DREAM OFFICE REAL ESTATE INVESTMENT TRUST Q2 2020
Table of Contents
SECTION I
- KEY PERFORMANCE INDICATORS AT A GLANCE
- BASIS OF PRESENTATION
- FORWARD-LOOKINGDISCLAIMER
- OUR OBJECTIVES
- BUSINESS UPDATE
SECTION II
- OUR PROPERTIES
- OUR OPERATIONS
14 OUR RESULTS OF OPERATIONS
SECTION III
19 INVESTMENT PROPERTIES
- INVESTMENT IN DREAM INDUSTRIAL REIT
- OUR FINANCING
- OUR EQUITY
SECTION IV
- NON-GAAPMEASURES
- QUARTERLY INFORMATION
SECTION V
38 DISCLOSURE CONTROLS AND PROCEDURES
- RISKS AND OUR STRATEGY TO MANAGE
- CHANGES IN ACCOUNTING POLICIES AND DISCLOSURES
SECTION VI
40 ASSET LISTING
CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
- Condensed consolidated balance sheets
- Condensed consolidated statements of comprehensive income
- Condensed consolidated statements of changes in equity
- Condensed consolidated statements of cash flows
- Notes to the condensed consolidated financial statements
Management's discussion and analysis
(All dollar amounts in our tables are presented in thousands of Canadian dollars, except for rental rates and per unit amounts, or unless otherwise stated)
SECTION I
KEY PERFORMANCE INDICATORS AT A GLANCE
Performance is measured by these and other key indicators:
As at | ||||||||||||
June 30, | March 31, | June 30, | ||||||||||
2020 | 2020 | 2019 | ||||||||||
Total portfolio(1) | 31 | |||||||||||
Number of properties | 31 | 33 | ||||||||||
Gross leasable area ("GLA")(2) | 5.5 | 5.5 | 6.2 | |||||||||
Investment properties value | $ | 2,464,222 | $ | 2,439,261 | $ | 2,457,098 | ||||||
Comparative portfolio(3) | 88.3% | |||||||||||
Occupancy rate - including committed (period-end) | 89.9% | 90.8% | ||||||||||
Occupancy rate - in-place(period-end) | 87.8% | 89.1% | 88.9% | |||||||||
Average in-place and committed net rent per square foot (period-end) | $ | 23.00 | $ | 22.66 | $ | 22.42 | ||||||
Weighted average lease term ("WALT") (years) | 5.3 | 5.3 | 5.2 | |||||||||
Three months ended | Six months ended | |||||||||||
June 30, | March 31, | June 30, | June 30, | June 30, | ||||||||
2020 | 2020 | 2019 | 2020 | 2019 | ||||||||
Operating results | $ | 57,600 | $ | 122,431 | ||||||||
Net income | $ | 64,831 | $ | 46,533 | $ | 56,467 | ||||||
Funds from operations ("FFO")(4) | 23,136 | 24,082 | 28,721 | 47,218 | 57,021 | |||||||
Net rental income | 28,179 | 28,928 | 32,348 | 57,107 | 64,530 | |||||||
Comparative properties net operating income | 30,401 | 61,903 | ||||||||||
("NOI")(4) | 31,502 | 31,502 | 61,668 | |||||||||
Distributions | $ | 15,158 | $ | 30,480 | ||||||||
Total distributions paid and payable(4) | $ | 15,322 | $ | 16,015 | $ | 32,074 | ||||||
Per unit amounts | $ | 0.38 | $ | 0.76 | ||||||||
FFO (diluted)(4)(5) | $ | 0.39 | $ | 0.44 | $ | 0.88 | ||||||
Distribution rate | 0.25 | 0.25 | 0.25 | 0.50 | 0.50 | |||||||
As at | ||||||||||||
June 30, | March 31, | December 31, | June 30, | |||||||||
2020 | 2020 | 2019 | 2019 | |||||||||
Financing | 3.68% | |||||||||||
Weighted average face rate of interest on debt (period-end)(6) | 3.78% | 3.88% | 3.94% | |||||||||
Interest coverage ratio (times)(4) | 3.1 | 3.0 | 2.9 | 2.8 | ||||||||
Net total debt-to-adjusted EBITDAFV (years)(4) | 8.1 | 7.8 | 7.5 | 8.5 | ||||||||
Level of debt (net total debt-to-net total assets)(4) | 38.3% | 38.5% | 37.6% | 45.4% | ||||||||
Average term to maturity on debt (years) | 4.6 | 5.1 | 4.7 | 4.7 | ||||||||
Available liquidity and unencumbered assets | $ | 213,949 | ||||||||||
Available liquidity(4) | $ | 218,611 | $ | 413,580 | $ | 351,408 | ||||||
Unencumbered assets(4)(7) | $ | 239,747 | $ | 222,340 | $ | 281,274 | $ | 146,396 | ||||
Capital (period-end) | 60.5 | |||||||||||
Total number of REIT A Units and LP B Units (in millions)(8) | 60.8 | 61.5 | 63.6 | |||||||||
Net asset value ("NAV") per unit(4) | $ | 27.61 | $ | 27.13 | $ | 26.70 | $ | 25.49 |
- Total portfolio excludes properties held for sale and joint ventures that are equity accounted at the end of each period, as applicable.
- In millions of square feet.
- Current and comparative periods exclude acquired properties, properties sold, properties under development and joint ventures that are equity accounted. 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.
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- FFO, comparative properties NOI, total distributions paid and payable, diluted FFO 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 and NAV per unit are non-GAAP measures used by management in evaluating operating and financial performance. Please refer to the section "Non-GAAP Measures" for details of these measures and reconciliations to the nearest comparable GAAP measure.
- 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".
- 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.
- Unencumbered assets as at June 30, 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".
- Total number of REIT A Units and LP B Units includes 5.2 million LP B Units (or subsidiary redeemable units) which are classified as a liability under IFRS.
BASIS OF PRESENTATION
Our discussion and analysis of the financial position and results of operations of Dream Office Real Estate Investment Trust ("Dream Office REIT" or the "Trust") should be read in conjunction with the audited consolidated financial statements of Dream Office REIT and the accompanying notes for the year ended December 31, 2019 and the unaudited condensed consolidated financial statements of Dream Office REIT and the accompanying notes for the three and six months ended June 30, 2020. Such consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board ("IFRS"). The Canadian dollar is the functional and reporting currency for purposes of preparing the condensed consolidated financial statements.
This management's discussion and analysis ("MD&A") is dated as at August 6, 2020. For simplicity, throughout this discussion, we may make reference to the following:
- "REIT A Units", meaning the REIT Units, Series A of the Trust;
- "REIT B Units", meaning the REIT Units, Series B of the Trust;
- "REIT Units", meaning the REIT Units, Series A, and REIT Units, Series B, of the Trust;
- "Units", meaning REIT Units, Series A, REIT Units, Series B, and Special Trust Units, collectively; and
- "LP B Units" and "subsidiary redeemable units", meaning the LP Class B, Series 1 limited partnership units of Dream Office LP (a subsidiary of the Trust).
When we use terms such as "we", "us" and "our", we are referring to Dream Office REIT and its subsidiaries.
Certain figures in this document are presented on a comparative portfolio basis. Comparative portfolio figures represent the results and values of investment properties which the Trust has owned in all periods presented. Acquired properties are excluded from comparative portfolio figures until the properties have been owned for all periods presented. Except as specifically noted, the results of investments that are equity accounted are excluded from disclosures in this document.
Market rents disclosed throughout the MD&A are management's estimates at a point in time and are subject to change based on future market conditions.
In addition, certain disclosures incorporated by reference into this report include information regarding our largest tenants that has been obtained from available public information. We have not verified any such information independently.
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FORWARD-LOOKING DISCLAIMER
Certain information herein contains or incorporates comments that constitute forward-looking information within the meaning of applicable securities legislation, including but not limited to statements relating to the Trust's objectives, strategies to achieve those objectives, the Trust's beliefs, plans, estimates, projections and intentions, and similar statements concerning anticipated future events, future growth, stability of NOI at our properties, results of operations, performance, business prospects and opportunities, acquisitions or divestitures, tenant base, rent collection, future maintenance and development plans and costs, capital investments, financing, the availability of financing sources, income taxes, vacancy, renewal and leasing assumptions, future leasing costs and lease incentives, litigation and the real estate industry in general (including statements regarding our disposition targets, the timing of proposed dispositions, use of proceeds from asset sales, redevelopment and intensification plans and timelines, expected capital requirements and cost to complete development projects, anticipated income and yield from properties under development, timing of project completion, the effect of building improvements on tenant experience, tenant retention, leasing velocity, property operating costs and rates on future leasing, the recoverability of capital investments from future tenants, the future composition of our portfolio, future NAV growth, cash flows, debt levels, liquidity and leverage and our future capital requirements and ability to meet those requirements), in each case that are not historical facts. Forward-looking statements generally can be identified by words such as "outlook", "objective", "may", "will", "would", "expect", "intend", "estimate", "anticipate", "believe", "should", "could", "likely", "plan", "project", "budget" or "continue" or similar expressions suggesting future outcomes or events. 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 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 including foreign exchange rates; employment levels; mortgage and interest rates and regulations; the uncertainties around the timing and amount of future financings; the impact of the COVID-19 pandemic on the Trust; the ability of the Trust to access government grants; regulatory risks; environmental risks; consumer confidence; the financial condition of tenants and borrowers; our ability to sell investment properties at a price which reflects fair value; leasing risks, including those associated with the ability to lease vacant space; our ability to source and complete accretive acquisitions; and interest rates.
Although the forward-looking statements contained in this MD&A are based on what we believe are reasonable assumptions, there can be no assurance that actual results will be consistent with these forward-looking statements. Forward-looking information is disclosed in this MD&A as part of the section "Our Objectives". Factors that could cause actual results to differ materially from those set forth in the forward-looking statements and information include, but are not limited to, general economic conditions; local real estate conditions, including the development of properties in close proximity to the Trust's properties; timely leasing of vacant space and re-leasing of occupied space upon expiration; dependence on tenants' financial condition; costs to complete development activities; NOI from development properties on completion; the uncertainties of acquisition activity; the ability to effectively integrate acquisitions; interest rates; availability of equity and debt financing; our continued compliance with the real estate investment trust ("REIT") exception under the specified investment flow-through trust ("SIFT") legislation; and other risks and factors described from time to time in the documents filed by the Trust with securities regulators.
All forward-looking information is as of August 6, 2020. 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 applicable law. Additional information about these assumptions, risks and uncertainties is contained in our filings with securities regulators, including our latest Annual Report and Annual Information Form available on the System for Electronic Document Analysis and Retrieval ("SEDAR") at www.sedar.com. Certain filings are also available on our website at www.dreamofficereit.ca.
OUR OBJECTIVES
We have been and remain committed to:
- Managing our business and assets to provide both yield and growth over the longer term;
- Driving superior risk-adjusted returns and growth in our net asset value by investing in our assets through upgrades, intensification and redevelopment, and selectively disposing of assets with lower long-term return potential;
- Building and maintaining a strong, flexible and resilient balance sheet; and
- Maintaining a REIT status that satisfies the REIT exception under the SIFT legislation in order to provide certainty to unitholders with respect to taxation of distributions.
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BUSINESS UPDATE
The COVID-19 pandemic has caused significant economic and social disruptions to all businesses and daily life. At this time, 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 is still uncertain. Since we announced the launch of our strategic plan in 2016, we have transformed Dream Office REIT into a safer, higher quality company. As a result of these initiatives, 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 June 30, 2020, the Trust had approximately $214 million of available liquidity(1), $240 million of unencumbered assets(1) and a level of debt (net total debt-to-net total assets)(1) of 38.3%, down from 45.4% at June 30, 2019. The Trust has only one mortgage totalling $14.5 million in downtown Toronto to refinance during the second half of 2020. In addition, over 72% or 0.4 million square feet of total 2020 portfolio expiries have been committed.
Despite COVID-19's disruption to the leasing market and physical distancing measures currently in place, the Trust is managing an active pipeline of renewals and new leases with existing and prospective tenants. During the COVID-19 period from March to July 2020, we have leased over 250,000 square feet across our portfolio at a weighted average net rent of $37.41 per square foot, or over 40% above the weighted average expiring net rent on the space. In addition, we are currently working on over 400,000 square feet of leasing deals across the portfolio at rents in line with pre-COVID rates.
We believe our near-term financial and operational exposures are very manageable.
The following table summarizes selected operational statistics with respect to the second quarter of 2020, all presented as a percentage of recurring contractual gross rent by month as at August 6, 2020:
Cash | CECRA program | Deferral | ||
collected | receivables | arrangements | Outstanding* | |
April 2020 | 92.7% | 2.7% | 0.5% | 4.1% |
May 2020 | 91.5% | 2.7% | 1.4% | 4.4% |
June 2020 | 88.7% | 2.8% | 3.8% | 4.7% |
Q2 2020 | 91.0% | 2.7% | 1.9% | 4.4% |
July 2020 | 90.1% | 2.7% | 2.4% | 4.8% |
* Includes the 25% of recurring contractual gross rent that the Trust expects to forgive under the CECRA program.
Since the COVID-19 pandemic was announced, our tenant relations team has been in touch with our tenants on a bi-weekly basis, updating them on new government programs and Dream initiatives to prepare our buildings for their return. We have been educating tenants on government-led relief initiatives and assisting tenants with back to work planning for their employees. In certain instances, the Trust has granted deferrals and rent repayment arrangements to select tenants on a case-by-case basis. It is the Trust's intention to support our tenants through the COVID-19 pandemic so they can recover quickly with an economically viable business for the long term.
We are actively working with smaller tenants who qualify for the Canada Emergency Commercial Rent Assistance ("CECRA") program operated jointly by the federal and provincial governments. Tenants who are eligible for CECRA 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% during the months of April to June. We currently anticipate approximately 100 tenant applications to participate in the CECRA program. The CECRA program receivables in the table above represent the unpaid portion of the 25% rent the tenant applicant is required to cover and the 50% that we expect to receive from the government upon approval of the CECRA applications. The Trust has collected the majority of the 25% rent that tenant applicants owe to the Trust.
We have also agreed to work with certain tenants representing approximately 1.9% of the second quarter's recurring contractual gross rent by deferring their gross rent for a period of time to help their business. The current weighted average deferral period on current arrangements is approximately eight months.
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As at June 30, 2020, the Trust has recorded COVID-related provisions totalling approximately $1.5 million, which are included in the line item "COVID-related provisions and adjustments" within net rental income. This provisions balance represents an estimate of potential credit losses on our trade receivables for all uncollected rent as at June 30, 2020 along with the 25% of recurring contractual gross rent that the Trust expects to forgive, subject to participating tenants' eligibility for participation in the CECRA program. Partially offsetting the impact of provisions included in "COVID-related provisions and adjustments" is the impact of government programs totalling $1.2 million that the Trust qualified for during the second quarter and collected subsequent to the quarter.
The COVID-19 pandemic and the measures taken to control it have affected the Trust's risk exposure and led to elevated uncertainties in the estimates used in preparing the condensed consolidated financial statements. These risks and uncertainties are detailed in Section V of this MD&A.
- Available liquidity, unencumbered assets and level of debt (net total debt-to-net total assets) are non-GAAP measures used by management in evaluating operating and financial performance. Please refer to the "Non-GAAP Measures" section of the MD&A for a full description of these non-GAAP measures and a reconciliation, where available, to the condensed consolidated financial statements.
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SECTION II
OUR PROPERTIES
At June 30, 2020, our ownership interests included 5.5 million square feet of gross leasable area ("GLA") across 31 properties, which comprise 29 active office properties (5.2 million square feet) and two properties under development (0.3 million square feet). In addition, we have a 50% interest in a joint venture arrangement that owns 220 King Street West, Toronto (11,000 square feet at our share). We have excluded this joint venture from all of our metrics throughout the MD&A.
Comparative portfolio owned gross leasable area and fair value by region
The following pie charts illustrate the Trust's total GLA and the fair value of investment properties by region, excluding investment properties under development, investment in joint ventures and acquired properties as at June 30, 2020.
Top ten tenants
Our external tenant base includes provincial and federal governments as well as a wide range of high-quality large international corporations, including Canada's major banks and small- to medium-sized businesses across Canada. With just over 500 tenants and an average tenant size of approximately 10,000 square feet in our portfolio, excluding properties under development and investment in joint ventures, our risk exposure to any single large lease or tenant is mitigated. The following table outlines the contributions to total annualized gross rental revenue of our ten largest external tenants. Our top ten tenants have a weighted average lease term of 5.2 years.
Gross rental | Owned area | ||||
Tenant | revenue (%) | (thousands of sq. ft.) | Owned area (%) | Credit rating(1) | |
1 | Government of Ontario | 11.4 | 595 | 11.4 | A+/A-1 |
2 | Government of Canada | 8.1 | 363 | 7.0 | AAA/A-1+ |
3 | State Street Trust Company | 5.3 | 219 | 4.2 | AA-/A/A-1+ |
4 | International Financial Data Services | 3.1 | 137 | 2.6 | N/R |
5 | Medcan Health Management Inc. | 2.6 | 88 | 1.7 | N/R |
6 | U.S. Bank National Association | 2.3 | 185 | 3.6 | AA-/A-1+ |
7 | CIBC | 1.4 | 54 | 1.0 | A+/A-1 |
8 | Field Law | 1.2 | 64 | 1.2 | N/R |
9 | Goodlife Fitness Centre Inc. | 1.1 | 54 | 1.0 | N/R |
10 | DBRS | 1.1 | 41 | 0.8 | N/R |
Total | 37.6 | 1,800 | 34.5 |
- Credit ratings are obtained from Standard & Poor's Rating Services Inc. and may reflect the parent's or guarantor's credit rating. N/R - not rated
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The following chart profiles the industries in which our tenants operate based on estimated annualized gross rental revenue.
OUR OPERATIONS
The following key performance indicators related to our operations influence the cash flows generated from operating activities.
Performance indicators | June 30, 2020(1) | March 31, 2020(1) | June 30, 2019(1) | |||
Comparative portfolio | 88.3% | |||||
Occupancy rate - including committed (period-end) | 89.9% | 90.8% | ||||
Occupancy rate - in-place(period-end) | 87.8% | 89.1% | 88.9% | |||
Average in-place and committed net rent per square foot (period-end) | $ | 23.00 | $ | 22.66 | $ | 22.42 |
WALT (years) | 5.3 | 5.3 | 5.2 |
- Current and comparative periods exclude acquired properties, investment in joint ventures, sold properties and properties under development. Acquired properties comprises 6 Adelaide Street East, Toronto downtown, which was acquired on September 12, 2019.
Comparative portfolio occupancy
The following table details our comparative portfolio in-place and committed occupancy and in-place occupancy rates, by region at June 30, 2020, March 31, 2020 and June 30, 2019. Our in-place and committed occupancy rates include lease commitments for space that is currently being readied for occupancy but for which rent is not yet being recognized.
In-place and committed occupancy rate | In-place occupancy rate | ||||||
Occupancy rate | June 30, | March 31, | June 30, | June 30, | March 31, | June 30, | |
(percentage) | 2020 | 2020 | 2019 | 2020 | 2020 | 2019 | |
Toronto downtown | 97.2 | 97.4 | 97.7 | 97.0 | 96.9 | 97.0 | |
Other markets | 72.1 | 76.3 | 78.3 | 71.2 | 75.0 | 74.1 | |
Total comparative portfolio(1) | 88.3 | 89.9 | 90.8 | 87.8 | 89.1 | 88.9 |
- Current and comparative periods exclude acquired properties, investment in joint ventures, sold properties and properties under development. Acquired properties comprises 6 Adelaide Street East, Toronto downtown, which was acquired on September 12, 2019.
Comparative portfolio in-place occupancy on a quarter-over-quarter basis decreased to 87.8% compared to 89.1% at Q1 2020, primarily due to the expiry of a temporary lease in Western Canada and a 55,000 square foot bankruptcy of industrial space which predates COVID-19 at 2200-2206 Eglinton Avenue East and 1020 Birchmount Road in Scarborough. Net rents on the space occupied by the bankrupt tenant were $4.00 per square foot, which we believe are well below market rates for industrial space in the current market, presenting an opportunity for us to surface additional value.
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Comparative portfolio in-place occupancy on a year-over-year basis decreased to 87.8% compared to 88.9% at Q2 2019. In the Other markets region, Saskatchewan saw 64,000 square feet of net negative absorption from expiries, and the Greater Toronto Area had 17,000 square feet of net negative absorption, primarily due to the previously mentioned bankruptcy offset by net positive absorption through the remainder of that geographic area. Toronto downtown in-place occupancy was flat relative to the prior year. In Saskatchewan, we are engaging with prospective tenants for approximately 150,000 square feet of currently vacant space.
At June 30, 2020, vacant space committed for future occupancy approximated 24,000 square feet, bringing our overall comparative portfolio in-place and committed occupancy to 88.3%. This future committed occupancy is scheduled to take occupancy during the latter half of 2020.
The following table details the change in comparative portfolio in-place and committed occupancy for the three and six months ended June 30, 2020:
Three months ended June 30, 2020 | Six months ended June 30, 2020 | ||||||||
Weighted | As a | Weighted | As a | ||||||
average | percentage | average | percentage | ||||||
net rents | Thousands | of total | net rents | Thousands | of total | ||||
per sq. ft. | of sq. ft. | GLA | per sq. ft. | of sq. ft. | GLA | ||||
Occupancy (in-place and committed) at beginning | |||||||||
of period | 4,682 | 89.9% | 4,733 | 90.8% | |||||
Vacancy committed for future occupancy | (39) | (0.8%) | (39) | (0.7%) | |||||
Occupancy (in-place) at beginning of period | 4,643 | 89.1% | 4,694 | 90.1% | |||||
Natural expiries and relocations | $ | (23.82) | (52) | (1.0%) | $ | (24.64) | (165) | (3.2%) | |
Early terminations and bankruptcies | (5.41) | (61) | (1.2%) | (6.34) | (65) | (1.2%) | |||
Temporary lease expiries | (5.00) | (13) | (0.2%) | (4.30) | (15) | (0.3%) | |||
Temporary leasing | - | - | - | 0.00 | 1 | 0.0% | |||
New leases | 36.42 | 19 | 0.4% | 34.48 | 36 | 0.7% | |||
Renewals and relocations | 31.89 | 36 | 0.7% | 26.64 | 86 | 1.7% | |||
Comparative portfolio occupancy (in-place) at end | |||||||||
of period(1) | 4,572 | 87.8% | 4,572 | 87.8% | |||||
Vacancy committed for future occupancy(1) | 24 | 0.5% | 24 | 0.5% | |||||
Comparative portfolio occupancy (in-place and | |||||||||
committed) at end of period(1) | 4,596 | 88.3% | 4,596 | 88.3% |
- Excludes acquired properties, investment in joint ventures, sold properties and properties under development. 6 Adelaide Street East, Toronto downtown, was acquired on September 12, 2019.
The table below summarizes the comparative portfolio retention ratio with a comparison between the renewal and relocation rate and expiring rate on retained tenant space for the three and six months ended June 30, 2020.
As a result of the timing of lease executions, the renewal rates shown below were based on commitments signed in previous periods and may not be reflective of the renewal rates on leases executed during the quarter for future occupancy.
Three months ended | Six months ended | |||
June 30, 2020(1) | June 30, 2020(1) | |||
Tenant retention ratio | 69.2% | 52.1% | ||
Renewal and relocation rate (per sq. ft.) | $ | 31.89 | $ | 26.64 |
Expiring rate on retained tenant space (per sq. ft.) | 23.45 | 21.62 | ||
Renewal and relocation rate to expiring rate spread (per sq. ft.) | 8.44 | 5.02 | ||
Renewal and relocation rate to expiring rate spread (%) | 36.0% | 23.2% |
- Excludes acquired properties, investment in joint ventures, sold properties and properties under development. 6 Adelaide Street East, Toronto downtown, was acquired on September 12, 2019.
For the three months ended June 30, 2020, the tenant retention ratio was 69.2%. The renewal and relocation rate to expiring and relocation rate spread was $8.44 per square foot, or 36.0% higher than expiring rates on retained tenant space, due to positive spreads on renewals in Toronto downtown, partially offset by negative spreads on renewals in Saskatchewan within Other markets. In Toronto downtown, the Trust secured new leases for the balance of the expiring space.
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For the six months ended June 30, 2020, the tenant retention ratio was 52.1%, primarily due to challenging leasing conditions in the Western Canadian provinces in Q1 2020. The renewal and relocation rate to expiring and relocation rate spread was $5.02 per square foot, or 23.2% higher than expiring rates on retained tenant space, for the same reasons as above.
Comparative portfolio rental rates
Average in-place and committed net rents across our comparative portfolio increased to $23.00 per square foot at June 30, 2020, compared to $22.66 per square foot at March 31, 2020 and $22.42 per square foot at June 30, 2019.
The overall increase in our comparative portfolio average in-place and committed net rents on a quarter-over-quarter basis was mainly driven by higher rates on new leases and renewals in the Toronto downtown region. The increase in rental rates in the Other markets region was primarily due to the previously mentioned bankruptcy in the Greater Toronto Area that was at a rate significantly below average rates for the region, partially offset by negative spreads on new leasing and renewals in Western Canada.
The overall increase in our comparative portfolio average in-place and committed net rents on a year-over-year basis was primarily driven by the Toronto downtown region, with net rents per square foot increasing by $0.72, or 3.0%, due to rental rate steps and increases in net rents on new leasing and renewals since the prior year comparative quarter. Net rents in the Other markets region declined by $0.16, or 0.9%, relative to the prior year, due to declines in net rents per square foot in the Western Canadian provinces within that region due to the continued challenging leasing environment in those particular markets, offset by the above- mentioned bankruptcy.
The following table details the average in-place and committed net rental rates in our comparative portfolio as at June 30, 2020, March 31, 2020 and June 30, 2019:
Average in-place and committed net rent | |||||||
(per sq. ft.) | June 30, 2020 | March 31, 2020 | June 30, 2019 | ||||
Toronto downtown | $ | 24.99 | $ | 24.88 | $ | 24.27 | |
Other markets | 18.02 | 17.36 | 18.18 | ||||
Total comparative portfolio(1) | $ | 23.00 | $ | 22.66 | $ | 22.42 | |
(1) Current and comparative periods exclude acquired | properties, investment | in joint ventures, | sold | properties and properties | under development. |
6 Adelaide Street East, Toronto downtown, was acquired on September 12, 2019.
Market rents represent base rents only and do not include the impact of lease incentives. Market rents reflect management's best estimates with reference to recent leasing activity and external market data, which do not take into account allowance for increases in future years. The market rents presented in the table below are based on the best available information as at the current period and may vary significantly from period to period as a result of changes in economic conditions, including the effects of the COVID-19 pandemic.
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.
The following table compares market rents in our comparative portfolio to the average in-place and committed net rent as at June 30, 2020:
As at June 30, 2020 | |||||
Average in-place and | Market rent/ | ||||
Market rent(1) | committed net rent | average in-place and | |||
(per sq. ft.) | (per sq. ft.) | committed net rent | |||
Toronto downtown | $ | 30.94 | $ | 24.99 | 23.8% |
Other markets | 14.75 | 18.02 | (18.1%) | ||
Total comparative portfolio(2) | $ | 26.32 | $ | 23.00 | 14.4% |
- Market rents include office and retail space.
- Current and comparative periods exclude acquired properties, investment in joint ventures, sold properties and properties under development. 6 Adelaide Street East, Toronto downtown, was acquired on September 12, 2019.
Dream Office REIT 2020 Second Quarter Report | 9
Comparative portfolio leasing costs and lease incentives
Initial direct leasing costs include leasing fees and related costs and broker commissions incurred in negotiating and arranging tenant leases. Lease incentives include costs incurred to make leasehold improvements to tenant spaces, cash allowances and landlord works. Initial direct leasing costs and lease incentives are dependent upon asset type, lease terminations and expiries, the mix of new leasing activity compared to renewals, portfolio growth and general market conditions.
Initial direct leasing costs shown in the table below include costs attributable to leases that commenced in the respective periods. Due to the timing of the signing of lease agreements, certain costs, such as lease commissions, may be incurred in advance of lease commencement.
For the three and six months ended June 30, 2020, approximately $1.1 million and $3.5 million of initial direct leasing costs and lease incentives were attributable to leases that commenced in our comparative portfolio during the quarter and period, respectively. Average initial direct leasing costs and lease incentives on a comparative portfolio basis for the three and six months ended June 30, 2020 were $3.56 and $4.76 per square foot per year, respectively, representing a change of $0.10 and $1.69 per square foot over the prior year comparative quarter and period, respectively. The increase in leasing costs relative to the prior year was primarily due to leasing costs provided to tenants in our Other markets region, especially in the Western Canadian provinces where leasing costs remain elevated due to challenging leasing conditions, while the higher demand for space in Toronto downtown resulted in relatively lower leasing costs offered to tenants during the quarter.
Three months ended June 30, | Six months ended June 30, | ||||||||
Performance indicators | 2020(1) | 2019(1) | 2020(1) | 2019(1) | |||||
Leases that commenced during the period | 55 | 122 | |||||||
Thousands of square feet | 211 | 472 | |||||||
Average lease term (years) | 5.7 | 7.4 | 6.1 | 7.9 | |||||
Initial direct leasing costs and lease incentives | $ | 1,117 | $ | 3,536 | |||||
In thousands of dollars | $ | 5,417 | $ | 11,462 | |||||
Per square foot | 20.31 | 25.67 | 28.98 | 24.30 | |||||
Per square foot per year | 3.56 | 3.46 | 4.76 | 3.07 |
- Current and comparative periods exclude temporary leases, acquired properties, investment in joint ventures, sold properties and properties under development. Acquired properties comprises 6 Adelaide Street East, Toronto downtown, which was acquired on September 12, 2019.
Comparative portfolio lease maturity profile, lease commitments and expiring net rental rates
The following table details our in-place lease maturity profile, lease commitments and expiring net rental rates by region and by year, and excludes acquired properties, investment in joint ventures and properties under development as at June 30, 2020.
Temporary | Remainder of | |||||||||||||
(in thousands of square feet) | leases | 2020 | 2021 | 2022 | 2023 | 2024 | 2025+ | |||||||
Toronto downtown | ||||||||||||||
Expiries | (19) | (78) | (737) | (666) | (511) | (233) | (1,009) | |||||||
Expiring net rents at maturity | $ | 12.20 | $ | 24.14 | $ | 23.47 | $ | 25.87 | $ | 25.68 | $ | 26.86 | $ | 24.63 |
Commencements | n/a | 31 | 393 | 246 | 194 | - | 43 | |||||||
Commencements as a percentage of expiries | n/a | 40% | 53% | 37% | 38% | - | 4% | |||||||
Other markets | ||||||||||||||
Expiries | (40) | (292) | (124) | (69) | (54) | (109) | (631) | |||||||
Expiring net rents at maturity | $ | 11.07 | $ | 17.98 | $ | 18.05 | $ | 20.61 | $ | 18.08 | $ | 21.80 | $ | 16.92 |
Commencements | n/a | 226 | 84 | 26 | - | - | - | |||||||
Commencements as a percentage of expiries | n/a | 77% | 68% | 38% | - | - | - | |||||||
Total comparative portfolio | ||||||||||||||
Expiries | (59) | (370) | (861) | (735) | (565) | (342) | (1,640) | |||||||
Expiring net rents at maturity | $ | 11.43 | $ | 19.29 | $ | 22.69 | $ | 25.38 | $ | 24.95 | $ | 25.24 | $ | 21.66 |
Commencements | n/a | 257 | 477 | 272 | 194 | - | 43 | |||||||
Commencements as a percentage of expiries | n/a | 69% | 55% | 37% | 34% | - | 3% |
n/a - not applicable
Dream Office REIT 2020 Second Quarter Report | 10
Net rental income
Net rental income is defined by the Trust as total investment property revenue less investment property operating expenses plus property management and other service fees. Property management and other service fees comprise property management fees earned from properties owned by Dream Asset Management Corporation ("DAM") and properties owned by or co-owned with Dream Hard Asset Alternatives Trust ("DHAAT"), and fees earned from managing tenant construction projects and other tenant services. Fees earned from tenant services are not necessarily of a recurring nature and the amounts may vary year-over-year and quarter-over-quarter.
For a detailed discussion about investment properties revenue and expenses for the three and six months ended June 30, 2020, refer to the "Our Results of Operations" section.
Comparative properties NOI (year-over-year comparison)
Comparative properties NOI is a non-GAAP measure used by management in evaluating the performance of properties owned by the Trust in the current and comparative periods presented. When the Trust compares comparative properties NOI on a year-over- year basis for the three and six months ended June 30, 2020 and June 30, 2019, the Trust excludes investment properties acquired after January 1, 2019, assets held for sale or properties sold prior to the current period. Comparative properties NOI also excludes lease termination fees; one-time property adjustments, if any; bad debt expenses; NOI from properties under development until reclassified to active properties for a period of two full calendar years; investment in joint ventures; property management and other service fees; straight-line rent; and amortization of lease incentives. This measure is not defined by IFRS, does not have a standardized meaning and may not be comparable with similar measures presented by other income trusts.
Three months ended | Change in | Change in | |||||||
June 30, | June 30, | Change | |||||||
weighted average | in-place | ||||||||
2020 | 2019 | Amount | % | occupancy % | net rents % | ||||
Toronto downtown | $ | 23,764 | $ | 24,169 | $ | (405) | (1.7) | (0.5) | 2.6 |
Other markets | 6,637 | 7,333 | (696) | (9.5) | (1.7) | (0.8) | |||
Comparative properties NOI | 30,401 | 31,502 | (1,101) | (3.5) | (0.9) | 1.9 | |||
COVID-related provisions and adjustments | (336) | - | (336) | ||||||
Lease termination fees and other | 58 | 73 | (15) | ||||||
6 Adelaide Street East, Toronto downtown(1) | 439 | - | 439 | ||||||
Properties under development | 50 | 46 | 4 | ||||||
Straight-line rent | (111) | 5 | (116) | ||||||
Amortization of lease incentives(2) | (2,816) | (2,971) | 155 | ||||||
Property management and other service fees | 434 | 545 | (111) | ||||||
Sold properties(3) | 60 | 3,148 | (3,088) | ||||||
Net rental income from continuing operations | $ | 28,179 | $ | 32,348 | $ | (4,169) | |||
Net rental income (loss) from discontinued | |||||||||
operations(4) | $ | (2) | $ | 4,956 | $ | (4,958) |
- Acquired on September 12, 2019.
- For the three months ended June 30, 2020 and June 30, 2019, amortization of lease incentives included $(23) and $(319), respectively, related to acquired and sold properties and properties under development, as applicable.
- For the three months ended June 30, 2020, NOI from sold properties comprises post-closing adjustments for properties sold in prior periods.
- Net rental income (loss) from discontinued operations comprises the net rental income from the previously segmented Ottawa and Montréal region.
Dream Office REIT 2020 Second Quarter Report | 11
Six months ended | Change in | Change in | |||||||
June 30, | June 30, | Change | |||||||
weighted average | in-place | ||||||||
2020 | 2019 | Amount | % | occupancy % | net rents % | ||||
Toronto downtown | $ | 48,017 | $ | 47,655 | $ | 362 | 0.8 | (0.4) | 3.3 |
Other markets | 13,886 | 14,013 | (127) | (0.9) | (0.1) | (0.6) | |||
Comparative properties NOI | 61,903 | 61,668 | 235 | 0.4 | (0.3) | 2.4 | |||
COVID-related provisions and adjustments | (336) | - | (336) | ||||||
Lease termination fees and other | (4) | 463 | (467) | ||||||
6 Adelaide Street East, Toronto downtown(1) | 807 | - | 807 | ||||||
Properties under development | 97 | 117 | (20) | ||||||
Straight-line rent | (172) | 69 | (241) | ||||||
Amortization of lease incentives(2) | (6,001) | (5,744) | (257) | ||||||
Property management and other service fees | 807 | 1,455 | (648) | ||||||
Sold properties(3) | 6 | 6,502 | (6,496) | ||||||
Net rental income from continuing operations | $ | 57,107 | $ | 64,530 | $ | (7,423) | |||
Net rental income (loss) from discontinued | |||||||||
operations(4) | $ | (13) | $ | 9,681 | $ | (9,694) |
- Acquired on September 12, 2019.
- For the six months ended June 30, 2020 and June 30, 2019, amortization of lease incentives included $(109) and $(545), respectively, related to acquired and sold properties and properties under development, as applicable.
- For the six months ended June 30, 2020, NOI from sold properties comprises post-closing adjustments for properties sold in prior periods.
- Net rental income (loss) from discontinued operations comprises the net rental income (loss) from the previously segmented Ottawa and Montréal region.
For the three months ended June 30, 2020, comparative properties NOI decreased by 3.5%, or $1.1 million, over the prior year comparative quarter, primarily driven by lower transient parking revenues in both our regions as a result of city lockdown restrictions and lower weighted average occupancy and in-place net rents in Other markets. We expect parking revenues to recover over time as lockdown restrictions are lifted and traffic to our properties improves.
Toronto downtown saw a decline in comparative properties NOI of $0.4 million, or 1.7% over the prior year comparative quarter, predominately due to the aforementioned lower transient parking revenues, partially offset by rent step-ups and a tenant expansion in the latter half of 2019 along with higher net rents on renewed space.
Other markets experienced a decrease in comparative properties NOI of $0.7 million, or 9.5% over the prior year comparative quarter, largely due to lower transient parking revenues and tenants vacating 34,000 square feet at Princeton Tower in Q3 2019, 26,000 square feet at Saskatoon Square in the prior quarter and the 55,000 square foot bankruptcy at 2200-2206 Eglinton Avenue East and 1020 Birchmount Road in Scarborough in the current quarter.
For the six months ended June 30, 2020, comparative properties NOI increased by 0.4%, or $0.2 million, over the prior year comparative period, mainly driven by higher rental rates in Toronto downtown due to the previously mentioned positive leasing activity, partially offset by lower transient parking revenues in both regions and declines in in-place net rents in Other markets.
Included in COVID-related provisions and adjustments are provisions for outstanding and deferred accounts receivable and CECRA losses totalling $1.5 million, net of the effect of various government programs totalling $1.2 million.
Lease termination fees and other are not necessarily of a recurring nature and the amounts may vary year-over-year. For the three and six months ended June 30, 2020, lease termination fees and other amounted to income of $0.1 million and a loss of $4 thousand, respectively.
For the six months ended June 30, 2020, property management and other service fees decreased by $648 relative to the prior year comparative period due to reduced construction activity. For the six months ended June 30, 2019, property management and other service fees included $0.4 million in tenant construction fees for fitting out tenant space and includes fees earned from managing tenant construction projects and other tenant services related to sold properties in the prior year.
Included in properties under development are 357 Bay Street in Toronto downtown and 1900 Sherwood Place in Regina. Development projects to revitalize these properties commenced in Q3 2018. NOI at these properties under development may vary year-over-year until they stabilize upon completion of development projects and the commencement of the leases.
Dream Office REIT 2020 Second Quarter Report | 12
Comparative properties NOI (quarter-over-quarter comparison)
When the Trust compares comparative properties NOI, as defined above, on a quarter-over-quarter basis for the three months ended June 30, 2020 and March 31, 2020, the Trust excludes investment properties acquired after January 1, 2019, assets held for sale or properties disposed of prior to the current period, and the other exclusions outlined above. Because 6 Adelaide Street East was acquired on September 12, 2019, it was excluded from comparative properties NOI below.
Three months ended | Change in | Change in | |||||||
June 30, | March 31, | Change | weighted average | in-place | |||||
2020 | 2020 | Amount | % | occupancy % | net rents % | ||||
Toronto downtown | $ | 23,764 | $ | 24,253 | $ | (489) | (2.0) | (0.1) | 0.3 |
Other markets | 6,637 | 7,249 | (612) | (8.4) | (2.5) | 1.6 | |||
Comparative properties NOI | 30,401 | 31,502 | (1,101) | (3.5) | (1.0) | 0.8 | |||
COVID-related provisions and adjustments | (336) | - | (336) | ||||||
Lease termination fees and other | 58 | (62) | 120 | ||||||
6 Adelaide Street East, Toronto downtown(1) | 439 | 368 | 71 | ||||||
Properties under development | 50 | 47 | 3 | ||||||
Straight-line rent | (111) | (61) | (50) | ||||||
Amortization of lease incentives(2) | (2,816) | (3,185) | 369 | ||||||
Property management and other service fees | 434 | 373 | 61 | ||||||
Sold properties(3) | 60 | (54) | 114 | ||||||
Net rental income from continuing operations | $ | 28,179 | $ | 28,928 | $ | (749) | |||
Net rental loss from discontinued operations(4) | $ | (2) | $ | (11) | $ | 9 |
- Acquired on September 12, 2019.
- For the three months ended June 30, 2020 and March 31, 2020, amortization of lease incentives included $(23) and $(86), respectively, related to acquired and sold properties and properties under development, as applicable.
- For the three months ended June 30, 2020, NOI from sold properties comprises post-closing adjustments for properties sold in prior periods.
- Net rental loss from discontinued operations comprises the net rental loss from the previously segmented Ottawa and Montréal region.
For the three months ended June 30, 2020, comparative properties NOI decreased by 3.5%, or $1.1 million, when compared with the prior quarter, predominately driven by lower transient parking revenues in both regions as previously mentioned as well as lower weighted average occupancy in Other markets, partially offset by higher in-place net rents in both of our regions.
Toronto downtown experienced a decrease in comparative properties NOI of $0.5 million, or 2.0%, when compared to the prior quarter. The decline in Toronto downtown quarter-over-quarter was primarily due to lower parking revenues attributable to parking lot closures as a result of COVID-19.
Other markets saw a decline in comparative properties NOI of $0.6 million, or 8.4%, over the prior quarter, primarily due to lower transient parking revenues and a 55,000 square foot bankruptcy at 2200-2206 Eglinton Avenue East and 1020 Birchmount Road and 14,000 square feet of negative leasing activity in Calgary.
Dream Office REIT 2020 Second Quarter Report | 13
OUR RESULTS OF OPERATIONS
Condensed consolidated statement of comprehensive income
Three months ended June 30, | Six months ended June 30, | ||||||||
(in thousands of Canadian dollars) | 2020 | 2019 | 2020 | 2019 | |||||
Investment properties revenue | $ | 50,704 | $ | 57,031 | $ | 103,452 | $ | 114,596 | |
Investment properties operating expenses | (22,525) | (24,683) | (46,345) | (50,066) | |||||
Net rental income | 28,179 | 32,348 | 57,107 | 64,530 | |||||
Other income | 4,904 | 5,427 | |||||||
Share of income from investment in Dream Industrial REIT | 18,833 | 26,311 | |||||||
Share of net income (loss) from investment in joint ventures | 354 | (18) | 247 | (18) | |||||
Interest and other income | 649 | 639 | 1,366 | 974 | |||||
5,907 | 19,454 | 7,040 | 27,267 | ||||||
Other expenses | (2,777) | (5,419) | |||||||
General and administrative | (3,035) | (5,672) | |||||||
Interest: | (10,770) | (21,636) | |||||||
Debt | (13,064) | (26,030) | |||||||
Subsidiary redeemable units | (1,309) | (1,309) | (2,617) | (2,617) | |||||
Amortization of intangible assets and depreciation on property and | (362) | (773) | |||||||
equipment | (444) | (905) | |||||||
(15,218) | (17,852) | (30,445) | (35,224) | ||||||
Fair value adjustments, leasing and transaction costs | 20,203 | 24,909 | |||||||
Fair value adjustments to investment properties | 12,322 | 16,907 | |||||||
Fair value adjustments to financial instruments | 16,721 | 6,281 | 61,975 | (9,099) | |||||
Transaction costs recovery (leasing and net transaction costs) | 1,842 | (587) | 1,484 | (1,310) | |||||
38,766 | 18,016 | 88,368 | 6,498 | ||||||
Income before income taxes and discontinued operations | 57,634 | 51,966 | 122,070 | 63,071 | |||||
Current and deferred income taxes recovery (expense), net | (32) | (118) | 376 | (235) | |||||
Income from continuing operations, net of taxes | 57,602 | 51,848 | 122,446 | 62,836 | |||||
Loss from discontinued operations | (2) | (5,315) | (15) | (6,369) | |||||
Net income for the period | 57,600 | 46,533 | 122,431 | 56,467 | |||||
Other comprehensive income (loss) | (2,914) | (2,074) | 6,291 | (2,819) | |||||
Comprehensive income for the period | $ | 54,686 | $ | 44,459 | $ | 128,722 | $ | 53,648 |
Investment properties revenue
Investment properties revenue includes base rent from investment properties, recovery of operating costs and property taxes from tenants, parking services revenue, the impact of straight-line rent adjustments, lease termination fees and other adjustments as well as fees earned from property management and other services, including leasing and construction. Leasing, construction and lease termination fees, and other adjustments are not necessarily of a recurring nature and the amounts may vary year- over-year.
Investment properties revenue for the quarter was $50.7 million, compared to $57.0 million in the prior year comparative quarter. For the six months ended June 30, 2020, investment properties revenue was $103.5 million, compared to $114.6 million in the prior year comparative period. Overall, the decrease over the prior year comparative periods was primarily driven by properties sold during 2019 and lower parking revenues as a result of parking lot closures due to COVID-19, partially offset by revenues from a property acquired in Q3 2019 and higher in-place net rents.
Investment properties operating expenses
Investment properties operating expenses comprise operating costs and property taxes as well as certain expenses that are not recoverable from tenants. Operating expenses fluctuate with changes in occupancy levels, expenses that are seasonal in nature, and the level of repairs and maintenance incurred in any given period.
Investment properties operating expenses for the quarter were $22.5 million, compared to $24.7 million in the prior year comparative quarter. For the six months ended June 30, 2020, investment property operating expenses were $46.3 million, compared to $50.1 million in the prior year comparative period. Overall, the decrease in investment properties operating expenses over the prior year comparative periods was mainly driven by properties sold during 2019, partially offset by expenses incurred for a property acquired in Q3 2019.
Dream Office REIT 2020 Second Quarter Report | 14
Share of income from investment in Dream Industrial REIT
Our share of income from our investment in Dream Industrial Real Estate Investment Trust ("Dream Industrial REIT") includes our share of the entity's net rental income, other revenue and expenses, fair value adjustments to investment properties and other items and income from discontinued operations, net of taxes, net of adjustments related to our ownership of Dream Industrial REIT's subsidiary redeemable units. Our share of income from our investment in Dream Industrial REIT is not necessarily of a recurring nature and the amounts may vary year-over-year due to fluctuations in fair value adjustments to investment properties.
The following table summarizes our share of income from investment in Dream Industrial REIT:
Three months ended June 30, | Six months ended June 30, | ||||||||
2020 | 2019 | 2020 | 2019 | ||||||
Share of net income | $ | 4,908 | $ | 17,054 | $ | 793 | $ | 25,826 | |
Net dilution gain (loss) | (4) | 1,779 | 4,634 | 485 | |||||
Share of income from investment in Dream Industrial REIT | $ | 4,904 | $ | 18,833 | $ | 5,427 | $ | 26,311 |
The $12.1 million and $25.0 million decrease in our share of income (excluding dilution adjustments) over the prior year comparative quarter and prior year comparative period, respectively, was primarily due to the timing of equity deployment by Dream Industrial REIT and fair value losses recorded during Q1 2020 to write off acquisition related costs. Dilution adjustments are dependent on the timing of equity transactions by Dream Industrial REIT and will vary from period to period based on the level of the Trust's participation in those equity offerings.
Share of net income (loss) from investment in joint ventures
Our investment in joint ventures includes the Trust's 50% interest in a partnership that acquired 220 King Street West in Toronto during Q3 2019 and the Trust's investment in Alate Partners, an investment company focused on the property technology market in which we have invested jointly with DAM. The Trust and DAM each hold a 25% interest in Alate Partners.
For the three and six months ended June 30, 2020, share of net income from investment in joint ventures amounted to $0.4 million and $0.2 million, respectively, and mainly comprises gains in the Alate Partners investment and net rental income from 220 King Street West, partially offset by general and administrative expenses and interest on debt.
Interest and other income
Interest and other income mainly comprises interest earned on vendor takeback mortgage ("VTB mortgage") receivables and a construction loan facility committed as part of the sale of a property in 2018, cash on hand and miscellaneous income. The interest earned on cash on hand and miscellaneous income are not necessarily of a recurring nature and may vary year-over-year depending on the amount of cash on hand and miscellaneous income at any given period.
Interest and other income for the three months ended June 30, 2020 was $0.6 million, relatively flat over the prior year comparative quarter. For the six months ended June 30, 2020, interest and other income was $1.4 million, compared to $1.0 million in the prior year comparative period. The $0.4 million increase over the prior year comparative period was due to interest earned on the construction loan facility and higher cash balances on hand during Q1 2020.
General and administrative expenses
The following table summarizes the nature of expenses included in general and administrative ("G&A") expenses:
Three months ended June 30, | Six months ended June 30, | ||||||||
2020 | 2019 | 2020 | 2019 | ||||||
Salaries and benefits | $ | (984) | $ | (791) | $ | (1,918) | $ | (1,620) | |
Deferred compensation expense | (849) | (1,001) | (1,452) | (1,568) | |||||
Professional services fees, public reporting, overhead-related costs | (944) | (2,049) | |||||||
and other | (1,243) | (2,484) | |||||||
General and administrative expenses | $ | (2,777) | $ | (3,035) | $ | (5,419) | $ | (5,672) |
For the three and six months ended June 30, 2020, G&A expenses were $2.8 million and $5.4 million, respectively, a decrease of $0.3 million over both prior year comparative periods, mainly attributable to a decrease in deferred compensation expense due to a lower unit price and lower overhead-related costs.
Dream Office REIT 2020 Second Quarter Report | 15
Interest expense - debt
Interest expense on debt for the quarter was $10.8 million, compared to $13.1 million in the prior year comparative quarter. For the six months ended June 30, 2020, interest expense on debt was $21.6 million, compared to $26.0 million in the prior year comparative period.
Overall, the decrease in interest expense on debt over the prior year comparative periods was mainly due to the discharge of debt related to sold properties in the prior year, the discharge of maturing debts (including the remaining $150 million Series C Debentures) in the prior quarter and overall lower borrowing rates on the revolving credit facilities in the current quarter.
Interest expense - subsidiary redeemable units
Interest expense on subsidiary redeemable units for the three and six months ended June 30, 2020 was $1.3 million and $2.6 million, respectively, consistent with the prior year comparative quarter and period. The interest expense on subsidiary redeemable units represents distributions paid and payable on the 5.2 million subsidiary redeemable units owned by DAM.
Amortization of intangible assets and depreciation on property and equipment
Amortization of intangible assets and depreciation on property and equipment expense for the three and six months ended June 30, 2020 was $0.4 million and $0.8 million, respectively, and decreased over the prior year comparative periods, primarily due to fewer depreciable information technology assets.
Fair value adjustments to investment properties
Refer to the heading "Fair value adjustments to investment properties" in the section "Investment Properties" for a discussion of fair value adjustments to investment properties for the three and six months ended June 30, 2020.
Fair value adjustments to financial instruments
Fair value adjustments to financial instruments include remeasurements of the carrying value of subsidiary redeemable units and deferred trust units which are carried as a liability under IFRS. The fair value adjustments to financial instruments are dependent on the change in the Trust's REIT A Unit trading price, and the adjustments may vary significantly year-over-year as the liabilities are marked to the closing price for the REIT A Units.
For the three and six months ended June 30, 2020, the Trust recorded fair value gains to financial instruments totalling $16.7 million and $62.0 million, respectively, due to the remeasurement of the carrying value of subsidiary redeemable units and deferred trust units as a result of declines in the Trust's unit price over the prior quarter and prior year-end.
Transaction costs recovery (leasing and net transaction costs)
The following table summarizes the nature of expenses included in leasing costs and net transaction recovery:
Three months ended June 30, | Six months ended June 30, | ||||||||
2020 | 2019 | 2020 | 2019 | ||||||
Internal leasing costs | $ | (370) | $ | (511) | $ | (782) | $ | (1,182) | |
Recovery (costs) attributable to sale of investment properties(1) | 2,212 | (76) | 2,266 | (128) | |||||
Transaction costs recovery (leasing and net transaction costs) | $ | 1,842 | $ | (587) | $ | 1,484 | $ | (1,310) |
- Recovery (costs) attributable to sale of investment properties consist of recoveries, transaction costs, commissions and other expenses incurred in relation to the disposal of investment properties.
For the three and six months ended June 30, 2020, recoveries attributable to the sale of investment properties were primarily due to the final settlement of post-close balances from various properties and the release of an escrow held back on the sale of an investment property during 2017.
Current and deferred income taxes recovery (expense), net
Current and deferred income taxes are not necessarily of a recurring nature and the amounts may vary from period-to-period due to changes in tax legislation and the performance of our U.S. subsidiary.
Net current and deferred income taxes recovery (expense) for the three and six months ended June 30, 2020 was a net expense of $32 thousand and a net recovery of $0.4 million, respectively. For the period-to-date, the Trust recognized a net current tax recovery stemming from the introduction of the U.S. Coronavirus Aid, Relief, and Economic Security Act, partially offset by deferred income tax expense relating to our sole investment property in the U.S.
Dream Office REIT 2020 Second Quarter Report | 16
Loss from discontinued operations
Loss from discontinued operations comprises loss from our investment properties previously included in the Ottawa and Montréal region. For the three and six months ended June 30, 2020, the Trust generated a nominal loss from discontinued operations. The loss in the current quarter and period-to-date mainly comprises post-closing adjustments for the properties sold in a prior period.
Other comprehensive income (loss)
Other comprehensive income (loss) is not necessarily of a recurring nature and the amounts may vary from period-to-period primarily due to changes in exchange rates. Other comprehensive income (loss) comprises amortization of an unrealized gain on an interest rate swap, unrealized foreign currency translation gain (loss) related to the investment property located in the U.S., the Trust's share of Dream Industrial REIT's other comprehensive income (loss) and share of comprehensive income (loss) from an investment in a joint venture.
For the three and six months ended June 30, 2020, other comprehensive loss amounted to $2.9 million and other comprehensive income of $6.3 million, respectively. The changes in other comprehensive income (loss) for the respective periods were primarily driven by fluctuations in our share of other comprehensive income from our investment in Dream Industrial REIT as a result of foreign currency translation adjustments and similar foreign currency translation adjustments on our U.S. property.
Funds from operations ("FFO")
Management believes FFO (including diluted FFO per unit) is an important measure of our operating performance. This non-GAAP measurement is a commonly used measure of performance of real estate operations; however, it does not represent net income nor cash flows generated from (utilized in) operating activities, as defined by IFRS, is not necessarily indicative of cash available to fund Dream Office REIT's needs and may not be comparable with similar measures presented by other income trusts. In compliance with Canadian Securities Administrators Staff Notice 52-306 (Revised), "Non-GAAP Financial Measures", FFO has been reconciled to net income in the "Non-GAAP Measures" section under the heading "Funds from operations ("FFO")".
The following table summarizes FFO and diluted FFO per unit.
Three months ended | Six months ended | |||||||||||
June 30, | March 31, | June 30, | June 30, | June 30, | ||||||||
2020 | 2020 | 2019 | 2020 | 2019 | ||||||||
FFO for the period | $ | 23,136 | $ | 24,082 | $ | 28,721 | $ | 47,218 | $ | 57,021 | ||
Diluted weighted average number of units(1) | 61,512 | 62,336 | 65,144 | 61,935 | 65,163 | |||||||
FFO per unit - diluted | $ | 0.38 | $ | 0.39 | $ | 0.44 | $ | 0.76 | $ | 0.88 |
- Diluted weighted average number of units includes the weighted average of all REIT A Units, LP B Units, vested but unissued and unvested deferred trust units and associated income deferred trust units.
The year-over-year decrease in diluted FFO per unit for the three and six months ended June 30, 2020 was mainly due to asset sales (net of unit buybacks and debt reduction) (-$0.03 and -$0.08, respectively), lower comparative properties NOI and the net impact of COVID-related provisions and adjustments on our results (-$0.02 and $nil, respectively), lower share of FFO from our investment in Dream Industrial REIT (-$0.01 and -$0.02, respectively) and other items ($nil and -$0.02, respectively).
The quarter-over-quarter decrease in diluted FFO per unit for the three months ended June 30, 2020 was primarily driven by lower comparative properties NOI and the net impact of COVID-related provisions and adjustments on our results (-$0.02), partially offset by lower units outstanding as a result of unit buybacks under the Normal Course Issuer Bid ("NCIB") (+$0.01).
Related party transactions
From time to time, Dream Office REIT and its subsidiaries enter into transactions with related parties that are generally conducted on a cost recovery basis or under normal commercial terms.
On May 15, 2019, the Trust entered into a shared services agreement (the "New Shared Services Agreement") with Dream Asset Management Corporation ("DAM"), a subsidiary of Dream Unlimited Corp., which replaced the existing Management Services Agreement, Shared Services and Cost Sharing Agreement and Administrative Services Agreement (the "Existing Agreements"). As a result of the termination of the Existing Agreements, any incentive fees that may have been payable to DAM in the future under the Management Services Agreement were eliminated. Under the New Shared Services Agreement, the Trust acts as the property manager for DAM's income properties in Canada and DAM acts as the development manager for the Trust's future development projects. In order to take advantage of economies of scale, the New Shared Services Agreement maintains certain resource-sharing arrangements between the Trust and DAM, such as information technology, human resources and insurance, among other services as requested, on a cost allocation basis.
Dream Office REIT 2020 Second Quarter Report | 17
Under the New Shared Services Agreement, in connection with each development project, DAM earns a development fee equal to 3.75% of the total net revenues of the development or, for rental properties, 3.75% of the fair value upon completion, without any promote or other incentive fees. In connection with the property management services provided by the Trust to DAM, the Trust earns a fee equal to 3.5% of gross revenue of the managed income properties.
Related party transactions with DAM
The following is a summary of costs processed by DAM and the Trust for the three and six months ended June 30, 2020 and June 30, 2019:
Three months ended June 30, | Six months ended June 30, | ||||||||
2020 | 2019 | 2020 | 2019 | ||||||
Property management services fee charged by the Trust | $ | 45 | $ | 50 | $ | 102 | $ | 105 | |
Costs processed by the Trust on behalf of DAM (cost recovery) | 2,013 | 1,740 | 4,270 | 3,256 | |||||
Development fees charged by DAM(1) | (589) | (295) | (1,177) | (295) | |||||
Costs processed by DAM on behalf of the Trust (cost recovery) | (405) | (532) | (988) | (1,110) | |||||
Net fees and reimbursements from DAM | $ | 1,064 | $ | 963 | $ | 2,207 | $ | 1,956 |
(1) Development fees charged by DAM became effective May 15, 2019.
For the three and six months ended June 30, 2020, total distributions and interest paid and payable to DAM were $4.4 million and $8.7 million, respectively (for the three and six months ended June 30, 2019 - $3.7 million and $7.3 million, respectively).
Related party transactions with DHAAT
The following is a summary of the amounts that were charged to DHAAT for the three and six months ended June 30, 2020 and June 30, 2019:
Three months ended June 30, | Six months ended June 30, | ||||||||
2020 | 2019 | 2020 | 2019 | ||||||
Property management and construction fees related to co-owned | $ | 180 | $ | 506 | |||||
properties | $ | 260 | $ | 573 | |||||
Costs processed on behalf of DHAAT related to co-owned properties | 315 | 385 | 532 | 808 | |||||
Amounts charged to DHAAT under the Services Agreement | 94 | 103 | 178 | 197 | |||||
Total cost recoveries from DHAAT | $ | 589 | $ | 748 | $ | 1,216 | $ | 1,578 |
Related party transactions with Dream Industrial REIT
The following is a summary of the cost recoveries from Dream Industrial REIT for the three and six months ended June 30, 2020 and June 30, 2019:
Three months ended June 30, | Six months ended June 30, | ||||||||
2020 | 2019 | 2020 | 2019 | ||||||
Total cost recoveries from Dream Industrial REIT | $ | 1,238 | $ | 1,275 | $ | 2,533 | $ | 2,046 |
Dream Office REIT 2020 Second Quarter Report | 18
SECTION III
INVESTMENT PROPERTIES
Investment properties continuity
Changes in the value of our investment properties by region, excluding an investment property owned through a joint venture that is equity accounted, for the three and six months ended June 30, 2020 are summarized in the following tables:
Three months ended | ||||||||||
Building | ||||||||||
improvements, | Amortization of | |||||||||
initial direct | lease incentives, | |||||||||
leasing costs | foreign exchange(2) | June 30, | ||||||||
March 31, | and lease | Fair value | and other | |||||||
2020 | incentives(1) | adjustments | adjustments | 2020 | ||||||
Toronto downtown | $ | 1,939,150 | $ | 5,732 | $ | 20,307 | $ | (1,734) | $ | 1,963,455 |
Other markets | 347,230 | 1,672 | (330) | (3,264) | 345,308 | |||||
Total comparative portfolio(3) | 2,286,380 | 7,404 | 19,977 | (4,998) | 2,308,763 | |||||
Add: | 46,212 | |||||||||
6 Adelaide Street East, Toronto downtown | 45,682 | 530 | (7) | 7 | ||||||
Properties under development | 107,199 | 1,831 | 233 | (16) | 109,247 | |||||
Total amounts included in condensed | ||||||||||
consolidated financial statements | $ | 2,439,261 | $ | 9,765 | $ | 20,203 | $ | (5,007) | $ | 2,464,222 |
- Includes $255 of interest capitalized to properties under development.
- Included in Other markets is a foreign currency translation adjustment totalling $(2,075) related to a property located in the U.S.
- Comparative portfolio excludes acquired properties, investment in joint ventures and properties under development. 6 Adelaide Street East, Toronto downtown, was acquired on September 12, 2019.
Six months ended | ||||||||||
Building | ||||||||||
improvements, | Amortization of | |||||||||
initial direct | lease incentives, | |||||||||
leasing costs | foreign exchange(2) | June 30, | ||||||||
January 1, | and lease | Fair value | and other | |||||||
2020 | incentives(1) | adjustments | adjustments | 2020 | ||||||
Toronto downtown | $ | 1,890,308 | $ | 10,891 | $ | 65,962 | $ | (3,706) | $ | 1,963,455 |
Other markets | 382,792 | 6,849 | (44,322) | (11) | 345,308 | |||||
Total comparative portfolio(3) | 2,273,100 | 17,740 | 21,640 | (3,717) | 2,308,763 | |||||
Add: | 46,212 | |||||||||
6 Adelaide Street East, Toronto downtown | 45,499 | 713 | (14) | 14 | ||||||
Properties under development | 102,346 | 3,739 | 3,283 | (121) | 109,247 | |||||
Total amounts included in condensed | ||||||||||
consolidated financial statements | $ | 2,420,945 | $ | 22,192 | $ | 24,909 | $ | (3,824) | $ | 2,464,222 |
- Includes $521 of interest capitalized to properties under development.
- Included in Other markets is a foreign currency translation adjustment totalling $2,340 related to a property located in the U.S.
- Comparative portfolio excludes acquired properties, investment in joint ventures and properties under development. 6 Adelaide Street East, Toronto downtown, was acquired on September 12, 2019.
Properties under development
The table below summarizes select financial information related to the two properties under development as at June 30, 2020.
Carrying value | Estimated yield on | ||||||||
Property | at time of | Capital invested | Estimated capital | cost and original | |||||
(in millions of Canadian dollars) | reclassification | to date(1) | remaining | Estimated NOI(2) | carrying value | ||||
357 Bay Street, Toronto | $ | 24.1 | $ | 19.1 | $ | 9.9 | $ | 2.9 | 5.5% |
1900 Sherwood Place, Regina | 42.2 | 17.0 | 8.6 | 5.4 | 8.0% |
- Capital invested to date excludes interest capitalized to properties under development.
- Does not include contractual annual rent escalators over the term of the leases.
Dream Office REIT 2020 Second Quarter Report | 19
Valuations of externally appraised properties
For the six months ended June 30, 2020, there were six investment properties valued by qualified external valuation professionals with an aggregate fair value of $529.3 million, representing 21% of the total investment property values (for the year ended December 31, 2019 - 10 investment properties with an aggregate fair value of $1.1 billion, representing 44% of the total investment property values).
Fair value adjustments to investment properties
Fair value adjustments to investment properties are not necessarily of a recurring nature and the amounts may vary from period- to-period due to changes in the market and valuation assumptions.
For the three months ended June 30, 2020, the Trust recorded a fair value gain of $20.2 million, primarily due to fair value gains of $20.3 million related to certain income properties located in Toronto downtown due to higher market rent assumptions supported by the Trust's recent leasing activity used by third-party appraisals received during the quarter, while the fair value adjustment in the Other markets region was minimal during the quarter.
For the six months ended June 30, 2020, the Trust recorded a fair value gain of $24.9 million, primarily due to fair value gains of $66.0 million in Toronto downtown and $3.3 million in our properties under development, partially offset by fair value losses of $44.3 million in Other markets. Fair value gains in Toronto downtown for the six months ended June 30, 2020 were attributed to six third-party appraisals obtained during the period and include a $43 million fair value gain to reflect the council zoning approval at 250 Dundas Street West received in Q1 2020, with the balance driven by higher market rate assumptions for the appraised properties. Fair value gains of $3.3 million in our properties under development reflect value-enhancing capital expenditures incurred to revitalize these properties for upcoming occupancy. Fair value gains for the period were partially offset by fair value losses of $44.3 million in Other markets due to an increase in capitalization rates by 44 basis points ("bps") over the prior year, increased vacancy assumptions and lower market rent assumptions, reflecting the uncertainty of the macroeconomic environment and the impact on Western Canadian provinces due to weak global demand and declining oil prices.
The duration and full scope of the economic impact of COVID-19 is unknown at this time. Key valuation assumptions which could be impacted over the long term include: market rents, leasing costs, vacancy rates, discount rates and capitalization rates. The Trust continues to monitor the effect of the economic environment on the valuation of its investment properties.
If there are any changes in the critical and key assumptions used in valuing the investment properties, in regional, national or international economic conditions, or new developments in the COVID-19 pandemic, the fair value of investment properties may change materially.
Assumptions used in the valuation of investment properties
Refer to Note 4 of the condensed consolidated financial statements for details of the assumptions used in the Trust's investment property valuations.
Building improvements
Building improvements represent investments made to our investment properties to ensure optimal building performance, to improve the experience of and attractiveness to our tenants and to reduce operating costs. In order to retain desirable rentable space and to generate adequate revenue over the long term, we must maintain or, in some cases, improve each property's condition to meet market demand.
As part of our broader strategy to invest capital in our buildings to improve the experience of and attractiveness to tenants, as well as to reduce operating costs, we expect overall building improvement costs to remain elevated. These improvements are value-add in nature and our tenants will have a better experience at our buildings, leading to improved tenant retention, quicker leasing of available space and realization of higher rental rates.
Dream Office REIT 2020 Second Quarter Report | 20
The table below summarizes the building improvements incurred for the three and six months ended June 30, 2020 and June 30, 2019.
Three months ended June 30, | Six months ended June 30, | ||||||||
Building improvements | 2020 | 2019 | 2020 | 2019 | |||||
Recoverable | $ | 3,751 | $ | 1,125 | $ | 6,203 | $ | 3,000 | |
Value-add | 640 | 1,002 | 2,359 | 1,642 | |||||
Value-add additions to properties in the Bay Street corridor | 1,783 | 363 | 3,111 | 363 | |||||
Non-recoverable | 1,151 | 1,021 | 1,597 | 1,374 | |||||
Total comparative portfolio(1) | 7,325 | 3,511 | 13,270 | 6,379 | |||||
Add: | 393 | 575 | |||||||
6 Adelaide Street East, Toronto downtown | - | - | |||||||
Properties under development | 1,333 | 4,702 | 2,727 | 8,493 | |||||
Interest capitalized to properties under development | 255 | 104 | 521 | 161 | |||||
Sold properties | - | 1,747 | - | 2,589 | |||||
Total amounts included in condensed consolidated financial | |||||||||
statements | $ | 9,306 | $ | 10,064 | $ | 17,093 | $ | 17,622 |
- Current and comparative periods exclude acquired properties, investment in joint ventures, sold properties and properties under development at the end of Q2 2020. 6 Adelaide Street East, Toronto downtown, was acquired on September 12, 2019.
For the three and six months ended June 30, 2020, we incurred $7.3 million and $13.3 million, respectively, in expenditures related to building improvements in our comparative portfolio, the majority of which are value-add and recoverable from tenants under the terms of current and future leases.
Recoverable building improvements for the three and six months ended June 30, 2020 were $3.8 million and $6.2 million, respectively, and included safety enhancements, heating, ventilation and air conditioning upgrades, elevator modernization and recoverable lobby and common area upgrades.
For the three and six months ended June 30, 2020, value-add building improvements were $0.6 million and $2.4 million, respectively, relating to pre-development and value-enhancing capital expenditures at certain properties.
As part of our transformation of our properties in the Bay Street corridor, for the three and six months ended June 30, 2020, the Trust incurred $1.8 million and $3.1 million, respectively, of value-add capital, of which certain capital investments will be recoverable from current and future tenants under the terms of their leases. Capital investments included refreshing the main lobbies, washrooms, stairwells and exterior facades and breaking ground in reimagining an alleyway (as at June 30, 2020, total value-add capital invested to date on the Bay Street corridor was $5.2 million). We plan to invest approximately $50 million over the next two years to revitalize these assets into best-in-class boutique office buildings which we believe can attract top tier tenants and the highest rents. Progress on these projects was delayed due to COVID-19 restrictions but we expect the projects to be finished by mid-2021.
For the three and six months ended June 30, 2020, non-recoverable building improvements were $1.2 million and $1.6 million, respectively, which include costs for structural and building enhancements.
As part of our development program, for the three and six months ended June 30, 2020, properties under development incurred $1.3 million and $2.7 million, respectively, in building improvements and included reconstruction costs to building interiors at 357 Bay Street in Toronto downtown and costs at 1900 Sherwood Place in Regina for a parkade expansion and building upgrades to the exterior and common areas. As we progress through the development projects at these two properties, we expect to continue to incur building improvement costs that will serve to enhance the overall experience for our new and existing tenants at the buildings once complete.
Dream Office REIT 2020 Second Quarter Report | 21
INVESTMENT IN DREAM INDUSTRIAL REIT
Dream Industrial REIT is an unincorporated, open-ended real estate investment trust listed on the Toronto Stock Exchange under the symbol "DIR.UN".
The table below summarizes the Trust's participation in Dream Industrial REIT's Distribution Reinvestment Plan ("DRIP") and the Trust's ownership:
Three months ended | Six months ended | ||||||||||
June 30, | March 31, | June 30, | June 30, | June 30, | |||||||
2020 | 2020 | 2019 | 2020 | 2019 | |||||||
Units acquired via DRIP | - | 385,535 | 399,762 | 385,535 | 836,786 | ||||||
Cost of units acquired via DRIP | $ | - | $ | 4,950 | $ | 4,744 | $ | 4,950 | $ | 9,413 | |
Ownership at period-end | 16.2% | 16.2% | 19.2% | 16.2% | 19.2% |
The Trust's ownership quarter-over-quarter remained flat. The decrease in the Trust's ownership over the prior year comparative quarter was mainly driven by equity offerings by Dream Industrial REIT in the current and prior year as well as Dream Industrial REIT's DRIP, deferred unit incentive plan and unit purchase plan, which collectively decreased our relative ownership, partially offset by our participation in Dream Industrial REIT's DRIP prior to suspension of its DRIP effective for the March 2020 distribution. As the DRIP was suspended throughout the quarter, we received our monthly distributions in cash, rather than in units.
OUR FINANCING
Debt summary
The key performance indicators in the management of our debt are as follows:
June 30, | March 31, | December 31, | June 30, | |||||
Financing and liquidity metrics | 2020 | 2020 | 2019 | 2019 | ||||
Weighted average face rate of interest on debt (period-end)(1) | 3.68% | 3.78% | 3.88% | 3.94% | ||||
Interest coverage ratio (times)(2) | 3.1 | 3.0 | 2.9 | 2.8 | ||||
Net total debt-to-adjusted EBITDAFV (years)(2) | 8.1 | 7.8 | 7.5 | 8.5 | ||||
Level of debt (net total debt-to-net total assets)(2) | 38.3% | 38.5% | 37.6% | 45.4% | ||||
Average term to maturity on debt (years) | 4.6 | 5.1 | 4.7 | 4.7 | ||||
Variable rate debt as percentage of total debt | 10.8% | 11.5% | - | 13.1% | ||||
Available liquidity(2) | $ | 213,949 | $ | 218,611 | $ | 413,580 | $ | 351,408 |
Unencumbered assets(2)(3) | $ | 239,747 | $ | 222,340 | $ | 281,274 | $ | 146,396 |
- 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.
- The calculation of the following non-GAAP measures - interest coverage ratio, net total debt-to-adjusted EBITDAFV, level of debt (net total debt-to-net total assets), available liquidity and unencumbered assets - is included in the "Non-GAAP Measures" section of the MD&A.
- Unencumbered assets as at June 30, 2019 have been restated to conform to current period presentation. For further details, please refer to the "Non-GAAP Measures" section under the heading "Unencumbered assets".
The overall net total debt-to-net total assets ratio has decreased 20 bps from 38.5% in Q1 2020 to 38.3%, primarily due to lump sum repayments on the revolving credit facilities during the quarter and fair value uplifts from our Toronto downtown properties as a result of marking to third-party appraisals.
Net total debt-to-adjusted EBITDAFV has increased to 8.1 years from 7.8 years since the prior quarter, mainly driven by lower comparative properties NOI quarter-over-quarter which was largely due to a reduction in transient parking income.
Our interest coverage ratio has increased to 3.1 times from 3.0 times, primarily due to lower interest expense on debt as a result of the discharge of the $150 million Series C Debentures on January 21, 2020 and lower borrowing rates on the revolving credit facilities, partially offset by lower comparative properties NOI quarter-over-quarter.
Our available liquidity of approximately $213.9 million comprises undrawn demand revolving credit facilities totalling $193.0 million and $20.9 million of cash and cash equivalents on hand as at June 30, 2020, a decrease of $4.7 million from the prior quarter due to capital expenditures, lump sum repayments on the Trust's $300 million demand revolving credit facility and REIT A Unit buybacks through our NCIB program.
Unencumbered assets as at June 30, 2020 was $239.7 million, an increase of $17.4 million from $222.3 million in the prior quarter, due to an increase in the unit price of our holdings of unpledged Dream Industrial REIT Units.
Dream Office REIT 2020 Second Quarter Report | 22
Liquidity and capital resources
Dream Office REIT's primary sources of capital are cash generated from operating activities, net proceeds from investment property dispositions, demand revolving credit facilities, and mortgage financing and refinancing. Our primary uses of capital include the payment of distributions, costs of attracting and retaining tenants, recurring property maintenance, development projects, major property improvements, debt principal repayments and interest payments. We expect to meet all of our ongoing obligations with current cash and cash equivalents on hand, cash flows generated from operations, net proceeds from investment property dispositions, demand revolving credit facilities and conventional mortgage refinancing.
In our condensed consolidated financial statements as at June 30, 2020, our current liabilities exceeded our current assets by $133.1 million. Typically, real estate entities seek to address liquidity needs by having a balanced debt maturity schedule and undrawn demand revolving credit facilities. We are able to use our demand revolving credit facilities on short notice, which eliminates the need to hold significant amounts of cash and cash equivalents on hand. Working capital balances can fluctuate significantly from period-to-period depending on the timing of receipts and payments. Debt obligations that are due within one year include debt maturities and scheduled principal repayments of $101.2 million. We typically refinance maturing debt with our undrawn demand revolving credit facilities and mortgages of terms between five and ten years. Amounts payable and accrued liabilities balances outstanding at the end of any reporting period depend primarily on the timing of leasing costs and capital expenditures incurred, as well as the impact of transaction costs incurred on acquisitions and dispositions.
We continue to maintain high levels of liquidity for capital expenditures to improve the quality of our properties.
Financing activities
On January 21, 2020, the Trust repaid the Series C Debentures with an aggregate principal amount of $150.0 million.
Demand revolving credit facilities
As at June 30, 2020, the Trust's $300 million demand revolving credit facility is secured by first-ranking charges on four investment properties and 9,551,160 Dream Industrial LP Class B limited partnership units. The Trust has an accordion option of up to $100 million additional borrowing capacity on the $300 million demand revolving credit facility if additional assets are pledged as security, subject to lender approval.
As at June 30, 2020, the amount available under the $300 million demand revolving credit facility was $173.0 million, comprising $296.7 million of borrowing capacity less $122.0 million in drawings and $1.6 million in the form of letters of credit. As at June 30, 2020, the amount available under the $20 million demand revolving credit facility was $20.0 million.
Debt maturity profile
Our current debt profile is balanced with staggered maturities over the next nine years. The following table summarizes our debt maturity profile, excluding debt in joint ventures that are equity accounted, as at June 30, 2020:
Demand revolving | ||||||||||
Mortgages | credit facilities | Total | ||||||||
Outstanding | Weighted | Outstanding | Weighted | Outstanding | Weighted | |||||
balance | average | balance | average | balance | average | |||||
due at | interest | due at | interest | due at | interest | |||||
Debt maturities | maturity | rate | maturity | rate | maturity | rate | ||||
Remainder of 2020 | $ | 14,523 | 4.32% | $ | - | - | $ | 14,523 | 4.32% | |
2021 | 105,657 | 4.89% | - | - | 105,657 | 4.89% | ||||
2022 | 59,880 | 3.49% | 122,000 | 2.24% | 181,880 | 2.65% | ||||
2023 | 139,951 | 4.25% | - | - | 139,951 | 4.25% | ||||
2024 | 17,205 | 4.16% | - | - | 17,205 | 4.16% | ||||
2025-2029 | 579,258 | 3.59% | - | - | 579,258 | 3.59% | ||||
Subtotal before undernoted items | $ | 916,474 | 3.86% | $ | 122,000 | 2.24% | $ | 1,038,474 | 3.67% | |
Scheduled principal repayments on | 82,305 | - | - | - | 82,305 | - | ||||
non-matured debt | ||||||||||
Subtotal before undernoted items | $ | 998,779 | 3.85% | $ | 122,000 | 2.24% | $ | 1,120,779 | 3.68% | |
Unamortized financing costs | (3,839) | (2,066) | (5,905) | |||||||
Unamortized fair value adjustments | 297 | - | 297 | |||||||
Debt per condensed consolidated financial statements | $ | 995,237 | 3.89% $ | 119,934 | 2.46% | $ | 1,115,171 | 3.74% |
Dream Office REIT 2020 Second Quarter Report | 23
Commitments and contingencies
Dream Office REIT and its operating subsidiaries are contingently liable under guarantees that are issued in the normal course of business, on certain debt assumed by purchasers of investment properties, and with respect to litigation and claims that arise from time to time. In the opinion of management, any liability that may arise from such contingencies would not have a material adverse effect on the condensed consolidated financial statements of the Trust as at June 30, 2020.
In 2015, a subsidiary of the Trust received notices of reassessment from both the Canada Revenue Agency and the Alberta Minister of Finance with respect to its 2007, 2008 and 2010 taxation years. These reassessments relate to the deductibility of certain tax losses claimed by the subsidiary prior to its acquisition by the Trust. These federal and provincial reassessments, if upheld, could increase total current taxes payable, including interest and penalties, by $12.8 million. No cash payment is expected to be made unless it is ultimately established that the Trust has an obligation to make one. Management is of the view that there is a strong case to support the position as filed and has contested both the federal and provincial reassessments. Since management believes that it is more likely than not that its position will be sustained, no amounts related to these reassessments have been recorded in the condensed consolidated financial statements as at June 30, 2020.
At June 30, 2020, Dream Office REIT's future minimum commitments are as follows:
Minimum payments due | ||||||||
Within 1 year | 1-5 years | > 5 years | Total | |||||
Operating lease payments for low-value assets | $ | 143 | $ | 250 | $ | - | $ | 393 |
Operating commitments | 3,417 | 3,241 | - | 6,658 | ||||
Fixed price contracts | 222 | 888 | 2,023 | 3,133 | ||||
Total | $ | 3,782 | $ | 4,379 | $ | 2,023 | $ | 10,184 |
In 2018, the Trust originally committed US$7.25 million to fund investments in real estate technologies, of which US$4.2 million was funded as at June 30, 2020 (December 31, 2019 - US$3.5 million). Subsequent to the quarter, the Trust funded an additional US$0.8 million.
The Trust is contingently liable under guarantees that are issued on certain debt assumed by purchasers of investment properties totalling $112.4 million (December 31, 2019 - $114.3 million) with a weighted average term to maturity of 3.2 years (December 31, 2019 - 3.7 years). The geographic distribution of the guaranteed debt is: 78% in British Columbia, 14% in Ontario and 8% in Québec.
In the event that a contemplated development project proceeds, the Trust has committed to contribute one of its investment properties with a fair value of $41.0 million to the development project.
As part of the sale of F1RST Tower in 2018, the Trust committed to a construction loan facility of up to $12.5 million. The construction loan facility bears interest at 4.5%, matures on April 10, 2022 with an option to extend to April 10, 2023 and is secured by the property. As at June 30, 2020, the Trust had funded $1.9 million under the construction loan facility.
OUR EQUITY
Total equity
Our discussion of equity includes LP B Units (or subsidiary redeemable units), which are economically equivalent to REIT Units. Pursuant to IFRS, the LP B Units are classified as a liability in our condensed consolidated financial statements.
Unitholders' equity | |||||||
June 30, 2020 | December 31, 2019 | ||||||
Number of Units | Amount | Number of Units | Amount | ||||
Unitholders' equity | 55,243,439 | $ | 2,032,675 | 56,234,546 | $ | 2,049,272 | |
Deficit | - | (480,233) | - | (574,801) | |||
Accumulated other comprehensive income | - | 10,081 | - | 3,790 | |||
Equity per condensed consolidated financial statements | 55,243,439 | 1,562,523 | 56,234,546 | 1,478,261 | |||
Add: LP B Units | 5,233,823 | 107,398 | 5,233,823 | 162,929 | |||
Total equity (including LP B Units)(1) | 60,477,262 | $ | 1,669,921 | 61,468,369 | $ | 1,641,190 | |
Net asset value ("NAV") per unit(2) | $ | 27.61 | $ | 26.70 |
- Total equity (a non-GAAP measure) is defined in the section "Non-GAAP Measures" under the heading "Total equity (including LP B Units or subsidiary redeemable units)".
- NAV per unit (a non-GAAP measure) is defined in this section under the heading "NAV per unit" and in the section "Non-GAAP Measures" under the heading "NAV per unit".
Dream Office REIT 2020 Second Quarter Report | 24
The amended and restated Declaration of Trust of Dream Office REIT dated May 8, 2014, as amended or amended and restated from time to time (the "Declaration of Trust"), authorizes the issuance of an unlimited number of the following classes of units: REIT Units, issuable in one or more series, Transition Fund Units and Special Trust Units. The Special Trust Units may only be issued to holders of LP B Units, are not transferable separately from these units and are used to provide voting rights with respect to Dream Office REIT to persons holding LP B Units. The LP B Units are held by DAM, a related party to Dream Office REIT, and DAM holds an equivalent number of Special Trust Units. Both the REIT Units and Special Trust Units entitle the holder to one vote for each unit at all meetings of the unitholders. The LP B Units are exchangeable on a one-for-one basis for REIT B Units at the option of the holder, which can then be converted into REIT A Units. The LP B Units and corresponding Special Trust Units together have economic and voting rights equivalent in all material respects to REIT A Units. The REIT A Units and REIT B Units have economic and voting rights equivalent in all material respects to each other.
As at June 30, 2020, DAM held 12,410,002 REIT A Units and 5,233,823 LP B Units for a total ownership interest of approximately 29.2%.
NAV per unit
NAV per unit is calculated as the total equity (including LP B Units) divided by the total number of REIT A Units and LP B Units. This non-GAAP measurement is an important measure used by the Trust, as it reflects management's view of the intrinsic value of the Trust. However, it is not defined by IFRS, does not have a standardized meaning and may not be comparable with similar measures presented by other income trusts.
As at June 30, 2020, our NAV per unit was $27.61, compared to $27.13 at March 31, 2020 and $25.49 at June 30, 2019, up $0.48 or 1.8% and $2.12 or 8.3%, respectively.
The quarter-over-quarter and year-over-year increase in NAV per unit of $0.48 and $2.12, 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. For the second quarter of 2020, the fair value gains in our Toronto downtown investment properties were $20.3 million, supported by third-party appraisals on five investment properties in the region.
NAV per unit is considered one of the Trust's key metrics and has increased consistently over the past 13 quarters as we improve the quality of our assets and the value of the business.
In compliance with Canadian Securities Administrators Staff Notice 52-306 (Revised), "Non-GAAP Financial Measures", the table below reconciles the major components of NAV per unit to total equity (as per the condensed consolidated financial statements).
GLA | Occupancy - | ||||||
(in millions | in-place and | WALT | |||||
Total | Per unit | of sq. ft.) | committed | (years) | |||
Investment properties | |||||||
Toronto downtown | $ | 1,963,455 | $ | 32.47 | 3.4 | 97.2% | 4.8 |
Other markets | 345,308 | 5.71 | 1.8 | 72.1% | 6.5 | ||
Total comparative portfolio investment properties | 2,308,763 | 38.18 | 5.2 | 88.3% | 5.3 | ||
Mortgages | (917,988) | (15.18) | |||||
Total comparative portfolio investment properties, | |||||||
net of mortgages | 1,390,775 | 23.00 | |||||
Acquired properties, net of mortgages | 36,177 | 0.60 | |||||
Properties under development, net of mortgages | 42,033 | 0.69 | |||||
Investment in Dream Industrial REIT | 325,820 | 5.39 | |||||
Investments in joint ventures | 16,656 | 0.27 | |||||
Cash and cash equivalents | 20,903 | 0.35 | |||||
Demand revolving credit facilities | (119,934) | (1.98) | |||||
Other items | (42,509) | (0.71) | |||||
Net asset value | $ | 1,669,921 | $ | 27.61 | |||
Less: LP B Units | 107,398 | ||||||
Total equity per condensed consolidated financial | |||||||
statements | $ | 1,562,523 |
Dream Office REIT 2020 Second Quarter Report | 25
Outstanding equity
The following table summarizes the changes in our outstanding equity:
For the three months ended June 30, 2020 | REIT A Units | LP B Units | Total |
Total units issued and outstanding at April 1, 2020 | 55,615,660 | 5,233,823 | 60,849,483 |
REIT A Units issued pursuant to Deferred Unit Incentive Plan ("DUIP") | 25,969 | - | 25,969 |
Cancellation of REIT A Units under NCIB | (398,190) | - | (398,190) |
Total units issued and outstanding at June 30, 2020 | 55,243,439 | 5,233,823 | 60,477,262 |
Percentage of all units | 91.3% | 8.7% | 100.0% |
For the six months ended June 30, 2020 | REIT A Units | LP B Units | Total |
Total units issued and outstanding at January 1, 2020 | 56,234,546 | 5,233,823 | 61,468,369 |
REIT A Units issued pursuant to DUIP | 164,878 | - | 164,878 |
Cancellation of REIT A Units under NCIB | (1,155,985) | - | (1,155,985) |
Total units issued and outstanding at June 30, 2020 | 55,243,439 | 5,233,823 | 60,477,262 |
Percentage of all units | 91.3% | 8.7% | 100.0% |
REIT A Units issued pursuant to DUIP | 5,187 | - | 5,187 |
Cancellation of REIT A Units under NCIB | (255,665) | - | (255,665) |
Total units issued and outstanding at August 6, 2020 | 54,992,961 | 5,233,823 | 60,226,784 |
Percentage of all units | 91.3% | 8.7% | 100.0% |
As at June 30, 2020, there were 830,400 deferred trust units and income deferred trust units outstanding (December 31, 2019 - 927,621) under the Trust's DUIP.
Normal course issuer bid
For the three and six months ended June 30, 2020, the Trust purchased for cancellation 398,190 REIT A Units and 1,155,985 REIT A Units, respectively, under the NCIB, at a cost of $7.8 million and $21.1 million, respectively (December 31, 2019 - 3,230,966 REIT A Units cancelled for $77.8 million).
Subsequent to quarter-end, the Trust purchased for cancellation an additional 255,665 REIT A Units under the NCIB at a cost of $5.1 million.
Weighted average number of units
The basic weighted average number of units includes the weighted average of all REIT Units, LP B Units, and vested but unissued deferred trust units and income deferred trust units.
The diluted weighted average number of units includes the basic weighted average number of Units, unvested deferred trust units and associated income deferred trust units. As at June 30, 2020, there were 202,803 unvested deferred trust units and associated income deferred trust units (June 30, 2019 - 254,904).
Three months ended June 30, | Six months ended June 30, | |||
Weighted average number of units (in thousands) | 2020 | 2019 | 2020 | 2019 |
Basic | 61,303 | 64,884 | 61,716 | 64,896 |
Diluted | 61,512 | 65,144 | 61,935 | 65,163 |
Distribution policy
Our Declaration of Trust, as amended and restated, provides our trustees with the discretion to determine the percentage payout of income that would be in the best interest of the Trust. For the three and six months ended June 30, 2020 and June 30, 2019, the Trust declared distributions totalling $0.25 per unit and $0.50 per unit, respectively.
The following table summarizes our total distributions paid and payable (a non-GAAP measure) for the three and six months ended June 30, 2020 and June 30, 2019:
Three months ended June 30, | Six months ended June 30, | ||||||||
2020 | 2019 | 2020 | 2019 | ||||||
Total distributions paid and payable(1) for the period | $ | 15,158 | $ | 16,015 | $ | 30,480 | $ | 32,074 |
- Total distributions paid and payable (a non-GAAP measure) is defined in the section "Non-GAAP Measures" under the heading "Total distributions paid and payable".
Dream Office REIT 2020 Second Quarter Report | 26
The decrease in total distributions paid and payable (a non-GAAP measure) on a year-over-year basis for the three and six months ended June 30, 2020 was primarily due to the cancellation of REIT A Units under the NCIB in the current and prior year.
The following table summarizes our monthly distributions paid and payable subsequent to quarter-end:
Date distribution | Month of | Date distribution was | Distribution per | Total distribution | ||
announced | distribution | paid or is payable | REIT A Unit | paid or payable | ||
June 19, 2020 | June 2020 | July 15, 2020 | $ | 0.08333 | $ | 4,603 |
July 22, 2020 | July 2020 | August 14, 2020 | 0.08333 | 4,588 |
Cash flows from operating activities, net of cash interest paid on debt and distributions declared
In any given period, actual cash flows generated from (utilized in) operating activities, net of cash interest paid on debt, may differ from total distributions paid and payable (a non-GAAP measure), primarily due to fluctuations in non-cash working capital and the impact of leasing costs, which fluctuate with lease maturities, renewal terms, the type of asset being leased and when tenants fulfill the terms of their respective lease agreements. Seasonal fluctuations in working capital requirements or the unpredictability of when leasing costs are incurred are funded with our cash and cash equivalents on hand and, if necessary, with our existing demand revolving credit facilities. As a result of these factors the Trust anticipates that in certain future periods, cash flows generated from (utilized in) operating activities, net of cash interest paid on debt, may be less than total distributions paid and payable (a non-GAAP measure). With a conservative balance sheet and significant liquidity, the Trust does not anticipate cash distributions will be suspended or altered.
To the extent that there are shortfalls in cash flows generated from (utilized in) operating activities, net of cash interest paid on debt when compared to total distributions paid and payable (a non-GAAP measure), the Trust will fund the shortfalls with cash and cash equivalents on hand and with our existing demand revolving credit facilities. The use of the demand revolving credit facilities may involve risks compared with using cash and cash equivalents on hand as a source of funding, such as the risk that interest rates may rise in the future, which may make it more expensive for the Trust to borrow under the demand revolving credit facilities, the risk that credit facilities may not be renewed at maturity or are renewed on unfavourable terms and the risk associated with increasing the overall indebtedness of the Trust. In the event that shortfalls exist, the Trust does not anticipate cash distributions will be suspended in the foreseeable future but does expect that there could be timing differences as a result of our intensification and redevelopment plans on certain assets within our portfolio. Accordingly, to the extent there are shortfalls, distributions may be considered an economic return of capital. The Trust determines the distribution rate by, among other considerations, its assessment of cash flows generated from (utilized in) operating activities, net of cash interest paid on debt. Management reviews the estimated annual distributable cash flows with the Board of Trustees periodically to assist the Board in determining the targeted distribution rate.
In any given period, the Trust anticipates that net income will continue to vary from total distributions paid and payable (a non- GAAP measure) as net income includes non-cash items such as fair value adjustments to investment properties and financial instruments and costs related to our disposition program such as debt settlement costs and costs attributable to sale of investment properties. Accordingly, the Trust does not use net income as a proxy for determining distributions.
The following table summarizes net income, cash flows generated from (utilized in) operating activities, net of cash interest paid on debt, and total distributions paid and payable (a non-GAAP measure) for the three and six months ended June 30, 2020 and June 30, 2019:
Three months ended June 30, | Six months ended June 30, | ||||||||
2020 | 2019 | 2020 | 2019 | ||||||
Net income for the period | $ | 57,600 | $ | 46,533 | $ | 122,431 | $ | 56,467 | |
Cash flows generated from (utilized in) operating activities, net of | 19,886 | 26,556 | |||||||
cash interest paid on debt | 19,866 | 34,909 | |||||||
Total distributions paid and payable(1) for the period | 15,158 | 16,015 | 30,480 | 32,074 |
- Total distributions paid and payable (a non-GAAP measure) is defined in the section "Non-GAAP Measures" under the heading "Total distributions paid and payable".
Dream Office REIT 2020 Second Quarter Report | 27
As required by National Policy 41-201, "Income Trusts and Other Indirect Offerings", the following table outlines the difference between net income and total distributions paid and payable (a non-GAAP measure), as well as the difference between cash flows generated from (utilized in) operating activities, net of cash interest paid on debt, and total distributions paid and payable (a non- GAAP measure), in accordance with the guidelines.
Three months ended June 30, | Six months ended June 30, | ||||||||
2020 | 2019 | 2020 | 2019 | ||||||
Excess of net income over total distributions paid and payable(1) | $ | 42,442 | $ | 30,518 | $ | 91,951 | $ | 24,393 | |
Excess (shortfall) of cash flows generated from (utilized in) operating | |||||||||
activities, net of cash interest paid on debt over total distributions | 4,728 | (3,924) | |||||||
paid and payable(1) | 3,851 | 2,835 |
- Total distributions paid and payable (a non-GAAP measure) is defined in the section "Non-GAAP Measures" under the heading "Total distributions paid and payable".
For the three and six months ended June 30, 2020, net income exceeded total distributions paid and payable (a non-GAAP measure) by $42.4 million and $92.0 million, respectively, primarily due to the impact of non-cash items such as fair value adjustments to our investment properties, our share of income from our investment in Dream Industrial REIT and fair value adjustments to financial instruments. For the three and six months ended June 30, 2019, net income exceeded total distributions paid and payable (a non-GAAP measure) by $30.5 million and $24.4 million, respectively, primarily due to the same reasons noted above.
For the three months ended June 30, 2020, cash flows generated from (utilized in) operating activities, net of cash interest paid on debt, exceeded total distributions paid and payable (a non-GAAP measure) by $4.7 million. For the six months ended June 30, 2020, total distributions paid and payable (a non-GAAP measure) exceeded cash flows generated from (utilized in) operating activities, net of cash interest paid on debt by $3.9 million. For the three and six months ended June 30, 2019, cash flows generated from (utilized in) operating activities, net of cash interest paid on debt, exceeded total distributions paid and payable (a non-GAAP measure) by $3.9 million and $2.8 million, respectively. The excess and shortfalls of cash flows generated from (utilized in) operating activities, net of cash interest paid on debt over total distributions paid and payable (a non-GAAP measure) in the current periods and over the prior year comparative periods is primarily due to fluctuations in non-cash working capital and the impact of leasing costs.
For the six months ended June 30, 2020 and June 30, 2019, the Trust received monthly distributions from its investment in Dream Industrial REIT totalling $9.8 million and $9.4 million, respectively. Prior to the March 2020 distribution, the Trust elected to reinvest all distributions through Dream Industrial REIT's distribution reinvestment plan. Had the Trust not reinvested the distributions received from Dream Industrial REIT, management is of the view such distributions could be used to mitigate any shortfalls of cash flows generated from (utilized in) operating activities, net of cash interest paid on debt, over total distributions paid and payable (a non-GAAP measure), even though distributions received from Dream Industrial REIT would be included as part of cash flows generated from (utilized in) investing activities in the condensed consolidated financial statements. Additionally, the Trust has included distributions received from Dream Industrial REIT as part of its calculation of EBITDAFV (a non-GAAP measure), consistent with management's view of the characterization of such cash flows as operating in nature as opposed to investing activities. On March 27, 2020, Dream Industrial REIT announced that it has suspended its DRIP and as a result, the Trust has commenced receiving cash distributions. For the six months ended June 30, 2020, the Trust received cash distributions from Dream Industrial REIT totalling $4.9 million.
Dream Office REIT 2020 Second Quarter Report | 28
SECTION IV
NON-GAAP MEASURES
Included in this section are reconciliations of non-GAAP measures presented throughout this MD&A to the nearest comparable condensed consolidated financial statements line item, in compliance with Canadian Securities Administrators Staff Notice 52-306 (Revised), "Non-GAAP Financial Measures". 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.
Available liquidity
Available liquidity is defined as the sum of cash and cash equivalents and undrawn demand revolving credit facilities at period- end, excluding cash held in joint ventures, which are equity accounted. Management believes that available liquidity, a non-GAAP measure, is an important measure in determining our resources available to meet all of our ongoing obligations. This non-GAAP measure does not have a standardized meaning and may not be comparable with similar measures presented by other income trusts.
In compliance with Canadian Securities Administrators Staff Notice 52-306 (Revised), "Non-GAAP Financial Measures", available liquidity has been reconciled to cash and cash equivalents in the table below:
As at | ||||||||
June 30, | March 31, | December 31, | June 30, | |||||
2020 | 2020 | 2019 | 2019 | |||||
Cash and cash equivalents | $ | 20,903 | $ | 40,667 | $ | 95,410 | $ | 14,238 |
Undrawn demand revolving credit facilities | 193,046 | 177,944 | 318,170 | 337,170 | ||||
Available liquidity | $ | 213,949 | $ | 218,611 | $ | 413,580 | $ | 351,408 |
Total equity (including LP B Units or subsidiary redeemable units)
One of the components used to determine the Trust's net asset value per unit is total equity (including LP B Units). Total equity (including LP B Units) is calculated as the sum of the equity amount per condensed consolidated financial statements and the subsidiary redeemable units amount. Management believes it is important to include the subsidiary redeemable (LP B) units amount for the purpose of determining the Trust's capital management. Management does not consider the subsidiary redeemable units to be debt or borrowings of the Trust, but rather a component of the Trust's equity. However, total equity (including LP B Units) is not defined by IFRS, does not have a standardized meaning and may not be comparable with similar measures presented by other income trusts.
In compliance with Canadian Securities Administrators Staff Notice 52-306 (Revised), "Non-GAAP Financial Measures", the table within the section "Our Equity" under the heading "Total equity" reconciles total equity (including LP B Units) to equity (as per condensed consolidated financial statements).
Total distributions paid and payable
Total distributions paid and payable is calculated as the sum of the distributions paid and payable on REIT A Units and subsidiary redeemable units (LP B Units) interest expense per condensed consolidated financial statements. Because management considers the subsidiary redeemable units to be a component of the Trust's equity, management considers the interest paid on the subsidiary redeemable units to be a component of total distributions paid to unitholders. However, total distributions paid and payable is not defined by IFRS, does not have a standardized meaning and may not be comparable with similar measures presented by other income trusts.
In compliance with Canadian Securities Administrators Staff Notice 52-306 (Revised), "Non-GAAP Financial Measures", total distributions paid and payable has been reconciled to total distributions paid and payable on REIT A Units (included in condensed consolidated financial statements) in the table below:
Three months ended | Six months ended | |||||||||
June 30, | March 31, | June 30, | June 30, | June 30, | ||||||
2020 | 2020 | 2019 | 2020 | 2019 | ||||||
Total distributions paid and payable on REIT A Units | $ | 13,849 | $ | 14,014 | $ | 14,706 | $ | 27,863 | $ | 29,457 |
Add: Interest on subsidiary redeemable units | 1,309 | 1,308 | 1,309 | 2,617 | 2,617 | |||||
Total distributions paid and payable | $ | 15,158 | $ | 15,322 | $ | 16,015 | $ | 30,480 | $ | 32,074 |
Dream Office REIT 2020 Second Quarter Report | 29
NAV per unit
NAV per unit is calculated as the total equity (including LP B Units) divided by the total number of REIT A Units and LP B Units. This non-GAAP measurement is an important measure used by the Trust, as it reflects management's view of the intrinsic value of the Trust. However, it is not defined by IFRS, does not have a standardized meaning and may not be comparable with similar measures presented by other income trusts.
In compliance with Canadian Securities Administrators Staff Notice 52-306 (Revised), "Non-GAAP Financial Measures", the table within the section "Our Equity" under the heading "NAV per unit" reconciles NAV per unit to equity as per condensed consolidated financial statements as at June 30, 2020 and as per the consolidated financial statements as at December 31, 2019. The table below reconciles NAV per unit to equity (as per condensed consolidated financial statements) as at March 31, 2020 and June 30, 2019.
Unitholders' equity | |||||||
March 31, 2020 | June 30, 2019 | ||||||
Number of Units | Amount | Number of Units | Amount | ||||
Unitholders' equity | 55,615,660 | $ | 2,039,909 | 58,376,385 | $ | 2,101,520 | |
Deficit | - | (523,984) | - | (607,503) | |||
Accumulated other comprehensive income | - | 12,995 | - | 3,676 | |||
Equity included in condensed consolidated financial | |||||||
statements | 55,615,660 | $ | 1,528,920 | 58,376,385 | $ | 1,497,693 | |
Add: LP B Units | 5,233,823 | 122,158 | 5,233,823 | 123,728 | |||
Total equity (including LP B Units)(1) | 60,849,483 | $ | 1,651,078 | 63,610,208 | $ | 1,621,421 | |
Net asset value ("NAV") per unit | $ | 27.13 | $ | 25.49 |
(1) Total equity (a non-GAAP measure) is defined in this section under the heading "Total equity (including LP B Units or subsidiary redeemable units)".
Unencumbered assets
Unencumbered assets represents the value of investment properties, excluding properties held for sale or investment properties in joint ventures which are equity accounted, which have not been pledged as collateral for the Trust's demand revolving credit facilities or mortgages, plus the fair value of unpledged Dream Industrial REIT units. This non-GAAP measurement is used by management in assessing the borrowing capacity available to the Trust. However, it is not defined by IFRS, does not have a standardized meaning and may not be comparable with similar measures presented by other income trusts.
Effective September 30, 2019, the Trust revised its calculation of unencumbered assets to include the fair value of unpledged Dream Industrial REIT units as management considers these units an asset that may be pledged to support future borrowings. Accordingly, unencumbered assets for comparative periods has been restated to conform to current period presentation.
In compliance with Canadian Securities Administrators Staff Notice 52-306 (Revised), "Non-GAAP Financial Measures", the table below presents the components of unencumbered assets:
June 30, | March 31, | December 31, | June 30, | |||||
2020 | 2020 | 2019 | 2019 | |||||
Investment properties not pledged as security for debt | $ | 96,872 | $ | 96,722 | $ | 110,555 | $ | 108,200 |
Fair value of unpledged Dream Industrial REIT units(1) | 142,875 | 125,618 | 170,719 | 38,196 | ||||
Unencumbered assets | $ | 239,747 | $ | 222,340 | $ | 281,274 | $ | 146,396 |
- Fair value of unpledged Dream Industrial REIT units is determined as the closing price of the Dream Industrial REIT units at the end of each period multiplied by the number of units not pledged as security for demand revolving credit facilities.
Funds from operations ("FFO")
Management believes FFO (including diluted FFO per unit) is an important measure of our operating performance. This non-GAAP measurement is a commonly used measure of performance of real estate operations; however, it does not represent net income or cash flows generated from (utilized in) operating activities, as defined by IFRS, is not necessarily indicative of cash available to fund Dream Office REIT's needs and may not be comparable with similar measures presented by other income trusts.
In February 2019, REALPAC issued a white paper on Funds from Operations and Adjusted Funds from Operations for IFRS. The Trust has reviewed the REALPAC FFO white paper guidelines and its determination of FFO is substantially aligned with the REALPAC FFO white paper guidelines with the exception of the treatment of debt settlement costs due to disposals of investment properties. These debt settlement costs are primarily funded from net proceeds from dispositions and not from cash flows from operating activities. Thus, the Trust is of the view that debt settlement costs due to disposals of investment properties should not be included in the determination of FFO.
Dream Office REIT 2020 Second Quarter Report | 30
In compliance with Canadian Securities Administrators Staff Notice 52-306 (Revised), "Non-GAAP Financial Measures", FFO has been reconciled to net income in the table below:
Three months ended | Six months ended | ||||||||||
June 30, | March 31, | June 30, | June 30, | June 30, | |||||||
2020 | 2020 | 2019 | 2020 | 2019 | |||||||
Net income for the period | $ | 57,600 | $ | 64,831 | $ | 46,533 | $ | 122,431 | $ | 56,467 | |
Add (deduct): | |||||||||||
Share of income from investment in Dream | (4,904) | (5,427) | |||||||||
Industrial REIT | (523) | (18,833) | (26,311) | ||||||||
Share of FFO from investment in Dream Industrial | 4,818 | 9,566 | |||||||||
REIT | 4,748 | 5,417 | 10,917 | ||||||||
Depreciation, amortization and write-off of | 3,045 | 6,493 | |||||||||
intangible assets | 3,448 | 3,653 | 7,011 | ||||||||
Costs (recovery) attributable to sale of | (2,212) | (2,264) | |||||||||
investment properties(1) | (52) | 76 | 128 | ||||||||
Interest expense on subsidiary redeemable units | 1,309 | 1,308 | 1,309 | 2,617 | 2,617 | ||||||
Fair value adjustments to investment properties(1) | (20,203) | (4,706) | (3,832) | (24,909) | (4,435) | ||||||
Fair value adjustments to investment properties | |||||||||||
held in joint ventures | (16) | - | - | (16) | - | ||||||
Fair value adjustments to financial instruments and | (16,865) | (62,072) | |||||||||
DUIP included in G&A expenses | (45,207) | (6,219) | 9,235 | ||||||||
Internal leasing costs | 370 | 412 | 511 | 782 | 1,182 | ||||||
Principal repayments on finance lease liabilities(1) | (12) | (11) | (12) | (23) | (25) | ||||||
Deferred income taxes expense (recovery) | 206 | (166) | 118 | 40 | 235 | ||||||
FFO for the period | $ | 23,136 | $ | 24,082 | $ | 28,721 | $ | 47,218 | $ | 57,021 | |
Diluted weighted average number of units(2) | 61,512 | 62,336 | 65,144 | 61,935 | 65,163 | ||||||
FFO per unit - diluted | $ | 0.38 | $ | 0.39 | $ | 0.44 | $ | 0.76 | $ | 0.88 |
- Includes both continuing and discontinued operations.
- Diluted weighted average number of units includes the weighted average of all REIT A Units, LP B Units, vested but unissued and unvested deferred trust units and associated income deferred trust units.
Comparative properties NOI
Comparative properties NOI is a non-GAAP measure used by management in evaluating the performance of properties owned by the Trust in the current and comparative periods presented. When the Trust compares comparative properties NOI on a year-over- year basis and quarter-over-quarter basis, the Trust excludes investment properties acquired after January 1, 2019 and assets held for sale or disposed of prior to or as at the current period. Comparative properties NOI also excludes lease termination fees; onetime property adjustments, if any; bad debt expenses; NOI from properties under development until reclassified to active properties for a period of two full calendar years; investment in joint ventures; property management and other service fees; straight-line rent; and amortization of lease incentives. This measure is not defined by IFRS, does not have a standardized meaning and may not be comparable with similar measures presented by other income trusts.
Effective March 31, 2020, The Trust revised its definition of comparative properties NOI on a quarter-over-quarter basis to exclude acquired properties after January 1, 2019 to increase comparability with our other operating metrics.
In compliance with Canadian Securities Administrators Staff Notice 52-306 (Revised), "Non-GAAP Financial Measures", comparative properties NOI for the respective periods has been reconciled to net rental income within the section "Our Operations" under the heading "Comparative properties NOI (year-over-year comparison)" and "Comparative properties NOI (quarter-over-quarter comparison)".
Dream Office REIT 2020 Second Quarter Report | 31
Earnings before interest, taxes, depreciation, amortization and fair value adjustments ("EBITDAFV")
EBITDAFV is defined by the Trust as net income for the period adjusted for: lease termination fees and other (including COVID- related provisions and adjustments), non-cash items included in investment properties revenue, fair value adjustments to investment properties and financial instruments, share of income from investment in Dream Industrial REIT, distributions received from Dream Industrial REIT, interest expense on debt and subsidiary redeemable units, amortization and write-off of intangible assets and depreciation on property and equipment, leasing, transaction and debt settlement costs and other activities, and net current and deferred income taxes. This non-GAAP measurement is an important measure used by the Trust in evaluating property operating performance; however, it is not defined by IFRS, does not have a standardized meaning and may not be comparable with similar measures presented by other income trusts. Effective December 31, 2019, the Trust refined its calculation of EBITDAFV to exclude net loss from joint ventures to improve consistency between the calculation of debt and adjusted EBITDAFV in its net total debt-to-adjusted EBITDAFV calculation. Consequently, EBITDAFV and net total debt-to-adjusted EBITDAFV have been restated in prior periods to be consistent with current period presentation.
In compliance with Canadian Securities Administrators Staff Notice 52-306 (Revised), "Non-GAAP Financial Measures", EBITDAFV has been reconciled to net income in the table below:
Three months ended | Six months ended | Year ended | ||||||||||||||
June 30, | March 31, | June 30, | June 30, | June 30, | December 31, | December 31, | ||||||||||
2020 | 2020 | 2019 | 2020 | 2019 | 2019 | 2018 | ||||||||||
Net income for the period | $ | 57,600 | $ | 64,831 | $ | 46,533 | $ | 122,431 | $ | 56,467 | $ | 117,320 | $ | 157,778 | ||
Add (deduct): | ||||||||||||||||
COVID-related provisions and | 336 | 336 | ||||||||||||||
adjustments | - | - | - | - | - | |||||||||||
Lease termination fees and | (58) | 62 | (49) | 4 | (469) | (1,288) | (5,870) | |||||||||
other(1) | ||||||||||||||||
Non-cash items included in | ||||||||||||||||
investment properties | 2,927 | 6,173 | ||||||||||||||
revenue(1)(2) | 3,246 | 3,120 | 5,929 | 13,144 | 11,229 | |||||||||||
Fair value adjustments to | (20,203) | (24,909) | ||||||||||||||
investment properties(1) | (4,706) | (3,832) | (4,435) | (56,949) | (47,533) | |||||||||||
Fair value adjustments to | (16,721) | (61,975) | ||||||||||||||
financial instruments | (45,254) | (6,281) | 9,099 | 55,162 | 1,371 | |||||||||||
Share of income from investment | (4,904) | (5,427) | ||||||||||||||
in Dream Industrial REIT | (523) | (18,833) | (26,311) | (56,078) | (43,125) | |||||||||||
Share of net loss (income) from | (354) | (247) | ||||||||||||||
investment in joint ventures | 107 | 18 | 18 | 641 | - | |||||||||||
Distributions received from | 4,853 | 9,778 | ||||||||||||||
Dream Industrial REIT | 4,925 | 4,769 | 9,477 | 19,222 | 17,914 | |||||||||||
Interest - debt(1) | 10,770 | 10,866 | 14,845 | 21,636 | 29,608 | 54,608 | 60,718 | |||||||||
Interest - subsidiary redeemable | 1,309 | 2,617 | ||||||||||||||
units | 1,308 | 1,309 | 2,617 | 5,234 | 5,234 | |||||||||||
Amortization and write-off of | ||||||||||||||||
intangible assets and | ||||||||||||||||
depreciation on property and | 362 | 773 | ||||||||||||||
equipment | 411 | 444 | 905 | 1,891 | 2,199 | |||||||||||
Leasing, transaction and debt | (1,842) | (1,482) | ||||||||||||||
settlement costs(1) | 360 | 587 | 1,310 | 7,344 | 7,179 | |||||||||||
Current and deferred income | 32 | (376) | ||||||||||||||
taxes expense (recovery), net | (408) | 118 | 235 | 486 | 342 | |||||||||||
EBITDAFV for the period | $ | 34,107 | $ | 35,225 | $ | 42,748 | $ | 69,332 | $ | 84,450 | $ | 160,737 | $ | 167,436 |
- Includes both continuing and discontinued operations.
- Includes adjustments for straight-line rent and amortization of lease incentives.
Dream Office REIT 2020 Second Quarter Report | 32
Trailing 12-month EBITDAFV and trailing 12-month interest expense on debt
Management believes that the trailing 12-month EBITDAFV and trailing 12-month interest expense on debt, both of which are non-GAAP measures, are important measures in identifying longer-term trends in property operating performance and the cost of the Trust's debt. These non-GAAP measurements do not have standardized meanings and may not be comparable with similar measures presented by other income trusts.
In compliance with Canadian Securities Administrators Staff Notice 52-306 (Revised), "Non-GAAP Financial Measures", the following tables calculate EBITDAFV and interest expense on debt for the trailing 12-month periods ended June 30, 2020 and June 30, 2019.
Trailing 12-month period | ||
ended June 30, 2020 | ||
EBITDAFV for the six months ended June 30, 2020(1) | $ | 69,332 |
Add: EBITDAFV for the year ended December 31, 2019(1) | 160,737 | |
Less: EBITDAFV for the six months ended June 30, 2019(1) | (84,450) | |
Trailing 12-month EBITDAFV | $ | 145,619 |
- EBITDAFV (a non-GAAP measure) for the respective periods has been reconciled to net income under the heading "Earnings before interest, taxes, depreciation, amortization and fair value adjustments ("EBITDAFV")" within this section.
Trailing 12-month period | ||
ended June 30, 2019 | ||
EBITDAFV for the six months ended June 30, 2019(1) | $ | 84,450 |
Add: EBITDAFV for the year ended December 31, 2018(1) | 167,436 | |
Less: EBITDAFV for the six months ended June 30, 2018 | (84,806) | |
Trailing 12-month EBITDAFV | $ | 167,080 |
- EBITDAFV (a non-GAAP measure) for the respective periods has been reconciled to net income under the heading "Earnings before interest, taxes, depreciation, amortization and fair value adjustments ("EBITDAFV")" within this section.
Trailing 12-month period | ||
ended June 30, 2020 | ||
Interest expense on debt for the six months ended June 30, 2020 | $ | 21,636 |
Add: Interest expense on debt for the year ended December 31, 2019(1) | 54,608 | |
Less: Interest expense on debt for the six months ended June 30, 2019(1) | (29,608) | |
Trailing 12-month interest expense on debt | $ | 46,636 |
(1) Includes interest expense on debt from continuing and discontinued operations.
Trailing 12-month period | ||
ended June 30, 2019 | ||
Interest expense on debt for the six months ended June 30, 2019(1) | $ | 29,608 |
Add: Interest expense on debt for the year ended December 31, 2018(1) | 60,718 | |
Less: Interest expense on debt for the six months ended June 30, 2018(1) | (29,906) | |
Trailing 12-month interest expense on debt | $ | 60,420 |
(1) Includes interest expense on debt from continuing and discontinued operations.
Interest coverage ratio
Management believes that interest coverage ratio, a non-GAAP measurement, is an important measure in determining our ability to cover interest expense based on our operating performance. This non-GAAP measurement does not have a standardized meaning and may not be comparable with similar measures presented by other income trusts.
Prior to December 31, 2018, interest coverage ratio was calculated as year-to-date EBITDAFV divided by year-to-date interest expense on debt.
Because the calculation of EBITDAFV has been adjusted effective December 31, 2019 as discussed under the "Earnings before interest, taxes, depreciation, amortization and fair value adjustments ("EBITDAFV")" heading above, the Trust has restated its prior period calculation of interest coverage ratio (times) to be consistent with current period presentation.
Dream Office REIT 2020 Second Quarter Report | 33
In compliance with Canadian Securities Administrators Staff Notice 52-306 (Revised), "Non-GAAP Financial Measures", the following table calculates the interest coverage ratio for the trailing 12-month periods ended June 30, 2020, March 31, 2020 and June 30, 2019 and the year ended December 31, 2019:
For the trailing 12-month period ended | Year ended | ||||||||
June 30, | March 31, | June 30, | December 31, | ||||||
2020 | 2020 | 2019 | 2019 | ||||||
Trailing 12-month EBITDAFV(1) | $ | 145,619 | $ | 154,260 | $ | 167,080 | $ | 160,737 | |
Trailing 12-month interest expense on debt(1) | $ | 46,636 | $ | 50,711 | $ | 60,420 | $ | 54,608 | |
Interest coverage ratio (times) | 3.1 | 3.0 | 2.8 | 2.9 |
- Trailing 12-month EBITDAFV and trailing 12-month interest expense on debt (non-GAAP measures) for the periods ended June 30, 2020 and June 30, 2019 have been reconciled under the heading "Trailing 12-month EBITDAFV and trailing 12-month interest expense on debt" within this section.
Net total debt-to-adjusted EBITDAFV
Management believes that net total debt-to-adjusted EBITDAFV, a non-GAAP measurement, is an important measure in determining the time it takes the Trust, on a go-forward basis, based on its normalized operating performance, to repay our debt. This non-GAAP measurement does not have a standardized meaning and may not be comparable with similar measures presented by other income trusts.
Net total debt-to-adjusted EBITDAFV as shown below is calculated as total debt (net of cash on hand), which includes debt related to assets held for sale, divided by adjusted EBITDAFV - annualized. Adjusted EBITDAFV - annualized is calculated as annualized quarterly EBITDAFV less NOI of disposed properties for the quarter plus the normalized NOI of properties acquired in the quarter.
Because the calculation of EBITDAFV has been adjusted effective December 31, 2019 as discussed under the "Earnings before interest, taxes, depreciation, amortization and fair value adjustments ("EBITDAFV")" heading above, the Trust has restated its prior period calculation of net total debt-to-adjusted EBITDAFV to be consistent with current period presentation.
In compliance with Canadian Securities Administrators Staff Notice 52-306 (Revised), "Non-GAAP Financial Measures", the following table calculates the annualized net total debt-to-adjusted EBITDAFV:
Amounts included in condensed consolidated financial statements | ||||||||
June 30, | March 31, | December 31, | June 30, | |||||
2020 | 2020 | 2019 | 2019 | |||||
Non-current debt | $ | 1,015,304 | $ | 1,097,867 | $ | 967,861 | $ | 1,096,298 |
Current debt | 99,867 | 33,063 | 182,511 | 183,518 | ||||
Debt related to assets held for sale | - | - | - | 172,316 | ||||
Total debt | 1,115,171 | 1,130,930 | 1,150,372 | 1,452,132 | ||||
Less: Cash on hand(1) | (15,164) | (35,311) | (89,816) | (8,439) | ||||
Net total debt | $ | 1,100,007 | $ | 1,095,619 | $ | 1,060,556 | $ | 1,443,693 |
EBITDAFV(2) - quarterly | 34,107 | 35,225 | 37,373 | 42,748 | ||||
Less: NOI of disposed properties for the quarter(3) | (58) | 65 | (2,084) | (94) | ||||
Adjusted EBITDAFV - quarterly | $ | 34,049 | $ | 35,290 | $ | 35,289 | $ | 42,654 |
Adjusted EBITDAFV - annualized | $ | 136,196 | $ | 141,160 | $ | 141,156 | $ | 170,616 |
Net total debt-to-adjusted EBITDAFV (years) | 8.1 | 7.8 | 7.5 | 8.5 |
- Cash on hand represents cash on hand at period-end, excluding cash held in co-owned properties and joint ventures that are equity accounted.
- EBITDAFV (a non-GAAP measure) has been reconciled to net income under the heading "Earnings before interest, taxes, depreciation, amortization and fair value adjustments ("EBITDAFV")" within this section. For the period ended June 30, 2019, EBITDAFV has been restated to exclude share of net loss from investments in joint ventures.
- NOI of disposed properties for the three months ended June 30, 2020, March 31, 2020 and December 31, 2019 includes NOI from properties classified as discontinued operations that were sold during Q3 2019.
Level of debt (net total debt-to-net total assets)
Management believes that level of debt (net total debt-to-net total assets) is an important non-GAAP measure in the management of our debt levels. This non-GAAP measure does not have a standardized meaning and may not be comparable with similar measures presented by other income trusts. Net total debt-to-net total assets as shown below is determined as total debt less cash on hand, which includes debt related to assets held for sale, all divided by net total assets (being determined as total assets, less cash on hand).
Dream Office REIT 2020 Second Quarter Report | 34
In compliance with Canadian Securities Administrators Staff Notice 52-306 (Revised), "Non-GAAP Financial Measures", the following table calculates the level of debt (net total debt-to-net total assets):
Amounts included in condensed consolidated financial statements | ||||||||
June 30, | March 31, | December 31, | June 30, | |||||
2020 | 2020 | 2019 | 2019 | |||||
Non-current debt | $ | 1,015,304 | $ | 1,097,867 | $ | 967,861 | $ | 1,096,298 |
Current debt | 99,867 | 33,063 | 182,511 | 183,518 | ||||
Debt related to assets held for sale | - | - | - | 172,316 | ||||
Total debt | 1,115,171 | 1,130,930 | 1,150,372 | 1,452,132 | ||||
Less: Cash on hand(1) | (15,164) | (35,311) | (89,816) | (8,439) | ||||
Net total debt | $ | 1,100,007 | $ | 1,095,619 | $ | 1,060,556 | $ | 1,443,693 |
Total assets | 2,888,637 | 2,882,908 | 2,911,682 | 3,189,409 | ||||
Less: Cash on hand(1) | (15,164) | (35,311) | (89,816) | (8,439) | ||||
Net total assets | $ | 2,873,473 | $ | 2,847,597 | $ | 2,821,866 | $ | 3,180,970 |
Net total debt-to-net total assets | 38.3% | 38.5% | 37.6% | 45.4% |
(1) Cash on hand represents cash on hand at period-end, excluding cash held in co-owned properties and joint ventures that are equity accounted.
QUARTERLY INFORMATION
The following tables show quarterly information since July 1, 2018.
Key portfolio, leasing, financing and other capital information
2020 | 2019 | 2018 | ||||||||||||||||
Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | |||||||||||
Portfolio(1) | ||||||||||||||||||
Number of properties | 31 | 31 | 31 | 33 | 33 | 37 | 37 | 37 | ||||||||||
GLA (millions of sq. ft.) | 5.5 | 5.5 | 5.5 | 6.1 | 6.2 | 7.3 | 7.3 | 7.3 | ||||||||||
Leasing - comparative portfolio(2) | 88.3% | |||||||||||||||||
Occupancy rate - including committed (period-end) | 89.9% | 90.8% | 93.1% | 94.3% | 93.2% | 93.0% | 94.2% | |||||||||||
Occupancy rate - in-place(period-end) | 87.8% | 89.1% | 90.1% | 92.6% | 92.9% | 91.8% | 91.5% | 88.3% | ||||||||||
Tenant retention ratio | 69.2% | 44.2% | 85.6% | 69.7% | 88.0% | 70.9% | 71.6% | 88.8% | ||||||||||
Average in-place and committed net rent per square foot | $ | 23.00 | ||||||||||||||||
(period-end) | $ | 22.66 | $ | 22.53 | $ | 22.79 | $ | 22.20 | $ | 21.06 | $ | 20.97 | $ | 20.87 | ||||
Financing | ||||||||||||||||||
Weighted average face rate of interest on debt | 3.68% | |||||||||||||||||
(period-end)(3) | 3.78% | 3.88% | 3.88% | 3.94% | 3.99% | 4.06% | 3.94% | |||||||||||
Interest coverage ratio (times)(4)(5) | 3.1 | 3.0 | 2.9 | 2.9 | 2.8 | 2.7 | 2.8 | 2.8 | ||||||||||
Net total debt-to-adjusted EBITDAFV (years)(4)(5) | 8.1 | 7.8 | 7.5 | 8.0 | 8.5 | 8.6 | 9.0 | 9.1 | ||||||||||
Level of debt (net total debt-to-net total assets)(4) | 38.3% | 38.5% | 37.6% | 41.3% | 45.4% | 45.1% | 45.0% | 46.2% | ||||||||||
Capital | 60.5 | |||||||||||||||||
Total number of REIT A Units and LP B Units (in millions)(6) | 60.8 | 61.5 | 61.5 | 63.6 | 64.3 | 64.6 | 65.3 | |||||||||||
NAV per unit(4) | $ | 27.61 | $ | 27.13 | $ | 26.70 | $ | 25.79 | $ | 25.49 | $ | 25.10 | $ | 24.97 | $ | 24.40 |
- Excludes properties held for sale and properties in joint ventures that are equity accounted at the end of each period.
- Excludes acquired properties, investment in joint ventures that are equity accounted, properties held for sale and properties under development at the end of each period, as applicable. For the period ended September 30, 2019 and for a period of two full calendar years thereafter, acquired properties comprises 6 Adelaide Street East, Toronto downtown, which was acquired on September 12, 2019.
- 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.
- The calculation of the following non-GAAP measures - interest coverage ratio, net total debt-to-adjusted EBITDAFV, level of debt (net total debt-to-net total assets) and NAV per unit - are included in the "Non-GAAP Measures" section of the MD&A.
- Interest coverage ratio and net total debt-to-adjusted EBITDAFV have been restated for 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 "Net total debt-to-adjusted EBITDAFV".
- Total number of REIT A Units and LP B Units includes 5.2 million LP B Units, which are classified as a liability under IFRS.
Dream Office REIT 2020 Second Quarter Report | 35
Results of operations
Effective June 30, 2019, the results of operations from the Ottawa and Montréal segment were presented separately as income (loss) from discontinued operations in the condensed consolidated statements of comprehensive income (loss), as both investment properties in that segment have been sold. As a result of this change in presentation, the prior periods' income measures of investment properties revenue and operating expenses, interest expense on debt (included in "Other expenses") and fair value adjustments to investment properties (included in "Fair value adjustments, leasing, transaction and debt settlement costs") attributable to this segment have been retroactively reclassified to income (loss) from discontinued operations in the table below, in accordance with IFRS requirements.
2020 | 2019 | 2018 | ||||||||||||||
(in thousands of Canadian dollars) | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | ||||||||
Investment properties revenue | $ | 50,704 | $ | 52,748 | $ | 56,990 | $ | 57,432 | $ | 57,031 | $ | 57,565 | $ | 57,245 | $ | 60,955 |
Investment properties operating | (22,525) | |||||||||||||||
expenses | (23,820) | (25,907) | (25,470) | (24,683) | (25,383) | (26,130) | (27,856) | |||||||||
Net rental income | 28,179 | 28,928 | 31,083 | 31,962 | 32,348 | 32,182 | 31,115 | 33,099 | ||||||||
Other income | 5,907 | 1,133 | 25,766 | 4,460 | 19,454 | 7,813 | 12,972 | 6,362 | ||||||||
Other expenses | (15,218) | (15,227) | (16,699) | (16,609) | (17,852) | (17,372) | (17,949) | (19,032) | ||||||||
Fair value adjustments, leasing, | ||||||||||||||||
transaction and debt settlement | 38,766 | |||||||||||||||
costs | 49,602 | 23,450 | (20,112) | 18,016 | (11,518) | 33,751 | 19,860 | |||||||||
Income (loss) before income taxes | ||||||||||||||||
and discontinued operations | 57,634 | 64,436 | 63,600 | (299) | 51,966 | 11,105 | 59,889 | 40,289 | ||||||||
Current and deferred income | (32) | |||||||||||||||
taxes recovery (expense), net | 408 | (149) | (102) | (118) | (117) | 244 | (349) | |||||||||
Income (loss) from continuing | ||||||||||||||||
operations, net of taxes | 57,602 | 64,844 | 63,451 | (401) | 51,848 | 10,988 | 60,133 | 39,940 | ||||||||
Income (loss) from discontinued | (2) | |||||||||||||||
operations | (13) | (258) | (1,939) | (5,315) | (1,054) | (1,644) | 1,442 | |||||||||
Net income (loss) for the period | 57,600 | 64,831 | 63,193 | (2,340) | 46,533 | 9,934 | 58,489 | 41,382 | ||||||||
Other comprehensive income (loss) | (2,914) | 9,205 | (1,058) | 1,172 | (2,074) | (745) | 2,991 | (771) | ||||||||
Comprehensive income (loss) for | ||||||||||||||||
the period | $ | 54,686 | $ | 74,036 | $ | 62,135 | $ | (1,168) | $ | 44,459 | $ | 9,189 | $ | 61,480 | $ | 40,611 |
Our results of operations may vary significantly from period to period as a result of fair value adjustments to investment properties, fair value adjustments to financial instruments, and net gains or losses on transactions and other activities. The decrease in our net rental income between Q3 2018 and Q2 2020 is primarily due to the effect of selling investment properties in order to focus on our highest quality assets.
Dream Office REIT 2020 Second Quarter Report | 36
Reconciliation between net income (loss) and funds from operations
(in thousands of Canadian dollars except for unit and per unit amounts)
2020 | 2019 | 2018 | |||||||||||||||
Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | ||||||||||
Net income (loss) for the period | $ | 57,600 | $ | 64,831 | $ | 63,193 | $ | (2,340) | $ | 46,533 | $ | 9,934 | $ | 58,489 | $ | 41,382 | |
Add (deduct): | |||||||||||||||||
Share of income from investment | |||||||||||||||||
in Dream Industrial REIT | (4,904) | (523) | (25,419) | (4,348) | (18,833) | (7,478) | (12,717) | (5,599) | |||||||||
Share of FFO from investment in | 4,818 | ||||||||||||||||
Dream Industrial REIT(1) | 4,748 | 4,878 | 5,139 | 5,417 | 5,500 | 5,572 | 4,217 | ||||||||||
Depreciation, amortization and | 3,045 | ||||||||||||||||
write-off of intangible assets | 3,448 | 4,134 | 3,426 | 3,653 | 3,358 | 3,477 | 3,717 | ||||||||||
Costs (recovery) attributable to | (2,212) | ||||||||||||||||
sale of investment properties(2) | (52) | 441 | 2,967 | 76 | 52 | (455) | 919 | ||||||||||
Interest expense on subsidiary | |||||||||||||||||
redeemable units | 1,309 | 1,308 | 1,309 | 1,308 | 1,309 | 1,308 | 1,309 | 1,308 | |||||||||
Fair value adjustments to | (20,203) | ||||||||||||||||
investment properties(2) | (4,706) | (33,707) | (18,807) | (3,832) | (603) | (20,160) | (24,823) | ||||||||||
Fair value adjustments to | |||||||||||||||||
investment properties held in | (16) | ||||||||||||||||
joint ventures | - | - | 518 | - | - | - | - | ||||||||||
Fair value adjustments to | |||||||||||||||||
financial instruments and DUIP | (16,865) | ||||||||||||||||
included in G&A expenses | (45,207) | 9,721 | 36,595 | (6,219) | 15,454 | (11,066) | 4,493 | ||||||||||
Debt settlement costs due to | |||||||||||||||||
disposals of investment | - | ||||||||||||||||
properties, net(2) | - | - | 1,620 | - | - | 1,070 | - | ||||||||||
Internal leasing costs | 370 | 412 | 500 | 506 | 511 | 671 | 512 | 630 | |||||||||
Principal repayments on finance | (12) | ||||||||||||||||
lease liabilities(2) | (11) | (11) | (8) | (12) | (13) | - | - | ||||||||||
Deferred income taxes expense | 206 | ||||||||||||||||
(recovery) | (166) | 149 | 102 | 118 | 117 | (288) | (276) | ||||||||||
Taxes attributable to dispositions | - | - | - | - | - | - | - | 625 | |||||||||
Other | - | - | - | - | - | - | (7) | 95 | |||||||||
FFO for the period(3) | $ | 23,136 | $ | 24,082 | $ | 25,188 | $ | 26,678 | $ | 28,721 | $ | 28,300 | $ | 25,736 | $ | 26,688 | |
Diluted weighted average number | 61,512 | ||||||||||||||||
of units(4) | 62,336 | 62,388 | 62,848 | 65,144 | 65,185 | 65,839 | 66,286 | ||||||||||
FFO per unit - diluted | $ | 0.38 | $ | 0.39 | $ | 0.40 | $ | 0.42 | $ | 0.44 | $ | 0.43 | $ | 0.39 | $ | 0.40 |
- Included in the Q3 2018 FFO was a $(1.0) million one-timetrue-up adjustment to our share of FFO from investment in Dream Industrial REIT. Excluding the adjustment, our share of FFO from investment in Dream Industrial REIT for that quarter was $5.2 million.
- Includes both continuing and discontinued operations.
- FFO (a non-GAAP measure) - refer to the section "Non-GAAP Measures" under the heading "Funds from operations ("FFO")" for further details.
- Diluted weighted average number of units includes the weighted average of all REIT A Units, LP B Units, vested but unissued and unvested deferred trust units and associated income deferred trust units.
Dream Office REIT 2020 Second Quarter Report | 37
SECTION V
DISCLOSURE CONTROLS AND PROCEDURES
At June 30, 2020, the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") of the Trust, along with the assistance of senior management, have designed disclosure controls and procedures to provide reasonable assurance that material information relating to Dream Office REIT is made known to the CEO and CFO in a timely manner and information required to be disclosed by Dream Office REIT is recorded, processed, summarized and reported within the time periods specified in securities legislation, and have designed internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the condensed consolidated financial statements in accordance with IFRS.
During the three and six months ended June 30, 2020, there have not been any changes that have materially affected, or are reasonably likely to materially affect, the internal controls over financial reporting.
RISKS AND OUR STRATEGY TO MANAGE
In addition to the specific risks discussed in this MD&A, we are exposed to various risks and uncertainties, many of which are beyond our control and could have an impact on our business, financial condition, operating results and prospects. Unitholders should consider these risks and uncertainties when assessing our outlook in terms of investment potential. For a further discussion of the risks and uncertainties identified by Dream Office REIT, please see below and refer to our 2019 Annual Report and latest Annual Information Form filed on the System for Electronic Document Analysis and Retrieval ("SEDAR") (www.sedar.com).
COVID-19
On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic. The duration and full scope of the economic impact of COVID-19 is unknown and as a result it is not possible to estimate the full impact on our financial results and operations. Risks and uncertainties arising from this global pandemic could include, but are not limited to, the impact on our tenants, global economies and financial markets, and our information technology systems.
COVID-19 has led to the extended shutdown of certain businesses, which may in turn result in disruptions, delays or reductions to our tenants' supply chains. COVID-19 may also impact consumer demand for our tenants' products or services, which may negatively impact our tenants' businesses. While governments have eased COVID-19 restrictions and businesses have started to reopen, there are still restrictive measures in place. These factors may impact our tenants' ability to meet their payment obligations.
COVID-19 has slowed down global economies, increased volatility in financial markets and resulted in a decline in the value of the Trust's unit price. The pandemic could impact debt and equity markets which could affect the Trust's ability to access capital.
COVID-19 has led to increased risks associated with cyber security. As such, this could impact our information technology systems and networks.
All of these factors may have a material adverse effect on our business, our results of operations and our ability to make cash distributions to unitholders.
Elevated estimation uncertainty as a result of COVID-19
On March 11, 2020, the World Health Organization declared the novel coronavirus ("COVID-19") a global pandemic. The pandemic has created significant uncertainty in the general economy, including the real estate market. Such a pandemic could, if prolonged, adversely impact our business directly and/or indirectly. Management continues to assess the impact of COVID-19 and governments' responses to it on the Trust. Portions of our financial results incorporate estimates from management that are subject to increased uncertainty due to the market disruptions caused by the COVID-19 pandemic. An area of increased estimation uncertainty in the Trust's condensed consolidated financial statements is the fair value of its investment properties.
The amounts recorded in the condensed consolidated financial statements are based on the latest reliable information available to management at the time the condensed consolidated financial statements were prepared where that information reflects conditions at the date of the condensed consolidated financial statements. However, uncertainty about these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amount of the affected asset or liability in the future.
Dream Office REIT 2020 Second Quarter Report | 38
Increase in credit risk as a result of COVID-19
Credit risk arises from the possibility that tenants in investment properties or counterparties to financial instruments may not fulfill their lease or contractual obligations. The Trust mitigates its credit risks from its tenants by attracting tenants of sound financial standing and by diversifying its mix of tenants. The Trust manages its credit risk on vendor takeback mortgage receivables by lending to reputable purchasers of properties, retaining security interests in the sold investment properties, monitoring compliance with repayment schedules, and evaluating the progress and estimated rates of returns of financed projects. The Trust manages its credit risk on debt guarantees on assumed debt by guaranteeing debt assumed by reputable purchasers of properties, monitoring the debtors' compliance with repayment schedules and loan covenants, and obtaining indemnities from parties with strong covenants.
COVID-19 and the measures to contain it have created significant uncertainty in the general economy. A deterioration in the economy may impact the ability of tenants to meet their obligations under their leases or contracts. The Trust continues to assess the effect of economic conditions on the creditworthiness of our tenants and counterparties. As part of this assessment, the Trust reviews the risk profiles of its tenant base to assess which tenants are likely to continue meeting their obligations under their leases and which tenants are at a greater risk of default. We expect that certain tenants may have difficulty meeting their obligations under their leases, resulting in an elevated risk of credit losses. Tenants may also apply for government assistance programs and require assistance in the form of short-term rent deferrals.
The Trust assesses the credit risk of its vendor takeback mortgages receivable by evaluating the credit quality of counterparties, whether the counterparties are fulfilling their obligations under the terms of the agreements and the value of the collateral relative to the balance of the receivable.
CHANGES IN ACCOUNTING POLICIES AND DISCLOSURES
Dream Office REIT's changes in accounting policies are described in Note 2 to the condensed consolidated financial statements for the three and six months ended June 30, 2020.
ADDITIONAL INFORMATION
Additional information relating to Dream Office REIT, including the latest Annual Information Form of Dream Office REIT, is available on SEDAR at www.sedar.com.
Dream Office REIT 2020 Second Quarter Report | 39
SECTION VI
ASSET LISTING
The following table includes supplementary information on our portfolio as at June 30, 2020.
Owned share of | Number of | Average tenant | Average | In-place and | ||||||||
total GLA (in | tenants | size (in | remaining | |||||||||
Property | Ownership | thousands of | (in-place and | thousands of | lease term | committed | ||||||
square feet) | committed) | square feet) | (in years) | occupancy | ||||||||
Adelaide Place, Toronto | 100.0% | 658 | 69 | 9 | 5.1 | 98.2% | ||||||
30 Adelaide Street East, Toronto | 100.0% | 414 | 7 | 59 | 4.3 | 100.0% | ||||||
438 University Avenue, Toronto | 100.0% | 323 | 18 | 18 | 5.5 | 100.0% | ||||||
655 Bay Street, Toronto | 100.0% | 301 | 22 | 13 | 5.6 | 98.4% | ||||||
74 Victoria Street/137 Yonge Street, Toronto | 100.0% | 266 | 5 | 53 | 5.3 | 98.9% | ||||||
720 Bay Street, Toronto | 100.0% | 248 | 1 | 248 | 5.5 | 100.0% | ||||||
36 Toronto Street, Toronto | 100.0% | 214 | 38 | 6 | 3.4 | 98.2% | ||||||
330 Bay Street, Toronto | 100.0% | 165 | 40 | 4 | 2.9 | 89.7% | ||||||
20 Toronto Street/33 Victoria Street, Toronto | 100.0% | 158 | 17 | 9 | 6.3 | 98.2% | ||||||
250 Dundas Street West, Toronto | 100.0% | 121 | 16 | 8 | 4.4 | 99.4% | ||||||
80 Richmond Street West, Toronto | 100.0% | 101 | 37 | 2 | 2.3 | 77.2% | ||||||
425 Bloor Street East, Toronto(1) | 100.0% | 83 | 8 | 10 | 10.0 | 100.0% | ||||||
212 King Street West, Toronto | 100.0% | 73 | 10 | 7 | 2.3 | 100.0% | ||||||
360 Bay Street, Toronto | 100.0% | 58 | 14 | 4 | 2.6 | 90.6% | ||||||
67 & 69 Richmond Street West, Toronto | 100.0% | 50 | 4 | 12 | 3.9 | 94.4% | ||||||
350 Bay Street, Toronto | 100.0% | 53 | 11 | 5 | 3.0 | 97.4% | ||||||
366 Bay Street, Toronto | 100.0% | 36 | 7 | 3 | 1.3 | 54.3% | ||||||
56 Temperance Street, Toronto | 100.0% | 32 | 8 | 4 | 5.7 | 100.0% | ||||||
Toronto downtown | 3,354 | 332 | 10 | 4.8 | 97.2% | |||||||
2200-2206 Eglinton Avenue East & 1020 Birchmount Road, | ||||||||||||
Scarborough | 100.0% | 442 | 10 | 21 | 9.6 | 47.9% | ||||||
50 & 90 Burnhamthorpe Road West, Mississauga | ||||||||||||
(Sussex Centre)(2) | 49.9% | 327 | 62 | 9 | 5.5 | 87.7% | ||||||
444 - 7th Building, Calgary | 100.0% | 261 | 9 | 23 | 6.7 | 80.5% | ||||||
Saskatoon Square, Saskatoon | 100.0% | 228 | 12 | 12 | 7.0 | 62.7% | ||||||
12800 Foster Street, Overland Park, Kansas, U.S. | 100.0% | 185 | 1 | 185 | 5.4 | 100.0% | ||||||
Princeton Tower, Saskatoon | 100.0% | 134 | 11 | 6 | 7.3 | 45.5% | ||||||
606 - 4th Building & Barclay Parkade, Calgary | 100.0% | 126 | 12 | 9 | 5.3 | 85.5% | ||||||
Kensington House, Calgary | 100.0% | 78 | 20 | 4 | 5.8 | 95.7% | ||||||
Preston Centre, Saskatoon | 100.0% | 62 | 13 | 4 | 3.4 | 78.5% | ||||||
234 - 1st Avenue South, Saskatoon | 100.0% | 10 | 3 | 2 | 3.5 | 66.8% | ||||||
Other markets | 1,853 | 153 | 11 | 6.5 | 72.1% | |||||||
Total comparative portfolio | 5,207 | 485 | 10 | 5.3 | 88.3% | |||||||
6 Adelaide Street East, Toronto(3) | 100.0% | 53 | 20 | 3 | 2.3 | 96.7% | ||||||
Total acquired properties | 53 | 20 | 3 | 2.3 | 96.7% | |||||||
Total comparative portfolio and acquired properties | 5,260 | 505 | 10 | 5.3 | 88.4% | |||||||
1900 Sherwood Place, Regina | 100.0% | 210 | 5 | 42 | 12.0 | 100.0% | ||||||
357 Bay Street, Toronto | 100.0% | 65 | 1 | 65 | 15.0 | 100.0% | ||||||
Total properties under development | 275 | 6 | 46 | 12.7 | 100.0% | |||||||
Total portfolio | 5,535 | 511 | 10 | 5.7 | 88.9% | |||||||
220 King Street West, Toronto(4) | 50.0% | 11 | 3 | 6 | 7.1 | 83.4% |
- Property subject to a ground lease.
- Co-ownedproperty.
- This property was acquired on September 12, 2019.
- Joint venture that is equity accounted. This property was acquired on August 22, 2019.
Dream Office REIT 2020 Second Quarter Report | 40
Condensed consolidated balance sheets
(unaudited)
(in thousands of Canadian dollars)
June 30, | December 31, | |||||
Note | 2020 | 2019 | ||||
Assets | ||||||
NON-CURRENT ASSETS | $ | 2,464,222 | ||||
Investment properties | 4 | $ | 2,420,945 | |||
Investment in Dream Industrial REIT | 5 | 325,820 | 320,295 | |||
Investments in joint ventures | 16,656 | 13,935 | ||||
Other non-current assets | 41,857 | 42,337 | ||||
2,848,555 | 2,797,512 | |||||
CURRENT ASSETS | 14,392 | |||||
Amounts receivable | 13,834 | |||||
Prepaid expenses and other assets | 4,787 | 4,926 | ||||
Cash and cash equivalents | 20,903 | 95,410 | ||||
40,082 | 114,170 | |||||
Total assets | $ | 2,888,637 | $ | 2,911,682 | ||
Liabilities | ||||||
NON-CURRENT LIABILITIES | $ | 1,015,304 | ||||
Debt | 6 | $ | 967,861 | |||
Subsidiary redeemable units | 107,398 | 162,929 | ||||
Deferred Unit Incentive Plan | 16,275 | 27,064 | ||||
Deferred tax liabilities, net | 2,491 | 2,342 | ||||
Other non-current liabilities | 11,500 | 12,236 | ||||
1,152,968 | 1,172,432 | |||||
CURRENT LIABILITIES | 99,867 | |||||
Debt | 6 | 182,511 | ||||
Amounts payable and accrued liabilities | 73,279 | 78,478 | ||||
173,146 | 260,989 | |||||
Total liabilities | 1,326,114 | 1,433,421 | ||||
Equity | 2,032,675 | |||||
Unitholders' equity | 2,049,272 | |||||
Deficit | (480,233) | (574,801) | ||||
Accumulated other comprehensive income | 10,081 | 3,790 | ||||
Total equity | 1,562,523 | 1,478,261 | ||||
Total liabilities and equity | $ | 2,888,637 | $ | 2,911,682 |
See accompanying notes to the condensed consolidated financial statements.
On behalf of the Board of Trustees of Dream Office Real Estate Investment Trust:
"Karine MacIndoe" | "Michael J. Cooper" |
KARINE MACINDOE | MICHAEL J. COOPER |
Trustee | Trustee |
Dream Office REIT 2020 Second Quarter Report | 41
Condensed consolidated statements of comprehensive income
(unaudited)
(in thousands of Canadian dollars)
Three months ended June 30, | Six months ended June 30, | ||||||||||
Note | 2020 | 2019 | 2020 | 2019 | |||||||
Investment properties revenue | 7 | $ | 50,704 | $ | 57,031 | $ | 103,452 | $ | 114,596 | ||
Investment properties operating expenses | (22,525) | (24,683) | (46,345) | (50,066) | |||||||
Net rental income | 28,179 | 32,348 | 57,107 | 64,530 | |||||||
Other income | 4,904 | 5,427 | |||||||||
Share of income from investment in Dream Industrial REIT | 5 | 18,833 | 26,311 | ||||||||
Share of net income (loss) from investment in joint ventures | 354 | (18) | 247 | (18) | |||||||
Interest and other income | 649 | 639 | 1,366 | 974 | |||||||
5,907 | 19,454 | 7,040 | 27,267 | ||||||||
Other expenses | (2,777) | (5,419) | |||||||||
General and administrative | (3,035) | (5,672) | |||||||||
Interest: | (10,770) | (21,636) | |||||||||
Debt | (13,064) | (26,030) | |||||||||
Subsidiary redeemable units | (1,309) | (1,309) | (2,617) | (2,617) | |||||||
Amortization of intangible assets and depreciation on property | (362) | (773) | |||||||||
and equipment | (444) | (905) | |||||||||
(15,218) | (17,852) | (30,445) | (35,224) | ||||||||
Fair value adjustments, leasing and transaction costs | 20,203 | 24,909 | |||||||||
Fair value adjustments to investment properties | 4 | 12,322 | 16,907 | ||||||||
Fair value adjustments to financial instruments | 8 | 16,721 | 6,281 | 61,975 | (9,099) | ||||||
Transaction costs recovery (leasing and net transaction costs) | 9 | 1,842 | (587) | 1,484 | (1,310) | ||||||
38,766 | 18,016 | 88,368 | 6,498 | ||||||||
Income before income taxes and discontinued operations | 57,634 | 51,966 | 122,070 | 63,071 | |||||||
Current and deferred income taxes recovery (expense), net | (32) | (118) | 376 | (235) | |||||||
Income from continuing operations, net of taxes | 57,602 | 51,848 | 122,446 | 62,836 | |||||||
Loss from discontinued operations | (2) | (5,315) | (15) | (6,369) | |||||||
Net income for the period | 57,600 | 46,533 | 122,431 | 56,467 | |||||||
Other comprehensive income (loss) | |||||||||||
Items that will be reclassified subsequently to net income: | 9 | 19 | |||||||||
Unrealized gain on interest rate swaps and other, net of taxes | 12 | 24 | |||||||||
Unrealized gain (loss) on foreign currency translation, net | (793) | 931 | |||||||||
of taxes | (439) | (812) | |||||||||
Share of other comprehensive income (loss) from | (2,541) | 4,926 | |||||||||
investment in Dream Industrial REIT | 5 | (1,647) | (2,031) | ||||||||
Items that will not be reclassified subsequently to net income: | |||||||||||
Share of other comprehensive income from investment in | 411 | 415 | |||||||||
joint ventures | - | - | |||||||||
(2,914) | (2,074) | 6,291 | (2,819) | ||||||||
Comprehensive income for the period | $ | 54,686 | $ | 44,459 | $ | 128,722 | $ | 53,648 |
See accompanying notes to the condensed consolidated financial statements.
Dream Office REIT 2020 Second Quarter Report | 42
Condensed consolidated statements of changes in equity
(unaudited)
(all dollar amounts in thousands of Canadian dollars)
Attributable to unitholders of the Trust | ||||||||||
Accumulated | ||||||||||
other | ||||||||||
Number of | Unitholders' | comprehensive | ||||||||
Six months ended June 30, 2020 | Note | REIT A Units | equity | Deficit | income | Total equity | ||||
Balance at January 1, 2020 | 56,234,546 | $ | 2,049,272 | $ | (574,801) | $ | 3,790 | $ | 1,478,261 | |
Net income for the period | - | - | 122,431 | - | 122,431 | |||||
Distributions paid and payable | 10 | - | - | (27,863) | - | (27,863) | ||||
Deferred trust units exchanged for REIT A Units | 164,878 | 4,558 | - | - | 4,558 | |||||
Cancellation of REIT A Units under NCIB | (1,155,985) | (21,143) | - | - | (21,143) | |||||
Issue and cancellation costs | - | (12) | - | - | (12) | |||||
Other comprehensive income | - | - | - | 6,291 | 6,291 | |||||
Balance at June 30, 2020 | 55,243,439 | $ | 2,032,675 | $ | (480,233) | $ | 10,081 | $ | 1,562,523 | |
Attributable to unitholders of the Trust | ||||||||||
Accumulated | ||||||||||
other | ||||||||||
Number of | Unitholders' | comprehensive | ||||||||
Six months ended June 30, 2019 | Note | REIT A Units | equity | Deficit | income (loss) | Total equity | ||||
Balance at January 1, 2019 | 59,369,278 | $ | 2,124,760 | $ | (634,513) | $ | 6,495 | $ | 1,496,742 | |
Net income for the period | - | - | 56,467 | - | 56,467 | |||||
Distributions paid and payable | 10 | - | - | (29,457) | - | (29,457) | ||||
Deferred trust units exchanged for REIT A Units | 70,604 | 1,708 | - | - | 1,708 | |||||
Cancellation of REIT A Units under NCIB | (1,063,497) | (24,902) | - | - | (24,902) | |||||
Issue and cancellation costs | - | (46) | - | - | (46) | |||||
Other comprehensive loss | - | - | - | (2,819) | (2,819) | |||||
Balance at June 30, 2019 | 58,376,385 | $ | 2,101,520 | $ | (607,503) | $ | 3,676 | $ | 1,497,693 |
See accompanying notes to the condensed consolidated financial statements.
Dream Office REIT 2020 Second Quarter Report | 43
Condensed consolidated statements of cash flows
(unaudited)
(in thousands of Canadian dollars)
Three months ended June 30, | Six months ended June 30, | |||||||||
2020 | 2019 | 2020 | 2019 | |||||||
Note | (see Note 2) | (see Note 2) | ||||||||
Generated from (utilized in) operating activities | $ | 57,600 | $ | 122,431 | ||||||
Net income for the period | $ | 46,533 | $ | 56,467 | ||||||
Non-cash items: | (4,904) | (5,427) | ||||||||
Share of income from investment in Dream Industrial REIT | 5 | (18,833) | (26,311) | |||||||
Fair value adjustments to investment properties | 4 | (20,203) | (3,832) | (24,909) | (4,435) | |||||
Fair value adjustments to financial instruments | 8 | (16,721) | (6,281) | (61,975) | 9,099 | |||||
Amortization and depreciation | 11 | 3,178 | 3,726 | 6,774 | 7,324 | |||||
Other adjustments | 11 | (1,400) | 1,024 | (847) | 1,475 | |||||
Change in non-cash working capital | 11 | 2,771 | 242 | (2,936) | 2,781 | |||||
Investment in lease incentives and initial direct leasing costs | (2,068) | (6,178) | (6,841) | (15,216) | ||||||
Interest expense on debt | 10,770 | 14,845 | 21,636 | 29,608 | ||||||
Interest expense on subsidiary redeemable units | 1,309 | 1,309 | 2,617 | 2,617 | ||||||
30,332 | 32,555 | 50,523 | 63,409 | |||||||
Generated from (utilized in) investing activities | (7,186) | (13,375) | ||||||||
Investment in building improvements | (4,726) | (8,961) | ||||||||
Investment in properties under development | (1,367) | (5,787) | (5,130) | (8,654) | ||||||
Investment in property and equipment | (250) | - | (308) | (11) | ||||||
Contributions to joint ventures | - | (337) | (2,059) | (1,324) | ||||||
Distributions from investment in Dream Industrial REIT | 4,853 | - | 4,853 | - | ||||||
Net proceeds from disposal of investment properties and net | 2,130 | 2,098 | ||||||||
transaction costs recovery | 9 | 2,345 | 1,936 | |||||||
Change in restricted cash | 141 | (1,619) | 1,896 | (1,467) | ||||||
(1,679) | (10,124) | (12,025) | (18,481) | |||||||
Generated from (utilized in) financing activities | - | 132,000 | ||||||||
Borrowings | 6 | 214,900 | 362,900 | |||||||
Lump sum repayments | 6 | (10,000) | (182,000) | (160,000) | (305,352) | |||||
Principal repayments | 6 | (4,970) | (4,518) | (9,480) | (8,610) | |||||
Financing cost additions | 6 | - | (1,240) | - | (2,575) | |||||
Interest paid on debt | (10,446) | (12,689) | (23,967) | (28,500) | ||||||
Interest paid on subsidiary redeemable units | (1,309) | (1,309) | (2,617) | (2,617) | ||||||
Distributions paid on REIT A Units | 10 | (13,880) | (14,761) | (27,946) | (29,539) | |||||
Cancellation of REIT A Units under NCIB and transaction costs | (7,795) | (16,443) | (21,155) | (24,948) | ||||||
Principal repayments on finance lease liabilities | (12) | (12) | (23) | (25) | ||||||
(48,412) | (18,072) | (113,188) | (39,266) | |||||||
Increase (decrease) in cash and cash equivalents | (19,759) | 4,359 | (74,690) | 5,662 | ||||||
Foreign exchange gain (loss) on cash held in foreign currency | (5) | (41) | 183 | (193) | ||||||
Cash and cash equivalents, beginning of period | 40,667 | 9,920 | 95,410 | 8,769 | ||||||
Cash and cash equivalents, end of period | $ | 20,903 | $ | 14,238 | $ | 20,903 | $ | 14,238 |
See accompanying notes to the condensed consolidated financial statements.
Dream Office REIT 2020 Second Quarter Report | 44
Notes to the condensed consolidated financial statements
(Unaudited, all dollar amounts in thousands of Canadian dollars, except for per unit or per square foot amounts)
Note 1
ORGANIZATION
Dream Office Real Estate Investment Trust ("Dream Office REIT" or the "Trust") is an open-ended investment trust created pursuant to a Declaration of Trust, as amended and restated, under the laws of the Province of Ontario. The condensed consolidated financial statements of Dream Office REIT include the accounts of Dream Office REIT and its subsidiaries. Dream Office REIT primarily owns central business district office properties in major urban centres across Canada, with a focus on downtown Toronto. A subsidiary of Dream Office REIT performs the property management function.
The principal office and centre of administration of the Trust is 30 Adelaide Street East, Suite 301, State Street Financial Centre, Toronto, Ontario, M5C 3H1. The Trust is listed on the Toronto Stock Exchange ("TSX") under the symbol "D.UN". Dream Office REIT's condensed consolidated financial statements for the three and six months ended June 30, 2020 were authorized for issuance by the Board of Trustees on August 6, 2020, after which they may only be amended with the Board of Trustees' approval.
For simplicity, throughout the Notes, reference is made to the units of the Trust as follows:
- "REIT A Units", meaning the REIT Units, Series A; and
- "subsidiary redeemable units", meaning the LP Class B Units, Series 1, limited partnership units of Dream Office LP, a subsidiary of Dream Office REIT.
Note 2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The condensed consolidated financial statements have been prepared in accordance with International Accounting Standard ("IAS") 34, "Interim Financial Reporting", as issued by the International Accounting Standards Board ("IASB"). Accordingly, certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with International Financial Reporting Standards ("IFRS") have been omitted or condensed. The condensed consolidated financial statements should be read in conjunction with the Trust's annual consolidated financial statements for the year ended December 31, 2019, which have been prepared in accordance with IFRS, as issued by the IASB.
Certain comparative figures in the condensed consolidated financial statements have been reclassified to conform to the current period presentation.
Accounting policies
The condensed consolidated financial statements have been prepared using the same significant accounting policies and methods as those used in the Trust's annual consolidated financial statements for the year ended December 31, 2019, except as disclosed below.
Government grants
Government grants are recognized in net income during the period when there is reasonable assurance that the grants will be received and that the Trust will comply with the terms of the respective grant. Government grants are presented separately as either income or as a reduction of the related costs for which the grants are intended to compensate, with similar grants presented on a consistent basis.
Lease modifications
From time to time the Trust may agree with tenants to modify the terms of lease agreements, including changes to the consideration under the lease. When the changes result in a reduction in amounts receivable relating to past lease periods, the Trust applies IFRS 9, "Financial Instruments" ("IFRS 9"), in determining whether to partially or fully derecognize those receivables. Other changes to the terms and conditions of the lease are treated as lease modifications in accordance with IFRS 16, "Leases" ("IFRS 16"), and the modified lease is accounted for as a new lease from the effective date of the modification, with any prepaid or accrued lease payments relating to the original lease included as part of the lease payments for the new lease.
Dream Office REIT 2020 Second Quarter Report | 45
Change in accounting policies
Presentation of interest expense on debt in the condensed consolidated statement of cash flows
The Trust has amended its accounting policy for the presentation of interest expense on debt in the condensed consolidated statements of cash flows. Effective January 1, 2020, the Trust has elected to present interest expense on debt as a cash flow arising from financing activities where it was previously included in cash flows from operating activities. The Trust has made this change in order to better align with the presentation of cash flows related to debt transactions. As a result of this change in presentation, cash flows generated from (utilized in) operating activities for the three and six months ended June 30, 2019 have increased by $12,689 and $28,500, respectively, with a corresponding reduction to cash flows generated from (utilized in) financing activities.
Business combinations
Effective January 1, 2020, the Trust has applied the amendments to the requirements of IFRS 3, "Business Combinations" ("IFRS 3"), in relation to whether a transaction meets the definition of a business combination. The amendments provide the option for an entity to assess whether substantially all of the fair value of the gross assets acquired is concentrated in a single asset or group of similar assets. If such a concentration exists, the transaction is not viewed as an acquisition of a business and no further assessment of the business combination guidance is required. There was no impact on the adoption of this amendment since the amendment is effective for business combinations for which the acquisition date is on or after the transition date.
Note 3
CRITICAL ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS IN APPLYING ACCOUNTING POLICIES
Preparing the condensed consolidated financial statements requires management to make judgments, estimates and assumptions that affect the amounts reported. Management bases its judgments and estimates on historical experience and other factors it believes to be reasonable under the circumstances, but which are inherently uncertain and unpredictable, the result of which forms the basis of the carrying amounts of assets and liabilities. However, uncertainty about these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amount of the affected asset or liability in the future. Except as disclosed below, management has applied the same methodologies in making critical accounting judgments, estimates and assumptions as disclosed in the Trust's annual consolidated financial statements for the year ended December 31, 2019.
Elevated estimation uncertainty as a result of COVID-19
On March 11, 2020, the World Health Organization declared the novel coronavirus ("COVID-19") a global pandemic. The pandemic has created significant uncertainty in the general economy, including the real estate market. Such a pandemic could, if prolonged, adversely impact our business directly and/or indirectly. Management continues to assess the impact of COVID-19 and governments' responses to it on the Trust. Portions of our financial results incorporate estimates from management that are subject to increased uncertainty due to the market disruptions caused by the COVID-19 pandemic. An area of increased estimation uncertainty in the Trust's condensed consolidated financial statements is the fair value of its investment properties.
The amounts recorded in these condensed consolidated financial statements are based on the latest reliable information available to management at the time the condensed consolidated financial statements were prepared where that information reflects conditions at the date of the condensed consolidated financial statements. However, uncertainty about these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amount of the affected asset or liability in the future.
Dream Office REIT 2020 Second Quarter Report | 46
Note 4
INVESTMENT PROPERTIES
Six months ended June 30, 2020 | Year ended December 31, 2019 | ||||||||||||
Active | Properties | Investment | Properties | ||||||||||
under | Active | under | Investment | ||||||||||
properties | development | properties | properties | development | properties | ||||||||
Balance, beginning of period | $ | 2,318,599 | $ | 102,346 | $ | 2,420,945 | $ | 2,704,241 | $ | 74,585 | $ | 2,778,826 | |
Right-of-use assets recognized on adoption | |||||||||||||
of IFRS 16 | - | - | - | 4,499 | - | 4,499 | |||||||
Adjusted balance, beginning of period | 2,318,599 | 102,346 | 2,420,945 | 2,708,740 | 74,585 | 2,783,325 | |||||||
Additions: | |||||||||||||
Investment property acquisition | - | - | - | 47,454 | - | 47,454 | |||||||
Building improvements | 13,845 | 2,727 | 16,572 | 24,237 | 24,981 | 49,218 | |||||||
Lease incentives and initial direct leasing | |||||||||||||
costs | 4,608 | 491 | 5,099 | 26,089 | 1,252 | 27,341 | |||||||
Capitalized interest | - | 521 | 521 | - | 488 | 488 | |||||||
Total additions to investment properties | 18,453 | 3,739 | 22,192 | 97,780 | 26,721 | 124,501 | |||||||
Transfers, dispositions, assets held for sale | |||||||||||||
and other: | |||||||||||||
Investment properties disposed of | |||||||||||||
during the period | - | - | - | (172,033) | - | (172,033) | |||||||
Investment properties classified as held | |||||||||||||
for sale during the period | - | - | - | (354,946) | - | (354,946) | |||||||
Other | - | - | - | (363) | - | (363) | |||||||
Total transferred, disposed, classified as | |||||||||||||
held for sale and other | - | - | - | (527,342) | - | (527,342) | |||||||
Changes included in net income: | |||||||||||||
Fair value adjustments to investment | |||||||||||||
properties | 21,626 | 3,283 | 24,909 | 54,519 | 1,210 | 55,729 | |||||||
Change in straight-line rent | (151) | (12) | (163) | 91 | (14) | 77 | |||||||
Amortization and write-off of lease | |||||||||||||
incentives | (5,892) | (109) | (6,001) | (12,998) | (156) | (13,154) | |||||||
Total changes included in net income | 15,583 | 3,162 | 18,745 | 41,612 | 1,040 | 42,652 | |||||||
Change included in other comprehensive | |||||||||||||
income (loss): | |||||||||||||
Foreign currency translation adjustment | 2,340 | - | 2,340 | (2,191) | - | (2,191) | |||||||
Total change included in other | |||||||||||||
comprehensive income (loss) | 2,340 | - | 2,340 | (2,191) | - | (2,191) | |||||||
Balance, end of period | $ | 2,354,975 | $ | 109,247 | $ | 2,464,222 | $ | 2,318,599 | $ | 102,346 | $ | 2,420,945 | |
Change in unrealized income included in | |||||||||||||
net income for the period | |||||||||||||
Change in fair value of investment | |||||||||||||
properties | $ | 21,626 | $ | 3,283 | $ | 24,909 | $ | 60,831 | $ | 1,210 | $ | 62,041 |
Investment properties includes $12,638 (December 31, 2019 - $12,801) related to straight-line rent receivables.
Valuations of externally appraised properties
For the six months ended June 30, 2020, there were six investment properties valued by qualified external valuation professionals with an aggregate fair value of $529,276, representing 21% of the total investment property values (for the year ended December 31, 2019 - 10 investment properties with an aggregate fair value of $1,073,130, representing 44% of the total investment property values).
Dream Office REIT 2020 Second Quarter Report | 47
Fair value adjustments to investment properties
The fair value of the investment properties as at June 30, 2020 and December 31, 2019 represents the Trust's best estimate based on internally and externally available information as at the end of each reporting period.
The duration and full scope of the economic impact of COVID-19 is unknown at this time. Key valuation assumptions which could be impacted over the long term include: market rents, leasing costs, vacancy rates, discount rates and capitalization rates ("cap rates"). The Trust continues to monitor the effect of the economic environment on the valuation of its investment properties.
If there are any changes in the critical and key assumptions used in valuing the investment properties, in regional, national or international economic conditions, or new developments in the COVID-19 pandemic, the fair value of investment properties may change materially.
Zoning approval
On January 29, 2020, the Trust received council zoning approval for its application to amend the zoning of its property at 250 Dundas Street West 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. As at December 31, 2019, this property was valued using the cap rate method consistent with the highest and best use of the property on that date. As a result of the approved rezoning, this property was valued by a qualified external valuation professional using the direct comparison approach, taking into consideration recent activity for comparable development sites during the three months ended March 31, 2020. The Trust continues to consider the value as determined by a qualified external valuation professional using the direct comparison approach to be appropriate as at June 30, 2020.
Assumptions used in the valuation of investment properties using the cap rate method
As at June 30, 2020, the Trust's investment properties, excluding properties under development, a property with redevelopment potential and a property valued by a qualified external valuation professional under the direct comparison approach, were valued using the cap rate method.
The critical valuation metrics by segment as at June 30, 2020 and December 31, 2019 are set out below:
June 30, 2020 | December 31, 2019 | ||||
Weighted | Weighted | ||||
Range (%) | average (%) | Range (%) | average (%) | ||
Toronto downtown | 4.50-6.00 | 4.79 | 4.50-6.00 | 4.81 | |
Other markets | 6.25-8.25 | 7.39 | 6.00-8.00 | 6.95 | |
Total portfolio | 4.50-8.25 | 5.15 | 4.50-8.00 | 5.08 |
Sensitivities on assumptions
Generally, an increase in stabilized net operating income ("NOI") will result in an increase to the fair value of an investment property. An increase in the cap rate will result in a decrease to the fair value of an investment property. The cap rate magnifies the effect of a change in stabilized NOI, with a lower rate resulting in a greater impact to the fair value of an investment property than a higher rate.
The following sensitivity table outlines the potential impact on the fair value of investment properties (excluding investment properties under development, a property with redevelopment potential and a property valued by qualified external valuation professionals under the direct comparison approach), assuming a change in the weighted average cap rate by 25 basis points ("bps") as at June 30, 2020.
Impact of change to weighted average cap rates
+25 bps | -25 bps | |||
Increase (decrease) in value | $ | (106,070) | $ | 117,460 |
Dream Office REIT 2020 Second Quarter Report | 48
Assumptions used in the valuation of investment properties using the discounted cash flow method
As at June 30, 2020 and December 31, 2019, the Trust's investment properties under development and a property with redevelopment potential were valued using the discounted cash flow method.
The critical valuation metrics as at June 30, 2020 and December 31, 2019 are set out below:
June 30, 2020 | December 31, 2019 | ||||||
Weighted | Weighted | ||||||
Range | average | Range | average | ||||
Discount rates (%)(1) | 5.25-8.25 | 7.08 | 5.25-8.25 | 7.09 | |||
Terminal cap rates (%)(1) | 5.00-7.50 | 6.68 | 5.00-7.50 | 6.69 | |||
Market rents (in dollars per square foot)(1)(2) | $ | 10.00-45.00 $ | 24.87 | $ | 10.00-45.00 | $ | 24.67 |
- Includes investment properties under development and a property with redevelopment potential.
- Market rents represent year one rates in the discounted cash flow model. Market rents include office space only and exclude retail space.
In addition to the assumptions noted above, leasing cost assumptions for new and renewed leasing were within the range of $5.00 and $40.00 per square foot as at June 30, 2020 and December 31, 2019.
Sensitivities on assumptions
The following sensitivity table outlines the potential impact on the fair value of investment properties under development and a property with redevelopment potential, assuming a change in the weighted average discount rates and terminal cap rates by a respective 25 bps as at June 30, 2020.
Impact of change to | Impact of change to | ||||||||
weighted average discount rates | weighted average terminal cap rates | ||||||||
+25 bps | -25 bps | +25 bps | -25 bps | ||||||
Increase (decrease) in value | $ | (2,722) | $ | 2,791 | $ | (3,235) | $ | 3,526 |
The following sensitivity table outlines the potential impact on the fair value of investment properties under development and a property with redevelopment potential, assuming the market rental rates were to change by $1.00 per square foot and if the leasing costs per square foot were to change by $5.00 per square foot as at June 30, 2020.
Impact of change to | |||||||||
Impact of change to market rental rates | leasing costs per square foot | ||||||||
+$1.00 | -$1.00 | +$5.00 | -$5.00 | ||||||
Increase (decrease) in value | $ | 1,602 | $ | (1,603) | $ | (566) | $ | 566 |
Generally, a decrease in vacancy rate assumptions will result in an increase to the fair value of investment properties under development and a property with redevelopment potential, while an increase in vacancy rate assumptions will result in a decrease to the fair value of investment properties under development and a property with redevelopment potential.
Dream Office REIT 2020 Second Quarter Report | 49
Note 5
INVESTMENT IN DREAM INDUSTRIAL REIT
Dream Industrial Real Estate Investment Trust ("Dream Industrial REIT") is an unincorporated, open-ended real estate investment trust listed on the Toronto Stock Exchange under the symbol "DIR.UN".
Six months ended | Year ended | ||||
June 30, 2020 | December 31, 2019 | ||||
Balance, beginning of period | $ | 320,295 | $ | 266,583 | |
Dream Industrial REIT units purchased through distribution reinvestment plan | 4,950 | 19,114 | |||
Distributions earned | (9,778) | (19,222) | |||
Share of net income | 793 | 51,304 | |||
Net dilution gain | 4,634 | 4,774 | |||
Share of other comprehensive income (loss) | 4,926 | (2,258) | |||
Balance, end of period | $ | 325,820 | $ | 320,295 | |
Dream Industrial REIT units held, end of period(1) | 9,177,705 | 8,792,170 | |||
Dream Industrial LP Class B limited partnership units held, end of period(2) | 18,551,855 | 18,551,855 | |||
Total units held, end of period | 27,729,560 | 27,344,025 | |||
Ownership as a percentage of units outstanding, end of period | 16.2% | 17.8% |
- 4,800,587 Dream Industrial REIT units are pledged as security for the $20,000 demand revolving credit facility as at June 30, 2020 and December 31, 2019.
- 9,551,160 Dream Industrial LP Class B limited partnership units are pledged as security for the $300,000 demand revolving credit facility as at June 30, 2020 and December 31, 2019.
On February 12, 2020, Dream Industrial REIT completed a public offering and issued 16,859,000 REIT units.
On March 27, 2020, Dream Industrial REIT announced that it has suspended its Distribution Reinvestment and Unit Purchase Plan, effective for the March 2020 distribution.
The fair value of the Trust's interest in Dream Industrial REIT of $296,152 (December 31, 2019 - $359,300) was determined using the Dream Industrial REIT closing unit price of $10.68 per unit at period-end multiplied by the number of units held by the Trust as at June 30, 2020.
Under IAS 28, "Investments in Associates and Joint Ventures", a significant or prolonged decline in the fair value of an investment in an equity instrument below its cost is an indicator of impairment. As a result, the Trust performed an impairment test as at June 30, 2020, by comparing the recoverable amount of its investment in Dream Industrial REIT using the value-in-use approach to its carrying value. Based on the impairment test performed, the Trust concluded that no impairment existed as at June 30, 2020.
Note 6
DEBT
June 30, | December 31, | |||
2020 | 2019 | |||
Mortgages(1)(2) | $ | 995,237 | $ | 1,003,081 |
Demand revolving credit facilities(2)(3)(4) | 119,934 | (2,709) | ||
Debentures | - | 150,000 | ||
Total | 1,115,171 | 1,150,372 | ||
Less: Current portion | (99,867) | (182,511) | ||
Non-current debt | $ | 1,015,304 | $ | 967,861 |
- Net of financing costs of $3,839 (December 31, 2019 - $4,230).
- Secured by charges on specific investment properties.
- Secured by certain Dream Industrial REIT units and Dream Industrial LP Class B limited partnership units (see Note 5).
- Net of financing costs of $2,066 (December 31, 2019 - $2,709).
Dream Office REIT 2020 Second Quarter Report | 50
Continuity of debt
The following tables provide a continuity of debt for the six months ended June 30, 2020 and for the year ended December 31, 2019:
Six months ended June 30, 2020 | ||||||||||
Demand | ||||||||||
revolving | ||||||||||
credit | ||||||||||
Mortgages | facilities | Debentures | Total | |||||||
Balance as at January 1, 2020 | $ | 1,003,081 | $ | (2,709) | $ | 150,000 | $ | 1,150,372 | ||
Cash items: | - | 132,000 | - | 132,000 | ||||||
Borrowings | ||||||||||
Lump sum repayments | - | (10,000) | (150,000) | (160,000) | ||||||
Principal repayments | (9,480) | - | - | (9,480) | ||||||
Non-cash items: | 1,412 | - | - | 1,412 | ||||||
Foreign currency translation adjustment | ||||||||||
Other adjustments(1) | 224 | 643 | - | 867 | ||||||
Balance as at June 30, 2020 | $ | 995,237 | $ | 119,934 | $ | - | $ | 1,115,171 | ||
(1) Other adjustments includes amortization of financing costs and fair value adjustments. | ||||||||||
Year ended December 31, 2019 | ||||||||||
Demand | ||||||||||
revolving | ||||||||||
credit | ||||||||||
Mortgages | facilities | Debentures | Total | |||||||
Balance at January 1, 2019 | $ | 964,758 | $ | 291,686 | $ | 149,769 | $ | 1,406,213 | ||
Cash items: | ||||||||||
Borrowings | 292,900 | 118,000 | - | 410,900 | ||||||
Lump sum repayments | (56,650) | (412,702) | - | (469,352) | ||||||
Principal repayments | (15,067) | - | - | (15,067) | ||||||
Lump sum repayment on property disposition | (18,000) | - | - | (18,000) | ||||||
Financing costs additions | (1,905) | (670) | - | (2,575) | ||||||
Non-cash items: | ||||||||||
Debt assumed on acquisition of investment property | 10,306 | - | - | 10,306 | ||||||
Debt classified as liabilities related to assets held for sale | (172,316) | - | - | (172,316) | ||||||
Foreign currency translation adjustment | (1,468) | - | - | (1,468) | ||||||
Other adjustments(1) | 523 | 977 | 231 | 1,731 | ||||||
Balance as at December 31, 2019 | $ | 1,003,081 | $ | (2,709) | $ | 150,000 | $ | 1,150,372 |
(1) Other adjustments includes amortization and write-offs of financing costs and fair value adjustments.
Demand revolving credit facilities
The Trust has two demand revolving credit facilities: (i) a $300,000 demand revolving credit facility; and (ii) a $20,000 demand revolving credit facility. The details of each demand revolving credit facility are specified in the tables below. The Trust also has an accordion option of up to $100,000 in additional borrowing capacity on the $300,000 demand revolving credit facility if additional assets are pledged as security and subject to lender approval.
Dream Office REIT 2020 Second Quarter Report | 51
The amounts available and drawn under the demand revolving credit facilities as at June 30, 2020 and December 31, 2019 are summarized in the tables below:
June 30, 2020 | ||||||||||
Face | ||||||||||
Interest rates | interest | Borrowing | Letters of | Amount | ||||||
Maturity date | on drawings | rate | capacity | Drawings | credit | available | ||||
Formula-based maximum not to | BA + 1.70% or | 2.24% $ | 296,666 | $ | (122,000) | $ | (1,620) | $ | 173,046 | |
exceed $300,000(1) | March 1, 2022 | Prime + 0.70% | ||||||||
Formula-based maximum not to | BA + 2.00% or | n/a | 20,000 | - | - | 20,000 | ||||
exceed $20,000(2) | March 31, 2021 | Prime + 0.85% | ||||||||
2.24% $ | 316,666 | $ | (122,000) | $ | (1,620) | $ | 193,046 |
- The $300,000 demand revolving credit facility is secured by four investment properties and 9,551,160 Dream Industrial LP Class B limited partnership units.
- The $20,000 demand revolving credit facility is secured by 4,800,587 Dream Industrial REIT units.
December 31, 2019 | ||||||||||
Face | ||||||||||
Interest rates | interest | Borrowing | Letters of | Amount | ||||||
Maturity date | on drawings | rate | capacity | Drawings | credit | available | ||||
Formula-based maximum not to | BA + 1.70% or | |||||||||
exceed $300,000(1) | March 1, 2022 | Prime + 0.70% | n/a $ | 300,000 | $ | - | $ | (1,830) | $ | 298,170 |
Formula-based maximum not to | BA + 2.00% or | |||||||||
exceed $20,000(2) | March 31, 2021 | Prime + 0.85% | n/a | 20,000 | - | - | 20,000 | |||
$ | 320,000 | $ | - | $ | (1,830) | $ | 318,170 |
- The $300,000 demand revolving credit facility was secured by four investment properties and 9,551,160 Dream Industrial LP Class B limited partnership units.
- The $20,000 demand revolving credit facility was secured by 4,800,587 Dream Industrial REIT units.
Debentures
Series C Debentures
On January 21, 2020, the Trust repaid the Series C Debentures with an aggregate principal amount of $150,000.
Note 7
INVESTMENT PROPERTIES REVENUE
Three months ended June 30, | Six months ended June 30, | ||||||||
2020 | 2019 | 2020 | 2019 | ||||||
Rental revenue | $ | 32,822 | $ | 34,969 | $ | 65,567 | $ | 69,640 | |
CAM and parking services revenue | 17,448 | 21,517 | 37,078 | 43,501 | |||||
Property management and other service fees | 434 | 545 | 807 | 1,455 | |||||
Total | $ | 50,704 | $ | 57,031 | $ | 103,452 | $ | 114,596 |
Note 8
FAIR VALUE ADJUSTMENTS TO FINANCIAL INSTRUMENTS
Three months ended June 30, | Six months ended June 30, | ||||||||
2020 | 2019 | 2020 | 2019 | ||||||
Remeasurement of carrying value of subsidiary redeemable units | $ | 14,760 | $ | 5,704 | $ | 55,531 | $ | (7,066) | |
Remeasurement of carrying value of deferred trust units | 1,961 | 577 | 6,444 | (2,033) | |||||
Total | $ | 16,721 | $ | 6,281 | $ | 61,975 | $ | (9,099) |
Dream Office REIT 2020 Second Quarter Report | 52
Note 9
TRANSACTION COSTS RECOVERY (LEASING AND NET TRANSACTION COSTS)
Three months ended June 30, | Six months ended June 30, | ||||||||
2020 | 2019 | 2020 | 2019 | ||||||
Internal leasing costs | $ | (370) | $ | (511) | $ | (782) | $ | (1,182) | |
Recovery (costs) attributable to sale of investment properties(1) | 2,212 | (76) | 2,266 | (128) | |||||
Total | $ | 1,842 | $ | (587) | $ | 1,484 | $ | (1,310) |
- Recovery (costs) attributable to sale of investment properties consist of recoveries, transaction costs, commissions and other expenses incurred in relation to the disposal of investment properties.
During the second quarter of 2020, the Trust recorded a net transaction costs recovery due to the final settlement of post-close balances from various properties and the release of an escrow held back on the sale of an investment property during 2017.
Note 10
DISTRIBUTIONS
Dream Office REIT's Declaration of Trust, as amended and restated, endeavours to maintain monthly distribution payments to unitholders payable on or about the 15th day of the following month. For the six months ended June 30, 2020 and June 30, 2019, the Trust declared distributions totalling $0.50 per unit.
The following table summarizes distribution payments for the six months ended June 30, 2020 and June 30, 2019:
Six months ended June 30, | ||||
2020 | 2019 | |||
Paid in cash | $ | (27,946) | $ | (29,539) |
Less: Payable at December 31, 2019 (December 31, 2018) | 4,686 | 4,947 | ||
Plus: Payable at June 30, 2020 (June 30, 2019) | (4,603) | (4,865) | ||
Total distributions paid and payable | $ | (27,863) | $ | (29,457) |
The following table summarizes our monthly distributions paid and payable subsequent to period-end:
Date distribution | Month of | Date distribution was | Distribution per | Total distribution | ||
announced | distribution | paid or is payable | REIT A Unit | paid or payable | ||
June 19, 2020 | June 2020 | July 15, 2020 | $ | 0.08333 | $ | 4,603 |
July 22, 2020 | July 2020 | August 14, 2020 | 0.08333 | 4,588 |
Note 11
SUPPLEMENTARY CASH FLOW INFORMATION
The components of amortization and depreciation under operating activities include:
Note | Three months ended June 30, | Six months ended June 30, | ||||||||
2020 | 2019 | 2020 | 2019 | |||||||
Amortization and write-off of lease incentives | 4 | $ | 2,816 | $ | 3,282 | $ | 6,001 | $ | 6,419 | |
Amortization of intangible assets | 97 | 112 | 198 | 224 | ||||||
Depreciation on property and equipment | 265 | 332 | 575 | 681 | ||||||
Total amortization and depreciation | $ | 3,178 | $ | 3,726 | $ | 6,774 | $ | 7,324 |
The components of changes in other adjustments under operating activities include:
Note | Three months ended June 30, | Six months ended June 30, | ||||||||
2020 | 2019 | 2020 | 2019 | |||||||
Deferred unit compensation expense | $ | 849 | $ | 1,001 | $ | 1,452 | $ | 1,568 | ||
Straight-line rent adjustment | 111 | (189) | 172 | (474) | ||||||
Deferred income taxes expense | 206 | 118 | 40 | 235 | ||||||
Costs (recovery) attributable to sale of investment properties | 9 | (2,212) | 76 | (2,264) | 128 | |||||
Share of net loss (income) from investments in joint ventures | (354) | 18 | (247) | 18 | ||||||
Total other adjustments | $ | (1,400) | $ | 1,024 | $ | (847) | $ | 1,475 |
Dream Office REIT 2020 Second Quarter Report | 53
The components of the changes in non-cash working capital under operating activities include:
Three months ended June 30, | Six months ended June 30, | ||||||||
2020 | 2019 | 2020 | 2019 | ||||||
Decrease (increase) in amounts receivable | $ | (941) | $ | 3,128 | $ | (601) | $ | 1,713 | |
Decrease (increase) in prepaid expenses and other assets | 331 | (1,981) | 140 | (3,360) | |||||
Increase in other non-current assets | (1,990) | (52) | (1,791) | (74) | |||||
Increase (decrease) in amounts payable and accrued liabilities | 5,649 | (761) | 29 | 4,716 | |||||
Decrease in other non-current liabilities | (278) | (92) | (713) | (214) | |||||
Change in non-cash working capital | $ | 2,771 | $ | 242 | $ | (2,936) | $ | 2,781 |
Note 12
SEGMENTED INFORMATION
For the three and six months ended June 30, 2020 and June 30, 2019, the Trust's reportable operating segments of its investment properties and results of operations were segmented geographically, namely Toronto downtown and Other markets. The chief operating decision-maker measures and evaluates the performance of the Trust based on net operating income as presented by geographical location below. The performance of assets held for sale, properties under development, acquired properties and sold properties are considered separately by the chief operating decision-maker from properties in the regional segments. Accordingly, revenue, expenses and fair value adjustments related to these properties have been reclassified to "Not segmented" for segment disclosure along with property management and other service fees, lease termination fees, bad debt expense, straight-line rent and amortization of lease incentives. The Trust did not allocate interest expense to these segments since leverage is viewed as a corporate function. The decision as to where to incur the debt is largely based on minimizing the cost of debt and is not specifically related to the segments. Similarly, other income, other expenses, fair value adjustments to financial instruments, leasing, transaction and debt settlement costs, and income taxes were not allocated to the segments.
Three months ended June 30, 2020 | Toronto downtown | Other markets | Segment total | Not segmented(1) | Total | |||||
Operations | $ | 39,136 | $ | 12,159 | $ | 51,295 | $ | (591) | $ | 50,704 |
Investment properties revenue | ||||||||||
Investment properties operating | (15,372) | (5,522) | (20,894) | (1,631) | (22,525) | |||||
expenses | ||||||||||
Net rental income (segment income) | $ | 23,764 | $ | 6,637 | $ | 30,401 | $ | (2,222) | $ | 28,179 |
Fair value adjustments to investment | $ | 20,307 | $ | (330) | $ | 19,977 | $ | 226 | $ | 20,203 |
properties |
- Includes revenue, expenses and fair value adjustments related to properties under development, acquired and sold properties, property management and other service fees, lease termination fees, bad debt expense, straight-line rent and amortization of lease incentives during the period.
Three months ended June 30, 2020 | Toronto downtown | Other markets | Segment total | Not segmented(1) | Total | |||||
Capital expenditures(2) | $ | 5,732 | $ | 1,672 | $ | 7,404 | $ | 2,361 | $ | 9,765 |
Investment properties | 1,963,455 | 345,308 | 2,308,763 | 155,459 | 2,464,222 |
- Includes activity of properties under development and acquired properties.
- Includes building improvements and initial direct leasing costs and lease incentives during the period.
Three months ended June 30, 2019 | Toronto downtown | Other markets | Segment total | Not segmented(1) | Total | |||||
Operations | ||||||||||
Investment properties revenue | $ | 40,289 | $ | 12,609 | $ | 52,898 | $ | 4,133 | $ | 57,031 |
Investment properties operating | ||||||||||
expenses | (16,120) | (5,276) | (21,396) | (3,287) | (24,683) | |||||
Net rental income (segment income) | $ | 24,169 | $ | 7,333 | $ | 31,502 | $ | 846 | $ | 32,348 |
Fair value adjustments to investment | ||||||||||
properties | $ | 12,332 | $ | (1,612) | $ | 10,720 | $ | 1,602 | $ | 12,322 |
- Includes revenue, expenses and fair value adjustments related to properties under development, acquired and sold properties, property management and other service fees, lease termination fees, bad debt expense, straight-line rent and amortization of lease incentives during the period.
Dream Office REIT 2020 Second Quarter Report | 54
Three months ended June 30, 2019 | Toronto downtown | Other markets | Segment total | Not segmented(1) | Reconciliation(2) | Total | |||||
Capital expenditures(3) | $ | 4,285 | $ | 2,751 | $ | 7,036 | $ | 6,702 | $ | - $ | 13,738 |
Investment properties | 1,829,938 | 378,710 | 2,208,648 | 603,396 | (354,946) | 2,457,098 |
- Includes activity of properties under development and acquired properties.
- Includes activity of assets held for sale during the year.
- Includes building improvements and initial direct leasing costs and lease incentives during the period.
Six months ended June 30, 2020 | Toronto downtown | Other markets | Segment total | Not segmented(1) | Total | |||||
Operations | $ | 80,161 | $ | 25,154 | $ | 105,315 | $ | (1,863) | $ | 103,452 |
Investment properties revenue | ||||||||||
Investment properties operating | (32,144) | (11,268) | (43,412) | (2,933) | (46,345) | |||||
expenses | ||||||||||
Net rental income (segment income) | $ | 48,017 | $ | 13,886 | $ | 61,903 | $ | (4,796) | $ | 57,107 |
Fair value adjustments to investment | $ | 65,962 | $ | (44,322) | $ | 21,640 | $ | 3,269 | $ | 24,909 |
properties |
- Includes revenue, expenses and fair value adjustments related to properties under development, acquired and sold properties, property management and other service fees, lease termination fees, bad debt expense, straight-line rent and amortization of lease incentives during the period.
Six months ended June 30, 2020 | Toronto downtown | Other markets | Segment total | Not segmented(1) | Total | |||||
Capital expenditures(2) | $ | 10,891 | $ | 6,849 | $ | 17,740 | $ | 4,452 | $ | 22,192 |
Investment properties | 1,963,455 | 345,308 | 2,308,763 | 155,459 | 2,464,222 |
- Includes activity of properties under development and acquired properties.
- Includes building improvements and initial direct leasing costs and lease incentives during the period.
Six months ended June 30, 2019 | Toronto downtown | Other markets | Segment total | Not segmented(1) | Total | |||||
Operations | ||||||||||
Investment properties revenue | $ | 80,257 | $ | 25,028 | $ | 105,285 | $ | 9,311 | $ | 114,596 |
Investment properties operating | ||||||||||
expenses | (32,602) | (11,015) | (43,617) | (6,449) | (50,066) | |||||
Net rental income (segment income) | $ | 47,655 | $ | 14,013 | $ | 61,668 | $ | 2,862 | $ | 64,530 |
Fair value adjustments to investment | ||||||||||
properties | $ | 20,722 | $ | (6,750) | $ | 13,972 | $ | 2,935 | $ | 16,907 |
- Includes revenue, expenses and fair value adjustments related to properties under development, sold properties, property management and other service fees, lease termination fees, bad debt expense, straight-line rent and amortization of lease incentives during the period.
Six months ended June 30, 2019 | Toronto downtown | Other markets | Segment total | Not segmented(1) | Reconciliation(2) | Total | |||||
Capital expenditures(3) | $ | 9,860 | $ | 9,987 | $ | 19,847 | $ | 15,432 | $ | - $ | 35,279 |
Investment properties | 1,829,938 | 378,961 | 2,208,899 | 603,145 | (354,946) | 2,457,098 |
- Includes activity of properties under development and sold properties.
- Includes activity of assets held for sale during the year.
- Includes building improvements and initial direct leasing costs and lease incentives during the period.
Dream Office REIT 2020 Second Quarter Report | 55
Note 13
RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
From time to time, Dream Office REIT and its subsidiaries enter into transactions with related parties that are generally conducted on a cost recovery basis or under normal commercial terms.
On May 15, 2019, the Trust entered into a shared services agreement (the "New Shared Services Agreement") with Dream Asset Management Corporation ("DAM"), a subsidiary of Dream Unlimited Corp., which replaced the existing Management Services Agreement, Shared Services and Cost Sharing Agreement and Administrative Services Agreement (the "Existing Agreements"). As a result of the termination of the Existing Agreements, any incentive fees that may have been payable to DAM in the future under the Management Services Agreement were eliminated. Under the New Shared Services Agreement, the Trust acts as the property manager for DAM's income properties in Canada and DAM acts as the development manager for the Trust's future development projects. In order to take advantage of economies of scale, the New Shared Services Agreement maintains certain resource-sharing arrangements between the Trust and DAM, such as information technology, human resources and insurance, among other services as requested, on a cost allocation basis.
Under the New Shared Services Agreement, in connection with each development project, DAM earns a development fee equal to 3.75% of the total net revenues of the development or, for rental properties, 3.75% of the fair value upon completion, without any promote or other incentive fees. In connection with the property management services provided by the Trust to DAM, the Trust earns a fee equal to 3.5% of gross revenue of the managed income properties.
Related party transactions with DAM
The following is a summary of costs processed by DAM and the Trust for the three and six months ended June 30, 2020 and June 30, 2019:
Three months ended June 30, | Six months ended June 30, | ||||||||
2020 | 2019 | 2020 | 2019 | ||||||
Property management services fee charged by the Trust | $ | 45 | $ | 50 | $ | 102 | $ | 105 | |
Costs processed by the Trust on behalf of DAM (cost recovery) | 2,013 | 1,740 | 4,270 | 3,256 | |||||
Development fees charged by DAM(1) | (589) | (295) | (1,177) | (295) | |||||
Costs processed by DAM on behalf of the Trust (cost recovery) | (405) | (532) | (988) | (1,110) | |||||
Net fees and reimbursements from DAM | $ | 1,064 | $ | 963 | $ | 2,207 | $ | 1,956 |
(1) Development fees charged by DAM became effective May 15, 2019.
The following is a summary of the amounts due from (to) DAM as at June 30, 2020 and December 31, 2019:
June 30, | December 31, | |||
2020 | 2019 | |||
Amounts due from DAM | $ | 896 | $ | 658 |
Amounts due to DAM | (993) | (921) | ||
Net amounts due from (to) DAM | $ | (97) | $ | (263) |
During the year ended December 31, 2018, the Trust, along with DAM, a subsidiary of Dream Unlimited Corp., entered into a joint investment in Alate Partners, an investment company focused on the property technology market. The Trust and DAM each hold a 25% interest in the equity accounted investment. At June 30, 2020, the Trust had funded $5,585 since inception into the joint investment (December 31, 2019 - $4,591).
Dream Office REIT 2020 Second Quarter Report | 56
Related party transactions with DHAAT
The following is a summary of the amounts that were charged to Dream Hard Asset Alternatives Trust ("DHAAT") for the three and six months ended June 30, 2020 and June 30, 2019:
Three months ended June 30, | Six months ended June 30, | ||||||||
2020 | 2019 | 2020 | 2019 | ||||||
Property management and construction fees related to co-owned | $ | 180 | $ | 260 | $ | 506 | $ | 573 | |
properties | |||||||||
Costs processed on behalf of DHAAT related to co-owned properties | 315 | 385 | 532 | 808 | |||||
Amounts charged to DHAAT under the Services Agreement | 94 | 103 | 178 | 197 | |||||
Total cost recoveries from DHAAT | $ | 589 | $ | 748 | $ | 1,216 | $ | 1,578 |
Amounts due from DHAAT as of June 30, 2020 were $141 (December 31, 2019 - $102).
Related party transactions with Dream Industrial REIT
The following is a summary of the cost recoveries from Dream Industrial REIT for the three and six months ended June 30, 2020 and June 30, 2019:
Three months ended June 30, | Six months ended June 30, | ||||||||
2020 | 2019 | 2020 | 2019 | ||||||
Total cost recoveries from Dream Industrial REIT | $ | 1,238 | $ | 1,275 | $ | 2,533 | $ | 2,046 |
Amounts due from Dream Industrial REIT relating to the Services Agreement as of June 30, 2020 were $475 (December 31, 2019 - $302).
Amounts due to Dream Industrial REIT as of June 30, 2020 were $218 (December 31, 2019 - $2,275).
Distribution and interest receivable (payable) from (to) related parties
June 30, | December 31, | |||
2020 | 2019 | |||
Distributions receivable from Dream Industrial REIT(1) | $ | 1,617 | $ | 1,643 |
Distributions payable to DAM(2) | (1,034) | (958) | ||
Subsidiary redeemable interest payable to DAM(3) | (436) | (436) |
- Distributions receivable is in relation to the 9,177,705 Dream Industrial REIT units and 18,551,855 Dream Industrial LP Class B limited partnership units held by the Trust as at June 30, 2020 (December 31, 2019 - 8,792,170 Dream Industrial REIT units and 18,551,855 Dream Industrial LP Class B limited partnership units). Distributions receivable as at December 31, 2019 included bonus distributions pursuant to Dream Industrial REIT's distribution reinvestment plan.
- Distributions payable is in relation to the 12,410,002 REIT A Units held by DAM as at June 30, 2020 (December 31, 2019 - 11,490,702 REIT A Units).
- Subsidiary redeemable interest payable is in relation to the 5,233,823 subsidiary redeemable units held by DAM as at June 30, 2020 and December 31, 2019.
For the three and six months ended June 30, 2020, total distributions and subsidiary redeemable interest paid and payable to DAM were $4,411 and $8,726, respectively (for the three and six months ended June 30, 2019 - $3,698 and $7,328, respectively).
Dream Office REIT 2020 Second Quarter Report | 57
Note 14
COMMITMENTS AND CONTINGENCIES
Dream Office REIT and its operating subsidiaries are contingently liable under guarantees that are issued in the normal course of business, on certain debt assumed by purchasers of disposed investment properties, and with respect to litigation and claims that arise from time to time. In the opinion of management, any liability that may arise from such contingencies would not have a material adverse effect on the condensed consolidated financial statements as at June 30, 2020.
In 2015, a subsidiary of the Trust received notices of reassessment from both the Canada Revenue Agency and the Alberta Minister of Finance with respect to its 2007, 2008 and 2010 taxation years. These reassessments relate to the deductibility of certain tax losses claimed by the subsidiary prior to its acquisition by the Trust. These federal and provincial reassessments, if upheld, could increase total current taxes payable, including interest and penalties, by $12,790. No cash payment is expected to be made unless it is ultimately established that the Trust has an obligation to make one. Management is of the view that there is a strong case to support the position as filed and has contested both the federal and provincial reassessments. Since management believes that it is more likely than not that its position will be sustained, no amounts related to these reassessments have been recorded in the condensed consolidated financial statements as at June 30, 2020.
At June 30, 2020, Dream Office REIT's future minimum commitments are as follows:
Minimum payments due | ||||||||
Within 1 year | 1-5 years | > 5 years | Total | |||||
Operating lease payments for low-value assets | $ | 143 | $ | 250 | $ | - | $ | 393 |
Operating commitments | 3,417 | 3,241 | - | 6,658 | ||||
Fixed price contracts | 222 | 888 | 2,023 | 3,133 | ||||
Total | $ | 3,782 | $ | 4,379 | $ | 2,023 | $ | 10,184 |
In 2018, the Trust originally committed US$7,250 to fund investments in real estate technologies, of which US$4,233 was funded as at June 30, 2020 (December 31, 2019 - US$3,483). Subsequent to the quarter, the Trust funded an additional US$750.
The Trust is contingently liable under guarantees that are issued on certain debt assumed by purchasers of investment properties totalling $112,395 (December 31, 2019 - $114,291) with a weighted average term to maturity of 3.2 years (December 31, 2019 - 3.7 years). The geographic distribution of the guaranteed debt is: 78% in British Columbia, 14% in Ontario and 8% in Québec.
In the event that a contemplated development project proceeds, the Trust has committed to contribute one of its investment properties with a fair value of $40,964 to the development project.
As part of the sale of F1RST Tower in 2018, the Trust committed to a construction loan facility of up to $12,500. The construction loan facility bears interest at 4.5%, matures on April 10, 2022 with an option to extend to April 10, 2023, and is secured by the property. As at June 30, 2020, the Trust had funded $1,884 under the construction loan facility.
Dream Office REIT 2020 Second Quarter Report | 58
Note 15
RISK MANAGEMENT
The Trust previously disclosed its risk exposures in its annual consolidated financial statements for the year ended December 31, 2019. The risk exposures are unchanged except as disclosed below.
Increase in credit risk as a result of COVID-19
Credit risk arises from the possibility that tenants in investment properties or counterparties to financial instruments may not fulfill their lease or contractual obligations. The Trust mitigates its credit risks from its tenants by attracting tenants of sound financial standing and by diversifying its mix of tenants. The Trust manages its credit risk on vendor takeback mortgage receivables by lending to reputable purchasers of properties, retaining security interests in the sold investment properties, monitoring compliance with repayment schedules, and evaluating the progress and estimated rates of returns of financed projects. The Trust manages its credit risk on debt guarantees on assumed debt by guaranteeing debt assumed by reputable purchasers of properties, monitoring the debtors' compliance with repayment schedules and loan covenants, and obtaining indemnities from parties with strong covenants.
COVID-19 and the measures to contain it have created significant uncertainty in the general economy. A deterioration in the economy may impact the ability of tenants to meet their obligations under their leases or contracts. The Trust continues to assess the effect of economic conditions on the creditworthiness of our tenants and counterparties. As part of this assessment, the Trust reviews the risk profiles of its tenant base to assess which tenants are likely to continue meeting their obligations under their leases and which tenants are at a greater risk of default. We expect that certain tenants may have difficulty meeting their obligations under their leases, resulting in an elevated risk of credit losses. We also expect that tenants may apply for government assistance programs and require assistance in the form of short-term rent deferrals.
As at June 30, 2020, the Trust has recorded COVID-related provisions totalling $1,496, which are included in investment properties operating expenses within the condensed consolidated statements of comprehensive income. This provisions balance represents an estimate of potential credit losses on our trade receivables for all uncollected rent as at June 30, 2020, in addition to the 25% of recurring gross contractual rent that the Trust expects to forgive, subject to the participating tenants' eligibility for participation in the Canada Emergency Commercial Rent Assistance program operated jointly by the federal and provincial governments. Also included in investment properties operating expenses is the impact of a government program totalling $1,160 that the Trust qualified for during the second quarter and collected subsequent to the quarter.
The Trust assesses the credit risk of its vendor takeback mortgages receivable by evaluating the credit quality of counterparties, whether the counterparties are fulfilling their obligations under the terms of the agreements and the value of the collateral relative to the balance of the receivable.
Note 16
FINANCIAL INSTRUMENTS
Fair value of financial instruments
Quoted market prices represent a Level 1 valuation. When quoted market prices are not available, the Trust maximizes the use of observable inputs. When all significant inputs are observable, the valuation is classified as Level 2. Valuations that require the significant use of unobservable inputs are considered Level 3. The Trust's policy is to recognize transfers in and transfers out of fair value hierarchy levels as of the date of the event or change in circumstances that caused the transfer. There were no transfers between Levels 1, 2 and 3 during the period.
Financial instruments where the carrying value does not approximate fair value are noted below:
June 30, 2020 | December 31, 2019 | |||||||||
Carrying | Carrying | |||||||||
Note | value | Fair value | value | Fair value | ||||||
Investment in Dream Industrial REIT | 5 | $ | 325,820 | $ | 296,152 | $ | 320,295 | $ | 359,300 | |
Non-current vendor takeback mortgage receivable | 35,984 | 33,735 | 34,100 | 33,084 | ||||||
Mortgages | 6 | 995,237 | 1,032,175 | 1,003,081 | 1,016,143 | |||||
Demand revolving credit facilities | 6 | 119,934 | 122,000 | (2,709) | - | |||||
Debentures | 6 | - | - | 150,000 | 150,000 |
Dream Office REIT 2020 Second Quarter Report | 59
Amounts receivable, cash and cash equivalents, tenant security deposits and amounts payable, and accrued liabilities are carried at amortized cost, which approximates fair value due to their short-term nature. As at June 30, 2020, the carrying value of the current vendor takeback mortgage receivable approximates fair value. Subsidiary redeemable units and the Deferred Unit Incentive Plan are carried at amortized cost, which approximates fair value as they are readily redeemable financial instruments.
Note 17
SUBSEQUENT EVENTS
Subsequent to June 30, 2020, the Trust purchased for cancellation an additional 255,665 REIT A Units under the normal course issuer bid at a cost of $5,085.
Dream Office REIT 2020 Second Quarter Report | 60
Corporate Information
HEAD OFFICE
Dream Office
Real Estate Investment Trust
State Street Financial Centre
30 Adelaide Street East, Suite 301
Toronto, Ontario M5C 3H1
Phone: (416) 365-3535
Fax: (416) 365-6565
INVESTOR RELATIONS
Phone: (416) 365-3535
Toll free: 1 877 365-3535
Email: officeinfo@dream.ca
Website: www.dreamofficereit.ca
TRANSFER AGENT
(for change of address, registration or other unitholder enquiries) Computershare Trust Company of Canada
100 University Avenue, 8th Floor Toronto, Ontario M5J 2Y1 Phone: (514) 982-7555 or
1 800 564-6253
Fax: (416) 263-9394 or 1 888 453-0330
Website: www.computershare.com
Email: service@computershare.com
AUDITOR PricewaterhouseCoopers LLP
PwC Tower, 18 York Street, Suite 2600 Toronto, Ontario M5J 0B2
CORPORATE COUNSEL
Osler, Hoskin & Harcourt LLP
Box 50, 1 First Canadian Place, Suite 6200 Toronto, Ontario M5X 1B8
STOCK EXCHANGE LISTING
The Toronto Stock Exchange
Listing Symbol: REIT Units, Series A: D.UN
For more information, please visit dreamofficereit.ca
Corporate Office
State Street Financial Centre
30 Adelaide Street East, Suite 301 Toronto, Ontario M5C 3H1 Phone: 416.365.3535
Fax: 416.365.6565
Website: www.dreamofficereit.ca
Email: officeinfo@dream.ca
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Dream Office REIT published this content on 06 August 2020 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 06 August 2020 22:08:05 UTC
