Release Date: August 12, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Dream Office Real Estate Investment Trust (DRETF, Financial) reported a 8.7% increase in diluted funds from operations (FFO) per unit, reaching CAD0.76.
- The company has seen substantial growth in leasing, with 60 deals for approximately 360,000 square feet already signed this year.
- Dream Office Real Estate Investment Trust (DRETF) has proactively addressed nearly all of its near-term debt maturities, including a significant mortgage at Adelaide Place.
- The company has generated approximately CAD2.4 million in construction fees through its in-house construction management and materials procurement team.
- Dream Office Real Estate Investment Trust (DRETF) has maintained a market-leading current and committed occupancy rate of almost 88% in its Downtown Toronto assets.
Negative Points
- The overall vacancy rate in Downtown Toronto remains high at around 18%, a level not seen since the early '90s.
- Net effective rents (NERs) continue to be compressed due to inflation, rising broker fees, and increased costs of materials and labor.
- The Canadian office market remains erratic, with fluctuating metrics such as vacancy rates, absorption, and cap rates.
- Dream Office Real Estate Investment Trust (DRETF) faces challenges from rising interest rates and a more selective lending environment.
- The company has a significant upcoming lease expiry at 74 Victoria, which could result in an annualized NOI impact of approximately CAD8 million if not fully leased.
Q & A Highlights
Q: Michael, strategically, it sounds like the asset sales that you're pursuing are ongoing but maybe not with the sense of maybe just takes time. Can you just comment a little bit on strategically if anything has changed and how you're viewing the asset sales? And maybe connected with that, is there anything else that you're considering or feel the need to increase liquidity in regards to maybe the Dream Industrial investment? Is that still something that you intend to own for an extended period of time into Office REIT?
A: Michael Cooper, Chairman & CEO: Well, I think our liquidity level is pretty good right now and we've been prepared for things to be more difficult. So we're pleased with that. I think the sale of one or two buildings might be appropriate. And with the Dream Industrial units, they've been a great investment for us. They're obviously not office so that they're not our core strategy. If we need them or if we decide opportunistically to sell them, that's something we could consider. But we're not really considering that now nor do we feel we need to.
Q: Gord, it sounds like there's a lot going on with the leasing and the face rates appear to be good. Can you just comment a little bit on the trends you're seeing on the net effective rents? If that's improving at all or if it's still really expensive just to get leasing done? And how you see that evolving over the next year?
A: Gordon Wadley, Chief Operating Officer: Yes. Good question, Mark. It's still really expensive to get leasing done I think right across the board. We're competing with a lot of different spaces that are fully improved. So for us, if we have base building space, it's table stakes to put in CAD70 a foot to CAD100 a foot to get it in a reasonably leasable condition to match our competitive set. So yes, I see NERs, at least for the next 18 to 24 months, being relatively challenged. But overall, I'm happy with how net rents are performing. And I'm happy with the pick-up of tours and the velocity of people that are coming through our buildings. So that's positive.
Q: I guess, first question just on dispositions. You talked about it a bit and you had a question from Mark there. But I mean, there was a couple of buildings listed for sale earlier this year. Just wondering, if you could provide an update on those specifically, if those are still intended to proceed or how that's going?
A: Michael Cooper, Chairman & CEO: I know you think that's an easy question but the answer is hard. As I mentioned, we definitely have been making great progress in one but it's a slow process. On the other one, we actually don't have an update. One thing I had to mentioned is, I think that another source of capital for us, we have some buildings whose loans mature. And while everybody expects that there's going to be paydowns on loans, we have a few that are under leveraged and they'll be a great source of capital for the company. So that's another choice that we have to look at. But our liquidity is in pretty good shape right now, at least as good as we had expected.
Q: Gord, this is only a question to you. Maybe a year ago we were talking about the number of stores going up but tenants essentially taking some time to actually sign those leases. When you look at the situation today, how does that compare in contrast a year ago? Are tenants being more willing to come to the table and actually execute or is it more the same?
A: Gordon Wadley, Chief Operating Officer: Good question. So we're starting to see more of these deals get executed. They're taking longer. We mentioned today that we've got at least 10 deals for about 270,000 square feet in the pipeline. These deals we've been working on for the better part of six to eight months on some of them. I think everybody is just being prudent on what the responsibilities are going to be in terms of construction and costs. But yes, to your point, a lot of the deals that we've seen come to fruition this year were deals that we started last year. I wouldn't say, they're getting any faster to do in a competitive environment. There's a lot of leverage being set-up by brokers and other landlords. So we just have to be patient and navigate through them. And every time we have a window to close, just do everything we can to try and get these things done. But I don't foresee deals getting any quicker in the near-term. We just got to keep battling through each one as they come.
Q: And maybe just looking at these deals that are being executed, like, let's say, 74 Victoria, when you look at the deals there, once signed and once the tenant takes an occupancy there, how long does it take before that shows up in the NOI? Is it still like 6 to 12 months over there?
A: Gordon Wadley, Chief Operating Officer: That's actually a good question. So one thing that we've been looking at instead of always putting capital in the deals is doing free rent, out-of-term fixturing. So that -- in that kind of case, we'll delay the occupancy date but give the tenant the access to the space in advance of the occupancy date. So they have out-of-term free rent but we start the term, say, for example, we do a five-year deal, maybe we'll give them five months of fixturing period. It takes us a month to do the space then you effectively get four months out-of-term free rent and then their commencement date starts on the 5th year. So on bigger deals, you will see a bit of a lag from when the deal is signed to when the actual rent commencement date is. But a lot of the time that is out-of-term free fixturing and we make sure they get a full term to amortize the cost that we put in. Does that answer your question?
Q: Just quickly, Jay, I wanted to walk through kind of the bridge between Q1 and Q2 on NOI. I think most of it is either in straight-line rents or lease termination income. But if you could give us a sense as to how that straight-line rent, I think you mentioned that it will impact the second half of the year? But should we assume that the full kind of CAD1 million of straight-line rent converts to cash rent? And is that a run rate for the remainder of the year?
A: Jay Jiang, Chief Financial Officer: Sure. No problem. So to answer the first part of your question from Q1 to Q2, in addition to the noted straight-line rent and lease termination income, we were also a little bit higher about CAD350,000 on comparable properties NOI sequentially and that's just due to free rent burning off for tenants that have taken occupancy. Our property management and construction income was also higher by CAD150,000. And we did
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
