This press release contains forward-looking information that is based upon assumptions and is subject to risks and uncertainties as indicated in the cautionary note contained within this press release.
TORONTO, Feb. 20, 2020 (GLOBE NEWSWIRE) — DREAM OFFICE REAL ESTATE INVESTMENT TRUST (D.UN-TSX) or (“Dream Office REIT”, the “Trust” or “we”) today announced its financial results for the three months and year ended December 31, 2019. Management will host a conference call to discuss the financial results on February 21, 2020 at 10:00 a.m. (ET).FINANCIAL HIGHLIGHTSSee footnotes at end.See footnotes at end.Net income for the quarter and year: For the three months and year ended December 31, 2019, the Trust generated net income of $63.2 million and $117.3 million, respectively. Included in the respective periods are fair value losses recorded on financial instruments totalling $9.5 million and $55.2 million, respectively, primarily attributed to the revaluation of the subsidiary redeemable units.Diluted FFO per unit(1)(2) for the quarter and year: Diluted FFO per unit for the three months ended December 31, 2019 was $0.40, compared to $0.42 at Q3 2019 and $0.39 at Q4 2018. Diluted FFO per unit for the year ended December 31, 2019 was $1.70 compared to $1.66 ($1.59 excluding lease termination fees received from a tenant in a Montréal property) in the prior year.
The year-over-year increase in diluted FFO per unit for the three months and year ended December 31, 2019 was mainly due to increases in comparative properties NOI(1) (+$0.04 and +$0.21, respectively), general and administrative expense savings (+$0.01 and +$0.02, respectively) and fees earned from property management and managing tenant construction projects ($nil and +$0.01, respectively), partially offset by asset sales (net of unit buybacks and debt reduction) (-$0.03 and -$0.13, respectively), lease termination fees received from a tenant in a Montréal property in Q1 2018 (-$0.07 for the year) and other items (-$0.01 and $nil, respectively).
Quarter-over-quarter, diluted FFO per unit decreased to $0.40 from $0.42 in Q3 2019, primarily driven by asset sales (net of debt reduction) (-$0.02) and lower FFO from our investment in Dream Industrial Real Estate Investment Trust (“Dream Industrial REIT”) (-$0.01), partially offset by a combined increase in comparative properties NOI(1) and other income (+$0.01).
Net rental income for the quarter and year: For the three months and year ended December 31, 2019, the Trust generated net rental income of $31.1 million and $127.6 million, respectively, compared to $31.1 million and $131.8 million, respectively, for the three months and year ended December 31, 2018. Net rental income for the quarter was flat over the prior year comparative quarter despite asset sales during the current year primarily due to higher comparative properties NOI(1). The overall decrease for 2019 relative to the prior year was mainly due to properties sold during 2019 and 2018, partially offset by higher comparative properties NOI(1).Comparative properties NOI(1) for the quarter and year: For the three months and year ended December 31, 2019, comparative properties NOI increased by 8.1%, or $2.4 million, and 12.2%, or $13.5 million, respectively, over the prior year comparative periods, mainly driven by higher occupancy and rental rates in Toronto downtown, with smaller increases in the Other markets region due to improving occupancy.
We are actively managing our assets in the Toronto downtown region, which represent 83% of our comparative investment property fair values, to improve the quality of the buildings and to continue to push rental rates in this market. For our assets in the Other markets region, which make up 17% of the fair value of our comparative investment properties, we are repositioning these assets to improve occupancy and liquidity.
For the three months ended December 31, 2019, comparative properties NOI increased 1.3%, or $0.4 million, when compared with Q3 2019, mainly driven by higher occupancy in the Other markets region. Toronto downtown was broadly flat where temporary vacancy due to lease expiries was offset by increases in net rents.
NAV per unit(1): As at December 31, 2019, our NAV per unit was $26.70, compared to $25.79 at September 30, 2019 and $24.97 at December 31, 2018, up $0.91 or 3.5% and $1.73 or 6.9%, respectively.
The quarter-over-quarter and year-over-year increase in NAV per unit of $0.91 and $1.73, respectively, was primarily due to cash flow retention from operations (diluted FFO net of distributions), fair value uplifts in our Toronto downtown investment properties and our share of fair value gains in Dream Industrial REIT’s investment properties.
As at December 31, 2019, the carrying value of our investment in Dream Industrial REIT, which is accounted for under the equity method, is $320.3 million compared to a market value of $359.3 million based on the closing price as at December 31, 2019, representing a difference of $39.0 million, or $0.63 per unit of the Trust.
NAV per unit is considered one of the Trust’s key metrics and has increased consistently over the past 11 quarters as we improve the quality of our assets.
Zoning approval for 250 Dundas St. W.: On January 29, 2020, the Trust received council zoning approval for its application to amend the zoning of its property at 250 Dundas St. W. in downtown Toronto. The revised zoning permits the Trust to convert the office property to a multi-use development comprising commercial office, multi-residential rental and retail components totalling over 503,000 square feet of gross floor area. The project currently contemplates replacing the existing 122,000 square foot old office building with a new Class A 49-storey residential tower with 522 residential units and an 8-storey commercial podium with 165,000 square feet of office and retail space. Total gross leasable area including the residential component is currently estimated to be over 456,000 square feet. Its prime location in the downtown Toronto core will benefit from its proximity to the health sciences district, Ryerson University, University of Toronto, OCAD University, and excellent transit connectivity to the adjacent St. Patrick Subway Station and Dundas St. streetcar line. The Trust is currently working with its development team and architects to evaluate the design and timing of the project. The approval is subject to satisfying customary by-law conditions and the expiration of applicable appeal periods.“We are very pleased to have received approval at 250 Dundas to develop Dream Office REIT’s first ever residential, retail and office building,” said Michael J. Cooper, Chief Executive Officer of Dream Office REIT. “As a result of our progress in transforming our business over the past three years, we have repositioned our portfolio to have significantly higher exposure to well located, high quality central business office properties primarily in downtown Toronto. We are currently investing value-add capital in the Dream Collection on Bay Street to create unique tenant experiences and improve the overall quality of those buildings. We look forward to starting development at 250 Dundas to create another example of a well-located, best-in-class asset for the REIT.”CAPITAL HIGHLIGHTSSee footnotes at end.REIT A Units purchased for cancellation during the quarter and year: For the three months and year ended December 31, 2019, the Trust purchased for cancellation no REIT A Units and 3,230,966 REIT A Units, respectively, under the normal course issuer bid, at a cost of approximately $nil and $77.8 million (or $24.09 per unit), respectively.Previously announced dispositions closed during the quarter and year: For the three months ended December 31, 2019, the Trust sold two properties located in London and North York, Ontario for gross proceeds net of adjustments and before transaction costs totalling $156.1 million.
For the year ended December 31, 2019, the Trust sold seven investment properties totalling over $0.5 billion and used the net proceeds to pay down debt, buy back units and reinvest in value-add capital in our existing properties.
February 2020 distribution: On February 20, 2020, the Trust announced a distribution of $0.08333 per REIT A Unit for the month of February 2020. The February 2020 distribution will be payable on March 13, 2020 to unitholders of record at February 28, 2020.Unsecured debenture repayment: On January 21, 2020, the Trust redeemed its remaining Series C Debentures with an aggregate principal amount of $150 million with an annual interest rate of 4.074% using a combination of cash on hand and our demand revolving credit facilities.“We have made good progress in simplifying our capital structure and reducing the debt and overall risk of our business,” said Jay Jiang, Chief Financial Officer of Dream Office REIT. “Our capital sources remain flexible and our balance sheet is well capitalized to pursue opportunistic investments, value-add capital projects and long term development programs.”OPERATIONAL HIGHLIGHTSSee footnotes at end.In-place occupancy: Comparative portfolio in-place occupancy on a quarter-over-quarter basis increased modestly by 50 basis points to 90.1%, compared to 89.6% at Q3 2019, primarily due to 8,000 square feet of net positive leasing absorption in Saskatchewan and 13,000 square feet of net positive leasing absorption at our property in Scarborough within the Other markets region. In-place occupancy in Toronto downtown remained relatively stable on a quarter-over-quarter basis.
Comparative portfolio in-place occupancy increased by 2.4% on a year-over-year basis primarily due to 117,000 square feet of net positive leasing absorption at the property in Scarborough within the Other markets region. Occupancy was broadly flat for the remainder of the portfolio.
Leasing activity: For the three months ended December 31, 2019, approximately 156,000 square feet of leases commenced. The overall retention ratio for the quarter was 86%. Rental rates on renewals for the quarter were 6.9% below expiring rates due to negative spreads on renewals in Calgary and to a lesser extent Saskatchewan totalling 23,700 square feet, all within our Other markets region. These negative rent spreads were offset by positive spreads in downtown Toronto where we had 54,000 square feet of renewals with a retention ratio of 78% at rates that were $1.03 or 4.8% higher than expiring net rents. Further, as at December 31, 2019, Toronto downtown market rents are estimated to be approximately 25% higher than our in-place and committed net rents. As a result of when leases are executed, there is typically a lag between leasing spreads relative to our estimates of the spread between estimated market rents and average in-place and committed net rental rates.
To date, we have secured 2020 lease commitments totalling approximately 0.4 million square feet in our comparative portfolio, representing 71% of our expected 2020 lease maturities.
Leasing momentum in downtown Toronto remains robust, given low vacancy rates, which remain amongst the lowest in North America. To date, we have completed new and renewed leases representing over 50% of our 2020 lease maturities in the Toronto downtown region. In particular, the net rents for the 2020 lease renewals totalling approximately 52,000 square feet in Toronto downtown is approximately 35% above expiring net rents.
During the quarter, the Trust renewed its tenant at 12800 Foster Street, Kansas, U.S. for approximately 185,000 square feet for a five year term commencing on December 1, 2020. To date, we have completed approximately 80% of our 2020 lease maturities in the Other Markets region.
APPOINTMENT OF CHIEF OPERATING OFFICERThe Trust is pleased to announce the appointment of Mr. Gord Wadley to the position of Chief Operating Officer. In that role, Mr. Wadley will have oversight of the operating performance of our properties, including asset management, leasing, property operations, internal and third party property management services.Mr. Wadley joined Dream Office REIT in 2011 and has held progressively senior positions within the Trust. Most recently, he was Senior Vice President, Commercial Properties and Vice President, Leasing. Prior to joining the Trust, he worked in commercial brokerage for CB Richard Ellis providing commercial representation to corporate clients both domestic and international. Mr. Wadley earned a degree from Acadia University and earned his Master of Business Administration in Real Estate Leadership from the University of Fredericton, New Brunswick.CALLManagement will host a conference call to discuss the results tomorrow, February 21, 2020 at 10:00 a.m. (ET). To access the conference call, please dial 1-888-465-5079 in Canada and the United States or 416-216-4169 elsewhere and use passcode 8763 059#. To access the conference call via webcast, please go to Dream Office REIT’s website at www.dreamofficereit.ca and click on the link for News & Events, then click on Calendar of Events. A taped replay of the conference call and the webcast will be archived for 90 days.OTHER INFORMATIONInformation appearing in this press release is a selected summary of results. The consolidated financial statements and Management’s Discussion and Analysis (“MD&A”) of the Trust are available at www.dreamofficereit.ca and on www.sedar.com.Dream Office REIT is an unincorporated, open-ended real estate investment trust. Dream Office REIT owns well-located, high-quality central business district office properties in major urban centres across Canada, with a focus on downtown Toronto. For more information, please visit our website at www.dreamofficereit.ca.FFO, comparative properties NOI, diluted FFO per unit, NAV per unit, interest coverage ratio, net total debt-to-adjusted EBITDAFV, level of debt (net total debt-to-net total assets), available liquidity, and unencumbered assets are non-GAAP measures used by management in evaluating operating and financial performance. Please refer to the cautionary statements under the heading “Non-GAAP Measures” in this press release.A description of the determination of diluted amounts per unit can be found in the section “Our Equity” under the heading “Weighted average number of units” in Dream Office REIT’s MD&A for the three months and year ended December 31, 2019.Total number of units includes 5.2 million LP B Class B, Series 1 units of Dream Office LP, a subsidiary of the Trust, which are classified as a liability under IFRS.Excludes properties held for sale and joint venture properties at the end of each period.Weighted average face rate of interest on debt is calculated as the weighted average face rate of all interest bearing debt balances excluding debt in joint ventures that are equity accounted.Interest coverage ratio, net total debt-to-adjusted EBITDAFV (years) and unencumbered assets have been restated in the comparative periods to conform to current period presentation. For further details, please refer to the “Non-GAAP Measures” section under the headings “Interest coverage ratio”, “Net total debt-to-adjusted EBITDAFV” and “Unencumbered assets” in Dream Office REIT’s MD&A for the three months and year ended December 31, 2019.Comparative portfolio excludes acquired properties, properties sold, properties under development and joint ventures that are equity accounted as at December 31, 2019.NON-GAAP MEASURESThe Trust’s consolidated financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”). In this press release, as a complement to results provided in accordance with IFRS, the Trust discloses and discusses certain non-GAAP financial measures, including FFO, comparative properties NOI, diluted FFO per unit, NAV per unit, interest coverage ratio, net total debt-to-adjusted EBITDAFV, level of debt (net total debt-to-net total assets), available liquidity, unencumbered assets, as well as other measures discussed elsewhere in this release. These non-GAAP measures are not defined by IFRS, do not have a standardized meaning and may not be comparable with similar measures presented by other income trusts. The Trust has presented such non-GAAP measures as Management believes they are relevant measures of the Trust’s underlying operating performance and debt management. Non-GAAP measures should not be considered as alternatives to net income (loss), net rental income, cash flows generated from (utilized in) operating activities, cash and cash equivalents, total assets, non-current debt, total equity, or comparable metrics determined in accordance with IFRS as indicators of the Trust’s performance, liquidity, cash flow, and profitability. For a full description of these measures and, where applicable, a reconciliation to the most directly comparable measure calculated in accordance with IFRS, please refer to the “Non-GAAP Measures” in Dream Office REIT’s MD&A for the three months and year ended December 31, 2019.FORWARD LOOKING INFORMATIONThis press release may contain forward-looking information within the meaning of applicable securities legislation, including statements regarding our objectives and strategies to achieve those objectives, future asset acquisition and asset management strategies, future development plans, anticipated dispositions, the future composition of our portfolio, the terms of and duration of secured tenant renewals, the timing of committed occupancies, estimated market rents and our capital program. Forward-looking information is based on a number of assumptions and is subject to a number of risks and uncertainties, many of which are beyond Dream Office REIT’s control, which could cause actual results to differ materially from those that are disclosed in or implied by such forward-looking information. These risks and uncertainties include, but are not limited to, general and local economic and business conditions; the financial condition of tenants; the effects of dispositions under contract on our portfolio composition and leverage (also referred to as level of debt (net total debt-to-net total assets)); our ability to refinance maturing debt; leasing risks, including those associated with the ability to lease vacant space; rental rates on future leasing; and interest and currency rate fluctuations. Our objectives and forward-looking statements are based on certain assumptions, including that the general economy remains stable, interest rates remain stable, conditions within the real estate market remain consistent, competition for acquisitions remains consistent with the current climate and that the capital markets continue to provide ready access to equity and/or debt. All forward-looking information in this press release speaks as of the date of this press release. Dream Office REIT does not undertake to update any such forward-looking information whether as a result of new information, future events or otherwise except as required by law. Additional information about these assumptions and risks and uncertainties is contained in Dream Office REIT’s filings with securities regulators, including its latest annual information form and MD&A. These filings are also available at Dream Office REIT’s website at www.dreamofficereit.ca.For further information, please contact:Photos accompanying this announcement are available athttps://www.globenewswire.com/NewsRoom/AttachmentNg/7d019c5e-beb9-4324-b0f3-5d6c3e5d0f2c
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