Dream Office REIT Reports Q2 2021 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 and six months ended June 30, 2021 and provided a business update related to the COVID-19 pandemic. Management will host a conference call to discuss the financial results on August 6, 2021 at 10:00 a.m. (ET).

OPERATIONAL HIGHLIGHTS

(unaudited)	As at
	June 30,		March 31,		June 30,
	2021		2021		2020
Total properties^(1)
Number of active properties		28		28		29
Number of properties under development		2		2		2
Gross leasable area (“GLA”) (in millions of sq. ft.)		5.5		5.5		5.5
Investment properties value	$	2,483,301	$	2,473,123	$	2,464,222
Total portfolio^(2)
Occupancy rate – including committed (period-end)		85.6%		87.2%		88.4%
Occupancy rate – in-place (period-end)		83.9%		85.8%		87.9%
Average in-place and committed net rent per square foot (period-end)	$	23.18	$	23.26	$	23.07
Weighted average lease term (“WALT”) (years)		5.0		5.0		5.3
See footnotes at end.

	Three months ended				Six months ended
	June 30,		June 30,		June 30,		June 30,
	2021		2020		2021		2020
Operating results
Net income	$	25,464	$	57,600	$	35,610	$	122,431
Funds from operations (“FFO”)^(3)		21,347		23,136		42,656		47,218
Net rental income		27,014		28,179		53,285		57,107
Comparative properties net operating income (“NOI”)^(3)		28,003		30,509		55,995		62,009
Per unit amounts
FFO (diluted)^(3)(4)	$	0.38	$	0.38	$	0.75	$	0.76
Distribution rate		0.25		0.25		0.50		0.50
See footnotes at end.

• Net income for the quarter and year-to-date: For the three and six months ended June 30, 2021, the Trust generated net income of $25.5 million and $35.6 million, respectively. Included in net income for the three and six months ended June 30, 2021 are negative fair value adjustments to financial instruments totalling $11.0 million and $19.1 million, respectively, primarily attributed to the revaluation of the subsidiary redeemable units and negative fair value adjustments to investment properties totalling $3.7 million and $9.8 million, respectively, which represents maintenance capital spent but not capitalized for certain properties.

• Diluted FFO per unit⁽³⁾⁽⁴⁾ for the quarter and year-to-date: For the three months ended June 30, 2021, diluted FFO per unit was stable at $0.38 per unit relative to Q2 2020 as the effect of accretive unit repurchases under our Normal Course Issuer Bid ("NCIB") program in the prior year (+$0.03), NOI from our completed development at 357 Bay Street in Toronto downtown (+$0.02), and improvements in COVID-related provisions and adjustments (+$0.01) was offset by lower comparative properties NOI (-$0.05) and other items (-$0.01).
  
  For the six months ended June 30, 2021, diluted FFO per unit decreased marginally to $0.75 per unit from $0.76 per unit in Q2 2020 primarily due to decreases in comparative properties NOI (-$0.11) which were partially offset by the effect of accretive unit repurchases under our NCIB program in the prior year (+$0.05), NOI from our completed property under development at 357 Bay Street in Toronto downtown (+$0.04) and improvements in COVID-related provisions and adjustments (+$0.01).

• Net rental income for the quarter and year-to-date: Net rental income for the three and six months ended June 30, 2021 decreased by $1.1 million and $3.8 million relative to the prior year comparative periods primarily due to lower weighted average occupancy, lower transient parking revenues as a result of parking lot closures from city lockdown restrictions across our portfolio and a property sale in the prior year. Partially offsetting the year-over-year decreases was net rental income from our completed property under development at 357 Bay Street in Toronto and investment properties operating expense savings.

• Comparative properties NOI⁽³⁾ for the quarter and year-to-date: For the three months ended June 30, 2021, comparative properties NOI decreased by 8.2%, or 2.5 million, over the prior year comparative quarter, primarily driven by a 4.6% decline in weighted average occupancy and a $0.4 million decrease in parking revenues. Over the course of the COVID-19 pandemic we have seen significant reductions in leasing activity and building traffic relative to historical norms leading to declines in occupancy and parking income as a result of repeated states of emergency in Toronto. As the states of emergency are lifted, we anticipate leasing activity and traffic flow to our properties will improve and our comparative properties NOI and parking revenues will begin to normalize by 2022. Since lockdown restrictions were eased in Toronto in June 2021, we have seen significant increases in tour volume as prospective tenants are planning their space needs for a return to the office by the end of 2021.
  
  For the six months ended June 30, 2021, comparative properties NOI decreased by 9.7%, or $6.0 million, over the prior year comparative quarter, primarily driven by a 4.5% decrease in weighted average occupancy and lower parking revenues of $1.6 million across the portfolio as a result of city lockdown restrictions, partially offset by higher rents on lease commencements in Toronto downtown.
  
  We are actively managing our assets in the Toronto downtown region, which represent 86% of our 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 investment properties fair value, we are repositioning these assets to improve occupancy and liquidity in the private market.

• In-place occupancy: Total portfolio in-place occupancy on a quarter-over-quarter basis decreased by 1.9% relative to Q1 2021. In Toronto downtown, 131,000 square feet of expiries were partially offset by 23,000 square feet of renewals and 24,000 square feet of new leasing. In the Other markets region, 45,000 square feet of expiries and 21,000 square feet of temporary leasing expiries were partially offset by 35,000 square feet of renewals and 15,000 square feet of new leases.
  
  Total portfolio in-place occupancy on a year-over-year basis decreased from 87.9% at Q2 2020 to 83.9% this quarter due to net negative absorption.

• Lease commencements for the quarter and year-to-date: For the three and six months ended June 30, 2021, approximately 98,000 and 516,000 square feet of leases commenced, respectively, not including temporary leases. The renewal and relocation to expiring rate spreads for the three and six months ended June 30, 2021 were 12.4% and 6.0%, respectively, above expiring rates. For the three months ended June 30, 2021 positive spreads on renewals and relocations in Toronto downtown of 27.0% were partially offset by negative spreads on renewals and relocations of 3.6% in our Other markets region.
  
  For the six months ended June 30, 2021, positive leasing spreads on renewals and relocations in Toronto downtown of 7.8% were offset by negative leasing spreads on renewals and relocations of 6.3% in our Other markets region. In Toronto downtown, renewals included a 248,000 square feet tenant exercising its option to renew at expiring rates established back in 2010 with no associated leasing costs. Excluding the effect of this renewal option, the increase in net rents on renewals and relocations in Toronto downtown was 22.9%.

• Tenant profile: As illustrated in the chart below, the Trust has a diversified and stable tenant mix.
  
  See Figure 1, Estimated Annualized Gross Rental Income by Tenant Industry
  
  Our top ten tenants make up approximately 39% of gross rental revenue, and 50% of our top tenants have credit ratings of A or higher.

• Completion of 1900 Sherwood Place: During Q2 2021 the Trust completed its development project at 1900 Sherwood Place in Regina. The project was completed on time and on budget. On July 1, 2021, subsequent to the quarter, the tenant took full occupancy and commenced paying rent.

• Environmental, Social & Governance (“ESG”) Update: The Trust currently has a number of ESG initiatives underway which form a component of the corporate and management goals of the Trust for 2021. We have made a submission to the Global Real Estate Sustainability Benchmark to obtain a rating for 2021 which is currently being evaluated. In the current year, we are looking to build on our LEED Gold status certifications in our portfolio by pursuing an additional certification along with the WELL Health-Safety Certification from the International WELL Building Institute (IWBI). During the quarter, Dream Office REIT was recognized as Canada’s largest office portfolio to be WELL Health-Safety rated by IWBI with 25 properties totalling 4.6 million square feet or 87% of the Trust’s Canadian gross leasable area being certified by the group.
  
  The WELL Health-Safety Certification is an evidence-based third-party verified rating for all new and existing building and space types focusing on operational policies, maintenance protocols, stakeholder engagement and emergency plans to address a post-COVID-19 environment now and into the future. The certification is designed to empower owners and operators to take the necessary steps in order to prioritize the health and safety of their staff, visitors and other stakeholders. We believe this certification will demonstrate that our buildings are managed with a view towards the safety of our tenants and visitors.

BUSINESS UPDATE

As at June 30, 2021, the Trust had approximately $150 million of available liquidity⁽³⁾, $319 million of unencumbered assets⁽³⁾ and a level of debt (net total debt-to-net total assets)⁽³⁾ of 41.0%.

Since March 2020, the COVID-19 pandemic has continued to cause significant economic and social disruptions to Canadian residents and businesses. Until June 11, 2021 the province of Ontario was under an emergency shutdown under the Emergency Management and Civil Protection Act. We are currently undergoing various stages of reopening, but we still do not know the duration and extent of the pandemic, whether there will be additional shutdowns, the effect of variants, or the impact these factors 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 and our tenants’ abilities to make decisions for their businesses, the Trust is continuing to manage an active pipeline of renewals and new leases with existing and prospective tenants.

During the second quarter of 2021, the Trust executed leases totalling approximately 147,000 square feet across our portfolio. Subsequent to the quarter and up to today's date, the Trust has signed commitments for an additional 21,000 square feet. Since the beginning of the year, we have executed leases in Toronto downtown totalling approximately 90,000 square feet at a weighted average net rent of approximately $33.05 per square foot, 20.3% higher than the weighted average prior net rent on the same space. In the Other markets region, the Trust secured leases for approximately 150,000 square feet at a weighted average net rent of $13.94 per square foot, a decrease of 12.9% relative to prior rents primarily due to new deals rolling down to market rates in western Canada. To date, the Trust has secured commitments for approximately 764,000 square feet, or 86%, of 2021 full-year portfolio lease expiries.

Approximately 2.2% 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 and also in line with the Trust's sublet ratios over each of the past four quarters.

The following table summarizes selected operational statistics with respect to the trailing four quarters and the month of July 2021 as at August 5, 2021, all presented as a percentage of recurring contractual gross rent:

	Cash	Deferral	25% of rent forgiven
	collected^*	arrangements^**	under CECRA program	Outstanding
Q3 2020	97.6%	0.3%	1.3%	0.8%
Q4 2020	98.6%	—%	n/a	1.4%
Q1 2021	98.5%	—%	n/a	1.5%
Q2 2021	97.4%	0.7%	n/a	1.9%
July 2021	97.2%	—%	n/a	2.8%
* Includes the 50% of recurring contractual gross rent that the Trust received from the government through the Canadian Emergency Commercial Rent Assistance (“CECRA”) program. ** Deferral arrangements are presented net of subsequently received cash receipts.

Our tenant relations team continues to engage with 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.

For the three months ended June 30, 2021, the Trust qualified for government programs totalling $0.6 million. Partially offsetting the effect of government programs are COVID-related provisions totalling approximately $0.2 million, which are included in the line item “Government assistance, net of COVID-related provisions” 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 ended June 30, 2021.

“Despite the pandemic, our focus has remained on improving our best buildings in the best locations so that they become popular and safe spaces for our tenants to bring back their employees,” said Michael J. Cooper, Chief Executive Officer of Dream Office REIT. “We are very aware that we are managing our business in an industry that is undergoing significant change. We believe that our portfolio and balance sheet are very well positioned to capitalize on continuously evolving trends and will continue to improve in value in the near and long term.”

CAPITAL HIGHLIGHTS

KEY FINANCIAL PERFORMANCE METRICS	As at
(unaudited)	June 30,		December 31,
	2021		2020
Financing
Weighted average face rate of interest on debt (period-end)^(5)		3.41%		3.56%
Interest coverage ratio (times)^(3)		3.0		3.2
Net total debt-to-adjusted EBITDAFV (years)^(3)		9.5		8.8
Level of debt (net total debt-to-net total assets)^(3)		41.0%		41.1%
Average term to maturity on debt (years)		3.8		4.1
Available liquidityand unencumbered assets
Available liquidity (in millions)^(3)	$	149.9	$	148.5
Unencumbered assets (in millions)^(3)		319.0		244.8
Capital
Total number of units (in millions)^(6)		55.9		55.9
Net asset value (“NAV”) per unit^(3)	$	29.09	$	28.69
See footnotes at end.

• Financing update: On April 1, 2021, a $9.7 million mortgage secured by an investment property in Toronto matured and was repaid. On the same day, the Trust entered into a new mortgage secured by the same property totalling $30.0 million. The new interest-only mortgage has a term of three years and bears interest at an annual fixed rate of 2.97%.
  
  Also on April 1, 2021, the Trust repaid in full, without penalty, a $26.6 million mortgage secured by our sole property in the United States prior to its maturity date.
  
  On May 1, 2021, the Trust refinanced a mortgage secured by an investment property in Calgary at maturity totalling $28.3 million for a term of three years at an annual fixed interest rate of 3.50%.
  
  On June 1, 2021, a $14.5 million mortgage secured by an investment property in Toronto matured and was repaid. On the same day, the Trust entered into a new mortgage secured by the same property totalling $44.3 million. The new interest-only mortgage has a term of two years with a six-month extension option and bears variable interest at the Bankers’ Acceptance rate plus 1.70% per annum.
  
  On July 2, 2021, subsequent to the quarter, the Trust refinanced a mortgage secured by an investment property in Calgary at maturity totalling $14.5 million for a term of five years at an annual fixed interest rate of 2.54%.
  
  Also on July 2, 2021 the Trust refinanced a mortgage secured by an investment property in Calgary prior to maturity, without penalty, totalling $10.0 million for a term of five years at an annual fixed interest rate of 3.15%.
  
  The Trust has now addressed all of its 2021 mortgage maturities.

• NAV per unit⁽³⁾: our NAV per unit increased to $29.09 when compared to $28.69 at December 31, 2020. The increase in NAV per unit relative to December 31, 2020 was primarily due to cash flow retention (diluted FFO net of distributions) and incremental income from our investment in Dream Industrial REIT.

“We have maintained comfortable liquidity levels, a significant unencumbered asset pool and a safe balance sheet throughout the pandemic, and we will remain disciplined and opportunistic in our capital allocation decisions over the next year,” said Jay Jiang, Chief Financial Officer of Dream Office REIT.

CONFERENCE CALL

Management will host a conference call to discuss the financial results tomorrow, August 6, 2021 at 10:00 a.m. (ET). To access the conference call, please dial 1-888-465-5079 in Canada or 416-216-4169 elsewhere and use passcode 9881 335#. 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, then click on 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 condensed 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)	Excludes joint ventures that are equity accounted at the end of each period.
^(2)	Excludes properties under development and joint ventures that are equity accounted at the end of each period.
^(3)	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.
^(4)	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 and six months ended June 30, 2021.
^(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)	Total number of units includes 5.2 million LP B Units which are classified as a liability under IFRS.

NON-GAAP MEASURES

The Trust’s condensed 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, leverage, 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 and six months ended June 30, 2021.

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 and comparative properties NOI after the COVID-19 pandemic, our ability to increase the desirability of our buildings, our asset management strategies, prospective leasing activity, our ability to achieve building certifications and our ability to collect and track ESG data in 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 effect of government restrictions on leasing and building traffic; the ability of the Trust and its tenants to access government programs; the financial condition of tenants; the timing of current and prospective tenants’ return to the office, 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.