry-level kind of office jobs really being where, you know, this could have a big impact early, you know, early.
Speaker #9: And I'm wondering, would the, you know, have conversations you're having either with tenants or other brokers or landlords about, you know, does that have an impact on space demand?
Speaker #5: Yeah.
Speaker #9: Or?
Speaker #5: I, I don't think we've been seeing that yet. I mean, I heard something from New York that I thought was quite, a thoughtful piece.
Speaker #5: It was saying that, you know, the best and the brightest that going through the largest investment banks are working very hard to stay ahead of AI's development so they can keep their jobs.
Speaker #5: They're very high-paying jobs. I thought that was an interesting visual. that AI is sort of chomping at them. And they've otta be more productive and learn how to work with AI more.
Speaker #5: To be able to be very valuable to their companies. So, you know, we're seeing a lot of things like that where it's working with the IA, not AI, not necessarily.
Speaker #5: being replaced by it. But, I think what we're seeing is like it's to find a person if you have an issue with Facebook. I think we're seeing a lot of companies with their call centers going much more online with bots.
Speaker #5: And doing a better job. And everybody evolved with it is happier. So I can see we're seeing that there now. We don't do that kind of business with our tenants.
Speaker #5: But it's sort of along the edges that it's replacing people. We're thinking that AI is becoming integrated into many, many businesses—how they do their work, if that makes sense.
Speaker #9: Yep. and then just to go back to the, you know, work-from-home, theme. you know, it feels like a lot of times in situations like this, we're sort of debating like, when do we sort get back to pre-COVID times?
Speaker #9: And I ess like w the question I wanted to ask was just do you think like there has there has been some demand destruction for office space as a result of working, work-from-home, like over the long haul?
Speaker #9: Like, or do you really feel like the advent the advent of work-from-home is, ou know, on a on a wide scale really hasn't changed the demand curve long term?
Speaker #5: Well, you ow, I, I, I in my entire career, the use of office space for persons has gone from like 350 square feet to 140.
Speaker #5: That's over 30 years. So over that whole time, what had was we eded to have bigger growth in employment than the shrinking of space per person.
Speaker #5: And I think there'll be an element of that with work-from-home. just another gratuitous comment. I think that after five years of, you know, for most part, stressful times, it's become pretty obvious that people need more flexibility to take care of things and so I think we're seeing more flexibility.
Speaker #5: But it might be, you know, four days in the office and some sort of days where you can get work done the way you want.
Speaker #5: I don't remember anybody in our company's history not being able to get to one of their kids' performances or school events ever before any of this stuff.
Speaker #5: So I think it's, maybe sort of institutionalizing what a lot of people already did. but I ink having more flexibility is becoming essential for people's well-being.
Speaker #5: But you gotta be productive. So I think I think that's sort a different approach to work. But it's gonna be mostly in office. Prior to COVID, some people worked from home.
Speaker #5: a lot of times it was on a consulting base and stuff like that. That's probably has increased. so that might be a little bit of, just like when office space per person shrinks, there may be a bit of that.
Speaker #5: I suspect that going forward, we've wa we're way past the peak of the number of people that would be working from home. I do not think that's a growing number.
Speaker #5: A, a growing percentage. So I'm not sure how much of a headwind it is. But I think there has been a change. So if your demand curve has moved, it may have moved down a little bit.
Speaker #5: But the real question for us isn't if it's down. It's actually the steepness of demand. How much more demand will there be? And if it's down 2% from where it otherwise would have been, that's not as significant as how quickly it's growing.
Speaker #5: And how much more demand there is for space.
Speaker #9: Okay. That's great. Appreciate the ussion, gentlemen.
Speaker #5: Thank ou.
Speaker #2: This concludes the question and answer session. I would like to turn the conference back over to Mr. Cooper for any closing remarks. Please go ahead.
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