Dream Office Real Estate Investment Trust

Thank you very much, operator, and good morning to everybody, and thank you for joining our call. This morning, we're here once again with Jay Jiang, the CFO; and Gord Wadley, our Chief Operating Officer.

We think the third quarter was a pretty significant quarter for Dream Office. We have been able to secure high-quality tenants and are filling up a lot of vacant spaces as we turn over some of our weaker tenants.

We've seen a much stronger leasing market. And we hope that over the next couple of quarters, some of the tenants that are committed and not in place will take possession and we'll continue to lease more space.

I think the most interesting number is, excluding 74 Victoria, which the federal government vacated at the end of last year, the rest of our downtown Toronto portfolio is now over 90% committed. And we can identify many vacant spaces that are quite leasable, and we expect to make progress throughout the balance of this year and into 2026.

So we're feeling pretty good about the shape we're in. With some of the large deals that we've done, getting long-term leases with stable tenants, we have given up some occupancy to make space for them, and Gord will go over that in more detail.

But generally, we're seeing the demand for space to be increasing. We see a lot more people back to work.

And the market seems to be getting a little bit stronger, and we expect to see that continue throughout the next few quarters. So with that, I'll turn it over to the team to make their prepared comments.

Well, that's great. Thanks very much, Michael.

Good morning. I hope everyone is keeping well.

As always, it's really nice to get a chance to connect with you all today and share some of the work that our team has been doing year-to-date. I also look forward to taking the opportunity to share some of our priorities to close out 2025, as well as key milestones regarding our asset strategies, operating performance and leasing.

We remain very committed and I would say, laser-focused on leasing up and improving the quality of our assets despite operating in a challenging environment for the sector. For the last 2 years, we've continued to see very steady and measured growth across the portfolio.

As a management team, we've been very consistent in the messaging where we'd say there would be incremental net absorption quarter-over-quarter, and we've been very hypersensitive in identifying and managing risks well in advance to mitigate any material drop in income or committed occupancy. This approach has yielded another consecutive quarter where we've seen committed occupancy growth directly in line with the guidance we shared throughout the year.

For Dream Office, leasing continues to actually be quite resilient. We've done over 630,000 square feet of gross leasing year-to-date, and that's made up of 110 deals across the portfolio.

More specifically, in Toronto, we've done 520,000 square feet completed across 92 deals. And of that, 252,000 square feet were new leases and 270,000 square feet were renewals.

We are in advanced negotiations on another 60,000 square feet of deals, which would bring our annual total, just from Toronto, to 580,000 square feet. For context for everybody, the 3-year average annual leasing volume in Toronto was about 530,000 square feet.

This puts us on track to exceed this level in 2025 with even fewer assets. For the 252,000 square feet of new leasing, NERs are outperforming the business plan at about $18 a square foot versus $15.

This outperformance is driven by longer WALTs, which allow higher TI and LC costs to be amortized over the extended terms. The average new lease term is 8.5 years versus 5 years what we had in the budget, reducing effective cost to $11 a square foot per year versus $16 a square foot per year.

While net rents remain in line with our guidance and top of the market for their respective classes in the mid-30s. For the 267,000 square feet of renewals, NERs are in line with guidance, even with a few large deals executed at lower NERs to accommodate certain blend and extends and protect occupancy.

Most notably, IFDS at 30 Adelaide to accommodate a large new tenant at 30 Adelaide to backfill the space we got back. On the balance of the renewals, we've seen improved performance with the weighted average NERs kind of low to mid-20s when you exclude those big blend and extends.

To quickly touch on other markets, year-to-date, we've completed 110,000 feet of leasing across 21 deals in Western Canada, including 23,000 square feet of new leasing across 10 deals and 87,000 square feet of renewals across 11 deals. We are well in line with our 3-year average annual leasing volume in other markets or Western Canada.

Deal velocity and absorption and committed occupancy is honestly what I get asked the most about by investors, analysts and researchers. I want to give you all some very important context.

Our best year of total leasing was 2023, where we did approximately 604,000 square feet gross. And subsequently, the best year of leasing volume, the number of deals that we did was 2024, where we did 104 deals.

We're quite pleased year-to-date that we've eclipsed total square footage leased already with 630,000 square feet and total deal volume with over 110 transactions. We still have another quarter to go.

We have consistently said our goal is to get incrementally better each quarter, and we have from an occupancy -- committed occupancy perspective quarter-over-quarter since 2023. A big catalyst for our absorption has been our model suite program.

Since 2024, we built out 26 model modified suites across 120,000 square feet of vacancy in the portfolio. By being proactive and investing the capital and improving space to attract move-in-ready tenants, we've leased 20 of the 26 spaces for 85,000 square feet.

We're also conditional on another 3 for an additional 15,000 feet, which would be 101,000 of the 121,000 or approximately 90% of the units. This summer, many of you might remember, but we had a slide at our AGM that illustrated the growth in occupancy on our Bay Street Collection assets.

In Q2 2024, we are at 72% occupancy. We showed that to close out Q1 2025, we were up almost 400 basis points to 76%.

And now with our model suite deals completed on Bay Street and the 2 conditional deals we have in the pipeline, we're up another 500 basis points to 81%, just on the Bay Street Collection. As such, we're pretty pleased to see some steady growth in committed occupancy since Q1 2024 in that specific note.

Over the course of the year, we have consistently worked and guided our committed occupancy to be in the high 80s, the mid- to high 80s to close out 2025. We're well on pace to achieve this and feel confident to reach about 86.5%, supported by deals signed this year on vacant space with future commitments.

A great example is our largest asset at Adelaide Place. Currently, it has 78.5% in-place occupancy.

I'm pleased to share that we've done significant leasing in that asset the last 12 months to the tune of 220,000 square feet, bringing our committed -- not our in-place, but our committed occupancy to 95.7%. These deals, while not immediately contributing to NOI, we'll see our NOI go from $15.5 million to just over $18 million in the next year at AP alone.

This derisks and anchors the portfolio by being a large fully leased asset with strong steady cash flow, great covenants, long term. Going asset by asset, when you drill down a little further, if you net out our largest single exposure being the remaining vacancy that we had at 74 Victoria, our committed occupancy for the portfolio, as Michael said, is about 90%.

As a quick reminder, we had PSPC informed us just over 18 months ago that they were leaving the building in full, giving us 200,000 square feet of vacancy. Since then, we've secured 70,000 square feet direct with PSPC.

We completed another deal for 44,000 square feet, and we have a very active prospect in advanced negotiations for another 25,000 square feet. That would take us to over 130,000 square feet of the vacancy that we had received just over a year ago.

We had about 187,000 square feet of expiries this year, of which 91,000 square feet are renewals, and it got us to a renewal ratio over the year of about 48.7% year-to-date. What I would like everybody to know is, on top of that, we did another 40,000 square feet of new leasing on that exact same expiring space in advance of them vacating this year, which gets us to 74% coverage on units that are expiring.

Ultimately, the management team feels quite good going into 2026 and carrying on the momentum as the Toronto portfolio has about 340,000 square feet of expiries next year. Of these, about 40% are addressed net of known vacates, we only have about another 110,000 square feet of unaddressed expiries.

When you look at the deal velocity and absorption we've had over the years, it's quite manageable. Of this 110,000 square feet, we currently have proposals with about 76,000 square feet.

So we feel like we're in good shape on addressing year-over-year rollover and more importantly, backfilling space as it comes up. And we've got a track record of doing that over the course of the past 18 months.

In closing, our Q3 results reflect the strength and resilience of Dream's Office strategy and execution. Despite ongoing sector challenges, we've tried to be transparent and share with everyone our guidance and really work towards the guidance and do what we say we're going to do.

Our team's proactive approach to leasing, risk management and asset quality has delivered consistent growth in occupancy and net absorption. Our Toronto and other markets are outperforming historical averages to date over the last 5 years.

Our model suite program and targeted investments continue to attract high-quality tenants while our disciplined management of renewals and backfilling expiries position us to achieve our committed occupancy targets for year-end and beyond. As we look ahead to 2026, we remain very confident in our ability to sustain this momentum, drive portfolio stability and create long-term value for our stakeholders.

Thank you to our team for all their efforts and continued commitment, and thanks to you all online for your continued support and interest. I'll now turn it over to my good friend and CFO, Jay Jiang.

Thank you, Gord. Good morning, everyone.

Today, I'll walk you through our third quarter financial results and share our outlook for the rest of the year. Please note, we'll provide formal guidance for 2026 during our fourth quarter conference call in February.

This quarter, our diluted funds from operations were $0.60 per unit, matching both our internal expectations and with year-to-date FFO at $1.90 per unit, we're on track to be within the range of guidance we provided on our August conference call. Compared to last year's third quarter, FFO per unit declined $0.17 per unit.

The decline was largely driven by the sale of 438 University, the sale of our vendor take-back mortgage in Calgary and 5.9 million units of Dream Industrial REIT. The cumulative impact of these asset sales reduced our FFO by approximately $0.19.

These dispositions brought in approximately $180 million of cash proceeds, which we used to repay mortgages and credit facility, which improved our debt-to-gross book value by 280 basis points. At an estimated cost of debt of 5%, we saved approximately $0.11 for the quarter by reducing debt.

So the net FFO dilution is approximately $0.08 in exchange for $180 million of debt reduction, improved liquidity and a safer balance sheet. Note that on a cash basis, impact is further reduced by additional $0.03 because the cash distribution forgone on the Dream Industrial REIT units sold is $0.05 versus $0.08 of FFO.

Year-over-year, the weighted average interest on our total debt balance increased by approximately 23 basis points. FFO declined $0.06 due to refinancing mortgages at a higher interest rate environment and drawing on our revolver to fund some of our larger long-term lease completed this year to improve committed occupancy.

Year-over-year comparative net operating income from our income portfolio was flat for the quarter despite losing $2 million of NOI at 74 Victoria from the federal government expiry. We were able to offset this decline with increased NOI at Adelaide Place, 36 Toronto and 30 Adelaide.

Our year-over-year straight-line rent reduced by approximately $0.05 as in the prior year, there were 2 larger tenants that began operations in their premise prior to economic commencement of the lease. Those tenants are now paying contractual rents.

We are up $0.03 on the completed development and rent commencement of 366 Bay and down $0.01 on taking 606-4th Avenue in Calgary into development and terminating some of the in-place leases. We're pleased with the progress of our 2 properties under development at 606-4th in Calgary and 67 Richmond in Toronto.

Once stabilized, these 2 projects are expected to contribute over $4 million in annual NOI at our share or roughly $0.20 per unit. Other items, including the elimination of previously accrued tenant liabilities and expenses that are no longer required and higher property management expenses offset to 0.

Year-over-year, our debt-to-gross book value increased 130 basis points to 53.2% as a result of fair value declines in the income portfolio. Over the past 12 months, the weighted average cap rate of our income portfolio increased from 5.72% to 6.15%.

Our debt over trailing 12-month EBITDA improved to 11.4x versus 11.7x on a comparative basis. Currently, there is approximately 450 basis points of spread between our in-place and committed occupancy, which represents approximately $6.7 million of annualized EBITDA, of which $1.7 million comes online at the end of 2025, $4.2 million over the course of 2026 and the remaining $0.8 million in 2027.

Once the leases take commencement and we continue to improve our occupancy, we expect our EBITDA to grow and improve our leverage ratios over time. On the financing front, we've already addressed all $741 million of our 2025 debt maturities, which represented 53% of our total debt stack.

We've already actively begun to work on $166 million of debt maturities for next year and are confident in our ability to secure favorable terms and higher refinancing balances and maturity. This quarter, we repaid our $8.7 million of mortgages on 606-4th Avenue and then sold 50% of our interest in the project to Pomerleau Capital.

Having Pomerleau as a partner in this project makes strategic sense for us as they are one of Canada's largest construction companies and their wholly owned subsidiary, ITC Construction Group, will be the construction manager. In addition, we were able to reduce development risk and repatriate $15.3 million of proceeds to reduce our own debt.

Construction is already underway, and we anticipate completion in the fall of 2027 with stabilization by mid-2028. On stabilization, we anticipate that the asset will produce approximately $3.6 million of NOI at a development yield of approximately 5.6%, including land at 100%.

We closed on the ACLP loan for $64 million for a term of 10 years at a rate of 3.3%. So the project yield provides an attractive spread of 230 basis points to the cost of borrowing.

In addition, we have also worked with 9,000 square feet of tenants to relocate them into our adjacent building at 444-7th. This relocation improved occupancy at 444-7th by 340 basis points.

We're overall pleased to have obtained a creative solution that helps us reduce risk, improve liquidity and enhance income and value in our remaining property in an otherwise very challenging office market in Calgary. At 12800 Foster Street, Overland Park, our existing lease with U.S.

Bank concludes in November 2025, and we have listed the asset for sale earlier this year. We have received expressions of interest from prospective buyers and are negotiating with them on the sale.

We are targeting a transaction in early 2026, and we will provide more information on pricing and timing as we make more progress. On our August conference call, we provided updated guidance of between $2.40 to $2.45 per unit and annual comparative property NOI to be relatively flat to slightly positive for 2025.

We are still on track with that guidance to close off the year. Our business planning process is scheduled for December, and we'll provide 2026 guidance during our February call.

We believe our portfolio is well positioned for growth in income and value, especially if the downtown Toronto market continues to improve. With that, thank you.

And now I'll turn the call back to Michael for Q&A.

Thanks, Jay. Thanks, Gord.

And operator, at this time, we'd be happy to answer questions.

Gord, this one is probably for you. When you look at the demand that's kind of come up in September across Bay Street, is that more specifically for a certain kind of flow plate?

Or is that generally across-the-board where people really need space now and are willing to actually come to smaller plates?

Yes. Good question.

It's a combination of both. So we're catching a lot of tenants that are in around the 3,000 to 5,000 square foot range that are looking at our Bay Street Collection.

And the bulk of the tours, I mentioned are model suites. So they're really kind of coveting improved suites that are move-in ready.

And we're starting to see for the first time, a few kind of start-ups dip their toe in the water, but the profile is mostly still professional services firms. Deals we're doing are with money managers, law firms, people that kind of covet having a Bay Street address, but it's in about the 3,000 to 5,000 square foot range we're seeing the most velocity of tours.

That makes sense. And probably looking at 74 Victoria and considering the leasing you guys have done to date on that space and what's remaining out there, is there something that stands out in the space that remains that makes it may be less or more challenging to kind of lease out?

And is that something which should probably meet the current requirement out there?

Yes. I'm glad you brought it up.

So 74 Victoria would be, by any class considered almost a typical government building, like a low B, C class type building. We expect some capital to redo the common areas, which has attracted more tours and help the deal velocity.

We just finished the lobby renovation. We've done 2 floors into high-quality model suites that really show what the potential is.

But the difficulty with that building is that, it is an old building. It's a large footprint.

And as such, it kind of caters to a bit of a submarket in Toronto that has less velocity than the Class AAA or the A class market. It's almost a tale of 2 buildings.

Like if you look at Adelaide, for example, our committed occupancy is almost 96%. And if you look at 74 Victoria, a different class of asset, well located.

It caters to a different group where you're seeing less velocity of tours and interest.

We might a little bit more positive on 74 Victoria. It's in an incredible location.

The floor plates are big, and it probably is good for larger tenants that are looking to have a decent space that is very cost friendly. And I think there's a fair amount of tenants like that.

We got a lot of space back last year. We're making progress leasing it.

And I think we'll continue to do fairly well leasing that building over the next 24 months. Gord, how long would you budget it to re-lease the space at the federal government left at the end of last year?

We put that just about 2 years, Michael.

Yes. So I think like when you have such a big change to a building, it does take time to backfill.

And I think we're doing pretty good. So I'm pretty impressed with how well that's going.

That's great. Maybe just looking at the assets out here, I look at the list of assets here right here, 36 Toronto, 330 Bay and 250 Dundas.

One thing that's common between all 3 is the in-place committed right now is around between 70% and 75% right there. When you think about these assets and the demand, like do we feel that in the next 12 to 24 months, we'll probably see incremental flow of leases out here?

Yes. So 330 Bay -- sorry, Michael.

I was just going to go through each of the assets you asked questions on. So 330 Bay, we've seen a real velocity in tours.

We've actually done quite a bit of leasing in the building that has forward commitments. So we're quite optimistic about it.

350 Bay, I think, was the other building you mentioned and 250 Dundas. 250 Dundas is a site, I'll let Jay talk about, but it's a site that's a redevelopment site for us.

So we've just been holding on to in-place tenants for cash flow purposes. And then on 350 Bay, we had a low in-place occupancy there.

But on that building, I don't want to give too much forward-looking information. We're getting pretty close on a deal that would take the occupancy to almost 100%.

And we're hoping that deal will be done by the end of the year.

So my first question is, is the impact of the return to work policies on the market vacancy consistent with the prior expectations of 6 to 12 months?

Generally, I think so. We're pretty impressed with how many people are coming back to work and how various governments and banks have been encouraged back to work.

But Gord, do you want to go in a bit more detail?

Yes. I think really the only group that is trailing back to work is the government.

I think the banks that we have in our buildings, they've been communicating with us. They're in at least 4 days a week.

The provincial government, they're in 5 days a week. Municipality is starting to come back, but it's just the federal government that hasn't quite landed on a return-to-work program.

We're seeing a lot of our private sector tenants. I'd say the vast majority are now in 5 days a week in some capacity.

So my personal observation is I feel like everybody's return to work is normalized, saving except the federal government.

All right. So what's the breadth of the tenant demand right now in Toronto today by category?

Is it like majority by banks? Or is it diversified with other industries as well?

Good question. So our portfolio, it's all -- the majority are kind of like low-rise buildings, smaller floor plates.

So we see quite a mix of tenants through. We're seeing a lot of professional services firms come through.

We're starting to see more consulting firms to our buildings. And I think if you read the budget and some of the infrastructure that's coming out with the Fed, a lot of these consulting firms are tying their interest to different provincial and federal government contracts.

So we're starting to see some consulting firms come through. The provincial government is very active in space accommodations.

They're out looking at vacancies as well as other buildings. And then I'd say, predominantly -- and the other thing we're seeing, too, is I mentioned it before on the first caller is, we're starting to see some more start-up interest, which we haven't seen over the last little while, a lot of tech start-ups have been touring some of our smaller units.

And what's appealing to them is, we've got some growth potential in the portfolio as well. So when we speak to them, we say, look, you may be 2,000 today, but let's stay in touch, let's communicate and let's see if we can grow you organically.

And then we just kind of show them examples of how we've done it. And it helped us strike a few deals, which is great.

Nice. Good to know.

My next question will be on the NERs. So what kind of trends are you seeing on the NERs on smaller that is like less than 10,000 square feet and the larger deals?

Yes. So for net effective rents, I mentioned on new deals, we're doing better than we had budgeted.

We're seeing kind of high-teens, low-20s. We were seeing a real aversion to term lengths the last few years, but this has kind of changed.

We've been able -- I think you could see in our stats, our WALTs have gone up as well, too. So that's helped net effective rents get stronger.

We have more time to amortize the cost. So on new deals, we're in and around high-teens, low-20s.

Our renewals were brought down a little bit this past quarter just because we did some blend and extends. And on these blend and extends, we put some costs in to attract and retain some of our largest tenants.

We were successful in doing it, but it did cost us some free rent and some TIs to do so. The other thing that's contributing to NERs, and I'm not complaining about it because it's a necessary function in the market is leasing commissions for brokers have more than doubled over the last 2 years.

So the whole market is susceptible to that, and that contributes to NER compression as well.

All right. Makes sense.

Just the last one. So do you see any incremental pickup in the Toronto office buyer sentiment?

And how should we think about your disposition plans for 2026?

That's a great question. I think that there's definitely a better mood around office.

There was a recent transaction that closed at 70 York. And that was interesting because that was somebody buying an office building as an office building as most of the trades over the last few years have been buying office buildings to use this institutional quality.

So we think it's marginally getting better, but it's not very deep. So I think that will take some more time, but there's definitely more people who are getting educated on it, studying the market.

So we'll see what happens.

All right. And any disposition plans for 2026?

Can you give any color on that?

Well, I think that in the other category, I think that Jay mentioned our Kansas City asset. If we can, we might lighten up there a little bit.

In Toronto, we really like what we have. We may sell a building, but I don't think we're intending to sell much in Toronto over the foreseeable future.

Thank you very much, operator. I just want to close with a little retrospective.

For those who may not recall, at our year-end for 2015 in February 2016, we announced that we were concerned about suburban assets and some other assets, and we were going to sell a lot of assets and buy back stock. So between 2016 and 2019, we sold 38 of 40 buildings in Alberta.

We sold 142 buildings in total. We reduced the size of the REIT from $7.2 billion by 60%.

We bought back about 60% of the stock. And by the time we got to 2019, we were in great shape.

There was like less than 3% vacancy in Toronto, rents were very high, buildings were full competition for space. And then we woke up at the beginning of this decade with COVID and people not being able to go to the buildings.

And that was a total shock. Work from home was something that was really a fringe item before that.

And it's basically been one thing after another with inflation going up, interest rates going up, uncertainty around policies with the U.S. and elsewhere.

And we're going into 2026, which is actually the seventh year of this decade. So there's no doubt it's been a tough sector to be in office.

But we're pleased with the budget. We're pleased this morning, there was just a bunch of new jobs created in Canada.

The unemployment rate went down. It's a relatively mixed environment, but we think that there's becoming more confidence.

So the question was, is it just banks that are expanding? Well, they definitely are expanding as they bring tenants back, but we're seeing with the budget and the incentives in it.

We expect that there's going to be more and more businesses taking chances and growing. And we think things look more positive than they have for a while.

But that doesn't mean that we don't -- that we're not fully aware of just how difficult it's been to be in the office sector for the last 6 or 7 years. So I think we're quite optimistic for what's going forward.

I think we're through a lot of the difficult times. We've made huge adjustments, but continues the way it's been for the next couple of quarters will be good.

But there's no quick fixes, but we're pleased with the progress we're making. So I guess that's my summary.

It's a little bit -- it's just like what we've been doing in the last decade. And we're hoping now we're through most of the difficult times and things are getting better.

With that, I'd like to thank the listeners. And please know that Gord, Jay and I are available at any time to answer any more of your questions.