Call details. D noted (and we agree) “visibility” is being impacted by tenant uncertainty over the economy (not just return to office). As a result, D believes tenants are still figuring out space requirements post pandemic, with potentially another 12-18 months until sufficient visibility returns. D reiterated 2024 guidance, incl. FFOPU of $2.80-2.90 (we’re at $2.89) and flat-to-low-single-digit SSNOI (YTD = 1.3%). D expects 2025 SSNOI to be = or > 2024E. Of the 206ksf expiring at 74 Victoria (4% of portfolio GLA; $11M annual NOI or 10% of total) in Toronto on Nov 1st , 64ksf will likely be renewed by the Federal Gov’t (lease spread to expiring is n/a), with a target 40k-50k sf more expected by year-end with NFPs and Professional Service tenants interested (faster than D previously expected; targeting 2H/25 economic occupancy). As a partial offset, D noted $7M of annualized NOI set to come on-line from other leasing by year-end (~500bp of occupancy). Advanced leasing discussion pipeline = 14 deals at 270ksf vs. 360ksf completed YTD. On leverage and liquidity, D target = sub-11x net debt/EBITDA by end of 2025 (Q2/24A = 11.8x; +0.2x q/q), relying mostly on organic EBITDA growth (every $50M dispo = 0.1x). D is seeing debt quotes on DT Toronto office in the mid-5% range (250bp spread) vs. a recent deal in Calgary at 6.65%. It expects to extend the $225M loan at Adelaide Place (due in 2025) by year-end (no equity expected; 50%-60% LTV) and sees upfinancing opportunities elsewhere as a source of liquidity. Discussions ongoing on the potential all-cash sale of 438 University (323ksf; 93% occupied), with no update provided at 212 King St. D still covets its DIR position (13.5M units), which we think is contingent upon selling either 438 University or 212 King St (i.e., otherwise, D may have to sell DIR units). Overall, D seemed content with current liquidity (~$80M ex. CIB loan availability).
Q2/24 Highlights & Developments
Reported and recurring FFOPU was $0.738, above our $0.711 and $0.699 consensus (range = $0.67-$0.73); reflects +1.5% q/q and +5.2% y/y (Q1 = +0.9% y/y).
IFRS NAVPU fell $1.1 q/q (-1.7%) to $64.82 (Q1 = -$0.39 q/q) on a $25M FV Loss ($1.3/un), representing 1% of Q2 GBV and 7% of unit price. Avg. cap rate was down 2bp q/q to 5.74%; Q1 = +1bp q/q (DT Toronto = -1bp q/q to 5.38%; Q1 = +1bp q/q).
SPNOI decelerated to 1.2% y/y (Q1 = +1.5%; YTD = +1.3%). DT Toronto and Other Market SPNOI were +2.6% and -2.7%, respectively (Q1 = +2.8% and -2.7%).
In-place occupancy drops. Disclosed in-place occupancy fell 10bp q/q to 79.2% (including -70bp in DT Toronto) below our flat q/q forecast (Q1 = -270bp q/q) and our flat q/q est. for D markets (see Exhibit 1 here). Committed occupancy increased 80bp q/q to 84.3% (Q1 = -90bp q/q). Bad debt expense was flat at $0.5M (Q1 = $0.5M) and = 0.2% of NOI vs. 0.2% q/q. Q2 Tenant retention ratio was at 44% vs. 31% q/q (2023A= 67.9%).
Leasing spreads down, along with In-Place rent while leasing costs are up. Lease renewal spread (on 41k sf) was 3.5% vs. 3.9% q/q (on 40k sf) and 25.9% for 2023A (481k sf). Total leasing cost/sf was $66.8/sf ($16.7/sf per year; WALT = 4 years) or 254% of one-year net rent vs. $13.6/sf ($4.7/sf per year) q/q. Avg. In-place rent was down 1.7% q/q to $26.33/sf (Q1 = +1.6%). D-est. market rent (gross, not NER) was up 100bp q/q to $27.11, leading to an est. portfolio MTM of 3% (Q1 = +11bp q/q; 0.2%). Ex. temp vacancies, D has 512Ksf expiring in 2024 with 357Ksf commencing (70%), for total occupancy exposure of 310bp.
Leverage edges higher, but liquidity should be sufficient to fund 2024 maturities if need be. Liquidity was down $15M q/q to $166M (incl. $14M in cash) and = 0.2x 2024-2025 debt maturities (Q1 -$6M q/q; 0.3x 2024-2025). D has only $17M of debt maturing in 2024 (1% of total debt). Unencumbered asset down $10M to $2.4M = 0.2% of total debt (Q1 = -$5M, 0.9% of total debt). Reported net debt/GBV was up 50bp to 50.9% (Q1 = +40bp) and Debt/EBITDA was up 0.2x to 11.8x (Q1 = +0.1x), above sector avg. of 45% and 11.4x, respectively.