Dream Office Real Estate Investment Trust

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

Right. And it does sound like tours are picking up and just leasing volume is up generally. When would you expect TIs to start to come down? Is that more of a 2026 improvement? And where do you think market vacancy should be to cause TIs to start to inflect downwards?

So that's a great question. I actually spoke about this with an investor last week and it's interesting. Usually a landlord's market starts to turn at about 90%. Once you start getting in the mid 90s, you have a little bit more leverage to push back on some of these requests. That being said, you know, while there's still vacancy in the market and while there's still uncertainty around unit prices, so materials, labor, all these different things with what's going on from a macroeconomic perspective I think there's still some uncertainty in the market also two brokers are getting paid more and brokers getting paid as much like taxes they never go back down once they hit a certain hurdle so I foresee that cost always kind of staying where it is and just with the uncertainty around unit costs for materials things like that I suspect they'll continue on a per square foot basis to stay relatively high for at least another 18 months to 24 months. And then once the general overall market occupancy starts to tighten a little bit, then you'll probably see better NERs.

Okay. And then just lastly, curious if and how the sale of 438 University, how that informs your overall fair values. Is there much to read through for for the balance of your portfolio?

Yeah, that's a good question. So in the prepared remarks, we said that for IFRS accounting valuation cycle, we appraised 41% of our portfolio this year. And in addition for that for financing, we almost did equal amounts. So the way the appraisers look at it is on a discounted cash flow basis over 10 years. And the values are quite sensitive to the reversionary cap rates. And there is an expectation that especially you get through the next two years or so, there is a normalization to the office market. On 438, I think it was important to point out that in addition to just the $105 million, we got $20 million of incremental benefits. And those are real value because if we move tenants from one building to another, that was about $1 million of NOI. So to us... That was quite meaningful. And if you looked at the forward projection of NOI at 438 University, the cap rate would have probably been a high five. But with that said, I mean, the second part of it is that there was other data points of assets sold, not only by us, for example, 720 Bay. There were other assets sold to users, and those were very attractive cap rates. And, of course, but overall, we acknowledge that the investment market is tough. It'll be interesting to see. We'll follow the appraisers quite closely. With all these data points coming in, we'll be tracking them to see how they're reflecting that in the assumptions. But thus far right now, what we're seeing is rents are holding up. If anything, rents are probably going up. The higher TIs are reflected, but you cap the rents and you take the present value of the TIs. You're building as long as they can maintain high occupancy, which is what we've seen the values will hold.

Got it. All for me. Thank you. Turn it back.

And your next question today will come from Pami Burr with RBC Capital Markets. Please go ahead.

Thanks. Hi, everyone. Just coming back to the conditional or the leasing done at 74, Victoria, when would those conditional leases take effect? And then to clarify, did you say that one of the tenants was relocating from 30 Adelaide? I may have misheard that, but just some clarity there would help.

Yeah, we're potentially going to move one tenant from 30 Adelaide over to 74 Victoria. That lease would start towards Q4 of this year. The balance of the leases would start probably, the tenant would be in place by the end of the year, but start cash flowing by the end of next year. And then the other prospect that we're working with for another floor would probably see rents commence towards Q3 or Q4 of next year as well too.

But I would say that we've got a tenant to take the space in 30 Adelaide that we're moving. So that'll be placed. Okay.

Yeah, that was actually part of the next question, so that helps. And just coming back to the Calgary office conversion, what can you share perhaps in terms of the timing of when that project could start and then the total expected costs? Do you have that?

Sure. Just at a high level, things are still moving right now. But generally speaking, we're hoping to commence on the redevelopment construction portion by the end of this year. And the conversion itself will probably take 18 to 24 months. So that's a timeline that we're working with for Q3 2027 occupancy commencement. With regards to the cost, just very high level because we're still working through some things. Our expectation is that the hard and soft cost will come around $70 million. But we'll get the grant from the city. And for the financing, it's interesting, based on the metrics, we're able to potentially target a 10-year loan around $60 million. So there's very little equity that's required. But nevertheless, we're looking at bringing in a partner to share in the risks. of this project. Right now it's looking good, but we're focused on really just improving occupancies in both buildings, and we're excited because we'll have one full office building and then one full, hopefully, residential rental. And I think you guys all know residential is doing quite well in Calgary, and we're excited to bring in residents into downtown Calgary.

Great. That's helpful. Just maybe to clarify, does that $70 million aggregate cost that you quoted for hard and soft, that excludes the land or the value, so yeah, excludes the land, okay. Last one, just on the relocation of the tenants at 438 University and 250 Dundas, I believe, can you remind us when that takes effect?

Yeah, so one of the relocations from 438 takes effect next year at Adelaide Place. We've got another tenant from 438 that would take effect next year as well too, potentially a smaller tenant at Adelaide Place. And then at 250 Dundas, the benefit of the deal is we have a fully unencumbered redevelopment site now. We had a large tenant that was in that building that we didn't have a right to terminate or do a demo with. As a portion of this sale, we now have the flexibility to do that. So that tenant's about 45,000 square feet. We're actively speaking with them about opportunities to move them in the portfolio. And we also got a handful of other smaller tenants at 250 Dundas that we're in various stages of talking to to move in the portfolio as well too. So yeah, it's been quite a benefit for us, that 438 deal.

Great. Thanks very much. I will turn it back.

And your next question today will come from Matt Kornack with National Bank Financial. Please go ahead.

Good morning, guys. Just quickly back to the residential conversion math. Can you give us a sense as to what you'd expect to kind of yield on cost-wise? And then also, do you have other opportunities similar to this? And would you entertain keeping the residential within Dream Office or sell it or find another vehicle for it?

Sure, Matt. I think in the prepared remarks we said that we like to target a 6% yield. Now, interestingly, we also said that we're looking at relocating some tenants from 606 into our adjacent property that we also own. That 6% does not include any of the potential incomes that we can transfer, so that's upside with regards to Like, I do think having a residential income would definitely improve our income profile, if not in Calgary, but for the whole REIT. And the cap rates are quite attractive as well. But we'll decide closer to the completion day what's best for Dream Office if we want to keep it or sell it.

Matt, I don't think there'd be any trade within the Dream Group. So we have a third-party partner. We'll keep it together or we'll sell it.

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

Yeah, so this would probably be a unique one. We have two other assets in downtown Calgary. One is the adjacent office building that will be well-occupied afterwards, and the other is Kensington House, which is also fully occupied. Though down the road, that might be a good redevelopment candidate into residential and The reason for that is a couple of things have to work right. One is we really focus on the floor plate, and 606 floor has a very functional floor plate for a residential conversion. It also has a parking lot parkade, which is important as well. And I'm sure if you Google it, you could tell that right now the anchor tenant in place is Canadian Western Bank. and post-merger with National Bank. We don't know what their strategy will be, but for us, we're trying to proactively reduce the risk of the building having a drop in occupancy. So I think this is a really good outcome. But if there's opportunities down the road for conversions where it makes sense, not only in Calgary, but other parts of our portfolio, we'll certainly look at it.

Fair enough. And then just on net rental income, this quarter. It came in a bit better than we were expecting. Was there anything, I know you mentioned there's some one-time items, but I don't think they're necessarily in that figure. But also, 74 Victoria, would it have been kind of two-thirds out of this quarter, or was there some timing delay in terms of the departure?

No. Well, 74 Victoria, 200,000 square feet maturity, but we released 64,000 square feet and the rest of it, I think the lease, correct me if I'm wrong, Gordaz, was November the 1st, right? So two out of the three months in the quarter, we would have seen the reduction. In terms of net rental income, yeah, you're right. The income from sold properties and the other income line items would have been the items that were flagged. That would be higher than atypical. Otherwise, the other thing we could think of is a Milos lease. Some of the restaurants are taking commencement, so they're paying rents, and soon enough, 366 Bay, but most of that should still have been in straight line, but they'll flow into NOI starting next quarter.

Okay, and last one for me, just in terms of the timing, longer term of FFO growth. It sounds like you're going to be in transition in 2025. I would assume, given what you said on your occupancy guidance, that you're going to start to at least see an SFO from a regaining lost ground, maybe not an ASFO. But is 2027 really kind of a year of stabilized kind of back to, I mean, not normal occupancy, but you should see the full earnings implications of the leasing that you're expecting to do? How I should think about this?

I think your general trend is probably right, though timing, we're hopeful that's sooner in 26 than in 27. One thing to think about is, We've been able to increase rent across our portfolio despite the drop in occupancy since COVID. What's happening is our NOI, the guidance we gave on a comparative basis, is flat or higher. And we've typically been able to hit that each year despite the drop in occupancy. It's interest expense where we're getting hit of... all the loans that have been maturing at low interest rates, we're getting the same amount, and that's great because our income's high, but the spreads and the benchmarks are about, in total, 250 to 300 basis points higher. So if, I think we guided on our Q3 call, just on Adelaide Place alone, that could be around $4 million a year. Now, when I say that, what's interesting is when you get through the cycle, what's becoming sort of headwinds right now could become tailwinds in the future. in a couple of years, and we're already seeing that the benchmark's dropping, and if we can refinance it, maybe not as low as before, but even if you can refinance these loans about 4% to 5%, we'll see support on interest expense savings, and that's quite meaningful.

That makes sense. Thanks. Your next question today will come from Lorne Calmar with Desjardins. Please go ahead.

Thanks. Good morning. Gord, maybe just looking back one last time to the guidance side of things, what does that assume in terms of retention? Is it basically the one known non-renewal in Kansas and everyone else kind of renews?

Well, it's a combination. So the one known non-renewal with U.S. Bank, yeah, that's one in Overland Park. And the rest just assumes we retain just a little over 60% of the tenants that we have in place. And You know, we've already recovered a good majority of that. Renewals outside of Overland Park don't make up a big component of our guidance. It's new leasing that we have to do. And on the new leasing targets for this year, it's about 275,000 feet, which is less than we've done in the past few years. So I feel pretty good about it, Loren.

Okay. And then... Can you maybe give us a little insight into the conversion rates, how that's been trending over the last couple of years, and where you're sort of expecting it to go? Obviously, tour activity is up, but with more space to tour. Obviously, it may seem a little more tougher to convert, I would assume.

Yeah, so tour conversion rates, because there's so much... Oh, you still there? Yep. Yeah, so tour conversion rates, because there's so much... supply is around 20%. As the supply starts to tighten, you'll start to see conversion rates get a little bit better. But as a whole, we track it where around 20% of our tours convert to actual deals. A little more than that convert to offers. But while live offers are going, it's a competitive environment with other landlords. So I'd say we're around 20% for tour conversions.

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

Yeah, I do see it trending higher. So the more absorption there is in the market as a whole, the less opportunity there is. So when a tenant is touring with lower vacancy, there's a higher chance that they're going to commit. So it's really just kind of market-driven, and we just keep tracking it.

Okay, and then maybe just one last quick one. Would it be fair to assume that the cost per square foot to renovate or to create these model or modified suites would be in that 75 to 125 range per square foot?

Yeah, I think you got it. Now, that is to convert something that's in base building to sort of turnkey space. And how we think about the economics on that is once you do that conversion, often the tenants wouldn't really ask for much of an inducement package. And if you do the conversion, we think the physical life of that is at least 10 to 15 years. And if they sign a five-year lease, your NER might be a bit softer for the first five years, but they're really strong from year six to 10. So if you do a DCF on that, it looks very attractive, not to mention that you're not giving up too much on opportunity costs. And the downside of not having occupancy means that you're paying for the additional rents. But further to that, that's assuming that the space is in raw condition. A lot of our space across Bay Street and boutique are in semi-modified suite conditions. So if you reduce the spend by half of what you just said, that makes the economics look very good.

Okay. That is great, Colin. Thank you so much. Thanks, Lauren.

Once again, if you have a question, please press star and then 1. And your next question today will come from Mario Saric with Scotiabank. Please go ahead.

Hi. Good morning. So, Jay, the guidance that you offered for the year excluded any transaction activity outside of Kansas. What's the likelihood internally that you're attaching to be able to monetize value in 2025, whether it's selling additional IPP or any of the substantial residential density within the portfolios?

Yeah, that's a good question, and I would say that's a question we get on our call each February. I got to say that we don't forecast it. One is just we have 26 buildings and it's hard to forecast transactions in this type of market. I'll also say that each year we've been able to monetize at least one building thus far. So we're actively seeking and hence where we're giving guidance without any transaction activities. But we'll have to look at each one individually to see what that does for the income, the value, the cash flows, where it makes sense. I think we're good.

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

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

Okay. And then just maybe for Gord, just talking about the economy, has there been any change in tenant behavior with respect to the escalated U.S. tariff discussion and the potential implications for businesses and the economy?

Yeah, there hasn't been a ton. We've had one or two tenants take a bit of a wait-and-see approach until, like we had one or two deals that were supposed to firm up in February that they wanted to take a bit of a wait-and-see approach until April. just to see what that impacts. But it hasn't been as material as many have speculated.

Got it. Okay. And then just a clarification question. On the vacant space in the portfolio today, DreamOff is essentially paying for all of the additional rent?

Yes.

Okay.

Thanks, guys. Mario, it includes, just before you go, Gord, when we say DreamState, it's all our companies that are paying it, not just DreamOffice.

I think we have time for one more question. If there's any, if not guys, then please just feel free to reach out to JRI if there's anything else after.

Showing no further questions, this will conclude our question and answer session. I would like to turn the conference back over to Mr. Cooper for any closing remarks.

Thank you, everybody, for participating. And as Gord said, we're happy to answer any questions throughout the day as you may need. Thank you again for spending your time with us. We look forward to talking in the future. Bye-bye.

The conference has now concluded. You may now disconnect your lines. Thank you for participating and have a pleasant day.