Dream Office REIT Reports Q2 2023 Results

This press release contains forward-looking information that is based upon assumptions and is subject to risks and uncertainties as indicated in the cautionary note contained within this press release. All dollar amounts in our tables are presented in thousands of Canadian dollars, except for rental rates and per unit amounts, unless otherwise stated.

TORONTO–(BUSINESS WIRE)–DREAM OFFICE REAL ESTATE INVESTMENT TRUST (D.UN-TSX) (“Dream Office REIT”, the “Trust” or “we”) today announced its financial results for the three months ended June 30, 2023 and provided a business update.

OPERATIONAL HIGHLIGHTS

(unaudited)

	As at
	June 30,				March 31,			June 30,
	2023				2023			2022
Total properties(1)
Number of active properties		26			26			28
Number of properties under development		2			2			2
Gross leasable area (in millions of square feet)		5.1			5.1			5.5
Investment properties value	$	2,363,523		$	2,386,395		$	2,603,123
Total portfolio(2)
Occupancy rate – including committed (period-end)(3)		83.9%			84.0%			85.0%
Occupancy rate – in-place (period-end)(3)		80.9%			80.2%			81.6%
Average in-place and committed net rent per square foot (period-end)	$	25.33		$	25.13		$	23.35
Weighted average lease term (years)		5.0			5.2			5.3
See footnotes at end.

	Three months ended
		June 30,			June 30,
		2023			2022
Operating results
Funds from operations (“FFO”)(4)	$	17,507		$	20,332
Comparative properties net operating income (“NOI”)(5)		27,750			26,739
Net rental income		25,296			26,181
Net income (loss)		(49,706)			65,922
Per unit amounts
Diluted FFO per unit(6)	$	0.35		$	0.38
Distribution rate per Unit		0.25			0.25
See footnotes at end.

“In the second quarter, we were able to return 31% of the market capitalization of Dream Office REIT to its unitholders by selling 12.5 million units of our investment in Dream Industrial REIT and buying back 12.5 million units of Dream Office REIT and continue to own the same portfolio of properties,” said Michael Cooper, Chief Executive Officer of Dream Office REIT. “With fewer units outstanding, gains in occupancy and net operating income will have an even more profound effect on unitholder values as we continue to see increased activity in our downtown Toronto portfolio, complete development approvals and increase our comparative properties net operating income.”

• Net income for the quarter: For the three months ended June 30, 2023, the Trust generated a net loss of $49.7 million. Included in net loss for the three months ended June 30, 2023 are negative fair value adjustments to investment properties totalling $38.9 million across the portfolio and net loss from our investment in Dream Industrial Real Estate Investment Trust (“Dream Industrial REIT”) totalling $33.7 million primarily due to the sale of 12,500,000 units at a price below IFRS carrying value during the quarter, partially offset by net rental income totalling $25.3 million and positive fair value adjustments to financial instruments totalling $14.7 million, primarily due to the revaluation of the subsidiary redeemable units as a result of a decrease in the Trust’s unit price.
• Diluted FFO per unit⁽⁶⁾ for the quarter: For the three months ended June 30, 2023, diluted FFO per unit decreased by $0.03 per unit to $0.35 per unit relative to $0.38 per unit in Q2 2022, driven by a lower share of FFO⁽⁴⁾ from our investment in Dream Industrial REIT (-$0.02) due to the sale of 12,500,000 units during the quarter, lower net rental income from sold properties (-$0.02) and higher interest expense (-$0.02), partially offset by higher comparative properties NOI (+$0.02) and the accretive effect of repurchases under the normal course issuer bid (“NCIB”) and substantial issuer bid (“SIB”) (+$0.01).
• Net rental income for the quarter: Net rental income for the three months ended June 30, 2023 decreased by 3.4%, or $0.9 million, over the prior year comparative quarter primarily due to the sale of 720 Bay Street in Q1 2023.
• Comparative properties NOI⁽⁵⁾ for the quarter: For the three months ended June 30, 2023, comparative properties NOI increased by 3.8%, or $1.0 million, over the prior year comparative quarter, primarily driven by higher in-place net rents across the portfolio from rent step ups and higher rates on new leases and renewals. Partially offsetting the increases was lower weighted average in-place occupancy in both regions. The increase in comparative properties NOI was primarily driven by a year-over-year increase of 5.1%, or 1.0 million, in Toronto downtown due to rent step ups and higher rates on new leases and renewals.
• In-place occupancy: Total portfolio in-place occupancy on a quarter-over-quarter basis increased by 0.7% relative to Q1 2023. In Toronto downtown, in-place occupancy increased by 1.5% relative to Q1 2023 as 86,000 square feet of new lease commencements and 39,000 square feet of renewals were partially offset by 80,000 square feet of expiries. In the Other markets region, in-place occupancy decreased by 0.7% relative to Q1 2023 as 14,000 square feet of expiries were partially offset by 2,000 square feet of renewals.
  
  Total portfolio in-place occupancy on a year-over-year basis decreased from 81.6% at Q2 2022 to 80.9% this quarter due to negative absorption in Toronto downtown and the sale of the fully-occupied 720 Bay Street in Q1 2023 along with negative absorption in Other markets, partially offset by the sale of Princeton Tower in Saskatoon in Q3 2022.
• Lease commencements for the quarter: For the three months ended June 30, 2023, excluding temporary leasing, 117,000 square feet of leases commenced in Toronto downtown, including a 54,000 square foot lease with a flexible workspace provider where rents comprise a share of the tenant’s net revenues. The remaining 63,000 square feet of lease commencements were at net rents of $35.30 per square foot, or 21.7% higher than the previous rent in the same space with a weighted average lease term of 4.2 years. In the Other markets region, a 2,000 square feet lease commenced at $25.00 per square foot, flat when compared to previous rents in the same space with a lease term of one year.
  
  The renewal and relocation rate to expiring rate spread for the quarter was 15.3% above expiring rates on 41,000 square feet of renewals.

BUSINESS UPDATE

As at June 30, 2023, the Trust had $2.7 billion of total assets, $2.4 billion of investment properties and $1.3 billion of total debt.

During Q2 2023, the Trust executed leases totalling approximately 56,000 square feet across our portfolio. In Toronto downtown, the Trust executed 53,000 square feet of leases at a weighted average initial net rent of $34.62 per square foot, or 18.9% higher than the weighted average prior net rent per square foot on the same space, with a weighted average lease term of 3.2 years. In the Other markets region, comprising our properties located in Calgary, Saskatoon, Regina, Mississauga, Scarborough and the United States (“U.S.”), we executed leases totalling 3,000 square feet at a weighted average net rent of $27.74 per square foot, an increase of 9.8% from the weighted average prior net rent on the same space, with a weighted average lease term of 3.2 years. Subsequent to June 30, 2023, the Trust executed a further 53,000 square feet of leases in Toronto downtown at a weighted average initial net rent of $37.17 per square foot, or 54.8% higher than the weighted average prior net rent per square foot on the same space, with a weighted average lease term of 12.6 years. In addition, the Trust has a further 229,000 square foot of deals which are conditional or in advanced stages of negotiations at a weighted average initial net rent of $27.13 per square foot, or 11.8% higher than the weighted average prior net rent per square foot on the same space with a weighted average lease term of 5.4 years.

Since the beginning of the year to today’s date, the Trust has executed leases totalling approximately 294,000 square feet across our portfolio. In Toronto downtown, the Trust has executed 283,000 square feet of leases at a weighted average initial net rent of $33.04 per square foot, or 18.7% higher than the weighted average prior net rent per square foot on the same space, with a weighted average lease term of 6.4 years. In the Other markets region, the Trust has executed leases totalling 11,000 square feet at a weighted average initial net rent per square foot of $21.67, or 7.9% higher than the weighted average prior net rents on the same space, with a weighted average lease term of 2.7 years.

To date, the Trust has secured commitments for approximately 742,000 square feet, or 107%, of 2023 full-year natural lease expiries. In Toronto downtown, 14,000 square feet is currently being held intentionally vacant for retail repositioning and property improvement purposes.

Touring volume has been healthy and relatively in line with pre-COVID levels. However, the time to complete deals has stretched out as tenants take longer to make decisions. For leases completed over the course of the year, we continue to see strong net rents; however, leasing costs are elevated relative to historical norms as tenants are putting more emphasis on upgrading their workspace to attract employees back into the office as well as higher material and labour costs. Demand for built out space is increasing as tenants seek to minimize downtime and capital while maximizing flexibility. We have developed eight turnkey spaces totalling 37,000 square feet to meet this demand, of which five suites totalling 22,000 square feet have been leased. We are seeing strong interest from prospective tenants for the remaining three suites.

During Q2 2023, we successfully completed the launch of premium restaurant Daphne in the ground floor retail space at 67 Richmond Street West alongside our joint venture partner, INK Entertainment. Since the beginning of 2022, as part of our strategy to pursue premium retail offerings at our properties, we have completed 52,000 square feet of restaurant leases in the downtown core at weighted average initial net rents of $54.44 per square foot, or 24.8% higher than the weighted average prior net rents on the same space, escalating to an average net rent of approximately $70.00 per square foot over the terms of the leases with a weighted average lease term of 14.1 years. For certain restaurant leases, the Trust has revenue participation rights over and above the contractual net rents. These restaurants elevate our assets and bring vibrancy and traffic to our properties.

We remain committed to investing in our well-located real estate portfolio in downtown Toronto to distinguish our assets and attract unique tenants. During 2022, we took 366 Bay Street and 67 Richmond Street West in Toronto offline to fully revitalize the assets. The development projects at these properties comprise full modernizations of the properties, including technical systems, interior lighting and elevators, along with enhanced common areas and larger floorplates. At 366 Bay Street, we have spent $10.6 million over the course of the project, $7.9 million of which has been funded by our Canada Infrastructure Bank credit facility (the “CIB Facility”) which provides low-cost fixed-rate financing for commercial property retrofits to achieve certain energy efficiency savings and greenhouse gas emission reductions. At 67 Richmond Street West, we have spent $1.6 million on the project, $1.3 million of which has been funded by the CIB facility. The projects at 366 Bay Street and 67 Richmond Street West are expected to be completed and ready to lease in Q4 2023 and Q2 2024, respectively.

Subsequent to Q2 2023, we secured a commitment at 366 Bay Street for a lease for the entire building with a global financial institution that has been attracted by the location of the asset, as well as the successful completion of our redevelopment and decarbonization program at the building. The lease is expected to have a term of 15 years for approximately 40,000 square feet with initial net rents of $38.00 per square foot, escalating to $50.00 per square foot over the term of the lease. The full building fixturing and fitout is expected to commence in Q4 2023 on redevelopment project completion with lease commencement scheduled for Q4 2024.

Also during the quarter, we announced our 50/50 joint venture partnership with CentreCourt for the mixed-use development of Block 2 at 2200-2206 Eglinton Avenue East and 1020 Birchmount Road in Scarborough, Ontario. The development planning process for the project is underway and we are currently working through the next steps with our partner. The development is expected to consist of two towers comprising 651,000 square feet of gross floor area, which will contain approximately 1,000 residential units, 39 affordable housing units and 8,000 square feet of retail space.

On May 16, 2023, the Trust completed the sale of 12,500,000 Dream Industrial REIT units and used the proceeds to buy back 12,500,000 of its REIT A units under the SIB. The sale of Dream Industrial REIT units allowed the Trust to monetize a portion of its holdings and offer to unitholders the option to either access liquidity by selling at a premium to market trading price or increase their ownership in the Trust. We continue to opportunistically look to sell or partner on our existing assets to reduce leverage and increase the value of the business.

As at June 30, 2023, the Trust had approximately $204.5 million of available liquidity⁽⁷⁾, comprising $12.2 million of cash, undrawn revolving credit facilities totalling $93.8 million and undrawn amounts on our CIB Facility of $98.4 million. The Trust also had $17 million of unencumbered assets⁽⁸⁾ and a level of debt (net total debt-to-net total assets)⁽⁹⁾ of 48.3%.

During Q2 2023, the Trust drew $3.8 million against the CIB Facility. In total, we have drawn $14.4 million against the CIB Facility since 2022. These draws represent 80% of the costs to date for capital retrofits at 13 properties in Toronto downtown for projects to reduce the operational carbon emissions in these buildings by an estimated 3,241 tonnes of carbon dioxide (“CO₂”), or 57.5%, per year on project completion.

CAPITAL HIGHLIGHTS

KEY FINANCIAL PERFORMANCE METRICS				As at
(unaudited)		June 30,		December 31,
		2023		2022
Financing
Weighted average face rate of interest on debt (period-end)(10)		4.40%		4.42%
Interest coverage ratio (times)(11)		2.2		2.5
Net total debt-to-normalized adjusted EBITDAFV ratio (years)(12)		10.9		10.4
Level of debt (net total debt-to-net total assets)(9)		48.3%		44.6%
Average term to maturity on debt (years)		2.9		3.1
Undrawn credit facilities, available liquidity and unencumbered assets
Undrawn credit facilities (in millions)	$	192.3	$	163.5
Available liquidity (in millions)(7)		204.5		171.6
Unencumbered assets (in millions)(8)		17.1		115.7
Capital (period-end)
Total number of REIT A and LP B units (in millions)(13)		37.9		51.3
Net asset value (“NAV”) per unit(14)	$	34.71	$	31.36
See footnotes at end.

• NAV per unit⁽¹⁴⁾: As at June 30, 2023, our NAV per unit increased to $34.71 compared to $31.36 at December 31, 2022. The increase in NAV per unit relative to December 31, 2022 is driven by cash flow retention (FFO net of distributions) and the effect of accretive unit repurchases under our NCIB program and SIB, partially offset by fair value losses on investment properties in both regions due to cap rate expansions across several properties and the sale of 12,500,000 units of Dream Industrial REIT at a price below IFRS carrying value. As at June 30, 2023, equity per the condensed consolidated financial statements was $1.2 billion.
• Mortgage refinancing: During the second quarter of 2023, the Trust repaid in full a $25.9 million mortgage secured by a property in Regina by drawing on the $375 million revolving credit facility and pledged the property against that facility.
  
  Subsequent to quarter-end, the Trust secured a commitment from a lender to refinance a $116.1 million mortgage which matures during 2023. The new $141.8 million fixed-rate interest-only mortgage is for a term of seven years with pricing to be determined at close, based on the seven-year swap rate plus 2.15% or approximately 6.3% at current market rates. The new mortgage is expected to close during Q3 2023.

“Year to date, we have addressed $186.3 million of mortgage maturities for a weighted average term of 5.2 years,” said Jay Jiang, Chief Financial Officer of Dream Office REIT. “We have only $140 million of loans maturing from now until the end of 2024, of which approximately $67 million is maturing in the second half of 2023. We will continue to explore opportunities to reduce debt and make our business safer.”

INVESTOR DAY

In lieu of a conference call, on Wednesday, September 6, 2023, Dream Unlimited Corp., Dream Office REIT and Dream Impact Trust are welcoming investors for a joint investor session. The event will be hosted at our head office at 30 Adelaide Street East, Suite 301 at 10:00 am ET. This session will discuss each company’s net asset value, capital allocation strategy and business plan, to provide better insight into how we view and manage the businesses. To attend, please RSVP to Kim Lefever at [email protected].

OTHER INFORMATION

Information appearing in this press release is a selected summary of results. The condensed consolidated financial statements and Management’s Discussion and Analysis (“MD&A”) of the Trust are available at www.dreamofficereit.ca and on www.sedarplus.ca.

Dream Office REIT is an unincorporated, open-ended real estate investment trust. Dream Office REIT is a premier office landlord in downtown Toronto with over 3.5 million square feet owned and managed. We have carefully curated an investment portfolio of high-quality assets in irreplaceable locations in one of the finest office markets in the world. For more information, please visit our website at www.dreamofficereit.ca.

FOOTNOTES
(1)		Excludes properties held for sale and investments in joint ventures that are equity accounted at the end of each period.
(2)		Excludes properties under development, properties held for sale and joint ventures that are equity accounted at the end of each period.
(3)		Occupancy figures as at June 30, 2022 include the sold properties 720 Bay Street in Toronto and Princeton Tower in Saskatoon. Excluding these properties from June 30, 2022 figures, total portfolio in-place occupancy would have been 81.6% and in-place and committed occupancy would have been 85.3%. In Toronto downtown, in-place occupancy would have been 83.1% and in-place and committed occupancy would have been 87.9%.
(4)		FFO is a non-GAAP financial measure. The most directly comparable financial measure to FFO is net income. The tables included in the Appendices section of this press release reconcile FFO for the three months ended June 30, 2023 and June 30, 2022 to net income. For further information on this non-GAAP financial measure please refer to the statements under the heading “Non-GAAP Financial Measures, Ratios and Supplementary Financial Measures” in this press release.
(5)		Comparative properties NOI is a non-GAAP financial measure. The most directly comparable financial measure to comparative properties NOI is net rental income. The tables included in the Appendices section of this press release reconcile comparative properties NOI for the three months ended June 30, 2023 and June 30, 2022 to net rental income. For further information on this non-GAAP financial measure, please refer to the statements under the heading “Non-GAAP Financial Measures, Ratios and Supplementary Financial Measures” in this press release.
(6)		Diluted FFO per unit is a non-GAAP ratio. Diluted FFO per unit is calculated as FFO (a non-GAAP financial measure) divided by diluted weighted average number of units. For further information on this non-GAAP ratio, please refer to the statements under the heading “Non-GAAP Financial Measures, Ratios and Supplementary Financial Measures” in this press release. A description of the determination of the diluted weighted average number of units can be found in the management’s discussion and analysis of the financial condition and results of operations of the Trust for the three and six months ended June 30, 2023, dated August 3, 2023 (the “MD&A for the second quarter of 2023”) in the section “Supplementary Financial Measures and Other Disclosures” under the heading “Weighted average number of units”.
(7)		Available liquidity is a non-GAAP financial measure. The most directly comparable financial measure to available liquidity is undrawn credit facilities. The tables included in the Appendices section of this press release reconcile available liquidity to undrawn credit facilities as at June 30, 2023 and December 31, 2022. For further information on this non-GAAP financial measure please refer to the statements under the heading “Non-GAAP Financial Measures, Ratios and Supplementary Financial Measures” in this press release.
(8)		Unencumbered assets is a supplementary financial measure. For further information on this supplementary financial measure, please refer to the statements under the heading “Non-GAAP Financial Measures, Ratios and Supplementary Financial Measures” in this press release.
(9)		Level of debt (net total debt-to-net total assets) is a non-GAAP ratio. Net total debt-to-net total assets comprises net total debt (a non-GAAP financial measure) divided by net total assets (a non-GAAP financial measure). The tables in the Appendices section reconcile net total debt and net total assets to total debt and total assets, the most directly comparable financial measures to these non-GAAP financial measures, respectively, as at June 30, 2023 and December 31, 2022. For further information on this non-GAAP ratio and these non-GAAP financial measures, please refer to the statements under the heading “Non-GAAP Financial Measures, Ratios and Supplementary Financial Measures” in this press release.
(10)		Weighted average face rate of interest on debt is calculated as the weighted average face rate of all interest-bearing debt balances excluding debt in joint ventures that are equity accounted.
(11)		Interest coverage ratio (times) is a non-GAAP ratio. Interest coverage ratio comprises trailing 12-month adjusted EBITDAFV divided by trailing 12-month interest expense on debt.  Adjusted EBITDAFV, trailing 12-month adjusted EBITDAFV and trailing 12-month interest expense on debt are non-GAAP measures. The tables in the Appendices section reconcile adjusted EBITDAFV to net income for the three and six months ended June 30, 2023 and June 30, 2022  and for the year ended December 31, 2022 and trailing 12-month adjusted EBITDAFV and trailing 12-month interest expense on debt to adjusted EBITDAFV and interest expense on debt, respectively, for the trailing 12-month period ended June 30, 2023.  For further information on this  non-GAAP ratio and these non-GAAP financial measures, please refer to the statements under the heading “Non-GAAP Financial Measures and Ratios and Supplementary Financial Measures” in this press release.
(12)		Net total debt-to-normalized adjusted EBITDAFV ratio (years) is a non-GAAP ratio. Net total debt-to-normalized adjusted EBITDAFV comprises net total debt (a non-GAAP financial measure) divided by normalized adjusted EBITDAFV (a non-GAAP financial measure). Normalized adjusted EBITDAFV comprises adjusted EBITDAFV (a non-GAAP financial measure) adjusted for NOI from sold properties in the quarter. For further information on this non-GAAP ratio and these non-GAAP financial measures, please refer to the statements under the heading “Non-GAAP Financial Measures and Ratios and Supplementary Financial Measures” in this press release.
(13)		Total number of REIT A and LP B units includes 5.2 million LP B Units which are classified as a liability under IFRS.
(14)		NAV per unit is a non-GAAP ratio. NAV per unit is calculated as Total equity (including LP B Units) (a non-GAAP financial measure) divided by the total number of REIT A and LP B units outstanding as at the end of the period. Total equity (including LP B Units) is a non-GAAP measure. The most directly comparable financial measure to total equity (including LP B Units) is equity. The tables included in the Appendices section of this press release reconcile total equity (including LP B Units) to equity as at June 30, 2023 and December 31, 2022. For further information on this non-GAAP financial measure please refer to the statements under the heading “Non-GAAP Financial Measures, Ratios and Supplementary Financial Measures” in this press release.

Contacts

For further information:

Michael J. Cooper
Chairman and Chief Executive Officer

(416) 365-5145

[email protected]

Jay Jiang
Chief Financial Officer

(416) 365-6638

[email protected]

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