Home Canadian REITs Dream Office REIT Reports Q1 2020 Results

Dream Office REIT Reports Q1 2020 Results

by reitintel

May 07, 2020 17:20 ET

| Source: Dream Office REIT

photo-release

Estimated Annualized Gross Rental Revenue by Tenant Industry
Estimated Annualized Gross Rental Revenue by Tenant Industry

Estimated Annualized Gross Rental Revenue by Tenant Industry

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, May 07, 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 ended March 31, 2020 and provided a business update related to the COVID-19 pandemic.

FINANCIAL HIGHLIGHTS

SELECTED FINANCIAL INFORMATION Three months ended
(unaudited) March 31, December 31, March 31,
(In thousands of dollars except per unit amounts) 2020 2019 2019
Operating results
Net income $ 64,831 $ 63,193 $ 9,934
Funds from operations (“FFO”)(1) 24,082 25,188 28,300
Net rental income 28,928 31,083 32,182
Comparative properties net operating income (“NOI”)(1) 31,502 31,438 30,166
Per unit amounts
FFO (diluted)(1)(2) $ 0.39 $ 0.40 $ 0.43
Distribution rate 0.25 0.25 0.25
Net asset value (“NAV”)(1) 27.13 26.70 25.10

See footnotes at end.

UNITS AND PORTFOLIO INFORMATION As at
(unaudited) March 31, December 31, March 31,
2020 2019 2019
Units
Total number of units (in millions)(3) 60.8 61.5 64.3
Total portfolio information(4)
Number of active properties 29 29 35
Number of properties under development 2 2 2
Gross leasable area (“GLA”) (in millions of sq. ft.) 5.5 5.5 7.3
Investment properties value (in billions) $ 2.4 $ 2.4 $ 2.8

See footnotes at end.

  • Net income for the quarter: For the three months ended March 31, 2020, the Trust generated net income of $64.8 million. Included in net income are fair value gains recorded on financial instruments totalling $45.3 million primarily attributed to the revaluation of the subsidiary redeemable units.
  • Diluted FFO per unit(1)(2) for the quarter: Diluted FFO per unit for the three months ended March 31, 2020 was $0.39, compared to $0.40 at Q4 2019 and $0.43 at Q1 2019.The year-over-year decrease in diluted FFO per unit for the three months ended March 31, 2020 was mainly due to asset sales (net of unit buybacks and debt reduction) (-$0.04), lower share of FFO from our investment in Dream Industrial REIT (-$0.01) and other items (-$0.01), partially offset by higher comparative properties NOI(1) (+$0.02).

    The quarter-over-quarter decrease in diluted FFO per unit for the three months ended March 31, 2020 was primarily driven by asset sales (net of unit buybacks and debt reduction).

  • Net rental income for the quarter: For the three months ended March 31, 2020, the Trust generated net rental income of $28.9 million compared to $32.2 million for the three months ended March 31, 2019. Net rental income for the quarter decreased relative to the prior year comparative quarter due to asset sales during the prior year partially offset by higher comparative properties NOI(1).
  • Comparative properties NOI(1) for the quarter: For the three months ended March 31, 2020, comparative properties NOI increased by 4.4%, or $1.3 million, over the prior year comparative quarter, mainly driven by higher in-place rents in Toronto downtown and higher weighted average occupancy in Other markets.We are actively managing our assets in the Toronto downtown region, which represent 85% of our comparative investment property fair values, to improve the quality of the buildings and to continue to improve rental rates in this market. For our assets in the Other markets region, which make up the remaining 15% of the fair value of our comparative investment properties, we are repositioning these assets to improve occupancy and liquidity in the private market.

    For the three months ended March 31, 2020, comparative properties NOI increased modestly by 0.2%, or $0.1 million, when compared with Q4 2019, mainly driven by higher in-place rents in Toronto downtown, partially offset by slightly lower weighted average occupancy and in-place rents in Other markets.

  • NAV per unit(1): As at March 31, 2020, our NAV per unit was $27.13, compared to $26.70 at December 31, 2019 and $25.10 at March 31, 2019, up $0.43 or 1.6% and $2.03 or 8.1%, respectively.The quarter-over-quarter and year-over-year increase in NAV per unit of $0.43 and $2.03, respectively, was primarily due to cash flow retention from operations (diluted FFO net of distributions), and fair value uplifts in our Toronto downtown investment properties partially offset by fair value losses in our Other Markets investment properties, primarily in Western Canada. The fair value gains in our Toronto downtown investment properties were primarily driven by a fair value lift supported by a third party appraisal on 250 Dundas Street West as a result of a rezoning approval during the quarter.

    NAV per unit is considered one of the Trust’s key metrics and has increased consistently over the past 12 quarters as we improve the quality of our assets.

BUSINESS UPDATE

The COVID-19 pandemic has caused significant economic and social disruptions to all businesses and daily life. At this stage, it is still too early to predict the duration and extent of the pandemic, the impact it may have on the financial performance of the Trust in 2020 and whether it will have any long-term impact on our business. Since we announced the launch of our strategic plan in 2016, we have been focused on making Dream Office REIT a safer, higher quality company. We believe Dream Office REIT is currently well positioned, with a portfolio of exceptional real estate, primarily located in downtown Toronto, combined with a strong balance sheet and ample liquidity.

As at March 31, 2020, the Trust had approximately $219 million of available liquidity(1), $222 million of unencumbered assets(1) and a level of debt (net total debt-to-net total assets)(1) of 38.5%, down from 45.1% at March 31, 2019. The Trust has one mortgage totaling $14.5 million in downtown Toronto to refinance during the second half of 2020.

The following is a summary of operational updates:

  • We collected approximately 95% of April gross rent and our tenant relations team has been in active discussions with tenants who are currently in arrears. The majority of rent in arrears is from ground floor retail and/or small businesses (under 10,000 square feet). We intend to work with these businesses on creating a mutually beneficial solution that also supports the long-term viability of their business. In some instances, we are waiting for more information on their financial position and clarity on the various government relief programs and subsidies. On April 24, 2020, the Government of Canada announced the Canada Emergency Commercial Rent Assistance program for small businesses. The program will provide forgivable loans to commercial property owners who in turn will lower the rent of eligible small businesses by 75% for the months of April (retroactive), May and June. While the details of the program are being finalized, it is expected to help small businesses and commercial landlords. Eligible tenants are those who pay less than $50,000 in gross rent per month, generate less than $20 million in revenues at a corporate level and have experienced a decline in revenues of at least 70%.
  • On a case-by-case basis, we have agreed to work with a few tenants to help their businesses by deferring their gross rent for a period of one to three months. As at May 7, 2020, the amount of agreed deferred gross rent as a percentage of total gross rent for the months of April and May 2020 was 0.3% and 1.9%, respectively. We are in active discussions with a small number of tenants to reach a solution to help them manage their finances during this difficult time. Rent deferral or abatement requests will continue be reviewed and granted on a case-by-case basis.
  • As at May 7, 2020, the Trust has completed new or renewed leases representing over 70% of our 2020 maturities across the portfolio. 2020 lease maturities that are currently uncommitted total only 155,000 square feet, or 2.8% of the Trust’s total GLA.
  • Despite COVID-19’s disruption to the leasing market, the Trust has signed or is in active discussions with tenants to lease or renew approximately 300,000 square feet of GLA in downtown Toronto and the Greater Toronto Area in 2020 and beyond at rents that are comparable or higher than market rents at the beginning of 2020. Included in the 300,000 square feet and subsequent to the quarter, the Trust has signed a firm deal at a property in downtown Toronto extending a government tenant lease (206,000 square feet) for a term of two years at over 20% higher than the expiring rent. The new lease is expected to commence in November 2022. We currently anticipate being able to finalize the majority of the rest of these leases in the second half of 2020.

“We were fortunate to be able to successfully execute on Dream Office REIT’s strategic plan over the past four years to significantly strengthen our operating and financial position,” said Michael Cooper, Chief Executive Officer of Dream Office REIT. “Our portfolio and balance sheet are now well positioned to enable us to focus our attention on taking care of our employees, tenants, and unitholders during these most challenging and uncertain times.”

CAPITAL HIGHLIGHTS

KEY FINANCIAL PERFORMANCE METRICS As at
(unaudited) March 31, December 31, March 31,
2020 2019 2019
Financing
Weighted average face rate of interest on debt (period-end)(5) 3.78% 3.88% 3.99%
Interest coverage ratio (times)(1) 3.0 2.9 2.7
Net total debt-to-adjusted EBITDAFV (years)(1) 7.8 7.5 8.6
Level of debt (net total debt-to-net total assets)(1) 38.5% 37.6% 45.1%
Average term to maturity on debt (years) 5.1 4.7 4.4
Available liquidity and unencumbered assets
Available liquidity (in millions)(1) $ 218.6 $ 413.6 $ 192.1
Unencumbered assets (in millions)(1)(6) 222.3 281.3 177.1

See footnotes at end.

  • REIT A Units purchased for cancellation: Since the beginning of 2020 the Trust has purchased for cancellation 862,755 REIT A Units under the Normal Course Issuer Bid (“NCIB”), at a cost of approximately $15.5 million or $18.00 per unit. We believe that the market price of our units since March has not reflected the intrinsic value of the Trust and the units represented an attractive investment opportunity. Accordingly, the Trust has been purchasing units for cancellation and is prepared to continue to purchase units through its NCIB program as market conditions warrant.
  • Unsecured debenture repayment: On January 21, 2020, the Trust repaid its remaining $150 million Series C Debentures with an annual interest rate of 4.074%.

“While we are currently uncertain on the duration and impact COVID-19 will have on our business, we feel our near-term leasing, capital and refinancing exposures are very manageable,” said Jay Jiang, Chief Financial Officer of Dream Office REIT. “Our business is well positioned with ample liquidity to take advantage of any great opportunities that may arise in the near term.”

OPERATIONAL HIGHLIGHTS

SELECTED OPERATIONAL INFORMATION As at
(unaudited) March 31, December 31, March 31,
2020 2019 2019
Comparative portfolio(7)
Occupancy rate – including committed (period-end) 89.9% 90.8% 91.4%
Occupancy rate – in-place (period-end) 89.1% 90.1% 89.1%
Average in-place and committed net rent per square foot (period-end) $ 22.66 $ 22.53 $ 22.07
Weighted average lease term (years) 5.3 5.5 5.0

See footnotes at end.

  • In-place occupancy: Comparative portfolio in-place occupancy on a quarter-over-quarter basis decreased by 1.0% to 89.1%, compared to 90.1% at Q4 2019, primarily due to 45,000 square feet of net negative leasing absorption in Saskatchewan due to lease expiries and 11,000 square feet of net negative leasing absorption in Toronto due to timing between tenant expiries and future occupancy.Comparative portfolio in-place occupancy was flat on a year-over-year basis. In the Other markets region, 55,000 square feet of net positive leasing absorption at 2200-2206 Eglinton Avenue East and 1020 Birchmount Road in Scarborough was partially offset by 34,000 square feet of net negative leasing absorption in Saskatchewan, while occupancy in Toronto downtown decreased by 70 basis points, or 23,000 square feet, due to temporary vacancy between lease expiries and future occupancy.
  • Lease commencement & leasing update: For the three months ended March 31, 2020, approximately 67,000 square feet of leases commenced, not including temporary leases. Rental rates on renewals and relocations for the quarter were 15.9% above expiring rates predominately due to positive lease spreads on renewals in Toronto downtown, offset by renewals done at close to expiring rates in Other markets.
  • Tenant profile: As illustrated in the chart below, the Trust has a diversified and healthy tenant mix with over 20% of estimated annualized gross rental revenue from governments and government agencies. Our top 10 tenants make up more than 35% of total rent and 50% of our top tenants have credit ratings of A or higher.A photo accompanying this announcement is available at https://www.globenewswire.com/NewsRoom/AttachmentNg/bb0e0fa0-a3a2-4c30-af35-d173dad440fb

CALL

Dream Office REIT holds semi-annual conference calls following the release of second quarter and fourth quarter results. Dream Office REIT recently held a video investor conference call jointly with Dream Unlimited Corp. to provide an update on our businesses during COVID-19 and answer live questions from investors and analysts. A replay of this conference call and details of future calls as they are announced can be found at www.dream.ca/office/news-events. We intend to host similar calls in the future.

OTHER INFORMATION

Information appearing in this news release is a selected summary of results. The condensed consolidated financial statements and Management’s Discussion and Analysis (“MD&A”) of the Trust are available at www.dreamofficereit.ca and on www.sedar.com.

Dream Office REIT is an unincorporated, open-ended real estate investment trust. Dream Office REIT 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.

FOOTNOTES

  1. 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.
  2. A description of the determination of diluted amounts per unit can be found in section “Our Equity” under the heading “Weighted average number of units” of the MD&A for the three months ended March 31, 2020.
  3. Total number of units includes 5.2 million LP B Units which are classified as a liability under IFRS.
  4. Excludes properties held for sale and joint ventures that are equity accounted at the end of each period, as applicable.
  5. Weighted average face rate of interest on debt is calculated as the weighted average face rate of all interest bearing debt balances excluding debt in joint ventures that are equity accounted.
  6. Unencumbered assets as at March 31, 2019 has been restated to conform to current period presentation. For further details, please refer to the “Non-GAAP Measures” section under the heading “Unencumbered assets” in Dream Office REIT’s MD&A for the three months ended March 31, 2020.
  7. Comparative portfolio excludes acquired properties, properties sold, properties under development and joint ventures that are equity accounted as at March 31, 2020. Acquired properties and properties under development are excluded from comparative properties NOI until they have been operating for two full calendar years. Acquired properties comprises 6 Adelaide Street East, Toronto downtown which was acquired on September 12, 2019.

NON-GAAP MEASURES

The Trust’s condensed consolidated financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”). In this press release, as a complement to results provided in accordance with IFRS, the Trust discloses and discusses certain non-GAAP financial measures, including FFO, comparative properties NOI, diluted FFO per unit, NAV per unit, 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, 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” section in Dream Office REIT’s MD&A for the three months ended March 31, 2020.

FORWARD LOOKING INFORMATION

This press release may contain forward-looking information within the meaning of applicable securities legislation, including statements regarding our objectives and strategies to achieve those objectives, asset management strategies, future development plans, the future composition of our portfolio, the terms of and duration of secured tenant renewals, the timing of committed occupancies, renewal and leasing assumptions, 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; employment levels; mortgage and interest rates and regulations; the uncertainties around the timing and amount of future financings; uncertainties surrounding the COVID-19 pandemic; the financial condition of tenants; 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:

Michael J. Cooper Jay Jiang
Chairman and Chief Executive Officer Chief Financial Officer
(416) 365-5145 (416) 365-6638
mcooper@dream.ca jjiang@dream.ca

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