Dream Office Real Estate Investment Trust

Good morning, ladies and gentlemen. Welcome to the Dream Office REIT Q4 2021 conference call for Friday, February 18, 2022. During this call, management of Dream Office REIT may make statements containing forward-looking information within the meaning of applicable securities legislation. Forward-looking information is based on a number of assumptions and is subject to a number of risks and uncertainties, many of which are beyond Dream Office REIT's control. That could cause actual results to differ materially from those that are disclosed in or implied by such forward-looking information. Additional information about these assumptions and risks and uncertainties is contained in Dream Office REITs filings with securities regulators, including its latest annual information form and MD&A. These filings are also available on Dream Office REITs website at www.dreamofficereit.ca. Later in the presentation, we will have a question and answer session. To queue up for a question, press star 1 on your telephone keypad. Your host for today will be Mr. Michael Cooper, Chair and CEO of Dream Office REIT. Mr. Cooper, please go ahead.

Thank you, Operator, and good morning to everyone. Today I'm with Gord Wadley, the Chief Operating Officer. I'm Jay Jing, the Chief Financial Officer. I'm just going to make a few comments and turn it over to Gord. And then Jay, and when Jay's done, we'll be answering questions. Just as a point of view, you know, we own all these buildings that have been barely used for two years coming up on March 13th, and they're in tremendous shape. We continue to renew tenants. We're doing some new leasing projects. But we are losing some tenants, some are downsizing and there's some bankruptcies. But overall, to be at the level we're at where there's 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 called 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 Groups, 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 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 progress on our developments. At 250 Dundas, we're advancing the site plan. It's already zoned. And that's a building that will have 150,000 square feet of office and 350,000 square feet of residential. Right at the corner, I mean, one building in from the corner of Dundas and University, which is an incredible location for the hospitals, governments, schools, cultural, and we're very excited that that will be a successful building. 2200 Edmonton 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 over the 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 what will be 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 the 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's 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, both 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 were 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, it 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 at pre-pandemic levels. We've also seen steady growth in NER performance and achieved net rents for deals being completed versus budget. On average, we're 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 of 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've worked through supply challenges and construction delays and we've managed well and are poised 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 boast 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 our team at just over 98% for the year, with our average vault in the portfolio at 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 Gresby rating. We're pleased to report that in Q4, we had among the highest first-year Gresby score historically in Canada at 91. We also had the country's top sustainability score. And basically, sustainability 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 green lease leaders as platinum for our standard office lease. We were a lead 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 one and two and select scope three 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. In that vein, 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 CID 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. will 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 in 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, it 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 establish 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 covet. Thank you, and I'll turn it over to Jay.

Thank you, Gaur. 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. Notwithstanding that 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 40 cents was flat year over year, and we were two cents higher for the year. In general terms, we lost five cents per unit from lower occupancy, one-time lease termination income, and other items, and we gained five cents 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% euro per year. To categorize the composition of annual gains, 4% is from the increase in value of our dream industrial re-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 unannounced major capital initiatives. We also want to highlight that the usual COVID caveats 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 and 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 a sustained, normalized state. we will see our forecast as a balancing act between optimism and the time it takes to progress to normalization. So for our internal forecast, 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 spires 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 achieved, and we hope to re-approach 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 of about 2.28%. Interest rates have since increased at the beginning of the year, but currently we only have $60 million of expiries 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 on non-core assets. Our dream industrial restake is over $430 million at fair value based on today's trading price or 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 DIR 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 the 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 a 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 in the nine other buildings and also the alleyway by mid-year. We will continue to progress on pre-development work at 212 King and 2200 Eglinton. At our current trading price of just over $25, if we assume fair value on our dream industrial holdings and assets in other markets at book value, our downtown Toronto portfolio of 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 that on the other side of the pandemic, our well-located and modernized office portfolio will return to very high occupancies at high rents. We will have fewer units outstanding than 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, I'd be happy to answer any questions.

Thank you. We will now begin the question and answer session. If you have a question, please press star then one on your touchtone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. There will be a delay before the first question is announced. And if you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then one on your touchtone phone. And our first question online comes from Mr. Scott Brumson from CIBC.

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 the Golden Mile and how you guys are fitting in with it.

Sure. The Golden Mile is actually an incredible area. There'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 In a new zoning that allows residential, we expect that 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 of major, major scale redevelopment. Our site, we're getting very close with the city. We're working very closely with them. Plus, they have the landowners involved. as there's a lot of things we're trying to do, not just on 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, 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 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 project to get shovels in the ground? End of 2023?

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

That's great. Thanks. That's helpful. I'll turn it over. Thank you. Thanks, Scott.

Thank you. Our next question on the line comes from Mr. Mike Markutis from Desjardins. Please go ahead.

Mr. Mike, I like that. Good morning, everybody. 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 rate.

Hi, Mike. It's Jay. I'll start on just the quantification of the capital, and then Gore 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, so 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 the additional rents. The tenants are getting a better building. A big component can be amortized into the additional rents because it's common areas, washrooms, elevators. And the tenants do 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 news this week. We're just finalizing everything. This involves having consultants to agree to 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, there's 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 and Gates, better buildings for operating costs. And, uh, so we'll be able to recover a bunch. And, uh, we're also hoping that this will also help validate higher, uh, higher rents. So there's all kinds of, uh, contributors, but we, we're, we do not, we're not in a position to reveal the return on equity court with that. Don't talk about the return on equity.

No, we'll talk and we'll give a quick overview on, on the scope and, um, You know, 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 subcategories. 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've 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 a 30 athlete lately, we've got a partnership with Tesla and a number of EV chargers. Renewable energy is a big component of our reduction strategy around rooftop solar. And then aesthetics, 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. Could you just remind me, is this long-term capital? What's the term of the facility? It will be long-term.

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

Is it fair to say it'll be 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 were able to comment if you've heard any dialogue with this party and if you are able to comment on whether they're a happy, quiet shareholder or if there's going to be more of an activist bent to their involvement. Thank you.

You know, we've had a lot of significant shareholders. Sandpiper, now Artis, is the only one that's gone over 10%. All of the significant shareholders have acquired the stock because they like 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 artists as a shareholder. We're 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.

Thank you. Our next question online comes from Mr. Mark Rothschild from Canaccord.

Thanks, Hank. Good morning, everyone. In Jay's comment, you mentioned the implied value of the downtown Toronto office. And I think, I'm not sure if it was Michael or 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 if it's something that you're likely to do over the next year and 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, they're mainly domestic local buyers for assets in Saskatoon, and there was some interest in Calgary. I don't know the reason behind some of the deals, but I think maybe oil prices have increased. So people are interested in the assets, especially that we've managed them in a way that the occupancies are higher. They have positive free cash flow. I said 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 that 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, it should be approximate of those values.

Yeah, I mean, I think the numbers is it's about 82% of our value is in downtown Toronto. And then we've got Sussex and 2200 Eggington, 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 property. It's a very small property. It would 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 Industrial has done extremely well. well, the unit price might be slightly just of late, but is there a maximum amount that you would be comfortable with with Dream Industrial representing of the market cap 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, so it represents less. So we're just totally focused on the value. What I would say is, Since we created Dream Industrial REIT, there's been lots of talk about, well, you're an office REIT, we have this, and we've always said, hey, it's an investment. I'm pretty pleased that we've owned it as long as we have. We bought more occasionally. We sold one million shares once. But Dream Industrial has been a very valuable, moderating investment 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. Our next question online comes from asylum channel bus from Cormark securities.

Thank you, operator. Good morning, everybody. My first question is around B 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 that been a part of the 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 tendencies on Bay Street are small boutique law firms that we've either just recently renewed or or we're in active discussions with to 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 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're seeing banks trying to rationalize space and reduce their space. That's not as much a 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. 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 it is just to reduce costs. And we're seeing new era businesses drawing leaps and bounds and needing basically like That's what I was saying earlier. There's all these new buildings coming. They're mostly full, and we're seeing 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 rent, so the delta rent should kind of be in your favor. And just looking at Q4, I think there are about five buildings in the downtown portfolio with like sub 70% occupancy levels, which I think is a great opportunity for the REIT 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 2022? It's 90% commitment, sorry.

Yeah, you were breaking up a little bit at the end, but you were talking about vacancy pockets in some of our 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 has been delayed a little bit with the Omicron variant, but track touring activity, everything else is normalizing. And if we see the same indicators that we saw in October and 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 talking about 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 that, Jay and Michael. My last question before I turn it back is on in terms of understanding the increase in commitment of occupancy. So, Jay, when you say 90% increase in commitment by December, what's the timing difference between commitment and when those visas actually start paying up?

Typically, it's about four to six months when we get our commitment. 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.

Can you also mention how often it usually takes from the time you meet a tenant or start talking to a 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 a deal, even in the hottest markets. So we bake in some timing from commitments to when it starts to cash flow.

Perfect. That's actually a great call, God. And thank you, gentlemen, and congrats on a great call. I'll turn it back.

Thank you very much. Thanks.

Thank you. Our next question online comes from Jenny Ma from BMO Capital Markets.

Hi, good morning. I want you to focus over to your debt stack. It looks like the floating rate debts crept up to almost one quarter. I know it's fluctuated throughout the years, but given the expectation of the rates going up, how are you thinking 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 months ago. We've monitored it. So our credit facility is variable. We're currently about 75% fixed, 25% variable. 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 sensitivity. say the other variable components of debt are actually on the land. So 250 Dundas, 2200 Eglinton, it gives us more flexibility in terms of the timing of construction. So we have the opportunity of layering on construction debt without taking on large penalties. But right now, 7525, we're comfortable with, we'll monitor it. And then when we get the the other, the green facility, that will be fixed. So that will reduce the weighting 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 was happening is the banks are baking in quite a few raises. So right now, Just on economics, it makes more sense to keep it variable, but we are watching that ratio.

Right, right. Okay, great. I also want to dig into the parking revenue trend a bit. I don't think the numbers are set out in the report, but what would you say is the utilization right now, and what's the gap to full potential? And also, the second part of my question is, has there been any changes in the parking rates that you guys are charging?

Okay, so just conceptually, total parking is about 10% of NOI, and five are contractuals assigned to leases, five are transient, which is just gate revenue. I would say utilization, it's been 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 zero 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 on 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 rates will probably be higher once things stabilize 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 more keen on having it full than to push the rates today.

Okay. So if it's 10% at full potential, where would you say it was in, I guess, 2.4? It's a pretty wide range in 2.4.

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

And when you say the 5% contractual, are those parking contracts as individuals or are those tied to leases with certain tenants?

Those would be leases.

Oh, leases. 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 tied to leases.

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

Okay. Okay, okay, great. And then I have a bit of a technical question on the accounting side. As far as the input on your DCF calculation, it looks like the market rent has gone up a bit. It's starting in two, three, actually. I think it's, I think it was, let me see here, about $44 in the last couple of quarters, and it's up to that $30 range, and it looks like 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 that 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.

Thank you. Our next question online comes from Sam Damian from TD Securities.

Thanks, and good morning, everyone. Just maybe first for Gord, perhaps, when you look at the committed occupancy and the in-place occupancy, it's 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? Sure.

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 Sasquare. Then we did a deal at 655 Bay 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 expiring rents from $17 and brought them up to $30 a 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 year? Correct. Okay. And Michael, maybe just looking at the development projects, planning is getting pretty finalized here. Approvals are coming through. You talked about 250 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 Edmonton is really interesting because it's not one building, it's a whole series of buildings. So when it's 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, there's lots of value there. The trickier one is 212 King because that's just a huge building. You've 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. You're not getting the approvals and looking to sell the site. You're keeping these and proceeding with the development, potentially with partners and staggering 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.

And maybe one for Jay. Just when you look at the IRS 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 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 DCF. 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 bias on your term fundamentals. So when you look at the underlying assumptions, so for example, occupancy, rent, parking, it's hard to push the values up significantly to try to reconcile with the private trades. But at the same time, we've been doing the leases. All of the leases are coming in at a pretty high rent. 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 is the reason why you see sort of the values, they fly over the When we are replacing the tenants with the renewals or the new leases, they're coming in high. And then when you cap it, it's a good value. And then 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.

Thank you. Our next question online comes from Mr. Matt Cornett. from National Bank Financial. Please go ahead.

Hi, guys. Just a quick follow-up on 2200 Eglinton. Is there a 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 a 165,000-square-foot existing office building, and it's it's pretty fully leased. I mean, I don't remember if it's 82 or whatever, but it's well leased. That building will remain. 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 a condo's 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 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 some 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 asking this somewhat selfishly because I walk by it every day on my walk into the office, but what is the timeline in terms 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, or 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 where 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 tinting 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 large 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 pretty much leasing vacant space and maintaining existing tenants in place?

Yeah, a lot of it is block and tackle. Actually, for 2022, just heading into it, even pre-COVID, the two large ones were 74 Victoria, that was the Passports Office, and then State Street here in our head office there at 30 Adelaide. We addressed the 74 Victoria in 2020, so I think they were expiring at 27. We got them to 33. And then State Street, I'd like to 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, Matt, if you remember, they expire this year.

They're about 225,000 feet long. So we have commitments on about 185,000 of that 225,000 feet, even in advance of the natural expires. So we've addressed a really good chunk of it. They had two sub-tenants that we renewed 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, we 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 the space. Correct. And then they had some subtenants, and we're dealing with the balance, but it should turn out quite well.

Okay, perfect.

Thank you. Our next question online comes from Panny Beer from RBC Capital Markets.

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 talk about it more with analysts than we actually do with tenants, for whatever that means.

What are you hearing from tenants? It's pretty broad. Some tenants are taking a little bit more space and some are taking a little less. It's almost 50-50. And to Michael's point earlier, the 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 and extends, 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 have groups of people working together but not all open. But I actually think that most people are thinking about it, want people to come back, and once they know how the space will be used, they would do something. But amazingly enough, 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, Jay, maybe coming back to your comments on the same property NOI outlook for the year, 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 the stats, we think this year will actually 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 spreads?

Yeah. So we're seeing average net rents up by about 10% on what we're seeing on pre-negotiations and deals that we're conditional on. So we're seeing a good uptake on that. NERs right now for deals that are closing early in the year are flatter up a bit. But 2022, we're in pretty good shape. We've addressed about 75% of our expiring revenues, and we're keeping on top of it.

Yeah, to 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 that so 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 our new leases it's about close to 30% and the other markets we have in our disclosure we just roll them to market so overall I think for the year we'll probably be in the high teens to 20%. overall.

Got it. I lied. I've got one more. You mentioned tenants expressing interest in some of your new projects. Can you just expand on that? What types of tenants have contacted you in terms of some of the projects underway?

Yeah, so it ranges. On Bay Street, we get 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. You know, 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 co-working. We get a lot of call for co-working 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.

Thank you. Our final question comes from Mario Zarek from Scotiabank.

Good morning, guys.

You made it.

I made it. I made it. I'm a, I'm working from home today. I suspect the connection would have been stronger if I was working from the office. So Michael, I wanted to come back to your comment on, on land values. You mentioned condos are selling at 1500 square foot. You're at implied 500 for dream office in the market today. What would you say the differential downtown in land values between office and residential today for buildable square foot in terms of density?

So I want to clarify it a bit. We're sitting in 30 Adelaide. It's a 400,000 square foot building. If we rezoned 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, it's worth $200 million. If we were to rezone it at 1.1 million square feet at $108 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, there are historic buildings. You wouldn't be able to do that. So I was thinking more about this kind of building, 720 Bay, 655 Bay. A lot of these buildings, like we saw it at 250 Dundas, It's worth so much more money if we do something new with it. So what I was trying to say was we can't tell you with confidence how every office is going to function and how many people are going to work at home or any of those things. We're confident that there will 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 Quayside bid this week. That's about... a 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 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 at 1,500 foot for condos is impressive. You know, 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 a Liberty Village building at $925 for a square foot, and it has no further development. I mean, we didn't see that back there in 2009. So if 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 redevelopments, there'll be lots of more opportunities. So, you know, we're single-mindedly focused on reducing the shares outstanding. I think since 2016, we sold 140 of 172 buildings. We still have the 32. We've reduced our shares outstanding by about 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 the boutique buildings, but we also have a lot of buildings that have a lot of value for other uses as well. So that's where our confidence comes from and the value of the business over a longer period of time.

100% makes a lot of sense. I did want to ask you on the Quayside 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, you know, there's a tremendous number of competing goals that the governments have been trying to achieve, including a 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. What's the name of the museum he did? The African American Museum of History, the Smithsonian. This guy is a legend. He doesn't do a lot of these kinds of projects. We were very fortunate that he saw in 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, 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 for a couple hundred thousand 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 Quayside, 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 Eggington, 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 that I might just email to you in the essence of time, given we're at about 70 minutes here now. But maybe one last one for me. When you think about the future of the company, it really – really focus on development and redevelopment going forward in terms of creating value. So when we think about 212 King, 250 Dundas, 2200 Eglinton, when you think about the potential value creation there relative to what you have embedded in your IFRS NAV today, how would those two compare? Those three projects, how are they valued within your IFRS NAV? and what are the benchmarks to increase that value in your eye for us 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, 438 University, and our share of 212 King, 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 the development value. So You know, very simply, what we use is if you spend a million dollars on a piece of land, if you rezone it, it should be worth two. And once you finish developing, it should be worth four. So, you know, we're probably, if I had to guess, 25% to 30% of the way to recognizing value, let's say, on 250 Dundas, considering it's zoned. If you look at 2200 Edmonton, 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 there, we're still carrying it at 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, that 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'm kind of shocked that today of all days is 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. We're looking forward to seeing you in person soon. All the best.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now