Dream Office Real Estate Investment Trust

Good morning, ladies and gentlemen. Welcome to the Dream Office REIT fourth quarter conference call for Friday, February 17, 2023. 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 REITs 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 MDNA. These filings are also available on Dream Office REITs websites at www.dreamofficereit.ca. Later in the presentation, we will have a question and answer session. To queue up with your question, please be sure to press star one one 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 very much and welcome everybody to our year-end conference call. I wrote a report to the board and referred to it feeling like Groundhog Day over and over again in the office sector. I'm here with Gord and Jay. They'll deal with the financials and the operations. I just want to talk a little bit about some of the strategy and other opportunities we're seeing. Last month, we closed the sale of 720 Bay. The highest use and value was at the Health Science Building. We're pleased with the sale. I always liked the building. I think the building is going to perform well in whatever form over the long term. But, you know, it's a good opportunity to get liquidity. This quarter of a million square foot building is about a quarter of the space that we have in the Discovery District. And I think it proves out that the Discovery District has an additional value over just other office buildings. It's not a commodity. So we have another 750,000 square feet there, including 250 Dundas. And we think that's pretty exciting. In addition, we own about 26 million shares of Dream Industrial. And it's been doing very well. It's about $400 million of investment and liquidity. And that's a pretty exceptional asset for Dream Office. At 2200 Edmonton, we mentioned that we've received approval for about 2.5 million square feet of residential density for the most part, in addition to the 165,000 square foot office building. Basically, the density is divided into four phases, about 600,000 square feet each. We're in discussions now with the developer we know very well for them to develop condos on the first phase. And after cost, the density is probably about $70 a foot with 2.5 million square feet. That's about $175 million plus the 165,000-square-foot office building. So once we get all the zoning done, once we make progress on it, the $110 million book value could become $200 million, and that's an additional $2 a share, basically. The Bay Street collection is coming along great, and Gord has a lot of updates on it. But just a couple of other examples. 74 Victoria is zoned residential. That's where the passport office is, the federal government's attendance there. It's on Yonge Street. It's right between the King and Queen subway stop. And we could build a significant residential building there if we decided to go ahead with that. 30 Adelaide, it's interesting because if we can eliminate the requirement to replace the office space, which seems rational given the desire for housing, it's probably worth $300 million just as a residential development. So we see lots of value with office buildings. Our Bay Street collection is going to be occupied with all the work will be done. The restaurants will be in place. I think it's going to be very exciting. And our other office buildings are doing very well. And we've got lots of opportunities to get extra value out of our company aside from office. That's a general overview. I'm happy to answer questions at the end. But gentlemen, do you guys want to start your comments?

No problem. Thanks a lot, Michael. Well, good morning, everyone. It's Gord Wadley speaking. First and foremost, I hope you're all keeping really well. It's nice to get a chance to connect with you today and share some of our work that the team's completed not just in Q4, but over the course of the year. I look forward to sharing some of the big news and the key milestones regarding our asset plans. As Michael mentioned, we've now fully completed our Bay Street collection, and we're quite proud of it. Since we pushed well past the public health crisis, our team's been working in unison with existing tenants, new tenants, and prospects to ensure a seamless transition back to our buildings. That being said, the return to office rebound many expected has been a bit tempered when you measure it by traditional indicators akin to occupancy and net new absorption. However, on our team, there's real optimism when looking at future commitments, tour activity, trailing occupancy, and like Michael mentioned, new retail. On the cost side, we're seeing some stability stabilization on materials and finishing trades, which we feel positions Dream Office very well in the years ahead. Anecdotally, in the 13 years that I've worked at Dream, we've never printed more parking passes or security access cards than we did over the course of the last two quarters of 2022. From a macro perspective, overall vacancy in Toronto is stabilized to approximately 14% across all classes. This is a level not seen since the great financial crisis. From our perspective, Vacancy in our core portfolio has moved in lockstep with market dynamics, taking us to an overall current and committed rate that's slightly better than market at approximately 88%. Despite some of the industry challenges and what you read in the news and social media, we're starting to see some material improvement. It was the most active year of leasing for Dream Office in the last three years, with rents holding up very well on the just over 700,000 square feet of deals we completed during the course of 2022. That's in contrast to the 480,000 square feet of deals we did the year before that. And we continue to see really positive momentum and some increasing activity going into the spring with a number of prospects and some conditional deals totaling almost another 100,000 plus square feet. Closing out Q4, we completed approximately 25 transactions for almost 180,000 square feet and over 110 deals for almost 700,000 square feet for all of 2022. For some additional context, we did seven transactions over 25,000 square feet, and this is important. We did another four transactions over 50,000 square feet. So from our perspective, material deals of scale are getting done, and companies are making big commitments. Albeit, they're taking a little bit longer, and the tenants are much more pragmatic with their capital outlays, and they're ultimately being much more prudent with their balance sheet, given the uncertainty around inflation and their cost of capital. Our rates have been very resilient and we saw average net rents up 8% versus budget. But given some of the cost pressures, NERs remain largely flat year over year. We've seen a marked improvement in net rents and that's a real testament to the quality and the location of the buildings that we own. The efforts of our operating team and ultimately staying true to our asset and capital strategy. Our construction and development team is managed very well. And I can now officially say today that we've completed all our major work on eight buildings that make up our Bay Street collection. In conjunction with world-class hospitality and hotel designer, Paolo Ferrari, we've completed seven lobbies, 112 bathrooms, eight reef facades, and dramatically upgraded all key base building components, including elevators, HVAC, mechanical. And in addition to all this, we further continue to dramatically reduce our carbon footprint in partnership with the Canadian Infrastructure Bank, toward our goal of being net zero by 2035. I want everyone to keep in mind that's almost 15 years earlier than the commitments announced by our federal government. I look forward to getting an opportunity to tour anyone on this call who's interested. It'd be great to walk you through in person and share firsthand all the great work our team's done. We're really proud of it. On our last call, we mentioned we were close to announcing a number of best-in-class retail and hospitality concepts. that align with our bold vision for Bay Street Collection. We worked very hard to create a new class of asset known as boutique luxury in the core of the financial district and adding these curated retail amenities in partnership with some of the globe's top restauranteurs and placemakers we believe will make our core assets very appealing. Executing on our hospitality strategy has been a major catalyst to attracting and retaining some of Canada's most discerning companies And we've seen this over the course of last year with 25 office deals done on Bay Street collection at an average net rent of over $38 a foot. The past few quarters, we've been highlighting the negotiations of completing some marquee deals. We're very proud to say today that we've completed four deals with arguably Canada's top restaurant tours that total over 30,000 square feet and two more are conditional. When completed, this will total approximately 45,000 square feet of total retail absorption at average rent close to $70 a square foot and annualized NOI impact of an additional $3 million. These are all in our most desirable assets, completing and supporting our goal of bringing an elevated and all-new experience of boutique luxury that is totally unique to Toronto's financial core. We're very proud to share today that we are bringing NELOS to Toronto. We are working very closely with owner Costas Spiliadis and his team. Milos has grown from its roots in Montreal and is now one of the most sought after restaurant brands globally. This is an absolutely incredible experience, not just for our buildings, not just for our tenants, and not just for the financial core, but I really believe it'll be a great draw for the city and our team is very proud to be working with Costas and the team at Milos. Also today, we want to share, we've reimagined our concept of our alleyway project. We've partnered with Charles Caboose's Inc Entertainment Group to open an incredible new concept to Bay Street that will have an elevated outdoor urban oasis in the alleyway. This is an amenity that's been missing to date in downtown Toronto. Inc's long history as a food and entertainment impresario is an absolute game-changing addition for the financial core, and it's an exciting feature that everyone can share on the Bay Street collection. We're also very proud to say that we have one of Toronto and one of Canada's best restaurants joining our portfolio with Aloe at Adelaide Place, as well as a premier Omakase restaurant. We have two more incredible offerings also under contract that should close next quarter and allow for an extra 15,000 square feet of net new retail absorption. Chair Max Fennell- quarter over quarter, we remain relatively fat flat on our current and committed we're off by about 20 basis points on an apple to apples basis. Chair Max Fennell- But want everyone to know on this call that two of the large deals that we anticipated to close in Q4 are still conditional on some lagging municipal approvals which we feel confident will get. Chair Max Fennell- We have some very cautious optimism, with the additional hundred 50,000 square feet of otherwise and conditional deals and very active negotiation will report on these in subsequent quarters. Even going into this quarter, we secured a very important multi-floor deal and additional key renewal that retains two large tenancies at 20 and 36 Toronto. As a portfolio, we recovered 100% of expiring revenues in 2022 and are already firm and committed on just over 80% of expiring income in 2023. In the current pipeline, we're actively negotiating and trading paper on over 14 deals and RFP responses for 300,000 square feet across both portfolios. There's a lot of press and focus around shadow vacancy and the state of the sublease market in Toronto. To be honest with everyone, this hasn't been an issue or something we're seeing in the REIT. Currently in our portfolio, there's just around 75,000 square feet of space available for sublet, or put differently, it's less than 1.5% of the portfolio nationally. In Saskatchewan and Calgary, occupancy is flat. We sold Princeton Tower. Our current and committed occupancy went from about 76 to 78.8. Tours and activities in those markets have picked up. We've recently received and are responding to numerous RFPs with all levels of government. Our current and committed occupancy is hovering around 88% in our core portfolio. For additional context, if we didn't sell 720 Bay, our current and committed would be closer to 90. Collections continue to be very strong at over 99.5% for the year. Our average vaults in the portfolio are still quite high at just around 5.3 years. Operationally and of great importance, I also want to update on our ESG goals achieved this past year at Dream Office. While the Dream Organization has always emphasized the importance of being good corporate citizens, we're making it an absolute priority to increase transparency, As more than ever, investors want to know how businesses are incorporating ESG principles into their operations and in unison, how we're building on our early successes in this arena. Over the course of this past year, we highlighted some of our accomplishments, which included our reductions in energy and water consumption, waste management, greenhouse gases admissions, as well as a number of highlights on employee development and the diversity of our workforce. We've rolled out our social procurement policy late in 2021, which we allot 20% of contract awards to equity seeking groups and remain on target for the goals that we want to achieve. We established a diversity, inclusion and advancement team to ensure that our entire workforce has every equal opportunity to succeed and also the trades, contractors and service providers align and share their inclusivity policies with us. This is to ensure everyone we deal with is doing their parts to be leaders in inclusion. One core goal was to improve on our national leading Gresby score that we secured in 2021, which is often regarded as the leading sustainability benchmark in our industry. We think this will be a valuable communication tool for our tenants and investors, both private and public. In 2022, we were able to successfully increase our score to 92 out of 100, making us the top performer nationally and the third best in North America while maintaining our five-star rating. We're also continuing to work toward our goal of additional green building certifications for our properties, and we were named in 2022 platinum by green lease leaders. When upgrading our assets, we put a real focus on improving consumption metrics and data of GHG and carbon utilization associated with our overall net zero strategy. These variables are at the absolute forefront of what we hope will separate us from our peers. As a landlord and a leader, we have a tremendous opportunity and responsibility to influence and improve our carbon footprint and in turn align with the growing sustainability demands of our clients. We all work really hard on implementing our ESG strategy throughout our portfolio. Being a good community and environmental steward is absolutely core to our business. And as tenants become much more sophisticated in their commitment to the environment and the community, we want to be ready to share strategies, be a resource, and ultimately partner to make very meaningful contributions to support sustainability in the environment. Overall, our goal is to be recognized as one of the top sustainable REITs in Canada, and we look forward to sharing our progress over the coming quarters. You know, in closing and ultimately, I feel really good about our portfolio. quality improvements that we've made to our assets both at an operating and aesthetic level put us in a very strong position as tenants continue to figure out what their long-term plans are around their specific accommodations our biggest partners and tenants all three levels of government have been really great champions of the work we're doing around environmental and community stewardship but i'd say to everyone physical assets aside I really couldn't be more pleased with how the teams navigated through some of the evolving challenges to the industry. Their effort, their dedication to not only our company but to our clients is what I'm candidly most proud of. At the end of the day, it's this combination of having irreplaceable assets coupled with the quality, high-character team of people we have operating and leasing those buildings that gives me the greatest confidence going forward into 2023. Thanks so much, everyone. I'm going to turn it over to Jake.