U.S. Markets open in 5 hrs 28 mins

Edited Transcript of D.UN.TO earnings conference call or presentation 9-Aug-19 2:00pm GMT

Q2 2019 Dream Office Real Estate Investment Trust Earnings Call

Toronto Aug 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Dream Office Real Estate Investment Trust earnings conference call or presentation Friday, August 9, 2019 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Jay Jiang

Dream Office Real Estate Investment Trust - CFO

* Michael J. Cooper

Dream Office Real Estate Investment Trust - Chairman & CEO

================================================================================

Conference Call Participants

================================================================================

* Jenny Ma

BMO Capital Markets Equity Research - Analyst

* Mark Rothschild

Canaccord Genuity Corp., Research Division - MD & Real Estate Analyst

* Matt Kornack

National Bank Financial, Inc., Research Division - Analyst

* Sam Damiani

TD Securities Equity Research - Analyst

* Zan Zhang

CIBC Capital Markets, Research Division - Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, ladies and gentlemen. Welcome to the Dream Office REIT Second Quarter 2019 Conference Call for Friday, August 9, 2019.

During this call, management of Dream Office REIT may make statements containing forward-looking information within the meaning of applicable securities legislation. Forward-looking information is based on a number of assumptions and is subject to a number of risks and uncertainties, many of which are beyond Dream Office REIT's control that could cause actual results to differ materially from those that are disclosed in or implied by such forward-looking information.

Additional information about these assumptions and risks and uncertainties is contained in Dream Office REIT's filings with securities regulators, including its latest annual information form and MD&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. (Operator Instructions)

Your host for today will be Mr. Michael Cooper, CEO of Dream Office REIT. Mr. Cooper, please go ahead.

--------------------------------------------------------------------------------

Michael J. Cooper, Dream Office Real Estate Investment Trust - Chairman & CEO [2]

--------------------------------------------------------------------------------

Thank you very much, Paulette. Good morning, everyone, and welcome to Dream's conference call. I'm here today with Jay Jiang, the Chief Financial Officer of Dream Office. I think it's been a busy week for most of the listeners, so we're going to provide a pretty basic summary, and then we'll be happy to answer your questions.

Jay, do you want to start with your report?

--------------------------------------------------------------------------------

Jay Jiang, Dream Office Real Estate Investment Trust - CFO [3]

--------------------------------------------------------------------------------

Sure, Michael. Good morning. In the second quarter, we reported FFO of $0.44 per unit. Relative to the last quarter of $0.43, the increase of $0.01 per unit was mainly attributed to higher comparative properties NOI of $1 million offset by a reduction of nonrecurring income. Relative to the same quarter and prior year of $0.40 per unit, the increase of $0.04 was driven by occupancy and rental increases in downtown Toronto, including the 191,000 square feet lease that commenced at 438 University; reductions in G&A, offset by a loss of NOI from assets sold since the prior year.

Comparative properties NOI was up 9.9% in the second quarter driven by an 18.8% increase in downtown Toronto, relatively flat in the Greater Toronto area and a decrease of 9.8% in our other markets, mainly due to leasing challenges in Saskatchewan and Calgary.

In downtown Toronto, 2019 is 91% committed at rents that will commence at an average of 12% higher than expiring. Note that these leases were signed in prior periods and that the market rent has continued to increase. In 2020 and 2021, we will have about 600,000 square feet of expiries in downtown Toronto that is currently uncommitted at average expiring rent of $24 per square foot, and we think the market rent today for such space is around $30 less.

Assuming no further growth to market rents, we will likely be able to realize a 25% or higher increase on new leases. Given that downtown Toronto is expected to be about 80% of our portfolio by fair value this quarter, we remain optimistic that we will have strong organic growth for the foreseeable future.

We reported net asset value per unit of $25.49 or $0.39 higher than last quarter driven by net fair value increase in the portfolio from higher rents, retained earnings from operations and increase in value from our ownership of Dream Industrial REIT units.

Our leverage was 45.4% at the end of Q2 with $351 million of available liquidity. Year-over-year ending June 30, we will have increased FFO per unit by 10.9% and site total net asset value and distribution return of 10.6% while reducing leverage by 270 basis points.

Subsequent to quarter end, we have closed the previously announced disposition of 700 De La Gauchetière in Montréal and have a firm contract on the sale of 150 Metcalfe in Ottawa. We expect to net over $180 million in aggregate after repaying mortgages and transaction costs. We intend to use the proceeds to pay off our line, fund capital projects, repurchase units and potentially acquire properties in downtown Toronto.

We have also completed our financing initiatives for the year by closing on 4 mortgages totaling just under $300 million with a weighted average term of 9 years and an average interest rate of 3.6%. We extended our $435 million credit facility to 2022. We have reduced our variable rate debt exposure from over 26% at the beginning of the year to 7% today. And now we have approximately $0.5 billion in liquidity.

With everything that has happened in the first 6 months, we are now updating our guidance for the remainder of 2019. We expect to end the year with the leverage at or around 40%, which was a level that we are comfortable with to manage our business in the near to medium term. Assuming no further transactions, our FFO per unit for the second half of 2019 should be approximately $0.42 each quarter. We expect that the loss of income from the sale of Montréal and Ottawa of just under $5 million per quarter to be offset by higher comparative properties NOI of 10% for the year on our entire portfolio and lower interest expense from lower debt.

For the rest of the year and through 2020, we will mainly focus on development and value-add projects already identified as a Dream collection on Bay Street. The planning and design are substantially complete, and construction work will commence this fall. We expect to be done by the end of 2020.

As previously mentioned, we will have approximately $0.5 billion of available liquidity to fund these projects and other opportunities to improve our core assets in downtown Toronto. We will also have ample flexibility to pursue investment opportunities to complement our existing portfolio when they become available. We remain open-minded to recycling capital outside of downtown Toronto where it makes economic sense and may continue to repurchase units so that our growth in FFO and value will have a more meaningful impact on a per unit basis.

I will now turn it back to Michael.

--------------------------------------------------------------------------------

Michael J. Cooper, Dream Office Real Estate Investment Trust - Chairman & CEO [4]

--------------------------------------------------------------------------------

Thank you, Jay. We made some major changes to the company with so much of our value and income coming to downtown Toronto. We're very positive in the market, and I think we're also focused on how do we get the most out of every building. We're down to 21 buildings in downtown Toronto, and we have plans for every one of them, and we see incredible opportunities to make them more valuable.

We started work on the Dream collection on Bay Street, and we're excited for people to see what we're doing. And then we're going to spread that work around the remaining buildings and continue to make our buildings more valuable. I think we're really looking to add 22 landmark buildings in downtown Toronto.

We've -- we're very close to closing on 2 acquisitions, both of which are small assets that we think have a strategic value for our business in addition to being at numbers that we think will work. So the second of the 2, we hope to just close soon, but we don't have any space. It has a 1.5 -- the average lease term was 1.5 years, and we've got an asset plan done. And as soon as that's firmed up and ready to close, we will be approaching tenants that we're otherwise unable to accommodate and show them what we're going to do with the building. And I think we're going to have a very special asset.

It's been a while since we bought new buildings. We've been quite experienced in selling buildings. I think we sold over 140 buildings in the last couple of years. I thought it was a couple of years since we bought a building. Jay told me that it's been 6 years since we last bought a building. So I would say that's a pretty big change in our outlook and recycling of capital for the business.

We sold 700 DLG, and the 150 Metcalfe is getting close. We've got 2 buildings in Calgary. One of them is our head office, our land and housing business. That's a future development site. It's in a great part of town, and we're very bullish on it. The other one is Barclay Square, which is a great location. It was among the best assets we had in downtown Calgary. It's quite well leased, but we kind of have uncertainties whether that's an asset we will keep or not in Saskatchewan. Andrew Reial has done a great job with our assets in Regina. They've got long-term leases. We're just finishing up some construction to get them ready, and we're going to look to sell those. We've got 3 buildings in Saskatoon. One is quite stabilized. We're not too fussed about it. We've got 2 downtown that need some attention. And there's London City Centre, and that's basically everything other than Toronto. So it's getting to be a very, very focused portfolio, and we're happy with the balance sheet. And we will probably look to continue to grow in downtown Toronto.

It's probably been about 6 or 7 buildings that have sold over the last 5 years that would've been of interest to us. So when we say we're interested in building downtown Toronto, it's not like there is anything we can do at any given time. But when the time comes, we'll be very focused on it.

So we're pleased with the business. The government of Ontario renewed their lease at 720 Bay, which is one of our 4 buildings in the health district. That means they'll be in the building until the end of 2025. That building is directly behind Toronto General. It's amazing what's happening in the hospitals, amount of capital that's being spent. We're happy to have that building available at the end of 2025 to develop. We'll probably start working on a redevelopment plan for it way before that, but we intend to have the federal -- the provincial government in that building now. And that's something we're seeing. We're seeing a lot of activity with the governments, and we're trying to line up really solid income, develop a couple of buildings, and then we'll get to the next round. So we're happy with that.

If there's anything I wasn't concentrated on my comments today, I just want to mention a little bit about our proptech investment in Alate. Alate made -- or committed to make about 6 investments. The first one is an app that our property management team identified very early in the beginning of that company. We liked it a lot, and we've invested some money in that. And then we just had a second round. That company now has 70 million square feet of office space on their app, and it's being used by some of the best real estate firms globally, and we think that could be a real win. We've got investment in a parking app that's really interesting. It's when you make a reservation for dinner, you can arrange parking, you can make -- and book your parking. There's an interesting one where it's office furniture that you can resell back to the manufacturer, and it's very, very easy to get an office furnished and make changes. I think that's -- we think that one's pretty exciting.

We did invest with our partner, Relay, in Bird, the scooter company, and we invested a little bit of money in that. That one was pretty interesting. But what was really interesting about that one is we secured the rights to run Bird -- to own Bird Scooter in Canada. So we brought an operating partner. It's 50-50. Our share -- in 3 months, the share of that business is now 7.5%. And in the last 2 weeks, we've launched in Calgary. So if you're in Calgary and you want to ride a scooter, there's a good chance that's an asset at Dream offices. And we're working very close with all the different legislatures, both provincial and city, because we've got to get to -- change their laws to allow scooters, but we think it's going to happen very quickly. So that's maybe something people haven't been thinking about.

That's pretty much my comments. And Paulette, Jay and I would be quite content to answer questions. So please?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And our first question comes from Mark Rothschild from Canaccord Genuity.

--------------------------------------------------------------------------------

Mark Rothschild, Canaccord Genuity Corp., Research Division - MD & Real Estate Analyst [2]

--------------------------------------------------------------------------------

In regard to the Toronto acquisitions, is it possible just to give us a little more color on what the potential total investment is in these properties? And also should we look at these as properties that are not necessarily going to be materially near-term accretive or accretive at all and more long-term development or redevelopment opportunities? [If there is more you need to say.]

--------------------------------------------------------------------------------

Michael J. Cooper, Dream Office Real Estate Investment Trust - Chairman & CEO [3]

--------------------------------------------------------------------------------

I'd say we're probably looking at somewhere around maybe $60 million in total. I think they'll be net asset value accretive, for sure. I'm not sure how long it'll take. They are income properties, not development properties.

--------------------------------------------------------------------------------

Mark Rothschild, Canaccord Genuity Corp., Research Division - MD & Real Estate Analyst [4]

--------------------------------------------------------------------------------

Okay. Great. And then for the Toronto office market, obviously you're having some good [rents]. I want to go with the outlook looks good. What type of occupancy pickup can we expect to see? And how strong is the market for some of the smaller space that you might have over the next year?

--------------------------------------------------------------------------------

Jay Jiang, Dream Office Real Estate Investment Trust - CFO [5]

--------------------------------------------------------------------------------

Okay. I can answer that. So we had a build space taken back in downtown Toronto. Actually, some of it we're holding back. We call them strategic vacates, especially if it's on the retail side. We thought that it would make sense to have contiguous spacing along the street side front. And -- but over the course -- I would say, the rest of the year into 2020, I would expect occupancy to be relatively flat. As things come up, we'll bring it back to some capital and then we'll try to get higher rents. So you'll see increases in NOI, but occupancy should be relatively stable.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

Our next question comes from Sam Damiani from TD Securities.

--------------------------------------------------------------------------------

Sam Damiani, TD Securities Equity Research - Analyst [7]

--------------------------------------------------------------------------------

Just on those 2 acquisitions. What is it about these 2 that you liked perhaps that you may not have liked about some other properties that have traded in the market over the last couple of years?

--------------------------------------------------------------------------------

Michael J. Cooper, Dream Office Real Estate Investment Trust - Chairman & CEO [8]

--------------------------------------------------------------------------------

Oh, actually, that's a really interesting question because I don't think it's the right question. The Bank of Canada building traded a few years ago at a 3.8% cap, and I don't even like to go down University anymore. We weren't in a position to buy it then. So I don't think the question is what did we like about these buildings that we didn't like about others. There's been so few available that now we're in a position that when a special building comes up, we're comfortable buying it. So -- I mean that's the big change, not that these buildings are more special than something like the Bank of Canada building. I would say that both these buildings are within 100 feet of other assets we own, and they actually both had a lot of vacancy. One of those that -- it's very, very small, but I think we've re-leased the whole building during due diligence.

--------------------------------------------------------------------------------

Sam Damiani, TD Securities Equity Research - Analyst [9]

--------------------------------------------------------------------------------

So that sort of ties into -- sorry. Go ahead.

--------------------------------------------------------------------------------

Michael J. Cooper, Dream Office Real Estate Investment Trust - Chairman & CEO [10]

--------------------------------------------------------------------------------

Go ahead.

--------------------------------------------------------------------------------

Sam Damiani, TD Securities Equity Research - Analyst [11]

--------------------------------------------------------------------------------

No. I was just going to say that sort of ties into my next question, which is how big is this opportunity set for you, for the REIT now to grow in downtown Toronto in this type of asset?

--------------------------------------------------------------------------------

Michael J. Cooper, Dream Office Real Estate Investment Trust - Chairman & CEO [12]

--------------------------------------------------------------------------------

I would say that it's very, very small. And we're probably looking at maybe -- by the way, look, if you take a look at the transactions that happened in downtown Toronto in the financial core, we were part of the 3 just to do with Scotia Plaza. Cadillac Fairview sold 30% of their building to OPTrust, I think. 70 York is traded. It's on leased land. That's not that interesting. I think 140 -- 55 University is a kind of building we might have been interested in at the time, but we weren't ready. There's a small building, they have 141 Adelaide that traded, but they just aren't buildings to trade.

--------------------------------------------------------------------------------

Sam Damiani, TD Securities Equity Research - Analyst [13]

--------------------------------------------------------------------------------

Okay. That's helpful. And then -- so 40% leveraged today. Is that -- and you said sort of that's where you'll be sort of near term, but is that where you see running the REIT long term?

--------------------------------------------------------------------------------

Jay Jiang, Dream Office Real Estate Investment Trust - CFO [14]

--------------------------------------------------------------------------------

Yes. I think for the foreseeable future, we guided to 40% leverage, I think 8x debt to EBITDA and 3x interest coverage. And that was end of the year and at the AGM. I think we got there quite quickly because of the 700 De La Gauchetière. If anything, we would have eclipsed it. But I think that puts us in a good position going into next year to work on the redevelopment, the capital projects. And it sets up reasonably well for development in the future. So we're pretty happy here.

--------------------------------------------------------------------------------

Michael J. Cooper, Dream Office Real Estate Investment Trust - Chairman & CEO [15]

--------------------------------------------------------------------------------

Just on the debt, I look at it a bit differently. I really try to look at -- I don't know what's going to happen in the future. I kind of like if we -- we want to have low debts compared to the cap rate. You know want I mean? So if you say all our assets are 1% caps, we would have 10% debt, but that would be very scary. So we kind of look at what would happen in a normalized market, and let's say you use a 6.5% cap on the -- and so we had a 6.5% cap, and it turned out that we were 55% debt. And I'd say, look, we're going to get growth in our assets. We've got 40% debt now. We can talk as much as you want about what somebody thinks assets might be worth. I want to make sure that if cap rates move along, these buildings are -- buildings and the business is really safe and secure.

--------------------------------------------------------------------------------

Sam Damiani, TD Securities Equity Research - Analyst [16]

--------------------------------------------------------------------------------

That makes sense. Okay. And just on the Dream collection redevelopment and renovation work that you say it's going to be finished by the end of next year. Can you give us a sense of where things stand today? And just to confirm that all of these sort of 7 buildings that I think we talked about at the AGM are actually going to be finished by the end of next year.

--------------------------------------------------------------------------------

Jay Jiang, Dream Office Real Estate Investment Trust - CFO [17]

--------------------------------------------------------------------------------

So that would be our goal. We showcased, I think, 2 or 3 plans at the AGM, sans that we have plans for every building now. So to date, most of the costs incurred has been in planning and soft costs. We're going to be hitting the ground with the shovels probably by fall, and things are going to go quickly because we're going to have a plan in place. And we'll probably draw some thoughts together on the Weston condo lobby. So there will be a process in place to make it efficient. And I think we'll be there by then.

--------------------------------------------------------------------------------

Sam Damiani, TD Securities Equity Research - Analyst [18]

--------------------------------------------------------------------------------

Okay. That's great. Michael, you mentioned the government of Ontario renewing at 720 Bay. And the way you were talking, it sounded like you're preparing for them to vacate at the end of this term. Is that kind of the plan then? Does the government in that space already have plans to move it to another space in 6 years?

--------------------------------------------------------------------------------

Michael J. Cooper, Dream Office Real Estate Investment Trust - Chairman & CEO [19]

--------------------------------------------------------------------------------

No. No, no, no. Actually, it's quite the opposite. This building, I think, opened in May 1989 with a $20 rent. And it was for 10 years. And then in 1999, they renewed at $14, and we didn't own the building then. We bought it in 2004. The lease came up in 2009, the same time the mortgage came up. We paid out the debt. They had renewed, but we had to go to market. We had to build it through a process. We went through mediation they found for us. And then the government appealed that they found for us. And then we entered into a transaction. We added another 10 years. And in that 10 years, they had one last renewal, which would -- they just exercised -- they had to exercise by June 30 for $20. So it's a little ironic that rent starting in 2020 is precisely the rent that was agreed to in 1989.

So with this, they have no more rights, and maybe we'll work with them after that and maybe we won't. But it's the first time in the history of this building, the owner of the building had a choice as to what they want to do with the building. So after this renewal, there's no further rights. That's where we get to decide finally.

But I do want to mention one other thing that last year around this time, we did a substantial issuer bid and bought stock at $24. We saw where we will reposition the company, and we wanted to make sure that we capture a lot of value. And we were really quite content with the outcome. Since then, in Toronto, net rents have surpassed in nominal dollars the peak rent of 1989. So if you built a building in 1989, you got $34 rent. You never saw that again until this year. So we're now seeing rent would have gone up a lot, and I think we're pretty well positioned for it.

So 720 Bay, the government has the right at $20. We would have got a lot higher rent if they didn't have the right, but at least we're getting control of our asset back.

--------------------------------------------------------------------------------

Sam Damiani, TD Securities Equity Research - Analyst [20]

--------------------------------------------------------------------------------

Right. Understood. And just on the guidance, I think at the beginning of the year, one component of the guidance was 5% to 6% growth in NAV. You've already done, I think, 6% year-to-date. How do you feel about that now?

--------------------------------------------------------------------------------

Michael J. Cooper, Dream Office Real Estate Investment Trust - Chairman & CEO [21]

--------------------------------------------------------------------------------

I think the way we look at it is we're not predicting cap rates. We really just look at how the NOI goes up as we roll up rents. And I mean like we're trying to -- it's kind of a number that may be important to you. I think, Jay, if he was being honest would say, yes, that seems pretty doable, so I'll use it.

--------------------------------------------------------------------------------

Jay Jiang, Dream Office Real Estate Investment Trust - CFO [22]

--------------------------------------------------------------------------------

Agree.

--------------------------------------------------------------------------------

Sam Damiani, TD Securities Equity Research - Analyst [23]

--------------------------------------------------------------------------------

Thanks for your honesty. [25].

--------------------------------------------------------------------------------

Michael J. Cooper, Dream Office Real Estate Investment Trust - Chairman & CEO [24]

--------------------------------------------------------------------------------

It wasn't his.

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

Our next question comes from Jenny Ma from BMO Capital Markets.

--------------------------------------------------------------------------------

Jenny Ma, BMO Capital Markets Equity Research - Analyst [26]

--------------------------------------------------------------------------------

With regards to the government tenant renewal in the Mississauga North York buildings, was there any change in the rental rate for that renewal/extension?

--------------------------------------------------------------------------------

Jay Jiang, Dream Office Real Estate Investment Trust - CFO [27]

--------------------------------------------------------------------------------

No. I think what happened there was, first, they did a 1-year extension, and then they extended it by another 4 years. But the rents there were already pretty healthy relative to the market. So I think we got it around $24-ish. So it was pretty flat to expiring. But the tenants there, I think both of the major tenants, they've been there for 20 years. They're very supportive of the building. We have a great relationship. And I think just extending the wealth in that building will really help improve the value.

--------------------------------------------------------------------------------

Jenny Ma, BMO Capital Markets Equity Research - Analyst [28]

--------------------------------------------------------------------------------

Okay. What is your long-term view of the 2 suburban assets that are left just given the focus on downtown Toronto? When you talk about the dearth of opportunities for acquisitions downtown, do you believe that at some point, there would be some incremental spillover into suburban and that there is value there? Or is it really just a downtown Toronto focus exclusively going forward?

--------------------------------------------------------------------------------

Michael J. Cooper, Dream Office Real Estate Investment Trust - Chairman & CEO [29]

--------------------------------------------------------------------------------

That's a wonderful question these days. 2200 Eglinton is going to get done for between 2,000 and 3,000 residential units. So that's a fantastic asset. We looked at another asset in the last quarter that was right near that in Scarborough that we did put a bid in. It traded for a way too high a price. I'm not going to say we wouldn't do something. That one was quite unique. It was basically land in place of income.

So yes, I mean what I'll say is something like 2200 Eglinton is really interesting. For us, we're happy to own it and develop it. In the suburbs, I just don't see us find any commodity kind of office buildings ever again. Sussex Centre within the center of a city of 1.3 million people and 5001 Yonge is in the center -- another city with 1.3 million people. We don't really view that as suburban. Sussex Centre, we're pretty excited about the opportunity to reposition that asset. I think it's got the highest occupancy it's had in a long, long time. There's a lot of interesting things happening in the retail, and there's probably more redevelopment there. So we are not thinking about, oh, why don't we go spend money outside of downtown Toronto because that would be fun? We would have quite a bit of resistance to do that other than where there's an unusual situation with development.

--------------------------------------------------------------------------------

Jenny Ma, BMO Capital Markets Equity Research - Analyst [30]

--------------------------------------------------------------------------------

Okay. That's fair. If we do see value start to tick up in the areas outside of downtown, would you consider selling these properties?

--------------------------------------------------------------------------------

Michael J. Cooper, Dream Office Real Estate Investment Trust - Chairman & CEO [31]

--------------------------------------------------------------------------------

So now you're asking the opposite question. I think the 2200 Eglinton, we will not sell because it should become $1 billion rental project. So I wouldn't say -- I think that's quite different. Sussex Centre is really interesting, too. We have a partner in that one. That's the kind of asset -- and the thing with 5001 Yonge, I think if we got an incredible price, we might consider it. I think in downtown Toronto, the real issue is you can't replace an asset you sold. And we don't feel the same way in the suburbs.

--------------------------------------------------------------------------------

Jenny Ma, BMO Capital Markets Equity Research - Analyst [32]

--------------------------------------------------------------------------------

Okay. That's fair. And then my last question is given the occupancy rates that you do have in Toronto, what is then your experience with some of your growing tenants? Have you been able to reshuffle and accommodate them? Or do you find that they've got to move on if they're looking for a bigger space?

--------------------------------------------------------------------------------

Michael J. Cooper, Dream Office Real Estate Investment Trust - Chairman & CEO [33]

--------------------------------------------------------------------------------

Actually, that's a great question. Our retention rate is huge. I think it's over 80% or something like that. So we've been doing pretty good keeping our tenants, and we've been working really hard to shovel tenants around. And we've been getting really healthy rental rate increases. So so far, it's working pretty smoothly.

--------------------------------------------------------------------------------

Operator [34]

--------------------------------------------------------------------------------

Our next question comes from Zan Zhang from CIBC Capital Markets.

--------------------------------------------------------------------------------

Zan Zhang, CIBC Capital Markets, Research Division - Research Analyst [35]

--------------------------------------------------------------------------------

I just had a few questions on financing and capital allocation. So first, I guess you've really been active on the SIB. Just curious to hear your thoughts on how the REIT would prioritize between unit repurchases in the future and committing capital towards redevelopments.

--------------------------------------------------------------------------------

Jay Jiang, Dream Office Real Estate Investment Trust - CFO [36]

--------------------------------------------------------------------------------

Sure. I'll have that. So it's not exact science. We look at a couple of things. First, we look at our balance sheet, our liquidity. We're in pretty good shape right now. We have $0.5 billion in liquidity, but I don't think it's really one or the other type of thing. We look at the value of the company, where it could be versus what we can get in the market today. And if you think about a stock that trades at a high 5% cap versus what you can buy that's comparable to our portfolio, it's not a bad place to put your capital. But we're looking for opportunities every day, and it's going to remain fluid. So we have been buying in the market because we thought it was a good opportunity to trim the unit count a little bit so that the growth can be shared amongst a lower unit base. But going forward, I think we're going to be pretty fluid.

--------------------------------------------------------------------------------

Zan Zhang, CIBC Capital Markets, Research Division - Research Analyst [37]

--------------------------------------------------------------------------------

Okay. Got it. And I guess in terms of upcoming debt maturities, I was wondering how the upcoming Series C debenture maturity fits into the overall financing strategy.

--------------------------------------------------------------------------------

Jay Jiang, Dream Office Real Estate Investment Trust - CFO [38]

--------------------------------------------------------------------------------

That one will be something, but we're going to pay it back.

--------------------------------------------------------------------------------

Zan Zhang, CIBC Capital Markets, Research Division - Research Analyst [39]

--------------------------------------------------------------------------------

Okay. Got it. So switching gears to probably some transactions. Can we get your outlook for any remaining noncore dispositions?

--------------------------------------------------------------------------------

Jay Jiang, Dream Office Real Estate Investment Trust - CFO [40]

--------------------------------------------------------------------------------

Sure. I think I guided $75 million for the year. So so far, with the 3 -- 2.5 properties we sold, that gets us to be about $50 million or -- there's an asset in Regina, we're working on it. We're trying to move that away towards other buildings so we can free ourselves up on the debt settlement costs. I think we're pretty optimistic on that one, but it's not a large asset. Right now, it's August, so we still have a couple more months. But I think we'll come in around that mark for the buildings in Western Canada. And obviously, that won't include the DLG in that $75 million. So that's outside of that.

--------------------------------------------------------------------------------

Zan Zhang, CIBC Capital Markets, Research Division - Research Analyst [41]

--------------------------------------------------------------------------------

Okay. And then just going back to the potential peak office acquisitions in downtown Toronto. So will the REIT be pursuing more of these in the future potentially outside of the downtown core?

--------------------------------------------------------------------------------

Michael J. Cooper, Dream Office Real Estate Investment Trust - Chairman & CEO [42]

--------------------------------------------------------------------------------

Look, we're only looking at downtown acquisitions in the financial core, the kind of stuff that we have now. We're pretty reticent to go to the suburb unless there's some really compelling reason. And I guess on the [Prince] stuff, it would be driven by the opportunity. We're not really looking, but if there was a combination of income plus development, it could be something.

But we spend a lot of effort to get to buildings that are quite special. Each building is quite special. So we're not going to grow to add a building or something like that. It's got to be a very compelling reason.

We've got so much organic growth in what we have. We don't want to dilute that. So we've got a lot of work to do on our assets. And I think we're going to end up with literally one of the -- I think we have one of the best portfolios that are owned by anybody in downtown Toronto. And I think Toronto is really coming to its own -- into its own. So what you end up with is we've got this phenomenal position in downtown Toronto. And Toronto is sort of stepping up the ladder of greater and greater cities. So I think we want to be really careful not to be buying the sector, but focusing on assets that we think we know what to do with.

--------------------------------------------------------------------------------

Operator [43]

--------------------------------------------------------------------------------

And we have a follow-up question from Sam Damiani from TD Securities.

--------------------------------------------------------------------------------

Sam Damiani, TD Securities Equity Research - Analyst [44]

--------------------------------------------------------------------------------

Just on the 357 Bay, how much of the costs have been fixed or tendered there? And also a similar question on the Dream collection work that's going to go on for next year as well.

--------------------------------------------------------------------------------

Jay Jiang, Dream Office Real Estate Investment Trust - CFO [45]

--------------------------------------------------------------------------------

Okay. Majority at 357 Bay and...

--------------------------------------------------------------------------------

Michael J. Cooper, Dream Office Real Estate Investment Trust - Chairman & CEO [46]

--------------------------------------------------------------------------------

Sorry, 357 Bay is a lot done.

--------------------------------------------------------------------------------

Jay Jiang, Dream Office Real Estate Investment Trust - CFO [47]

--------------------------------------------------------------------------------

Yes. Yes. And then Dream collection, we're going through the planning process. So we're in the process of engaging construction managers and anchor tenders as we speak.

--------------------------------------------------------------------------------

Sam Damiani, TD Securities Equity Research - Analyst [48]

--------------------------------------------------------------------------------

But you would reiterate the kind of cost numbers that you were discussing at the AGM?

--------------------------------------------------------------------------------

Jay Jiang, Dream Office Real Estate Investment Trust - CFO [49]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Michael J. Cooper, Dream Office Real Estate Investment Trust - Chairman & CEO [50]

--------------------------------------------------------------------------------

Yes. We don't think we're going to have issues with spending more money on the same thing. I think that we're very active in looking and saying, oh, we're going to do this, maybe we should do this other thing, too. So we could expand the scope, but I don't think we're fussed at all about the construction cost of 84 bathrooms, 7 facades, 7 lobbies and some HVAC, okay? I think we're pretty confident on that.

--------------------------------------------------------------------------------

Sam Damiani, TD Securities Equity Research - Analyst [51]

--------------------------------------------------------------------------------

And just finally, Jay, you mentioned the current leverage is 40%. That was a net debt number? Or was that before factoring in the cash that's probably sitting on the balance sheet today?

--------------------------------------------------------------------------------

Jay Jiang, Dream Office Real Estate Investment Trust - CFO [52]

--------------------------------------------------------------------------------

We're doing net debt.

--------------------------------------------------------------------------------

Sam Damiani, TD Securities Equity Research - Analyst [53]

--------------------------------------------------------------------------------

That's 40% net debt. Okay.

--------------------------------------------------------------------------------

Operator [54]

--------------------------------------------------------------------------------

Our next question comes from Matt Kornack from National Bank Financial.

--------------------------------------------------------------------------------

Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [55]

--------------------------------------------------------------------------------

You're adding density to some of your sites. Some of this is residential. But given the dynamics you're talking about, would you anticipate potentially getting into the development game, adding office density?

--------------------------------------------------------------------------------

Michael J. Cooper, Dream Office Real Estate Investment Trust - Chairman & CEO [56]

--------------------------------------------------------------------------------

One of the development sites that we're looking at would be about 50% office, much more office than we have now. So when we look at every site and try to determine what mix uses generate the highest returns, where we get an asset that we want to hold for a long time, and a lot of that actually has to do with what it is that we're allowed to do. And then once we know what we're allowed to do sort of driving -- what does the office look like compared to a residential rental.

--------------------------------------------------------------------------------

Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [57]

--------------------------------------------------------------------------------

Would you potentially look at buying, I guess, greenfield opportunities or land or even using the platform that you have potentially developed, office product on some of the land you already own in other entities?

--------------------------------------------------------------------------------

Michael J. Cooper, Dream Office Real Estate Investment Trust - Chairman & CEO [58]

--------------------------------------------------------------------------------

It's -- look, in other entities, 318 Parliament is part of the Distillery. It's got 300,000 square feet of commercial. About 240,000 of this is office and some of it is leased, and the rest is under LOI. Under the [Weston] project, we think we've got a commercial site just to the east of Distillery.

So I think what we're seeing now that's changed a lot is you got a retail REIT that owns retail centers and then they look at developing and they develop on them the highest and best use. So for our company, wherever we have land, we try to figure out what's the best thing to do with it and then we do it. So I think you've seen a real huge shift from REITs from saying, oh, all I do is retail or all I do is office. Once you start developing, you want to do the best thing you can do with the land. And that's why smart centers are doing 6 different kinds of things. And it's just -- that's where you get the money now. So we'll definitely develop the best on everything we own. I don't think we're going to be doing greenfield or sort of think about that, meaning there was like growing corn there and then we would [be doing] that. But I think downtown, that's where we're getting at before. [Prince] if there's an idea we could look at buying and dream off or something we could look at developing office there or residential.

--------------------------------------------------------------------------------

Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [59]

--------------------------------------------------------------------------------

Right. And then in terms of new supply right now, in the next year or 2 in Toronto, if you have a lease coming to maturity, you're pretty much screwed if you're a tenant, but...

--------------------------------------------------------------------------------

Michael J. Cooper, Dream Office Real Estate Investment Trust - Chairman & CEO [60]

--------------------------------------------------------------------------------

We tend not to think of it that way. As a shareholder, I don't think they would think of it that way either.

--------------------------------------------------------------------------------

Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [61]

--------------------------------------------------------------------------------

But what I'm saying is when there's new supply coming on and tenants have a little bit more choice, do you think the rent spreads that are being obtained today are realistic in 3 to 5 years?

--------------------------------------------------------------------------------

Michael J. Cooper, Dream Office Real Estate Investment Trust - Chairman & CEO [62]

--------------------------------------------------------------------------------

Yes. That's a great question because I had mentioned before that we now have in nominal dollars the same rent as 1989, or to put a different way, in real dollars rent's half of what it was in 1989. At the same time that there's a labor shortage and the best and the brightest want to work in places that are interesting. So I think that generally -- sorry. So let's say, the rent was $34 in 1989, and now they're $34 again. On top of that, in our ability, you might have another $25 of operating costs and taxes, so you're at $60. Well, the tenant, they've gone from $48 to $60 in the last 2 years. It's an increase, but it's not as big as you think in terms of what their overall occupancy costs are, nor do I think it is a significant amount of money that affects the profitability of their company. I actually think they're spending more money on real estate now and they're getting something better for it. So I think that -- I think office space has gone from just a G&A expense to something that's more meaningful to the company. I think that's a major change.

On the supply side, we're trying to build incredible buildings, and we're trying to improve our buildings to be incredible that will really appeal to people and help them run their business better. And there's a lot of new supply, and a lot of it is needed. I'm not too fussed about that. If you ask me what I would worry about, I would say, if 5 Canadian banks decide to do the same thing that Deutsche Bank did, every one of them would give back a whole building. So yes, there's a lot of supply, but it's needed.

The real question is, is there something fundamental that's going to happen to the economy? But that happens from time to time, and we want to make sure we have buildings that are going to outperform in a good market or a bad market. It's not our strategy. We talk about debt. That's our strategy. It's like you don't know when you're right or not so you make sure that you've got the flexibility to handle whatever comes at you. So my favorite part of the quarter is the subsequent part that says we have $500 million of available liquidity.

--------------------------------------------------------------------------------

Operator [63]

--------------------------------------------------------------------------------

And we are showing no further questions. I'll now turn the call over to Mr. Cooper for closing comments.

--------------------------------------------------------------------------------

Michael J. Cooper, Dream Office Real Estate Investment Trust - Chairman & CEO [64]

--------------------------------------------------------------------------------

I'd like to thank everybody for participating. Jay and I are available whenever you want. And we're pleased with the quarter, but we think we've got an even better future ahead. Thank you.

--------------------------------------------------------------------------------

Operator [65]

--------------------------------------------------------------------------------

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating, and you may now disconnect.