Good morning, ladies and gentlemen. Welcome to the Dream Office REIT second quarter 2019 conference call for Friday, August 9th, 2019. 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&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.
To queue up for a question, press star one on your telephone keypad. Your host for today will be Mr. Michael Cooper, CEO of Dream Office REIT. Mr. Cooper, please go ahead.
Thank you very much, Paulette. Good morning, everyone, and welcome to Dream's conference call. I'm here today with Jay Jiang, the Chief Financial Officer of Dream Office. I think it's been a busy week for most of the listeners, so we're going to provide a pretty basic summary, and then we'll be happy to answer your questions. Jay, do you want to start with your report?
Sure, Michael. Good morning. In the second quarter, we've reported FFO of CAD 0.44 per unit relative to the last quarter of CAD 0.43. The increase of CAD 0.01 per unit was mainly attributed to higher comparative properties NOI of CAD 1 million, offset by reduction of non-recurring income. Relative to the same quarter in prior year of CAD 0.40 per unit, the increase of CAD 0.04 was driven by occupancy and rental increases in Downtown Toronto, including the 191,000 sq ft lease that commenced at 438 University. Reductions in G&A, offset by loss of NOI from assets sold since the prior year. Comparative properties NOI was up 9.9% in the second quarter, driven by an 18.8% increase in Downtown Toronto, relatively flat in the Greater Toronto Area, and decrease of 9.8% in our other markets, mainly due to leasing challenges in Saskatoon and Calgary.
In Downtown Toronto, 2019 is 91% committed at rents that will commence at an average of 12% higher than expiring. Note that these leases were signed in prior periods and that the market rent has continued to increase. In 2020 and 2021, we will have about 600,000 sq ft of expiries in Downtown Toronto that is currently uncommitted at average expiring rent of CAD 24 per sq ft, and we think the market rent today for such space is around CAD 30 net. Assuming no further growth in market rents, we will likely be able to realize a 25% or higher increase on new leases. Given that Downtown Toronto is expected to be about 80% of our portfolio by fair value this quarter, we remain optimistic that we will have strong organic growth for the foreseeable future.
We reported net asset value per unit of CAD 25.49 or CAD 0.39 higher than last quarter, driven by net fair value increase in the portfolio from higher rents, retained earnings from operations, and increase in value from our ownership of Dream Industrial REIT units. Our leverage was 45.4% at the end of Q2, with CAD 351 million of available liquidity. year-over-year ending June 30th, we will have increased FFO per unit by 10.9%, implied total net asset value and distribution return of 10.6%, while reducing leverage by 270 basis points. Subsequent to quarter end, we have closed the previously announced disposition of 700 de la Gauchetière in Montreal and have a firm contract on the sale of 150 Metcalfe in Ottawa. We expect to net over CAD 180 million in aggregate after repaying mortgages and transaction costs.
We intend to use the proceeds to pay off our line on capital projects, repurchase units, and potentially acquire properties in Downtown Toronto. We have also completed our financing initiatives for the year by closing on four mortgages totaling just under CAD 300 million with a weighted average term of nine years and an average interest rate of 3.6%. We extended our CAD 435 million credit facility to 2022. We have reduced our variable rate debt exposure from over 26% at the beginning of the year to 7% today. Now we have approximately half a billion dollars in liquidity.
With everything that has happened in the first six months, we are now updating our guidance for the remainder of 2019. We expect to end the year with leverage at or around 40%, which was a level that we are comfortable with to manage our business in the near to medium term.
Assuming no further transactions, our FFO per unit for the second half of 2019 should be approximately CAD 0.42 each quarter. We expect that the loss of income from the sale of Montreal and Ottawa of just under CAD 5 million per quarter to be offset by higher comparative properties NOI of 10% for the year on our entire portfolio and lower interest expense from lower debt. For the rest of the year and into 2020, we will mainly focus on development and value add projects already identified at The Dream Collection on Bay Street. The planning and designs are substantially complete. Construction work will commence this fall. We expect to be done by the end of 2020. As previously mentioned, we will have approximately half a billion of available liquidity to fund these projects and other opportunities to improve our core assets in Downtown Toronto.
We will also have ample flexibility to pursue investment opportunities to complement our existing portfolio when they become available. We remain open-minded to recycling capital outside of Downtown Toronto where it makes economic sense and may continue to repurchase units so that our growth in FFO and value will have a more meaningful impact on a per unit basis. I will now turn it back to Michael.
Thank you, Jay. We made some major changes to the company, with so much of our value and income coming out of Downtown Toronto. We're very positive on the market, I think we're also focused on how do we get the most out of every building. We're down to 21 buildings in Downtown Toronto, we have plans for every one of them, we see incredible opportunities to make them more valuable. We've started work on The Dream Collection on Bay Street, we're excited for people to see what we're doing. Then we're going to spread that work around to the remaining buildings and continue to make our buildings more valuable. I think we're really lucky to have 22 landmark buildings in Downtown Toronto.
We're very close to closing on two acquisitions, both of which are small assets that we think have a strategic value for our business, in addition to being at numbers that we think will work. The second of the two, we hope to disclose soon, but we don't have any space. The average lease term is one and a half years, and we've got an asset plan done, and as soon as that's firmed up and we're ready to close, we will be approaching tenants that we're otherwise unable to accommodate and show them what we're going to do with the building. I think we're going to have a very special asset. It's been a while since we've bought new buildings. We've been quite experienced in selling buildings. I think we sold over 140 buildings in the last couple of years.
I thought it was a couple of years since we bought a building. Jay told me that it's been six years since we last bought a building, so I would say that's a pretty big change in our outlook and recycling of capital for the business. We sold 700 de la Gauchetière. At one point the NAV is getting close. We've got two buildings in Calgary. One of them is our head office for our land and housing business. That's a future development site. It's in a great part of town, and we're very bullish on it. The other one is Barclay Centre, which is a great location. It was among the best assets we had in Downtown Calgary. It's quite well leased. We're kind of uncertain as to whether that's an asset we would keep or not.
In Saskatchewan, Andrew Rail's done a great job with our assets in Regina. They've got long-term leases. We're just finishing up some construction to get them ready, and we're going to look to sell those. We've got three buildings in Saskatoon. One is quite stabilized. We're not too fussed about it. We've got two downtown that need some attention, and there's London City Centre, and that's basically everything other than Toronto. It's getting to be a very focused portfolio, and we're happy with the balance sheet. We'll probably look to continue to grow in Downtown Toronto. There's probably been about six or seven buildings that have sold over the last five years that would have been of interest to us. When we say we're interested in building in Downtown Toronto, it's not like there's anything we can do at any given time.
When the time comes, we'll be very focused on it. We're pleased with the business. The Government of Ontario renewed their lease at 720 Bay, which is one of our four buildings in the health district. That means they'll be in the building till the end of 2025. That building is directly behind Toronto General. It's amazing what's happening at the hospital, the amount of capital that's being spent. We're happy to have that building available at the end of 2025 to develop. We'll probably start working on a redevelopment plan for way before that. We're quite content to have the provincial government in that building now. That's something we're seeing. We're seeing a lot of activity with the governments, and we're trying to line up really solid income while we develop a couple buildings, and then we'll get to the next round.
We're happy with that. If there's anything I was going to concentrate on in my comments today, I just want to mention a little bit about our PropTech investment in Alate. Alate's made, or has committed to make, about six investments. The first one is an app that our property management team identified very early in the beginning of that company. We liked it a lot, and we've invested some money in that. Then we just did a second round. That company now has 70 million sq ft of office space on their app, and it's being used by some of the best real estate firms globally, and we think that could be a real win. We've got an investment in a parking app that's really interesting. It's when you make a reservation for a dinner, you can arrange parking and book your parking.
There's an interesting one where it's office furniture that you can resell back to the manufacturer, and it's very easy to get an office furnished and make changes, stuff like that. We think that one's pretty exciting. We did invest with our partner, Relay, in Bird, the scooter company, and we invested a little bit of money in that. That one's pretty interesting. What was really interesting about that one is we secured the rights to own Bird scooter in Canada. We brought in an operating partner. It's 50/50. Our share, Dream Office's share of that business is now 7.5%. In the last two weeks, we've launched in Calgary. If you're in Calgary and you want to ride a scooter, there's a good chance that's an asset of Dream Office's.
We're working very close with all the different legislatures, both provincial and city, because we've got to get them to change the laws to allow scooters. We think it's going to happen very quickly. That's maybe something people haven't been thinking about. That's pretty much my comments. Paulette, Jay and I would be quite content to answer questions.
Thank you.
We will now begin the question and answer session. If you have a question, please press star then one on your touch-tone 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. If you are 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 touch-tone phone. Our first question comes from Mark Rothschild from Canaccord Genuity. Please go ahead.
Thanks, good morning, guys. In regard to the Toronto acquisitions, is it possible just to get us a little more color on what the potential total investment is in these properties? Also, should we look at these as properties that are not necessarily going to be materially near-term accretive or accretive at all, and more long-term development or redevelopment opportunities? Is there anything more you could say?
I'd say we're probably looking at somewhere around maybe CAD 60 million in total. I think they'll be net asset value accretive for sure. I'm not sure how long it'll take. They are income properties, not development properties.
Okay, great. For the Toronto office market, obviously, you're having some good success. A lot of that looks good. What type of occupancy pickup can we expect to see, and how strong is the market for some of the smaller spaces you might have over the next year?
Okay, I can answer that. We had a bit of space taken back in Downtown Toronto. Actually, some of it we're holding back. We call them strategic vacates, especially if it's on the retail side. We thought that it would make sense to have contiguous spacing along the street side front. Over the course, I would say the rest of the year into 2020, I would expect occupancy to be relatively flat. As things come up, we'll bring it back, put some capital in, we'll try to get higher rents. You'll see increases in NOI, but occupancy should be relatively stable.
Okay, great. Thank you very much.
Our next question comes from Sam Damiani from TD Securities. Please go ahead.
Thanks, and good morning. Just on those two acquisitions, what is it about these two that you liked perhaps that you may not have liked about some other properties that have traded in the market over the last couple of years?
Actually, that's a really interesting question, because I don't think it's the right question. The Bank of Canada building traded a few years ago at a 3.8 cap. I don't even like to go down University anymore. We weren't in a position to buy it then. I don't think the question is what did we like about these buildings that we didn't like about others. There's been so few available that now we're in a position that when a special building comes up, we're comfortable buying it. That's the big change, not that these buildings are more special than something like the Bank of Canada building. I would say that both of these buildings are within 100 feet of other assets we own. They actually both had a lot of vacancy.
The one in the buildings. It's very, very small, but I think we've re-leased the whole building during due diligence.
Sorry, go ahead.
Go ahead.
No, I was just going to say that sort of ties into my next question, which is, how big is this opportunity set for you, for the REIT now to grow in Downtown Toronto in this type of asset?
I would say that it's very, very small. By the way, look, if you take a look at the transactions that happened in Downtown Toronto in the financial core, we were part of three just to do with Scotia Plaza. Cadillac Fairview sold 30% of their building to OP Trust, I think. 70 York has traded. It's on leased land. That's not that interesting. I think 140, 41, 55 University is the kind of building we might've been interested in at the time, but we weren't ready. There's a small building, 141 Adelaide that traded.
Yep.
There just aren't buildings to trade.
Okay, that's helpful. 40% leverage today. You said that's where you'll be near-term, but is that where you see running the REIT long-term?
Yeah, I think for the foreseeable future, we guided to 40% leverage. I think 8 x the EBITDA and 3 x interest coverage. That was end of the year end at the AGM. I think we got there quite quickly because of the 700 de la Gauchetière . If anything, we eclipsed it. I think that puts us in a good position going into next year to work on the redevelopment, the capital projects, and it sets up reasonably well for development in the future. We're pretty happy here.
Could you give us some Sorry.
Just on the debt, I look at it a bit differently. I really try to look at, I don't know what's going to happen in the future. I kind of like if we want to have low debt compared to the cap rate. Do you know what I mean?
Yep.
If you say all our assets are 1 caps, we would have 10% debt, but that would be very scary. We kind of look at, well, what would happen in a normalized market, and let's say you use a 6.5 cap on the. If we have a 6.5 cap, and it turned out that we were at 55% debt. I'm saying, look, we're going to get growth in our assets. We've got 40% debt now. We can talk as much as we want about what somebody thinks assets might be worth. I want to make sure that if cap rates move a lot, these buildings are, the buildings and the business is really safe and secure.
That makes sense. Okay. Just on the Dream Collection redevelopment and renovation work that you say is going to be finished by the end of next year. Can you give us a sense of where things stand today? Just to confirm that all of these seven buildings that I think were talked about at the AGM are actually going to be finished by the end of next year.
That would be our goal. We showcased, I think, two or three plans at the AGM. Since then, we have plans for every building now. To date, most of the costs incurred have been in planning and soft costs. We're going to be hitting the ground with the shovels probably by fall, and things are going to go quickly because we're going to have a plan in place. We'll probably do all the facades together, all the washroom common lobbies. There will be a process in place to make it efficient. I think we'll be there by then.
Okay, that's great. Michael, you mentioned the Government of Ontario renewing at 720 Bay. The way you were talking, it sounded like you're preparing for them to vacate at the end of this term. Is that the plan there? Does the government in that space already have plans to move into another space in six years time?
No. Actually, it's quite the opposite. This building, I think, opened in May 1989 with a CAD 20 rent. It was for 10 years. Then in 1999, they renewed at CAD 14. We didn't own the building then. We bought it in 2004. The lease came up in 2009, the same time the mortgage came up. We paid out the debt. They had renewed, but we had to go to market. We had to deal with...
Process
a process. We went through mediation they found for us. Then the government appealed that. They found for us. We entered into a transaction. We added another 10 years. In that 10 years, they had one last renewal, which they just exercised. They had to exercise it by June 30th at CAD 20 . It's a little ironic that the rent starting in 2020 is precisely the rent that was agreed to in 1989. With this, they have no more rights, and maybe we'll work with them after that, and maybe we won't. It's the first time in the history of this building, the owner of the building's had a choice as with what they want to do with the building. After this renewal, there's no further rights. That's where we get to decide finally.
I did want to mention one other thing that, last year around this time, we did a substantial issuer bid and bought stock at CAD 24. We saw where we repositioned the company, and we wanted to make sure that we captured a lot of value. We were really quite content with the outcome. Since then, in Toronto, net rents have surpassed, in nominal dollars, the peak rent of 1989. If you built a building in 1989, you got CAD 34 rent. You never saw that again until this year. We're now seeing rents that have gone up a lot, and I think we're pretty well positioned for it. 720 Bay, the government has the right at CAD 20. We would've got a lot higher rent if they didn't have the right, but at least we're getting, control of our asset back.
Right. Understood. Just on the guidance, I think at the beginning of the year, one component of the guidance was 5%-6% growth in NAV. I'm sure you've already done I think 6% year to date. How do you feel about that now?
I think the way we look at it is, we're not predicting cap rates. We really just look at how the NOI goes up as we roll up rents. I mean, it's a kind of a number that may be important to you. I think Jay, if he was being honest, would say, "Yeah, that seems pretty doable, so I'll use it."
Agree.
Thanks for your honesty.
It wasn't his.
Our next question comes from Jenny Ma from BMO Capital Markets. Please go ahead.
Thanks. Good morning.
Good morning.
With regards to the government tenant renewal in the Mississauga North York building, was there any change in the rental rate for that renewal/extension?
I think what happened there was first they did a one-year extension, and then they extended it by another four years. The rents there were already pretty healthy relative to the market. I think we got it around 24-ish. It was pretty flat to expiring. The tenants there, I think, both of the major tenants, they've been there for 20 years. They're very supportive of the building. We have a great relationship and, I think just extending the walls in that building will really just help improve the value.
Okay. What is your long-term view of the two suburban assets that are left, just given the focus on Downtown Toronto? When you talk about the dearth of opportunities for acquisitions downtown, do you believe that at some point there would be some incremental spillover into suburban, and that there's value there, or is it really just a Downtown Toronto focus exclusively going forward?
That's a wonderful question. He says. 2200 Eglinton is going to get zoned for between 2,000 and 3,000 residential units. That's a fantastic asset. We looked at another asset in the last quarter that was right near that in Scarborough, that we did put a bid in. It traded for a way too high a price. I'm not going to say we wouldn't do something, but that one was quite unique. It was basically land with in-place income. Yeah. I mean, what I'm trying to say is something like 2200 Eglinton is really interesting. For us, we're happy to own it and develop it. In the suburbs, I just don't see us buying any commodity kinds of office buildings ever again. Sussex Centre is in the center of a city of 1.3 million people, and 5001 Yonge is in the center of another city with 1.3 million people.
We don't really view that as suburban. Sussex Centre, we're pretty excited about the opportunity to reposition that asset. I think it's at the highest occupancy it's had in a long time. There's a lot of interesting things happening in the retail, and there's probably more redevelopment there. We are not thinking about, oh, why don't we go spend money outside of Downtown Toronto because that would be fun. We would have quite a bit of resistance to do that other than where there's an unusual situation with development.
Okay, that's fair. If we do see value start to tick up in the areas outside of downtown, would you consider selling these properties?
Now you're asking the opposite question. I think the 2200 Eglinton we will not sell because it should become a billion-dollar rental project. I wouldn't see it. I think that's quite different. Sussex Centre's really interesting, too. We have a partner in that one. That's the kind of asset. Same with 5001 Yonge. I think if we got an incredible price, we might consider it. I think in Downtown Toronto, the real issue is you can't replace an asset you sold.
We don't feel the same way in the suburbs.
Okay, that's fair. My last question is, given the occupancy rates that you do have in Toronto, what has been your experience with some of your growing tenants? Have you been able to reshuffle and accommodate them, or do you find that they've got to move on if they're looking for bigger space?
That's a great question. Our retention rate is huge. I think it's over 80% or something like that. We've been doing pretty good keeping our tenants, and we've been working really hard to shuffle tenants around. We've been getting really healthy rental rate increases. So far it's working pretty smoothly.
Okay, great. Thanks. I'll turn it back.
Thanks.
Our next question comes from Zan Zhang from CIBC Capital Markets. Please go ahead.
Hi. Good morning. I just had a few questions.
Hi.
Good morning. I just had a few questions on financing and capital allocation. First, I guess the REIT has been active on the SIB. Just curious to hear your thoughts on how the REIT would prioritize between unit repurchases in the future, and committing capital towards new redevelopments.
Sure. I'll add that. It's not an exact science. We look at a couple of things. First, we look at our balance sheet, our liquidity. We're in pretty good shape right now. We mentioned we have half a billion in liquidity, so I don't think it's really a one or the other type of thing. We look at the value of the company, where it could be versus what we can get in the market today. If you think of a stock that trades at a high five cap versus what you can buy, that's comparable to our portfolio. It's not a bad place to put your capital. You know we're looking for opportunities every day, and it's going to remain fluid.
We have been buying the market because we thought it was a good opportunity to shrink the unit count a little bit so that the growth can be shared amongst a lower unit base. Going forward, I think we're going to be pretty fluid.
Okay, got it. I guess in terms of upcoming debt maturities, I was wondering how the upcoming Series C debenture maturity fits into the overall financing strategy.
That one will be simple. We're going to pay it back.
Okay, got it. Guess switching gears to property transactions, can we get your outlook for any remaining non-core dispositions?
Sure. I think I guided CAD 75 million for the year, so far with the three two and a half properties we sold, that gets us to be about CAD 50 million. There's an asset in Regina we're working on it. We're trying to move the debt away to another building so we could free ourselves up on the debt settlement cost. I think we're pretty optimistic on that one, but it's not a large asset. Right now it's August, we still have a couple more months, I think we'll come in around that mark for the buildings in Western Canada. Obviously, that won't include the DLG when I say CAD 75 million, that's outside of that.
Okay. Just going back to the potential boutique office acquisitions in Downtown Toronto, will the REIT be pursuing more of these in the future, potentially outside the downtown core?
We're only-
Sorry.
Beg your pardon?
Oh, sorry. Go ahead.
Look, we're only looking at downtown acquisitions in the financial core, like the kind of stuff that we have now. We're pretty reticent to go to the suburbs unless there's some really compelling reason. I guess on the fringe stuff, it would be driven by the opportunity. We're not really looking, but if there was a combination of income plus development, we could do something. We spend a lot of effort to get to buildings that are quite special. Each building is quite special. We're not going to grow to add a building or something like that. It's got to be a very compelling reason.
Okay, got it.
Because we've got so much organic growth in what we have, we don't want to dilute that. We've got a lot of work to do on our assets, and I think we're going to end up with literally one of the best portfolios that are owned by anybody in downtown Toronto. I think Toronto is really coming into its own. What you end up with is we've got this phenomenal position in downtown Toronto, and Toronto is stepping up the ladder of greater and greater cities. I think we want to be really careful not to be buying the sector, but be focusing on assets that we think we know what to do with.
Okay. Sounds good. Thanks. I'll turn it back.
Thanks.
We have a follow-up question from Sam Damiani from TD Securities. Please go ahead.
Thanks. Just on the 357 Bay, how much of the costs have been fixed or tendered there? Also, similar question on the Dream Collection work that's going to go on for the next year as well?
Okay. Majority at 357 Bay.
Sorry, 357 Bay is a lot done.
Yeah. Yeah. Then Dream Collection, we're going through the planning process. We're in the process of engaging construction managers and getting through tenders as we speak.
You would reiterate the kind of cost numbers that you were discussing at the AGM?
Yep.
We don't think we're going to have issues with spending more money on the same thing. I think that we're very active and looking and saying, "If we're going to do this, maybe we should do this other thing too." We could expand the scope, but I don't think we're fussed at all about the construction cost of 84 bathrooms, seven facades, seven lobbies, and some HVAC. I think we're pretty confident on that.
Yeah. Just finally, Jay, you mentioned the current leverage is 40%. That was a net debt number, or was that before factoring in the cash that's probably sitting on the balance sheet today?
We're doing net debt.
That's 40% net debt. Okay. Thank you.
Our next question comes from Matt Kornack from National Bank Financial. Please go ahead.
Hi, guys. You're adding density to some of your sites. Some of this is residential, given the dynamics you're talking about, would you anticipate potentially getting into the development game, adding office density?
One of the development sites that we're looking at would be about 50% office, much more office than we have now. We look at every site and try to determine what mix of uses generates the highest returns, where we get an asset that we'll want to hold for a long time. A lot of that actually has to do with what it is that we're allowed to do, and then once we know what we're allowed to do, sort of driving like, what does the office look like compared to a residential rental.
Would you potentially look at buying, I guess, greenfield opportunities or land or even using the platform that you have to potentially develop office product on some of the land you already own in other entities?
Look, in other entities, 31A Parliament is part of the Distillery. It's got 300,000 sq ft of commercial, about 240 of it is office, and some of it's leased and the rest is under LOI. Under the West Don Lands project, we think we've got a commercial site just to the east of Distillery. I think what we're seeing now that's changed a lot is you've got a retail REIT that owns retail centers, and then they look at developing, they develop on them the highest and best use. For our company, wherever we have land, we try to figure out what the best thing to do with it, and then we do it.
I think you've seen a real huge shift from REITs, from saying, "Oh, all I do is retail," or, "All I do is office." Once you start developing, you want to do the best thing you can do with the land. That's why SmartCentres are doing six different kinds of things. It's just that's where you get the money now.
Right
We'll definitely develop the best on everything we own. I don't think we're going to be doing greenfield. I sort of think about that meaning there was like, we were growing corn there, and then we would do something. We don't see that. I think downtown, that's what I was getting at before, on the fringe, if there's an idea, we could look at buying in Dream Office and we could look at developing office there or residential. We'll see.
Right. Then in terms of new supply, right now in the next year or two in Toronto, if you have a lease coming to maturity, you're pretty much screwed if you're a tenant.
We tend not to think of it that way. As a shareholder, I don't think they would think of it that way either.
What I'm saying is when there's new supply coming on and tenants have a little bit more choice, do you think the rent spreads that are being obtained today are realistic in three to five years?
Yeah. That's a great question because I had mentioned before that we now have, in nominal dollars, the same rent as 1989, or to put it a different way, in real dollars, rent's half of what it was in 1989. At the same time, that there's a labor shortage and the best and the brightest want to work in places that are interesting. Let's say the rents were CAD 34 in 1989 and now they're CAD 34 again. On top of that, in our buildings, you might have another CAD 25 of operating costs and taxes, so you're at CAD 60. Well, the tenant, they've gone from CAD 48 to CAD 60 in the last two years.
It's an increase, it's not as big as you think in terms of what their overall occupancy costs are, nor do I think is it a significant amount of money that affects the profitability of their company. I actually think they're spending more money on real estate now, they're getting something better for it. I think office space has gone from just a G&A expense to something that's more meaningful for the companies. I think that's a major change. On the supply side, we're trying to build incredible buildings, we're trying to improve our buildings to be incredible, that'll really appeal to people and help them run their business better. There's a lot of new supply, and a lot of it is needed. I'm not too fussed about that.
If you ask me what I would worry about, I would say if five Canadian banks decided to do the same thing that Deutsche Bank did, every one of them would give back a whole building. Yeah, there's a lot of supply, but it's needed. The real question is something fundamental is going to happen to the economy. That happens from time to time, and we want to make sure we have buildings that are going to outperform in a good market over a bad market. That's our strategy. We talk about debt. That's our strategy, is like we don't know when you're right or not, you make sure that you got the flexibility to handle whatever comes at you. My favorite part of the quarter is the subsequent part that says we have CAD 500 million of available equity.
Makes sense. Thanks, Michael.
Thanks.
We are showing no further questions. I'll now turn the call over to Mr. Cooper for closing comments.
I'd like to thank everybody for participating. Jay and I are available whenever you want, and we're pleased with the quarter, but we think we've got an even better future ahead. Thank you.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating, and you may now disconnect.