Earnings Call: Q4 2019

Feb 21, 2020

Good morning, ladies and gentlemen, and welcome to the Dream Office REIT Year End 2019 Conference Call for Friday, February 21, 2020. 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 REIT's filings with securities regulators, including its latest annual information form and MD and A. These filings are also available on Dream Office REIT's website at www.dreamofficereit. Ca. Later in the presentation, we will have a question and answer session. 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, operator. Welcome everybody to Dream Office's year end conference call. I'm here with Jay Jing, the CFO and Gord Wadley, the Chief Operating Officer. We'd like to begin with Jay providing some prepared remarks, then I have a few comments and then after that, the 3 of us are happy to answer your questions. Jay? Great. Thank you, Michael. Good morning. In the Q4, we reported FFO per unit of $0.40 which was in line with our internal expectations and $0.01 above Q4 in 2018. Overall, we are pleased with our 2019 results. Our leverage declined from 45% to 37.6 percent due to over $500,000,000 of asset sales and despite having less assets and lower leverage, our FFO per unit increased 0 point 0 $1 for the year. Our exposure to Downtown Toronto increased from 68% to 83% as we sold approximately 2,000,000 square feet of assets in other markets. We were able to overcome lower leverage and lower yields by generating higher comparative property NOI growth of 12.2% for the year, reducing our G and A expenses and earning extra fees from our property management and construction business. Net asset value per unit at year end was $26.70 an increase of 3.5% over last quarter and 6.9% for the year. In Q4, our portfolio saw an increase in value of $62,000,000 of which $28,000,000 are from capital investments and $34,000,000 attributed to fair value increases through higher NOI. We also realized our share of net income from our Dream reinvestment of $21,000,000 which is accounted for under the equity method in accounting. Based on current value of approximately $14 the fair value of these units are worth over $60,000,000 or $1 per unit relative to the book value of our balance sheet. Our weighted average capitalization rate used to determine fair value of the company and cash distributions. For 2020, we will provide the following high level guidance assuming a steady state that is exclusive of potential acquisitions, dispositions and unannounced major capital initiatives. We are expecting diluted FFO per unit of 1 $0.60 We expect comparative properties NOI of approximately 3%, consisting of 5% increase in downtown Toronto, primarily attributed to higher rents, offset by negative 5% in our other markets to reflect continuing market challenges in some of our remaining assets in Western Canada, particularly in Saskatchewan. We are working through these assets and if we are able to sell some of them, we will be able to improve both the return profile and the comparative property NOI in 2020. We are anticipating our average leverage for the year to be below 40%. Within the other market segment, there market segment, there are approximately $75,000,000 of assets that we are currently working actively on the leasing and asset management front in the near term in preparation for a sale, but are currently not making any predictions or targets on disposition volumes in 2020. With regards to leasing, at year end, we have 46% of the 100 and 7,000 square feet expiring in Downtown Toronto this year already addressed at net rents in the mid-30s per square feet. We expect to have most of the expiries in Downtown Toronto for 2020 committed by mid year. We are also 82% leased on 2020 expiries for our other market segment. Late in the Q4, we renewed a 185,000 square feet lease at our only building in the United States for 5 additional years with net rents comparable to expiring. This was an important renewal for us as our debt is currently locked up in a commercial mortgage pool until 2021. So adding 5 years of term will help preserve the value and liquidity of this building. As announced in prior quarters, we will be making significant investments in our properties over the course of 2020. We turned over 357 Bay to WeWork and they are currently working on their construction and fixed stream and expect to collect NOI starting in November. We understand that WeWork is leasing the building to enterprise clients, we would expect to have a credit worthy tenant occupying the space. Similarly, in 1900 Sherwood in Regina, we expect to finish obligation by mid year and we'll turn over our space to the tenants construction and fit out program. NOI should commence from the new space in the summer of 2021. In aggregate, we have spent $33,000,000 out of the $55,000,000 allocated to these redevelopments as of the end of Q4. Both projects are currently on time and on budget. We also announced a $50,000,000 investment in Bay Street earlier this year to enhance our lobbies, washrooms, facades, program and the alleyway. To date, we have completed all of our designs and have commenced construction. We plan to substantially complete the Dream Collection Bay Street Village this year. In January, we repaid our last tranche of the $150,000,000 unsecured debentures. We currently have about 90,000,000 dollars drawn on our line with $240,000,000 of liquidity and $280,000,000 of unencumbered assets. We have significantly cleaned up our capital and debt structure over the past 2 years. We have only 1 small mortgage maturing in 2020 and minimal refinancing or interest rate risk over the next 3 years. Our balance sheet is in good shape and support our capital and development initiatives, we will continue to look for opportunities to improve our assets to the best in class standard and deliver solid long term results for our unitholders. Now I will turn it back to Michael with his thoughts. Thank you, Jay. I don't want to spend a couple of minutes talking about our macro view on valuation and maybe why there's some very significant differences of views about what the value of the company is. And then I wouldn't mind spending a couple of minutes just going over our entire portfolio. On October 15, 2008, the U. S. Fed came out and announced emergency interest rates that were such a tremendous decline in order to keep the economy going, they set the overnight Fed rate at 1.5%. Today, the target is 1.5% to 1.75% 12 years later. So I think that what's really been happening over the last 12 years is something's changed, and the cost of money is a lot less than it used to be. Growth is a lot harder to get than it used to be. And people are trying to figure out what's a fair return given the risk. So when I look at it, what we start with is, if you use U. S. Treasuries as the risk free rate, we're at 66 times cash flow for risk free and there's no upside or downside in nominal dollars. So I think the main question is how much of a premium should people get from 66 times cash flow as they take on more risk. What we've seen and how we run our business is we think that even at as high prices as it seems historically, high quality assets that produce predictable income that have some upside are a much better buy today than assets that have unpredictable income. So I would say that today is not a day to buy cheap assets because what we've been seeing is cheap assets get cheaper, high quality assets have tremendous value. We're seeing rents going up and we don't see the tenants choking on it. Rent used to be the 2nd highest cost of most tenants and now after people and now there's a lot of other costs that are way up there too. So we're seeing that rental rates in Downtown Toronto have gone up. There's lots of reasons for it, but the most important thing to me is, I don't think it is affecting tenants' ability to run their business, attract people and grow given the rents. So we think there's a big backdrop for increasing rental rates to the level they are now and to continue to go so to continue to do so. What we are seeing is that the rental rates are significantly higher than a year ago, 5 years ago. And as I've mentioned before, last year is the 1st year we've exceeded 1989 rents. So I mean we probably have something like 1% rental rate growth over the last 30 years that's just occurred in the last 18 months. We think it's the right thing to do and only fair to provide our tenants with incredible space, incredible buildings that make it easier for them to attract people, run their business and treat their clients well. So that's why what we're doing is really focusing on how to create better and better experiences in our buildings. In a lot of cases, the rents are more than double what they were just 4 or 5 years ago, and we want our tenants to have a good experience. Having said that, we believe that we're getting well rewarded for the money we're putting into the buildings. Right now, we're focused on 9 buildings, 8 buildings on Bay Street. And it's very small work. Some of these buildings are as small as 30,000 or 40000 Square Feet. We're expecting that by the end of this year, the work will be done. We got private and public laneways connecting the buildings. We're upgrading everything in the buildings. And we think for this 2 block area downtown Toronto, we're going to create something that's really special for our tenants, plus for the rest of the city. We're working now with retail tenants that I think are going to be really exciting and animate the space. This isn't just space that will be accessible from Bay Street or Richmond. This is a space that will be accessible from our private laneways. And we're going to create something that we hope to see you at and hopefully we'll have something for you in the spring of 2021. When we look at our other buildings in Downtown Toronto, 438 University, we're looking at some very, very interesting new uses on the ground floor, upgrading it. That's a 700,000 square foot building at a really great location, and we expect the rents to continue to rise there and our tenants' enjoyment to continue to increase. 36 Toronto and 20 Toronto is a big building, it's right beside 30 Adelaide, 74 Victoria, 6 Adelaide East. I think we've got 1,100,000 square feet within 100 feet of each other and that's going to be a real target of upgrading in the future. Downtown Toronto is where most of our buildings are and we're pretty much full. I think we're going to stay full. And by making special buildings and special opportunities, things we like to think of as like landmark buildings, we think we can get great rents when the economy is good and we can keep them full when the economy isn't. When we look and I think what's that Jay, 85% of our value? Yes, it's most of it, within a walking distance. So then I just want to go over the other buildings that we have. And we've got 2 buildings in Calgary. 1 is Kensington House, which is where Dream Unlimited's head office is out west. That is a very interesting part of Calgary. There's currently a building under construction just behind it. That really the value of the land exceeds the value of the building, and we think that's a great opportunity. We've got Barclays Square, which was the best building when you combine location and quality. It's got a big parking garage on it, plus 2 office buildings, it's relatively well leased. I think that that's a building that we'll probably keep, but if there's anybody on the phone that wants to buy it, if it's a good price, we'd sell it. Then we got parking garage and 3 buildings in Saskatoon. And those ones we're working on and we hope to sell them over time. Got a beautiful building in Regina that's got an 18 year lease. I think we're building it to an 8 cap. If we put 3.5% debt on for 50%, it's going to be something like a 14% running rate and there's going to be no capital that's required. We would happily sell that at the price if we can do better than those kind of returns, we'd sell it. We just did a 5 year lease for our loan building in the States. That building we would have sold other than the fact that it's part of a CMBS security with a huge penalty if we sell it, but that comes up in September 2021. So we will sell it then. And that's everything we own outside of Toronto. Now we also own Sussex Centre, which is 2 blocks south of Square 1, where Oxford announced a new city of 30,000 people. There's also a new train station. And that building, I think around it, is 30 buildings of 60 or more for residential. So we like that building because there's a lot happening there and the value is going up. I think we're really seeing increasing rental rates, increasing occupancy, and we think there's a lot that we can do with it. The other building we have in the GTA is 16 acres of Edmonton and Birchmount. We've referred to this many times. It's in the Golden Mile study area. We're working with the city. There's 100 acres there that will be rezoned for residential and mixed use. On our site, we're expecting to get we've got 165,000 square foot office building. It's quite well leased, and we're expecting to get approval for at least 2,400 apartment units as well. That's going to be a major undertaking. I like it because it's I the newest public transportation. And that's all of our other category. When we look downtown, we got 250 Dundas approved, which we're really excited about. That building is really interesting because it's kind of at the nexus of some of the cultural parts of the city, the universities, the government, it's on the subway. And we think it's going to be attractive to a lot of people as an apartment and we think the office space is going to be really valuable as part of the hospital district. 212 King, we're working very aggressively to get ready within the next 60 to 90 days. It will be unveiled publicly as part of our process with the city. And we're looking forward to showing it to everybody. It's going to be an exceptional building and one that I think will add a lot of value to our company. So I mean, I'm pretty pleased that we could talk about our portfolio in a matter of minutes. The last comment I want to make is this one about what our company is worth. And as I said earlier, the multiple on higher quality assets is double or triple the multiple on lower quality assets. And our assets, I think, are among the highest quality commercial assets in any Canadian REIT. It's also very concentrated in downtown Toronto. So what our book value were I'm just giving this to you guys as a suggestion of a way to look at the business. We're at about $5.70 a square foot based on our book value. Our book value is basically based on historical precedence when our appraisals where we're trading now. $900 a foot, the stock would be worth $45 a share at $1,000 a foot, it's $51 at $1100 it's $57 dollars So that's the leverage we have to the underlying market. But I would suggest that as Jay so eloquently speaks about comparative property plus 0.00 or minus 0.00, it's really missing the point. The real point is what's downtown Toronto worth when you've got high quality income, reasonable growth and the U. S. Treasuries are trading at 66x cash flow. The average risk free rate around the world is probably 1%, so it's trading at 100x cash flow. So the question is, if you want to own a significant part of downtown Toronto, what expected return do you have? And I think that we put our money where our mouth is and bought back in excess of 50,000,000 shares from the company. I personally dream Unlimited have bought 100 of 1,000,000 of dollars of stock. And we don't think the company is overvalued, but we're totally open to you all deciding what you think it's worth. And now I'd be happy to answer questions. Thank you. And we'll now begin the question and answer session. And from Canaccord, we have Mark Rothschild. Please go ahead. Thanks and good morning, Yvonne. Good morning, Mark. In regards for 250 Dundas and the project on Eglinton, can you maybe just give a little bit more color on the timing of actually getting going further on development and when you'd actually plan on being investing more material amounts of money in getting development going? Great. We would say between 18 24 months, we'll hit the site plan approval and get our drawings done, construction costs tendered, and we'll probably do some of the leasing on the office component. And we view that we probably start construction between 18 24 months, but until then we don't have to spend a lot of money. On Eglinton, I've mentioned a few times that it's the Golden Mile study area. That means that the city is looking at how that land should be used. So it's not as if it's just our application. It's all part of how the city works on it. They're probably a year behind where they thought they would be. I think we would expect that within 18 months or so, the overview of that area should be complete. We put an application in for our site. It will obviously be behind that, but we're hoping that we can get some work done with the city at the same time as they're doing the overall plan. So I would say we're probably 2.5 years away from starting there. Okay. Thanks. And with quite a bit of time before you're going to need to invest money in these projects, with and with the unit price where it is, is stock buyback something that would still potentially be considered or alternatively are you seeing the opportunity to acquire properties in downtown Toronto? Well, that's a great question. Well, the first thing I would say is, we have not made any decision to stop buying back stock. We'll see what the stock does. We'll see how the company goes, but that's a potential use of cash. And I mean, we are looking at buying some properties. I don't think people realize how impossible it is to buy Downtown Toronto properties at prices that we're comfortable with unless there's something about the future or strategic how it fits with us. But I mean, we're currently looking at a number of properties. Okay, great. Thanks. Thanks. From Desjardins, we have Mike Markidis. Please go ahead. Thanks for taking my questions. Maybe just on the back of Mark's question on the stock buybacks and no real significant use of capital for the next couple of years. How do you marry the DRIP program with Dream Industrial and buy more stock there versus buying more Dream Office stock? How do you look at that? I would say that for years we've been saying that Dream Industrial isn't necessarily a strategic investment for us. Most of our shares have a zero cost base, which means every dollar of proceeds is taxable. The only time we participate in an equity issue is $108.75 We thought that was a strategic one to get the stock going and it turns out to have worked out pretty well. I don't see us buying more Dream Industrial. I mean, I think we could sell some. Yes. Just Mike, it's Jay. We did identify a number of uses for the cash over the next couple of years. There's also looking at other opportunities, as Michael mentioned, within the core of the core to upgrade those assets as well. We're trying to stagger it, so we don't have a huge amount of construction ongoing at the Dream Industrial Units, they provided a pretty good return over the last couple of years, one of the best performers. And it's really nice without the need for cash, they were providing a pretty good CapEx free yield from our perspective. But there are some units that we have that we've been collecting through the trip that anytime if we need the cash, we could sell it a little bit in a pinch. So there's a lot of flexibility there and we're pretty excited with what they're doing with their business. Okay. Appreciate that. My question wasn't so much on the with the long term intentions where I was just looking I think you guys are still subscribed on it's 100% on the DRIP, correct, on DIR? Yes. Right. So I guess just given Mark's question on the Dream Office, NCIB and re upping on DIR through the DRIP, Just curious how you balance those 2? To be blunt about it, we went into the DRIP to support DIR so that they had more cash. And we say it on the DRIP, we're happy to. We get it at a discount. But whether I mean, I would just say it's an arbitrage. We're getting a premium to the market value, and we don't need the cash. But those shares, as Jay was saying, we'd be happy to sell them. But I don't see any reason why we'd come out of the DRIP. It's kind of a it's an easy way to get a bonus. And then we can either keep the stock or sell the stock. It's up to us. Okay. Fair. Just, Jay, on 250 Dundas, maybe if you could just walk us through your valuation of that asset at December 31 and how that's treated and now that you've got conditional zoning, how you'll be looking to value at that either at the end of Q1 or subsequent to that as the condition on the zoning was lifted? Sure. As most of you know, we got zoning on January, I believe 21. So as of year end, it was recorded on our books as income properties as is that was the highest and best use at the time. We're actually working through both underwriting sort of a long term development as well as engaging a third party appraiser to value the property. So by our Q1 results, we'll have a couple of data points to use to drive the fair value of the asset with additional density and the development potential. Okay, got it. And then if I just one more question for me please on Birch Mountain Eglinton, I just noticed that you guys moved it from held for development to other. So I guess clearly it's not a downtown Toronto asset, but does the reclass to other and from future property held for development, does that alter or signal anything with respect to your desire to be a participant in the development long term? I mean it seems that you're pretty bullish, but just curious on the reclass. Okay. So I mean, I'll start. It has nothing to really do with that. Just as you recall, earlier in last year, we had a couple of different segments. We had Ottawa and Montreal, so there's no buildings there. We had North York and Mississauga, so we have half a building left. And given that all the rest of the assets can be summarized fairly quickly by Michael and also it's only 17%, We just figured for simplicity of our disclosures and reporting and how we look at the business is really downtown Toronto and then we have the other markets. So that was really the intent of it to simplify the disclosures. Longer term, we expect to develop on the site. We could do it in phases all in one, but it doesn't really have anything to do with disclosure. Got it. And okay. And before I turn it back, I'd just say the simplicity of your business and disclosures is a really beautiful thing from our perspective. Thank you. Appreciate it. From BMO Capital Markets, we have Jenny Ma. Please go ahead. Thanks. Good morning. Good morning. So Michael, going to your comments about the value of the stock and looking at it from a per square foot basis, how do you reconcile that with the book value that is being carried at? And then maybe talk about what needs to happen at least from the IFRS standpoint to really see a material change in the way you look at it? Is it cap rates and market transactions? Is it just NOI growth? Maybe expand on how you reconcile those two numbers. I'd start with I don't need any reconciliation. So I don't spend any time on it. I think that the way that IFRS numbers are calculated are historic and institutionalized. And we have a process and it is what it is. Then there's a portion that I believe which is that the value of high quality things have changed dramatically from what they were and they're not reflected. But Jay probably has a more technical answer. Thanks, Michael. I agree with Michael, but we do reconcile it. That's part of my job. That's our job. Yes, sorry. Yes, that's why. I'd like to say, like in the year, 44% of our assets were externally appraised, whether for financing or valuation purposes. So we have to use those data points for the audit and our quarterly statements. The rest of it, we're pretty transparent in how the assets are valued. Most of them would be under the direct cap methodology. And then the assumptions I use once again are disclosed and they are market actually if we look at the brokerage report. So some of those assumptions, yes, it is just basically a reflection point of where things are at in terms of the discount rate, the cap rate and the market rent. But over time, as rents do go up, the values will go up. But I think it's tough to reconcile it versus the price per square foot today. Okay. Yes, that's fair. And then going on to some of your downtown Toronto properties, I mean, the occupancy rate is pretty high, but there's handful of buildings where it looks like there is some room to be had. Is that related to just leasing friction or is that related to the some of the redevelopment you're doing along the Bay Street corridor and when can we see those gaps close? That's a great question. I don't believe there's any space that we have that we couldn't lease if we wanted to. What we decided to do is maybe hold some space off until the adjoining space is available. There's a number of spaces where we think if we combine locations, we can do much better over the long term. So I think that pretty much every vacancy is strategic. Okay. So I know you said same property NOI growth this year from Downtown Toronto would be driven by rent growth. So is this occupancy lift sort of a 2021 event then after you're done with the work you're doing on Bay Street? Some of them may actually carry out longer term out after this year. But just on that, if you look at the expiry table in the MD and A, less than 5% of the properties roll in 2020. So the pickup is not going to be that high this year, but rents are continuing to go up and these strategic vacates are actually tied to other spaces that are coming up And most of them are on the ground floor or the retail sections in the downtown Toronto. So we have bigger plans for those longer term. Okay. And then it looks like you've made very good leasing progress on 2021 so early in the year. Just wanted to get some insight on whether or not that's being driven by tenants who are very keen on keeping their space. Is it just you guys rather taking what's known right now and rolling over the tenants? Who's really driving the renewal of the leasing and the timing? So it's Gord Wadley speaking. That's a great question. A lot of people wanting to get ahead of the curve. Rates are growing at such a high rate. We've done some government deals. We've done a number of private sector deals along Bay Street for the people that really covered the value that Michael was talking about and seeing what we're doing to the buildings. So we've been able to lock in a lot of deals earlier. And then predominantly, it's just people trying to retain their space. We're seeing a lot of year and a half early blend in extents. And it's been positive over the course of the last couple of quarters. Yes. Just to jump in, 2021, there is a tenant large tenant that exercise a renewal option. It's the last one. But that one's flat. The rest of the ones that we're doing are at market or above. Okay. So is it fair to say then for the Downtown Toronto tenant that having access and being able to commit space is more important than the pricing of the space? I would say, yes, being able to have a well located address in the downtown core of Toronto is driving a lot of these early decisions and they're not as price sensitive. And are they renewing for 5, 10 year terms? Are they trying to max that out? And how are you guys balancing that with getting You just want to hear Gord speak. So they are obviously trying to max out the terms if they can. We're looking at we're being a lot more pragmatic in how we're approaching these leases. We're looking at them at shorter terms on some for full floors because we really think we can at the rate that the market is growing right now, we really think over the course of the next 2, 3, 5 years, we can capitalize. And we've seen such a positive change on renewing tenants on Bay Street Collection expiring at $21 and seeing average growth in the net rent up to about $40 So it's we don't it's not saying that we don't want to do 10 year deals, but we want to be more thoughtful on the deals that we're locking in. Just a last point on that. We're putting in a lot of capital in Bay Street. So we think that once the work is done, we could probably get a better lift. So some of those spaces, it might be more strategic to do shorter term holds. Exactly. Okay, great. That's good color. And Gord, congrats on the promotion and look forward to hearing more from you. Thank you very much. Appreciate it. Thanks. From TD Securities, we have Sam Damiani. Please go ahead. Thank you and good morning. Just to follow on that, can you just give us an update as to what extent leasing is already starting to reflect the redevelopment of the Bay Street properties like are the leases being done in that sort of $4 range? Yes. And we're well ahead of the curve and our asset thesis is working. The important thing to notice is we're getting average net rents over $40 on the expiry rents of 21 but that also includes the CAM increase for us on recovering some of these improvements. So we're still seeing the demand and we're having a tremendous amount of absorption in these opportunities. Sam, I think it's a really interesting question because we had a thesis that if we put money into these buildings, we would get well rewarded for it. We're getting rents now that exceed the rents we planned on for when it's finished. We can't really tell how much of that is based on the fact that they see what we're doing and they see our plans and they're paying us for it and how much of it is the market. So I remember that we did a significant lease. I think it was like 65,000 square feet on Richmond. 2 years ago, we got an uptick from $21 to $0.27 lots of high fives and I think we get more than $40 today. So that was a mistake. So we can't really tell, but I stick with the part that our tenants are paying us a lot of rent and we want them to have a good experience in our buildings. And would you be willing to share a little bit on the inducement side? How are those structured on a 5 or 7 year lease? So what I would say over the course of the last year, our landlord work costs per square foot are down close to about $10 We're down about 40% to 50% on what we're paying. The other thing I'd say is we're paying brokers less too. A lot of these tenants are trying to do things direct. That cost has gone down. So on an NER basis, we've seen our NERs improve by almost $8 a foot, which is up about 35% year over year. I've been doing this a long time, and the market conditions we're having now is really exceptional. So we are trying to be conservative and lock down as much space as we can and much higher rents because who knows what it's like in the future. But I do feel as if there's been a lot of changes in Toronto and we've got higher rents for a lot longer. So we're pretty excited about it. But we're also appreciative. Okay, great. And just maybe back to 250 Dundas. I know there's still work to be done, but you've obviously spent a lot of time and fully intend to proceed on the redevelopment. Is there like an IRR or return on investment that you're sort of hoping or planning for when the final numbers are finalized including the sort of demolition of the existing property? You know what, I mean, look, the real issue becomes when you say your starting value is. So it's on our books for $41,000,000 So pick a number you say it's worth and I'll tell you the IRR. But generally at a reasonable value for the density, we should be mid teens as an IR from there. But having said that, I think what we're really looking at is we can get going back to the thesis about Cigna between 66x and 100x cash flow for risk free. Once we build this new building, it will be among the highest quality. It's in a phenomenal location. There'll be almost no CapEx for the 1st 10 years, which makes it higher and higher quality. And what we'll be doing is we'll be building an incredible building and getting it at a discount, including getting a huge profit on the land. So your IRR number is great if you're getting paid to promote. There's no promote, so it's not as important. But I would say that, you do use your own math, if you use, let's say, 14% or 15% IRR for 4 years, you end up getting a building a lot cheaper than if you had to buy it. And as we said before, it's very hard to buy anything. So I know what you're getting at, but use 14 or 15, I would say, off of a decent land value. Any thoughts that you're willing to share on land value in that location right now? So what's happening now is people are buying land and at market and they're racing to go to market and most of the time it's condos. For a lot of other people who might have land at like $50 or $60 a square foot, and you say market might be $200 for residential, they're deciding whether they want to build an apartment or a condo and they're looking at the long term returns. And if you have land at $60 a foot and somebody says market's $200 when you go to the bank you show $200 I would say when people are going to the banks, they're probably showing 12%, 13% IRRs on average based on fair, fair value for the land. It helps them get the financing. I think a lot of people are trying to do assemblies where they're able to get land less expensive by the time they get approval. But you're asking for a specific question to put in a model. I'd probably say without pushing the envelope, it's not for sale. We're not going to get 100 bids. But I think the residential is probably worth 200 a foot and commercial maybe 100 a foot, maybe 120. Thanks. That's helpful. Thank you. From Scotiabank, we have Mario Saric. Please go ahead. Hi, good morning. Just maybe on the operational side and specifically focusing on 2021 and the uptick in lease expiries. Can you talk about whether there's any chunky leases in that 736 that are set to expire in Downtown Toronto? Sure. Yes, within that number, as I mentioned before, from one of Jenny's questions, there's a large tenant that had exercised their renewal option that was flat, that was around 230,000 square feet. The rest of it is there's a pocket I think at Adelaide Place that was around 46,000. There's another one around 70,000, but otherwise the rest of it is pretty small. And a lot of tenants, as Gord mentioned, are trying to get ahead of sort of the expiry and lockdown certainty. So right now, we're working with them. So we'll find out we'll probably be able to lease up most of the space 6 months to a year in advance at the minimum. Got it. Okay. And assuming no meaningful change in market rents over the next 12 months, is it a fair comment to make that the 2021 same store NOI growth should be meaningfully above your expectations for 2020? That's correct, both on rents and probably on the amount of square footage is a lot higher. So you could do the math on that, yes. Okay. And then just maybe shifting gears back to the IFRS valuation. Can you just walk us through the methodology in terms of how you reflect value based on in place rent versus market rent? So look, I noted that your estimation of market rent was up about 3.5% quarter over quarter. So Q4 versus Q3 and that's consistent with the increase in the reported book value per unit. So can you just kind of walk us through what rent is reflected in the $26,070,000 today and how you think about showing the mark to market opportunity in that number over time? Sure. Maybe I'll spend some time walk through the valuation methodology. We do on an asset to asset basis. So I believe most or if not all of the properties in Downtown Toronto are valued under direct cap methodology, which you take the stabilized NOI or rent numbers over the cap rates. But keep in mind that we do have to reflect the existing leases in place. So you can't cap what we think is market rent on day 1 because we have to acknowledge that there is existing walls in each of the buildings. So over time, what happens if we make adjustments for leases that mature over the next say 5 to 7 years. And then we also assume inflations in the market rents as well. So over time depending on the wallet profile of every single building you realize the pickups and that's basically the methodology. Got it. Okay. And then just to clarify at 250 Dundas, the highest and best use as at December 31, 2019 was office because you had not received the zoning at the time, is that? That's correct. There's no incremental value in density then. Got it. Okay. And then in terms of capital recycling within the dream entity, dream office was inactive during the quarter in terms of the buyback. The Dream Unlimited was pretty active. I think it was buying 1,700,000 units or so. Can you kind of walk us through how you decide which entity buys units and whether kind of the subsequent unsecured debenture redemption kind of impacted that decision in Q4 for Dream Office? I actually think that there's not an issue about priorities. I think there's different businesses, different boards, different management teams. I think based on having a 15% or 20% premium to NAV, we kind of felt a little bit intimidated about continuing to buy back the stock. From Dream Unlimited's perspective, we were quite happy to buy the stock. So that's I don't know if you're aware of it, but Dream Unlimited got a bunch of money recently. So that was a pretty good use, was to flip it out of Dream Global and into Dream Office, and that's worked out pretty good. I think we're really we're huge believers in Dream Office. In February 2016, we put out an announcement saying we're going to really change the company. And I'm not sure I think we had some good ideas at the time. But underlying it, I don't know that we thought it out completely, but what we were doing was we were going to the highest quality assets we had and shunning all the rest and we just keep buying it back. So I think that if I would be critical, I would say we around $31 we sort of thinking like, wow, you know, dollars 50 around $31 we sort of thinking like, wow, it's shareholders money, are you sure, are you sure, are you sure? But I think that we're open minded to buy in the future. We'll see where it goes. I mean, the stock's been on a bit of a tear in the last 72 hours. Yes. The $15 seems like a lifetime ago, that's for sure. Last question just on ESG, I appreciated some of the disclosure some of the things that you've done, especially on the energy side over the past several years. Can you maybe quantify or help quantify the impact on your gross rent per square foot in terms of the savings that you've achieved from your energy initiatives and what that might look like going forward in terms of benefits to the tenants? Sure. Just as a background, yes, it's been more of a focal point for investors. We've been doing it a long time, not to sort of make checklists, but we thought it was the right thing to do and it provide economic benefit. Though it's interesting to note for the first time in 2020 within our management goals, we have ESG sections. So there's a number of them with regards to building efficiencies. But 2 of them is like we're targeting water and energy consumption reduction of 2.5%. There's a couple of initiatives. It's kind of reduction of 2.5%. There's a couple of initiatives. It's kind of hard to quantify a blended per square feet reduction on operating costs. But one example with one of our largest assets, Adelaide Place, we reduced the utilities by almost like 20% and that had an impact about a quarter to $0.50 per square foot on additional rents that's on that initiative. So what happened was all the tenants in the building, they're expecting to get a refund at the year end adjustment. So we're keeping our tenants happy. We're helping the environment and it just creates more room on the additional rent. So we could look at various capital initiatives that can improve the sort of the look and experience of the building, but at the same time really optimize how we look at energy. Got it. That sounds like a win win. Sorry, one more question for you, Jade. In your $1.60 guidance on FFO over 2020, how much lease termination income is reflected in that, if any? Well, we do not forecast lease termination income. Okay. Thank you. From RBC Capital Markets, we have Tommy Byrd. Please go ahead. Thanks and good morning. Just, Michael, you mentioned it's tough to buy, but you are looking at a number of properties. Can you maybe just comment on that disconnect and maybe the types of sellers that are out there? The buyers are more interesting. The sellers are people who own properties and they're being offered prices beyond anything they ever dreamt of. So that's why they would sell. What's interesting is the buyers are everybody. And I would say one area is extremely high net worth individuals who have strong cash flow from other businesses are looking to buy real estate because it seems a lot better than a treasury bill. There's pension funds that want more. If you think about Downtown Toronto, when you look at Omers and Cadillac and a few others allied us, there is really not that many people who own Downtown Toronto and there's a lot more people that would like to. So you've got private equity, you've got pension funds. I would say that's interesting is just how much high net ultra, ultra high net worth money is looking for Downtown Toronto. Got it. And just your comments on that, on I guess the number of properties or you've got a lot under review. What sort of volume are you looking at? Well, it's all small. If we divide a 40,000 square foot building or 60,000 square foot building, that would be great. Okay. And just the comments on rents going higher for longer, just what's your sense of perhaps when this from your perspective, when that momentum may start to slow and perhaps how new supply may factor into that? Like we're living in a time of unprecedented demand for everything in downtown Toronto, meaning office space or residences and stuff. So I have no idea when it changes. I just look at the companies and I've been really quite pleased that that the increase in rental rate really hasn't changed people's behavior. We don't see them reducing their space. We don't see them moving to suburbs, anything more and more people coming downtown. So it looks to me like it's healthy and companies can operate with $40, $45 $50 rents. So I don't know if we've peaked and we flattened out, like we gapped up or if it grows at 3% a year from here, I have no idea. But I don't see anything that looks like it's going to be difficult on the rents. I think the new buildings are getting exceptional rents. I mentioned before, there's not that many landlords in downtown Toronto. They're all well capitalized. So the guys who are building new buildings are getting tremendous rents. And I don't think that that's hurting us in any way. If anything, I think it's helping at this point. And I'm not concerned about them, maybe to a certain extent the space they're giving up, but I think it's really quite surprising how much space is being leased and nothing's been given up. Right. Just last one for me at and I apologize if this was somewhat asked earlier, but 250 Dundas, can you just provide some color on the range of costs for that project? It might be a bit early, but I'm just trying to get a sense there. And then whether this is something that Dream would undertake on its own? Easy to answer the second question, yes. We will do it ourselves. I think there was some comment about 2,200 Edmonton, we're going to do that ourselves. We're not looking for partners. The first question is how much does it cost? A lot. So we're probably looking at I mean, generally, I think it might cost $800 a foot all in at fair value, but that would probably be including $200 a foot for land. So $600 for soft cost construction, TIs, everything, including residential or maybe office. Office might be a bit cheaper. Jay, you have a comment? Yes. We're actually last week, I think we were talking to various construction managers trying to get a plan going on there. I think you're probably in the right ballpark. It really depends on when this is built, what construction costs are at that time. But I would use Michael's numbers as a rough guide. And sorry, did you indicate at what point you might actually start construction on that? Yes. We think that we'll be in a position to start construction within 18 to 24 months. Okay, got it. Thanks very much. Thank you. And we have no questions at this time. We'll turn it back to Mr. Michael Cooper for closing remarks. We're exhausted. Thank you all for your interest. Feel free to follow-up, and we look forward to seeing you or speaking to you next time. Thank you. Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.