Earnings Call: Q4 2018

Feb 22, 2019

Good morning, ladies and gentlemen. Welcome to the Dream Office REIT 4th Quarter 2018 Conference Call for Friday, February 22, 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 and A. These filings are also available on Dream Office REIT's website at www.dreamofficereit. Ca. Ca. Your host for today will be Mr. Michael Cooper, Chair and CEO of Dream Office REIT. Mr. Cooper, please go ahead. Thank you, operator, and I'd like to welcome everybody to our Q4 conference call. Today's call will be structured by having Jay Jing go over the financials, then I'd like to make some comments on the business, and then we'd be happy to answer your questions. Jay? Great. Thank you, Michael. Good morning. We are pleased with the progress we have made in reshaping the portfolio, operations and capital structure over the past 2 years. The company is in good financial condition and we are now well positioned to deliver strong NAV growth while continuing to reduce the risk of the company. In the Q4, we reported FFO per unit of $0.39 including a $0.01 of non recurring debt settlement costs. Relative to the last quarter of $0.40 per unit, we saw $2,200,000 of higher NOI from our Downtown Toronto portfolio, including 1 month's contribution of the new 191,000 square feet lease at 438 University. That was offset by $1,200,000 of lower NOI in Saskatchewan, of which included $800,000 of free rent at Victoria Tower. Relative to the last quarter, we also had $3,000,000 of lower NOI because of properties that were sold in the second half of twenty eighteen. However, we now have less units outstanding, less debt and higher portfolio quality. Our NAV improved from $24.40 in Q3 to $24.97 mainly due to fair value increase of $54,000,000 in Downtown Toronto, offset by $21,000,000 reduction in Calgary. For the year, NAV per unit increased 6.4%. In addition, there was a distribution of $4,300,000 for a total return of 10.7. Cap rates remain flat in Toronto, so value increases were driven by higher rent assumptions. In Calgary, we have yet to see signs of improvement in the leasing markets, so valuation models have been updated to reflect the prolonged period of downtime and low rents. Over the course of our strategic plan, we have repositioned our business to have 75% exposure to Toronto and GTA by asset value and have reduced exposure to Alberta to only 4%. The 3 buildings remaining in Alberta are our best located and highest quality assets from day 1. Portfolio mix is well positioned to deliver strong results in 2019 and beyond. In downtown Toronto, as of today, we are at 90% committed on expiring space to see our approximately 20% higher net rents over in place. Our current market rents are estimated to be 23% higher than contractual in downtown Toronto and 15% across the entire portfolio. Our leverage at 45% is a decline of 120 basis points quarter over quarter attributed to debt repayment from the assets sold in Q4 and increase in NAV. Net debt to EBITDA and interest coverage were 9% and 2.8%. We are presenting our 2019 guidance in a format that is consistent with how we manage our business. Our main goals are to deliver strong NAV total return growth to continue to improve average portfolio quality and to reduce risk across our business. We intend to deliver average annual NAV and distribution return of 9% to 10% in 2019, driven mainly by increase in NOI in our core portfolio. We expect SPNOI growth of 15% in Downtown Toronto and that includes 11 months of incremental contribution from 438 University. Our assets in the GTA, Ottawa and Montreal are stable with high occupancy and is expected to deliver steady results. We expect continuing weakness from Western Canada, but that exposure has been significantly reduced. To improve portfolio quality, we think we can sell about $75,000,000 from our non core assets this year. We may be able to sell more depending on pricing and buyer appetite. There are also a few assets that we are currently working on to improve their liquidity profile. As these assets are sold, our exposure to Downtown Toronto will increase further and we can focus more of our time and resources on the best assets and to deliver higher per unit performance. Our focus in 2019 is the Bay Street Village, which consists of our boutique buildings on Bay, Temperance and Richmond Street. We are currently working on the concepts with our architect designer and we'll have more details to share in May, including the costs and the returns we expect. We intend to improve on all of our key financial metrics. Our goal over the next 2 years is to trend net debt to gross book value closer to 40%, improve debt to EBITDA from 9% to 8% and to improve interest coverage to 3% or better. If we can deliver the strong NAV growth and total return we expect while reducing risk at the same time, it would make our company very attractive to own and invest in. These are our goals not only for 2019, but it's also the blueprint for the next 5 years as we continue to improve the quality and growth profile of the business and consistently reduce risk. We think the company is well positioned to achieve these goals, and we look forward providing more updates in the upcoming quarters. I'll now turn the call back to Michael. Thank you, Jay. I just want to give a little bit of an update on the business. To start with, I am thrilled that it's 2019. Between 2016 and the end of 2018, we sold 138 properties for over $3,700,000,000 That money was used to pay down mostly debt, but also to reduce the shares outstanding from $113,000,000 to $64,000,000 We're left with 34 assets of which I'd like to walk through sort of where we are at with them. In Calgary, we've got Kensington House, which is in the Kensington area, which is really desirable. The building is the head office for Western Canada for Dream Unlimited. It's in good shape. The building is very good. And its future is probably going to be a higher density residential site one of these days. So we're quite content to own that. Barclays Square is our only other building in Calgary. It's in center ice in Calgary. And of any of the buildings we own, we think that one is the best in order to continue to participate in the Calgary market and have a redevelopment opportunity. Ironically, those are basically the only 2 buildings we have in Alberta. We used to have 40. And ironically, I believe as of now, we have no oil and gas tenants in our portfolio. When we go to Saskatchewan, in Saskatoon, there's been some new building and we've had to recover from some tenancy losses. I think we kind of bottomed out. It's going to start to get better. In Regina, our team has done a great job entering into long term leases. We're basically 100% leased and the buildings are quite valuable. In Ottawa, we've got 150 Metcalf. It's undergoing an energy retrofit, which is saving a lot of money for the tenants. And we're getting strong interest in it, and I think we're going to see a lot of growth there. 700 Dula G is a building we have in Montreal and our team did a great job there. We've recently renewed a 200 1000 square foot tenant who was expiring in 2020 until 2030 and we've leased another 7,000 square feet in the building. In total, we have over 96 percent occupancy and an average weighted lease term of 8.5 years. So we're quite content with that building, and we think that the income is going to grow. In the GTA, we have Sussex Center, which is in the center of Mississauga and we're starting to see the occupancy increase. That building is expected to be in front of a new train station. There's tremendous buildings being condominium being built all around it, And we expect that that building has a better future than its past. The other building that we have is 5,001 Young. And it's in the center of North York. It's doing very well. A large part of the building, I think over 80% is the federal government and we hope that they're going to continue to stay there. And we think that building is an excellent building. So that's basically the operating assets that we have outside of Downtown Toronto. We also have 2,200 Eglinton East, which is at Birchmount and Eglinton. But who knows when it happens, but it's anticipated that the subway and light rail transit across town will be open by the end of next year. The area that our 15 acres is in sorry, so the building on that is about 165,000 square feet. It's actually quite well leased for a long term. And we have about 14 acres of excess land. That site is one of 6 sites owned by a group of owners in what's called the Golden Mile Zoning Area and it's under review and we're expecting in the next 18 months that the rezoning will have taken place. It's a very significant area because altogether there's about 100 acres owned by the 6 landlords. And it is quite feasible that ultimately there'll be 20,000 apartments built there or at least 20,000 housing units. On our site, we're expecting to get density of over 2,000 units or 2,000,000 square feet in addition to the building we have. We're going to go for more than that. But that could turn out to be a real win in terms of the value created in the zoning and ultimately the value from the building the residential as well. Aside from that, our portfolio consists of our downtown assets, which are benefiting from a lot of different factors. Toronto is doing very well. I think structurally, Toronto is just capturing more of the business activity in the country, and it's capturing more of the population growth. And our view is that Toronto looks like it's going to do very well for decades. Not that there won't be some downs, but I think our view is that Toronto is really one of the most interesting cities to own a lot of real estate in North America. Within our downtown core, the 19 buildings we have, I think Jay went over some of the parameters. But we're seeing a lot of demand. And what we're trying to do is create buildings that are exciting for the tenants, that landlords are quite that as of the landlord are providing tenants with things that help them be more competitive with their customers and their employees. We're really focused on starting with this Bay Street Village, which we think is a really interesting concept about having this really urban village. We've done the distillery district. We're doing a project in Dream Unlimited in Zibby. And those are both the same kind of ideas about having like a real community within a larger city. For inspiration, I think we looked at what Rovner has done in Mayfair. I think that the Miami Design District is pretty amazing. Those are just inspirations. But effectively, what we're looking to do is take the 8 buildings we have, plus some of the public spaces, plus some private spaces that we can reprogram and create a really unique area in the center of the city that's going to be providing new pathways and laneways and shared amenities. So we talked last time about 357 Bay, which is going to be completely gutted and redone. And there, we're getting rents in the high 40s. Recently, in the Bay Street Village, we achieved rent of $40 for the first time on an existing building as is. As Jay mentioned, we're expecting for the annual meeting to lay out a lot more details on the capital. But just as a little bit of foreshadowing, we're anticipating redoing 7 lobbies. We're going to redo all of the facades, 8 facades plus external lighting. Altogether, we're going to redo 88 bathrooms and we're looking to try to make them something that isn't standard, but that's something that people will appreciate. We're redoing stairwells. We're doing some of the HVAC equipment and other systems so that the buildings are extremely competitive with the best buildings. And we expect to see that as we do these changes and build the community there, we're going to see a lot higher rents than we're even seeing now. One of the things we're most excited about is how we're going to integrate all of these buildings with the laneway system and alleyway system that we're working on putting together among the buildings. That's going to be a big beginning for us in terms of how we want to run our buildings in the future. We're starting with those 9 buildings. We have another 10 downtown, just at 30 Adelaide, 36 Toronto, 20 Toronto and 70 Kilmer Victoria. That's a big chunk of our space. There's opportunities at Adelaide Place and we have opportunities in the Health District. So we're pretty excited about what's happening. Within the Health District, we're continuing to make progress on 250 Dundas. We then have an application in for 180,000 square feet of office space, plus an additional close to 430,000 square feet of residential. And we're hoping to see some significant progress on that this year. That will add a lot of value and that's an exceptional area because it's got the hospitals, it's got U of T Ryerson, the government as well as a lot of the culture that's just west of University on Dundas. So that's sort of around our buildings and what we're doing. I would just say that I would end with what I started with. It's very exciting to be in 2019 and work on making our portfolio exceptional. At this time, we'd be pleased to answer any questions. Thank you. We will now begin the question and answer session. Our first question online comes from Mr. Mark Rothschild from Canaccord Genuity. Please go ahead. Thanks and good morning everyone. In regard to the guidance on asset sales, I think it was $75,000,000 or so that was mentioned. Would that be mainly from Saskatchewan, in particular Regina? And as well, you've done good leasing at DLG in Montreal. Would that property no longer be for sale? I'll speak to the 75 first and then maybe Michael can talk about DLG. So yes, the $75,000,000 is actually from a pool of assets about $150,000,000 Some assets we mentioned that we will work on to just improve their liquidity profile either through asset management or leasing strategies, but we think that we'd be able to sell about 75 at a fair price this year. And Mark, on the other question, which is about $700,000,000 to the G, what I would say is we're using our Downtown Toronto portfolio to benchmark what type of returns we can expect in the company. And then we're looking at the other assets and figuring out how they affect our return. Are they good diversification? Are they steady? Or what's the opportunity to pay down debt, maybe buy back some more stock? So we'll look at any assets other than downtown Toronto to be opportunistic on. 700 Villa G, if we got a good price for it, we would definitely consider selling it. It's a massive asset. It's our only asset in Montreal. Having said that, we expect that the NOIs are going to go up about 20% to 25% over the next 5 years. And it's got a long lease term. So we're fine either way, but with a good offer we'd sell it. Okay, great. And then in downtown Toronto, I think with I'm not sure if it was 2 Dundas where you mentioned that you have the zoning application you applied to the city. And I know it obviously takes a long time to get these things through and get approvals. Is there a timeline that you expect when you think you could start doing something? And then also do you anticipate applying for any other major redevelopments in Toronto this year? I think that at 250 Dundas, there's a reasonable chance that this year we'll make some good progress on the zoning. There'll be another year of site plan approval and meeting all the conditions of the zoning. And this is just predicting the future, but we could see some action in 2021 potentially. On other approvals, we will put something in for we put in a we're involved in the Golden Mile rezoning. We'll put in a site plan approval or a site plan we'll put an application on that this year as well. I don't know if we'll get any others in now. Okay, great. So I will not ask about Dundas the next few quarters. I'll leave it for you. No, you could ask about it every day. I get in about 8:15 and I'd be happy to speak to you about it every single day. Thank you very, very much. I appreciate it. Thank you, Mark. Thank you. Our next question on line comes from Chris Couprie with CIBC. Please go ahead. Good morning, guys. I guess this one maybe for Michael, just kind of a broad question on co working. Do you have a sense for what co working penetration rate is in Toronto at the moment and how that would stack up to some other major cities? I don't know the numbers, but it's minuscule. I think London and New York are much more significant. And in fact, I think the co working is it's just getting going here. On that point, are you thinking that there's still a lot of latent demand from that tenant type? Is it just the lack of available space that's preventing it from growing? What I would say is WeWork has done an incredible job, but there's other people competing. And in the state, some of the landlords are trying to compete. The key thing is okay, by the way, I hate co working because they don't work together. It's just a way to make office space easier to use. So historically, what we did was we rely the whole industry relied on our tenants covenant in order to finance our buildings. And we needed long term leases and good covenants. And what's come along here is there's furnished space, it's very flexible, you don't have to make as long a commitment. I've said this before, but it's pretty onerous on a tenant whose business is dynamic to sign a 10 year lease, which could cover more than 2 complete budget periods. If they do 4 year budgets, 2.5 budget periods. So that's pretty tough to sort of pressure tenants to try to make long term commitments if they have a changing business. And I think this flexible workspace that's WeWork and others is providing a lot of value to tenants. So the two things I see is, and you can see when we talk about Bay Street Village and what we're doing downtown, we're definitely moving towards creating a way to deal with tenants so that it's much easier for them to pay us a lot of money because they're getting a lot of what they want and a lot more flexibility. So I think the real issue is how is the flexible space companies going to compete with the landlords in providing tenants with the best value. And keep in mind that all those flexible work companies are paying the landlords a lot of money and they're charging their tenants even more. So I think it's actually pretty exciting that we've really been learning that tenants will pay us more if we give them more of what they want, which is very valuable for our buildings and the flexible work businesses can enhance our returns to the extent that they're dealing with a different kind of tenant than we are. So I'd say that's my global view on the flexible workspace. Is that helpful? Yes, that's very helpful. Thank you. And then just one question on properties that are on the potential. 212 King Street West, any update on that property? Our guys are working on it all out. That's 212. We're working with our neighbor 214. That's a pretty special site. But it is a complicated start site. We've toured architects in Paris, London and New York. We've chosen an architect and we're working towards a plan, but that one's going to take longer. That's a little bit harder than some of the others. Our next question online comes from Mario Speric from Scotiabank. Please go ahead. Hi, good morning. I thought some of the commentary in the letter to unitholders are pretty interesting with respect to kind of the shift or the significant shift that you've highlighted in how office towers are perceived by tenants along with some of the sustainability initiatives that you highlighted in the annual report. If we sit back and just broadly speaking think about the importance of factors that tenants place to the leasing decision today versus 5 years ago, How would you rank those factors? And how they've changed over the past 5 years? I'm thinking about factors like cost, sustainability, location, signage, etcetera. Yes, no, it's a nobody's giving me easy questions today. What I would say about that is, for most of my career, when you deal with tenants for office space, they view it as an expense and they view it as G and A. And the tenants were very prepared to make compromises to reduce their costs. And I think now the space that people use to conduct their business is becoming a marketing tool for their customers and for their employees. And we've seen all of a sudden a change where the tenants are saying, you know what, I need the thing that works for me and I'm prepared to pay for it. It may not sound like a big change, but it's a complete change to how we need to run our business. So I think there's lots of opportunities. But to be blunt, we sold 138 buildings since we didn't think they were going to be able to adapt to what tenants want now. When you talk about what the priorities are, I think the main priority is people want space that they're going to have, but they're being extended not shortened. The people are working and they want their people to be very excited about where they work. So as an example, I love the story about, I guess it's $1,000,000 a year if you graduate from engineering in Stanford. And one of my favorite stories was somebody I know what Facebook was saying, they were interviewing somebody who was quite keen on a job and said that before she would make a decision, she wanted to see the space she would be working in and to see how much daylight she has. So if you're Facebook and that's what people are interested in and you're paying them a lot of money, you better have a lot of areas to work that have daylight in non interior offices that people are going to feel bad in. So I think that how people feel in this space is a big deal. I think things like connectivity and air quality are a big deal. I think the sustainability is an awkward one because I think people are very inconsistent about their decisions around it. But because we have a big renewable power business, we do a lot of things with sustainability. I think we divide it up into 2 parts and the bigger part is there's tremendous opportunities to reduce the amount of energy that you're using and carbon that you're consuming and creating on a very as an investment in terms of investing in your building and getting really short paybacks. So those are easy and we're doing them all over. And the little harder ones are how do you change how you manage your building so that it's even more sustainable. But we're working on a lot of ideas, and I would say tenants do think it's important. But I would say that my experience is, especially in the kind of buildings we have, a lot of them have 4,000 square foot floor plates or 9,000 square foot floor plates. It's just part of the soup. I think the big one is how does this work for us. So just as an example on Bay Street, if you're a money manager and you need 4,000 square feet, you can have a space in one of our buildings. It can be a really cool space. The elevator will open up directly onto your floor. You can create whatever experience you want. And I think that carries a lot of sway with the tenants we deal with. Okay. And then how do we think about attempting to quantify the financial implications of that significant shift? So by that I mean, in retail, for example, we have these we have growth ratios in terms of tenants' willingness to pay rent. In residential, we have affordability measures in terms of rent to disposable income and things like that. Like within the office space as a result of this shift, how do we think about the ability and willingness to pay in relation to their respective businesses? I can't think of any. I mean, just an example, and I'm only going on public information, but last week, I think it was a lot of stuff started to come out about Sidewalk Labs wanting to build a Google head office on the waterfront, and they're looking at building a masterpiece there. Although it's kind of connected, as I was saying, into what Google wants to be. So they want to have a showpiece on the waterfront that will be recognizable. And also they're trying to figure out how Sidewalk Labs can grow. So I think there's a I think that they fit together well, but there's no math to come out with what they can afford to pay or not pay. So this is all new science. Okay. And in terms of your comment on Toronto being a good market for decades, generally in terms of tenant demand, we're aware of what's in the marketplace today in terms of requirements. How do we how do you get color in terms of what tenant requirements may be 3 to 5 years out? Well, most of them are making decisions now for 3 to 5 years out. I think I think Cadillac Fairview, I don't know, addresses very well, but I think they're building a 1,200,000 square foot downtown. And And I think they started marketing it 18 months ago and they haven't broken ground yet. So 3 to 5 years out, we're dealing with right now. It's beyond that that's harder. But my comments are not on specific tenants. It's on what seems like incredible growth in Toronto. There's a certain amount of freedom that maybe you don't have in other places as a rule of law other than the Liberal government. The political, political, that's all. But compared to a lot of other places, rule of law is good. And there's lots of opportunities with immigration. I read something recently that the immigrants to Canada have higher education degrees than the people in Canada. So I think Canada has got a lot of factors that are going to drive it. And I think within Canada, from our experience, Toronto is winning. I mean, I think Vancouver is doing quite well, although they're having a bunch of issues. I think Montreal is doing better than it used to, I still don't think it's winning. I don't think Ottawa is winning. It just seems that Toronto is getting a bigger percentage of everything than it used to. And I don't see why that would stop. Okay. That makes sense. Maybe just last question on Toronto. So clearly kind of the demand drivers are there that you referenced. One question that has come up is just what the demand supply balance may look like couple of years out. So there's 7,000,000 square feet in construction today, which isn't an overly significant number in relation to the broader inventory and some of the key macro trends you highlighted. At what point does supply become a concern for you in Toronto? Whether it's a certain 1,000,000 square feet or You know what, the supply is never an issue until the economy goes into a downtrend. So that's my personal belief that nobody's ever had a good economy and a supply issue. The issue has been there's been a bunch of supply and all of a sudden there's something that happens to demand and then you've got a big oversupply. But Toronto, I think that there's a couple of things. It is a very competitive real estate market and there are major, major players who are happy to build. It used to just be the pension funds and now it's the REITs as well. So there is we are cautious about supply. There's also a change I've never seen before which is when I started in the industry we built a building on 1 Adelaide Street East and it was hard for us to get professional tenants to move to the east side of Yonge. That was a major barrier that people could not imagine being on East Side of Young. What we're seeing now is Liberty Village, the distillery all across the south from basically Dufferin to the Don Valley at least are sites that are wonderful for 300,000 square foot buildings. Never seen that before. We're also seeing that most of the downtown development is in the South Core. We're seeing very little in the Core. So we're watching supply a lot. What I would say is most of our buildings, what we're trying to do is build luxury buildings that get premium rents that are extremely attractive. And if there is a supply glut, we want to invest in our buildings and make them special so that they do well in good times and bad. So I think that's like what you're getting at, we don't know. But what I would say is we are designing our portfolio so that it would be very competitive to fill in tough times. Okay. That all makes sense. Okay. Thanks for the color. Thank you. Thank you. Our next question online comes from Matt Kornack, National Bank Our next question online comes from Matt Kornack, National Bank Finance. Please go ahead. Hi, guys. Just a quick question with regards to leasing. You've got in your MD and A 23% positive rent spreads in Toronto. I'm just thinking in the context of what you want to do and the potential to need to de lease some of the space, how do you make the decision not to take a 23% rent uplift and move ahead with a project similar to the WeWork one where you'll get it, but at a higher rate and have to put some CapEx in, but there's a time issue there as well. I'm just thinking or just want to know how you think about those type of investments? So maybe let me start and Michael you can jump in. I think it's best. We look at everything case by case and looking at our properties in the Bay Street Village, we think those are the best opportunities we have to sort of adopt a tron error approach. Michael gave an example that last week we hit our first $40 net at $80 Richmond and that was almost like an experiment where we said that instead of trying to do a traditional lease with a tenant, let's try to invest early on into the space, bring it back now into the base, to the brush concrete and present something to the tenant that they'll sort of see as something that's great for their employees. And we were able to just get multiple bids on it. So I think in that note, we'd be more willing to roll that strategy out. Obviously in buildings that are bigger with larger square footages, we'd be looking to get term, get a good covenant. We have a lot of government tenants. It's both about balance on security versus getting higher returns. I'm going to jump in now. Okay. So on 67 Richmond, we have a tenant there and we've extended their lease and it's on good terms and it's good for the building. 357 Bay, I don't think we could have gotten great rents from great tenants because the building needed to be changed. So when we looked at it, we thought, this is the kind of building that we should be able to get rents way into their 40s rather than maybe 28. Not only that, if we delayed fixing that building up, we would just get an older and older building that's at a good location. Instead, what we're trying to build is a building that is extremely well sought after no matter what the economy is. So I think that it's not just a simple question about the time value of money or something like that. The real question is how are you making your portfolio increasingly competitive? And when I say that, just a couple of comments. The pension funds are putting more money into office buildings than office landlords used to put in. So we are seeing a major change that the buildings have to be capitalized more than they used to just to stay competitive is one thing. The other data point that I think is really interesting is and again this is just from public information. Mankes recently bought into 320 Bay Street and again, it's only for public information. But it looks like what their plan is, is to redo that building without expanding it anywhere, which I don't think I've ever seen Menckes do. So I find it interesting and confirming that here is a developer who's saying, I'm going to buy an existing building, a portion of existing building with a pension fund and we're going to do everything we can to drive rents up by enhancing it and delivering better services. So what I would say is you've got to do that with your buildings or they're not going to be in the running. And I'd say that sorry, one thing with Mencky's, they don't do this for fun. They got to think the returns are good. From a leasing standpoint as well, like in retail, there's a concept of having redevelopment rights in a lease. Is that concept something that you can do in office or that you've tried to do in terms of potentially having the flexibility to put a tenant in and get them out when you'd like to reposition a property? So what happens with that is you can get it. If you get it, it may hurt your ability to lease or the rates that you get in some cases. But we have that at 357 Bay, we have that at 250 Dundas, we have that at 212 King. And I think a number of the leases that we're doing now will have something like that if we have the idea of releasing it. Okay. So you give up a little bit of the upside on the renewal, but you get the flexibility to do what you want to do in the future? It depends. Sometimes you can get the full rent, but you might give them back some of the money they put in as amortized over the term. It's building by building and tenant by tenant. But if like in 30 Adelaide, I think would really hurt us if we're dealing with 100,000 square foot lease. It doesn't necessarily hurt us with a 10,000 square foot tenant on Bay Street. Sure. And with regards to the Bay Street assets and creating a village in that space, maybe something that people want to come downtown to on the weekend. Do you need the buy in of adjacent properties or do you have enough scale to do it with what you own there? And I guess we'll see at the AGM what you plan on doing, but do you think it'll be enough of a draw to get people to actually come downtown Toronto to hang out? If we do it well, I think that it'll be a pretty special kind of offbeat hidden kind of place that will attract people. As far as other property owners, there's only one property that would have any involvement with it at all that we don't own. Fair. And the last one for Jay. I understand your guidance. There's a lot of moving parts with regards to FFO per unit growth. But can you at least give us sort of, if not a ballpark, what you think the gives and takes would be in terms of transferring that same property NOI growth number that you're expecting into FFO growth? Yes, sure, sure, Matt. So the reason I didn't give the FFO growth, as you said, there's a couple of moving parts. One is dispositions. We don't know the sort of the asset mix, the pricing that we're going to sell. And second, we really want to focus on NAV growth because we don't want to make short term decisions for FFO when we can make better decisions for long term growth. Having said that, if you do need something for your models, I would say that let's assume we eliminate the one time termination income on DLG last year. If we could be relatively flat but have lower leverage and lower yielding buildings but higher growth, we'd be pretty content with that. If we sell less and if we can drive higher rents in Toronto, there is definitely upside in FFO. Okay, awesome. Thanks guys. Thank you. And thank you. Our next question online comes from Sam Damiani from TD Securities. Please go ahead. Thanks. And most of my questions have actually been asked already. But just on the Bay Street Village, these projects, which I assume will be done in stages over time, would you be embarking on these on a spec basis or would you be sort of pre leasing some space in a building for initiating the investment? 100% spec. 100%. So I can give you some ideas. Sorry, I'm hearing you both. What were you saying, Sam? No, just wanted to confirm. A lot of the costs will be worked into operating costs. And like just as it's interesting and it's an interesting question. I think it really goes to what Mario had been referring to before. It's all over Sam. You better give your tenant something great or they're not going to renew and they're not going to lease to them. So the idea of saying I'm not going to spend any money unless I know I have a contract. I think it's not going to work as well as the future as it did in the past, number 1. Number 2, what we're going to do, our expectation is that tenants who are in those buildings who are going to pay for a good part of it because a lot of things are amortized are going to be thrilled that we did it because the buildings are so much better than they were before. So I think all we're going to do is spend a bunch of money, get paid back, get higher rents and make a lot of friends. Yes. The operating costs in those buildings, I'm sure are quite a bit lower than the neighboring properties around you. So there's lots of room for that. We're going to talk about math. We have a lot of room. There's 2 things that are so cool. Okay. The first thing is, if you drive up the quality of the building, you start to compare yourself against a different peer group that has much higher operating costs. But if you look at the buildings we have now, our operating costs are lower than their existing peer group. That's why I say there's so much room for us to make the buildings better and have people happier to pay extra in operating costs because they're getting a lot more for That makes sense. I just wanted to also clarify something that was said early in the call, which was I think a 2 year goal to get leverage down to 40%. So just to confirm, is that a 2 year goal? And how should we think about getting there in terms of fair value gains, asset sales and buybacks? Sure. I'd just say 2 years. We might be able to do that sooner. Rolling down. Yes. Most of that from income, I think part of it is if we can sell some assets and pay down the debt, that would be great and it gets there. But also on the income metrics, if we grow NOI, that goes a long ways to getting us on a better debt to EBITDA or interest coverage score. Does the 8 times debt to EBITDA target, is that a longer term? It just feels like if there's going to be some spaces taken out of service that might be a little bit hard to achieve in the near term? We're seeing pretty good growth in Toronto just from rolling over the leases into higher rents. So I think part of that over the course of the year is as new leases roll on with higher NOI, that will get it down closer to 8 on its own. And if we can sell some assets, we should be able to get there within a year and a half or so. Sam, I'm not certain, but I think that the new rent at 357 Bay or the new gross rent probably exceeds the existing rent at 250 Dundas. So I'm not sure we're going to have rents rolling down as buildings come offline. Good point. Thank you. And Jay, did you say in your guidance what the overall same property NOI would be or I heard you say 15% for Toronto? Yes, I said 15% for Toronto. But if we look at the other assets in the GTA, Ottawa and Montreal, let's assume that's the low single digit growth. I did say Calgary will continue to see some weakness as tenants roll and the replacement leases are coming in at quite a bit lower. Non core markets, Michael mentioned, we bottomed out, so we could probably do around flat. But those are some assets that we're looking to sell. So once we sell that and redeploy, we could get a better return on it. Thank you. Our next question on line comes from Jenny Mok from BMO Capital. Please go ahead. Thanks. Good morning, everyone. Pardon? It's Friday. There's a lot of reporting. Are you guys tired? Well, I need to get my question in. Actually, Michael, I wanted to clarify your comments about 700 DLG. You mentioned that you renewed a tenant. I didn't catch the size of that, the 10 year renewal. 200,000 square feet. 200, and you said that will take it to 96% occupancy, did I write that down correctly? You got it correct. So is there an expansion involved with this tenant then? No. So, okay, okay. Sorry, there was some other leasing done. It's just that over 1,000,000 square feet, so a 200,000 square foot tenant renewing for 10 years extends the average lease term a lot and reduces the risk of the asset a lot. Right, right. Was there any change in the rental rate? We got the renewal at relatively close to market and we're working out the final details. So we'll have more to report on that quarter. And Andrew Real, who did the deal is sitting here whispering to me that there's a he whispers, he's saying that the rent's up 50%. But we're whispering that. Okay. Got you. That's helpful. And then, Michael, when we're talking about everything that's going on in Downtown Toronto, I'm just kind of looking at it from a longer term risk mitigation standpoint. All these changes that we're making to make buildings more appealing to people and working on a lot of the qualitative measures combined with sort of the expansion you said from the Don Valley to Liberty Village about the location of where people want to be. If we see a shrinkage in demand at some point, do you think that the changes we're making now is a little is a change from location being the primary factor? Or do you think at the end of the day location will still matter more? So no, location totally matters, okay. The difference is that when tenants think when businesses are thinking about where they're going to locate, which matters the most, some are saying Liberty Village is a pretty good area for them to be in the best location or the distillery or anywhere else. So I think we've got to separate out what might have been the historic preferred location from what people are deciding now. We think that the Bay Street corridor will continue to be very desirable. And we think downtown is very desirable, particularly because of the subway and this is where people are used to going. But there's lots of choices now. Does that answer your question? Well, I guess I'm just trying to think how defensive longer term for the outskirts, if you will, at this point. Is there a real change in expansion permanently of the definition of a good location? Or are things like transportation, proximity to subway, which Liberty Village and the distillery don't quite have, but aren't far from. Is there just going to be so much demand that those places will still remain very desirable or is transit and location to the core still, guess, the Trump factor? So I don't like that word, but Neither do I, just not think on the fly. I think what you're saying is, in 5 years or 10 years from now, what will people's preferences be for space? And I don't know the answer, but what I would say is, as an example, if you're more on the King Street set where there may be lots of restaurants and other things people like and less good transportation, you probably have a riskier proposition when you're trying to deal with your tenant renewing because you're unsure whether another tenant is going to be by compared to when you're located right in the downtown core with the subway. So I think that it probably continues to be a safer bet in downtown, but I'm sure Michael Emery would say that is not true. Okay. Okay. I appreciate your view. And then a question for Jay, this is just technical, but with regards to debt settlement costs, there was a portion that was added back to FFO and the portion that wasn't. So what is the driving force behind that when we think about it? Okay. So there's 2 parts. The debt settlement cost that was added back is attributed to properties that were sold. So we see it more as a transaction cost, not operating item. The one that we didn't add back was attributed to the Bay Street financing portfolio that we did. We committed to the loan on December 28. So therefore, there's a liability and for that, we think that should be in FFO. Okay. So that's related to $105,000,000 That's correct. It closed in Jan 2nd, but yes. Right. Okay. So there won't be this line item related to the $105,000,000 in Q1 then because it's been picked up in Q4? That's correct. Yes. Okay. Got you. Got you. And then was there anything in the Q4 interest expense number, just under $15,000,000 that was non recurring? I don't think so, no. No? Okay. That's it for me. Thank you. Thank you. And I'm showing we have no further questions at this time. And for that, we're all grateful. I'd like to thank everybody who's been on the call and your continued interest in the business is appreciated. And we're very excited about the future. Thank you very much and we'll see you at our annual meeting. Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.