Dream Office Real Estate Investment Trust T.D.UN

Alternate Symbol(s): DRETF

Dream Office Real Estate Investment Trust (the Trust) is an open-ended real estate investment trust. The Trust owns central business district office properties in various urban centers across Canada, with a focus on downtown Toronto. The Trust owns and manages 3.5 million square feet of office land in downtown Toronto. Its objectives include managing its business and assets to provide both yield and growth over the longer term. Its properties are located across Adelaide Place, Toronto; 30 Adelaide Street East, Toronto; 438 University Avenue, Toronto; 655 Bay Street, Toronto; 74 Victoria Street/137 Yonge Street, Toronto; 36 Toronto Street, Toronto; 330 Bay Street, Toronto; 20 Toronto Street/33 Victoria Street, Toronto; 250 Dundas Street West, Toronto; 80 Richmond Street West, Toronto; 425 Bloor Street East, Toronto; 212 King Street West, Toronto; 357 Bay Street, Toronto; 360 Bay Street, Toronto; 350 Bay Street, Toronto; 56 Temperance Street, Toronto; and 6 Adelaide Street East, Toronto.

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Dream Office Real Estate Investment Trust

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Post by incomedreamer11on Jun 27, 2023 11:11am

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Post# 35516295

Scotia comments on meeting with Cooper

Dream Office REIT (Michael Cooper, Chairman & CEO)

Current environment feels a bit like “musical chairs”, with visibility quite low. That said, D does expect its portfolio occupancy (Q1/23A in-place = 81%) to move higher through 2023 and into 2024 (our 2H/23E and 2024E are 80.4% and 81.1%, respectively). Broadly speaking, tenants are leaving lower-quality buildings for higher-quality options. A good existing example = Government of Ontario. The Federal government is taking less space on the whole. Higher technology company valuations is encouraging. Removal of existing required office re-replacement in Toronto re-developments would be constructive (given elevated office vacancy and residential new supply not keeping up with demand) as “office density” is likely being given negative value today (with residential density values still up vs. pre-pandemic levels and near all-time highs). With respect to WFH, D noted lack of visibility on tenant long-term plans. It is very hard to say what will happen to broader market occupancy and rent in this environment. Operationally, Dream believes it has made the right decisions navigating the current office backdrop.
NER’s have fallen during COVID, but remains well above 10+ years ago. D cited the downtown Toronto portfolio purchase in 2011 at a 7.2% going-in cap rate, with in-place net and NER of ~$19/sf and ~$14/sf, respectively. D cited a pre-COVID pre-covid rent of ~$42/sf has come down to ~$32/sf. Tenant incentive packages, including much higher broker commissions (see below) are in the $25/sf-$30/sf range vs. ~$14/sf ten years ago and much lower pre-COVID. D noted Financial tenant consolidation of offices (multiple locations) into more centralized locations, with recent examples including both Scotiabank and CIBC (buildings being vacated may be under pressure).
Lots of short-term uncertainty. Valuation-wise, D noted assets were priced off essentially 0% interest rates, which have moved up materially. With that in mind, determining in-place cap rates and where they may go is very challenging. Cap rate direction will be dictated by rent trends, an observation we agree with. With respect to financing, D noted that lenders are very cautious on Office. Most of the capital flow is towards Apartments, Industrial and Self-Storage (consistent with our thoughts in our December 2022 CBRE Lender Survey note).
Material residential upside, but it will take time. D noted three large sites with residential zoning approval in the GTA, including Scarborough (~2.5Msf), Dundas/University (0.3Msf) and Simcoe/King (0.4Msf). These are significant projects (50% stake in Simcoe could cost $600M to build; Dundas = $500M...vs. current D market cap of $659M). D mentioned the returns in Scarborough are a bit challenged presently. That said, our prior research has noted residential intensification NPV/un upside of $4/un+ in Dream’s existing portfolio (over a 10-year time frame, however).