Mr. Michael Cooper reports

DREAM OFFICE REIT REPORTS Q2 2023 RESULTS

Dream Office Real Estate Investment Trust has released its financial results for the three months ended June 30, 2023, and provided a business update.

"In the second quarter, we were able to return 31 per cent 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."

Highlights:

• 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 the REIT's investment in Dream Industrial Real Estate Investment Trust totalling $33.7-million, primarily due to the sale of 12.5 million units at a price below IFRS (international financial reporting standards) 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 (funds from operations) per unit (6) for the quarter: For the three months ended June 30, 2023, diluted FFO per unit decreased by three cents per unit to 35 cents per unit relative to 38 cents per unit in Q2 2022, driven by a lower share of FFO (4) from the REIT's investment in Dream Industrial REIT (minus two cents) due to the sale of 12.5 million units during the quarter, lower net rental income from sold properties (minus two cents) and higher interest expense (minus two cents), partially offset by higher comparative-property net operating income (NOI) (plus two cents), and the accretive effect of repurchases under the normal course issuer bid (NCIB) and substantial issuer bid (SIB) (plus one cent).
• Net rental income for the quarter: Net rental income for the three months ended June 30, 2023, decreased by 3.4 per cent or $900,000 over the prior-year comparative quarter, primarily due to the sale of 720 Bay St. in Q1 2023.
• Comparative-property NOI (5) for the quarter: For the three months ended June 30, 2023, comparative-property NOI increased by 3.8 per cent 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 per cent 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 per cent relative to Q1 2023. In Toronto downtown, in-place occupancy increased by 1.5 per cent 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 per cent 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 per cent at Q2 2022 to 80.9 per cent this quarter due to negative absorption in Toronto downtown and the sale of the fully occupied 720 Bay St. 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 per cent 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-foot lease commenced at $25 per square foot, flat when compared with 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 per cent 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 its 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 per cent 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 the trust's properties located in Calgary, Saskatoon, Regina, Mississauga, Scarborough and the United States, the trust executed leases totalling 3,000 square feet at a weighted average net rent of $27.74 per square foot, an increase of 9.8 per cent 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 per cent 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 per cent 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 its 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 per cent 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 per cent 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 per cent 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-19 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, trust rust continues 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. The trust 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. The trust is seeing strong interest from prospective tenants for the remaining three suites.

During Q2 2023, the trust successfully completed the launch of premium restaurant Daphne in the ground floor retail space at 67 Richmond St. W alongside the trust's joint venture partner, INK Entertainment. Since the beginning of 2022, as part of the trust's strategy to pursue premium retail offerings at its properties, the trust has 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 per cent higher than the weighted average prior net rents on the same space, escalating to an average net rent of approximately $70 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 the trust's assets and bring vibrancy and traffic to its properties.

The trust remains committed to investing in its well-located real estate portfolio in downtown Toronto to distinguish its assets and attract unique tenants. During 2022, the trust took 366 Bay St. and 67 Richmond St. W 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 floor plates. At 366 Bay St., the trust has spent $10.6-million over the course of the project, $7.9-million of which has been financed by the trust's Canada infrastructure bank (CIB) credit 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 St. W, the trust has spent $1.6-million on the project, $1.3-million of which has been financed by the CIB facility. The projects at 366 Bay St. and 67 Richmond St. W are expected to be completed and ready to lease in Q4 2023 and Q2 2024, respectively.

Subsequent to Q2 2023, the trust secured a commitment at 366 Bay St. 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 the trust's 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 per square foot, escalating to $50 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, the trust announced its 50/50 joint venture partnership with CentreCourt for the mixed-use development of block 2 at 2200 to 2206 Eglinton Ave. E and 1020 Birchmount Rd. in Scarborough, Ont. The development planning process for the project is under way and the trust is currently working through the next steps with its 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 12.5 million Dream Industrial REIT units and used the proceeds to buy back 12.5 million 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. The trust continues to opportunistically look to sell or partner on its 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 the 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 per cent.

During Q2 2023, the trust drew $3.8-million against the CIB facility. In total, the trust has drawn $14.4-million against the CIB facility since 2022. These draws represent 80 per cent 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 cent per year on project completion.

Capital highlights:

• Net asset value (NAV) per unit (14): As at June 30, 2023, the trust's NAV per unit increased to $34.71, compared with $31.36 at Dec. 31, 2022. The increase in NAV per unit relative to Dec. 31, 2022, is driven by cash flow retention (FFO net of distributions) and the effect of accretive unit repurchases under the trust's 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 12.5 million 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 per cent or approximately 6.3 per cent 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, Sept. 6, 2023, Dream Unlimited Corp., Dream Office and Dream Impact Trust are welcoming investors for a joint investor session. The event will be hosted at the trust's head office at 30 Adelaide St. E, Suite 301, at 10 a.m. ET. This session will discuss each company's net asset value, capital allocation strategy and business plan, to provide better insight into how the trust views and manage the businesses. To attend, please RSVP to Kim Lefever at klefever@dream.ca.

Other information

Information appearing in this news 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 on the trust's website and on SEDAR+.

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. The trust has carefully curated an investment portfolio of high-quality assets in irreplaceable locations in one of the finest office markets in the world.

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