Good morning, ladies and gentlemen. Welcome to Dream Office REIT Q2 2022 Conference Call for Friday, August 5th, 2022. 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, please press zero then one on your telephone keypad. Your host for today will be Mr. Michael Cooper, Chair and CEO of Dream Office REIT. Sir, you may begin.
Thank you very much operator and good morning to everybody. Welcome to Dream Office's second quarter conference call. Today I'm here with Gordon Wadley, the Chief Operating Officer, and Jay Jiang, the Chief Financial Officer, and they'll speak to the results. I just wanna start with a couple of opening comments on what's happening at Dream Office. Firstly, we're very pleased with the assets that we own. We did a lot of work to reduce the portfolio to these assets. We spent a lot of time improving the assets, decarbonizing the assets, and I think we've got some foundational assets that are irreplaceable. The office sector is, you know, a complicated sector in a complicated time.
What we're finding now is, like as an example, we'd like to redo our space and make it a little bit more modern. However, we're really not sure how we should change our office space because we're not convinced that how it's going to be used. Now, I've met with a few other CEOs who are in exactly the same position, all of whom want to have the same amount of space as they have now. We're still uncertain. We've been seeing a lot more people coming downtown. We're really pleased that the demand for restaurants downtown is huge. There's a lot more traffic, and we think this fall we're going to see a lot more people.
I think things are coming around and we expect that as we head into the fall, we'll see a lot more people in the office and we expect to see some more leasing. What's pleasing in the first six months of the year, we've had a consistent occupancy and Gord will get into a little bit about some of the delays, but we've got some wonderful restaurants that have made commitments to our buildings, and we think that not only will they be great tenants, they'll also attract other great tenants. As we look forward, we feel a little bit uncertain what normal occupancy is. We believe it's significantly higher than where we are now. We're just not certain as to how long it may take to hit the new normal.
We think there's a lot of embedded value in our business. You know, I think that our valuations of the assets have been pretty conservative over the last two and a half years. Notwithstanding that, between cash that we're retaining and the industrial REIT's performance, we've seen that asset value grow consistently. Gord, do you want to get into the operations?
I will thanks Michael. It's very nice to be with you all today, and I hope everyone's doing really well. Much in line with what Michael just stated, as their industry continues to navigate what wholesome return to work looks like, specifically to our clients' prospective tenants in various industries, our team is staying the course to offer best-in-class operations, elevated level of hospitality, building quality, and to drive leasing as we wrap up construction to further improve our portfolio for the long term. The city of Toronto has seen market vacancy grow and stabilize from pre-pandemic levels of just around 2% to current levels of about 14% across all classes.
Our portfolio has moved in lockstep with this trend, where our core portfolio relating to current and committed occupancy on average is trending at approximately 89%, which is up just over 20 basis points from last quarter. Although we saw some positive momentum, there's some tempered optimism from leasing, operations, and construction as our clients, albeit slower than expected, begin to open their doors and come back to work. Like Michael said, they're diligently planning on coming back potentially in the fallout from Labor Day. We are seeing some positive variables that indicates improvements to occupancy long term as our tours are consistently growing week to week, sublease space stabilized, now representing only about 2% of our portfolio. We're tracking already this year to do more square footage absorbed than last year and complete a higher number of both new leases and renewals.
Net rents are trending quite strong, with averages well over CAD 30 a sq ft. Across all of Toronto, in parallel to this, we're seeing strong increases despite cost pressures associated with construction, procurement of deliveries and materials, and the time it takes to build. In our other markets portfolio, current and committed occupancy remain largely unchanged quarter-over-quarter at 79%. We're seeing better tour and deal velocity in Saskatchewan, where we did about 38,000 sq ft beginning of the year. Again, rates and NARs up 16% and 60% respectively compared to our budget. Overall, across all markets, we're quite pleased with how our team has managed communications with existing tenants and clients. Collections are back up at pre-pandemic levels of over 99%, and this is also signified by our over 75% receipt retention ratio at mid-year for 2022.
Year-to-date, leasing volume has picked up versus last year as we've done about 343,000 sq ft, totaling just about 55 deals, both new and renewal. These are all at pre-pandemic rates for many years. I just wanted to note that this is probably already approximately 100,000 sq ft more than this point last year. We have some cautious optimism with the additional 150,000 sq ft of LOIs and conditional deals in very active negotiation, which we will report on in subsequent quarters. One key driver to our future success that I just want to touch on is our curated retail strategy. Over the past few quarters, we've been highlighting the negotiations and prospects of completing four very marquee deals on our Bay Street collection.
We're very proud to say today that we've completed three of these deals with arguably Canada's top restaurateurs that total approximately 30,000 sq ft. We have two additional marquee deals that are conditional. Our completed retail deals are not reflected in this quarter's facts and just firmed up in the past few days. When complete, this will total approximately 50,000 sq ft of total absorption at average net rents close to CAD 70 a sq ft, an annualized NOI impact of just over CAD 3 million. These are all in our most desirable node, and it'll finish off and support our thesis of bringing an elevated and all-new experience in boutique luxury to the financial core. The global challenges associated with construction have been very well publicized.
Our teams worked very hard through supply challenges, mandated construction shutdowns, and have managed well and are over 95% complete in our Bay Street collection project with all the bathrooms, all the lobbies, and our feature alleyway all complete. We're effectively just finishing up the full glazing refaçade program at 330 Bay. This is scheduled to be complete at the end of September. We are all well underway at 366 Bay and tracking quite well to budget for this 40,000 sq ft asset. Feedback's been tremendous to date, and we're receiving a steady influx of tourists. We really look forward to showing you the completed product, and hopefully, we'll get a chance to walk you through in person very soon. For 366 Bay, for context, we're looking at spending about CAD 16 million on a CAD 22 million building.
We anticipate a positive value increase upon construction completion at the end of Q1 2023. In unison with this project, we're also doing 67 Richmond, which we previously had on the books for about CAD 30 million. We injected about another CAD 12 million in capital. On completion, we're targeting about 5.5% yield on adjusted cost base. We took both buildings offline as these are full deep retrofits where we are replacing all the building systems, ensuring we meet our GHG reduction targets, introducing all new control technologies, new lobbies, new bathrooms, and curtain walls to bring in more light penetration, and also have a direct street side view of our alleyway project and the great animation associated with it. We often get asked by people on this call regarding 366 Bay.
Our client is well into their fit up and doing a great job on what's going to be a showcase location for them. As context, we spent about CAD 29 million on time and on budget. We took a building that was valued at about CAD 24 million to now over CAD 62 million. We also dramatically decarbonized and fully removed over 30 tons of asbestos, added all new HVAC and mechanical to make this a sustainable, clean example of what a premier heritage asset should look like moving forward. We take this community stewardship because that's really core to our business. By upgrading our assets, we put a real focus on improving consumption metrics and data, GHG, and carbon utilization associated with our overall net zero strategy.
We're actively working with CIB on our CAD 113 million debt facility to dramatically reduce our carbon emissions by 40% over the next three years. Adhere to our very lofty goal to be net zero by 2035. These initiatives are at the forefront of what we hope will separate us from all our peers. As a landlord and a leader, we have a tremendous opportunity to influence and improve our carbon footprint, and in turn, align with the growing sustainability demands for our clients. Last year, we had the country's best first year Bradley score at 91, and our team has been working very hard on building on that momentum for year-end, an equal or better score. Also, we have the country's top Sustainalytics score and are among the top 10% in this rating globally.
Sustainalytics is a Morningstar company that rates sustainability in listed companies based on their environmental, social, corporate governance performance, and it effectively applies a risk rating. In addition, we're signatory to UNPRI, and we also committed to Net Zero Asset Managers, which stem from COP26 and represents the largest organization of asset managers globally. These are not really metrics decided. The general public, corporations, and our government at all levels over the past few years have become much more sophisticated in understanding the importance of these ESG verticals, and as such, have been tremendous partners, supporters, and advocates to integrate programs into our hard assets, making them much more resilient and appealing to very discerning tenants. Operating leases are a key component of this commitment that tenants are making to the physical space and work environments.
This past quarter I'm very proud of the team as we are awarded certified platinum and recognized by Green Lease Leaders as having the most sustainable lease and operating standards in all of Canada. Creating healthy and positive buildings have always been a cornerstone of our Dream Office approach and a real source of pride for our team. As a company, we're very fortunate to have focused on great buildings in irreplaceable locations and use our capital and design to improve our buildings to a whole new standard of boutique luxury that focuses on sustainability, hospitality, and community stewardship. As always, I always welcome an opportunity to show or share and verse in our progress. Please stay tuned for some very exciting announcements from our new committed retail partners. With that, I'll turn it over to Jay Jiang.
Thanks a lot Gord good morning everybody. Originally, our goal for 2022 had been to minimize the word COVID, so we can manage our business in a more normalized operating state, both economically and psychologically. While that has been true to some extent with COVID coming up less in our conversations, we now find ourselves in a rather uncertain economic environment, facing significant supply chain disruptions, a high inflationary environment, and rising interest rates. The return to work for larger users of office space in Toronto has lagged a bit as a result of the summer and a competitive labor market. However, we are seeing good progress and improvement in utilization of both our office buildings and parking garages. We believe post Labor Day will be a meaningful milestone for the increasing activity from both existing and prospective tenants.
We think despite all of these challenges noted above, our company has continuously delivered sustainable results over the past few years. We own a very well-located portfolio of assets in downtown Toronto, and if we take good care of them through our modernization and decarbonization programs, we can capitalize on the asset's quality and have a very valuable and safe portfolio of assets that we will be happy to own for a very long time. In this quarter, we reported CAD 0.38 of diluted FFO per unit or flat year-over-year. We had income contribution from completed development at 90 Sherbourne, higher income from our Dream Industrial REIT investment, offset by lower in-place occupancy, higher interest expenses, and drop-off of one-time income in the comparative period, such as the wage subsidy programs.
Our committed occupancy was unchanged quarter-over-quarter at 85%, which consisted of 20 basis points increase in downtown Toronto and 30 basis points decrease in other markets. We have less than 150,000 sq ft of expiry consisting of 33 leases for the remainder of the year, which we feel is quite manageable, especially considering that paired against 150,000 sq ft of deals that we are currently in negotiations for. As I update our internal model, we are currently projecting diluted FFO per unit of approximately CAD 1.50 for 2022. We have factored in higher interest rates as our financing at variable rates are up 200 basis points since January, and also reflected the timing of lease commitments that haven't signed to date.
Now for clarity, we are tracking well against budget on committed occupancy targets of around 90% in downtown Toronto and 80% in other markets. However, a few prospective tenants, most notably restaurants, have lagged a bit in taking possession of the space due to longer than anticipated fixturing periods caused by supply chain disruptions and elevated construction costs. We'd like to highlight that the leases signed this quarter were at a very healthy spread of 48% higher than expiry in Toronto, and we are hitting record rents on our leasehold and restaurant spaces, which have not yet been reflected in the results. This means for the purpose of modeling, some of the unassisted NOI that was originally anticipated in the second half of the year will be recognized in the first half of 2023, which will contribute favorably to stabilized cash flow and value.
Our Q2 NAV was CAD 32.83 which is relatively flat quarter-over-quarter. Given the backdrop of interest rate and cap rate sensitivities, we've reviewed our valuation assumptions in detail this quarter. Under the direct cap method, our downtown Toronto assets for 80% of our portfolio by fair value is using a stabilized cap rate of approximately 4.8% and market rents of just over CAD 31. Our cap rates remain comfortably within the midpoint of ranges of latest published broker and appraiser cap rate surveys. Our signed leases year to date have been higher than published market rents. When we reconcile the methodology to the DCF cash flow model and latest available private market trade data, we think our asset values are quite reasonable. Our balance sheet remains very safe.
We have CAD 145 million of cash and availability on our credit facility and CAD 113 million available on the Canada Infrastructure Bank facility that can be used for building retrofit and GHG emission reduction programs. We think we have ample liquidity and resources for all operational and capital needs for the foreseeable future. For the remainder of the year, unsurprisingly, our focus is to lease space because that is a driver and outlet for cash flow, asset liquidity, value, and investor sentiment. We are encouraged that the building capital we invested across Bay Street is starting to show fruition, and the restaurant leases we've signed will significantly increase rent, value, and tenant yield across our portfolio. We intend to adopt a similar type of prudence across all of our capital initiatives, including the two smaller development projects at 366 Bay and 67 Richmond.
We are conscious to prove out value and return on capital on every dollar invested on behalf of our unitholders. Beyond leasing and value add capital, our NCIB program is resuming in August, and we intend to continue to repurchase our units on an opportunistic basis, given the disconnect between implied valuations versus the price required or controls on new properties today. Overall, we'll remain cognizant over the challenges of managing a commercial office business, but we just wanna say that, we remain very committed to this company because we see significant value and quality in our assets. Operator, we're happy to take any questions now.
Well thank you. We will now begin our question and answer session. If you have a question, please press zero then one on your touchtone phone. If you wish to be removed from the queue, please press zero then two.
If you're using a speakerphone, please pick up the handset first before pressing the numbers. Once again, with your question, you can enter the queue by pressing zero then one. We have our first question from Sairam Srinivas with Cormark Securities.
Thank you operator good morning guys. My first question is for Gord. Gord, in terms of the back to office momentum, what are you hearing from the tenants in terms of their plans heading into the fall, as well as generally in terms of office utilization rates? How has it been looking for Q2 and right now post quarter?
Yeah, that's a good question. You broke up a little bit on there, but I think you asked what we've been seeing and what kind of trends we've been seeing from our tenants on their return to work. That's the first part of the question?
Yeah. Yeah.
Right. Effectively, what we've seen in a lot of our private sector tenants, we've seen a bit more of an appetite on them working with us to understand what our back to work policies are, the improvements that we've done so they can communicate them with their tenants, get them on board and feeling comfortable about coming back. We've seen a big difference. To be quite candid with you, we've seen a big difference at the occupancy levels of our private sector tenants versus our public sector tenants. In our private sector tenants, we're probably seeing just over about 50% or 60% occupancy ratio based on people coming through doors, checking through. Our public sector tenants is a bit of a different story.
It's a bit of a lower occupancy ratio, but what we've been doing is communicating with them, working with them. What we're hearing at the federal and provincial levels, we'll start to see a lot more traction after Labor Day and getting people back into the office. Really for us, it's just been communicating what our operating protocols are, putting them on paper, sharing them with our tenants so they can in turn share them with their clients and their staff, so people feel more comfortable coming back. Then doing a lot of tours and walking them through and showing them the improvements that we've done around BAS technologies and the HVAC, the elevators, and just raising the overall comfort level. Right now, I'd say, you know, private sector tenants, 50%-60% back in the office.
Public sector, much lower, but we're pretty optimistic that the public sector tenants will start to come back in earnest come September. My apologies, the second part of your question, I didn't quite catch because the phone line broke up.
Gordon I think you answered my question because it was basically on utilization rates. I think you have a good color. Just probably digging back on the public side, would you say that number is close to about 30%-40%, I guess, in terms of occupancy?
Yeah. You know, it's really department driven. I'd say that's a really good number to say. A lot of back office, I'd say it's lower to about 30% right now. We have some client-facing public sector tenants that is at a much higher occupancy level. It's really department specific. You know, if you're working in finance or revenue for the federal or provincial government, may not need to be in as much. If you're working for passports, immigration, infrastructure, they generally seem to be in a little bit more.
That makes sense. Thanks for that color, Gord. My last question, I guess, is for Jay. Jay, I know last quarter you kind of guided in terms of occupancy being or maybe it was I think in Q4, when you guided the occupancy being fairly stable, for the rest of 2022. Is that something you probably maintain right now or do you see any tenants leaving?
Yeah. Thanks for the question. Most of our maturities happened in the first half of the year. For the rest of the year, in my prepared remarks, I said we only have CAD 150 ,000 spread across 33 leases. The point there was, it's quite manageable. One. Then two, there's a lot of leases, low-hanging fruit. We feel like we can address most of them, and we could stabilize committed occupancy around 90%, which was our original goal. That is really what we see as a driver of value and cash flow looking out into 2023. We're quite optimistic today about that.
Just on the in-place occupancy where we're a bit lighter, our tenants more or less are taking a bit longer than previously or pre-COVID in terms of taking the space and getting their fixtures done. What we're seeing now is a lag for a bigger spread between in-place and committed occupancy of around 200 basis points. We're quite comfortable that the committed is pretty on brand, which we're really our focus on. The in-place will lag a little bit just around composition of the nature of the leases that we're signing. They're a bit more complicated, less strong, larger and more unique tenants. It's the supply chain disruptions that are giving them a bit more time to do their construction work.
That is good color. Thank you so much. I'll join back.
Thank you. Our next question comes from Mark Rothschild with Canaccord Genuity.
Thanks, good morning, everyone. Maybe just to start, maybe this is for Michael, if you could expand a little bit on the capital program as far as how you look at whether you want to sell more assets or buyback units, and you have some projects going on with investment properties. How do you look at that over the next year?
I think we started a lot of programs with the idea of creating excellent buildings, and we're continuing with that. On the development front, we've pretty much delayed things a little bit because we don't really want to put the capital into it now. We're still bullish on buying back stock. I think that we've got the liquidity to do that, and we've got other sources of liquidity if we need it. I would say we're not looking to do any acquisitions. We're probably spending less money on our existing building than we planned. But the key things we're continuing with. New developments, we'll take a look. 2200 Eglinton is coming along. Could bring in a partner there if we choose, and that could help with liquidity and also development.
For the most part, we want to see just continue with what we've been doing.
Okay great thanks. It does sound like there's some good leasing going on. The TIs were up in the quarter. To what extent is that a trend or is that maybe just some specific leases this quarter? Obviously, any different quarter could jump around.
Yeah, that's a good question. You pulled it out Mark. The cost in the TIs has been higher due in large part to construction costs. Jay touched on it in his remarks a little bit, but construction costs quarter-over-quarter have escalated quite a bit from materials. Not just procurement of materials, it's securing trades and executing on time. That's been one of the biggest factors that we've seen. We had to put a little bit more money into deals just to try to accelerate and get the space built in time. But it's just a combination of materials and getting the people to do the work as well too, has proven a bit of a challenge that I think all landlords are dealing with right now.
Is it more to do with, from my view, more to do with just the cost of getting things done and not so much as a change in or increased demands from tenants?
Yeah, I'd say it's more cost and getting things done. To be honest with you, too, Mark, tenants have a little bit more leverage with the growing vacancy over the last quarter or two than they traditionally have in the past. We're starting to see a little bit more requests on potentially free rent, interim free rent as well too, which sometimes will make it into deals and with higher TI.
Okay, great. Thanks so much.
Welcome.
We have our next question from Matt Kornack with National Bank Financial.
Good morning, guys. With regards to the property you have for sale or in the process of selling in Saskatoon, can you give us a sense as to who the buyer is and also what the NOI impact would be from the sale of that if it goes through?
Sure. It will be a domestic buyer, but the source of the capital may be from outside of the country. It's a private buyer, and it's strategic for them. In terms of the impact on the financials, the cap rate will be between 7%-8%. Again, we're not pre-taxable because there's a lot of capital commitments to it. You're looking at more like 2%.
Sorry, 7%-8% in place or is that a stabilized number? Because it looks like most of the occupancies you've disclosed are a little lower in that market.
7-8 would be the in-place for fourth quarter annualized.
Okay. Fair enough. On 67 Richmond, did that contribute to NOI at all in Q2 or was it already vacated throughout most of the quarter?
Yeah. Very, very nominal. That was basically we have been planning for this building to become our next gut project for over a year now. It was just fortunate that the tenancy seemed coming up and we already had moved out a couple of test cases with 357 Bay and the capital we were putting across Bay Street. Unless we were seeing strong traction on the retail and restaurant side, it was natural for this to become the next building. We're quite excited to bring this to the market when it's ready.
Yeah. I think Gord said CAD 12 million of CapEx associated with the repositioning of that. Is that correct?
That's correct, Matt.
Okay. Last one, Gord. Just in terms of, I missed your commentary in terms of timing as to when you'd expect the restaurants to be in their space and the space to be fit out. Then maybe as a ancillary question, on 357 Bay. Do you have a sense as to when WeWork would maybe be fitting out their space, just in terms of getting that Bay Street corridor looking to its best shape?
Yeah. We'll pull up the question. WeWork's actively working on their space right now. They anticipate an early Q1 completion date. I was just in there the other day, doing a tour, and it looks incredible. They're starting to do a great job. The exterior looks great as well, too. The work we've done is really strong for the building. On the restaurant side, Matt, there's gonna be a couple of different dates. Our partners are pretty particular on when they launch, but we're actively doing the construction on one of our very large restaurant spaces right now. We're well underway. We anticipate that potentially kind of summer, fall of next year, we'll be in a position to be opening and cash flowing that space.
Okay. Perfect. Sorry Jay one last follow-up on the timing of the Saskatoon disposition. Should we expect that to close in the near term, or is it that far along in the process?
You never know with trying to sell a building today, but we're hopeful that we can wrap up the rest of the paperwork and see by a 30-60 day close.
Okay, perfect. Thanks, guys.
We have our next question from Scott Thompson with CIBC.
All right thanks and good morning gentlemen. Just wondering what impact are you seeing from the tech slowdown in terms of current tenants either looking to downsize or put space up for sublease?
Yeah. In our portfolio Scott it hasn't changed too much really since the beginning of the pandemic. Most of our larger tech tenants, we've already had discussions earlier the past two years, so I don't foresee us getting any surprises internally from the slowdown. Just as some general market color, you know, I am hearing and seeing that there will be some more sublet space coming on in the financial core in the King West region from some tech users. For the most part, in the financial core, the buildings that we own, I think we're gonna weather the tech slowdown quite well, just because, you know, we don't have as much exposure and we've just been consistently and constantly communicating with them.
A lot of our larger tech tenants were actually well underway on land and expand as well. We foresee that we're not gonna see much of this.
Gordon, have you seen a change in tone and volume of discussions with prospective tenants, I guess either in tech or other industries?
Yeah, you know what? I wanna be cautiously optimistic about how I'd say this. Tours have picked up a little bit, but to be candid with you, Scott, deals are just taking longer, and there's not the same sense of urgency there was to get deals over the goal line and complete deals as that we were seeing before 2020. Like, I think there's activity there. People are still coming through the doors. They're very keen on seeing what we've done and how we can lend ourselves to their business. The deals in general are just taking longer. I think tenants are starting to get resigned to the fact that building their space and mobilizing and moving over is taking longer as well, too.
We're starting to see a lot of tenants, quite frankly, you know, past the two-year mark that may have two years, two and a half years of term still in their existing space already come a little bit earlier, to get a sense of what we're doing so they can start to plan ahead, on what their occupancy decisions are, because it's just taking a little bit longer overall.
Maybe sort of a follow-on on that. Putting aside the retail leasing components of the new leases, can you comment on expected timing of closing the gap between in-place and committed occupancy?
Yeah. Jay and I were talking about this yesterday. What we're seeing from in-place to committed, we're hoping kind of by next summer we'll be in a position where we'll see that gap closing a little bit. For us, in our forecasts and how we've been looking at deals, we've been pushing the deals out probably two to three months. It's usually taking 60-90 days or more to get these deals commencing. You get the deal done, but it's 60 or 90 days more to do the fixturing and other things, so it's taking a little bit longer.
The gap right now is probably two to three months more than we've traditionally seen, and we're hoping things stabilize in terms of labor and trade market a little bit more towards next summer, and we're in a position where we can see timing, completion and cash flow close the gap a little bit.
Yeah. Some of the key metrics, I think by year end, you'll see some meaningful progress on getting the in-place occupancies up. It's always gonna trail a little bit on any lease we sort of sign from over the next year or so. A lot of the leases have been committed and so the stats on Q4 will be pretty good, and then you'll gradually see the income pick up in Q1, Q2. By next summer, or hopefully our committed occupancy will be a lot higher, and then you should probably see a better handle on the in-place as well.
All right. Thanks Gordon, Jay. Actually maybe just one more for Jay. Are there any other major properties, I mean, I think sort of like, you know, 40-40,000 sq ft + that you're considering taking offline for redevelopment?
At this rate, no. I think we're pretty much close to getting through the rest of the Bay Street assets. We will be doing capital programs on a selective basis, and try to leverage our CIB program as well to decarbonize the building. For entire building remodernization and redevelopment, I think that would probably be the last one for a while.
Okay. Thanks gents it's very helpful. Turn it back. Thank you.
Yeah.
Thank you. As a reminder, if you have a question, please press zero then one to queue up with your question. We have our next question from Mario Saric with Scotiabank.
Hey good morning guys. Maybe an operational question for Gord, maybe a bit more detailed, but I'm curious if Dream keeps stats on the percentage of tenants on the lease renewals that are kind of expanding versus contracting versus maintaining at lease renewal. I guess the occupancy stats will highlight the trends, but just bit curious to see if there's more kind of color on that front, and if you can separate it out between public versus private tenants and so on.
Yeah, no, it's a good question. We don't per se keep stats necessarily on that. What I can say is, you know, a few of our bigger tenants, as people know, State Street and other groups, had downsized a little bit. What we're seeing from the government is that it's basically kind of a wait and see stay in place.
We're seeing some shorter term renewals, as is until they're in a position to make occupancy decisions. Public sector, for the most part, we haven't seen very much downsizing. Some of our larger tenants earlier on in the pandemic, and then as we saw over the course of the last year, we saw some marginal downsizing. One or two tenants we saw. Private sector, we saw a little bit bigger downsizing. We're starting to see some tenants grow as well too. We've got a lot of smaller tenants in our portfolio, so we're starting to see a lot of private sector tenants maybe take an extra 1,000 sq ft to put another boardroom, maybe do some exterior perimeter offices. It's a mix at this point.
Mario I'd be shooting in the dark if I gave you a specific number, but if I could give you any real color, it would be that our public sector tenants are, for the most part, just kind of staying as is.
Would it be fair to say then, like, the larger tenants may be giving up a little bit of space, but your average 5,000 sq ft tenant, which is kind of the bread and butter of the portfolio, you're not necessarily seeing contraction. Like that tenant might went from 5,000 sq ft - 3,000 sq ft or going from 5,000 -0 or growing.
Exactly. You said it exactly right. The 5,000 sq ft tenants, they were previously going from 5,000 -0 or they're picking up another 10%-15%.
Got it. Okay. Maybe shifting over to kind of capital allocation, on the NCIB, would it be fair to say that going forward, given where leverage is and the concerns over cap rates moving up, broadly speaking in the space, that the NCIB may be more directly tied to asset dispositions, whether that's direct assets like the New York Aquarium or Dream Industrial units, for example. Or do you see yourself using liquidity today, if the unit price remains below CAD 20?
Yeah. Thanks Mario Saric. Yeah. Well, we're working it quite carefully. We're quite comfortable with the position we are today. We obviously have a couple levers to pull. I mean, the Dream Industrial units have been great to us over the past two years of fantastic fundamentals. We have said many times it's not strategic, but just having them around is a good support to that liquidity. We can also margin them and they develop an unencumbered asset pool. We do not have any restrictive covenants that prohibit us from tapping into the unencumbered pool. We have a Canada Infrastructure Bank program to cover a lot of the capital. We're quite comfortable with the liquidity to use. At the same time, we are open to selling assets outside of the core.
We're in the process of selling a taller building, but there are many others. We think we have a lot of levers to pull and it's just the entire program itself, we estimate to be around CAD 60 million. It's not gonna be a huge use of capital. I think over the next year we're quite comfortable with the liquidity and how we navigate it for the purpose of NCIB.
Got it. Then, you know, how do you think about I think Michael mentioned that, you could potentially bring in a partner, as I think kind of verged on. How do you think about, potentially sacrificing some long-term value creation if you bring a partner in today as opposed to two years from now, for liquidity to execute on the NCIB, which is more tangible and more short-term in nature? How do you think about the short term versus long term in terms of capital allocation? I guess is the question.
Yeah.
Oh, go ahead Jay.
Maybe I'll start by jumping in. Thank you for your question. We're working through the final phases of the rezoning right now. The good thing about that development site is that it could probably be split into 6-8 phases. We have a lot of flexibility in terms of when to bring in a partner and for whatever the first phase, let's call it. I think it's also residential, so that has a broader appeal right now with different sources of capital. If we can get good value for it, I think that's a win-win in terms of monetizing a good value on our books.
It'll help delever the balance sheet a little bit, and as you said, we'll be able to use that as a source of liquidity for the NCIB.
I was gonna say that it would get good value now because we're so far advanced in the rezoning. That project's probably a CAD 1.6 billion project in total. Owning half is still a major development, and is probably more accessible for us than 100%.
Great. No, that makes sense. The last question, and there may not be an answer to this, but it was mentioned that the goal was to get to net zero by 2035. Is there any way today to think about the cost of doing so, in relation to the value of the building?
Yeah. Yeah, that's a really good question. I think even before these initiatives were announced, I think we were looking at ways to make our buildings more attractive to tenants. Now, a lot of these initiatives include decarbonization. We look at these types of programs similar to how we would look at any traditional capital program, which we expect to get good financial returns in addition to making our buildings more green. On one hand, we've already got LEED certification, WELL certification across a lot of the portfolios because we've been doing it for the last five years. The CIB program was important because first of all, it's a great source of debt in order to fund it.
It's a 25-year secured program and align them in a way that the more GHG we reduce in the building, the lower the interest rate will be. It's a very attractive source of capital in making our buildings better. On the return side, I think the tenants are really supportive in a lot of these initiatives. We'd be able to amortize a lot of the common areas because, I mean, it's important to the tenants. They have their own ESG and emission goals as well. I think over the next little while we're looking at tackling every single project, like how we would look at doing an expansion or a redevelopment.
We think with the capital facility, as well as it being aligned with the tenants, we'll have a pretty effective program that's been delivered pretty well by IRRs.
Yeah, I think it was Scott that mentioned a little bit about closing the gap from commitments to occupancy. What we're seeing with this GHG program and what we're doing in the building is that it's helping us with our absorption, and we're winning business as a result of having this program, showcasing this program. The feedback that we've been getting from government tenants and also too from very sophisticated private sector tenants that have these ESG verticals as a component of their business is that it's a deciding factor in a lot of what we're doing. We're also seeing, you know, albeit it's something that's a little bit high level right now, but we're also seeing people not only are willing to commit earlier, but they're willing to pay more and be a part of it.
They like the reporting that we're doing. They like the awards that we're winning. The way that we showcase it to them is they're a partner in the building. Everybody benefits from the shared success that we have through this program. To be candid with you, it's helping us win some great new business.
Okay. Thanks for calling.
We have our next question from Thomas Burr with RBC Capital Markets.
Thanks good morning just on coming back to 2200 Eglinton. I just wanted to, I don't know if you have the update, you know, on the company. The zoning approval is likely before year end. Then you mentioned the discussion around, you know, bringing in some partners. I'm curious, you know, are talks ongoing or in progress on that and any color you can share there would be helpful.
Sure. I'll let Michael talk about the progress of the discussion with partners. You broke up on the first part, but I think you were asking about the status of the rezoning. We're hopeful or optimistic we'd be able to get clarity on that before year end. We're just working through some final milestones with regards to Section 37 and some of the community benefits. The sentiment is this will be a built offer, but we just need clarity on that. Things happened a bit slow over the summer, but we're quite optimistic we'll be able to get rezoning and really good value out of the site. Michael, do you wanna cover the partnerships aspect?
Okay. Well, on the rezoning, we expect that by the end of the year we'll be in good shape. On the rezoning, we still have the site plan to go. With the site plan, we haven't gone far enough on the pricing and pro forma, but so we've had some very brief conversations, but we don't have numbers to show anybody yet until we're finished with the zoning. This might be something for next year.
Okay. Sorry Michael just on this, your comment on the site plan. If the zoning is successfully received by year end, presumably you would then, Mark, you know, the value on that property, or do you have to wait for the site plan approval?
That's a Jay question. I think that the value would be pretty reasonable at that time. Jay, when do you mark them up?
I think if you get rezoning, you did certainly hit one of the milestones. What I would do is I would punt that question to the appraiser, and they would go through all the analysis. There's a lot of confidence in that in the gold model. They would probably look at the similar sites and their progress with the other landlords and derive a value. The first mark that we did, we were pretty far along, and financing was one of the key milestones because we got offered a piece of debt that was higher than the book value. That was probably a good indicator it was worth more. If you take once we get rezoning, it achieves another significant milestone, so it's likely worth more.
Gradually you can build that over time to a completed site. Then, as Michael said before, we'll take a look at the pro forma and DCF basis to see what would be the economic value completed versus the value today. Over time, we expect that to gradually pick up over the next year or so.
Okay. Just on the 2023 debt maturities. It's fairly large, and I believe a chunk of it relates to one property, but just any thoughts on, you know, plans for the refinancing of that, maybe any possible consideration of a hedge? I'm just curious how you're thinking about next year's goals.
Yeah. You're right. Next year the biggest asset is actually our head office. We're sitting in it right now. We're already starting some conversations with the lenders. They're good. There's good appetite because the building's well leased, it's well located, and also they like the sponsorship. We're quite confident we'll be able to get pretty good terms on this asset. With regard to your question on whether to hedge the rate, we've had these conversations since January first because, I mean, we were looking at swapping potentially a portion of our credit facility at that point in time when the rates were in the mid-twos. Interestingly enough, all those lenders we talked to, multiples, were saying that the fixed rate would probably be around 4.5%.
They were baking in 6-7 raises. When the war began, we called the lenders again, and nothing's really changed. We thought that was quite interesting. We did the refinancing with the disclosures for our building in Mississauga. While variable debt will probably keep it simple in the high 4%, fixed is around the 5%. We're not speculators of interest rates. I think overall we're quite encouraged that we were able to get up front end on the properties and the lenders see good value in the asset. What we did, and we had a partner for that building, is to do a half swap on it. We took CAD 65 out of the CAD 130, and what you end up with is a blended rate of about 4.9%.
For the building next year, I think typically my preference is to go fixed. The curve has inverted, so I think it'll be interesting to see what like the 10-year rate would be. But no, obviously, a lot can change. So, a lot has changed since we got to this point too. I bet, like, every single month we'll get a data point. So by the time we have these conversations next year, I would say things might be different, but we'll be prepared to make a lending decision on the mortgage, then.
Okay. Just to clarify, I think the expiring rate's about 4%.
For this building, I don't have it offhand, but it's gotta be about right because it's around the high threes or four.
Okay. Just lastly, Jay, I just wanna clarify, maybe we're just not entirely clear on my end in terms of the way it came through. Did you say CAD 1.50, that's 1.50, for your FFO guidance this year? If you can also just expand on what that implies for same-property NOI growth.
Yes, it is 150. Same-Property NOI growth, I think for the year will probably plus fees might be negative single digits. As we said before on the income question into next year. We're set up quite well from both Same-Property NOI and FFO and hopefully the occupancy in Q4 2023.
Good. Thanks very much, and we'll turn it back.
We have our next question from Jenny Ma.
Hey, good morning. Just had a couple more questions with regards to that CAD 1.50 guidance you gave, Jay. You mentioned that you're factoring some higher rates that you assumed on the floating. Did that factor any expected future increases or just what we've seen to date?
I would say mostly to date. Though we try to follow the news, but it's really hard to kind of speculate what will be announced at the next round of meetings. I think all in, we assume the blended rate on the facility is mid- to high-4%, which is what we're seeing today. It also factors in the refinancing of the one property that we talked about earlier with Thomas Burr.
Okay. If I'm hearing you correctly, to the extent there is more bumps in the rate, then there could be additional pressure on cash flow?
It depends on when the bumps are. That's not correct. If interest rates go up, our interest expense-
Mm-hmm.
Goes up and vice versa, yeah.
Okay. Are you factoring any more share buybacks in the guidance?
No, our base case forecasts do not include any major capital allocation decisions, dispositions, things like that.
Okay, great. It looks like, you know, you mentioned earlier that you're looking at using liquidity to continue to buy back units. I'm just wondering, given where the floating rate is at and potentially moving to, you know, when we think about that, would it be fair to look at the yield on the units sort of as a proxy on the cost of the equity and then, you know, comparing the two numbers and thinking about how you would allocate capital?
That's one metric we look at. We also really look at the value of the intrinsic value of the real estate.
Mm-hmm.
On the liquidity side, we would certainly factor in the cost of debt, both in terms of the impact to FFO, in addition to debt to EBITDA and the effect to the gross book value. We're cognizant of all those factors. Ultimately, we think the business and the portfolio is incredibly valuable. I think it has been a tough run for being a commercial office landlord, but I think we're seeing a lot of positive indicators as well. What we're seeing is obviously pretty good to stabilize cash flows and value over the next run. Not to mention that replacement cost is running even higher. We're sitting in a building today that's on a price basis, trading on the stock market around CAD 450.
There's a condo being built across the street, where we're looking at right now, it's selling for CAD 1,500. We look at a lot of data. We look at jobs, so we look at employment numbers. We feel pretty good about office buildings, well-located ones that don't require a lot of capital or are well-maintained, and we want to own more of them.
Great. That's helpful. I guess my next question is, when you look at the floating rate debt component, it's pushing 30%. You know, I know you mentioned you weren't speculating on interest rates, but would you be comfortable having that creep a little bit higher to fund unit buybacks? Or is there some sort of, you know, unofficial ceiling on that number, where your comfort level goes down?
We don't really have a ceiling per se, but we are very aware of not taking on too much variable interest rate. We run a lot of sensitivity the management exercise within the company. Going back to Thomas Burr's question, we looked at swapping it. We don't think that economically it really makes sense because we would just be paying the same rate starting off in January. What we really wanna focus then on is looking at what the impact of any future increases would have on just how we manage the company. I think we have a lot of levers with holding on to localized industrial units, working on future dispositions, and some mix of that. We'll see. We have lots of time to exercise the NCIB program.
The program itself, as I said before, isn't really too big, but we're definitely aware of our very low exposure.
Okay, great. One more housekeeping question. On the Saskatchewan potential disposition, is there any debt on that asset?
Yeah, actually on that building's been a challenge for us. The debt is actually just a bit more than the asset itself, which is carried at IFRS and will be transacted at IFRS. The proceeds of all that will be used to delever the balance sheet, yes.
Okay. Do you have the rate handy on that?
The rate on the debt?
Yes.
I think it's probably in the mid, high threes.
Okay. Great. Thank you very much.
Thank you. We have our next question from Scott Thompson with CIBC.
Oh, hi. I had a follow-up on refinancing, but it was covered in discussion with Thomas Burr, so I'll withdraw. Thanks.
Thank you, sir.
Thank you.
We have no further questions at this time. I will now turn the call back over to Mr. Michael Cooper for closing remarks.
Thank you very much. Appreciate everybody's interest. Lots of questions. We'll try to continue to provide you with good information to understand the company. What I would say is our view of the assets are very valuable. I don't believe that the yield on the distribution is a good metric to look at the value of the buildings. As far as floating rate debt, if we wanna have less floating rate debt, we would fix it. I don't think that's a capital allocation decision. I think that we'll manage the debt in a way that we're comfortable with. I think Jay's point is that right now when you fix the debt, you end up locking in a pretty high interest rate. I don't think we feel it helps much. We're watching, pick our opportunities.
The interest rates are moving around a lot even as of today. We're quite bullish about the business in the long term and we just need people to get back to work. I do thank you all for your interest in the company and look forward to proving out the results. Thank you very much.
Thank you. Ladies and gentlemen, this concludes our conference. We thank you for your participation. You may now disconnect.