Dream Office Real Estate Investment Trust

TSX:D.UN

Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen, and welcome to the Dream Office REIT Q2 2021 Conference Call for Friday, August 6, 2021. 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 with securities regulators, including its latest annual information 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, Chairman and CEO of Dream Office REIT. Mr. Cooper, please go ahead.

[Michael J. Cooper, Chairman & CEO]

Thank you, operator, and good morning, everyone, and welcome to Dream Office REIT's second quarter conference call. Today, I'm with Jay Jiang, our CFO; and Gord Wadley, our COO. Once we've made our presentation, we will be happy to answer your questions. Over the last 18 months, everyone's lives have changed dramatically at the same time. This quarter it is obvious to me that it will take longer than had been expected to get into a new rhythm on many ways in people's lives, including work. One example that I have thought of, is how to address the different choices people have made around vaccines. Over the last 6 weeks, we will be researching what our policy could be for unvaccinated people in the office. Part of this research as a result is hearing from vaccinated employees that they aren't comfortable coming into the office if they will be exposed to people who are not vaccinated. Firstly, we are not medical people, and we are not scientists. While I don't believe that vaccinated people are much at risk by being around unvaccinated. Neither I nor our team are, in any way, talented or have the background to deal with this. Secondly, I don't even think the scientific community shares the same views. Thirdly, our provincial government has provided no guidance on this issue, leaving every company to find their own way. So we will be taking it a bit slower before we may come back to work mandatory. We also don't know what the capacity limits will be. So we are assuming that after Labor Day, we should be able to have 50% capacity. As a result, we will have people alternating with a week on in the office and a week off from the office through the fall until we know more. What we decided to do is that for September, coming to the office will be voluntary, and it will become mandatory in October so that people can get settled at home in September before they come back to work.Now we're also providing some flexibility for work from home throughout the fall, even among the 5 days that people are on. This will provide people the time to adjust to the post COVID world. Having said that, with the complete ball and carry come back to work policy, we already have over 70 of our people in the office. For the month of August, we've encouraged people to take a vacation and relax. We expect a very busy fall and we want people to have the right frame of mind and the energy to do their best work, starting out from Labor Day. We are providing time and flexibility, not just so people can adjust their life at home when their mental states have to return to the office, because -- but also because we're more confident that people want to come back to work. And we want them to come back to work on their own. These are couple of my observations from recently. I really believe that people want to be based down. Apartment rates increasing in each month. Toronto prices are at an all-time high. We have strong interest from potential new tenants for exciting concepts for our retail. There are more people downtown every day. And on the summer weekend base, the streets are very busy. So people love what Downtown offers. And as soon as they can access it, I am confident that downtown Toronto will thrive again. Already in the U.S., hotel occupancy and RevPAR are just about at pre-pandemic levels.If you look at airline airfares, you'll see that they're introducing significantly more flights, and the actual cost of those flights are no longer discounted. So it does look like we'll see more normal outcomes with a little bit more time. If we look at economies that have opened before us, we're seeing that activity is returning. So while it is a slower return to nonaffected, we are seeing that life is returning to normal. There have been enormous changes regarding labor in our society. Labor is exceptionally scarce and companies are going to further lengths than any time I have seen in my career to attract and retain talent. The government would suggest that people need assistance to help them through this crisis at this time. The reality is that restaurants and many other businesses were unable to open or open at the capacity they are allowed to because they can't get staff.Further, the media has suggested that the only type of employees are the ones who want to stay at home, have more flexibility in their life, and make work a lower priority? Now there are and there have always been all types of people. But while some people may be making a decision to live their life differently after the last 18 months, others have seen the value of being in a financial position and are actually more ambitious than ever. We have seen the most successful investment banks in the world provide access -- sorry, in the world, provide across the board pay increases to entry-level staff. These pay increases are so much that the entry-level analyst at Goldman Sachs or JPMorgan were just about being the top tax bracket in Canada. Imagine that for your first year out of school. Closer to home, the Canadian banks and law firms have raised compensation. In the real estate industry, every single one of our peers, as we do, have unfulfilled -- unfilled positions and competition for caliber is driving up compensation. I actually don't think that there's ever been a better time to enter the workforce or be early in your career to find jobs that achieve great pay and manage an ambitious plan for your career. And that actually includes any time including right after world War II. We are seeing increased wages. And unlike in the previous decade, companies are able to pass these costs through to customers in all industries, almost all industries, so their profitability isn't suffering. As we clearly do not have sufficient skilled labor for the jobs we have vacant in real estate, banking law, service industries and likely in just about every field. It is great that we expect over 400,000 new immigrants annually to help us grow.So given all of the above, I'm pretty bullish about the economy and about our city. With regards to office space, all of our tenants are working with us to get ready to welcome a higher percent of their staff back in the office after Labor Day. We are not seeing any significant changes to how they want to use their office space. In fact, I was speaking with one of the largest office furniture manufacturer in Canada, who said that they are very busy. They are not being asked to make material changes to the furniture they produce. Other than that, their clients want more flexible, less expensive furniture with shorter delivery times. Obviously, over the next few years, we may see more changes, but we aren't seeing them yet. Gord and Jay will provide much more detail on the leasing demand versus supply. But as we have said in our press release, we are seeing a big increase in tours, and we're starting to complete new leases on vacant space. Now that we are seeing more interest from tenants, we anticipate that the third quarter will be our low for occupancy this cycle. With respect to our view of the value of the company, we are very comfortable with current book value and expect to see increases as we get more back to normal. To the extent that there have been trades of -- at downtown Toronto real estate, the values are significant based on cap rate or value per square foot.Good real estate is hard to come by, and Toronto continues to have desirable attributes that make it one of the top markets for investment in North America. We've been investing in our buildings in very creative ways, which are attractive to tenants in the community. We have taken great steps to make our buildings more sustainable. We are also working on making the operation of our buildings more inclusive for suppliers, tenants in the community. We believe our offering are very competitive with our peers, and our approach will keep our buildings desirable over the long term. Often built selling around the core for at least $600 per square foot. As a comparator, condominiums or the same vicinity are selling for about 1,400 square foot -- $1,400 a square foot. So if there's relative value. In addition, we don't just own office building. We also own 26.6 million shares in Dream Industrial, which are currently worth about $425 million, which is a significant portion of our market cap. Notwithstanding that the current stock price is much higher than it has been in industrial. We expect that its outstanding real estate and stock performance will continue to accelerate, which will be a great value to the office REIT. As we have discussed before, we also have development assets that are currently producing income, but also provide additional value, which is less correlated to the office dynamics as they include significant residential components. It is surreal to own assets that aren't used very much for 18 months. Behavior patterns have changed radically. Valuable information is scarce. But we continue to believe that our business is well positioned and will continue to be successful as we adapt to the new world. Gord?

[Gordon Wadley, Chief Operating Officer]

Well, thanks, Michael, and hello, everyone. I sincerely hope you and all your families are doing really well. Candidly, it's no secret, the pandemic in the many various states of emergency have resulted in Toronto vacancy to increase to over 9% downtown across all classes. This is a level not seen since the great financial crisis. It's really important to keep in mind that just before the pandemic, vacancy was around 2.5% across all classes. Vacancy in our portfolio has seemingly moved in lockstep with the market moving from 3% to 9%, taking us to an overall occupancy rate of just over 91%. But that being said, there's genuine and real optimism at all levels of our business from leasing operations and construction, as our clients open their doors, people come back to work and regulations are relaxed. Due in large part to the national vaccination effort and associated reopening of the economy in our core market of Ontario, we're seeing great momentum throughout all phases of our business. Tours are up dramatically, like Michael said, sublease space is being taken off the market. It now represents less than 1.5% of our portfolio. Absorption is picking up and key deal metrics are very strong in terms of net rents and even NERs for deals done this year are all north of $30 on average.Other markets, Saskatchewan and Calgary, current and committed occupancy grew from 71% to 78% since the start of the year. This is due in large part to those economies being opened sooner and coupled with some viable new leasing and expansions to the tune of about 148,000 feet. NERs are up 20% on new deals there and 35% on renewals versus budget. From an income perspective, we're really very pleased with how our teams managed through the COVID pandemic. Regular communications with our clients and brokers have helped secure our overall collection ratio of 98%. For the most part, the vast majority of existing clients have renewed their leases over the last 12 months, as seen by our 75% GLA retention ratio at midyear for 2021. New leasing has picked up in Q2 versus a much slower Q1 in our core portfolio. And to date, we've done about 250,000 square feet, all at pre-pandemic rates and NERs. We also sincerely feel really good about the additional 260,000 square feet of LOIs and deals in very active negotiation, which we hope to report on in the coming quarters. One important variable that supports our optimism is the growing interest in retail leasing. Michael touched on it, but we're conditional on 3 deals for almost 35,000 square feet at rates north of $85 a square foot per average in our downtown retail portfolio. A lot of that space, just so everybody knows, is repurposed or currently not income producing. So it will be a viable impact to our NOI in the future.It's funny. 12 months ago, the hot take was Beds and Sheds. Everyone was talking about Beds and Sheds. Resin industrial were seen as the most viable asset class with bricks-and-mortar retail often left for dead or a distant afterthought. But we're really excited about the quality of these deals we're working on, the concepts and the offerings we're going to provide our clients and the community as a whole. These are potentially landmark transactions that align really well with their Bay Street collection, and we feel the amenity and cashier of these will enhance the value of our assets and overall offering even further. One thing I also take solace in the fact in, is leasing rents and inducements have remained in line with their business plan, thus exceeding rental expectations on our core assets for some recent deals done and outpacing expectations in non-core markets where we see the most demand.The absorption in the core portfolio was tempered very early due to the lockdowns. But akin to what we saw in noncore markets have been accelerating over the last month. We're seeing dramatic increase in tours and interest, which we hope to transition into commitments that we can see share. Aside from leasing and income metrics, the team remains active, on pace and very committed to our operational, construction and most importantly, ESG goals. As a company, we're really fortunate to have focused on great buildings in unparalleled locations. And prior to the pandemic, we used our capital in time to improve our buildings to a whole new standard of boutique luxury. Despite the mandated construction closures, our team has done a great job and had a head start to make our buildings safe throughout the pandemic. We use this time to upgrade many of our assets, not just aesthetically, but from all aspects of base building, ranging from HVAC, mechanical and structural. This is to future-proof and really support all facets that tenants covet coming back to the office. Primarily air quality, vertical transportation and accessibility. By upgrading our assets, we put a real focus improving consumption metrics and data around GHG and carbon utilization associated with our new overall net zero strategy. These variables are really at the forefront of what we hope will separate us from our peers. Our team takes real pride that as a landlord and a leader, we have a tremendous opportunity to influence and improve our carbon footprint and internal line with the growing sustainability demands of our clients.We had a corporate goal this year to establish a viable GRESB score, and the team worked really hard on implementing our ESG strategy throughout the portfolio. We're pleased to report that we have submitted our application last month. And based on our preliminary assessment, hope to secure a strong score next quarter that separates us from our peer set. In the end, being a good community and environmental steward is absolutely core to our business. And as tenants become more sophisticated in their commitment to the environment and community, we want to be ready to share our strategies, be a resource and ultimately partner to make meaningful contributions to support sustainability and the environment. This past quarter, our operating lease was the first to be certified gold and recognized by the Green Lease leaders association of Canada. Also, we had some very strong national coverage coast-to-coast for being the first and largest portfolio in Canada to be well health and safety certified. Just as a quick reminder, the WELL health and safety certification is an evidence-based third-party verified rating to address the post-Covid environment. The WELL health and safety rating helps guide users in preparing their spaces for reentry. We're so proud to have to achieve this high standard in health and safety at this remarkable scale.This verification of our operational and maintenance policies, communications and engagement and emergency preparedness ensures all of our occupants, all of our clients and all of their staff, can feel safe and confident in our buildings emerging from this pandemic, whether it's a boutique heritage building on Bay Street or one of our downtown high rises at Adelaide place, we're ready. In the end, creating healthy and positive buildings has always been a cornerstone of our Dream Office approach. Over the pandemic, this has never been as important. We feel really strongly and committed that having proactively made investments in new technologies and put in place extensive measures and protocols to ensure a healthy and safe return to our buildings, we are very uniquely positioned to capitalize on the momentum that we're starting to see in the market, going towards the end of the year and far beyond. As such, to be honest with everyone, I'm real proud of the team for their efforts and commitments throughout as we transition into new normal.I'll turn it over to Jay. Thank you.

[Jay Jiang, Chief Financial Officer]

Thank you, Gord. I'll be speaking briefly on our operations, financial position and some thoughts on capital allocation going forward. Our operational results to date have been affected by the effects of the pandemic in the multiple states of emergencies in Ontario. Our buildings and parking garages have remained empty for the better part of 16 months, and a decrease in transient parking revenue has negatively affected our results by over $0.03 this year. The majority of tenants are approximately 98% each quarter are paying their rents. Our retention ratio year-to-date has been just shy of 70%, and both spreads and net effective rents on deals executed have been favorable and in line with pre-COVID leasing rates. Unsurprisingly, the main challenge had been for us to tour prospective tenants to see new spaces and whether those prospective tenants to be able to commit to new leases when they do not know when they can return to work. As Gord has covered, we are quite encouraged that we are finally seeing touring activities resume in our downtown Toronto portfolio, and we are optimistic some of those prospective deals will turn into commitments by the end of the year. We have also completed our development project at 1,900 Sherwood in Regina, which will contribute $5.3 million of annualized NOI starting in the third quarter, and we anticipate that post Labor Day, our parking garages will have better utilization.Despite these restrictions and the challenges on occupancy and income, we're quite pleased that our year-over-year funds from operations per unit was relatively flat. We have a great portfolio of assets that is very well positioned to come out of the pandemic, and our balance sheet is in great shape and can provide a lot of flexibility in terms of how we want to allocate capital over the next year. We think there's a tremendous amount of capital available to us in the debt market due to the quality of our portfolio and the strong relationships with our lenders. We have addressed all expiring mortgages in 2021, which collectively equates to about $127 million at a weighted average interest rate of about 2.76. This replaces $104 million maturing at 4.88. So that's a healthy lift on both the balance and the rate. We are also in discussions with our syndicate of lenders on the renewal and upsizing of our secured revolving facility, and we anticipate to be able to finalize the extension shortly at comparable terms. Our net asset value per unit continues to improve. It's up about 1% quarter-over-quarter. Since COVID started, our NAV increased from just over $27 in March 2020 to $29.09 this quarter. Consistent with CBRE cap rates and private market transactions, we have noticed no movements in cap rates for downtown Toronto office buildings during the pandemic, and we are quite comfortable with using 4.8% cap rate on stabilized NOI to value our portfolio in downtown Toronto today.Now to categorize the movements through COVID, the increase in our NAV over the entire period were up 40% from our investment in Dream Industrial REIT, 40% from accretive unit purchases at an average price of $19.3, and the remainder is coming from retained earnings within our business. At our current trading price this morning, just about $22.20, if we fair value our Dream Industrial Holdings and the assets in other markets at book, our downtown Toronto portfolio of 3.5 million square feet is trading at an implied price per square foot of less than $500. We think that's a significant discount to what we consider to be intrinsic value. The appraisals we see at private market comps for similar assets that have transacted. We feel optimistic that the leasing and income will normalize as we come out of the other side and that the employees gradually return to the office. Therefore, we think the obvious use of capital today is for Dream Office to continue to repurchase our units under the normal course issuer bid program. It begins later this month. We have ample excess liquidity on our balance sheet. We can also fund acquisitions with either a disposition of noncore assets when they happen and a bit of our Dream Industrial units. We're happy to take any questions. And now I'll turn the call over to the moderator. Thank you.

[Operator]

And I'll begin the question and answer session. [Operator Instructions] And our first question is from Sairam Srinivas from Cormark Securities.

[Sairam Srinivas, Research Analyst]

Firstly, congratulations on a great quarter. My first question is in terms of the leasing activity. You mentioned that the activity is picking up since June. So in terms of the pre-pandemic levels and what you're seeing right now, how do they compare? And secondly, when you see an occupancy recovery, how is the private market thinking about occupancy? And where are the pricing in the recovery as such?

[Michael J. Cooper, Chairman & CEO]

Gordon, Jay, do you want to take that question up?

[Jay Jiang, Chief Financial Officer]

Sure. The audio wasn't clear, but I think one of your questions was how is the touring activity comparing to pre-pandemic? I think, Gordon, do you want to take that one?

[Gordon Wadley, Chief Operating Officer]

Yes, it's a great question. So pre -- So pre-pandemic, we're probably averaging close to about 25 to about 35 tours a week. Last week, we had our high watermark throughout the pandemic, we had 27 tours. So we're starting to get in line with what the tours were during the course of the pandemic, we're averaging about 5 to 6 tours a week. And the majority of those were virtual tours. Presume sending 3D plans, those kind of things, but active walking tours over the course of the last week, and we'll get our releases today have all been north of 25, which is almost in line with prepayables.

[Sairam Srinivas, Research Analyst]

And then the second part of the question, which I just bought a bit blurred out on audio was in terms of the OTN recovery and how the private market is thinking about occupancy and essentially pricing that into any deals you're seeing in the market?

[Jay Jiang, Chief Financial Officer]

Yes, sure. I think right now, it will take a bit of time for some of the tourists to come into commitments, but we are quite optimistic because the conversations are speeding up. Michael did mention that -- we think Q3 is probably going to be our top in terms of the occupant seat. But just looking at existing renewals and new deals and maybe some expectation that we'll be able to convert some of those leases. We think by year-end, we'll probably be around where we are at today. And then towards next year, we're quite optimistic that the occupancy is going to pick up.

[Sairam Srinivas, Research Analyst]

That's great color. And finally, my last question is around -- I know there's a fleet mentioned in the press release about repositioning the assets in other markets outside downtown and essentially enhancing their liquidity. Can you throw some color into, like, is the thought process to actually -- like are you seeing more deal activity coming out in those markets? Or is it just like am I reading too much into it?

[Jay Jiang, Chief Financial Officer]

Yes, sure. That's a good question. So in those markets, our key goal is to drive up the occupancy and getting the occupancy up has many benefits. You get the recoveries on the operating costs, you make it more desirable for our private market sale. In fact, we're getting more interest now throughout, the summer. So we hope we can probably sell 1 or 2 assets maybe by end of the year, early next year. Third, even if we can't sell the assets when your occupancy is higher. We have a great group of lenders, and they'll be able to give us a pretty good LTV and terms on the property. So on a lever basis, you have those properties now that are in a positive cash flow position and also with pretty attractive financing rates, it provides a pretty good levered return to the company until the day were able to sell them. So we sold a lot of assets already. We're certainly not concerned at all. If we sell the remaining ones. If we do, it's great. If not, it's not going to hurt us, but we plan our budget and liquidity and debt on the assumption that we don't. And if we do its extra capital.

[Sairam Srinivas, Research Analyst]

Our next question is from Sam Damiani from TD Securities.

[Sam Damiani, Director, Institutional Equity Research]

Gord, your comments were very helpful on the sort of the trends and addressing the occupancy decline. I know that some of the occupancy decline in the portfolio was due to some redevelopment activity going on. But just wondering if you're hearing some of the specific reasons why some of the latest departures took place what these tenants are deciding to do? Are they consolidating space, reducing their space needs, relocating to other landlords? And how would you, I guess, compare some of the tenants decisions that have happened most recently to, as the pre-pandemic?

[Gordon Wadley, Chief Operating Officer]

Yes. Good question, Sam. So what we're seeing is a couple. So we've got a private sector. We've got a good roster of private sector clients, and we've got some government clients at all levels. So we had 1 or 2 government clients, downsize due to funding and then also relocate to suburban locations. We haven't really lost any tenants to competitive landlords or competitive situations. So what we're seeing is on the government side, we're seeing some pressure in terms of funding, which has influenced their decisions. What we've seen on the private sector side, we've done a couple of larger deals, blend and extends, get some extra term in exchange for taking back a little bit of space. The space that we do take back is usually quite usable. And some of the space that we've taken back were actually in negotiations with tenants to backfill that space. But the irony, I was talking about this with Michael, the other day. So the irony about some of the space that we got back from the private sector tenants was that we started those negotiations or those discussions even before COVID. So we knew that some of that space would come back. And right now, we're just backfilling it. But on the government side, it's mostly been around sensitivities on funding. And then the private sector side, we've seen some rigs. But that being said, and the same thing, we've seen some private sector clients expand. We have a great partner and a client out in Saskatchewan, took another 30,000 square feet from us. We're talking to a few clients on our Toronto Street portfolio that are looking to expand and are some lease, it's kind of the general consensus throughout the market, but our sublease, our tenant center subleasing are taking their space back off because they're starting to realize that they actually do need the space. So we've seen that drop actively being sublet in our portfolio now is just a little under 1.5%. So that's been reassuring. I hope that helps then.

[Sam Damiani, Director, Institutional Equity Research]

That is helpful. And also just looking at the lease expiry schedule. In terms of the forward commitments that you have today versus, let's say, a year ago or pre-pandemic, it's clear that tenants are waiting longer to make renewal decisions. Is that dynamic starting to reverse? Are you starting to hear from tenants earlier on about renewals? Or is that not happening yet?

[Michael J. Cooper, Chairman & CEO]

Yes. No, that's a good point. So we're starting to hear from them, and we're starting to hear from their brokers. I think brokers have been a pretty good catalyst in the market to try and get these discussions going early. So we've had a couple of larger tenants where we're already engaged a bit earlier now. I think it's twofold. I think people are starting to realize that the market is starting to shift. So they're being a little bit more quick and proactive to try to put a deal together now. So we have been fielding a lot of those calls. And that's kind of what we've been seeing in the market today.

[Operator]

Our next question is from Mark Rothschild from Canaccord.

[Mark Rothschild, MD & Real Estate Analyst]

Obviously, things have worked out really well with Dream Industrial and industrial sector in general. And it's become, as Michael mentioned, a big part of the market cap with Dream Office, with potential continued buyback of units, to what extent are you comfortable with the industrial stake becoming an even larger part of the market cap? And is there a limit to how much you'd want to contribute to the REIT or, does it really not matter?

[Michael J. Cooper, Chairman & CEO]

Thanks, Mark. I mean, we've always said that we hold them for strategic reasons, but not sorry, not strategic, but to make money. And we started buying stock in addition to the first $18 million at $8.75. Last year, we sold 1 million shares, 1 million units. And we continue to make decisions step-by-step, but we're not overly concerned about what happens. We hope it's incredibly successful. If it becomes a huge part of the market cap, we think that's a good thing. But we don't -- we're not a pension fund that manages those kind of things. So we're going to make the decision we think is right all the time, but we're not going to be making decisions based on waiting.

[Mark Rothschild, MD & Real Estate Analyst]

So with potential additional unit buyback to Dream Office, from what I understand, you're saying it could become a much larger position relative position in Dream Office, and that's not a problem at all.

[Michael J. Cooper, Chairman & CEO]

Okay. Yes.

[Mark Rothschild, MD & Real Estate Analyst]

Okay. Great. And maybe just one other small question. When the pandemic started, obviously, parking revenue took a big hit. What are you seeing with the trends in that? And to what extent do you expect that to come back as employees come back to the office?

[Michael J. Cooper, Chairman & CEO]

Gord?

[Gordon Wadley, Chief Operating Officer]

Well, parking has been a little bit slow throughout the summer right now, still. What we did throughout the course of the pandemic is we donated a number of spots as well to first responders that are in the area. People that have been on the front lines of the pandemic. What we suspect in speaking with our clients and talking to them, we should see an uptick by at least 30% to 35% over the course of September and October. And more of a dramatic uptick come November and December as the weather starts to get really cold. We think parking is going to be in great demand. I think in speaking with a lot of our clients and facilities managers, I think there's a -- there's a bit of a reservation around public transit still with their staff. So like Michael said, it's a war on talent a little bit earlier. So a lot of our clients are talking about using parking as inducements and ways to o and win new talent. So we feel pretty good about the parking that we have towards the end of the year and going into Q1 of next year.

[Operator]

Our next question is from Matt Kornack from National Bank Financial.

[Matt Kornack, Analyst]

A question for Gord, I guess, with regards to the lower retention in Q2. Did that relate to the tenant dynamics that you were talking about with the government and private sector? And was there any sort of strategic de leasing related to Bay Street in that as well?

[Gordon Wadley, Chief Operating Officer]

Good question. So may stream, not a lot of de leasing. We were holding off some occupancy on some of our ground-level floors for these retail deals that we're working on. So that was a bit of a lag in the Re forecast. For us, we were caught a little bit by surprise by 110 and at 655 Bay, which was a government-related tenant where we where we assumed renewal. And unfortunately, they were -- they had some of their funding fold. But we are on that very same space, which represents about 35,000 -- just over 35,000 square feet. We're actively negotiating with an existing tenant. So we feel like we can hopefully get that backfilled by no later than the end of Q1 of next year.

[Jay Jiang, Chief Financial Officer]

Yes. And I'll jump in for a little bit. If you look at retention rates by quarter, it's quite lumpy. We, in fact, tracked it over the probably last 20 quarters. And on an annual basis, it's always going to settle in around the same. Mark, which is about between 60% to 70%. We don't think this year will be any different even with the pandemic. So like Q1, we had a higher ratio. We had a lot of renewals impact the government, keeping their space this quarter was down a bit. We expect the rest of the year to pick up and end up in the same spot at year-end.

[Matt Kornack, Analyst]

Okay. That makes sense. And then just on Bay Street more generally, other than 366, Bay, do you anticipate maybe expanding what you're doing there to other buildings? Or are you happy with kind of the configuration of those? And then maybe more generally on Bay Street as well, just where are you at in the process of the repositioning and investment in those assets?

[Gordon Wadley, Chief Operating Officer]

Those are good questions. So we'll start with the repositioning of the assets. So we did have some construction delays that set us back just over 10 weeks. We're on all the outdoor works or aliad, our retail will be done by September. Some of the finishing works around the lobby, the vertical transportation buildings upgrades and throughout a few of the buildings will be pushed into early Q1 of next year. But we're really happy with the buildings that we've done. We can't wait till it's safe. So we can show everyone on the call. We're happy to walk you through. But the quality of work has been incredible. The feedback from our clients has been incredible. And what's been really cathodic for us is it's not quarter related, but we just finished and closed a deal last week at one of our Bay Street collection buildings where we had expiry rents at $20 and our average net rent in this new building -- or sorry, at 80 Richmond are now over $44. So we've seen a huge lift in the deals. Our asset thesis is paying off on the deals that we're doing, and people are really excited with the quality of the work that we're doing as well, too. So on the actual work itself, we did get some delays in timing, but we're starting to see a real pickup. And people seem really excited about the retail alleyway as well too, which is a great amenity.

[Jay Jiang, Chief Financial Officer]

Jay, on the lending environment, you've addressed 2021 maturities. Looked like some of them were a bit shorter in duration. Was that rate driven? Or is there something strategic to the terms that you went with on the refinancing? A little bit of both. Some of the lower maturity deals were actually, for example, 2, 200 and 250 Dundas. And on those ones, I think we're still going through the predevelopment phase, and we wanted to keep the optionality to open the loan-to-value and the rates were really good. So that was really the main reason. Everything else was pretty standard, and we're going for 3 years again on our credit facility like before.

[Matt Kornack, Analyst]

Okay. And because you mentioned it on 250 Dundas, I mean there's been a bit of a trend towards health care usages. That's obviously in close proximity to the hospitals here in Toronto. Any thoughts as to maybe changing or approaching more health-care-related tenancies there, whether it's lab space or medical office, et cetera?

[Michael J. Cooper, Chairman & CEO]

Well, it's not just the office space, also the residential space, we're located besides Sick Kids, Toronto General, Mount Sinai, the Rehab Hospital and Princess Margaret. So I think that there's strategic relations we could have, and we are talking to the hospitals about what we can do together. One of the things is the hospital system, the health system, Ontario has gone through a lot of change right now. So we thought it's a good idea to be patient as they sort of make their own changes, but we expect that there could be great opportunities. With that building plus the other 3 that we own in the hospital district, 4 38 University, 655 and 720 Bay.

[Operator]

Our next question is from Mario Saric from Scotiabank.

[Mario Saric, Analyst]

Just maybe a couple of operational questions for Gord. You mentioned the sublet space now less than 1.5% of the portfolio. That's down from 2.2% at quarter end. Is there any trend in terms of the type of tenant that's taking back the space? And then secondly, would you correlate taking back space with decision-making, i.e., that tenant is deciding on kind of the longer-term office space need by taking back the sublet space? Or is it just simply taking it back and then figuring out what to do 6 to12 months from now?

[Gordon Wadley, Chief Operating Officer]

Yes. So we are seeing -- good question. So we are seeing -- it's predominantly tech related. That we're seeing that had put their sublease space on the market initially. And I think when the pandemic hit and fairness to everyone, there's cash sensitivities and cash restraints that people were being sensitive about. And now that people have kind of worked through the worst of it, and there's a general sentiment that the worst is over, I think people are looking at their longer-term plans. What we're hearing is there's a real demand on labor. So they want to be able to attract and retain new labor. So what we're seeing is people -- when they take their space back, they've been working with in conjunction with our construction teams to kind of repurpose the space a little bit, making some Zoom-specific rooms or some amenity-related rooms. And it kind of serves a great purpose for us because they get the sublease space off the market. And then we also work with them on construction and get some fees through construction as well, too. So we're happy to have those conversations. Our team is working really hard to communicate with our clients pretty frequently. And the other areas where we've done quite well. I've noticed over the course of the last few quarters is we had some tenants that were subleasing space. And now we're in direct negotiations with those tenants. So space that would have come back to us. I can think of about 44,000 square feet right now with 2 tenants. Where we're actively working on extending them directly for longer terms than what the natural expiry was at their sublease. So yes, we're seeing people do it really for operational purposes and the overall consensus is that they want to hold on to their space for the longer term.

[Michael J. Cooper, Chairman & CEO]

Yes. And just one minor clarification for you, Mario. The 2.2% in the press release is amount of space in our portfolio that's sublet. The 1.5 that Gord's referring to is the percentage of space that's on the sublease market. Both numbers are low, interestingly enough, both numbers are declining.

[Mario Saric, Analyst]

Yes. Got it. Okay. And then just -- I think Michael mentioned the war on talent. And I think, Gord, you mentioned one incremental data point in terms of the dark desire for additional parking. So whether it's Dream, the entity or kind of your tenants, are there any other incremental kind of trends that you're seeing that employers are using to really capture that highly coveted talent in the market today relative to what you've seen historically. So clearly, compensation will be one, but what else is really popping up today that you haven't seen in the past?

[Michael J. Cooper, Chairman & CEO]

Jay? Gord? I don't really have a lot of insight on that. Although I'm seeing people recruit earlier in people's university careers going directly throughout the industry through Linkedin in a much more aggressive way than they used to. I'm ben seeing people offering in the states anyways, premiums to prior income like we'll pay 30% more than your 401 K or whatever it's called, whatever your T4 is in the U.S. So yes, we are seeing people getting much more aggressive on comp. I think they're also trying more aggressive on their workplace. But what's amazing is we're seeing people being very aggressive as well on what they expect from people that they're paying a lot of money to. So they expect them to be in the office and to work very hard. Gord? Jay? do you have any other insights?

[Jay Jiang, Chief Financial Officer]

Yes. I think, well, I mean, obviously, compensation is a big part of it. But also, I think the culture of the workplace, you're going to be spending a lot of time at work each day. You want to be with the people you like. The other one is this is the experience of the job. You want to be working on interesting work, interesting deals. And I think they look at it as an entire package as a whole. Office space is another one. They want to have ample space to work in, good lighting, good air. And they want to be in an environment where it creates more of a social experience than just being at work for 12 hours a day. So I think we look at all of that, but it's fair -- like compensation is increasing. We're trying to keep up at the same time, but we have to give it like the complete experience.

[Gordon Wadley, Chief Operating Officer]

Yes. One data point we're following and it's evolving as well, too, is the last expansion fit ups that we've done, at least 2 of the last 4. There's been a real demand for management and kind of executive perimeter offices over the course of the last kind of 3 to 4 years, it's been open, real collaboration space, but we've seen this -- and typically, it's been in law firms where you've seen it, but these were professional services firms where they wanted to build out some offices for their management team, which has been a bit of a change, and we'll keep our eye on it.

[Michael J. Cooper, Chairman & CEO]

Yes. We're hiring okay.

[Mario Saric, Analyst]

My one last question just pertains to kind of Dream Office versus Dream Industrial. You sound pretty bullish in terms of repurchasing Dream Office units. Hypothetically speaking, fulfilling the full NCIB going forward, I know in the past, there may have been some tax implications with respect to selling Dream Industrial REIT. But from a tax efficiency standpoint, hypothetically speaking, would you be able to do that to buy Dream Office units on a tax-efficient basis? Or are they under?

[Michael J. Cooper, Chairman & CEO]

Yes, we could buy this year's full amount of stock under the NCIB without any tax issues. And we have a variety of ways of paying for it. So we've got a lot of flexibility on that. Whether or not Dream Industrial units help fund it or we use other resources. You've got lots of capital. So that's not an issue.

[Operator]

Our next question is from Jenny Ma from BMO Capital Markets.

[Jenny Ma, Analyst]

I'm just wondering if you are hearing about any delta-related impacts on your leasing conversation, realize that it's still very much evolving, but we've seen some headlines out of the states out of large employers in terms of pushing back return to office. So I'm just wondering, in the last few weeks, has that come up at all in the conversations? And also recognizing that you've done a lot of work to your office space to make it safe as well. So if that's a factor at all.

[Gordon Wadley, Chief Operating Officer]

That's a great question...

[Michael J. Cooper, Chairman & CEO]

No. We're not seeing -- sorry, Gord. We're not seeing anything specific with the delta variant in terms of people returning to office plans other than the fact that people who are vaccinated are getting more nervous about being around people who aren't. And that's what I was referring to earlier, Gord?

[Gordon Wadley, Chief Operating Officer]

No, that's a good point. I was just going to add that we spent a better part of 18 months upgrading our buildings, and we've been nationally recognized on a couple of different levels for work to the base building and also with the well health and safety certification, like we're looking at as an opportunity to bulletproof our assets. So as we market space out, we market all of the base building upgrades that we've done, all the filtration, all the UV LED technologies, everything we're doing to mitigate the spread of germs and viruses and clean air. What we're doing is we're putting that front and center in all of our materials. And we've gotten great feedback. And I think we've come up with preparedness and protocol plans throughout our portfolio. We're very vocal with it. And how we lease space now, health and safety, to your point, Jenny, it's a huge component of it. And it's core to what everything that we're doing. And sophisticated tenants now want to know. And a year ago, it was heads of HR and the CFO coming on these tours. Now it's facilities, managers and health and safety officers coming on these tours. So we have to arm ourselves with the right information and touch on the key points to satisfy them. And I've been real proud of the team today for what they've done.

[Jenny Ma, Analyst]

That's great to hear. In these conversations, have you seen any changes in what they're looking for in terms of lease terms or increased flexibility in any way, just to, I guess, guard against a heightened number of unknowns in the next few years?

[Michael J. Cooper, Chairman & CEO]

To be honest, no, not lately, earlier in the pandemic, there was a real focus on shorter terms, flexibilities, rights to terminate, things like that in deals. But over the course of the last kind of 8 to 12 weeks, we haven't seen as quite as much push. The overall vacancy rate has been declining in the core as well, too. So there's slowly being a little bit less leverage in terms of what you can demand on the tenant side for these deals. So it's been trending more towards landlords, a little less towards flexibility over the last course of the 8 weeks, but we are seeing, from a lease perspective, we're seeing much more sophisticated tenants start to really dictate in the schedules, what their expectations are around performance and base building and how we kind of co manage and help support them. So yes. In terms of flexibility, it's been a bit of a declining trade.

[Jenny Ma, Analyst]

Okay. Great. And then moving to sort of the return to office. I'm wondering if you guys are formally tracking what your tenants' intentions are or informally tracking that? And whether or not you're seeing any patterns in terms of what the plans are at least as they stand now, like any differences between government versus private sector tenants or large versus small tenants? Any sort of insight there?

[Michael J. Cooper, Chairman & CEO]

Yes. So we're in constant communication at some of the highest levels with the provincial and the federal government. They're a big client of ours and a valued client. We suspect that we're going to start to see them really reoccupying the offices at least a 50% capacity towards Q1 of next year. Right now, it's a lot of -- they're probably in around 25% to 30% in our buildings. Our private sector tenants, especially on Bay Street because our average size is a little less than 5,000 square feet. They've been operating at almost near full capacities. We've got a number of tenants downtown that are private sector that have been throughout the pandemic and when they've been allowed to do it building their office space. But I suspect governments, the banks, you'll see towards kind of Q4, Q1 of next year once there's a little bit more clarity.

[Jenny Ma, Analyst]

Okay. Great. On the smaller private sector side, have you seen some of your tenants or heard on the street of some smaller operators who've chosen to go virtually, I guess, almost all virtual and really getting back the majority of their space. Yes. Yes and no. And one interesting data point is we've mostly seen it in tenants that are under 1,500 square feet. So if it was an independent office, if it was a tenant that was a professional services for medical, things like that. We've seen some of those tenants choose to work from home temporarily. Ironically, we had one of the tenants actually come back and do a deal in another building after it. But for the most part, it's the smaller offices where we're seeing them move towards not renewing their space.

[Operator]

And we have a question from Sam Damiani from TD Securities.

[Sam Damiani, Director, Institutional Equity Research]

Two quick fair follow-ups. Jay, your comments on the parking revenue in your introductory comments. I think it was $0.03. I believe that was a year-to-date. So can we assume a full return of the parking revenue would boost NOI by about $3.5 million annualized?

[Jay Jiang, Chief Financial Officer]

Yes. Q3 has been a bit quiet. We think -- or we hope the utilization picks up after Labor Day, but you're looking at a one and change per quarter. So once it's back, we'll get that pickup. Interestingly, we're wondering what would be the rates in the garages post COVID because we think a lot of employers won't want their employees to have the perks or the parking passes. We think a lot of people would want to drive to work and traffic's picking up. So we're pretty optimistic about 2022.

[Sam Damiani, Director, Institutional Equity Research]

Makes sense. And then, Gord, you mentioned the sublet stat, and thanks for the clarification on that as well. But -- so if it's 1.5% on offer today, and that's down, like where was that at the peak during the pandemic? And what would that have looked like pre-pandemic, if you have that?

[Gordon Wadley, Chief Operating Officer]

It was always even pre-pandemic. It was always kind of floating around 2%, 2.25%, so we really haven't had any deviation throughout our portfolio. And now it's down to 1.5%. So it hasn't been that many dramatic swings for us on the sublease market.

[Sam Damiani, Director, Institutional Equity Research]

So you would say it's actually below pre-pandemic levels?

[Michael J. Cooper, Chairman & CEO]

Yes, I would. And I think a big reason for that is a lot of our tenants are in around the 5,000 square foot range, and they're not making these huge swings in terms of their occupancy decisions. So I think people are taking early, we're taking a wait-and-see approach. And now people are feeling a lot more comfortable about their space. So yes, we weathered the sublet storm pretty well.

[Operator]

[Operator Instructions] So no further questions. I'll turn it back over to you, Michael, for closing remarks.

[Michael J. Cooper, Chairman & CEO]

Thank you so much, John. I want to thank everybody for their time today. And for the continued interest of the company, and we look forward to having more to share with you in 90 days. Thank you very much, and enjoy your August.

[Operator]

Thank you. Ladies and gentlemen, that concludes today's conference. Thank you for participating, and you may now disconnect.