Dream Office Real Estate Investment Trust
TSX:D.UN
Earnings Call Analysis
Q4-2023 Analysis
Dream Office Real Estate Investment Trust
Amidst the backdrop of a baffling class B and C office market, Dream Office REIT stands out in the cosmopolitan city of Toronto, dominating with its prime locations and robust occupancy rates in premier spots. 2023 unfolded as a banner year for the company, boasting a considerable leasing volume of around 800,000 square feet, a solid jump from the previous year's 659,000 square feet. The net rents persisted strongly within the $30 to $35 per square foot range, aligning with the REIT's strategic projections despite a tightening net effective rent (NER) due to rising costs, sitting at about $17 to $18 per square foot. Even with a cautious stance moving into 2024, Dream Office REIT is well-positioned to meet its occupancy guidance, with admirable tenacity evident in its management of near-term debt and effective hedging strategies that mitigate potential interest rate fluctuations.
The REIT's asset and capital strategy is bearing fruit, highlighted by securing high-profile tenants such as DBRS Morningstar, BFL Insurance, Paramount Films, ICICI Bank, and Citco Bank, reinforcing the allure of its properties like the Bay Street collection. As a testament to their strategic location and resplendent refurbishments, these assets have harvested rents averaging over $38 per square foot – a significant uptick from rents in the low 20s. The less than 1% sublet space in the national portfolio underscores the strength and uniqueness of the REIT's assets, as does the increased downtown Toronto committed occupancy from 82.7% to 85.4%. While some uncertainty around occupancy lingers for 2024, eking out potential positive outcomes from lease expirations remains the focus, along with pushing the environmental agenda receiving high GRESB and Sustainalytics scores and a Green Lease Leader in Platinum recognition.
Financially, Dream Office REIT radiates resilience: diluted funds from operations (FFO) perked up modestly by 2% to $0.38 per unit from the fourth quarter of 2022's $0.37 per unit. Net operating income (NOI) held the line year-over-year, and while the net asset value (NAV) per unit contracted by 3.7% to $33.15, largely due to a recalibration of property values and interest rate hedges, these calculated moves have seen the REIT cut down its variable debt exposure dramatically from 24.1% to 6.7%. This strategic financial positioning, driven by a reductive fixed vs. floating interest rate from over 7% to 5.4%, forecasts annual interest savings of approximately $6 million. The anticipation for a moderate tailwind of people returning to offices, combined with a tempering in interest rates in the coming two years, supports a cautiously optimistic outlook for occupancy and NOI beyond 2024.
You don't have any saved screeners yet
Good afternoon, ladies and gentlemen. Welcome to the Dream Office REIT Q4 2023 conference call for Thursday, February 15, 2024. During this call, management of Dream Office REIT may make statements containing forward-looking information within the meaning of applicable securities legislation. 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 that could cause actual results to differ materially from those that are disclosed in or implied by such forward-looking information. Additional information about these assumptions and risks and uncertainties is contained in Dream Office REIT's filings and securities regulators, including its latest annual information form and MD&A. These filings are also available on Dream Office REIT's website at www.dreamofficereit.ca. Later in the presentation, we will have a question-and-answer session. [Operator Instructions] Your host for today will be Mr. Michael Cooper, Chair and CEO of Dream Office REIT. Mr. Cooper, Please go ahead.
Thank you, operator, and good evening, everybody. Today, I'm here with Gord Wadley, our Chief Operating Officer; and Jay Jiang, our CFO. I'm going to say a couple words about our update tonight. I'm going to turn it over to Gord and then Jay, and then we'd be happy to answer your questions. I want to start by saying that business continues to go as we've expected for the business plan for 2023. There's been a slight increase in occupancy pretty much every quarter, but barely, like a slight increase. We've been achieving our internal budgets and our cash flows, and we've achieved our debt refinancing as planned, so that's all good. Over the last 4 years, it's been very tough in the office sector. About 4 years ago, next month, it's 4 years since everything shut down because of COVID. And at the time, there was an immediate halt to use of office space. It's probably been 2 years since public health has been an issue for the use of office space, but it's been a slow recovery since then. I think we're seeing improvements in the number of people coming downtown, but there's still a tremendous amount of flux in how people are using office space. Businesses are making slow decisions. And aside from a very uncertain geopolitical environment, a Canadian economic environment, specifically in the office sector, we're seeing a very uncertain environment. So together with our Board, we decided that given the environment that we're in, retaining cash is valuable. And we decided to effectively reduce the distribution and retain about another $18 million a year, just to give us more shock absorbers with an uncertain environment. Now, in September 6, we had an Investors Day, and we did say that the way we look at the office REIT is, for 3 years, we think occupancy would be about the same and leasing costs would be about the same. And then in the fourth and fifth year, we get slightly better. We might end up at the end of 5 years, which would be the end of 2028, to have occupancy of around 93% better than it is now, but not as good as pre-COVID, and leasing costs being about the middle between what they were before, and then we'd end up with a pretty good value. So in the last 6 months, we haven't seen improvements, but even still, we sort of think that with all the news and all the frustration around office, it's better to keep cash. So, it's not that things have changed, we just think that the Board has a responsibility to prudently look at what the best use of capital is. In this case, maintaining capital to have more flexibility in such an uncertain environment is a good idea. Regardless of the distribution policy, the intrinsic value of the company doesn't change. So, our view of it is it doesn't go to the value of the company, and in fact, the company is stronger, retaining more cash. And we're focused on how do we maintain the value and increase the value of the company over the longer term. So we think this is a good long-term decision, and we'd like to see some more improvements in the environment, see some of that progress to what we talked about on September 6 with increasing occupancy and reducing leasing costs. And we'll be watching that. And as we feel like there's less uncertainty and we're making progress, we'll continue to look at the dividend policy. And hopefully, we'll see an opportunity to raise the distribution as we're more certain about the conditions. So I think that that's where we're at. We're going to answer questions. But Gord, do you want to give us an update on what the operations are like?
Yes, no problem. Thanks, Michael, and hope everybody on the line is doing well. It's good to speak to everyone today. I'd start by saying none of us are immune to the headlines. And nothing has been more polarizing than the impact of value and negative sentiment around non-core markets, specifically the Class B and C office market. However, one thing is undisputable. And that's that Toronto downtown is regarded as the best office market in Canada for occupancy and rents due to a very talented workforce, vibrant urban lifestyle, with some of the best retailers nationally, making it an attractive destination for businesses seeking a prime location and competitive rates by any global standard. We own and manage nearly 85% of our assets from a value perspective in central and irreplaceable locations in downtown Toronto. As such, 2023 was our most active year of leasing for Toronto, with both direct and sublet space being absorbed market-wide. I'm pleased to say that we've been approximately 800,000 square feet of deals in 2023. This compares to 659,000 square feet completed in 2022. But of equal importance that I want to highlight is rents held up very well across the board. Net rents have continued to be strong at around $30 to $35 and in line with our business plan. This resulted in the spread of about 20% against expiring rents. However, as discussed in our last conference call, higher material and labor costs, combined with higher commissions, have continued to compress NERs, and we're averaging about $17 to $18 a square foot. Ultimately, we completed approximately just over 100 deals this year, which half were renewals and half new deals across the portfolio. For some additional context, we did 1 transaction over 190,000 feet, and we did 6 deals over 25,000 square feet. These key indicators support our optimism that deals of scale are getting done, and more importantly, companies are making major commitments to their office accommodations, coupled with the reality that our rates have been very resilient to our guidance. It's a real testament to the quality and location of the buildings we own, the efforts of our operating team, and ultimately staying true to our asset and capital strategy, which I'll touch on a bit shortly. Despite having a strong year of leasing in 2023, we're being very cautiously optimistic for 2024, with 299,000 square feet already committed versus the 590,000 square feet approximate square footage expiring. Of the 590,000 square feet expiring, only 1 asset makes up 200,000 square feet, and that's 74 Victoria. The team is actively working on over 150,000 square feet of active prospects with varying stages of negotiation in the court, and we'll report more on these in coming quarters. We feel we're very well positioned to meet our guidance, and hope to see additional improvements as the year goes on. As a management team, we're focused on liquidity, given that the cost to improve suites has dramatically grown over the last 4 years. Gone are the days when you could do carpet and paint and ceiling tiles, tenants are dramatically more sophisticated in expectations for a suite. CEOs have now been replaced on tours by HR and facility managers. Front and center is HVAC quality circulation, tech hubs, and smart building software. All of these cost drivers have seen market NERs be compressed on average by about 20%. This coinciding with material and soft cost increases, as well as some supply chain and procurement challenges to deliver. I am very proud of our team to date, as to help mitigate costs, we often self-perform the work, and have consistently delivered on time and on budget. This reputation has been a real catalyst in helping us win deals and outperform the market. Covenant is key. Much like our management team, vendors are very actively reviewing their office loan exposure, and they're becoming much more selective based on properties, location, and quality, in addition to the covenant of the borrowers. They're evaluating tenant profiles and leases carefully, and loan sizes are getting upsized more conservatively. Getting back to my previous point on NER compression, tenants too are much more sophisticated in their demands, and are acutely aware of their own balance sheet and liquidity position. Hence, many are trying to push traditional costs to the landlords on transactions to reduce their tenancy, and this is having a real impact in a high interest environment. Jay can touch on this a little bit more. But in light of these challenges, we've proactively addressed most of our near-term debt maturities, and put hedges in place to reduce our floating interest rate exposure. Our downtown Toronto committed occupancy continues to be very resilient. And our pipeline remains strong, which will continue to support healthy cash flows at our buildings. Covenant-wise, we have large commitments with the federal, provincial, and municipal tenants. We continue to work hard, improve, and leverage our stronger lender relationships to ensure that the balance sheet is well protected through what we believe will be a tough trough in the office lending market. Being honest, I think our reputation, ability to manage, coupled with our well-located assets, has helped us secure some of the best covenant tenants for arguably some of the biggest deals in a very competitive [ submarket ]. We're very pleased to announce this quarter that we've been able to secure DBRS Morningstar for a very large renewal and expansion at Adelaide Place, as well as deals with BFL Insurance and Paramount Films' new office at 36 Toronto. This is on top of doing ICICI Bank's new headquarters at 366 Bay, and doing Citco Bank's new national head office at 20 Toronto, all on top of securing IO for their largest renewal of the year, 438 University. With our Bay Street collection now finished, the optimism on our offering is further supported by the 40 deals that we did in that specific project in 2023, with strong rents averaging over $38 a square foot on average. Keep in mind that we're replacing rents in the low 20s, and high-teens on new space. This is a new class of boutique trophy assets that don't compete with large towers. They're low-rise, they're walkable, they build small private floor plates, all new base building systems, and they have a level of luxury finish that's very unique to our market. In addition to the Bay Street collection, in our current pipeline, all across the country, we're actively negotiating trading paper on about 55 deals, totaling just over 400,000 square feet. This is both in Toronto and other markets. There's a lot of press and focus around shadow vacancy in the state of the sublease market in Toronto and Canada as a whole. This has not been an issue or something we're seeing in the REIT. Currently, our portfolio is only about 35,000 square feet of sublet space available, and this totals less than 1% of our portfolio nationally. Average WALTs in our portfolio continue to outperform the market at just over 5.5 years. Our office utilization rates in Toronto downtown continue to improve gradually each quarter. Year-over-year, our downtown Toronto in-place occupancy rate improved from 82.7% to 85.4%, and in-place and committed occupancy improved from 87.7% to 89%. This compares very favorably to downtown Toronto market stats recently published by CBRE Research, where occupancy declined from 84.7% to just over 82% year-over-year in 2023. Since Q3, our occupancy in downtown Toronto increased 40 basis points from 88.6% to 89% committed. Our retention ratio this past quarter has been quite strong at over 85.7%. Average expiring rates in Q4 was about $24.48, and the new renewal and retention rate was just over $31. This represents a gain of about 30% in rents. Our in-place and committed rents increased from $29.26 in December 2022 to $29.99 in September 2023 to $31.23 this quarter. We signed leases totaling over 781,000 square feet in downtown Toronto alone. This is 25% of our entire portfolio. At a weighted average initial rent of $30.47 per square foot, or said differently, 13.7% higher than the weighted average prior for all net rents in the same space. For 2024, we're tracking toward being approximately mid- to high-80s in current and committed occupancy, with mid-80s being a conservative number due to the following criteria. For additional context, we only have just over 300,000 square feet of expiries to lease by the end of the year, but the bulk of that number is attributed to 1 single tenant at 74 Victoria Street. They expire in November, and they make up almost 200,000 square feet. Our team is working through various options, including extensions, attracting other tenants, and looking at reconversions. Even if we retain a portion, lease some to a third party, or extend it, the result will be upside to the mid-80s guidance we provided, so we're being very proactive and cautiously optimistic. In addition to our leasing and operating metrics, we made tremendous strides in the back half of 2023 pertaining to our ESG, operating sustainability strategy. We mentioned on our last call that we're working hard to secure a viable GRESB rating. We're pleased to report last quarter we had among the highest in Canada at about 87. We also had the country's top Sustainalytics score, and are still among the top 10% in this ranking globally. In addition, we were again recognized as a Green Lease Leader in Platinum. We spent the better part of the past 2 years taking our well-located assets in downtown Toronto and transforming them into a new standard of boutique trophy assets. And this commitment to decarbonize takes our offering even further to ensure we will exceed the highest standards of environmental stewardship and responsible operating standards our clients and stakeholders have come to expect and covet. As we move forward, our team is very committed to our goals in operating and income. We're very passionate about the impacts we're making to our tenants, the community, and the environment. Now for the coming years, it's incumbent on our team to capitalize on these initiatives and continue to position ourselves as a landlord that really does build better communities to work in while driving occupancy, driving rental growth, and adding value to our portfolio. Just in closing, I couldn't be more pleased with how the whole team's navigated through some of the challenges that Michael touched on earlier. Their efforts and dedication to not only our company, but to our clients is what I'm most proud of. At the end of the day, it's a combination of having irreplaceable assets coupled with quality, [indiscernible] of people, we have operating and releasing those buildings that give me the greatest confidence going forward into 2024 and beyond. As always, if any time or anyone would like to tour or see firsthand all the great work we've done, please reach out. We're always really proud to showcase it. Thanks, everybody, and I'll turn it over to my friend, Jay.
Thank you, Gord. I will start off with an overview of our financial results, and then provide some guidance on how we are internally forecasting and thinking about our business for 2024. We reported diluted fund term operations of $0.38 per unit, up 2% from $0.37 per unit in the fourth quarter of 2022. We had approximately $0.02 per unit of lease termination and other non-recurring income in both comparative periods. So on a recurring basis, we are about $0.01 higher. Total comparative properties NOI was flat compared to the same quarter last year. In downtown Toronto, 1.5% higher rents and 1.3% higher occupancies were offset by lower operating recoveries due to our decision to limit amortization of value-add capital into additional rents for certain buildings. In other markets, CP NOI was also flat as higher rent steps and parking income was offset by lower occupancies in Regina and Saskatoon. Our net asset value per unit was $33.15, down $1.27 or 3.7% from Q3 NAV of $34.42. The decrease consists of $29 million attributed to fair value adjustments on investment properties as a result of increases in weighted average cap rates of our portfolio to 5.75%. As part of our valuation process, we obtained external appraisals on $647 million of properties this quarter, or 28% of the portfolio, and we recorded a loss of $8.1 million. Our lenders also appraised $755 million of properties over the course of the year for purposes of financing, which generally came in at or higher than carrying values. The other reduction in NAV this quarter was attributed to $14 million loss on mark-to-market of our swap contracts to fix approximately $365 million of debt from floating to fixed between 2022 to 2023. These positions are valued by independent valuators. So while the negative mark reflects their opinions and future decreases in interest rates, we feel it is better to pay 5.4% fixed for a remaining weighted average term of approximately 4 years versus our current floating rate of over 7%. These swaps save us approximately $6 million of interest expense, or about $0.16 on an annual basis. Since 2021, through these swaps, we have reduced our exposure to variable debt from 24.1% to 6.7%. So even though we incurred a loss on the swaps in the quarter, the swaps remain in the money, the swaps carry a positive value on our books, and continue to generate interest savings. Office remains a complicated sector to model and forecast. We think over time, our view is that more people will return to work, interest rates will normalize a bit over the next 2 years. Improvements will gradually happen in occupancy and rental rates as the sector finds its equilibrium. We think it is still difficult to predict occupancy and NOI for 2024, but we have shared the key assumptions we use in our model. Gord has already covered leasing and occupancy forecast in his prepared remarks. We think we will deliver flat to low single-digit CP NOI in 2024. In addition, 366 Bay will be online by Q4 of this year, and it is estimated to contribute $1.5 million of total annualized NOI by 2025. We are remodeling approximately $11 million of G&A this year, which is relatively in line with $10.7 million reported for 2023. For our investment in Dream Industrial REIT units, we are using the FFO per unit guidance of mid-single-digit growth that the DIR management team provided under conference call. Our Q4 annualized interest expense was approximately $63.5 million. We do not forecast any increases or decreases in rate movement in 2024. But should rates decline, each 50 basis points of decrease in the rates would have a $450,000 or approximately $0.012 of annualized improvement to our FFO. Without assuming any investment transaction activities, our model will produce between $1.40 to $1.45 of FFO per unit in 2024 on a recurring basis and prior to units consolidation. Our current leverage is 50% and debt-to-EBITDA is about 11.5x. We would like to reduce our leverage and continue to derisk our business in 2024. We announced a 2-for-1 consolidation of units while maintaining our distribution at $1 or effectively reducing our distribution by 50%. This preserves approximately $19 million of cash a year to reduce debt and fund leasing costs. Given market conditions and the negative sentiment for office, our Board believes retaining more cash while continuing to pay out a reasonable yield on our stock price is a prudent distribution policy. We will look to sell assets opportunistically at the right price as the net proceeds can make the business more valuable and deliver higher risk-adjusted returns in the long term. It is tough to give disposition guidance today as we are looking at both income properties and development sites for sale. Generally speaking, for every $50 million of assets we sell, proceeds will be used to pay down debt, and we expect leverage to decline up to 100 basis points and debt-to-EBITDA by 0.1x. We have various options. So in making our disposition decisions, we will consider the cash flow, income and future value of the asset we sell versus the proceeds and how that will make the business safer. We will provide more updates on our progress over the course of the year. I will now turn the call back to Michael.
Thanks, Jay. So I hope the way you hear is that our business is generally going according to the plan that we discussed on September 6. And our results are more or less as we expected, but there's an increased uncertainty for office sector specifically and generally in the economy. So we've decided to reduce our payout by half. We're going to consolidate our stock. So we'll go from about 38 million shares to 19 million shares, but we'll still pay $1 a share on the 19 million shares. The $90 million that we retain, that's going to be helpful. We can lease an extra 200,000 square feet to new tenants with that money or otherwise find excellent uses for the capital. It would be great to answer any questions at this point.
[Operator Instructions] The first question comes from Lorne Kalmar with Desjardins.
Just quickly can you just remind me of the rationale behind the unit consolidation?
We just thought it trades at a better range. We're up at $15 to $30 or something like that, that's a little bit better where we are now. We've done this in a number of other companies. Dream Unlimited consolidated went really well since. I don't think we've been at the same price as we were before. Impact has traded down, but we think office will trade well in terms of having a price that's not in single digits.
Okay. And then, you guys talked a little bit about dispositions. I believe you got 212 King or that aggregation of assets there. And then, I believe you also listed 438 University. I was just wondering if you guys could give us a little insight on how the sale process is going, buyer profiles and maybe expectations.
Okay. I'll give you some more general. In Impact Trust, we also have 10 Lower Spadina and 349 Ontario. There is 349 Carlaw that we're selling -- marketing. A couple of things are interesting. #1, we've had a tremendous number of confidentiality agreements signed for both 10 Lower Spadina as well as 438 University. I would say, it's significantly more that would have been signed last year. And I think that our intermediaries are very pleased with that. When you look at the makeup of the buyers, they're almost all for the buyer's own account and high net worth individuals. So, we haven't gone through getting bids yet on either of them. So that's something that's going to happen over the next 6 weeks. We don't have specific information, but it's interesting how many good quality buyers are looking at those 2 assets. At 212 King, that's a development asset, not an income property. We have a partner there, and the site is quite complicated. We've got interest that is quite reasonable. But execution of a development site usually comes with a lot of different conditions about the zoning and how somebody wants to maybe change what the zoning is and work with our partners. So, we're making progress on that 1, but it's going to take another couple of quarters before that's finalized if everything works out. But we'll have more information, I think, on 438 University and 10 Lower Spadina sooner, but they look quite good.
Okay. And then, maybe just quickly for Gord. You guys are obviously outperforming the market in terms of leasing. What types of tenants are you seeing the demand from?
Yes. Great question, Lorne. So we're talking about this today. The provincial government is out in the street for about 1 million square feet right now actively touring with a number of RFIs. So we're seeing a lot of government, some Crown corps. Coming off the new year, we've been seeing a lot of tech firms as well, too. We're starting to hear on tours that some tech firms are starting to get some more funding, which bodes well for going into 2024. But the bulk of the tours have been tech, professional services and a big driver on provincial government and municipal government.
The next question comes from Mario Saric with Scotiabank.
I just wanted to talk about, like in the press release, I think there was a note really focused on your 2024 focus. I think it was noted as leasing, reducing risk, preserving liquidity and exploring, delivering long-term value to unitholders in a very challenging office markets. So it looks like the distribution reduction goes to adjustment liquidity. I think Gord talked about the leasing momentum and the target occupancy levels in '24, and Jay is working on some near-term refinancings on the balance sheet side and if you're looking to sell some assets as well. So to the extent possible, outside of those items, can you talk about options that may exist to explore that long-term value embedded in your [ $33.5 ] outside of those things?
I mean, I think any options you can think about are on the table. So, we're pretty open-minded. I mean it's a challenging time. Dream Unlimited has a big stake in office, we'd like to retain it. And I would just say that we're looking at all of our assets and saying, what's the long-term value, how much liquidity should we get, how do we make the company safer and continue to have increasing upside. So, we're doing it asset by asset and seeing where the value is. But I think we're feeling pretty good about the company, but there's a lot of risk. So, I would say that there's a house view that I've consistently exposed that liquidity is important. It's a risky environment. And throughout all of our businesses, we've been looking for more liquidity. I don't know if listeners were aware, but last Monday, we announced that Dream Unlimited has entered into an agreement to sell Arapahoe Basin. It's creating a tremendous amount of liquidity. And throughout the business, we're just saying, hey, there's a lot of uncertainty at every level and liquidity is primary. And I think with office, it's obviously different than apartments or industrial. So we feel it's a little bit more significant to look at different ways to raise capital to make the company safer. But it's not a specific thing. This is a very unusual environment.
Sticking to liquidity, I think the quoted $187 million has about $100 million that's related to the CIB facility that is focused on retrofits. So if we kind of strip out that $100 million, give or take, you're looking at, call it, $90 million or so, where -- given the risk out there in the market, where would you like to see that liquid still in '24?
Good question, Mario. We're saying the higher the better, obviously. And we're doing lots of things to try to explore ways of increasing that number. We're very focused on refinancing. And we made good progress this year. We only have $73 million of mortgages, which were in advanced stages on. We listed a couple of potential assets that are already in the market. So we'll look at those. And as Michael said, we value liquidity quite a bit. It feels a lot better to have that the cash and the liquidity and the balance sheet, and I'll provide more opportunities in the future. And if things do get better sooner, our business is well positioned.
And I would say specifically because I know you like specific answers. The $90 million savings this year is good. The $90 million of liquidity on the books is good. And I think we had another $50 million or $60 million of liquidity. That would be a pretty good position to be in. But I don't think it's $200 million. I think it's another $50 million or $60 million would be good.
Just sticking to that theme, can you give us an update in terms of what's happening at Edmonton and Birchmount or the [indiscernible]. I'm not sure what you call it now, I can't remember, but...
I don't know, we changed names all the time. What I would say about Edmonton and Birchmount is really apropos of this conversation because we're dealing with the city. Historically, getting zoning has been controversial and getting site plans approved hasn't been that difficult. But we got the zone we wanted. It was a difficult process with a bunch of other landlords, including RioCan and Choice. And we all got our zoning. But now on the site plan, it's been tremendously difficult. We hope to get closer to being in a position on the plan of subdivision and access and other points that go all the way from Victoria Park to Birchmount, but it's holding everybody up. So everything is just delayed. So, I would say, in the last 90 days, we are exactly the same amount of time away from having it ready to go. And hopefully, over the next 90 days, with the city, we'll be able to get closer to having ready to go, but it's incredibly frustrating.
Appreciate that. Okay. This is my last question then on liquidity. One item -- the question is like with the distribution reduction implemented, does that change at all your view on your existing ownership of industrial units in terms of the strategy [indiscernible]?
Well, I think we'd like to keep the industrial units and we'd like to get liquidity effectively out of what we already own because the industrial units are excellent investments. So, I think, like for us, we look at it and say, if we raise $50 million and the industrial units are on the line, that would be $100 million that we can keep in the industrial units for fraternities. So I think that, that's a big part of why it's great to have liquidity from office buildings or from some of the development land, and we'll keep the industrial units.
The next question comes from Pammi Bir with RBC Capital Markets.
Just on the mortgage refis that you're working on, what sort of rates and terms are you seeing? And I'm curious as well what the loan-to-value ratios on those is, including the 2025 maturities?
Sure. It depends on the type of mortgage. Generally, we're trying to get long term and the conversations we've been having with the lifecos and the Schedule I banks, typically 5, 7, 10 years. And on the spreads, we're looking at about GOC 200 to 250. In 2024, actually 212 King is a mortgage that has been amortized for 9 years. So it's got a pretty small balance. And given that we're currently in the process, we might just extend it on the variable. But generally, we're looking at all in about just over 6%.
Okay. Sorry. Was that 212 King -- was that one of the 2025s or...
The 212 King, 6 Adelaide and small building in Calgary is 2024. 2025, we are looking at Adelaide Place.
And that's the big one for next year then?
Yes. That's right.
Okay. And then, just with respect to the distribution cut, how did you decide on the 50% more or less or why not more, I guess? And then just how much cushion does that provide relative to your internal AFFO forecast?
I'll answer the first one, and Jay can answer the second one. I would love to tell you that we have a machine that tells us exactly what the right cut is. But through the conversations, I think the view is that the business is in good shape, but now we should be able to have a decent distribution. 11% yield kind of reflects that people know that it's a high level of distributions for what we're producing. And I think that based on the internal work we've had and discussed it with the Board, the view of the 50% payout from where we were provides shareholders with a decent return and the company with decent liquidity. So, I think it's a qualitative, not a quantitative thing within that range.
Yes. Pammi, with regards to your question on AFFO, so we only disclosed FFO. And the reason for that is, we have 28 buildings. They're all quite unique. And when you have 180 buildings, it's easier to try to apply a reserve. And we put a lot of capitals in over the years. For example, on Bay Street, we put $50 million to really enhance the tenant experience. I will say that how we look at it, if you -- and I'm referring to the MD&A disclosures, when you look at the FFO and the guidance, between $1.40 to $1.45. And then, you can think about it in a couple of different components, all of which is disclosed. One is, how much does it cost to maintain capital reserves in the building? And we're quite focused on only spending money where we can get a return. So, the way we think about it generally, like safety, is about $1 a square foot. And with the leasing, that's where we want to really invest the capital to build a building to have tenants in there. On a quarterly basis and on an annual basis, you're looking at about $6 to $8 per square foot per year. That's what's been happening. We're prepared to go more for strategic deals, for example, in Adelaide Place for DBRS BSL, especially if the tenants are willing to invest in that space as well. Because it preserves the value and the lending value of the building. So as Michael referenced before, $19 million, it could be 200,000 square feet or more, and we think that delivers a lot of good value and return and safety to the REIT. But of course, at the same time, what we're doing is approaching tenants to see if they're willing to accept free rent periods instead of capital, and we're working on pretty creative solutions to both maintain liquidity and to our buildings. One example is 366 Bay, where we work with the tenant to actually get a credit facility to help with the fixturing and finishing. And so, we have a completed development that's fully leased, has a great lending value and it's funded by the facility.
Got it. That's helpful, Jay. Maybe just coming back to your comments on asset sales and leverage, where do you want to get it to? And over what time frame are you thinking?
Yes. So we'd like to get it below 50%. That's for sure. And ideally, the 11.5% should go down as well. Now, we're guiding to low to single-digit CP NOI, which will help with the equation as well. But it also depends on the building we sell. So if we sell the development site, typically that would have lower yield, it doesn't cost us a lot on the NOI and the cash front. And it would give us good liquidity as well and reduce debt. And on the buildings, we'll look at them 1 by 1.
I want to say, when you asked that question, everything is moving. We're going to start to see more office buildings trade. That will start to show maybe a little bit more certainty what values are. So he asks about what percentage. We'll see how it goes over time. I was just saying if we raised an extra $50 million this year, we would have a lot of flexibility to deal with what comes up. I don't think we can give you a leverage level, let's say, over the next 5 years because we're going to have to see how the office values turn out. So we'll work our way through it. But we've got lots of capacity to deal with rolling over mortgages, rolling over mortgages at reduced loan amounts to pay for our leasing, but there's a lot of things that are moving at once. I hope that helps. That can't be more specific.
Yes. No, that's helpful. Last 1 for me. I'm just curious, you mentioned, Gord, I think you mentioned some of the larger renewals that you did in Toronto in the quarter. I'm just curious, what did the -- without getting into specifics on each lease, just generally, what did the NERs look like relative to the prior NER on that same space percentage-wise, I guess?
So just in the prepared remarks, I put it was about 20%. 20% lower than what we had in the budget. So, the rents on the renewals were higher, but we put more deal costs in to help facilitate the refresh of the space. The bigger renewals that we've done, both tenants have been there for quite some time. So there were some NER compression for that. And then just in general, just for materials pricing, procurement, everything, NERs across the board have been down by about 30% in the portfolio. One thing people don't talk about too is commissions. Commissions are almost double what they were.
The next question comes from Sam Damiani with TD Cowen.
First question, I think, Gord, I think it was your comment where you see a tough trough in the office lending market. I just wanted to drill in and see if there was something specific you were alluding to in terms of actual sort of tangible evidence of the Canadian office lending market getting notably tougher in the last short while.
I think what I meant by that is, I don't know if it's a tough trough. I just think there's a lot more scrutiny on the building, the quality of the building, who's managing the building, and then a lot more scrutiny just on the income of those assets. And I'll turn it over to Jay.
Just to be clear, Sam, we rely on Gord for many, many, many things, and he's excellent at the things we rely on and for. But we do not rely on him for understanding the bank's lending criteria. So I'll turn it over to Jay.
So, 2023 was a good year for us for financing. We had about $250 million of mortgages, and we have Finance 287. We do not budge your forecast expectation that we'd be able to continue to up finance. We have great relationships with the lenders, Schedule I banks, lifecos and some of the foreign lenders now through relationships with the Dream Group of companies. They've been very supportive. We've been very transparent in how we deal with the lenders as well. I would say that so far the conversations are so good. But we are obviously in a different market today than pre-COVID. And if you go across and take a poll with all the lenders, I don't think very many will say that they have great appetite to increase office exposures. So what we're really focused is on filling the buildings with great covenants, long leases, investing into the building so that the vendors feel that the lending value is supportable. It makes our job easy to underwrite. And then, with that, we'd be able to have a fair path and visibility on all refinancings.
Yes. That's really good color. And I don't think what you're seeing is a whole lot different than we would have heard you say, 3, 6, 9 months ago. I'm just wondering, have you -- from just a broader markets perspective, not specifically to any of your discussions, are you sensing a notably tougher lending market overall more broadly now versus just 3 or 6 months ago?
We're not seeing an overall change in the market. We're actually doing very well across the board with our borrowing. What we are seeing is that -- in the states, there's a lot of blow-ups with the nonrecourse debt, and it is having an effect on the regulators. So, there's a lot of scrutiny and people are cautious. So far, we've been going -- we've done great in any loan we've done. I think what Jay has tried to say is, it makes sense to be cautious going forward.
Yes. Okay. And next question is just on the 74 Victoria. So, you said the lease comes up there. November, it's about 200,000 square feet. So, I guess, the fact that, that hasn't been dealt with yet, is that part of the decision to make the distribution cut?
Well, I think it's a good example, and I want to be careful in what I say. But as of January -- I think what I said on the last conference call was, we are seeing quite a bit of interest from schools to do leasing. And on January 22, our schools and institutional uses, I think I recall saying that, that's a good use. And on January 22, the federal government came out and said they're changing the rules for students to come to Canada. And we had a tenant who we were very advancement there. We had another tenant, 2 were schools, which were the 2 schools I was referring to in November, and both of those deals are dead now. So that was a disappointment, and it's a significant disappointment because it's hard to get tenants. I'm not commenting on government policy, just saying we're pursuing other things and thought we're in good shape there.
Yes. That's unfortunate, and that makes sense. I think the last question for me. Jay, you mentioned -- you made an amendment in terms of operating recoveries of certain CapEx. I didn't quite catch what you said there. Was that something that is going to meaningfully sort of adjust the NOI run rate in the near term?
Yes. So just for context, what happened there is, we put a lot of capital into some of our buildings to make them better. And specifically, this deals with about 4 to 5 buildings on Bay Street. And because the buildings are small at times when you amortize in, let's say, the lobby, washroom renovations, that would increase the additional rent. So it's more in consideration for the leasing strategy and the existing tenants that we don't want to overburden the additional rent. So that's why we did it. I think, the total amount is about $300,000 to $400,000 a year. Now, in terms of the run rate, what we're trying to do right now is look for opportunities to save on OpEx, and we found a couple of ideas already. So our hope is that in 2024, we find more savings than the $300 million to $400 million. We could pass those savings on to the tenants. And then we can continue to amortize these capital expenditures.
Okay. Okay. And I think the rest of my questions have been answered.
The next question comes from Ross Scindler, private investor.
So basically, I have 2 questions to ask. The first one, I want to ask like the Unity thing at 9,000 right now and [indiscernible]. So basically, [Technical Difficulty] why we should not sell those Dream industrial units. There is not a difference between the NAV and the trading price of that unit is $13 right now and the $17 in the NAV for these units. So by selling those units, why we are not considering the NCIB? And now, the company is doing post consolidation. I mean that unit will be very hard tomorrow with the distribution cut and basically the unit consolidation. So the units will be murdered tomorrow in the market. So, the company should look at the shareholders, also the individual shareholder and other shareholders. So they have to consider the unit price also for taking future decisions.
Yes. I'll attempt to answer a couple of them. First of all, it has been tough on the office region, not just us, but the Canadian sector as well as the U.S. sector. So, we're obviously seeing a large gap between intrinsic value, especially to look at replacement cost versus where it's trading at today. On your comments on the unit consolidation, how we're going to disclose it, we'll flush out the disclosure so it makes it easier to do comparative and to model our business starting in Q1. And in terms of servicing value, we listed a couple ideas that we think that we could sell some of the assets at fair price. We can improve the liquidity and safety and make the company safer and lease our buildings. We think over time as things reach equilibrium, hopefully the share price will come back.
No, but the question is like if we want to have liquidity, why don't we sell the assets to create liquidity and buy back as many units as we can? Because right now the market is not providing anything. So basically the market is very tough. They know that the office buildings are very tough. So every day, this last unit has reduced 20% of value, right. So basically the company has to look at the unit price while taking decisions. So, even if we sell the asset at fair market value, if we lose 2, 3 assets and with that we create liquidity, pay down debts and buy back units instead of unit consolidation. That will be 100% good idea than doing increasing the value or by increasing some FFO or something like that. Nothing [indiscernible] in the market basically. Only those companies which are doing unit buy back, they are the 1 who is getting rewarded. If you can say MFC recently, they are trading at $33, previously $23 when they started buying back the units, the market is rewarding them. So those companies in Canada who are buying units [Technical Difficulty] and CIB, those are the companies that are rewarded by the market. Otherwise all these companies are being murdered.
We used to have 113 million shares outstanding. We have 38. So we've been used to buying back stock. So we bought from 113 million shares down to 38. We're now at about the lowest price we've been through that whole time. So, I understand about buying back stock. I think what we've been saying is, we want to sell assets to raise liquidity in addition to the distribution reduction. And as far as NAV, I said this before, I think as we see more sales, the appraisers will have more information and we'll get better clarity on net asset values of office buildings. So, a lot of that will play out over the next 12 months, but please feel free to call Jay. He's on the press release if you want to talk about this anymore.
[Operator Instructions] The next question comes from Matt Kornack with National Bank Financial.
Just a slightly different tax on that last question. But we've seen employment or sort of employment aid population growth of 125,000 people. Building permits were down 25,000. There's a clear need for housing in this country. And I think Dream Office is ultimately a covered land play, and yet we're seeing assets at impaired value is part of this distribution cut to kind of give you some time till we get to a point where you'll see that additional asset value? Or maybe are you seeing investors that recognize that again, you're sitting on very good land and the best city in the country.
So, I would say that if a bunch of us own this company privately, we would not have specific distribution to the time like this. We would take a look at the business where we invest the money and how much liquidity we have. So, I think we're looking at this much more in the light of what is appropriate for the business to produce. With regards to housing, there is a crazy demand for it. Toronto is a very difficult city to get housing starts. It's very difficult to put the pieces together to build. There's a lot of things going on with City Hall and we are dealing with them. And everybody's making progress, but it's very slow. So, I think we're going to see more flexibility to not replace office space if you want to redevelop an office building. But we're still not there, but it's coming. I think we're making a lot of progress towards that.
And I think we saw a recent announcement of the project that didn't have an office replacement and allowed residential. Is that the beginning of it? Or do you think that there's still hoops to go through to get the city to come to the conclusion that residential may be the better usage for these?
Now, my personal view is the best approach would be to say, here is the pathway to build residential when you have office. What they're doing is, they're looking at each one and they're studying the situation. So, in that case, we can see the reasons for not having office replacement here, but there's no general rule. And then, maybe if you had 200,000 square feet of office, maybe you could replace it with 100,000, but it's all one-offs. This is all happening while the city is doing a big study to come up with a plan for how much office do they really need to protect, if any? So, they're looking at that now, but the idea of a universal approach will only come after they've finished studying it.
This concludes the question and answer session. I would like to turn the conference back over to Mr. Cooper for any closing remarks.
Thank you, operator. Thank you, everybody, for participating in this call. And please feel free to reach out to Gord, Jay or myself, and looking forward to keeping you updated, leasing, refinancing and getting on with the business. Thank you very much.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.