Dream Office Real Estate Investment Trust

Thank you, operator, and good morning to everyone. Today, I’m with Gordon Wadley, the Chief Operating Officer; and Jay Jiang, the Chief Financial Officer.

I’m just going to make a few comments and turn over to Gord and then Jay. When Jay is done, we’ll be answering questions.

Just as a point of view, we own all these buildings that have been barely used for two years coming up on March 13, and they’re in tremendous shape. We continue to renew tenants, we’re doing some new leasing.

But we are losing some tenants. Some are downsizing and some are – and there’s some bankruptcies.

But overall, to be at the level we’re at, where there has been hardly any use of our buildings for such a long period of time is remarkable. With Omicron, it delayed the reopening once again, it’s been very, very frustrating.

But I would say the surprise to me is how fast everything is opening right now. And it looks like we’re starting to see banks planning on opening in March, and the City of Toronto call people back for Tuesday.

So we’re now going to start to get real information about what the future of office use is. But I would say that we’ve seen a lot of information, where there’s going to be a heavy reliance on office use as part of winning company strategies and we’re quite confident.

With all of the Dream group’s developments in Toronto, including 212 King, I’ve really been shocked by how many large tenants are looking for new space. And it’s really surprising given all the new supply.

So obviously, there continues to be a lot of demand for best-in-class space. And I think that’s actually a pretty interesting sign like all the new buildings are going to be full and there’s demand for more.

So we think that’s very encouraging. We have and we will continue to make our buildings exceptional boutique office buildings.

And throughout the two years of the pandemic, we made tremendous progress. And I think that once the city opens up, people will be very surprised – happily surprised with how much better their buildings are now, particularly on Bay Street and some of the other things we’re doing.

We’re hoping that within the next month or so, we’ll finalize the decarbonization program, which is going to be a real first in the country and in many, many ways. In addition to decarbonizing, we’re expecting to have best-in-class connectivity, we’re going to have very healthy buildings, and we’ll have ultra low-carbon emissions for existing buildings.

We continue to make development – progress on our developments at 250 Dundas. We’re advancing the site plan.

It’s already zoned, and that the building will have 150,000 square feet of office and 350,000 square feet of residential right at the corner of its one building in the corner of Dundas University, which is an incredible location for the hospitals, government, schools, cultural and we’re very excited that that will be a successful building. 2200 Eglinton is progressing very well.

We expect to be able to build 2,500 residential units in addition to the current office building. And we also expect to be able to report progress on where we are with next quarter or two.

And 212 King is making its way through the zoning process. We’re clearing up some issues narrowing the issues with the city.

We are asking for 1.1 million square feet of office and residential for this superbly located project. So it’s a very big project.

And it’s a big deal for the city as well as for us. So that one’s taking a little bit of time, but that’s totally predictable.

What I would say is that these developments provide our future growth of our portfolio. And one of the great about it is they will continue to increase the quality of our building from the very high level of the quality of our real estate from already excellent quality that we have and we’ll be able to add a reasonable price.

We continue to be laser-focused on our exceptional Toronto portfolio. We continually improve it.

And while we’re doing that, we’re reducing shares outstanding, which means that every shareholder owns more of the business than they used to. With that, I’ll hand it over to Gordon.

Well, thank you, Michael. I hope everyone is doing well, and I’m glad to have an opportunity to connect with you all today.

Despite the impacts to the reopening efforts caused by various public health shutdowns related to Omicron, the team navigated through the headwinds, and we saw some real positive momentum in a variety of key aspects of our business. Q4 2021 represented the first quarter of positive absorption since the pandemic began.

We referenced on our last call that we felt optimistic we would close the year higher quarter-over-quarter on committed occupancy. And we did that by about 150 basis points from 88.5% to close to 90%.

We executed on a number of large deals of new and renewal. And what also helped is that we’ve seen some material improvements to occupancy, tours and deal velocity in Western Canada.

Just for reference for everyone. At the beginning of 2021, our current and committed occupancy was under 70% for Western Canada.

And through our leasing efforts, we’re able to bring that up to approximately 78.6%, specific to our non-core markets. Regardless of Omicron and despite what you read in the news and various social media hot takes, there was a very active year leasing for Toronto, and specifically Dream Office, with both direct and sublet space being absorbed market-wide.

We did approximately 550,000 square feet of deals in 2021. But of equal importance, our rents held up very well across the board.

Net rents have continued to be strong and in line with our business plan in pre-pandemic levels. We’ve also seen steady growth in any outperformance and achieved net rents for deals being completed versus budget.

On average, almost 5% over budget portfolio-wide on an NER basis and seen a positive spread of approximately 10% for net rents in our core portfolio, with rents now averaging over $35 a foot. For some additional context, we completed approximately 80 deals across the portfolio.

We did one transaction over 80,000 feet, and we did three deals over 30,000 feet. These key indicators to us support our optimism that deals with scale are getting done, and companies are making major commitments to their office accommodations.

You couple this with the reality that our rates have been very resilient to our guidance, It’s a testament to the quality and location of the buildings we own. It’s also a testament to the efforts of our operating team, and ultimately staying true to our asset and capital strategy, which I’ll touch on a little bit more shortly.

Like most of our peers, we work through supply challenges and construction delays. And we’ve managed well and our employees to complete our final touches on the Bay Street collection early this year.

And we’ve completed 357 and on pace to complete 366 Bay on time and on budget. The feedback from tenants and brokers alike on these projects has been tremendous.

We really look forward to showing you the completed product. And hopefully, we’ll get a chance to walk you through in person very soon.

The optimism on our Bay Street offering is further supported by the 12 deals that we did specific to that project, with some strong rents over $40 on average. I want everyone to keep in mind that we’re replacing rents on Bay Street in the low-20s and high teens on new space.

These are a new class of boutique assets that don’t compete with large towers. They’re low rise, they’re walkable, they build small private floor plates, all new base building systems and showcase a level of luxury finishes that are very unique to our market.

Our current pipeline, we’re actively negotiating and trading paper on 29 deals over 250,000 square feet, which we hope to complete no later than Q2. There’s a lot of press and focus around shadow vacancy in the state of the sublease market in Toronto.

This has not been an issue or something we’re seeing in the REIT. Currently in our portfolio, there’s only about 100,000 square feet of sublet space available, totaling less than 2% of our portfolio nationally.

Collections continue to be very strong for a team at just over 98% for the year, with our average WALT in the portfolio of just over five years. Leasing and operating metrics aside, we made tremendous strides in the back half of 2021 pertaining to our ESG, operating and sustainability strategy.

We mentioned on our last call that we’re working hard to secure a viable GRESB rating. We’re pleased to report that in Q4, we had among the highest first year GRESB score historically in Canada at 91.

We also had the country’s top sustained Alembic score, and basically sustain the – and is a rating – a global rating. It’s a Morningstar company that rates the sustainability of listed companies based on their environmental, social and corporate governance performance and applies a risk rating.

To this regard, we’re ranked in the top 10% globally. In addition, we are recognized by Greenleaf leaders as platinum for our standard office lease.

We were a LEED signatory to UNPRI, and also committed to net zero asset managers, which stem from COP26 and represents the largest organization of asset managers globally committing to net zero targets by 2050, or in our case, better. When we made our commitments and set our position among these global leaders in ESG, we also publicly made some of the industry’s most aggressive commitments to being leaders in GHG Reductions and decarbonization of our assets.

As part of our net zero goals, Dream Office is committing to net zero Scope 1 and 2 and select Scope 3 GHG emissions by 2035. We believe sincerely that real estate can be developed and managed to make positive impacts and make our communities more fair.

Real estate is responsible for about 40% of global greenhouse gas emissions. And our team sincerely believes and are working tirelessly toward reducing the growth of carbon emissions from our properties and reduce our overall emissions dramatically.

It’s never been more urgent to act to support a sustainable and climate resilient future. This initiative isn’t something new for our team.

And we’ve been working hard to be leaders in environmental stewardship for years. And that thing, we’ve always had a high confidence that there’d be accretive financing opportunities on the horizon.

True to this expectation, we recently announced in Q4 that CIB is partnering with our team to significantly and rapidly decarbonize at least 19 of our assets under management. We’ll do so over the next five years.

We’ll use the low interest long-term facility to finance baseline, incremental, accelerated and net new capital projects. These projects are projected to include chiller retrofits, installation of heat pumps, solar power, heat recovery ventilation systems, and numerous LED upgrades.

The beneficial financing terms and rates help us afford the additional capital expenditure in such a short period of time. As part of the initiative, we’ll be creating approximately 1,500 jobs during the life of the program, and all phases of the project cycle.

Dream has already begun the process of decarbonizing and modernizing each building already. We estimate in the first year of the program, we’ll reduce our carbon footprint equivalent to removing over 600 cars from the road, mitigating 350 homes energy use, or planting the equivalent of 46,000 trees annually.

The aggregate scope of work for all these projects, although great for the assets and our clients, is also a major catalyst for us to roll out an additional new program, very important to our team and important to the community. Our social procurement initiative we announced late last year ensures we open our tendering process to include underrepresented, diverse and equity seeking groups by mandating contract awards and our operating goals to support those in our community who may not typically have an opportunity, or exposure to work at an institutional scale for large projects.

For us, it’s not only the right thing to do, but there’s real value, as increased pool of proponents mitigates our supply chain risk, increases competitive pricing, and creates new business opportunities most importantly, and creates new business opportunities for groups who may not have had exposure to this scale of work in the past. The metrics we’ve identified create real impact in and around the communities we build and manage.

The targets focus on how much money, which we would be spending anyways is directed directly to capable and qualified companies that are often overlooked by large corporations. Additional targets ensure that we diversify our project teams at every level.

Our initiatives established the REIT as a clear leader in this area with deep and meaningful goals. As a result, it’ll help us create a more diverse and resilient supply chain for all our projects, and equally give meaningful, merit-based and fair opportunities to those in the community we serve.

We spent the better part of the last two years taking our incredible well-located assets in downtown Toronto and transforming them into a new standard of boutique luxury. And this commitment to decarbonization and community stewardship takes our offering even further to ensure we’ll exceed the highest levels of sustainability and responsible operating standards our clients and our stakeholders have come to expect and have it.

Thank you, and I’ll turn it over to Jay.

Thank you, Gord. Good morning.

For the second year in a row, our operational results have been significantly influenced by COVID variants and multiple rounds of lockdowns in Ontario. Not withstanding our buildings and parking garages have remained mostly empty for two years, we feel our operational and financial performance have shown a lot of resiliency during the course of the pandemic.

On the quarter, our FFO per unit of $0.40 was flat year-over-year, and we were $0.02 higher for the year. In general terms, we lost $0.05 per unit from lower occupancy, one-time lease termination income and other items.

And we gained $0.05 through income pickup of two completed redevelopment projects, accretion from NCIB and higher income from our Dream Industrial Investment. Our net asset value per unit ended the year at $31.49, up 2% from last quarter and 10% year-over-year.

To categorize the composition of annual gains, 4% is from the increase in value of our Dream Industrial REIT Holdings, 3% from the fair value increase of our income properties, 2% increase from retained positive free cash flow, and 1% from the reduced unit count from using our normal course issuer bid. Including our $1 per unit of distributions, that would imply a 13% total return.

Our stock price performance for the year was 24%. For 2022, we will once again share our internal model assuming a normalized state that is exclusive of any potential acquisitions, dispositions, any announced – unannounced major capital initiatives.

We also want to highlight that the usual COVID caveat that budgeting for office buildings remains challenging when we still do not know when our economy will reopen, how it will reopen, and how prospective an existing tenants will behave. Just prior to the most recent Omicron variant, we were seeing good leasing velocity and weekly increases in parking revenue in October and November.

While it is unfortunate that the latest shutdown has delayed our recovery by approximately three months, we are optimistic that those positive indicators will resurface again when we achieve and sustain normalized states. We will see our forecasts as a balancing act between optimism and the time it takes to progress to normalization.

So for our internal forecasts, we were projecting diluted FFO per unit of $1.60 or an increase of approximately 3% from 2021. We expect to see low single-digit same property NOI pickup across our portfolio, with weighted average occupancy relatively flat versus 2021.

This means that we expect some leasing enquiries in Q1 to be filled up in the mid to latter half of the year. We think downtown Toronto will end the year in the low 90% on a committed basis, and our other markets will be north of 80% committed.

We are anticipating our average debt to gross book value for the year to be in the low-40s, with ample liquidity to execute on all identified capital projects and any new opportunities that may arise. Pre-COVID, our debt to EBITDA target was eight times, which we have achieved and we hope to reapproach that target when the pandemic is over.

Liquidity is currently in very good shape. We successfully refinanced 500 million of debt this year at a weighted average rate about 2.28%.

Interest rates have since increased at the beginning of the year, but currently we only have $16 million of expire rate to refinance in 2022. We are not forecasting or relying on any dispositions as a source of liquidity.

However, we will continue to remain opportunistic to reasonable offers online for assets. Our Dream Industrial REIT stake is over $430 million at fair value.

Based on today’s trading price are almost a third of our market cap. We have been fortunate to benefit from strong industrial fundamentals and significant increases in the rents and value over the course of the pandemic.

While we await office tenants to return to work, we think industrial REITs will continue to benefit from the same factors that have contributed to their outperformance over the past two years. So we are content to continue to maintain a meaningful ownership of the IRR for investment purposes.

In terms of capital projects, we have completed 357 Bay and 1900 Sherwood over the past two years on time and on budget. In 2021, we will have two smaller redevelopment projects.

366 Bay was moved into development in first quarter. We are looking at a complete modernization of this property with new energy-efficient mechanicals, washrooms, common areas and LEED Gold Certification.

We are also looking at similar project for 67 Richmond, which is another small 50,000 square feet building for later this year. We think both of those buildings will be very desirable for high-end tenants who may be interested in occupying an entire building on Bay Street, which coincides with the completion of our Bay Street capital program and nine other buildings and also the alleyway by mid-year.

We will continue to progress on predevelopment work at 212 King and 2200 Eglington. Our current trading price of just over $25, if we assume fair value on our Dream Industrial Holdings and assets and other markets at book value, our downtown Toronto portfolio 3.5 million square feet is trading at an implied price per square foot of approximately $500.

We have been consistent in our message that the intrinsic value of Dream Office is higher and we will be more valuable over the long-term. We have maximized our unit repurchases under the normal course issuer bid program in 2021 and expect to do so again in 2022, as we believe this is easily the best use of our capital today.

We are optimistic on the other side of the pandemic. Our well located and modernized office portfolio will return to very high occupancy at high rents.

We will have clear units outstanding in the start of the pandemic and enhance the value of many of our assets. We think this will translate to a great upside on both FFO and not per unit for the foreseeable future.

I’ll turn it back to Michael.

Thanks, Jay. Thanks, Gord.

At this point, we’re happy to answer any questions.

Thanks. Hello, gentlemen.

Good morning, and congratulations on a good quarter. Just wondering if you can give an update on the sort of broader project at Golden Mile and how you guys are fitting in with it?

Sure. The Golden Mile is actually an incredible area, it’s about 100 acres of land there.

There’s about six or seven owners of land on the north side, although right at Victoria Park, there is one on the south, that’s all included in a new zoning that allows residential. We expect that was the – some of them have made deals, it’s all coming together, but they’ll probably be about 20,000 units approved.

And that’s going to be a pretty large area in Scarborough, which has a lot of large areas, but it’s going to be one of the first major scale redevelopment. Our site – we’re getting very close with the city.

We’re working very closely with them, plus, they are the landowners, as there’s a lot of things we’re trying to do not just in our site, but with the others to create a wonderful community. And I expect by the end of the year, we’ll have our zoning and we’ll be in good shape in 2023.

But it’s – I mean, that’s a $1.5 billion project. And it’s fantastic that we have a lot of experience doing large communities, large-scale developments that we’ve done in Toronto and across other places.

So we’re excited to get going on that one.

Thanks, Michael. Maybe a quick one for Gord.

Just on 250 Dundas, you do have a tenant in there, that’s fairly sizable. Have you made arrangements for them to move to potentially another space within the portfolio?

Yeah, we’re – good question, Scott. We’ve been dealing with them fairly regularly.

We have to keep in mind that the group that’s in there is a component of the province and their mandate is public health. So as we kind of get through the public health crisis, we think we’ll get a little bit more clarity around that, that vacate, but we’re actively working with the group and in good communication and the province has always been a really good partner of ours.

What’s the ideal timing on that that project to get it to get shovels in the ground?

Yeah, ideally, at the end of 2023, early 2024 at the latest is our ideal ideal time.

That’s great. Thanks.

That’s helpful. I’ll turn it over.

Thank you.

Thanks, Scott.

Mr. Mike, I like that.

Good morning, everybody. On the – yeah, I was hoping you could just give us a little bit more color on the deep retrofit program.

I think you said 19 buildings over five years. Perhaps you could just give us a sense of the capital spend, number one.

And then second of all, how you’re thinking about the economic return on that capital just in the context of the favorable financing rates?

Hi, Mike, it’s Jay. I’ll start on just the quantification of the capital and Gord will jump into the details of the retrofit program.

I think the good part of this program is a lot of the work that we’re doing is already incorporated into what we started on Bay Street. So for example, we’re doing redevelopment in two of the buildings of 366 Bay and 67 Richmond, so a big component will be incorporated.

Those projects will probably be between $10 million to $12 million. We have $10 million probably left to spend on Bay Street.

And even before COVID, we’ve been incorporating a lot of the work into it as well. In terms of the returns, it’s similar to our analysis on Bay Street.

We have some room right now on additional rents, the tenants are getting a better building. A big component can be amortized into the additional rents because of common areas, washrooms, elevators, and attendants.

Do you think it’s a great return for what they’re paying? So we’re getting a pretty good return on that as well.

So one thing I do want to caveat is we’re finalizing this very first decarbonization loan with Canadian Infrastructure Bank. It’s not done yet.

But we had good work – good news this week. We’re just finalizing everything.

This involves having consultants to greet all the work that we’re doing in advance. They have to take a look and be satisfied of the work that we’ve done when we’re completed.

But – so there is sensitivity, Mike, around the financials. I think Canadian Infrastructure Bank will want everybody to know the details as soon as we’re finished, because they would like to do more of these.

Overall, keep in mind that as we decarbonize the building as a significant reduction in energy costs, so we’ve got savings to the tenants. And to the extent that we have savings, we’re allowed to charge them.

And in addition to that, we’re getting a superior building, which will benchmark us against better buildings for operating costs. And so we’ll be able to recover a bunch.

And we’re also hoping that this will also help validate higher rents. So there’s all kinds of contributors.

But we do not – we’re not in a position to reveal the return on equity. Gord?

Yeah.

With that, don’t talk about the return on equity.

Well, we’ll talk about – give a quick overview on the Scope. And we put it into five kind of buckets, Mike, so we’re promoting conservation.

We’re finding building operational efficiencies. We upgrade for efficiency.

We select low-carbon fuel sources. We install renewable power generation, photovoltaics, wind power, things like that solar, and then we procure high-quality offset for whatever remaining footprints we need to get to our GHG Reduction targets.

So then we really break it down again into five kind of micro sub categories. So we do a lot of mechanical and electrical upgrades, HVAC efficiency, fuel switching, BAS connectivity, EMS.

We do a lot of envelope work. We’re actively working on right now.

We started, so we do facades, roofs, windowing, transportation, we get a lot of credit for EV chargers and bike infrastructure. If you haven’t been to 30 Adelaide lately, we’ve got a partnership with Tesla and number of EV chargers.

Renewable energy is a big component of our reduction strategy around rooftop solar, and then estatics, common area improvements. People forget when you use a faucet or a toilet are those low flow.

What are the outputs on that sinks? Even at operating standards, what materials we’re using?

The paper towels, is it electricity, things like that. So we’ve been doing this for the better part of two years.

And now it’s game time and we’re putting all our efforts together and we’re going to start unwinding the strategy this year. So we’re really excited.

Okay, and that sounds great. Thank you for that.

And then I’ll be – could you just remind me, is this long-term capital, like, what’s the term of the facility?

It will be long-term.

Okay.

But the bulk of the work, though, Mike, we’re targeting to get completed within the next five years.

Is it fair to say that the longest term debt we have?

Yeah.

Okay. That’s helpful.

Thanks very much. Okay.

I’ll ask one more before I turn it back and give everybody else a chance. Just wondering, we learned earlier this week, I think it was that you got a new – well, I guess not new, a renewed 10% shareholder.

And I was just curious if you’re able to comment with regard to the dialogue with this party and if you are able to comment on whether they’re happy, quite shareholder if there’s going to be more of an activist bent to their involvement? Thank you.

We’ve had a lot of significant shareholders. Sandpiper, now Artis is the only one that’s got over 10%.

All the significant shareholders have acquired the stock because they like what it – what the company owns and I think that’s the case here. I don’t expect any activism.

But who knows, we do value all of our shareholders. We’re happy to have Artis as a shareholder, we were happy to have Sandpiper as a shareholder, and we don’t discriminate against any shareholders.

I appreciate the call. Thanks.

I’ll turn it back.

Thanks. Good morning, everyone.

In Jay’s comment, you mentioned the implied value of the downtown Toronto office and I think I’m not sure it’s Michael or Gord someone spoke about that you’re open to selling non-core assets in other markets. Can we talk about if there’s a market to sell those assets at the IFRS value now and it’s something that you’re likely to do over the next year in regards to your thoughts about maybe surfacing the value and getting people to recognize the value in downtown Toronto office?

Sure. So we don’t, as I said, we don’t rely on the disposition, so it’s not in our forecast.

But I think the activity has picked up a little bit, I understand our team has been trading paper with their mainly domestic local buyers for assets in Saskatoon and there was some interest in Calgary. I don’t know the reasons behind some of those deals, but I think maybe oil prices have increased.

So people are interested in the assets, especially that we manage them in a way that occupancies are higher. They have positive free cash flow.

So last year that one of our goals was to get the occupancies high, so we could get financing for these assets. So they weren’t going to hurt our business.

We were able to do that with some of the assets are secured against our line. So we’re quite patient.

I think the carrying value or IFRS value of all of these assets are fair. So if we do transact, they should be approximate those values.

Yeah, and I think the numbers is – it’s about 82% of our value is in downtown Toronto. And then we’ve got Sussex and 2200 Eglinton, which are in the GTA, and they’re both great assets, that are long-term assets.

And outside of that we’ve got two buildings in downtown Saskatoon, and we’re doing pretty well with Saskatoon square. In Regina, we’ve redone the building there.

It’s got long term leases, and that’s a great building to hold or sell. in Calgary, we have the Kensington properties, it’s a very small property, be a great development site.

I think it’s actually quite well leased. Barclay is in downtown Calgary.

And then I think the only other building we have is in Kansas City. And we’re open minded, none of those buildings are viewed by us as super core.

So if we see the right deal, we would act on it or keep it just depending on the economics.

Okay, great. And maybe just one more question.

Dream Office has bought back units over the past few years, and industrial has done extremely well. Is – while the unit price I’ve got slightly just of late.

But is there a maximum amount that you would be comfortable with Dream Industrial or presenting of the market cap or Dream – off of Dream Office? Or is that not a number that really matters?

I actually never thought about it. I would say that if Dream Industrial goes up and represents more of our company, we like that.

We certainly don’t want it to go down to represents less. So we’re just totally focused on the value.

What I would say is – or simply create a Dream Industrial REIT is the motto talkable, we have office read, we have this and we’ve always say it’s an investment. I’m pretty pleased that we’ve owned it as long as we have.

We bought more occasionally. We sold 1 million shares once.

But Dream Industrial has been a very valuable moderating investments through COVID. So it’s worked out very well.

But once again, if there was a reason to do something differently, it’s an investment and we’d be open to it.

Okay, great. Thanks so much.

Thank you, operator, and good morning, everybody. My first question is around Bay Street and the law firms are one of the biggest employers out there.

As these firms compete with other firms in terms of getting their employees and a big part of that competition has been additional work from home. Has been a part of weaving discussions in the downtown and has that impacted leasing in any way?

So you were breaking up a little bit, but was your question, if there’s been a trend towards work from home around law firms?

Yes.

Yeah. So I think, almost universally, across during the pandemic, a lot of companies were looking at their accommodation plans.

We’re starting to hear and we’re starting to see people coming back to the office. We’re starting to hear some hybrid models, but no one dramatically reducing their footprint, especially along Bay Street.

And for us on Bay Street, our floor plates are really small. We don’t compete with the big law firms.

So we get a lot actually a good component of our tenancies on Bay Street are small boutique law firms that we’ve either just recently renewed, or we’re in active discussions with maybe take a little bit more space, or extend their lease. So we’re quite immune in our portfolio to the big downtown core law firm exposure.

I mean, what I’d say about this is not everything is about work from home. I think what the law firms are seeing is that their associates are getting offered New York rates to work for New York firms and sit in Toronto.

So they’re really struggling to keep people and they’re – very always been very focused on cost. I think they’re very busy, they can’t hire people.

So they’ve got their own decision to deal with. I think we’ve seen banks trying to rationalize space and reduce their space.

That’s not as much of work from home, although work from home may help them reduce their costs. But the thing to keep in mind is, it’s the companies that are growing, that are absorbing space.

And what I find amazing is, despite all the talk, most of those are technology companies. So they’re looking for 400,000 square feet, or 600,000 square feet.

If there wasn’t work from home, it might be a little bit more. I don’t – we don’t know.

All we know is that when people talk to us about sort of old era businesses, using less space a lot of is just to reduced costs. And we’re seeing new era businesses, drawing leaps and bounds and needing basically, like, that’s what I saying earlier, there’s all these new buildings coming.

They’re mostly full of worsening all these new tenants that are saying, we need half a million square feet. And it’s really – you just take a look at who needs the space.

And you can see that it’s not old companies, it’s new companies.

That actually makes a lot of sense, Michael. I mean, considering these new constructions also will come in at a significantly higher rents.

So delta then should kind of be in your favor. Just looking at Q4, I think there are about five buildings in the downtown portfolio with like sub-70% occupancy, which I think is a great opportunity for the data as such.

Historically, can you give us some color in terms of what’s been a challenge with these properties? And how do you see them contributing towards this broader 70% commitment goal for 2020?

It’s 90% commitment, sorry.

Yeah, you’re breaking up a little bit at the end, but you were talking about vacancy pockets and some are buildings. I think what’s interesting is we intentionally put a line in the press release, we’re holding back some space, I think around 40,000 square feet.

As we reposition some of those buildings are on Bay Street, so that when we do get the work done, we can attract high end tenants, and there’ll be some high end restaurant offerings coming in. And then the other vacancies that we’re looking at leasing up right now, I think a lot of it’s just been delayed a little bit with Omicron.

Variant, but touring activity, everything else is normalizing. And if we see the same indicators that we saw in October, November, I think we’re quite optimistic that we’ll see some good velocity in the spring.

I mean, I just want to point out to everybody that condominiums in Toronto and not as good locations, as our buildings are selling for $1,500 a square foot today, brand-new ones. We’re done with having an implied value of $500 a square foot for office.

I think we’re quite confident that we’re going to have lots of leasing. But I also think we’re quite confident that downtown Toronto is going to continue to thrive.

And the types of properties we have are literally trading at land value.

Thanks for color, Jay and Michael. And my last question before I turn it back is on – understanding the interface and commitment of occupancy.

So Jay, when you say 90% increase in commitment by December, what’s the timing difference between commitment and when do these actually start paying up?

Typically, it’s about four to six months, when we get our commitments. So we’ll get a commitment, we’ll have a firm deal, there’s always usually typically a four to six-month fixturing period to get the space ready.

And then we start cash flowing on the unit typically after that.

We also mentioned how often it usually takes for the time you meet a tenant, or start to undo renewal until the deal is done.

Yeah, the deal cycle of a deal can take anywhere from 60 to 120 days on average, just from the start. You have to negotiate the lease, you have to go through a scope of work.

There’s a lot of variables that you have to consider that go into doing the deal, even in the hottest markets. So we bake in some timing from commitments to when it starts the cash flow.

Perfect. That’s actually a great color, Gord.

And thank you gentlemen, and congrats on a great quarter. I’ll turn it back.

Thank you very much. Thanks.

Hi, good morning. I want you to focus over to your debt stack.

It looks like the floating rate debt crept up to almost one quarter. I know it’s fluctuated throughout the years.

But given the expectation of boats going up, how you think about that piece of the debt stack?

Hi, Jenny, it’s Jay. Good question.

We’ve been tracking the interest rates closely. I think on average, cost of debt would have been probably 75 basis points higher versus just a couple of months ago.

We’ve monitored it. So our credit facility is variable.

We’re currently about 75%, 25% variable. We do – we don’t really have a lot of covenants.

We have many ways of getting liquidity if needed. So we’re quite comfortable and we run a lot of sensitivities, say, the other variable components of debt are actually on a land.

So as soon as you’ve done that 2200 Eglington, it gives us more flexibility in terms of timing of construction. So we have the opportunity of layering on construction debt without taking on large penalties.

But right now, 75%, 25%, we’re comfortable with, we’ll monitor it. And then when we get the other – the green facility that will be fixed.

So that will reduce the waiting down a little bit.

Okay. So to sum up, you’re fairly comfortable, but probably won’t be going any higher than that 75%, 25% you mentioned?

Yeah, we even looked at potentially fixing it over the course of the last month or so. What’s happening is the banks are baking in quite a few raises.

So right now, just the sound economics, it makes more sense to keep it variable, but we are watching that ratio.

Right. Okay, great.

I also want to dig into the parking revenue trend a bit. I don’t think the numbers are laid out in the report.

But what would you say is the utilization right now? And what’s the gap to full potential?

And then also second part of the question is, has there been any changes in the parking rates that you guys are charging?

Okay, so just conceptually, full parking is about 10% of NOI. And five are contractual assigned the leases, five are transient, which is just gate revenue.

I would say utilization is a bit of a roller coaster. October, it was looking pretty good.

It was probably over 50%, 60%, 70%, and then it trended down close to 0% by December and then now we’re coming up. So, for example, in our garages, right now we have three floors.

We’re pretty well occupied on P2. So if you want to take that as a simple ratio, that’s probably two-thirds.

There’s a fixed component operating costs for these garages. But I would say that optimistically, we’re hoping that the garages will be pretty full by the time summer rolls around.

In terms of the rates, my personal feelings are that the race will probably be higher once things stabilized, because there will be more demand for parking. I don’t know how many people are going to be comfortable with taking public transportation.

But currently, as long as there is availability in the garages, we’re probably working on having a full stand to push the rates today.

Okay, so the 10% at sort of full potential, where would you say it was in, I guess, Q4 pretty wide range in Q4?

I would say out of the 10%, we’re probably around 4% to 5%.

Okay. And when you take the 5% contractual, are those parking contracts with individuals?

Or are those tied to leases with certain tenants? I was just thinking of –sorry, go ahead.

Those would be leases.

Oh, leases. Okay.

Okay. I was just thinking about what the average user might be tilted towards if they’re not necessarily going to be in the office five days a week, but these are types of leases.

Okay.

Yeah. Those are tied to leases at market terms that adjust every year.

Okay. Okay, great.

And then I have a bit of a technical question on the accounting side. As far as the interest on your DCF calculation, looks like the market rent has gone up a bit.

It’s starting in 2Q actually, I think it’s – I think it was here, about $44 in the last couple of quarters, and it’s up to that $30 range. And it looks at the bottom end of your assumptions went up from $10 to $31.

So I’m wondering if that was the big driver of the change and what drove back from I guess, Q2 to Q3?

On that one, we’ll have to take a look and get back to you. Can I call you offline?

Yep, yep, that sounds good. That’s it for me, then I’ll turn it back.

Okay.

Thanks. Good morning, everyone.

Just maybe first for Gord, perhaps the – when look at the committed occupancy and the in-place occupancy is a very wide gap today at about 2.5%. Is there something there that seems unusual?

How should that play out for the balance of 2022?

There’s a bit of a – good question, Sam. There’s a bit of a spread, because we’ve done a couple of large pocket deals that don’t start paying rent until kind of mid-year Q3.

Western Canada, we did a 30,000 square foot deal with a tenant at Sas Square. And then we did a deal at 655A, that starts later in the end of the year.

And that was a big deal. That was about 50,000 feet, Sam.

And that was a deal where we took the expired rents from $17 and brought them up to $30. So that’s why there’s a bit of a spread between committed and in-place.

So that gap should narrow over the course of the next quarter?

Correct.

Yeah. Okay.

Correct.

Okay. And Michael, maybe just looking at the development projects, planning is getting pretty finalized here, approvals are coming through.

You talked about two Dundas starting late next year, maybe. How are you preparing the balance sheet to accommodate the funding for one or more projects, and balancing that against obviously, your buyback activity?

And what other capital sources would you be considering?

We have discussed having partners in the projects potentially. In addition, we think that with the completion of the rezonings, the value will be appreciably higher as well.

2200 Eglinton is really interesting, because it’s not one building, it’s a whole series of buildings. So what is fully approved, the value will be quite high, and that increase in equity will be more than enough to fund each phase if we’d like to do that.

So that one’s pretty easy. 250 Dundas, again, that – there’s lots of value there.

The trickier one is 212 King, but we’re – because that’s just a huge building, you got to build it all at once. We have a partner there already, but it’s too far away to actually plan the financials.

Okay. So all of these are keepers getting the approvals and looking to sell the site.

You’re keeping these then proceeding with the development, potentially with partners and stay with them over time. You feel like you’ve got the balance sheet to be able to do what you need to do.

Yeah, we think so. We think so for sure.

Okay. Maybe one for Jay.

Just when you look at the IFRS valuation process, what does that process do to the NOI for valuation purposes relative to what the NOI actually was in 2021? Specifically thinking about, I guess, both occupancy, but also adjustments for your normalizing parking?

So, for example, what would be the net adjustment on the parking side to bring the NOI up to some stabilized number from where it was?

Yeah, sure, I can talk about the valuation conceptually, and then we can drill down. It’s been a big topic, because if you look at it, there’s a lot of private comps.

The valuation methodology looks at a variety of factors. They do direct comps, they do ETFs, they look at data points on the private trades as well.

We have a large portion of our portfolio appraised every single year. And generally, their methodology is consistent with how we would do it internally for accounting purposes.

So I’d say that during COVID, there’s probably more of a focus lies on near-term fundamentals. So when you look at the underlying assumption, so for example, occupancy, rent, parking, it’s hard to push the values up significantly to try and reconcile with a private face.

But at the same time, we we’ve been doing the leases, all the leases are coming in at pretty high rents. So when you take a discount on parking, or you take a discount on potentially a downtime of four to six months, until you pick up that leasing velocity, again, what you would typically do is probably present value that as a deduction.

But at the same time, if your income is stabilized and it gets capped, that’s a much bigger value. So what we’re seeing, there’s a reason why you see sort of the values, they fly over the courses.

When we are replacing the tenants with the renewals or the new leases are coming in the high and then when you have it, it’s a good value. And we’re offsetting that with some of the maintenance capital and just downtime from parking and leasing.

So you sort of end up back in the same place, but the private buyers are obviously seeing much better value for the long-term.

That sounds very simple. Okay.

Thanks very much.

Hey, guys, just a quick follow-up on 2200 Eglinton. Is there residual office or even I guess commercial real estate component of that?

And the residential, would that be rental maybe early days or condos?

So firstly, there’s 165,000 square foot existing office building and it’s pretty fully leased. And I don’t remember if it’s 82, or whatever, but it’s well leased, that building will remain.

The – and this is just for, as a reminder, this is a 16-acre site. So there’s a lot of land there.

And most of the development is not that high rise, it’s fairly mid-rise. We are hoping to be able to come up with ideas that will make it economically very attractive to do apartment rentals.

And we would look at condos to manage cash or whatever. But through our impact business, we have come up with some really wonderful ways of financing buildings that provide the government with some of the benefits they’re looking for, for their major, major initiatives.

So it’s too early, but we need to get it approved first, but we are talking to governments now on different ideas on how to make it rental and make it rental that includes them affordable, that would make it very attractive for the owners as well as for the community.

Absolutely, it would make sense in that area. And then on Bay Street, I’m saying this Africanus, somewhat selfishly, because I walked by it every day on my walk into the office.

But what is the timeline in terms of sort of the facade work as well as getting some of those new, really interesting restaurants that you guys have spoken about into the base? Because at this point, there’s a lot of scaffolding.

And has that impacted the leasing on the office component? Are people willing to lease the space on renderings at this point?

Good questions, Matt. So there’s two big facade projects that we have underway right now.

So 330 Bay, which is a complete refacade, we’re reglazing the whole front that’s tied to a retail deal that we’re working on, on the ground floor. And we have another pocket of strategic vacancy that we’re holding off for higher rents.

And then the other big component of the facade project is 80 Richmond. And 80 Richmond should be done in the next 15 to 30 days.

We have some tenting that we’re waiting to do when the weather gets a little bit warmer. But those will be done.

The retail deals that are on Bay Street and in our alleyway project, those are actively being worked on right now. They’re in the final stages of the planning and costing.

And we plan on starting the construction on that within probably about the next 30 days. So we’re excited to unveil all that and we’re targeting this summer to announce and showcase in person, at least one of those larger retail deals.

Okay, looking forward to it. And last one for me on the cadence of occupancy throughout the course of the year.

Jay, are there any known vacates versus some of that lease up? Or is it – it’s pretty much leasing vacant space and maintaining existing tenants in place?

Yeah, a lot of it block and tackle. Actually, for 2022, just heading into it even pre-COVID, we – the two large ones were 74 Victoria, that was a passport office.

And then State Street here in our head office at 30 Adelaide. We addressed the 74 Victoria in 2020.

So I think we’re expiring at 27. We got down to 33.

And then State Street, I’d like more probably talk about it in more detail. But we did address a significant portion of it.

But there will be probably timing lags from the new leases. And then as we talked about earlier, the fixturing and then commencement.

Yeah, so State Street, if you remember, they expire this year. They’re about 225,000 feet.

So we have commitments on about 185,000, of that 225,000 feet, even advanced to the natural expires. So we’ve addressed a really good chunk of it.

They had two sub tenants that we removed directly, and then we’re working on a direct deal, that’s conditional right now for a very large pocket of the balance. So we’ll only have about one floor left that’s actually actively being marketed.

So that’s how we’ve addressed State Street, and Jay mentioned 74 Victoria, last year renewed the whole building.

Okay, fair enough. So that was a good outcome on State Street.

So just to be clear, State Street is keeping a significant amount of space…

Correct.

And then they had some sub tenants. And we’re dealing with the balance, but it should turn out quite well.

Okay, perfect.

Thanks. Good morning.

You commented a bit on this in your release. But as we get closer to full reopening, and staying open, what sort of feedback are you getting in your conversations with tenants?

In terms of how they’re planning to use their space maybe differently in a post-pandemic world? And maybe what are some of the surprises?

Just by the way, we here – we got to do more with analysts than we actually do with dentists, for whatever that means. What are you hearing from them?

It’s pretty broad. Some tenants are taking a little bit more space, and some are taking a little less since it’s almost 50-50.

And to Michael’s point earlier, that tech companies that we’re often dealing with, they’re looking to expand, and they’re taking more. And then some of the professional services firms that we’re dealing with independent boutique firms, maybe they’re taking a little bit less, but they’re doing blends –blend and extend and we’re working with them kind of longer-term on some pockets.

But it’s pretty much 50-50 across the board.

What we’re finding is people don’t know how they’re going to use their office space in the future. I mentioned this a year ago, and I keep in touch with furniture manufacturers, they aren’t doing anything that’s different.

We hear discussions about maybe how groups of people working together, but not all open. But I actually think that most people are thinking about it, want to be able to come back.

And once they know how the space will be used, they would do something. But amazingly not, we’re not seeing a change in the way that people are using space or how they want to lay out the space as of yet.

Got it. No, that’s helpful.

I guess just coming – Jay, coming back to your comments on the same-property NOI outlook for the year just – and then you mentioned that the weighted average occupancy is going to be coming in relatively flat. I’m just curious how that same-property NOI breaks out between the downtown Toronto and the rest of the portfolio?

Yeah, when we look at this, as we think this year, I should be quite consistent. So we’ll see minor increases in both markets.

Okay. Just last one for me.

On the 2022 maturities, you’ve obviously made some good progress. What can you share with us just in terms of the spreads and how those were coming in on the leasing spread side?

Yeah, so we’re seeing average net rents up by about 10% on what we’re seeing on pre-negotiations and deals that were conditional on. So we’re seeing a good uptake on that.

Any ours right now for deals that are closing early in the year are flat or up a bit. But 2022, we’re in pretty good shape, like we’ve addressed about 75% of our expiring revenues and we’re keeping on top of it.

Yeah, just try to be a bit more specific. The two large pockets that we talked about earlier are probably going to be the biggest drivers of that.

And 74 Victoria, that was over 200,000 square feet, and you have a spread of 33 over 27 on us. I think that’s about 20%.

And as we get through State Street and put together the various pockets, we think we’re going to get quite a nice lift once everything is filled. So consistently, when we execute on new leases, it’s about close to 30%.

And the other markets, we have in our disclosure, we just rolled them to market. So overall, I think for the year, we’ll probably be in the high teens as 20% overall.

Got it. I might – I’ve got one more.

Just in terms of some of the – you mentioned tenants expressing interest in some of your new projects. Can you just expand on that, like what types of tenants are – have contacted you in terms of some of the projects underway?

Yeah, so it ranges. On Bay Street, we got some professional services firms that are quite interested in having a full floor on Bay Street, that’s appealing.

Technology, we’ve been getting a lot of calls on tech users. We announced publicly about 212 King and we’re going in for rezoning and approvals.

We’ve gotten 15 calls from large-tech tenants, bullish on that corner, the corner of King and Simcoe that are looking for space. So a lot of tech firms that are growing and expanding a lot of coworking, we get a lot of call from coworking in the market as well, too.

But it’s been predominantly tech groups that are leading the charge.

That’s great. I will turn it back.

Thank you.

Hey, good morning, guys.

You made it.

I made it. I made it.

I’m working from home. Today, I expect the connection would have been stronger if I was working from the office.

So Michael, I wanted to come back to your comments on land values. You mentioned condos are selling at $1,500 square foot.

You implied $500 to be in office in the market today. What would you say the differential downtown inland values between office and residential today for buildable square foot turning down today?

So I want to clarify a bit, we’re sitting at 30 Adelaide, it’s a 400,000 square foot building. If we rezone it, we could probably get 1.1 million square feet here on 65,000 square feet.

So at $500 a foot times, 400,000 square feet is worth $200 million. If we were to rezone it, at 1.1 million square feet at $180 a square foot, it’s worth what the building is currently in the implied stock market, and it would be worth more than that.

On Bay Street, their historic buildings, you wouldn’t be able to do that. So I’d say more about this kind of building.

720 Bay, 655 Bay, a lot of these buildings that we saw it at 250 Dundas is – were so much more money if we do something new with it. So what I was trying to say was, we can tell you with confidence how every office is going to function and how many humans work at home or those things.

We’re confident that there’ll be a lot of people that work from offices. What I was trying to say was just with the value of what’s going on in downtown Toronto, I don’t know if it’s known, but we’re chosen to do the Keysight bid this week.

That’s about 3.5 million square foot development. Beside that, we own a 1.3 million square foot development.

So we’re pretty tuned into what’s happening and we can see just how valuable Toronto is. So I think on these calls, everybody has this vision about what’s happening on office rents, what’s happening to where people work from.

And what I was trying to say was, there are other alternatives and the difference between $500 a foot, the implied value of $1,500 foot for condos is impressive. When we bought one – when we bought Adelaide place, we paid $212 million in 2009.

It was a 7.2 cap. And I think it was about $300 a foot.

And across the street, they were building the Shangri La and they were getting about $900 to $1,000 a foot. And I just thought I would buy this building for $300 a foot if the Shangri La gets $1,100 a foot because the comparative value is amazing.

And today, I think comparative value continues to be amazing. The difference is we’re seeing buildings like Blackstone bought Liberty Village building at $925 per square foot.

And it has no further development. I mean that we didn’t see that back there in 2009.

So you think about it. In 2009, we stepped up big to buy the first big building coming out of the global financial crisis at $300 a foot or maybe 40% of a condo price.

Today, we’re trading at $500 a foot, which is one-third of condo prices. And at the same time, we’re seeing Liberty Village at $925 a foot.

We’re seeing Royal Bank place at $800 a foot. So we’re pretty comfortable that this company will do well whichever way things sort of roll out with office space demand, but we’re pretty excited about the existing use.

And sort of as we get through some of the redevelopment, there’ll be lots of more opportunities. So we’re single mindedly focused on reducing the shares outstanding since – I think since 2016, we sold 140 of 172 buildings, we still have a 32.

We’ve reduced our shares outstanding by both 60% – no 55%. So we’ve been single mindedly focused on creating a business that has incredible assets with wonderful use.

We’re decarbonizing them. We’re making them boutique buildings.

But we also have a lot of buildings that have a lot of value for other uses as well. So that that’s where our confidence comes from and the value of the business over a longer period of time.

Yeah, 100% makes a lot of fun. I didn’t want to ask you on the Keysight announcement earlier this week, so congratulations on that.

It’s really early, but to what extent can you talk about the range of potential implications for Dream Office from that proposed development?

Oh, that’s a really interesting question. Look, this is a site that Sidewalk Labs have been working on.

It’s a big site. It’s a very important site.

And there’s a tremendous number of competing goals that the governments have been trying to achieve, including the high purchase price, as well as a lot of social goals. So our bid was, I mean, we were incredibly fortunate to be able to have some of the leading architects in the world, particularly Sir David Adjaye, who has not done a project in Canada.

He was knighted for his work, and a lot of his work has to do with accessibility and diversity. He does a lot of affordable housing.

I think, what’s the name of the museum he did, that the African American Museum of History, the Smithsonian. This guy is a legend.

And he doesn’t do a lot of these kinds of projects. We were very fortunate that he saw on us a business that was focused on trying to bring a real big goal of getting an economic return and getting stuff done for the community.

So he helped us, every – all the consultants helped us and we put together a real combination of great social benefits as well as what we think will be a great economic return. I say all of that, because we have about – the plan now, I think is a couple of hundred thousands square feet of commercial space.

Some of those uses are social, which will be really exciting. We’re trying to create some real business opportunities for underrepresented groups.

There is some commercial space. But at this point, we haven’t done any work with Dream Office for opportunities there.

But it is interesting that we’re seeing so many big tenants who knows what will happen. I’m not sure about Keysight, but our work on impact is definitely spreading into what we’re doing in office.

I think that as we’re getting developments, like 2200 Eglinton, and that’s been an amazing benefit that we are so focused on impact and getting it rezoned. But I think we’re going to see more and more opportunities for office to incorporate the impact framework on what they do and get benefits from it that could lead to more opportunities to build buildings.

Was that a clear answer?

Yeah, no, that’s good. That’s good.

I have a couple more. Let me just e-mail to you, in the essence of time giving reports 70 minutes here now.

But maybe one last one for me. When you think about the future of the company, it really, really focused on developing redevelopment going forward in terms of creating value.

So when we think about 212 King, 250 Dundas, 2200 Eglinton, when you look at the potential value creation there relative to what you have embedded in your IFRS math today, how would those two compare like those three proposals? How are they valuing within IFRS today?

And what are the benchmarks to increase that value in your IFRS over time?

It’s really early to determine what the ultimate value would be after developing the assets. But firstly, if you take 2200 Eglinton or 38 University and our share of 212 Kings, the value of those three assets would pretty much double the size of our office portfolio.

That’s how big they are. They are close to $2.5 billion in total our share at this point.

With it, there is definitely a significant increase in value from getting the zoning. And I don’t think, in my mind, any of those sites reflect the full ready-to-go value.

But in addition to that, there’s addition – the development value. So very simply what we use is if you spent $1 million on a piece of land, if you rezone, it should be worth $2, and once you finish developing, it should be worth $4.

So we’re probably if I had to guess 25% to 30% of the way to recognizing value, let’s say on 250 Dundas, considering as zoned. If you look at 2200 Eglington, we’re not even close.

And 212 King, that one may not get as much of a margin. It’s an incredible building, but it’s going to be a bit tough to build.

But but there we’re still carrying in it the 212 King value. So if you’re asking how many dollars, I don’t want to say a number, I’m only thinking that we might have a smaller denominator then.

So on a per share basis, it’ll be meaningful.

Yeah. It makes sense.

Okay.

Thanks, Michael.

Well, I think we just set a new record for the longest Dream Office conference calls. This has been going on for more than 20 years.

I’ve got a shot that today of all days, it’s the longest one, but thank you for your interest. We could have sat here for the rest of the day, but I guess we’re done now.

Thank you, and looking forward to seeing you in person soon. All the best.