Dream Office Real Estate Investment Trust (DUN) Earnings Call Transcript & Summary

Hi, everybody. Déjà vu. We're here again. I'm Michael Cooper. I'm the Chair of Dream Office. I'll act as the Chair of the meeting and our guest Secretary of the meeting, Rob Hughes. With the consent of the meeting, I appoint Daniela Munoz and [ Rumella ] of Computershare as scrutineers. We're going to deal with the formal parts of the meeting first, with Rob Hughes making the motions, Shannon seconding them and then we'll have a management presentation. We have an affidavit from Computershare of the notice availability of proxy materials. Our circular and other meeting materials were made available through notice and access. The scrutineers have advised that we have what we need to have a meeting, the financial statements. The first item is the presentation of the REIT's annual report, which contains the REIT's audited financial statements. I note that the Secretary has placed the meeting copy -- he placed before the meeting a copy of the annual meeting. Thank you for that, Rob. The next item of business is the election of the trustees. As stated in our circular, 7 trustees to be elected in the meeting, 7 nominees or name. They are Amar Bhalla, Don Charter, Jane Gravan, Kellie Leitch, Karine McIndoe, Qi Tang and myself. Rob?

I nominate the individuals listed in the management information circular for election as trustees of the REIT to hold office for the upcoming term.

Shannon?

I second the motion.

Thank you. Are there any further nominations? Nominations are closed. Since there's none -- no -- there's no -- nothing else, each of the 7 nominees received a majority of votes cast in their favor, and we'll issue a press release with the numbers later. Given the proxy received and the number of persons nominated for election as a trustee is equal to the number of trustees to be elected, proposed with the consent of the meeting not to take a formal vote, therefore, I confirm that the motion has been carried and the 7 persons who were nominated have been elected as trustees. The next item of business is the appointment of the auditors. Can I have a motion?

I move that PricewaterhouseCoopers LLP be appointed auditors of the REIT and subsidiaries for the ensuing year and the Board of Trustees be authorized to fix their remuneration.

I second the motion.

Thank you, Shannon. And Rob, are there any questions? Seeing none, the meeting will vote on the motion. I propose we take a vote by a show of hands, although nobody can answer why. I would ask those unitholders and duly appointed proxy holders who favor the motion to please raise your hand. [Voting]

Any votes withheld?

It passed.

It passed. The formal items of business set in the notice of meeting have been dealt with, and there's no further business to come before this meeting. The formal part of the meeting is to be concluded. And we'll now make a short presentation. Gord is going to speak first. I just want to make a couple of comments, which is the office sector has changed a lot. Our team has done an incredible job, reducing the number of buildings originally from 170-something to 31 buildings. We've done a lot of the work -- we're doing that we committed to in 2019 or earlier to upgrade the buildings. We've done a lot of work to decarbonize the buildings. Daphne is open this year at 67 Richmond, I just walked by where [ Milos ] is opening. The team is doing an incredible job with what we own, and we own great buildings. The confusing part is it's a tough time for office, vacancies are up. I've been through this before. The net effective rents are -- they're not as good as they were, but I can tell you, in 1992, net effective rents were always negative. It is nothing like that. But what does hang over it is like what's the future of office, how are people going to work and stuff like that. And we can run what we got. And the guys are doing a great job. What we do is we track what we see as risk to the company. That's on the debt, that's on leasing and maybe where we can sell some buildings. And every risk and opportunity, we track weekly, we're tracking well to what we're looking at, very difficult for people to make decisions, but we're pretty pleased with how things are going. And over the next 4 to 6 months, we hope to make some really significant -- accomplish a lot that will help us not just for the balance of this year but into the next few years to make sure we've got lots of liquidity, the buildings are leased and we got the financing. So Gord, do you want to give an update? Thanks.

Well, thanks, Michael, and good afternoon, everyone. I hope you're all keeping well. It's honestly really nice to be with you today in person. And I always look forward to our AGMs. I'm usually pretty optimistic by nature. But every day, you honestly see a sign that's something really positive. We may have turned a corner on something on what otherwise has been a pretty challenging few years in the sector. But in all sincerity, standing up here and seeing everyone in person today, it's one of those great signs that we're continuing the momentum, and we're moving ahead full speed. Over the next few minutes, I get the real honor to share all the hard work, goals and some important strategic wins that our team has going in the balance of 2024 and beyond. We approach the future of downtown Toronto leasing with very cautious optimism. While the past years has had some unprecedented challenges, we recognize the resilience and the potential of this dynamic market. And as Michael just mentioned, we've got some great assets in the most in-demand note nationally. This is a great slide to start with. It shows our occupancy to the competitive set. It illustrates that Dream is doing better than the markets as a whole and against our peers. It's specific to our committed occupancy and it's in relation to the A and B class inventories in which we compete. In a competitive market, this isn't a secret, but quality, good management and amenities, they've never been more prominent and important. As a company, we're really fortunate to have focused on some great buildings in unparalleled locations, and we have good optimism for the balance of the year with a pretty robust pipeline and advanced negotiations. We've seen some real substantial growth year-over-year on square footage leased. With 2023, I'm happy to say it's been our strongest year where Karine and her team did over 100 new deals and renewals for approximately 800,000 square feet. This momentum has been a real key catalyst for the office REIT having this leading occupancy. Yes. So this is a new slide we're introducing this year, but CBRE research notes that year-to-date for Toronto, there was about 240 office leases done. Of this, over 200 office leases, that's about 80% were on spaces that are 10,000 square feet or under. It's important to show this slide as we want to reiterate that Dream Office downtown portfolio, our average tenant size is just less than 10,000 feet. There's quite a reasonable amount of activity for that type of tenant, and we're starting to see a lot more tours, which is positive. This suits us well for the future as it's going to help us drive continued absorption in the core. The specific segment of the submarket, as you can see in the slide, has by far the most absorption, and we've seen steady growth in our tours specific to these ranges. We've been investing capital very prudently, working with Jay on a weekly basis in these smaller vacant suites to improve tour velocity and accelerate lease-up. We found that suites that are improved by far garnered the most interest, and we've budgeted approximately 20 vacant units to be improved and occupancy ready. We feel really good about our current pipeline. I don't mind disclosing today, we've got over 25 new and renewal prospects in various stages of negotiation, and it gets us to almost 350,000 square feet. While the deal velocity on larger leases has been quite slow, we will show in a future slide that our team has done a great job securing some very large-scale deals as of late. In contrast, very consistent to the market, we've seen solid activity in smaller spaces, especially in our boutique buildings and around Bay Street and Adelaide Place, where tenants can lease up to 10,000 square feet, have their own floor, have the security and have a Bay Street address. This is an important slide because despite all the headwinds in the office environment, we've really been pleased how our rents have held up versus our budget and even more so when you compare it to market. This slide is great as it shows that we've seen a healthy growth in downtown in-place rents, which has increased from over $26 to over $31.50 over the past 3 years. It's an annual growth rate of about 6%, which is quite positive for the sector. It's important to note that we own and manage nearly 85% of our assets just from a pure value perspective in irreplaceable locations right downtown Toronto. As such, 2023 was our most active year of leasing on a direct and sublet basis, where we did over 800,000 feet, as I mentioned, and that's in contrast to 620,000 square feet the year before and 470,000 the year before. So we're trending the right way. One facet of our business I'm always getting asked about, and I'm not kidding you, like I'm always getting asked about this from lenders, investors, analysts. It's in regards to office utilization. Even today, I've got like 3 questions on office utilization. It's a great metric as it has a direct correlation with occupancy. Based on this data, I'm quite optimistic. We closely follow the downtown Toronto occupancy index and attracts average weekly physical office occupancy as a percentage of pre-COVID occupancy. So just a bit of context to this slide. Last year, at this time, physical office occupancy in downtown Toronto averaged just under 50%. And as of mid-May, the average occupancy this year across all 5 workdays is already 65%. With the peak day, which is Wednesday, I was just talking about this morning, the peak day Wednesday is over 75%. This represents a very material improvement year-over-year, and it's quite dramatically up from the 5% in 2021. So this slide, I'm really proud to show it, and it's just a real testament to the team, leasing, asset management, everybody that worked hard to get these last 6 deals done. So last AGM, I left the presentation highlighting some risks, and I walked out of there with a mandate to secure 6 very key transactions. And as Michael mentioned before, flagged risks for the portfolio. I'm really happy to report here today that the teams had tremendous success with all 6 of our largest tenants, not only on a renewal basis but also on some new leasing and some expansions. And as a result, I think we've really significantly derisked the portfolio by securing these commitments. So just to quickly highlight, we expanded and we renewed DBRS Morningstar at higher rates on a 10-year deal; 30 Adelaide, we extended our State Street Bank; 438 University, we did the largest renewal last year in the core. We did almost 200,000 square feet with IO. Subsequent to that, Karine's team also did another 60,000 square feet at 655 Bay with IO. We put WeWork here because we get a lot of questions about WeWork and everything that's happening. We're proud to say that we've worked with them throughout the course of their CCAA. We've come out with a solution that preserves the property value, and we feel really good about the direction there. And then [ ICI Bank ] was just nominated for an AOP Deal of the Year. So we're quite proud of that deal. And then 74 Victoria, which was one of the biggest risks in our portfolio, we had budgeted the whole building to go vacant, and we've recently secured and are in some advanced negotiations for a large part of the building. So notwithstanding the increase we're seeing in net rents, net effective compression has been felt market wide over the past 4 years, and there's a perfect storm of increasing interest expense, material premiums on unit pricing, construction and skilled trade labor shortages. Dream has been acutely aware of these challenges, and we started an in-house construction management and material procurement team to try to save money and mitigate these costs. So just before I turn it over -- sorry, next slide, Kim. Sorry, just before I turn it over to Jay, I honestly couldn't be more pleased with how the whole team has navigated through some of these evolving challenges to the industry. Their efforts and dedication not only to our company but to our clients is truly what I'm most proud of. At the end of the day, it's a combination of having irreplaceable assets, coupled with the high quality, high character team of people, we have operated in leasing those buildings that gives me the greatest confidence closing out this year and going into 2025. I always throw this out there. I've had a lot of people take me up on it. I hope more people take me up on it. But if anyone at any time would like to tour any of our buildings, see firsthand the great work that our team has done and the great work that our team does on a daily basis operating these assets, in all sincerity, please reach out to me. We're always really proud to showcase our portfolio, all the great things that we're doing at Dream Office. And the best way to see it is in person and walk in with me. I want to thank everybody for coming out today. And I'm going to turn it over to my good friend Jay. Thank you.

Hello. Thank you very much, Gord, and thank you, everyone, for coming to our AGM. We put together a few slides today that we thought would be of interest to show the stability of our financial performance as well as the key focus over the next 12 months. Like Michael highlighted earlier on, we really want to preserve our liquidity and reduce risk in our business. The first slide shows that there is a noticeable improvement in the same property net operating income of our business since COVID. Despite a 9% drop in occupancy since the end of 2020, we have been able to increase our in-place rents from $23 per square foot to $27 per square foot on the overall portfolio. And at the same time, we've been able to manage our expenses prudently. On our conference call in February, we have guided to 2024 SP-NOI, a positive low single digits, and today, we're able to reconfirm that guidance. Our 2023 funds from operations per unit was $2.88 per unit on a post-consolidated basis. We expect to achieve a similar FFO per unit this year. That means our FFO payout ratio is expected to be approximately 35% at the midpoint of our guidance, which we think is pretty comfortable and safe as we continue to grow our occupancy and net operating income. We have been very busy in 2024, focusing on our top priorities, which is to improve liquidity and manage our risk across the entire business. We want to preserve cash and liquidity wherever possible to make our business safer. This means allocating capital wisely across our buildings to ensure that money spent will improve the net asset value of our buildings and also to increase the lending value. We have been very proactive in addressing debt, so that we have better visibility on refinancing values and term well in advance of their maturity. We have a few assets listed for sale as well. If sold, they will reduce debt further and provide more liquidity to make the business safer. We estimate that on average, for every $50 million of assets sold, we'll use the proceeds to delever and then we expect leverage to decline by about 100 basis points. So this slide provides a bit more detail on our refinancing activities. We have $73 million of mortgages maturing in 2024. We have already closed $56 million, and we are in advanced stages of finalizing the last $17 million of renewals for this year. We have $336 million of mortgages maturing in 2025 and also our credit facility, which currently has $290 million of drawings. Our largest mortgage maturing in 2025 is Adelaide Place at $225 million, and we are currently in advanced discussions with lenders to achieve a possible early refinancing this year. We think we are well positioned to refinance the rest of the loans and credit facilities next year as well. Next slide, please. So from early 2022 to mid-2023, the Bank of Canada increased the rate by about 475 basis points from 0.25% to 5%. One of our key objectives in 2022 was to reduce our exposure to variable interest rates from 24% at the time to now under 10%. To do so, we entered into approximately $366 million of interest rate swaps for a weighted average term of 5 years to derisk our exposure. It has served the REIT well by reducing our annual interest rate by $5.4 million or $0.27 per unit. While we do not rely on a decrease in interest rates in the future, the recent reduction in policy rate by 25 basis points and any other potential future rate cuts would benefit the REIT. For context, each 50 basis points of decrease in interest rates on our remaining variable debt will have $0.5 million or $0.026 per unit improvement in FFO. This is the last slide in our presentation. With that, I'll turn it back to Michael for Q&A.

Are there any question? Yes, sir.

[indiscernible]

Yes. You're referring to last year?

Yes.

Yes. We thought that was a unique opportunity to reduce like -- generally, there's more shares of office REITs than there are people who want to own them. So we thought that was a really creative way of taking some excess capital to reduce the shares outstanding. So we return the money to our shareholders, reduce our shares outstanding from basically 25 million to 17.5 million or 18 million. And we reduced the total capital in the company by -- a lot by selling the industrial units, which isn't an office REIT and giving it to the shareholders and having less shares outstanding. We have 200 million more or so. It depends on the stock price. And we -- that's the liquidity we want to maintain, and we're looking at how to manage that. But we thought it was a unique opportunity to do something for our shareholders. Okay. Thank you so much for coming out. This show will be on again in about 25 minutes. It will be Dream Unlimited.