Dream Office REIT Reports 2020 Year-end Results

This press release contains forward-looking information that is based upon assumptions and is subject to risks and uncertainties as indicated in the cautionary note contained within this press release.

TORONTO--(BUSINESS WIRE)--DREAM OFFICE REAL ESTATE INVESTMENT TRUST (D.UN-TSX) or (“Dream Office REIT”, the “Trust” or “we”) today announced its financial results for the three months and year ended December 31, 2020 and provided a business update related to the COVID-19 pandemic. Management will host a conference call to discuss the financial results on February 19, 2021 at 10:30 a.m. (ET).

FINANCIAL HIGHLIGHTS

SELECTED FINANCIAL INFORMATION		Three months ended						Year ended
(unaudited)		December 31,	September 30,			December 31,		December 31,		December 31,
(In thousands of dollars except per unit amounts)		2020	2020			2019		2020		2019
Operating results
Net income	$	15,551	$	39,294	$	63,193	$	177,276	$	117,320
Funds from operations (“FFO”)^(1)		22,723		23,088		25,188		93,029		108,887
Net rental income		27,945		27,890		31,083		112,942		127,575
Comparative properties net operating income ("NOI")^(1)		28,906		30,150		31,039		120,378		122,557
Per unit amounts
FFO (diluted)^(1)(2)	$	0.40	$	0.38	$	0.40	$	1.54	$	1.70
Distribution rate		0.25		0.25		0.25		1.00		1.00
Net asset value (“NAV”)^(1)		28.69		28.17		26.70		28.69		26.70
See footnotes at end.

UNITS AND PORTFOLIO INFORMATION		As at
^(unaudited)		December 31,	September 30,			December 31,
		2020	2020			2019
Units
Total number of units(in millions)^(3)		55.9		58.0		61.5
Total propertiesinformation^(4)
Number of active properties		29		28		29
Number of properties under development		1		2		2
Gross leasable area (“GLA”) (in millions of sq. ft.)		5.5		5.5		5.5
Investment properties value (in billions)	$	2.5	$	2.5	$	2.4
See footnotes at end.

• Net income for the quarter and year: For the three months and year ended December 31, 2020, the Trust generated net income of $15.6 million and $177.3 million, respectively. Included in net income are net rental income totalling $27.9 million and $112.9 million, respectively, and fair value adjustments to financial instruments totalling a loss of $10.2 million and a gain of $65.9 million, respectively, primarily attributed to the revaluation of the subsidiary redeemable units.
  
• Diluted FFO per unit⁽¹⁾⁽²⁾ for the quarter and year: Diluted FFO per unit for the three months ended December 31, 2020 was $0.40, compared to $0.38 at Q3 2020 and $0.40 at Q4 2019. Diluted FFO per unit for the year ended December 31, 2020 was $1.54 compared to $1.70 in the prior year.
  
  Diluted FFO per unit increased over the prior quarter mainly due to accretive unit repurchases net of asset disposition (+$0.03) and the lease commencement at our completed property under development (357 Bay Street in Toronto) (+$0.01), partially offset by lower comparative properties NOI and the net impact of COVID-related provisions and adjustments on our results (-$0.02).
  
  For the three months ended December 31, 2020, diluted FFO per unit was flat year-over-year as the effects of the lease commencement at our completed property under development (357 Bay Street in Toronto) (+$0.01), and savings on general and administrative expenses, interest savings on lower borrowing costs and other items (+$0.04) were offset by lower comparative properties NOI, the net impact of COVID-related provisions and adjustments during the current year (-$0.05).
  
  For the year ended December 31, 2020, diluted FFO decreased year-over-year mainly due to the effect of asset sales (net of unit buybacks and debt reduction) (-$0.10), lower comparative properties NOI and the net impact of COVID-related provisions and adjustments on our results (-$0.06) and a lower share of FFO from our investment in Dream Industrial REIT (-$0.03), partially offset by full year income pick-up from a property acquired in 2019 and the lease commencement at our completed property under development (357 Bay Street in Toronto) (+$0.03).

• Net rental income for the quarter and year: Net rental income for the three months and year ended December 31, 2020 decreased by $3.1 million and $14.6 million, respectively, relative to the prior year comparative periods primarily due to lower transient parking revenues as a result of parking lot closures from city lockdown restrictions across our portfolio, COVID-related provisions net of the effect of government programs and asset sales during the prior year. Partially offsetting the year-over-year decrease was the full year net rental income pick-up on a Toronto downtown property acquired in September 2019 and the lease commencement at our completed property under development (357 Bay Street in Toronto) during the quarter.

• Comparative properties NOI⁽¹⁾ for the quarter and year: For the three months ended December 31, 2020, comparative properties NOI decreased by 4.1%, or $1.2 million, when compared with the prior quarter, predominately driven by lower weighted average in-place occupancy in Other markets; in particular at Saskatoon Square there was 39,000 square feet of early termination since the beginning of this quarter to accommodate a new technology tenant seeking to take early occupancy for a term of over 15 years, partially offset by 8,900 square feet of new leases taking occupancy during the quarter.
  
  For the three months ended December 31, 2020, comparative properties NOI decreased by 6.9%, over the prior year comparative quarter, primarily driven by lower transient parking revenues across the portfolio as a result of city lockdown restrictions and lower weighted average occupancy, primarily as a result of transitory vacancy. Geographically, Toronto downtown was down 1.8% while Other markets were down 24.1%. In Toronto downtown, lower transient parking contributed to a decline year-over-year. Excluding the effect of lost revenue from parking lot closures, comparative properties NOI for Toronto downtown increased by 0.4%, primarily driven by higher net rental rates. In Other markets, we had 169,000 square feet of transitory vacancy and early terminations of which 39,000 square feet was an early termination during the quarter as noted above that was subsequently leased at Saskatoon Square and a 55,000 square feet industrial tenant bankruptcy at the Eglinton and Birchmount property. However, we have subsequently leased this space to a logistics company at net rental rates substantially higher than the previous bankrupt tenant, improving the overall tenant profile of that property.
  
  For the year ended December 31, 2020, comparative properties NOI decreased by 1.8%, over the prior year primarily driven by lower transient parking revenues across the portfolio as a result of city lockdown restrictions and lower weighted average occupancy in Other markets, partially offset by higher weighted average net rental rates in Toronto downtown. Excluding the effect of lost revenues from parking lot closures, Toronto downtown comparative properties NOI for the year ended December 31, 2020 would have increased by 1.8%, primarily driven by renewals and new leasing totalling 104,000 square feet taking occupancy during the year, with rental spreads 43.0% over expiring rates. In Other markets, comparative properties NOI would have decreased by 5.8% compared to a decrease of 8.1% over the prior year, after excluding the effect of lost revenues from parking lot closures, primarily due to the same reasons noted above.
  
  We expect parking revenues to improve when lockdown restrictions are lifted and traffic to our properties improves.
  
  We are actively managing our assets in the Toronto downtown region, which represent 86% of our comparative investment property fair values, to improve the quality of the buildings and to continue to improve rental rates in this market. For our assets in the Other markets region, which make up the remaining 14% of our comparative investment properties fair value, we are repositioning these assets to improve occupancy and liquidity in the private market.
  
• NAV per unit⁽¹⁾: As at December 31, 2020, our NAV per unit was $28.69, compared to $28.17 at September 30, 2020 and $26.70 at December 31, 2019, up $0.52 or 1.8% and $1.99 or 7.5%, respectively.
  
  The quarter-over-quarter increase in NAV per unit of $0.52 was primarily due to cash flow retention from operations (diluted FFO net of distributions) and incremental income from our investment in Dream Industrial REIT, coupled with our unit buyback program at prices below our NAV per unit. The year-over-year increase in NAV per unit of $1.99 was primarily driven by fair value uplifts in our Toronto downtown investment properties totalling $60.7 million, supported by third-party appraisals on seven investment properties, representing 26% of total investment properties fair value, along with the effect of our unit buyback program.
  
  NAV per unit is considered one of the Trust’s key metrics and has increased consistently over the past 15 quarters as we improve the quality of our assets and the value of the business.

• 357 Bay Street redevelopment project is now complete: During the fourth quarter of 2020, the Trust completed its redevelopment project on time and on budget, as part of our strategy to transform 357 Bay Street in Toronto into a best-in-class boutique office property. The single tenant took occupancy of the 65,000 square foot building on November 1, 2020 and commenced rental payments.
  
• ESG Update: The Trust included the following sustainability targets in its corporate goals for 2021: 1) submission for the Global Real Estate Sustainability Benchmark assessment in 2021; 2) achieve green building certifications for additional properties; and 3) 100% corporate level involvement in collection and tracking of ESG data on a timely manner. In addition, the Trust released its 2019 Corporate Sustainability Report in December 2020 (link), which outlines the priorities and achievements of the Trust’s Sustainability Strategy.

BUSINESS UPDATE

As at December 31, 2020, the Trust had over $148 million of available liquidity⁽¹⁾, approximately $245 million of unencumbered assets⁽¹⁾ and a level of debt (net total debt-to-net total assets)⁽¹⁾ of 41.1%. During the fourth quarter of 2020 the Trust closed on a $44 million mortgage secured by a property in downtown Toronto for a seven-year term with an annual interest rate of 3.17%.

Since March 2020, the COVID-19 pandemic continues to cause significant economic and social disruptions to Canadian residents and businesses. The province of Ontario is currently under its second emergency shutdown under the Emergency Management and Civil Protection Act. At this time, we still do not know the duration and extent of the pandemic or shutdown, and the impact they may have on the financial performance of the Trust for the next two years and beyond. Since we announced the launch of our strategic plan in 2016, we have transformed Dream Office REIT into a safer, higher quality company. As a result of these initiatives, we believe Dream Office REIT is currently well positioned, with a portfolio of exceptional real estate, primarily located in downtown Toronto, combined with a strong balance sheet and ample liquidity.

Despite COVID-19’s disruption to the leasing market, our tenants’ abilities to make decisions for their businesses and the stay-at-home order currently in place, the Trust is continuing to manage an active pipeline of renewals and new leases with existing and prospective tenants.

During 2020, the Trust executed leases totalling approximately 500,000 square feet across our portfolio at a weighted average net rent of approximately $29.91 per square foot, or 32.6% higher than the weighted average expiring net rent on the same space. Of that total, approximately 450,000 square feet were leased during the COVID-19 period from April 1, 2020 to the end of the year. The majority of these leases commence in 2021 and 2022. To date, the Trust has already secured commitments for approximately 70%, or just over 600,000 square feet, of 2021 total portfolio lease expiries.

Approximately 2.4% of the Trust's total portfolio is currently sublet, with a weighted average in-place net rent of just over $25 per square foot. This ratio is in-line with the Trust's historical percentages pre-COVID.

The following table summarizes selected operational statistics with respect to the trailing three quarters and the month of January 2021, all presented as a percentage of recurring contractual gross rent as at February 18, 2021:

	Cash	Deferral	25% of rent forgiven
	collected*	arrangements**	under CECRA program	Outstanding***
Q2 2020	96.5%	0.9%	1.3%	1.3%
Q3 2020	97.1%	0.5%	1.3%	1.1%
Q4 2020	97.2%	—%	n/a	2.8%
January 2021	96.9%	—%	n/a	3.1%
* Includes the 50% of recurring contractual gross rent that the Trust received from the government through the CECRA program. ** Deferral arrangements are presented net of subsequently received cash receipts. *** Outstanding balances in Q4 2020 and January 2021 include balances relating to tenants that may qualify for the CERS program totalling 1.1% and 1.3% of recurring contractual gross rents, respectively.

Our tenant relations team continues to engage and support our tenants through the pandemic so that they can recover quickly with an economically viable business for the long term. We have been educating tenants on government-led relief initiatives and assisting tenants with back to work planning for their employees. In certain instances, the Trust has granted deferrals and rent repayment arrangements to select tenants on a case-by-case basis.

From April to September of 2020, we worked with our tenants to apply for the Canada Emergency Commercial Rent Assistance (“CECRA”) program operated jointly by the federal and provincial governments. Under the program, tenants paid 25% of their April to September gross rents, while the Trust forgave 25% and the government reimbursed the Trust for the remaining 50%. Through participation in the CECRA program we were able to help approximately 100 tenants to meet their rental obligations during this difficult time. The Trust has collected substantially all of the 25% rent that the participating tenants owe to the Trust.

On October 9, 2020, the federal government announced the new Canada Emergency Rent Subsidy (“CERS”) program, which is currently in effect. Under this new program, eligible tenants would have their rent subsidized based on a sliding scale of up to 65%, with an additional 25% for businesses which were required to shut down as a result of a mandatory public health order. We worked collaboratively with a significant portion of our tenants who qualify for the program and we believe the strong collections in Q4 2020 have been assisted by this program's support for our tenants.

During Q2 2020 and Q3 2020 we agreed to work with certain tenants representing 1.6% and 1.0% of recurring contractual gross rents, respectively, by deferring their gross rent for a period of time to help their business. During Q4 2020, the Trust received payments on outstanding deferral arrangements representing 0.7% and 0.5% of Q2 2020 and Q3 2020 recurring contractual gross rents, respectively. The current weighted average deferral period on current arrangements is approximately five months.

For the three months and year ended December 31, 2020, the Trust has recorded COVID-related provisions totalling approximately $0.8 million and $3.5 million, respectively, which are included in the line item “COVID-related provisions and adjustments” within net rental income. These provision balances represent an estimate of potential credit losses on our trade receivables for all uncollected rent during the three months and year ended December 31, 2020. Partially offsetting the impact of provisions included in “COVID-related provisions and adjustments” is the impact of government programs totalling $0.2 million and $2.0 million, respectively, that the Trust qualified for during the fourth quarter and for the year.

“Our business was well positioned to manage the challenges over the last year and we have been pleased with the resilience of our portfolio and our ability to continue to support our tenants and their businesses through COVID,” said Michael J. Cooper, Chief Executive Officer of Dream Office REIT. “We will remain focused on operating our assets to the best of their potential and look forward to the road to recovery.”

CAPITAL HIGHLIGHTS

KEY FINANCIAL PERFORMANCE METRICS					As at
(unaudited)	December 31,		September 30,		December 31,
	2020		2020		2019
Financing
Weighted average face rate of interest on debt (period-end)^(5)		3.56%		3.60%		3.88%
Interest coverage ratio (times)^(1)(6)		3.2		3.2		2.9
Net total debt-to-adjusted EBITDAFV (years)^(1)(6)		8.8		8.4		7.5
Level of debt (net total debt-to-net total assets)^(1)		41.1%		39.9%		37.6%
Average term to maturity on debt (years)		4.1		4.3		4.7
Available liquidityand unencumbered assets
Available liquidity (in millions)^(1)	$	148.5	$	152.5	$	413.6
Unencumbered assets (in millions)^(1)		244.8		292.7		281.3
See footnotes at end.

• REIT A Units purchased for cancellation: Over the course of 2020 the Trust purchased for cancellation approximately 5.8 million REIT A Units under the normal course issuer bid (“NCIB”) program, at a cost of approximately $110.2 million or $19.08 per unit. We believe that the market price of our REIT A Units since March 2020 has not reflected the intrinsic value of the Trust and the repurchase of REIT A Units represented an attractive investment opportunity. Accordingly, the Trust has been purchasing REIT A Units for cancellation. The Trust has repurchased the maximum allowable REIT A Units under the current NCIB program.

“The successful execution of the strategic plan over the past five years have afforded us the balance sheet strength and liquidity to maximize the normal course issuer bid program at a significant discount to our net asset value in 2020,” said Jay Jiang, Chief Financial Officer of Dream Office REIT. “Our business remains well capitalized with ample liquidity and unencumbered assets to continue to execute on our strategies and capital program in 2021.”

OPERATIONAL HIGHLIGHTS

SELECTED OPERATIONAL INFORMATION						As at
(unaudited)	December 31,			September 30,			December 31,
	2020			2020			2019
Total portfolio^(7)
Occupancy rate - including committed (period-end)		88.0%			88.0%			90.8%
Occupancy rate - in-place (period-end)		85.2%			87.8%			90.2%
Average in-place and committed net rent per square foot (period-end)	$		23.31	$		23.15	$		22.56
Weighted average lease term (years)			5.1			5.1			5.5
See footnotes at end.

• In-place occupancy: Total portfolio in-place occupancy on a quarter-over-quarter basis decreased by 2.6% relative to Q3 2020. In Toronto downtown 75,000 square feet of negative leasing absorption during the quarter was partially offset by the single tenant taking occupancy at our newly completed 357 Bay Street property in Toronto downtown during the quarter. The Trust currently has commitments for 35,000 square feet of vacant space in the region which will take occupancy during 2021.
  
  In the Other Markets region we had 71,000 square feet of transitory vacancy and early terminations of which 39,000 square feet related to an early termination of a tenant's lease to accommodate a new technology tenant seeking to take early occupancy for a term of over 15 years at rates slightly above market for the property. The Trust has secured leases for a further 73,000 square feet of currently vacant space, of which 55,000 square feet relates to a logistics company for a lease commencing in February 2021 at net rental rates substantially higher than the previous bankrupt tenant in that space; improving the overall tenant profile of that property.
  
  Total portfolio in-place occupancy on a year-over-year basis decreased from 90.2% at Q4 2019 to 85.2% this quarter. The decrease year-over-year was largely due to the same reasons noted above.

• Lease commencements for the quarter and year: For the three months and year ended December 31, 2020, approximately 210,000 square feet and 393,000 square feet, respectively, of leases commenced, not including temporary leases or 357 Bay Street in Toronto which came online during the quarter. Rental rates on renewals and relocations over the respective periods were 2.0% and 12.4% above expiring rates. For the year ended December 31, 2020, positive leasing spreads on renewals in Toronto downtown of 37.8% were offset by negative leasing spreads on renewals of 1.3% in our Other markets region due to some negative leasing spreads on renewals in Saskatchewan and a 185,200 square foot renewal near expiring rates at our single tenant property in Kansas, U.S.
  
• Tenant profile: As illustrated in the chart below, the Trust has a diversified and healthy tenant mix.

See chart above, Estimated Annualized Gross Rental Revenue by Tenant Industry

Our top ten tenants make up more than 38% of gross rental revenue and 50% of our top tenants have credit ratings of A or higher.

CONFERENCE CALL

Management will host a conference call to discuss the financial results tomorrow, February 19, 2021 at 10:30 a.m. (ET). To access the conference call, please dial 1-888-465-5079 in Canada or 416-216-4169 elsewhere and use passcode 5750 188#. To access the conference call via webcast, please go to Dream Office REIT’s website at www.dreamofficereit.ca and click on the link for News & Events, then click on Calendar of Events. A taped replay of the conference call and the webcast will be archived for 90 days.

OTHER INFORMATION

Information appearing in this press release is a selected summary of results. The consolidated financial statements and Management’s Discussion and Analysis (“MD&A”) of the Trust are available at www.dreamofficereit.ca and on www.sedar.com.

Dream Office REIT is an unincorporated, open-ended real estate investment trust. Dream Office REIT is a premier office landlord in downtown Toronto with approximately 3.5 million square feet owned and managed. We have carefully curated an investment portfolio of high-quality assets in irreplaceable locations in one of the finest office markets in the world. We intend to enhance these properties to elevate their desirability to tenants and investors, and improve the overall community experience. For more information, please visit our website at www.dreamofficereit.ca.

FOOTNOTES
^(1)	FFO, comparative properties NOI, diluted FFO per unit, NAV per unit, interest coverage ratio, net total debt-to-adjusted EBITDAFV, level of debt (net total debt-to-net total assets), available liquidity and unencumbered assets are non-GAAP measures used by management in evaluating operating and financial performance. Please refer to the cautionary statements under the heading “Non-GAAP Measures” in this press release.
^(2)	A description of the determination of diluted amounts per unit can be found in section "Our Equity" under the heading “Weighted average number of units” of the MD&A for the three months and year ended December 31, 2020.
^(3)	Total number of units includes 5.2 million LP B Units which are classified as a liability under IFRS.
^(4)	Excludes properties held for sale and joint ventures that are equity accounted at the end of each period, as applicable.
^(5)	Weighted average face rate of interest on debt is calculated as the weighted average face rate of all interest bearing debt balances excluding debt in joint ventures that are equity accounted.
^(6)	Interest coverage ratio and net total debt-to-adjusted EBITDAFV as at December 31, 2019 have been restated to conform to current period presentation due to a change in the calculation of EBITDAFV. For further details, please refer to the “Non-GAAP Measures” section under the heading “Earnings before interest, taxes, depreciation, amortization, and fair value adjustments (“EBITDAFV”)” in Dream Office REIT’s MD&A for the three months and year ended December 31, 2020.
^(7)	Total portfolio excludes properties held for sale, properties under development and joint ventures that are equity accounted at the end of each reporting period, as applicable.

NON-GAAP MEASURES
The Trust’s consolidated financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”). In this press release, as a complement to results provided in accordance with IFRS, the Trust discloses and discusses certain non-GAAP financial measures, including FFO, comparative properties NOI, diluted FFO per unit, NAV per unit, available liquidity, unencumbered assets, level of debt (net total debt-to-net total assets), interest coverage ratio and net total debt-to-adjusted EBITDAFV, as well as other measures discussed elsewhere in this release. These non-GAAP measures are not defined by IFRS, do not have a standardized meaning and may not be comparable with similar measures presented by other income trusts. The Trust has presented such non-GAAP measures as Management believes they are relevant measures of the Trust’s underlying operating performance and debt management. Non-GAAP measures should not be considered as alternatives to net income, net rental income, cash flows generated from (utilized in) operating activities, cash and cash equivalents, total assets, non-current debt, total equity, or comparable metrics determined in accordance with IFRS as indicators of the Trust’s performance, liquidity, cash flow, and profitability. For a full description of these measures and, where applicable, a reconciliation to the most directly comparable measure calculated in accordance with IFRS, please refer to the “Non-GAAP Measures” section in Dream Office REIT’s MD&A for the three months and year ended December 31, 2020.

FORWARD-LOOKING INFORMATION
This press release may contain forward-looking information within the meaning of applicable securities legislation, including statements regarding our objectives and strategies to achieve those objectives, our expectations regarding parking revenues after the COVID-19 pandemic, our expectations regarding the effectiveness of the CERS program, the ability of our tenants to qualify for government programs, our ability to increase the desirability of our buildings, our asset management strategies, future purchases of units through its NCIB program, prospective leasing activity, anticipated timing of our first Global Real Estate Sustainability Benchmark assessment, our ability to achieve green building certifications, and our ability to collect and track ESG data on a timely manner. Forward-looking information is based on a number of assumptions and is subject to a number of risks and uncertainties, many of which are beyond Dream Office REIT’s control, which could cause actual results to differ materially from those that are disclosed in or implied by such forward-looking information. These risks and uncertainties include, but are not limited to, general and local economic and business conditions; employment levels; mortgage and interest rates and regulations; the uncertainties around the timing and amount of future financings; uncertainties surrounding the COVID-19 pandemic; the ability of the Trust and its tenants to access government programs; the financial condition of tenants; our ability to refinance maturing debt; leasing risks, including those associated with the ability to lease vacant space; rental rates on future leasing; future parking revenues and interest and currency rate fluctuations. Our objectives and forward-looking statements are based on certain assumptions, including that the general economy remains stable, interest rates remain stable, conditions within the real estate market remain consistent, competition for acquisitions remains consistent with the current climate and that the capital markets continue to provide ready access to equity and/or debt. All forward-looking information in this press release speaks as of the date of this press release. Dream Office REIT does not undertake to update any such forward-looking information whether as a result of new information, future events or otherwise except as required by law. Additional information about these assumptions and risks and uncertainties is contained in Dream Office REIT’s filings with securities regulators, including its latest annual information form and MD&A. These filings are also available at Dream Office REIT’s website at www.dreamofficereit.ca.