Mr. Michael Cooper reports
DREAM OFFICE REIT REPORTS Q3 2018 RESULTS
Dream Office Real Estate Investment Trust has released its financial results for the three and nine months ended Sept. 30, 2018. Management will host a conference call to discuss the results at 4 p.m. ET on Nov. 8, 2018.
SELECTED FINANCIAL INFORMATION
(in thousands of dollars except per-unit amounts)
Three months ended Nine months ended
Sept. 30, June 30, Sept. 30, Sept. 30, Sept. 30,
2018 2018 2017 2018 2017
Net income (loss) $41,382 $25,386 $ (637) $99,289 $34,055
Comparative properties net
operating income (NOI) 35,306 35,794 36,604 106,734 110,572
Funds from operations (FFO) 26,688 27,912 44,653 90,060 165,822
Net asset value (NAV) $24.40 $23.95 $22.40 $24.40 $22.40
FFO (diluted) 0.40 0.40 0.48 1.27 1.61
Distribution rate 0.25 0.25 0.25 0.75 1.00
Net income for the quarter and year-to-date
For the three months ended Sept. 30, 2018, the trust generated net income of $41.4-million, consisting of net rental income of $37.4-million, fair-value adjustments to investment properties of $24.8-million and share of income from the trust's investment in Dream Industrial REIT of $5.6-million, which was offset by interest expense on debt and subsidiary redeemable units of $17.1-million, fair-value adjustments to financial instruments of $4.4-million, general and administrative expenses of $3.2-million, net losses on transactions, leasing and other activities of $1.5-million, and cumulative other items of $200,000.
For the nine months ended Sept. 30, 2018, the trust generated net income of $99.3-million, consisting of net rental income of $119.3-million, share of income from the trust's investment in Dream Industrial of $30.4-million and fair-value adjustments to investment properties of $27.4-million, which was offset by interest expense on debt and subsidiary redeemable units of $49.7-million, fair-value adjustments to financial instruments of $12.5-million, general and administrative expenses of $9.5-million, net losses on transactions, leasing and other activities of $5.2-million, and cumulative other items of $900,000.
Comparative property NOI (net operating income) for the quarter and year to date
For the three months ended Sept. 30, 2018, NOI from comparative properties declined $500,000, or 1.4 per cent, when compared with the prior quarter, mainly driven by Toronto downtown. Toronto downtown saw a $300,000, or 1.5-per-cent, decrease in comparative property NOI over the prior quarter, mainly due to a tenant downsize at 330 Bay St. for approximately 16,000 square feet and the elimination of the Toronto vacancy tax rebate program in June, 2018, which had an impact on 438 University Ave. With respect to the vacant space at 330 Bay St., the trust has secured the majority of this space with a five-year lease that commences in Q1 2019, with net rents 33 per cent higher than the previous net rents. Partially offsetting these declines during the quarter included higher occupancy and rent steps in certain properties within this region.
For the three and nine months ended Sept. 30, 2018, NOI from comparative properties decreased by 3.5 per cent over the prior-year comparative periods, primarily driven by previously known large vacancies in downtown Toronto (438 University Ave.) and downtown Montreal (700 De la Gauchetiere St. W). In downtown Toronto, Loyalty One at 438 University Ave. vacated 200,000 square feet at the beginning of Q4 2017, which is set to be occupied by a new government tenant for a term of seven years commencing in December, 2018. At 700 De la Gauchetiere St. W in Montreal, Bell Canada vacated approximately 200,000 square feet at the beginning of Q2 2018, of which 98,000 square feet took occupancy immediately. The trust is currently marketing the remaining 87,000 square feet of vacant space at 700 De la Gauchetiere St. W. The trust believes that the asset is well positioned to capitalize on a growing economy, record low unemployment rate and strengthening technology sector in Montreal's downtown office market. Partially offsetting these declines included increases in comparative property NOI in the Calgary region for the three and nine months ended Sept. 30, 2018, of 17.2 per cent and 29.6 per cent, respectively, over the prior-year comparative periods, mainly driven by uplifts in occupancy, net of lower net rents. The trust has sold off the majority of its underperforming assets and reduced its portfolio to its best properties in the Calgary region, with an in-place occupancy of over 90 per cent.
As discussed in previous quarters, major vacancies in the trust's comparative property portfolio will heighten the volatility of the trust's operating performance for the balance of 2018, but the trust expects its operations to stabilize and improve in 2019.
Diluted FFO (funds from operations) per unit for the quarter and year to date
Diluted FFO per unit for the three months ended Sept. 30, 2018, was 40 cents, compared with 40 cents (39 cents excluding lease termination fees and other non-recurring items) at Q2 2018 and 48 cents (47 cents excluding lease termination fees and other non-recurring items) at Q3 2017. Diluted FFO per unit for the nine months ended Sept. 30, 2018, was $1.27 ($1.18 excluding lease termination fees and other non-recurring items), compared with $1.61 ($1.55 excluding lease termination fees and other non-recurring items) in the prior-year comparative period.
The quarter-over-quarter diluted FFO per unit remained stable at 40 cents, primarily driven by the positive impact of unit buybacks and debt reduction (from reallocation of capital from asset sales), offset by slightly lower comparative property NOI.
The year-over-year decrease in diluted FFO per unit for the three and nine months ended Sept. 30, 2018, was mainly due to asset sales (partially offset by unit buybacks and debt reduction) (minus seven cents and minus 26 cents, respectively), along with lower comparative property NOI (minus two cents and minus five cents, respectively) and other items (plus one cent and minus three cents, respectively).
NAV (net asset value) per unit
As at Sept. 30, 2018, the trust's NAV per unit was $24.40, compared with $23.95 at June 30, 2018, and $22.40 at Sept. 30, 2017, up 45 cents, or 1.9 per cent, and $2, or 8.9 per cent, respectively.
The quarter-over-quarter increase and year-over-year increase in NAV per unit of 45 cents and $2, respectively, were mainly due to the fair-value gains on properties in the Toronto downtown region, unit buybacks and cash flow retention from operations.
NAV per unit has increased for six consecutive quarters since Q2 2017.
Properties under development
The trust excluded 357 Bay St. in Toronto downtown and 1900 Sherwood Place in Regina from its comparative portfolio and has classified them as properties under development. During the quarter, the trust secured long-term leases at each of the properties and, over the course of the next two years, will undergo significant redevelopment programs to upgrade the building and improve the cash flow profile and value of each asset.
At 357 Bay St. in Toronto downtown, the trust secured a lease for the entire building with WeWork for approximately 65,000 square feet commencing in the second half of 2020 for a term of 15 years, with net rental rates starting at $45 per square foot, with annual rent escalators. The trust intends to invest approximately $29-million into the asset over the next two years, which includes a complete reconstruction of the building interior, all associated capital improvements and fitouts and tenant allowances for fixtures. In addition to the trust's share of investment, WeWork is committed to investing substantial amount of capital into the building and workspace. Upon completion, 357 Bay St. will transform into a best-in-class boutique office building in downtown Toronto. WeWork is a U.S.-based company that operates a global network of real estate solutions and services ranging from flexible, community-oriented workspace for entrepreneurs to more complex global solutions for Fortune 500 companies. WeWork has over 250,000 members spanning 253 locations across 74 cities in 22 countries (source: WeWork 2018 Economic Impact Report). The 357 Bay St. location will be the first property that is entirely dedicated to WeWork in Canada and will serve as its headquarters and national flagship location.
"The 357 Bay St. project represents Dream Office REIT's official launch of reimagination of our Bay Street village, including many of our assets on Bay, Temperance and Richmond St.," said Michael J. Cooper, chief executive officer of Dream Office. "Our partnership with WeWork at 357 Bay St. confirms meaningful office demand from a quality tenant at a great location and we will continue to invest in these assets to create value and deliver the best tenant experience."
At 1900 Sherwood Place in Regina, the trust secured a lease with the Co-operators for approximately 114,000 square feet, commencing in the second half of 2021, for a term of 18 years. The building will be renamed as the Co-operators Place and serve as a hub for Co-operators' life and health insurance operations for over 650 employees. As part of the lease, the trust will be investing approximately $26-million in leasing and value-add capital into the property over the next three years, which includes a 13,000-square-foot expansion to the building, adding substantially more parking space, replacing the heating, ventilation and air-conditioning system, curtain wall upgrades at the building entrance, as well as exterior and common area updates. These capital initiatives will enhance the overall experience for the new tenant as well as the existing tenants at the building once complete.
Properties held for future redevelopment
Properties held for future redevelopment include a 15-acre site held for future redevelopment at 2200 Eglinton Ave. E in Scarborough, located at the northwest corner of Eglinton Avenue East and Birchmount Road. The trust's asset management and leasing strategies for 2200 Eglinton Ave. E are applied with future redevelopment strategies in mind. The trust filed an official plan amendment application during the quarter, with a view toward redevelopment for mixed use, either in the form of a major overhaul of the property or as a ground-up development. In Q1 2018, the trust secured a 97,000-square-foot lease at this site, with commencements staggered over 2019. Accordingly, the trust expects to be operating cash flow neutral in 2020, enabling it to focus on its development efforts for this site without negatively impacting its NOI.
Disposition update for the quarter and year to date
For the three months ended Sept. 30, 2018, the trust sold IBM Corporate Park located in Calgary for $97.4-million, or approximately $272 per square foot. For the nine months ended Sept. 30, 2018, the trust sold six properties located in Alberta and Saskatchewan totalling $202.7-million. At quarter-end, the trust has four properties located in Calgary classified as assets held for sale totalling $99.1-million.
REIT A units repurchased for cancellation for the quarter and year to date
For the three and nine months ended Sept. 30, 2018, the trust purchased for cancellation approximately 151,000 REIT A units ($24.70 per unit for a cost of $3.7-million) and 13.8 million REIT A units ($23.53 per unit for a cost of $325-million), respectively, under the normal course issuer bid and substantial issuer bid programs.
Subsequent to quarter-end, the trust purchased for cancellation an additional 280,000 REIT A units under the normal course issuer bid at a cost of approximately $6.6-million, or $23.66 per unit.
Sound capital structure with ample liquidity
The trust ended the quarter with a net total debt to net total assets ratio of 46.2 per cent, net total debt to adjusted EBITDAFV of 9.1 years, and interest coverage ratio of 2.8 times. The trust's available liquidity of approximately $233-million comprises undrawn demand revolving credit facilities totalling approximately $221-million and $12-million of cash and cash equivalents on hand as at Sept. 30, 2018. The overall net total debt to net total asset ratio has declined 190 basis points from 48.1 per cent in Q2 2018 to 46.2 per cent this quarter, mainly driven by a reduction in the trust's drawings on its credit facilities with net proceeds from dispositions. The trust expects leverage to further decline using net proceeds from future asset sales.
"Over the next year, Dream Office REIT will continue to sell non-core assets, with net proceeds used to reduce debt, reinvest into our best assets and repurchase units on an opportunistic basis," said Jay Jiang, chief financial officer of Dream Office. "Our capital allocation strategy will prioritize NAV growth and improvement of our balance sheet over the long term."
Comparative portfolio in-place occupancy on a quarter-over-quarter basis remained relatively stable at 88.3 per cent when compared with 88.2 per cent at Q2 2018. Sussex Centre in Mississauga and 150 Metcalfe Street in Ottawa experienced positive leasing absorption during the quarter totalling approximately 9,000 square feet while all other regions remained relatively stable. Toronto downtown experienced a marginal decline in occupancy during the quarter mainly due to a tenant downsize at 330 Bay St. as mentioned herein.
The decline in the comparative portfolio in-place occupancy on a year-over-year basis was largely due to the known large vacancies mentioned herein at 438 University Ave. and 700 De la Gauchetiere St. W and vacancies in the non-core markets region. The declines in the non-core markets region were mainly due to 31,000 square feet of negative absorption at London City Centre and 8,000 square feet of negative absorption in Saskatchewan.
At Sept. 30, 2018, vacant space committed for future occupancy approximated 387,000 square feet, bringing the trust's overall comparative portfolio in-place and committed occupancy to 94.2 per cent. Of this future committed occupancy, approximately 358,000 square feet is scheduled to take occupancy in the remainder of 2018, the majority of which is attributable to the government tenant that will take occupancy at 438 University Ave., Toronto, in December, 2018, for a term of seven years.
For the three months ended Sept. 30, 2018, approximately 376,000 square feet of leases commenced, of which approximately 324,000 square feet were renewals. The overall retention ratio for the quarter was 89 per cent .
To date, the trust has secured 2018 lease commitments totalling approximately 1.8 million square feet in its comparative portfolio, representing over 110 per cent of its 2018 lease maturities. The trust has also leased 64 per cent of the 2019 lease maturities.
Leasing momentum in downtown Toronto remains robust given the low vacancy rates, which remain amongst the lowest in North America. To date, the trust has completed over 143 per cent of its 2018 lease maturities and 56 per cent of 2019 lease maturities in the Toronto downtown region. During the quarter, the net rents for lease renewals that commenced in Toronto downtown were approximately 10 per cent above expiring net rents. Further, as at Sept. 30, 2018, the Toronto downtown market rents are estimated to be approximately 17 per cent higher than its in-place and committed net rents. As a result of when leases are executed, there is typically a lag between leasing spreads relative to the trust's estimates of the spread between estimated market rents and average in-place and committed net rental rates.
Management will host a conference call to discuss the results on Nov. 8, 2018, at 4 p.m. ET. To access the conference call, please dial 1-888-465-5079 in Canada and the United States or 416-216-4169 elsewhere and use passcode 5098584 followed by the number sign. To access the conference call by webcast, please go to Dream Office's website and click on the link for news and events, then click on calendar of events. A taped replay of the conference call and the webcast will be archived for 90 days.
Information appearing in this news release is a select summary of results. The condensed consolidated financial statements and management discussion and analysis of the trust are available on Dream Office's website and on SEDAR.
Dream Office is an unincorporated, open-ended real estate investment trust. Dream Office owns well-located, high-quality central business district office properties in major urban centres across Canada, with a focus on downtown Toronto.
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