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Dream Office REIT Reports Q3 2019 Results

/EIN News/ -- TORONTO, Nov. 07, 2019 (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 and nine months ended September 30, 2019.

FINANCIAL HIGHLIGHTS

SELECTED FINANCIAL INFORMATION   Three months ended       Nine months ended  
(unaudited)   September 30,     June 30,       September 30,       September 30,     September 30,  
(In thousands of dollars except per unit amounts) 2019       2019       2018       2019       2018  
Operating results                            
Net income (loss) $ (2,340 )   $ 46,533     $ 41,382     $ 54,127     $ 99,289  
Funds from operations (“FFO”)(1)   26,678       28,721       26,688       83,699       90,060  
Net rental income   31,962       32,348       33,099       96,492       100,717  
Comparative properties net operating income ("NOI")(1)   33,759       34,223       30,516       101,176       91,276  
Per unit amounts                            
FFO (diluted)(1)(2) $ 0.42     $ 0.44     $ 0.40     $ 1.30     $ 1.27  
Distribution rate   0.25       0.25       0.25       0.75       0.75  
Net asset value (“NAV”)(1)   25.79       25.49       24.40       25.79       24.40  

See footnotes at end.

UNITS AND PORTFOLIO INFORMATION   As at  
(unaudited)   September 30,   June 30,   December 31,     September 30,  
    2019     2019     2018     2018  
Units                
Total number of units (in millions)(3)   61.5     63.6     64.6     65.3  
Total portfolio information(4)                
Number of active properties   30     30     34     34  
Number of properties under development   2     2     2     2  
Number of properties held for future redevelopment   1     1     1     1  
Gross leasable area (“GLA”) (in millions of sq. ft.)   6.1     6.2     7.3     7.3  
Investment properties value (in billions) $ 2.5   $ 2.5   $ 2.8   $ 2.7  

See footnotes at end.

  • Net income (loss) for the quarter and year-to-date: For the three and nine months ended September 30, 2019, the Trust generated a net loss of $2.3 million and net income of $54.1 million, respectively. Included in the respective periods are fair value losses recorded on financial instruments totalling $36.5 million and $45.6 million, respectively, primarily attributed to the revaluation of the subsidiary redeemable units.

  • Diluted FFO per unit(1)(2) for the quarter and year-to-date: Diluted FFO per unit for the three months ended September 30, 2019 was $0.42, compared to $0.44 at Q2 2019 and $0.40 at Q3 2018. Diluted FFO per unit for the nine months ended September 30, 2019 was $1.30 compared to $1.27 ($1.19 excluding lease termination fees received from a tenant in a Montréal property) in the prior year comparative period.

    The year-over-year increase in diluted FFO per unit for the three and nine months ended September 30, 2019 was mainly due to increases in comparative properties NOI(1) (+$0.05 and +$0.15, respectively), general and administrative expense savings (+$0.01 and +$0.02, respectively), change in FFO from our investment in Dream Industrial REIT (+$0.02 and $nil, respectively) and fees for property management and managing tenant construction projects ($nil and +$0.02, respectively), partially offset by asset sales (net of unit buybacks and debt reduction) (-$0.05 and -$0.08, respectively), lease termination fees received from a tenant in a Montréal property in Q1 2018  (-$0.08 for the nine-month period) and other items (-$0.01 and $nil, respectively).

    Quarter-over-quarter, diluted FFO per unit decreased to $0.42 from $0.44 in Q2 2019, primarily driven by decreases in comparative properties NOI(1) in the Other markets region (-$0.01), asset sales (net of unit buybacks and debt reduction) (-$0.01) and lower FFO from our investment in Dream Industrial REIT (-$0.01), partially offset by savings in general and administrative expenses and other items (+$0.01).
  • Net rental income for the quarter and year-to-date: For the three and nine months ended September 30, 2019, the Trust generated net rental income of $32.0 million and $96.5 million, respectively, compared to $33.1 million and $100.7 million, respectively, for the three and nine months ended September 30, 2018. The overall decrease in the respective periods is 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-to-date: For the three and nine months ended September 30, 2019, comparative properties NOI increased by 10.6%, or $3.2 million, and 10.8%, or $9.9 million, respectively, over the prior year comparative periods, mainly driven by higher occupancy and rental rates in Toronto downtown, partially offset by lower occupancy and rental rates in the Other markets region.

    The change in the current quarter’s comparative properties NOI over the prior year comparative quarter was 19.9% for Toronto downtown, 4.5% for Mississauga and North York and -13.2% for the Other markets region. We are actively managing our assets in the Toronto downtown region, which represent 79% of our 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 11% of the fair value of our investment properties, we are repositioning these assets to improve occupancy and liquidity in the private market.

    For the three months ended September 30, 2019, comparative properties NOI decreased 1.4%, or $0.5 million, when compared with Q2 2019, mainly driven by lower occupancy and rents in the Other markets region due to previously identified vacates.
  • NAV per unit(1): As at September 30, 2019, our NAV per unit was $25.79, compared to $25.49 at June 30, 2019 and $24.40 at September 30, 2018, up $0.30 or 1.2% and $1.39 or 5.7%, respectively.

    The quarter-over-quarter and year-over-year increase in NAV per unit of $0.30 and $1.39, respectively, was primarily due to cash flow retention from operations (diluted FFO net of distributions) and fair value uplifts in our Toronto downtown and Mississauga and North York investment properties, partially offset by fair value declines in Other markets.

    As at September 30, 2019, the carrying value of our investment in Dream Industrial REIT, which is accounted for under the equity method, is $296.0 million compared to a market value of $357.0 million based on the closing price on September 30, 2019, representing a difference of $61.0 million, or $0.99 per unit of the Trust.

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

CAPITAL HIGHLIGHTS

KEY FINANCIAL PERFORMANCE METRICS              As at    
(unaudited)  September 30,
    June 30,     December 31,     September 30,    
  2019
    2019     2018     2018    
Financing                
Weighted average face rate of interest on debt (period-end)(5) 3.88 %   3.94 %   4.06 %   3.94 %  
Interest coverage ratio (times)(1)(6) 2.8
    2.8     2.8     2.8    
Net total debt-to-adjusted EBITDAFV (years)(1) 8.1
    8.5     9.0     9.1    
Level of debt (net total debt-to-net total assets)(1) 41.3
%   45.4 %   45.0 %   46.2 %  
Average term to maturity on debt (years) 4.9
    4.7     3.8     4.0    
Available liquidity and unencumbered assets                
Available liquidity (in millions)(1) $ 433.8     $ 351.4     $ 163.9     $ 232.8    
Unencumbered assets (in millions)(1)(6) 156.4
    146.4     163.1     159.8    

See footnotes at end.

  • REIT A Units purchased for cancellation during the quarter and year-to-date: For the three and nine months ended September 30, 2019, the Trust purchased for cancellation approximately 2.2 million REIT A Units ($52.9 million or $24.41 per unit) and approximately 3.2 million REIT A Units ($77.8 million or $24.09 per unit), respectively, pursuant to its normal course issuer bid.

  • Acquisition of downtown Toronto boutique office properties: On August 22, 2019, the Trust acquired a 50% interest in 220 King Street West in Toronto, Ontario, through a joint venture partnership, for a gross purchase price of $12.5 million before closing adjustments and transaction costs at the Trust’s share.

    On September 12, 2019, the Trust acquired 6 Adelaide Street East, a 53,000 square foot boutique office building in downtown Toronto for a gross purchase price of $45.5 million before closing adjustments and transaction costs. The property is 96.7% occupied with in-place rents significantly below market rents for the area. With a weighted average lease term for the building of 2.3 years, the Trust sees opportunities for significant rent steps in the tight Toronto downtown leasing market.
  • Dispositions update for the quarter: For the three months ended September 30, 2019, the Trust sold four properties located in Montréal, Ottawa and Regina for gross proceeds net of adjustments and before transaction costs totalling $369.8 million or approximately $280 per square foot.

  • Dispositions under contract subsequent to the quarter: Subsequent to quarter end, the Trust is under contract to sell 5001 Yonge Street and our 40% interest in London City Centre for a total sale price of $157.2 million before closing adjustments and transaction costs. The transaction is expected to close in the fourth quarter, subject to customary closing conditions.

“We are pleased with the financial performance and the progress we have made in repositioning our portfolio year to date,” said Jay Jiang, Chief Financial Officer of Dream Office REIT. “Pro-forma the disposition of 5001 Yonge Street and our interest in London City Centre, the REIT’s presence in downtown Toronto and Greater Toronto Area will be approximately 88% and our pro-forma leverage will be approximately 38%. We are well positioned to capitalize on opportunities that can continue to grow the value and quality of our business.”

OPERATIONAL HIGHLIGHTS

SELECTED FINANCIAL INFORMATION As at    
(unaudited) September 30,
    June 30,     September 30,    
  2019
    2019     2018    
Comparative portfolio(7)            
Occupancy rate - including committed (period-end) 93.1 %   94.2 %   96.0 %  
Occupancy rate - in-place (period-end) 92.6 %   92.7 %   89.5 %  
Average in-place and committed net rent per square foot (period-end) $ 22.79     $ 22.65     $ 22.07    
Weighted average lease term (years) 4.8
    5.0     4.7    

See footnotes at end.

  • In-place occupancy: Comparative portfolio in-place occupancy on a quarter-over-quarter basis decreased modestly by 10 basis points to 92.6%, compared to 92.7% at Q2 2019 primarily due to a previously identified vacancy at Princeton Tower totalling approximately 34,000 square feet in the Other markets region, offset by net positive leasing absorption in Toronto downtown and Mississauga and North York.

    Comparative portfolio in-place occupancy on a year-over-year basis increased 3.1% to 92.6% when compared to 89.5% at Q3 2018. The increase in in-place occupancy was largely due to positive leasing absorption in the Toronto downtown region with the 0.2 million square feet government lease commencement at 438 University Avenue amongst other lease commencements in that region, partially offset by negative leasing absorption in the Other markets region.

    At September 30, 2019, vacant space committed for future occupancy was approximately 29,000 square feet, bringing our overall comparative portfolio in-place and committed occupancy to 93.1%. The majority of the Trust’s future committed occupancy is scheduled to take occupancy through the remainder of 2019.
  • Leasing activity: For the three months ended September 30, 2019, approximately 202,000 square feet of leases commenced, of which approximately 140,000 square feet were renewals and relocations. The overall retention ratio for the quarter was 70% with rental rates on renewals 16.9% above expiring rates.

    To today’s date, we have secured 2019 lease commitments totalling approximately 0.8 million square feet in our comparative portfolio, representing 98% of our expected 2019 lease maturities. With respect to 2020 expiries, we have secured lease commitments totalling approximately 0.4 million square feet in our comparative portfolio, representing over 48% 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 over 96% of our 2019 lease maturities in the Toronto downtown region. During the current quarter, the net rents for lease renewals that commenced in Toronto downtown were approximately 18.3% above expiring net rents. Further, as at September 30, 2019, Toronto downtown market rents are estimated to be approximately 21% higher than our in-place and committed net rents.

OTHER INFORMATION

Information appearing in this news release is a select 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.
(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 venture properties at the end of each period.
(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)   Interest coverage ratio 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” and “Unencumbered assets” in Dream Office REIT’s MD&A for the three and nine months ended September 30, 2019.
(7)   Comparative portfolio excludes acquired properties, properties sold, properties held for future redevelopment, properties under development and joint ventures that are equity accounted as at September 30, 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 (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 and nine months ended September 30, 2019.

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, future asset acquisition and asset management strategies, 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:

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

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