Dream Office Real Estate Investment Trust

Thank you very much, and welcome, everybody, to Dream Office's fourth quarter conference call. Today, I'm here with Gordon Wadley, the Chief Operating Officer; and Jay Jiang, the Chief Financial Officer.

Before they speak, I just wanted to say a couple of things, including, we're very pleased to have had about 60% of our entire debt coming up in 2025. And virtually all of that has now been taken care of in the terms of that we're very pleased with.

In addition, we've made progress on the sale of 438 University, [and now that one is firm]. On the capital side, things are going very well.

On the leasing side, Gord will share some success stories with you regarding 74 Victoria in terms of re-leasing of it, how many deals we've been leasing. And generally, the new statistics that are out show that on peak days in downtown Toronto, we're now up to 86% of the [technical difficulty] there's been a huge increase in traffic count and the work from home [technical difficulty].

Overall it has been five years since…

Thank you, operator. I'm sorry about the connection.

Gord, do you want to continue?

Yes. Thanks, Michael.

It's really nice to be with everyone again today. As you know, downtown is continuing to experience one of its highest vacancy rates in its history.

As of today, it currently stands at almost 20% across all classes. This is due to the potential for even more space entering the market as tenants either rightsize or expire.

This obviously makes it difficult to operate in an environment for commercial space in Canada. All that being said, our team continues to get deals done and find very creative opportunities to maintain and grow our occupancy.

Tours have picked up year-over-year due in large part to no new supply in the pipeline coupled this with the fact that we greatly improved our assets during a trough market. And as we discussed on previous calls, we made an effort to invest and isolate quick rent-ready suites to catch demand and compete on timing.

As a result, our portfolio continues to lead the market on sheer numbers of transactions. And this year, we did more total deals than any of the previous four years.

From a pure volume perspective, 2024 marked our most active leasing year in terms of deal velocity since pre-COVID. This past year, we did 114 deals total, of which 54 were direct new deals and 60 renewals totaling over 635,000 square feet.

The 114 deals completed this year was higher than the 98 in 2023 for 780,000 feet and the 93 in 2022 for 600,000 feet. Notably, rental rates remained strong and increased across the board with net rents holding steady in Toronto at $30 to $35 a square foot, aligning very well with our business plan, ultimately yielding a 20% spread against expiring rents.

However, it's important to note that we continue to see the combination of higher material and labor costs, along with increased commissions, which on new deals compressed net effective rents to the mid-teens in Toronto. But on the flip side, this was offset by our renewals that performed much better than budget with NERs in the mid- to high 20s.

Our committed occupancy in downtown Toronto, which constitutes the vast majority of our assets, stands at just under 85% to close out the year. This includes the drop in occupancy quarter-over-quarter due to the known vacate we had of 206,000 feet at 74 Victoria, of which we were able to successfully mitigate and renew 64,000 feet.

And I'm also really excited to talk a little bit later on the call about all the commitments and things we have going forward with that asset. From a macro perspective, this compares favorably to the overall market Class A occupancy at 83% and the B and C class occupancy at 72%.

Our team has excelled in tenant retention, moving tenants throughout the portfolio to accommodate their fluctuating size requirements. A great example of this is a large law firm tenant from 438 University that we moved to Adelaide Place and signing a large media tenant at 30 Adelaide, which is a full building, so we can start relocating some tenants over to 74 Victoria and fill that asset way ahead of plan.

We have accomplished our ground floor retail goal of backfilling all retail vacancies with premium restaurants, some of the best in the city, all of which will be opened by this quarter. Late last year, we launched our modified suites program, renovating and furnishing over a dozen units with good existing structures at a low cost.

Since their completion last September, several of these modified suites have already been leased and a few are in the process of being leased. As we move into 2025, we now have a selection of renovated model and modified suites within the Bay street collection that should drive leasing and have greatly improved tour velocity.

These suites, coupled with our 100% completion of retail in the core, has been a real catalyst for our uptick in tour activity and gives us the optimism to continue to hit our guidance in the years to come regarding absorption, occupancy and ultimately NOI growth. The one thing I'm really excited to talk to you about is last year, we identified the 206,000 square feet of government departure at 74 Victoria.

We identified this as a major risk. They expired at the end of 2024.

And in that short period, we renewed 64,000 square feet of the space at very high rents with minimal capital investment. And we're very pleased on the call today to share that we've also secured an additional commitment of 55,000 feet as well as another conditional lease for another 50,000 feet, and we're in negotiations for an additional floor as well.

I want to emphasize that in a market where B and C and overall stock is sitting vacant, our team has proactively leased 170,000 feet in less than six months, taking over an asset that has been 23% occupied at the lease expiry to what we think is going to be closer to 86%, 90% in a very short period of time by all industry accounts. So I'm really proud of the team's efforts on all this work.

We expect to see the continued lease-up of Adelaide Place and our Bay Street assets, along with the improved tour traffic at 67 Richmond, couple these with our retail being 100% leased to new restaurants, we're very confident NOI will continue its growth trajectory per our guidance. Given market uncertainty, we use a bottom-up approach to forecast property level cash flows by reviewing suite conditions, tenant profiles and renewal likelihood in the next 18 to 24 months.

Beyond 2026, we rely on broad market assumptions. We anticipate average in-place downtown occupancy to dip to 81% in 2025 before rising up to the high 80s in 2026 and stabilizing above 90% in 2027.

Despite having a very strong year of leasing in 2024, we're being cautiously optimistic, but feel we're in good shape for 2025 with a good portion of renewals already addressed. We're targeting approximately 275,000 feet of speculative leasing in Toronto, made up of new deals and renewals this year to hit our committed occupancy goal of high 80s.

For some context, we've done about 550,000 feet over the past two years on average. So I feel really good about our forecast to further support.

The team is actively working on over 30 deals in Toronto currently representing about 300,000 feet. These are very active prospects in various stages of negotiations, and we'll have more exciting news to come on these in subsequent quarters.

Based on the criteria, I feel we're very well-positioned to meet our guidance and hope to see additional improvements as the year goes on. Look, we all recognize the costs associated with closing deals have risen significantly.

Prospective tenants increasingly expect turnkey office space from landlords, including Dream Office. We're accommodating this demand by offering cash inducement packages to cover fit up capital costs ranging from $75 to $125 a square foot or by completing these upgrades speculatively to enhance leasing velocity.

Leasing commissions have also escalated with landlords providing higher commissions to entice brokers to direct their deals to our buildings. The one silver lining to the increased costs is the associated increased lease term that comes with it, often by simply spreading the cost and amortization to the tenant.

As such, we're seeing our average walks for the portfolio grow and they're now a very healthy almost 5.5 years on average. This outperforms the market.

Given the costs and emphasis on liquidity, we will always remain hypersensitive on covenant. Always.

We work in lockstep with our debt team and lenders to ensure we have the appropriate security and guarantees to support the costs, but ensure term value and stable cash flows for our assets. We remain very cautious and thoughtful with all our capital expenditures, ensuring that every dollar is allocated towards driving more leasing activity and maintaining the life and safety of our buildings so our tenants have a great experience.

Reflecting on our past decisions, we're very pleased that we upgraded most of our properties prior to Covid as they're now well-positioned and well located to capitalize on an office market recovery. Overall, we're pleased with the progress our team has made in maintaining the portfolio's occupancy and rental rates.

We look forward to the coming year where we anticipate an improvement in the office leasing environment, which ultimately should translate to higher occupancy rates and improved cash flows. I want to close today by sharing that we've made substantial progress in a very challenging operating environment by successfully renewing and replacing loans, which Jay is going to speak about shortly, divesting noncore assets and always maximizing leasing opportunities in absolutely every way we can.

Our business is now more secure with increased liquidity, and we'll continue to seek strategies to enhance business value and manage risks effectively in 2025 and beyond. I honestly couldn't be more appreciative of our team's efforts.

I'm always very grateful for our clients' commitment to us, and I want to thank you all for your interest and support and the good things we're doing at Dream Office. And I'm going to turn it over to my good friend, Jay Jiang.

Thank you, Gordon. Hi, everyone.

Good morning. I'll start off by giving an overview of our financial results and then share some insights on how we're forecasting our business for 2025.

We reported diluted funds from operations of $0.72 per unit, down from $0.75 per unit in the fourth quarter of 2023. This drop was mainly due to higher total interest expense of about $0.07, which is partially offset by lower tenant provisions of $0.03 and higher FFO from our investment in Dream Industrial REIT units of $0.01.

Included in the $0.72 are roughly $0.07 of nonrecurring cash adjustments with $0.04 reported in our MD&A line item, other income and $0.03 in income from sold properties. Our total 2024 reported FFO per unit was $2.98, which is about 4% higher than 2023.

If we exclude all the nonrecurring income items during the year, the recurring FFO was around $2.88, which is on the higher end of the guidance we gave in February 2024 of between $2.80 to $2.90. Total comparative properties NOI was flat compared to the same quarter last year or 2% higher for the year relative to 2023.

Similarly, we have delivered SP-NOI that aligns with our forecast. Despite managing through another challenging year in the office sector, we're pleased to deliver stable financial and operating results, exceeding the midpoint of our communicated guidance.

Our net asset value per unit was $59.47, down about 3% from Q3 of $61.24. The decrease includes $39 million of fair value write-downs on investment properties.

During the year, we externally appraised $894 million or 41% of our income portfolio. In addition to the valuation process as part of our quarterly reporting, lenders also internally review values and engage third-party appraisers as part of their credit approval process.

Over $800 million of properties were reviewed and appraised last year as part of the refinancing program, which also supports our carrying values. In addition to meeting our financial targets, we're happy to have executed on several key initiatives to reduce risk across our business.

2025 was a significant year for refinancing as we had $744 million of mortgage and credit facility commitments maturing. This represents almost 60% of our total debt stack.

We're pleased to announce that to-date we've refinanced or received credit approval for $711 million of maturing debt without any paydowns and at terms attractive to the REIT. This includes the $375 million revolving credit facility that expires in September of this year, for which we've received conditional approval for extension to September of 2027.

We're in advanced negotiations for the remaining $30 million of mortgages and expect this to be completed in a few months. In 2026, we have $165 million of mortgages maturing across six properties at a weighted average interest rate of 4.8%.

Based on the cash flows of these assets, we think the loan-to-value is quite conservative, and we're very confident in our ability to refinance these loans. Overall, we feel great that we've been able to address all the refinancing risks in our business for at least two years.

On January 24, we announced the sale of 438 University for gross proceeds of approximately $105 million or about $327 per square foot. As part of the transaction, we were able to secure additional benefits for the REIT, including relocating tenants at 438 University to other buildings in our portfolio and securing rights to unencumber our building at 250 Dundas, which is one of our best development sites.

We also earned a property management contract to earn fees for Dream Office for at least three years. We think these benefits are worth at least $20 million.

We're closing the transaction this week, and we will use the proceeds to pay out the $69 million of mortgage and pay down part of our revolver. This quarter, we also announced the potential conversion of our 126,000 square feet office building at 606-4th Avenue in Downtown Calgary into a brand-new 166-unit rental apartment building.

We're in the process of relocating several office tenants within 606-4th to the adjacent building at 444-7th Street that we also own. So this means we end up with a substantially full office building and a new apartment rental.

We think we can achieve a 6% development yield on the apartment project. But more importantly, this conversion reduces leasing and financing risk at 606-4th.

And also, it improves our overall income profile and quality of our portfolio in Calgary. We're currently finalizing the grant and government financing.

We're in advanced stages of securing a grant of up to $11 million from the City of Calgary to complete the conversion. We're also in the process of securing government financing for a 10-year loan, and we are looking at bringing in a partner on the project to further reduce our risk and equity requirements.

We're excited about the project and look forward to providing updates over the course of the year. We'll continue to look for opportunities and strategies to reduce risk in our business and find creative asset management and leasing strategies to improve our income profile.

The office sector remains a complicated sector to model and forecast. We're seeing touring activities improve since the New Year, and we think that we will benefit from a better leasing market over the next 24 months, resulting in improved rents and occupancy and a reduction in tenant inducements.

We think it's still difficult to predict occupancy and NOI for '25, but we've shared the key assumptions we use in our model. Gord has spoken extensively about our occupancy projections so on a steady-state basis, assuming no transaction activities, our model expects to produce between $2.60 to $2.70 of recurring FFO per unit in 2025.

We expect our comparative properties NOI to remain flat to positive low single-digit growth in 2025. After the close of 438 University, we expect to deploy cash proceeds to repay the mortgage and the credit facility outstanding, and we expect leverage to improve by 200 basis points.

We'll continue to look for opportunities to continue to reduce debt and improve the occupancy. We'll expect $11 million of G&A and to maintain our $1 per unit of annual distributions.

The renovation programs at our best buildings are substantially complete, so we don't expect to have significant capital outlays over the next three to five years. And these buildings are well-positioned to improve occupancy in a competitive market.

We look forward to providing more updates on our progress over the course of the year. Thank you for listening.

And now, I'll turn the call back to Michael to answer any questions that you may have.

Operator, can you please let them ask questions?

Thanks and good morning, everyone. I'm not sure if this comment is more for Gord or for Michael.

You spoke about tours being up and some optimism on improving occupancy. Would you make these comments just about your portfolio, or do you think this is reflective of some improvement in the market overall and maybe just expand on how you see the market evolving over the next year?

That's for Gord.

That's a great question, Mark. Inevitably, if we're getting more tours, any broker worth their salt would be showing other buildings as well, too.

So I think the more traction we're seeing, it's probably safe to say that it's picking up predominantly market wide. A lot of the tours that we're seeing are on our Bay street collection.

330 Bay, for example, has seen the biggest uptick in tours. I think we attribute it to Milos being completed.

But we also have four deals that we're currently working on, at 330 Bay right now. We don't know if that's one building in isolation, but the brokers and the managing directors that I speak to throughout Canada, they say Toronto is picking up right across the board, for tours in general.

Hi, great. Thanks.

Maybe just one for Jay. With the debt that's coming up more in 2026, it's not like there's going to be a problem with refinancing the debt.

But can you just talk a little bit more about the cost that, you would expect based on current rate? And maybe - are you planning on upsizing the debt to pull out capital, or how will that impact the overall balance sheet, what are the targets there?

Yes, great question. So Mark, you're right.

There are just five very small mortgages. So I don't think LTV is certainly the issue there.

If anything, we could look for opportunities to up finance. We said that the weighted average interest rate, expiring is 4.8.

Interestingly, Cora 22.42 has been dropping, that's the benchmark. If we look at five-year debt today, it's typically the spread, $200 million, $225 million or see where that goes.

We still have a couple more months, but if we were to lock them in today, it's probably in the low fives, 5.25 would be safe.

Okay. Great.

Thanks so much.

Thank you. Good morning everyone.

First question, just to clarify, Gord, on the sort of occupancy guidance, and outlook that you provided, were those on committed basis, or in place? And I guess just what gives you the, I guess, confidence to meet this, the 81% this year and then I think you said high 80s next year?

Yes, it's on a committed basis, Sam. And it's just pure numbers.

Like we got to do about 275,000 square feet of new leasing from this point now till this point next year. We've got some renewals who are on the pipe.

Just on average, if you take on aggregate the last three years of - gross leasing we've done, we've done 600,000ft per annum. So based on everything I'm seeing in the pipe, we've got 30 deals for about 300,000 feet that, we're trading paper on now.

I feel really good about hitting those numbers.

Yes. So to clarify, Sam Gord's commentary was on committed occupancy, and our guidance that we provided.

The way we model is, because we track against in place NOI. So the metric we use internally is weighted average in place occupancy.

We think that will be relatively flat across 2025 in our market. But we're going to be seeing improvements on leases signed.

So we typically already have 200 to 300 basis points of a spread. But towards the second half of 2025, we expect velocity, to pick up and position us well for '26.

Yes. And if a deal gets done today too, Sam, I think we've talked about this before, but if a deal gets done today, it usually doesn't commence until eight, 10 or 12 months after once you work in the free rent, or how you structure the deal.

So to Jay's point, like we'll get the deals done, but there's a bit of a downtime until the NOI picks up. So that's exactly how we laid it out for everybody.

Okay. That's helpful.

Thank you. And just on the lease expiry in the U.S.

this year, can you shed some light on what your expectations are there?

Yes, sure. Just for everybody's benefit, the lease Sam's talking about is 185,000 square feet.

At our building in Kansas City, the lease matures in December of this year. The rents in place are about $18.

So the annual annualized NOI, is about US$ 3.5 million. We're seeing touring and utilization pick up in the states.

You could probably read some of that in the reports. Kansas City, is one of those markets that we're seeing increase in activity.

We're actively working on a couple different paths right now. One is renewal for a partial portion, with existing tenant that wants to be there.

We also have prospective tenants that have also reached out, to us on our space and we've been actively working with a broker. Thirdly, it's interesting, we also have some unsolicited interest to acquire the building for tenant usage.

So we feel pretty good right now that, we have two to three options to look at. We're going to continue to work on it over the next quarter or two, and we'll probably report a progress in the summer, for you guys

It sounds like missing from those options is 100% renewal of the space, with the existing tenant. Is that accurate?

Yes, that's right. That was consistent with a lot of the financial service users in the state.

They have reviewed the operations downsized though. Those conversations are fluid.

So - but they do want to be in the building, in the market. They just don't need as much space as they did before.

But for us, we have the option to say, hi, what's the best path for us to realize the best income, and value for the building? So we think we'll have opportunities to consider both leasing and disposition path.

Okay. Last one from me, is I guess combo question on, I guess for CapEx for 2025.

I think you provided that with some detail last year in terms of numbers, and you did say debt would decline about 200 bps this year. I'm just wondering if you have a yearend debt-to-EBITDA target?

Yes. So we're certainly looking at reducing it.

If we see opportunities to delever through asset dispositions at a good value, we'll look at that internally. We're looking at debt-to-EBITDA in the 11s, but we're always hoping to do better.

Now there's two parts in the equation. One is to reduce debt.

We've been very good on the capital side. The other is to increase the EBITDA.

So if the leases are signed that's great, because even though our in-place EBITDA for 2025 is still a bit higher, you'll see that come down in '26.

And thanks. Just any other thoughts on CapEx numbers for this year in total?

Yes, sure. Most of our buildings as we said have their program substantially complete.

We allocated some, and then we also have some predevelopment work at 606-4. So general rule of thumb, is about in our portfolio, $1 to $2 per square foot per year, and I think we're going to be comfortable within that.

Gordon mentioned, we're doing a bottom up approach and we look at the CapEx reports across every single building, every single major component. So based on that, I think most of the larger items have already been addressed, over the past five years.

So just we're pretty confident in this estimate, for at least three years.

Great. Thank you.

I'll turn it back.

Thank you, operator. Good morning guys.

Good morning.

Just for '25, are you guys expecting any major leases that, could probably either expire, or you could renew?

Yes, thanks for your question Sai. So on our last question from Sam, if you haven't heard it, the one at Overland park in Kansas City, is a larger one.

And with regards to the rest, we don't have a lot of maturity. So if you look at our MD&A disclosures, over 50% have already been addressed, and with the remaining tenant expiries, I don't think anything's over 20,000.

So it's quite manageable and relatively small. All our pockets are space, compared to the last three, four years.

Yes, everything Jay's saying is accurate. Just for some extra context for you, Sai two of the deals that we're actively negotiating are over 50,000 feet, and we've got another couple of pockets that are over 20,000 feet.

So there's some pretty scale deals that should help us move the needle to hit our guidance.

That's great color, Gord. Thank you for that.

And probably a question for you. You mentioned increasing touring activity this year, and a lot of new people looking at space.

Can you give me some color on the kind of tenants you're seeing here? Are these companies already in Downtown, Are they moving in from outside?

Can you give some color on that one?

Yes. So they're predominantly Downtown tenants.

We're still seeing a lot of professional services firms. One group, we're not seeing as much as we used to, is tech firms.

We usually keep track of who's coming through the buildings. We're not seeing a tonne of tech come through.

It's mostly professional services firms. Government still is quite active in the market, the province being one of the most active groups.

And law firms. We always see a steady stream of law firms.

Either partners leaving from bigger firms to start their own firms. And Bay Street's a perfect portfolio for them, because they can get a full floor for about 5,000 square feet on some of these assets.

So mostly professional services, firm site.

And generally, Gord, when it comes to these tenants looking for spaces. Because I'm trying to differentiate your portfolio versus the larger big floor plans out there in the market.

Would you say that these are more specifically tailored to these smaller tenants, versus the largest spaces meant for, let's say [Kosher bank] of sorts?

Yes, that's a great point. Yes.

So our portfolio, our core portfolio caters to the smaller tenants. You can go to a building in one of these AAA towers, where you're 5,000 feet on a 30,000 square foot floor plate, or you can get your own floor plate from 5,000 to 7,000 square feet, come off the elevator, get in your space and have a Bay Street address with Dream.

So I think that's a compelling feature for everybody. And the other thing that we've done a good job.

We were talking about a bottom up approach, is we've been very pragmatic with our capital. So we've been improving model suites and quick rent ready suites.

So when tenants come, they're not looking at something in base building condition, they're looking at something that's improved that they can see themselves in. And it also helps us compete on timing.

So when all things are being equal, and there's another landlord at the table, our suites are ready to turn over quicker, and often we're able to catch tenants as a result. So it's been a pretty fruitful program for us.

And actually on that program, Gord, logistically when a new tenant is coming in, if it was a hard shell, they could probably design it and customize it, to their own use. So how are you guys thinking about this, the model suite program?

And if, let's say a tenant comes in, does need some bit of customization in there, does that increase, decrease in lead time. How are you guys thinking about that?

Yes, great question. So about four years ago we started our in-house project management, and self-performance team for construction.

And these groups like we have internally, architects, designers, people that can work and quickly improve space, bespoke for tenants. So it's been a great differentiator for us.

Oftentimes they go in, we have one conversation, our team can go and self-perform the trades. And get the work done, much faster than if we took it to a GC, ran a process.

So it's really helped us, it's been a competitive advantage. And when we're planning these model, and modified suites, we usually tap designers, get their feedback and just go ahead and perform.

Yes. One other observation to that, is what we notice is the larger tenants actually want more customization.

They're committing for a longer period of time for more square footage. In a lot of our Bay Street and boutique buildings, tenants often make decisions, sort of closer towards the lease expiry, and when they're looking for space, they often want something that's plug and play.

So to Gord's point, our designers have a lot of experiences, with smaller tenant requirements. It's more functionality of the space, how many employees could be in there.

And then you have your common things that you need like kitchen, washrooms, all that. So the design is uniquely tailored to the smaller tenant sizes, but they often - it meets their needs and they're ready to significant, within two to three months.

That makes sense. And my last question is more on a broader transaction market.

You guys mentioned that broader, you're going to see a dip in occupancy Downtown, and then probably the a recovery towards '26. How is the private market seeing this now?

You're seeing a lot of people now actually trying to do the math, and trying to get active behind transactions?

Yes, good question. We think that the smaller buildings tend to have more markets.

You have high net worth purchasers, so that market is fairly liquid. The larger Class B buildings, are tougher to sell, though what we found interesting is a lot of the buildings that we sold in the health and science district, they have unique users for those buildings.

So for example, two years ago we sold 720 Bay, to a user for conversion. And this building that we sold, 438 University, was also to facilitate a tenant's use.

And oftentimes there's synergies with these transactions, because we're able to relocate the tenants. So at the end of the day, when we add up all the values together, the pricing is good.

So we'll see. But oftentimes the transaction market follows up, with the cash flows and the occupancy.

So if we see improvements there. The interest rates are also lower now, than they were two years ago.

So hopefully it's thawing out a little bit. But we're focused on keeping the buildings occupied.

If they're occupied, they're attractive to both investors and purchasers.

Thank you for that color, Jay, and thank you guys. I'll turn back.

Thanks, Sai. Take care.

Thanks. Good morning.

Good morning.

Just firstly - following up on the occupancy outlook, high 80s by 2026. It sounds like that's basically predicated on what's under discussion.

Or are you factoring in any expectations for just a broader market recovery on the back of better RTO, and just the passage of time?

Yes, good question, Sumayya. It's a combination of both.

Like our pipeline's pretty robust right now. The team's working on some good deals.

And as Michael said, when he started off the call, utilization has been picking up to 86% on peak days. And we're starting to see that continue, to grow a little bit as more time goes on.

And one thing to keep an eye on, is we'll probably have a new government at some point this year. What's their mandate going to be?

And the federal government in every major market, makes up a pretty large portion, of the denominator in terms of office space. So, depending on what that return to office mandate is going to be, I think it's going to help spur even more on non-peak days, Mondays and Fridays.

But it's a combination of both our leasing targets, and our optimism in people coming back.

Right. And it does sound like tours are picking up, and just leasing volume is up generally, like.

So when would you expect TIs to start to come down? Is that more of a 2026 improvement?

And where do you think market vacancy should be, to cause TIs to start to inflect downwards?

So that's a great question. I actually spoke about this with an investor last week, and it's interesting.

Usually a landlord's market starts to turn at about 90%, once you start getting in the mid-90s, you have a little bit more leverage to push back on some of these requests. That being said, while there's still vacancy in the market, and while there's still uncertainty around unit prices, so materials, labor.

All these different things, with what's going on from a macroeconomic perspective, I think there's still some uncertainty in the market. Also two brokers are getting paid more, and brokers getting paid as much like taxes, they never go back down once they hit a certain hurdle.

So I foresee that cost always kind of staying where it is. And just with the uncertainty around unit costs for materials, things like that.

I suspect they'll continue on a per square foot basis, to stay relatively high for at least another 18 months to 24 months. And then once the general overall market occupancy starts to tighten a little bit, then you'll probably see better NERs.

Okay. And then just lastly, curious if and how the sale of 438 University, how that informs your overall fair values.

Is there much to read through for values, for the balance of your portfolio?

Yes, that's a good question. So in the prepared remarks, we said that for IFRS accounting valuation cycle, we appraised 41% of our portfolio this year.

And in addition for that for financing, we almost did equal amounts. So the way the appraisers look at it, is on a discounted cash flow basis over 10 years.

And the values are quite sensitive, to the reversionary cap rates. And there is expectation that especially you get through the next two years or so.

There is a normalization to the office market. On 438, I think it was important to point out that, in addition to the just the $105 million, we got $20 million of incremental benefits.

And those are real value, because if we move tenants from one building to another, that was about a million dollars of NOI. So to us that was quite meaningful.

And if you looked at the forward projection of NOI at 438, University the cap rate would have probably been a high five. But with that said, I mean the second part of it, is that there was other data points of assets sold not only by us, for example 720 Bay, there were other assets sold to users, and those were very attractive cap rates.

And of course, but overall we acknowledge that the investment market is tough. It will be interesting to see, we will follow the appraisers quite closely with all these data points coming in.

We'll be tracking them to see how they're reflecting that in the assumptions. But thus far, right now what we're seeing is rents are holding up.

If anything, rents are probably going up. The higher TIs are reflected.

But you cap the rents and you take the present value of the TIs, you're building as long as they can maintain high occupancy, which is what we've seen the values will hold.

Yes, got it. All from me, thank you.

Turn it back.

Thanks.

Thanks. Hi everyone.

Just coming back to the conditional, or the leasing down at 74 Victoria. When would those conditional leases take effect?

And then to clarify, did you say that one of the tenants was relocating from 30 Adelaide? I may have misheard that, but just some clarity there would help?

Yes, we're potentially going to - we're going to move one tenant from 30 Adelaide, over to 74 Victoria. That lease would start towards Q4, of this year.

The balance of the leases would start probably the tenant would be in place by the end of the year, but start cash flowing by the end of next year. And then the other prospect that we're working with for another floor would probably see rents commence towards Q3 or Q4 of next year as well too.

But I would say that, we've got a tenant to take the space in 30 Adelaide that we're moving, so that'll be replaced.

Okay. Yes, that was actually the part of the next question, so that helps.

And just coming back to the Calgary office conversion, what can you share perhaps in terms of the timing of when that project could start, and then the total expected costs? Do you have that?

Sure. Just at a high level.

Things are still moving right now, but generally speaking we're hoping to commence, on the redevelopment construction portion, by the end of this year. And the conversion itself will probably take 18 to 24 months.

So that's a timeline that we're working with, for Q3, 2027 occupancy commencement. With regards to the cost, just very high level, because we're still working through some things.

Our expectation, is that the hard and soft cost will come around $70 million. But we'll get the grant from the city.

And for the financing, it's interesting, based on the metrics we're able to potentially target a 10-year loan around $60 million. So there's very little equity that's required.

But nevertheless we're looking at bringing in partner, to share in the risks of this project. Right now it's looking good, but we're focused on, really just improving occupancies in both buildings.

And we're excited, because we'll have one full office building, and then one full, hopefully residential rental. And I think you guys all know residential is doing quite well in Calgary, and we're excited to bring in residents into Downtown Calgary.

Great. That's helpful.

Just maybe to clarify, does that $70 million aggregate costs that you quoted for the hard and soft. That excludes the land or the value so yes, excludes the land.

Okay, last one just on the relocation of the tenants at 438 University and 250 Dundas, I believe. Can you remind us when that takes effect?

Yes. So one of the relocations from 438 takes effect next year at Adelaide Place.

We've got another tenant from 438 that would take effect next year as well. Two potentially smaller tenant at Adelaide Place and then at 250 Dundas, the benefit of the deal is we have a fully unencumbered redevelopment site.

Now we had a large tenant that was in that building that didn't have a right to - that we didn't have a right to terminate, or do a demo with as a portion of this sale. We now have the flexibility to do that.

So that tenant's about 45,000 square feet. We're actively speaking with them about opportunities, to move them in the portfolio.

And we also got a handful of other smaller tenants at 250 Dundas that we're in various stages of talking to move in the portfolio as well too. So yes, it's been quite a benefit for us.

That 438 deal.

Great. Thanks very much.

I will turn it back.

Good morning, guys. Just quickly back to the residential conversion math.

Can you give us a sense as to what you'd expect kind of yield on cost wise? And then also, do you have other opportunities similar to this?

And would you entertain keeping the residential within Dream Office, or sell it or find another vehicle for it?

Sure, Matt. I think in the prepared remarks we said that we like to target a 6% yield.

Now interestingly, we also said that we're looking at relocating some tenants, from 606 into our adjacent property that we also own. That 6% does not include any of the potential incomes that we can transfer, so that's upside.

With regards to, like I do think having residential income would definitely improve our income profile. If not in Calgary, but for the whole REIT.

And the cap rates are quite attractive as well. But we'll decide closer to the completion day, what's best for Dream Office.

If we want to keep it or sell it.

And Matt, I don't think there'd be any trade within the Dream Group. So we have a third-party partner.

We'll keep it together or we'll sell it.

And other opportunities within the portfolio, or is this a kind of one-off, I guess you have other assets in - but they're going to house the tenants?

Yes. So this would probably be a unique one.

We have two other assets in Downtown Calgary. One is the adjacent office building that will be well occupied afterwards, and the other is Kensington House, which is also fully occupied, but down the road that might be a good redevelopment candidate into residential.

The reason for that is a couple things have to work right. One is, we really focus on the floor plate and 606 floor has a very functional floor plate, for a residential conversion.

It also has a parking lot of parquet, which is important as well. And I'm sure if you Google it you could tell that right now the anchor tenant in place is Canadian Western Bank, and post-merger with National Bank.

We don't know what their strategy will be, but for us. We're trying to proactively reduce the risk of the building - having a drop in occupancy.

So I think this is a really good outcome. But if there's opportunities down the road for conversions, where it makes sense, not only in Calgary, but other parts of our portfolio, we'll certainly look at it.

Fair enough. And then just on net rental income this quarter, it came in a bit better than we were expecting.

Was there anything. I know you mentioned there's some one-time items, but I don't think they're necessarily in that figure.

But also 74 Victoria, would it have been kind of two-thirds out of this quarter, or was there some timing delay in terms of the departure?

No, well, 74 Victoria, 200,000 square feet maturity, but we released 64,000 square feet and the rest of it. I think the lease correct me if I'm wrong, Gord was November 1, right.

So two out of the three months in the quarter, we would have seen the reduction. In terms of net rental income, yes, you're right.

The income from sold properties, and the other income line items would have been the items that, were flagged that would be higher than atypical. Otherwise, the other thing we could think of is Milos lease.

Some of the restaurants are taking commencement, so they're paying rents. And soon enough 366 Bay, but most of that should still have been in straight line, but they'll flow into NOI starting next quarter.

Okay. And last one from me, just in terms of the timing, longer term of FFO growth, it sounds like you're going to be in transition in '25, '26.

I would assume given what you said on your occupancy guidance that you're going to start to at least see it in FFO from a regaining lost round. Maybe not in AFFO, but is 2027 really kind of a year of stabilized, kind of back to not normal occupancy.

But you should see the full earnings implications of the leasing that you're expecting to do. How we should think about this?

I think your general trend is probably right though timing. We're hopeful that sooner in '26 than in '27.

One thing to think about is, we've been able to increase rents across our portfolio despite the drop in occupancy since COVID. What's happening is our NOI, the guidance we gave on a comparative basis is flat, or higher and we typically been able to hit that each year despite the drop in occupancy.

It's interest expense where we're getting hit. Of all the loans that have been maturing at low interest rates, we're getting the same amount.

And that's great, because our income is high. But the spreads and the benchmarks are about in total 250 to 300 basis points higher.

So if I think, we guided on our Q3 call just on Adelaide Place alone that could be $4 million a year. Now when I say that, what's interesting is when you get through the cycle.

What's becoming sort of headwinds right now, could become tailwinds in the future in a couple of years. And we're already seeing that the benchmark's dropping, and if we can refinance it, maybe not as low as before, but even if you can refinance these loans about 4% to 5%, we'll see support on interest, expense savings and that's quite meaningful.

Okay. Makes sense.

Thanks.

Thanks. Good morning.

Gord, maybe just flipping back one last time to the guidance side of things. What does that assume in terms of retention?

Is it basically the one known non-renewal in Kansas, and everyone else kind of renews?

Well, it's a combination. So the one known non-renewal with U.S.

Bank yes, that's one in Overland Park. And the rest just assumes, we retain just a little over 60% of the tenants that we have in place.

And we've already recovered a good majority of that renewals net new, or renewals outside of Overland Park, don't make up a big component of our guidance. It's new leasing that we have to do.

And on the new leasing targets for this year, it's about 275,000 feet, which is less than we've done in the past few years. So I feel pretty good about it.

Lorne.

Okay. And then, can you give us a little insight into the conversion rates, how that's been trending over the last couple years, and where you're sort of expecting it to go?

Obviously, tour activity is up, more spaces to tour obviously makes it a little more comfort to convert, I would assume?

Yes. So tour conversion rates, because there's so much.

Oh, it's still there?

Yes.

So tour conversion rates, because there's so much supply, is around 20%. As the supply starts to tighten, you'll start to see conversion rates get a little bit better.

But as a whole, we track it. We're around 20% of our tours convert to actual deals.

A little more than that convert to offers. But while live offers are going, it's a competitive environment with other landlords.

So I'd say we're around 20% for tour conversions.

Do you see that trending higher, presumably in the next couple of years? And if so, how do you kind of see it trending?

Yes, I do see it trending higher. So the more absorption there is in the market as a whole, the less opportunity there is.

So when a tenant is touring with lower vacancy, there's a higher chance that they're going to commit. So it's really just kind of market driven, and we just keep tracking it.

Okay. And then, maybe just one last quick one.

Would it be fair to assume that the cost per square foot to renovate, or to create these model and modified suites would be in that 75 to 125 range per square foot?

Yes, I think you got it now. That is to convert something that's in base building to sort of turnkey space.

And how we think about the economics on that is once you do that conversion, often the tenants wouldn't really ask for much of an inducement package. And if you do the conversion, we think the physical life of that is at least 10 to 15 years.

And if they sign a five-year lease, your NER might be a bit softer for the first five years, but they're really strong from year six to 10. So if you do a DCF on that, it looks very attractive.

Not to mention that you're not giving up, too much on opportunity cost. And the Downside of not having occupancy means that, you're paying for the additional rent.

But further to that, that's assuming that the space is in raw condition. A lot of our space across Bay Street and boutique are in semi-modified suite conditions.

So if you reduce the spend, by half of what you just said, that makes economics look very good.

Okay. That is great color.

Thank you so much.

Thanks, Lorne.

Hi, good morning. So Jay, the guidance that you offered for the year excluded any transaction activity outside of Kansas.

What's the likelihood internally that you're attaching, to be able to monetize value in 2025, whether it's selling additional IPP, or any of the substantial residential density within the portfolio?

Yes, that's a good question. And I would say that's a question we get on our call each February.

But I got to say that we don't forecast it. One is just we have 26 buildings, and it's hard to forecast transactions in this type of market.

I'll also say that each year, we've been able to monetize at least one building thus far. So we're actively seeking, and hence why we're giving guidance without any transaction activities.

But we'll have to look at each one individually to see what that does for the income, the value of the cash flows, where it makes sense. I think we're good.

And what do you think is the catalyst for, let's say, broader market transaction volumes to pick up? Is it rates coming down?

Is it clarity on the economy? Is it something else?

Yes, I think you answered it rates, occupancy, economy sentiment on the investment volumes. So all that, when people feel better, the investment market will pick up as well.

Okay. And then, just maybe for Gord, just talking about the economy, has there been any change in tenant behavior, with respect to the escalated U.S.

tariff discussion, and the potential implications for businesses in the economy?

Yes, there hasn't been a tonne. We've had one or two tenants take a bit of a wait and see approach until, like, we had one or two deals that were supposed to firm up in February that they wanted to take a bit of a wait and see approach till April, just to see what that impacts.

But it hasn't been as material as many have speculated.

Got it. Okay.

And then just a clarification question on the vacant space in the portfolio today. Dream Office essentially paying for all of the additional rent?

Yes.

Okay. Thanks, guys.

Mario, it includes just before you, Gord, when we say Dream is taking it, it's all our companies that are paying it, not just Dream Office.

Okay.

I think we have time for one more question, if there's any. If not, guys, then please just feel free.

Reach out to Jay or I if there's anything else after.

Thank you, everybody, for participating. And as Gord said, we're happy to answer any questions throughout the day as you may need.

Thank you again for spending your time with us. We look forward to talking in the future.

Bye-bye.