Dream Office Real Estate Investment Trust

TSX:D.UN

Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen. Welcome to the Dream Office REIT Year-end Conference Call for Friday, February 19, 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 form and MD&A. These filings are also available on Dream Office REIT's website at www.dreamofficereit.ca. [Operator Instructions] Your host for today will be Mr. Michael Cooper, Chair and CEO of Dream Office REIT. Mr. Cooper, please go ahead.

[Michael J. Cooper, Chairman & CEO]

Thank you, operator, and good morning to everybody. Today, I'm with Gord Wadley, the Chief Operating Officer of Dream Office; and Jay Jiang, the Chief Financial Officer. This has been a challenging time to run any business, and running office buildings in this environment has been really peculiar. We're coming up to 12 months with very few people working out of offices and a tremendous amount of discussions over how people will work in the future. We will not answer that today. Today, we're going to focus on the assets that we own and what we're doing with them. I would say the following. We spent 5 years repositioning the portfolio so that we would be 85% assets in downtown Toronto. We're strong believers in the future of the city of Toronto. The city of Toronto was doing better than it ever did the day before the pandemic hit. And we believe that Toronto will continue to do well after the pandemic is manageable. With regards to the buildings that we own, buildings of this quality and location, over the last 150 years or so, have done exceedingly well, and we expect that they will do very well in the future. Dream Office is 85% downtown Toronto office buildings and 15% outside of downtown Toronto. Outside of downtown Toronto includes Sussex Centre, which is a great building that's been doing very well; and 2200 Eglinton, which is adjacent to a new LRT subway stop that will be opening later this year. We're getting that building -- that land rezoned. It's 15 acres. We think we'll end up with maybe 2.5 million square feet of extra density at $70 a foot. That's about $175 million, which would be about $4 a share of additional value. We're also an owner of Dream Industrial stock, which is worth about $340 million, which is another $6. So we're currently trading at below $20, and we have $10 a share in our Dream Industrial REIT stock, and likely, we'll achieve that increment value this year at 2200 Eglinton. That remains -- that leaves $10 a share on all of our office buildings. And we're very excited at this pricing to be able to announce that we've completed our normal course issuer bid in January. And looking forward, we'll be using our capital to improve our buildings and buy back stock. I'd like to turn it over to Gord to provide an update on the operations. After that, Jay will speak about the financials, and then we'd be happy to answer your questions. Gord?

[Gordon Wadley, Chief Operating Officer]

Well, thanks, Michael, and good morning. First and foremost, I hope everyone in your families are all staying well. It's great to get a chance to connect with you all today. Ultimately, prior to the pandemic, the Toronto leasing market was a very favorable arena for, not just our company, but all landlords in general. Vacancy was sub 2% and rents were at record highs on both new leases and renewals. Demand for office space from the tech, finance and professional services sector provided tremendous tailwinds for commercial owners in downtown Toronto. The pandemic has resulted in office vacancy for Toronto to increase to over 7.5% downtown, a level not seen since the great financial crisis. New leasing has slowed a bit but this is a direct result of the various states of emergency being mandated, and largely as a result of these actions, many tenants are understandably delaying decisions on their future real estate strategy. Despite all of this and, further, despite what you read in the news and various social media hot takes, it was an active year of leasing for Dream Office. And of equal importance, rents held up very well on the over 500,000 square feet of deals we completed in 2020, and we continue to see real positive momentum and some increasing activity as we get to the spring. During the pandemic, and closing out 2020, we completed approximately 65 deals for over 500,000 feet. For some additional context, we did 3 transactions over 25,000 feet and one at approximately 190,000 square feet. So from our perspective, deals of scale are getting done and companies are making commitments. Our rates have been very resilient, and it's a 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. Net rents have continued to be strong and in line with our business plan at pre-pandemic levels. We've also seen steady growth in the NER performance of deals being completed, where, on average, we're 21% over budget on an aggregate basis. Like most of our peers, we've had some construction delays and challenges that we're managing through on our Bay Street collection. These are due solely to the mandated shutdowns on interior construction, and we're targeting substantial completion by the end of this summer. The feedback from tenants and brokers alike has been tremendous. We really look forward to unveiling it all to you all soon, and hopefully, we'll get a chance to walk you through in person. The optimism on our Bay Street offering is further supported by the 12 deals that we did in that specific project at strong rents and NERs, 30% higher than budgeted. These are a new class of boutique assets that don't compete with large towers. They're low rise, lockable, both small, private floor plates, all new base building systems and showcase the level of luxury finishes that are unique to the market. In the current pipeline, we're actively negotiating and trading paper on 20 deals totaling over 215,000 feet. There's a lot of press and focus around shadow vacancy in the state of the sublease market in Toronto. This has not been an issue or something we're seeing in the REIT. Currently, in our portfolio, there's only 103,000 square feet of sublet space available or, put differently, that's less than 1.8% of our portfolio nationally. In other markets, Saskatchewan and Calgary, occupancy is down a bit due in large part to a few known vacates and one insolvency restructure. Tours and activities in these markets have, however, picked up, and that's due in large part to their phase of the reopening. We very recently received and are responding to 3 RFPs totaling 55,000 feet. Also to note, we've completed a few key deals that haven't taken occupancy yet in Saskatchewan, one being a major national bank for 15,000 feet; and a large tech firm who are expanding significantly. Our current and committed occupancy is 94.5% in Toronto and approximately 72% in other markets. Collections continue to be strong at 97% for the year, with average WALT in the portfolio at almost 5.5 years. Early in the pandemic, we dedicated team members, reallocated resources and set our goals to ensure we stay in constant communication with our tenants. This was really to be a resource, a sounding board and ultimately be a partner to help facilitate their occupancy decisions. We've had some great success with this approach on direct renewals, renewals without a broker. This also helps us provide guidance on government subsidies and, most importantly, in turn, be an active and empathetic partner on making payment arrangements, which support our collection ratios. Operationally, and of great importance, I also want to touch briefly on some of our ESG initiatives here at Dream. While Dream has always been an organization that's emphasized the importance of being a good corporate citizen, we're making it an absolute priority to increase transparency on ESG. More than ever, investors want to know how businesses are incorporating these principles into their operations. Our team recently published a 2019 sustainability report. In it, we highlight some of our accomplishments, which include our reductions in energy and waste water consumption, greenhouse gas emissions as well as a number of highlights on employee development and the overall diversity of our workforce. We also discuss our 5-year plan and targets for sustainability, which we think are a bit ambitious but achievable. I would encourage everyone who's listening or who's interested to go see our ESG program and our sustainability report on our website. Every time you go and click and open, we make a donation to a worthy charity. However, our work doesn't stop there. We're in the process of implementing many initiatives across the business. We built ESG into our corporate goals for the years ahead, ensuring we remain very accountable to the execution and, ultimately, that our progress is measurable. Our primary goal this year is to submit for the GRESB assessment, the leading sustainability benchmark in the real estate industry. We think this will be a valuable communication tool for our investors. We are also continuing to work towards additional green building certifications, WELL health and safety certifications and achieving BOMA BEST and LEED in a number of our buildings. Internally, we established a diversity, inclusion and advancement team to ensure that our entire workforce has equal opportunities to succeed and, also, that our traders, contractors and service providers align and share their inclusivity policies. This is to ensure everyone we deal with is doing their part to be leaders in inclusion. We also just kicked off our sustainability working groups internally, which will focus on green property operations, sustainability reporting, communications and both employee and tenant engagement. Overall, our goal is to be recognized as one of the top sustainable REITs in Canada, and we look forward to sharing our progress over the coming quarters. Ultimately, I feel good about our portfolio. The quality of improvements we've made to our assets at both the operating and aesthetic level put us in a very strong position as we come through COVID. But bricks-and-mortar aside, I couldn't be more pleased with how the team has responded this past year. 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 this combination of having irreplaceable assets, coupled with the quality, high character team of people we have operating and leasing those assets, that gives me the greatest confidence going forward into 2021. Thank you, everyone, and I'll turn it over to Jay.

[Jay Jiang, Chief Financial Officer]

Great. Thank you, Gord. We're pleased to report our fourth quarter and year-end results for 2020. The materials are fairly comprehensive, so we will try to avoid repeating the content of the press release or MD&A. Instead, I will speak to our financial position, capital allocation and our internal budget for 2021. We're then happy to answer any questions on the materials afterwards. Despite being in a year-long public health crisis, we are pleased with the resiliency that our business has shown, allowing us to support our tenants and employees through COVID. We entered the pandemic having substantially completed our strategic plan to transform the business into a pure-play downtown Toronto office REIT. We built a well-capitalized balance sheet, which has resulted in a much safer and less volatile business. We feel the strategy works out well when times are good or bad. We reported net asset value per unit of $28.69, which implies an annualized total return of 11%, including distributions over 2020. We stated since February of 2016 that NAV was our focus metric and that it has now increased for 15 quarters in a row. Our year-end NAV includes independent appraisals for $778 million of properties or 31% of our portfolio prepared this year. Our units reached a high of $36 last March and dropped to $15 within the month. The average unit price was about $20 from March to year-end or roughly a 30% discount between the trading price and where we think its intrinsic value. Our IFRS carrying value applies a 4.8% cap rate or implied at $600 per square foot for downtown Toronto and, therefore, less than $200 per square foot for the rest of the portfolio. We have been monitoring private market transactions since COVID, which all fall in between $650 to $1,000 per square foot. And in almost all instances, we like the quality and the location of our portfolio better. So as this morning's trading price of roughly $19.30, based on the 4.8% cap rate for downtown Toronto, which we noted above, we feel comfortable with based on the private market comps, the market is attributing either stabilized net rents in the low 20s net or structural vacancies in the low 80s. Please note that our in-place rents are currently about $25. And as Gord noted, we did our leases during COVID at $0.38 net. So we feel there is a good margin of safety. Based on replacement costs developed today, net rents need to be in between $0.40 to $0.50 net, and we believe there will be long-term demand for commercial and residential space in the downtown core. Toronto is well positioned to continue to thrive on the economic center in Canada, supported by a strong immigration forecast and continuing expansions of multinational organizations. Now obviously, COVID has been a real distraction. Currently, real estate is very thematic, and the narrative is unfavorable for office REITs with lots of opinions about work from home versus return to the office. We feel that while it is too early to tell how tenants will behave post pandemic, businesses will continue to need space to collaborate, meet clients, drive sales and provide a separation between the work and the home. As the city opens back up and everything which makes Toronto a world class city return, the people will follow. For many businesses, providing a desirable workplace will be critical in talent recruitment and retention. So with all of that in consideration, we believe repurchasing our own units represent the best long-term investment for every dollar. So we have maximized our normal course issuer bid program and repurchased 5.8 million units or 9.4% of our own company at an average price of $19.08. After the buybacks, our balance sheet remains in very good shape. We are at 41% debt to gross book value, have approximately $150 million of liquidity and an unencumbered asset pool of $250 million with no covenant restrictions. Over the next few years, we do not have a lot of capital commitments, so our balance sheet remains flexible. We have approximately $110 million of debt to refinance in 2021 with a weighted average expiry rate of 4.88%. We think we will be able to obtain higher net refinancing proceeds and lower the interest rate by about 150 basis points on secured financing based on today's rates. We are also continuing to move forward with applications for our 3 major mixed-use development projects, 250 Dundas, 2200 Eglinton and 212, 220 King. In 2020, we received council zoning approval at 250 Dundas, for which we got appraisal and then recognized a $43 million fair value gain in the first quarter. All of the projects are still in predevelopment for 2021, so we anticipate approximately $12 million of soft cost to be spent. We think the capital is a great return on investment without adding a lot of risk as we continue to elevate the highest and best use of each site. Gord has already talked about our commitment to the Dream collection on Bay Street. Once the construction stoppage is lifted, we will resume our work and anticipate substantial completion in 2021. We spent $20 million to date, which implies $30 million left to spend this year. While we manage our business and financial planning with a very long-term view, we acknowledge that everyone on this call wants annual guidance for 2021, so we will share our internal budget. I would proceed with the obvious caveats that budgeting is challenging as we still do not know the extent or duration of the pandemic, when the economy will reopen, how it will reopen or how tenants will behave when that happens. We anticipate that annual comparative property NOI to be flat to down slightly for 2021 as the in-place occupancy will likely be lower in the first 2 quarters of 2021 as a result of the state-of-emergency measures limiting physical tours and leases to be signed. Many of our prospective tenants have identified the space when they had to wait for us to finalize the decisions on their lease. We believe many deals in our pipeline will be signed by the second half of 2021 and in-place and committed occupancy for the portfolio will trend up and end 2021 relatively in line with where we are at today. This will position us well for 2022. Our development obligation at 357 Bay in downtown Toronto was completed this quarter, and we worked to commence rent payments in November. We will realize the full year's rent in 2021. In addition, we anticipate 1900 Sherwood Place in Regina to be completed on time and potentially exceeding our budget of 8.0% development yield by the second half of the year. Both of these projects will contribute to net operating income but not comparable properties NOI. So we anticipate total property's NOI to be up in 2021. Using rounded numbers, we budget approximately $12 million of general and administrative expenses, relatively flat interest expense, $2.5 million increase in FFO from our share of Dream Industrial units based on guidance of 5% SP NOI growth and over 10% per unit FFO growth that their management team provided on Wednesday. As a side note, based on current share price, our holdings in Dream Industrial REIT are about 1/3 of our market cap. In our budget, we assume no acquisitions or dispositions. In the base case, however, we will be marketing certain assets in Western Canada and our loan asset in Overland Park, U.S.A. If we add up all of the assumptions I just spoke to, on a leverage-neutral basis, our FFO per year, a unit works out to roughly $1.60 per unit for 2021 or about a 4% increase. As mentioned before, we manage our business with a longer-term view. We look forward to business as usual in Dream Office, and we will update you all accordingly over the course of the year. I'll now turn the call back to the moderator.

[Operator]

[Operator Instructions] And I see we have our first question. It comes from Michael (sic) [ Mark ] Rothschild with Canaccord.

[Mark Rothschild, MD & Real Estate Analyst]

It's Mark. Maybe just expanding on your conversation about the sublease market. There's been definitely notably from brokerage reports that a huge increase in amount is available in the sublease space. But it seems like no change really in as far as your portfolio. Can you give some additional information on why you think that is, what you're seeing overall in the market? And ultimately, do you expect that to have an impact on rental rates?

[Gordon Wadley, Chief Operating Officer]

Yes. It's Gord. That's a great question. It's a great question. So in our portfolio, we're not seeing much, if any, sublease availability. And the reason being is a lot of the subleases you're hearing and reading in the publications across the market are large users. So they're large contiguous pockets of sublease availability. Our average user size is a lot smaller. So if we have a company that subleases space, the impact to our portfolio isn't as apparent to some of the other landlords. We've got a lot of smaller users that qualify for the government subsidies. We've made it a real point to contact and discuss with each one of our tenants what their occupancy plans are to get ahead of them rushing to make a sublease decision. So it's the combination of those factors. And I just think, in general, given the size of our average tenant base, given the size of our buildings, we're just in a better position to weather the exposure of having large tenants sublease space in the market. Did I answer your question?

[Mark Rothschild, MD & Real Estate Analyst]

Yes. In 2020, Dream Office sold some units in Dream Industrial, and clearly, some of that money, if not all of it went to buy back units in Dream Office. Can you talk maybe more strategically how you view the Dream Industrial position? And is this something that you would do from time to time if you see better value in one versus the other?

[Michael J. Cooper, Chairman & CEO]

Sure, Mark. I think that we're finding that the Dream Industrial units are very valuable, and it's a real -- a great source of cash flow. It's free of CapEx. And we expect that Industrial REIT will continue to perform well. So it's a great asset to own. We did sell some in the fall to buy back stock, and as time goes by, we'll probably sell some more from time to time but nothing dramatic.

[Mark Rothschild, MD & Real Estate Analyst]

Okay. Great. And then maybe just one last question for Jay. And maybe might follow up after privately with some of this, you don't have to -- but if you can just give some additional detail on when some of the new leases that you spoke about in your disclosure, another call, will take effect, in particular, maybe at Eglinton and Saskatoon Square?

[Jay Jiang, Chief Financial Officer]

Sure. No problem. Typically, you see a lag of about 6 to 8 months between when the lease is signed to when they take effect. For larger leases, they might take effect longer than a year. So for the -- for your question on the other markets, I would anticipate most of that to hit in-place occupancy in the second half, probably a lot of that in the third quarter. Keep in mind, Sherwood Place goes online in the third quarter as well. So you will see occupancy lift.

[Operator]

We have our next question from Sam Damiani with TD Securities.

[Sam Damiani, Director, Institutional Equity Research]

Just on the occupancy drop in -- in-place occupancy drop in Q4, it was a pretty significant drop. Was that fully expected? Or was there any surprises there?

[Michael J. Cooper, Chairman & CEO]

Gord?

[Gordon Wadley, Chief Operating Officer]

Yes, I can take that question. Good question, Sam. So it was fully expected. We've had this asset strategy over the better part of the last 18 months, where we had a lot of small tenants on small floor plates coming off really low expiring rents. And there's a lot more appeal, especially post COVID, to have dedicated small floors for users. So we've been working through that strategy of strategic vacates and getting full floor. And what I would say to you, Sam, is a lot of the buildings where you've seen a drop in the occupancy, these are small buildings. These are buildings that are 40,000 square feet. The average floor plate on some of these buildings is 3,000 square feet. So if we do lose a half floor tenant, it shows a drop in the occupancy, but really, it's by design. So we're just trying to work through some of those lower expiring rents and set ourselves up for success, having these smaller full floor plates to take out to the market.

[Sam Damiani, Director, Institutional Equity Research]

That's helpful. And just bigger picture, looking at the occupancy drop during the year last year, how much of that would have been unexpected versus just slower demand and maybe the physical difficulty and longer time to get deals done during the economic lockdowns? Just trying to figure out what is going on and if things aren't going to change from the pandemic in the near term, should we expect some continued erosion in occupancy as a potential?

[Jay Jiang, Chief Financial Officer]

Yes. So maybe I'll jump in here from a budgeting perspective. If you notice that the retention and renewal rates are fairly strong, and so I would say that is generally in line with budget. What's really hurt us is the 2 state of emergencies that were enacted, and that sort of really hurt the new leasing momentum in terms of the physical tours and the ability for tenants to sign leases. And so what happens is you just have a bigger pipeline. So I'd say that probably, without COVID, if we're hitting our budgets, our in-place occupancy would still be in the high 90s, and then you wouldn't really see the lag in the churn. But nevertheless, I mean, that gives us the opportunity, as Gord mentioned, in some of these smaller buildings to take back contiguous floors and turn it into turnkey space. And we did a couple of test cases as early as 2019, where we took the rents up from 18%, 19% all the way into the 40s. So we're still seeing strong rents and good demand for the space. It just takes longer.

[Sam Damiani, Director, Institutional Equity Research]

Okay. Just finally, on the Bay Street properties, I think there's a handful, maybe half a dozen buildings where the WALT has gone under 2.5 years, and some of them have dropped vacancy by over 500 basis points in the fourth quarter. Gord, you kind of talked about this in terms of some of this being by design, strategic vacates and whatnot. But as 2021 progresses and you reach completion on this -- these redevelopments, how should we look at -- or how should we expect those buildings to, I guess, perform in terms of reported occupancy and WALT over the course of the year?

[Gordon Wadley, Chief Operating Officer]

Yes. Great question, Sam. So we have occupancy, we're actively negotiating on a number of deals on Bay Street collection, and we've got occupancy rising towards the end of this year. Probably one of the biggest outliers on that building where you've seen the biggest drop in quarter-over-quarter occupancy has been 366 Bay. And that's a building where we're taking the same approach as 357 Bay. There's tremendous potential for this building. It's a small building that we currently have measured at about 38,000 square feet. If that's a building we go to substantially remediate, like we've done with 357 Bay, we take the rentable area up by about 5,000 square feet. We've got these small turnkey floors. There are some users in the market that are in that 30,000 to 45,000 square foot plate that would get their own stand-alone building on Bay Street. So we've got a whole holistic building management plan we're looking at for 366. And we think if we can take the rents up by $10 over expiry. That's an extra $450,000 in NOI per annum. And we think it's a really attractive building. So we see our occupancy going up towards the end of the year, and we've got an asset plan for each one.

[Operator]

Our next question is from Mario Saric with Scotiabank.

[Mario Saric, Analyst]

Maybe the first question for Jay, just on the '21 guidance. In that $1.60 FFO per unit, is there -- the expectation for any lease termination fees for the year, number one? And then number two, does the guidance inherently assume that the government subsidy programs are going to expire in June of '21?

[Jay Jiang, Chief Financial Officer]

Mario, first question, no, we do not forecast lease termination income. We do not anticipate there being material terminations currently. Second question, on wage subsidy, it's formulaic. And it's -- right now, we expect nominal amounts in the first quarter. And therefore, the guidance for the formula hasn't really been brought out yet for Q2 and beyond. So I mean it's very nominal on budget, I think like 58,000 is in there. So we do not rely on the subsidy.

[Mario Saric, Analyst]

Okay. In addition to the wage subsidy, though, I was also thinking about the service program, so just the government assistance programs are coming.

[Jay Jiang, Chief Financial Officer]

Yes. I mean, under the old program of CECRA, you sort of have to try to forecast the provision because you're forgiving 25% of the rent. Under the new program, the tenants are eligible for a higher percentage. So what we would do is maybe forecast a little bit of provisions in there, but our expectations are that, that program will continue to support our tenant's ability to pay. Our rent collections are continuing to be in the high 90s. And by really the second and third quarter of the year, we're going to start to see a recovery and both the tenants coming back, businesses to reopen and our parking garages, which actually is a pretty material figure in our NOI, to gradually recover as well.

[Mario Saric, Analyst]

Got it. So the parking revenue, as you mentioned, fairly meaningful. Is the expectation that, that will fully recover by the end of the year back to 2019 levels?

[Jay Jiang, Chief Financial Officer]

Yes. I would say that it's really like an inverse curve. You had okay parking in Q1 2020 and it dropped. In the summer, it came back a little bit. But here now, it's really hard to say when we're going to come back. So I think by the summer, where we gradually build the curve back up. And by the end of the year, we're going to expect that most of our parking garages will be well utilized.

[Mario Saric, Analyst]

Got it. Okay. Maybe shifting to capital allocation and then the NCIB. Can you remind us of when you can launch the new NCIB? And I think, Michael, you mentioned that the appetite is still there to buy back units given where the stock is trading. And how you characterize that appetite today relative to August of 2020, given the balance sheet leverage has ticked up a little bit and then while there aren't -- you're not expecting many dollars to be spent on development or redevelopment in 2021, I think you mentioned $12 million? Presumably, 2022 onwards, that'll be an increasing use of capital. How do you think about the unit buyback with all of that in mind?

[Michael J. Cooper, Chairman & CEO]

So I would say that the NCIB, we'll get a new one on mid-August. And I would expect on what we see now, if the stock is where it is, we'll use it all up. I mean it's nice, too, because between now and August, we'll get some answers on all the questions that have been raised today. And if we can see that the company is producing higher rents, higher occupancy, getting approvals, we'd be happy to use up the entire normal course issuer bid, and we'll fund it either through increased mortgages. I think we're getting a bunch of gains in our book value so that, that will offset the capital structure. And it's not that much money. So I think we'll continue to buy back stock as much as we can. I mean one of these is, we had 114 million shares at the peak. Now we're about 54 million. So we've reduced them by more than 50 million shares. It's kind of like a habit that we're going to break.

[Mario Saric, Analyst]

Fair enough. Okay. And then just from a Dream Industrial perspective, you talked about potentially doing a bit more, not materially. So I'm just wondering from a tax perspective, is there anything that prevents you from more materially filling down your stake and then redeploying into either redevelopment or the -- or your units just from an efficiency perspective?

[Michael J. Cooper, Chairman & CEO]

I'm sorry, was the question whether there's anything to prevent us from doing that?

[Mario Saric, Analyst]

Yes, from, like, is tax inefficiency an obstacle to doing that if you're still inclined to do so?

[Michael J. Cooper, Chairman & CEO]

I mean our view has been that we really like Dream Industrial, and if we want to get some liquidity, we would do it. Jay, do you want to go through any numbers on that?

[Jay Jiang, Chief Financial Officer]

Sure. I would -- to answer your question at a high level, I would say, it's a consideration, not an obstacle. In 2020, we sold a little bit. That didn't really have a material impact. We monitor our sort of tax basis compliance with set rules and the liquidity concurrently. So we anticipate the sources of capital use for the NCIB will be achievable within the tax structure.

[Mario Saric, Analyst]

Got it. Okay. My last question just pertains to leasing. Of the 450,000 square feet that was leased during the COVID crisis, and I think you've already taken care of 420,000 square feet of your '21 lease expiries, so you're well along your way there, have you seen any tangible data points pertaining to tenants either shrinking their respective footprints due to work-from-home strategies going forward or, conversely, increasing footprint due to new social distancing requirements? Is there anything in the data there that would suggest tenants are altering their behavior at all?

[Gordon Wadley, Chief Operating Officer]

That's a really good question. It's Gordon. We see a couple of different data points there. And as early as yesterday, we had a tenant discussion with a large tenant that was asking for the availability of contiguous space so that they can grow their footprint to make a little bit more space. We haven't seen -- let me rephrase that. So I'd say few and far between have been the tenants that are downsizing as a result. And we're starting, as we come through this, to speak to more and more tenants about potentially growing their footprint. And our client services team, we like to self-perform some construction and project management on our side as well, too. So we've been using that as an opportunity to talk to our tenants and help plan their space with them. And so we've had a lot of these conversations. And I'd say it's marginally more skewed towards people taking more space than it is the opposite in taking less.

[Operator]

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

[Matt Kornack, Analyst]

A quick follow-up on that line of questioning with regards to the discussions with your tenants. Just wondering, in terms of some of the vacancy that you've had, were those tenants that ultimately had financial strains related to COVID? And then maybe in addition to that, if you could discuss kind of your talks with the government because you've got them in there, you've got some financial services tenants and then maybe what some of the smaller tenants are thinking with regards to space as well.

[Gordon Wadley, Chief Operating Officer]

Sure. Thanks, Matt. It's Gord again. Just unpack your first question. So when we were speaking to some of the tenants, unfortunately, that haven't weathered COVID as well, I'd say, notably, the majority of them were people that would traditionally air issues prior to the pandemic. So I think this just kind of was an inflection point for a number of those tenants that were already struggling a little bit when COVID happened. For the most part, our collections have been tremendous, in the high 90s. So the bulk of the tenants that we're dealing with are committed to trying to make their business work. And we're doing whatever we can to help them on the occupancy side. You made a really good point, and not a lot of people are asking about the government and large users, but our position in working with the government is they've been tremendous to work with throughout the pandemic. We've done a number of notable renewals with them. We're working on a couple of other deals with them at both the provincial and the federal level. Keep in mind, we did 190,000 square feet with them at one of our buildings at the beginning of the year. And they did what they could to work with us to get the deal done throughout COVID, and they were a great partner to deal with, and they're looking at their occupancy strategies as well, too, from the vein of what their workplace is going to look like. They've gone to Workplace 2.0 this previous year. They're looking at doing another kind of hybrid where they're providing more space to their employees. So we're having these active conversations with them. But for the most part, the government has been staying with us and potentially expanding in some spots. Our larger institutional users, we haven't come to any real occupancy variances with them as of yet.

[Matt Kornack, Analyst]

Okay. Fair enough. And then on the lease maturity profile, and I think, Jay, you probably highlighted this in your guidance, but I think for other markets, you already anticipate -- you have commitments in excess of your maturities. But for the Toronto market, I think it's about 60% of total. What would you expect in terms of a retention ratio on maybe both markets? But what are the thoughts on retention at this point?

[Jay Jiang, Chief Financial Officer]

Sure. Retention ratio in Toronto, it's been pretty steady, and it hasn't really changed in COVID, and we're seeing about 70%, 75%. I think the easier way to sort of explain downtown Toronto is we don't expect a lot of activity given that right now it's almost March, for the first 2 quarters. But a lot of the pipelines, the tenants are ready to sign. So we think that in Q3, Q4, we're budgeting about maybe 300, 300 basis points of positive absorption in each of them. In other markets, as you said, if you look at the spread between the committed and in-place, a lot of that has already picked up. When Sherwood comes in, that'll help the occupancy, but otherwise, they will commence in sort of the second half of the year. On retention ratio, just because the portfolio is only 15% of the business and the buildings are unique to the geographies, it's hard to forecast the retention ratio. It's block and tackle. And I would generally say that we are in the business to fill up the space, and we are very open minded and we will get the occupancy up because that improves the liquidity from both the financing or a private market perspective.

[Matt Kornack, Analyst]

Sure. And at this point, it sounds like rents have held fairly firm. I mean, obviously, that can change but definitely in Toronto. Is that the fair characterization?

[Gordon Wadley, Chief Operating Officer]

It is, Matt, yes, they've stayed very consistent to pre-pandemic levels.

[Matt Kornack, Analyst]

And maybe this quarter, leasing costs were up a bit. Is that a function of -- I think it may have just been 357 Bay, but is there something else to that in terms of the pandemic? Or...

[Jay Jiang, Chief Financial Officer]

That was actually unique because the commencement this quarter was weighted and/or skewed heavily towards Overland Park lease that took occupancy, I think, at the end of the year.

[Matt Kornack, Analyst]

Okay. And last question for me. You have some very pretty looking renderings of some pretty impressive density that you can add on your sites. Do you foresee that being done within Dream Office REIT? Or would it be sold to another entity? Or what would be the time line if it is going to be done within Dream Office?

[Michael J. Cooper, Chairman & CEO]

So in reverse order, 212 King. We have a partner there. We started the zoning process. That would likely take 2 years before we have zoning, let alone site plan approvals. That's pretty distant. 250 Dundas is a really interesting building because it's got a lot of apartments, and it's right in the hospital district. We could have started it sooner, but I think that with all the changes in health care, we're looking at opportunities to get higher returns on that building by working with the hospital. So that's going to take some time. And they're really quite busy right now. But I think that we have 4 buildings in the health care district. And I think that they may surprise on the upside for what they're worth. And then at 2200 Eglinton, as I mentioned, in the Golden Mile study area, we're making a lot of progress. That's probably hopefully, a year away for zoning, 2 years away for site plan. What's really nice about that one is it's so much land, and there's so much density there. We can do it in smaller chunks. So 2200 Eglinton, I think we'll start that the minute we can. 250 Dundas, Gord, what do you think? If you had to estimate a start date, when would you do that?

[Gordon Wadley, Chief Operating Officer]

About 2 years, Michael, 2.5 years.

[Michael J. Cooper, Chairman & CEO]

Yes, 2 or 3 years, I think. And as far as whether we have partners or not, these projects will all be owned by Dream Office going forward. We could look at bringing in partners, not in 212 King but maybe in 2200 Eglinton.

[Operator]

[Operator Instructions] We have our next question from Jenny Ma with BMO Capital Markets.

[Jenny Ma, Analyst]

Wanted to talk a little bit about the -- what you're seeing in investment market because, Jay, you mentioned in the guidance that you haven't assumed any dispositions, but you also mentioned that you're marketing from Western Canada and the Kansas asset. So I'm just wondering when you're thinking about that, do you think, right now, there's -- it's going to be productive to be managing it? And when you're thinking about these, call it, noncore assets, is the desire to maximize the value of these assets or really try to get them off the books and really shore up your Toronto portfolio?

[Michael J. Cooper, Chairman & CEO]

Jay, do you want to answer that?

[Jay Jiang, Chief Financial Officer]

Sure. Yes. So there was an earlier remark where I made that improving the occupancy of all the buildings in the other markets will be beneficial for financing, and if we don't sell it, we could probably get a pretty good LTV relative to the fair value or carrying value. And if we get the occupancy higher, it also increases the desirability for these properties to be sold. In our budget, just because of uncertainty, it's really hard to forecast both the timing of the acquisition -- disposition, if it happens, and what the price would be. So we tend to want to avoid that. And also for the purpose, we do not want to rely on their liquidity for capital allocation purposes. Overland Park is unique. Just as a background, that building was tied to a building -- industrial building that is now in the Dream Industrial REIT, and the debt is in a CMBS pool. But in April of this year, we can pay it off without the defeasance costs. So we will market that building shortly. It's got a great covenant U.S. bank. We recently signed the 5-year deal that took occupancy -- or it was a renewal in December. And we're curious to see what that pricing will come in at. But once again, we do -- don't rely on it. But generally, I'd say that, I mean, other markets, we're able to get the occupancy up. So we're fine managing it. We think the value is very reasonable on the books, but we're really happy to have sold the assets that we did over the past 4, 5 years and just focus on downtown Toronto because we think that's where the future is.

[Jenny Ma, Analyst]

Okay. So it sounds like Kansas could be something that happened sort of second half of this year, and then maybe the other stuff is a little bit more uncertain. Is that fair to say?

[Jay Jiang, Chief Financial Officer]

Hopefully. I mean, the other stuff, it's really kind of random because, I mean, we have marketed over the past couple of years. We sold the majority of it. Excluding 1900 Sherwood, which it feels just like a bond right now. The other buildings, I'd say right now, from time to time, we get unsolicited interest. And we would take a look at them seriously. But we're open -- as people definitely know, like these are on the market, and if there's good interest, we'll engage, but we'll see.

[Jenny Ma, Analyst]

Have you seen that interest -- I was asking, have you seen the interest level shift recently, especially on a post-vaccine basis? Or is it really just random tire kickers here and there that you've been dealing with for the past couple of years?

[Jay Jiang, Chief Financial Officer]

For most of these properties, I would say it's been quite random, and nothing really has changed. But maybe financing is a consideration but there's so much capital out there right now. So we may be able to sell 1 or 2 buildings this year.

[Michael J. Cooper, Chairman & CEO]

Okay. Jenny, keep in mind that about half of the other properties are Burnhamthorpe and 2200 Eglinton, so then you add in Overland. Otherwise, they're pretty slow numbers, I think, $50 million in Saskatoon, maybe $8 million in Calgary. So Overland we would say was nonstrategic. The 2 Toronto assets, we really, really like. And we're sort of -- we could go either way on the other assets.

[Jenny Ma, Analyst]

Okay. Great. And then moving back to the sublet space. And I know it's very small, but -- and I apologize if I missed this, but what is the distribution of that space? Is it fairly reflective of the portfolio? Or is it more concentrated towards downtown Toronto? I guess the weighted average rent on is $25. So a little bit more color on that would be great.

[Gordon Wadley, Chief Operating Officer]

It's spread out pretty much everywhere, [ Wendy ]. We've got some sublet space at Sussex. We've got a couple of very small pockets on Bay Street and Richmond. And then I believe there's another sublet opportunity at Adelaide Place. So it's distributed throughout our portfolio.

[Operator]

Our next question is from Mike Markidis with Desjardins Capital Markets.

[Michael Markidis, Real Estate Analyst]

Quickly for me. Mike, you piqued my interest with talking about essentially a different use at the Dundas site. I was wondering if you can elaborate on that a little bit. And then secondly, would that require any more negotiation with the council in terms of the zoning, which you've already talked to?

[Michael J. Cooper, Chairman & CEO]

No, no. I think what we're looking at is the hospitals are booming. They're going to need more space. So we're looking to see if it makes sense to work with the hospitals to have more -- to have them take space in our building, whether they need any special requirements for it. And we think that could be good for the hospitals to free up space within their buildings. The other thing is we could look at -- on the residential, making arrangements with the hospitals to make sure that they've got accommodations for people that work at the hospital within 300 feet.

[Michael Markidis, Real Estate Analyst]

Okay. No, I think I got you there. So instead of conventional office, maybe an office use or lab type space and then, on the residential side, maybe some sort of contract.

[Michael J. Cooper, Chairman & CEO]

Yes. It's well within the shape of the building we got approved. It shouldn't require anything to go back to the city for.

[Operator]

And we have no further questions. I will now turn the call back over to Mr. Michael Cooper for closing remarks.

[Michael J. Cooper, Chairman & CEO]

Well, I'd like to thank everybody for their continued interest in the company. Please feel free to call Gord, Jay or myself if you have any further questions. We hope that over the next 90 days, we'll do a lot of leasing, get a lot of answers. But in the meantime, thank you for, again, spending your time with us. Have a great day. Goodbye.

[Operator]

And thank you. Ladies and gentlemen, this concludes our conference. Thank you for participating. You may now disconnect. Speakers, please stand by.