TD commentsDream Office REIT (D.UN-T) C$7.60
Potential WeWork Bankruptcy
Event
WeWork's continuing financial troubles have resulted in plans to file for bankruptcy in the U.S. next week, according to media reports (link). This follows missed debt repayments and departures of senior executives. We expect some near-term resolution of this uncertainty, including how the Canadian division will be impacted.
Impact: SLIGHTLY NEGATIVE
For Dream Office, WeWork occupies the entire 65,000 square feet of 357 Bay Street in downtown Toronto (see Exhibit below and here) and is the ninth-largest tenant, paying 2.3% of annualized gross revenues. The original 15-year lease has just over 12 years of remaining term. Looking at possible scenarios for WeWork in this building, we are comforted by the very high-quality nature of this space, and the building's prominent location and visibility in the downtown Toronto office market. Also, our understanding is that the space has seen continuing steady increases in its utilization. We expect 357 Bay Street is very likely a key Toronto location for WeWork, such that any continuing business would likely prioritize its retention going forward.
We estimate WeWork's current rent at the building is in the range of $46/sf-$47/sf net (with annual escalations from the $45/sf starting rent in 2020) and $67/sf gross (including CAM and property taxes). Gross Rents = 13% of Forecast AFFO: WeWork's annualized gross rental revenues equate to ~$4.4mm gross ($0.11/unit), equating to 13% of our average $0.86/unit AFFO/unit estimate for 2024-2025. As such, the loss of part or all WeWork's rental revenues would further stress Dream Office's ability to sustain its current $1.00/unit distribution level, in our view.
From a NAV perspective, we estimate Dream Office's invested cost in the building to be in the range of $55mm or $850/sf, which includes $29mm spent to completely reconstruct the building's interior to create a flagship location for WeWork. That represents 2% of Q2/23 total assets and 4.5% of Q2/23 IFRS NAV/unit ($34.71). With the units trading at a 9% implied cap rate, 65% below our $22.00 NAV/unit estimate, and yielding 13%, we believe today's valuation already discounts the associated risks.