Dream Office REIT Reports Q2 2022 Results

DREAM OFFICE REAL ESTATE INVESTMENT TRUST (D.UN-TSX) or (“Dream Office REIT”, the “Trust” or “we”) today announced its financial results for the three and six months ended June 30, 2022 and provided a business update. Management will host a conference call to discuss the financial results on August 5, 2022 at 10:00 a.m. (ET).

OPERATIONAL HIGHLIGHTS

See footnotes at end.

See footnotes at end.

“Despite recent uncertainties with cost inflations and rising interest rates, we believe Dream Office REIT is well positioned to manage these economic challenges and deliver great long-term value to its unitholders,” said Michael Cooper, Chief Executive Officer of Dream Office REIT.

• Net income for the quarter: For the three months ended June 30, 2022, the Trust generated net income of $65.9 million. Included in net income for the quarter are net rental income totalling $26.2 million, share of net income from investment in Dream Industrial REIT totalling $9.6 million and positive fair value adjustments to financial instruments totalling $52.4 million, primarily due to the revaluation of the subsidiary redeemable units as a result of a decrease in the Trust’s unit price, partially offset by negative fair value adjustments to investment properties totalling $5.8 million due to maintenance capital spent but not capitalized.

• Diluted FFO per unit⁽⁵⁾ for the quarter: For the three months ended June 30, 2022, diluted FFO per unit was flat relative to Q2 2021 at $0.38 per unit as net rental income from our completed development at Co-operators Place in Regina (+$0.02), the accretive effect of repurchases under the Normal Course Issuer Bid (“NCIB”) program in the current and prior year (+$0.02) and higher FFO from our investment in Dream Industrial REIT (+$0.01) were offset by lower net rental income (-$0.04) and higher interest expense (-$0.01).

• Net rental income for the quarter: Net rental income for the three months ended June 30, 2022, decreased by $0.8 million relative to the prior year comparative quarter primarily due to lower weighted average occupancy in Toronto downtown and lower rents on renewals and new leases in the regions that we collectively refer to as Other markets, comprising our properties located in Calgary, Saskatchewan, Mississauga, Scarborough and the United States. Partially offsetting the year-over-year decrease were net rental income from our completed property under development at Co-operators Place in Regina, higher net rents on renewals and new leasing in Toronto downtown and higher parking revenues.

• Comparative properties NOI⁽⁴⁾ for the quarter: For the three months ended June 30, 2022, comparative properties NOI decreased by 5.0%, or $1.4 million, over the prior year comparative quarter, primarily driven by declines in weighted average occupancy in Toronto downtown and lower in-place rents in the Other markets region. Partially offsetting the declines were rent steps and higher rates on renewals and new leases in Toronto downtown, higher weighted average occupancy in the Other markets region and higher parking revenues of $0.6 million across the portfolio.

We are actively managing our assets in the Toronto downtown region, which represent 82% of our active portfolio investment property fair values, to improve the quality of the buildings and to continue to improve rental rates in this market. For our assets in the Other markets region, which make up the remaining 18% of our total portfolio investment properties fair value, we are repositioning these assets to improve occupancy and liquidity in the private market.

• In-place occupancy: Total portfolio in-place occupancy on a quarter-over-quarter basis was 81.6% substantially flat when compared to Q1 2022. In Toronto downtown, 57,000 square feet of expiries and 18,000 square feet of early terminations were substantially offset by 39,000 square feet of renewals and 29,000 square feet of new lease commencements. At 67 Richmond Street West in Toronto, a tenant vacated 39,000 square feet during the quarter as a result of a termination agreement negotiated during 2021. The Trust has taken the building offline to commence a full building retrofit to transform the property to a best-in-class boutique office building.

In the Other markets region, 20,000 square feet of new lease commencements and 11,000 square feet of renewals were partially offset by 19,000 square feet of expiries.

Total portfolio in-place occupancy on a year-over-year basis decreased from 83.9% at Q2 2021 to 81.6% this quarter due to net negative absorption in Toronto downtown partially offset by the reclassification of Co-operators Place to active properties in Q3 2021 on development completion and net positive absorption in the Other markets region.

• Lease commencements for the quarter: For the three months ended June 30, 2022, 68,000 square feet of leases commenced in Toronto downtown at $33.18 per square foot, or 23.8% higher than the previous rent in the same space. In the Other markets region, 30,000 square feet of leases commenced at $11.91 per square foot or 4.9% lower than the previous rents in the same space as rental rates on new leasing rolled down to market rates.

The renewal and relocation rate to expiring rate spread for the quarter was 3.6% above expiring rates on 50,000 square feet of renewals.

BUSINESS UPDATE

As at June 30, 2022, the Trust had $3.1 billion of total assets, $2.6 billion of investment properties and $1.3 billion of total debt. To date the Trust has collected 98.7% of Q2 2022 recurring contractual gross rent, in line with collections in previous quarters. In-place and committed occupancy was flat compared to March 31, 2022, at 85.0%. Approximately 2% of the Trust’s total portfolio is currently sublet, with a weighted average in-place net rent of just over $26 per square foot.

During Q2 2022, the Trust executed leases totalling approximately 155,000 square feet across our portfolio. In Toronto downtown, the Trust executed 136,000 square feet of leases at a weighted average initial net rent of $36.92 per square foot, or 47.6% higher than the weighted average prior net rent per square foot on the same space, with a weighted average lease term of 4.8 years. In the Other markets region, we executed leases totalling 19,000 square feet at a weighted average net rent of $13.19 per square foot, an increase of 7.7% from the weighted average prior net rent on the same space, with a weighted average lease term of 2.7 years.

Since the beginning of the year to today’s date, we have executed leases totalling approximately 343,000 square feet across our portfolio. In Toronto downtown, the Trust executed 295,000 square feet of leases, 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 241,000 square feet of leases were at a weighted average initial net rent of $36.45 per square foot, or 34.9% higher than the weighted average prior net rent per square foot on the same space, with a weighted average lease term of 6.2 years. In the Other markets region, we executed leases totalling 48,000 square feet at a weighted average initial net rent per square foot of $16.87, or 2.9% higher than the weighted average prior net rents on the same space, with a weighted average lease term of 5.3 years.

To date, the Trust has secured commitments for approximately 724,000 square feet, or 90% of 2022 full-year natural lease expiries. In Toronto downtown, 50,000 square feet, or approximately 1.5% of the region’s gross leaseable area, was being held intentionally vacant for retail repositioning and property improvement purposes as at June 30, 2022.

We remain committed to investing in our well-located real estate portfolio in downtown Toronto to distinguish our assets and attract unique tenants. Despite supply chain and labour constraints in the construction industry, we are on target to finish the Bay Street revitalization redevelopment project in 2022 within the initial budget. Currently, the Trust has substantially completed the interior renovation work, and façade improvements and the alley revitalization project are scheduled to be finished this year. As a result of these improvements, the Trust has currently completed or is in an advanced state of negotiations with two high end restaurants totalling 26,000 square feet in downtown Toronto, representing 13,000 square feet of the space held intentionally vacant. We are also in advanced negotiations with an additional high end restaurant prospect for 6,000 square feet at one of our properties under development. We believe these restaurants will further enhance our properties and help attract tenants and visitors to our buildings.

Since 2020, our successful redevelopment program has completed two other projects on time and on budget that have significantly increased the value of the assets and delivered significant incremental income to the Trust. 357 Bay Street in Toronto downtown was completed in Q4 2020 and in Q2 2022 contributed $3.2 million of annualized comparative properties NOI⁽⁴⁾. Co-operators Place in Regina, Saskatchewan was completed in Q2 2021 and in Q2 2022 contributed $5.5 million of annualized comparative properties NOI⁽⁴⁾. We previously took 366 Bay Street in Toronto offline to fully revitalize the asset and during Q2 2022 a termination negotiated during 2021 at 67 Richmond Street West in Toronto presented an opportunity to undertake a similar project at that property.

At 67 Richmond Street West and 366 Bay Street, the development projects comprise full modernizations of the properties, including technical systems, interior lighting and elevators, along with enhanced common areas and larger floorplates. The Trust is targeting certain building and project certifications as part of the development projects. A portion of the development costs for these buildings will satisfy the terms of the Canada Infrastructure Bank credit facility, allowing the Trust to access low-cost fixed-rate financing for the developments.

As at June 30, 2022, the Trust had approximately $258 million of available liquidity⁽⁶⁾, comprising $10.2 million of cash, undrawn revolving credit facilities totalling $135.1 million and $112.9 million of availability on our Canada Infrastructure Bank credit facility which offers low-cost fixed-rate financing for commercial property retrofits to achieve certain energy efficiency savings and greenhouse gas emission reductions. The Trust also had $137 million of unencumbered assets⁽⁷⁾ and a level of debt (net total debt-to-net total assets)⁽⁸⁾ of 42.3%.

Rising input costs and interest rates, supply chain disruptions, uncertainty about future economic trends, the impact of geopolitical conflicts and residual effects of the COVID-19 pandemic have made it difficult for our current and prospective tenants to plan for the future. The full impact that these disruptions will have on the market for office space in the near term and the wider economy in general is unclear and difficult to predict. However, we believe that there will continue to be demand for high-quality and well-located office space in urban markets in Canada, especially in Toronto. The Trust has ample financial resources to absorb near-term operational challenges and a program to drive value in the business through capital improvements and redevelopments to deliver best-in-class boutique office space to our tenants.

In May 2022 the Trust was awarded a Platinum Level award by the Green Lease Leader program during the Better Buildings, Better Plants Summit by the Institute for Market Transformation and the U.S. Department of Energy’s Better Buildings Alliance. Building on the Trust’s 2021 Gold Level recognition, this year the Trust achieved Platinum Level recognition for integrating ambitious building energy reduction goals with social impact goals. To receive this recognition, the Trust qualified for credits in energy efficiency and sustainability best practices such as utility data tracking and sharing, cost recovery for capital improvements, building resilience and sustainability training. This is the first year that the Platinum Level award was implemented, and the Trust is one of the few applicants to achieve the highest level of recognition.

Our stake in Dream Industrial REIT continues to provide a meaningful contribution to our FFO. Over the past two years, Dream Industrial REIT has transformed into a global REIT that owns a high-quality logistics portfolio located in some of the most attractive industrial markets across North America and Europe. Monthly distributions from Dream Industrial REIT provide steady, predictable cash flow to the Trust at a time of uncertainty.

CAPITAL HIGHLIGHTS

See footnotes at end.

• NAV per unit⁽¹³⁾: As at June 30, 2022, our NAV per unit increased to $32.83 when compared to $31.49 at December 31, 2021. The increase in NAV per unit relative to December 31, 2021 was primarily due to cash flow retention (FFO net of distributions), fair value gains on investment properties in Toronto downtown for four properties valued by qualified external valuation professionals in Q1 2022 and favourable leasing activity at certain properties, incremental income from our investment in Dream Industrial REIT and the effect of accretive unit repurchases under our NCIB program during the period. As at June 30, 2022, equity per the condensed consolidated financial statements was $1.6 billion.
• Investment property disposition: As of August 3, 2022, the Trust is in negotiations with a potential buyer to sell a property located in Saskatoon for a gross purchase price of $14.0 million.
• Mortgage refinancing: On July 27, 2022, the Trust refinanced a $59.9 million mortgage secured by an investment property in Mississauga. The refinanced mortgage totals $64.9 million and bears variable interest at the Bankers’ Acceptance rate plus 1.55%. The Trust has fixed the interest rate on half the principal at a rate of 4.912%.

“In an uncertain economic environment, our focus is to keep our company safe, allocate capital prudently and invest smartly in our assets to increase value, attract tenants and earn an appropriate return on capital invested,” said Jay Jiang, Chief Financial Officer of Dream Office REIT.

CONFERENCE CALL

Management will host a conference call to discuss the financial results tomorrow, August 5, 2022, at 10:00 a.m. (ET). To access the conference call, please dial 1-866-455-3403 in Canada or 647-484-8332 elsewhere and use passcode 3565 5061#. To access the conference call via webcast, please go to Dream Office REIT’s website at www.dreamofficereit.ca and click on the link for News, then click on Events. A taped replay of the conference call and the webcast will be archived for 90 days.

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.sedar.com.

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 joint ventures that are equity accounted at the end of each period.
2. Excludes properties under development and joint ventures that are equity accounted at the end of each period.
3. 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, 2022 and June 30, 2021 to net income. For further information on this non-GAAP measure please refer to the statements under the heading “Non-GAAP Financial Measures, Ratios and Supplementary Financial Measures” in this press release.
4. 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, 2022 and June 30, 2021 to net rental income. For further information on this non-GAAP measure please refer to the statements under the heading “Non-GAAP Financial Measures, Ratios and Supplementary Financial Measures” in this press release.
5. Diluted FFO per unit is a non-GAAP ratio. Diluted FFO per unit is calculated as FFO (a non-GAAP financial measure) divided by 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 weighted average number of units can be found in the Trust’s Management’s Discussion and Analysis for the three and six months ended June 30, 2022 in the section “Supplementary Financial Measures and Other Disclosures” under the heading “Weighted average number of units”.
6. 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, 2022 and December 31, 2021. 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.
7. 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.
8. 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, respectively, as at June 30, 2022 and December 31, 2021. 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.
9. 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.
10. 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, 2022 and June 30, 2021 and for the year ended December 31, 2021 and trailing 12-month adjusted EBITDAFV and trailing 12-month interest expense to adjusted EBITDAFV and interest expense, respectively, for the trailing 12-month period ended June 30, 2022. For further information on this non-GAAP ratio, please refer to the statements under the heading “Non-GAAP Financial Measures and Ratios and Supplementary Financial Measures” in this press release.
11. 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 measure) adjusted for NOI from sold properties in the quarter. For further information on this non-GAAP ratio, please refer to the statements under the heading “Non-GAAP Financial Measures and Ratios and Supplementary Financial Measures” in this press release.
12. Total number of REIT A and LP B units includes 5.2 million LP B Units which are classified as a liability under IFRS.
13. NAV per unit is a non-GAAP ratio. NAV per unit is calculated as Total equity (including LP B Units) 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, 2022 and December 31, 2021. For further information on this non-GAAP measure please refer to the statements under the heading “Non-GAAP Financial Measures, Ratios and Supplementary Financial Measures” in this press release.

NON-GAAP FINANCIAL MEASURES, RATIOS AND SUPPLEMENTARY FINANCIAL MEASURES

The Trust’s condensed consolidated financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”). In this press release, as a complement to results provided in accordance with IFRS, the Trust discloses and discusses certain non-GAAP financial measures, including FFO, comparative properties NOI, available liquidity, adjusted EBITDAFV, trailing 12-month adjusted EBITDAFV and trailing 12-month interest expense on debt, and total equity (including LP B Units or subsidiary redeemable units) and non-GAAP ratios, including diluted FFO per unit, level of debt (net total debt-to-net total assets), interest coverage ratio, net total debt-to-normalized adjusted EBITDAFV and NAV per unit, as well as other measures discussed elsewhere in this release. These non-GAAP measures and ratios are not standardized financial measures under IFRS and might not be comparable to similar financial measures disclosed by other issuers. The Trust has presented such non-GAAP measures and non-GAAP ratios as Management believes they are relevant measures of the Trust’s underlying operating and financial performance. Certain additional disclosures such as the composition, usefulness and changes, as applicable, of the non-GAAP financial measures and ratios included in this press release have been incorporated by reference from the management’s discussion and analysis of the financial condition and results from operations of the Trust for the three and six months ended June 30, 2022, dated August 4, 2022 (the “MD&A for the second quarter of 2022”) and can be found under the section “Non-GAAP Financial Measures and Ratios" and respective sub-headings labelled “Funds from operations and diluted FFO per unit”, "Comparative properties NOI”, “Level of debt (net total debt-to-net total assets)”, “Net total debt-to-normalized adjusted EBITDAFV ratio (years)”, “Interest coverage ratio (times)”, “Available liquidity”, and “NAV per Unit”. The composition of supplementary financial measures included in this press release have been incorporated by reference from the MD&A for the second quarter of 2022 and can be found under the section “Supplementary financial measures and ratios and other disclosures”. The MD&A for the second quarter of 2022 is available on SEDAR at www.sedar.com under the Trust’s profile and on the Trust’s website at www.dreamofficereit.ca under the Investors section. Non-GAAP measures should not be considered as alternatives to net income, net rental income, cash flows generated from (utilized in) operating activities, cash and cash equivalents, total assets, non-current debt, total equity, or comparable metrics determined in accordance with IFRS as indicators of the Trust’s performance, liquidity, leverage, cash flow, and profitability. Reconciliations to the nearest comparable financial measure are contained at the end of this press release.

FORWARD-LOOKING INFORMATION

This press release may contain forward-looking information within the meaning of applicable securities legislation, including, but not limited to, statements regarding our objectives and strategies to achieve those objectives; our expectation that the Trust is well positioned to manage inflation and rising interest rates while delivering long-term value to unitholders; our ability to increase the desirability, occupancy and liquidity of our buildings; our plans to improve rental rates in the Toronto downtown region, and to reposition our assets in the Other markets region to improve occupancy and liquidity; the effect of building improvements on tenant experience and building quality and performance; our expectations regarding future demand for office space in urban markets in Canada; our ability to achieve building and project certifications; our development, redevelopment and intensification plans and timelines, our commitment to invest in our downtown Toronto portfolio and retrofit our properties in the Bay Street corridor, and the effect of these plans on the value and quality of our portfolio; our future capital requirements and cost to complete development projects, including expectations that projects will remain on budget; the expectation that development costs for certain projects will satisfy the terms of the Canada Infrastructure Bank credit facility, allowing access to low-cost fixed-rate financing for such projects; our asset management strategies, including in respect of capital allocation and investments, and prospective leasing activity and our overall financial performance, profitability and liquidity for future periods and years. Forward-looking statements generally can be identified by words such as “outlook”, “objective”, “may”, “will”, “would”, “expect”, “intend”, “estimate”, “anticipate”, “believe”, “should”, “could”, “likely”, “plan”, “project”, “budget”, or “continue” or similar expressions suggesting future outcomes or events. 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, which could cause actual results to differ materially from those that are disclosed in or implied by such forward-looking information. These risks and uncertainties include, but are not limited to, general and local economic and business conditions, including in respect of real estate; mortgage and interest rates and regulations; inflation; the uncertainties around the availability, timing and amount of future equity and debt financings; development risks including construction costs, the project timings and the availability of labour; NOI from development properties on completion; the impact of the COVID-19 pandemic on the Trust; the effect of government restrictions on leasing and building traffic; employment levels; mortgage and interest rates and regulations; the uncertainties around the timing and amount of future financings; leasing risks, including those associated with the ability to lease vacant space; rental rates on future leasing; and interest and currency rate fluctuations. Our objectives and forward-looking statements are based on certain assumptions, which include but are not limited to: that the general economy remains stable, our interest costs will be relatively low and stable, that we will have the ability to refinance our debts as they mature, inflation will remain relatively low, conditions within the real estate market remain consistent, our future projects and plans will proceed as anticipated, that government restrictions due to COVID-19 on the ability of us and our tenants to operate their businesses at our properties will continue to ease and will not be re-imposed in any material respects, competition for acquisitions remains consistent with the current climate, and that the capital markets continue to provide ready access to equity and/or debt to fund our future projects and plans. All forward-looking information in this press release speaks as of the date of this press release. Dream Office REIT does not undertake to update any such forward-looking information whether as a result of new information, future events or otherwise except as required by law. 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 at Dream Office REIT’s website at www.dreamofficereit.ca.

APPENDICES

Funds from operations and diluted FFO per unit

1. Includes both continuing and discontinued operations.
2. Diluted weighted average number of units includes the weighted average of all REIT A Units, LP B Units, vested but unissued and unvested deferred trust units and associated income deferred trust units.

Comparative properties NOI

Adjusted EBITDAFV

1. Includes adjustments for straight-line rent and amortization of lease incentives.
2. Includes both continuing and discontinued operations.

Trailing 12-month Adjusted EBITDAFV and trailing 12-month interest expense on debt

Interest coverage ratio (times)

Level of debt (net total debt-to-net total assets)

Available liquidity

Net total debt-to-normalized adjusted EBITDAFV ratio (years)

1. Cash on hand represents cash on hand at period-end, excluding cash held in co-owned properties and joint ventures that are equity accounted.

NAV per unit

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Michael J. Cooper
Chairman and Chief Executive Officer
(416) 365-5145
[email protected]

Jay Jiang
Chief Financial Officer
(416) 365-6638
[email protected]