Dream Office Real Estate Investment Trust (OTC:DRETF) Q2 2022 Earnings Conference Call August 5, 2022 10:00 AM ET
Company Participants
Michael Cooper – Chairman and CEO
Gordon Wadley – COO
Jay Jiang – CFO
Conference Call Participants
Sairam Srinivas – Cormark Securities
Mark Rothschild – Canaccord Genuity
Matt Kornack – National Bank Financial
Scott Fromson – CIBC
Mario Saric – Scotiabank
Pammi Bir – RBC Capital Markets
Jenny Ma – BMO Capital Markets
Scott Fromson – CIBC
Operator
Good morning, ladies and gentlemen. Welcome to the Dream Office REIT Q2 2022 Conference Call for Friday, August 5, 2022. During this call, management of Dream Office REIT may make statements containing forward-looking information within the meaning of applicable securities legislation.
Forward-looking information is based on a number of assumptions and is subject to a number of risks and uncertainties, many of which are beyond Dream Office REIT’s control that could cause actual results to differ materially from those that are disclosed in or implied by such forward-looking information.
Additional information about these assumptions and risks and uncertainties is contained in Dream Office REIT’s filings with securities regulators, including its latest annual information form and MD&A. These filings are also available on Dream Office REIT’s website at www.dreamofficereit.ca. Later in the presentation, we will have a question-and-answer session. [Operator Instructions]
Your host for today will be Mr. Michael Cooper, Chair and CEO of Dream Office REIT. Sir, you may begin.
Michael Cooper
Thank you very much, operator and good morning to everybody. Welcome to Dream Office’s second quarter conference call. Today, I’m here with Gord Wadley, the Chief Operating Officer; and Jay Jiang, the Chief Financial Officer and they will speak to the results. I just want to start with a couple of opening comments on what’s happening at Dream Office.
Firstly, we’re very pleased with the assets that we own. We did a lot of work to reduce the portfolio to these assets. We spent a lot of time improving the assets, decarbonizing the assets and I think we’ve got sensational assets that are irreplaceable. The office sector is a complicated sector in a complicated time. So what we’re finding now is like, as an example, we’d like to redo our space and make it a little bit more modern.
However, we’re really not sure, how we should change our office space, because we’re not convinced that how it’s going to be used. Now I’ve met with few other CEOs, who are at exactly the same position. All of whom want to have at the same amount of space as they have now. But we’re still uncertain, so we’ve been seeing a lot more people coming downtown. We’re really pleased that the demand for restaurants downtown is huge.
There’s a lot more traffic and we think this fall, we’ll see a lot more people. So I think things are coming around and we expect that, as we head into the fall, we’ll see a lot more people in the office and we expect to see some more leasing. We’re pleased that in the first six months of the year, we’ve had consistent occupancy and Gord will get into a little bit about some of the delays, but we’ve got some wonderful restaurants that have made commitments to our buildings.
And we think that not only will they be great tenants that’ll also attract other great tenants. So as we look forward, we’re still little bit uncertain what normal occupancy is, we believe it significantly higher than where we are now. We’re not – just not certain as to how long it may take to hit the new normal.
But we think there’s a lot of embedded value in our business and I think that our valuations of the assets have been pretty conservative over the last 2.5 years. And even notwithstanding that between cash that we’re with retaining and the industrial REITs performance. We’ve seen net asset value grow consistently.
Gord, you want to get into the operations?
Gordon Wadley
I will, thanks, Michael. It’s very nice to be with you all today and I hope everyone’s doing really well. Much in line with what Michael just stated, as there – as our industry continues to navigate what wholesome return to work looks like specifically to our clients, prospective tenants and various industries.
Our team is staying the course to offer best-in-class operations, elevated level of hospitality, building quality and to drive leasing as we wrap up construction to future proof our portfolio for the long term. The City of Toronto has seen market vacancy grow and stabilize from pre-pandemic levels just around 2% to the current levels of about 14% across all classes.
Our portfolio has moved in lockstep with this trend, where our core portfolio relating to current and committed occupancy on average is trending at approximately 89%, which is up just over 20 basis points from last quarter. Although, we saw some positive momentum, there is tempered optimism from leasing, operations and construction as our clients, albeit slower than expected begin to open their doors and come back to work or like Michael said, are diligently planning or coming back potentially in the fall after labor day.
We are seeing some positive variables that indicate improvements to occupancy long-term, as our tours are consistently growing week-to-week, sublease space has stabilized, now representing only about 2% of our portfolio. We are tracking already this year to do more square footages absorbed than last year and complete a higher number of both new leases and renewals.
Net rents are trending quite strong with averages well over CAD30 a square foot, across all of Toronto in parallel to this we’re seeing strong NERs despite cost pressures associated with construction, procurement of deliveries and materials and the time it takes to build. In our other markets portfolio, current and committed occupancy remained largely unchanged quarter-over-quarter at 79%.
We’re seeing better toured view velocity in Saskatchewan, where we did about 38,000 square feet at the beginning of the year. Again rates in NERs of 16% and 60% respectively compared to our budget. Overall across all markets, we’re quite pleased with how our team has managed communications with existing tenants and clients. Collections are back up at pre-pandemic levels of over 99% and this is also signified by over 75% retention ratio at mid-year for 2022.
Year-to-date, leasing volume has picked up versus last year, as we’ve done both driven by 43,000 square feet, totaling just above 55 deals both new and renewal. These are all at pre-pandemic rates in hours and NERs. And I just wanted to note, this is probably already approximately 100,000 square feet more than this point last year.
We have some cautious optimism with the additional 115,000 square feet at [indiscernible] in conditional deals in very active negotiation, which we will report on the subsequent quarters. One key driver to our future success that I just wanted to touch on is our curated retail strategy. Over the past few quarters, we’ve been highlighting the negotiations and prospect of completing four very marking deals on our Bay Street collection.
We’re very proud to say today that we completed three of these deals with arguably Canada’s top restaurant tours that total approximately 30,000 square feet. And we have two additional marquee deals that are conditional. Our completed retail deals are not reflected in this quarter’s stats and just firmed up in the past few days. When complete, this will total approximately 50,000 square feet of total absorption at average net rents close to $70 a square foot and annualized NOI impact of just over $3 million.
These are all in our most desirable note. And in finished shop and supporter of thesis, are bringing in elevated and all new experienced boutique luxury to the financing forum. The global challenges associated with construction have been very well publicized, our teams worked very hard to supply challenges, mandated construction shutdowns and have managed well and over 95% complete our Bay Street collection project with all the bathrooms, all the lobbies and our future alleyway all complete.
We’re effectively just finishing up the full lazing refacade program at 330 Bay. This is scheduled to be completed at the end of September. We are all well underway of 366 Bay and tracking quite well to budget for this 40,000 square foot asset. The feedback has been tremendous to-date and we’re receiving a steady influx of tours. We really look forward to showing you the completed product and hopefully we’ll get chance to walk you through in person very soon. For 366 Bay on context, we’re looking at spending about $16 million on a $22 million building.
We anticipate a positive value increased upon construction completion at the end of Q1, 2023. In unison with this project, we’re also doing 67 Richmond, which we previously had on the books for about $30 million. We injected about another $12 million in capital and upon completion, we’re targeting about a 5.5% yield on an adjusted cost base.
We took both buildings offline as these are full feet retrofits, where we were replacing all the buildings systems ensuring we meet our GHG reduction targets, introducing all new control technologies, new lobbies, new bathrooms and curtain walls to bring in more light penetration and also have a direct bird’s eye view of our alleyway project and the great animation associated with it.
We often get asked by people on this call, regarding 357 Bay, our client is well into their fit up and doing a great job on what’s going to be a showcase location for them. As context, we spent about $29 million on time and on budget to the building that was valuated about $24 million to now over $62 million. And we also dramatically decarbonized and fully removed over 30 tonnes of asbestos, added an all new HVAC and mechanical to make this a stainable, clean example of what a premier heritage asset should look like [indiscernible].
Being a good community steward is absolutely core to our business, by upgrading our assets, we put a real focus on improving consumption metrics and data of GHG and carbon utilization associated with our overall net-zero strategy. Rapidly working with CIB on our $113 million debt facility to dramatically reduce our carbon emissions by 40% over the next three years and adhere to our very lofty goal to be net zero by 2035.
These initiatives are at the forefront of what we hope will separate us from all our peers. As a landlord and leader, we have tremendous opportunity to influence and improve our carbon footprint and in turn, aligned with the growing sustainability demands for our clients. Last year, we had the country’s best first year GRESB score at 91 and our team has been working very hard on building on that momentum for year end, equal or better score.
Also we have the country’s to Sustainalytics score and are among the top 10% in this rating globally. Sustainalytics is a Morningstar company that rates sustainability of listed companies based on their environmental, social and corporate governance performance and then effectively applies risk rating. In addition, we’re signatory to UNPRI and we also committed to net zero Asset Managers, which stem from COP 26 and represents the largest organization of asset managers globally.
Leasing and operating metrics side, general public corporations and our government at all levels over the past few years to become much more sophisticated in understanding the importance of these ESG verticals, and as such, there have been tremendous partners, supporters and advocates to integrate programs into our hard assets, making the much more resilient and appealing to various churning tenants..
Operating leases are a key component of this commitment that tenants are making to the physical space and work environments. This past quarter I’m very proud of the team, as we are awarded certified platinum and recognize like Green Lease Leaders Association as having the most sustainable lease and operating standards in all of Canada.
Creating healthy and positive buildings have always been a cornerstone of our Dream Office approach and a real source pride for our team. As a company, we’re very fortunate to and focused on great buildings and irreplaceable locations and used our capital in time to improve our abilities to a whole new standard of boutique luxury that focuses on sustainability, hospitality and community stewardship.
As always, I always welcome an opportunity to show or share in person our progress and please stay tuned for some very exciting announcements from our new committed retail partners.
With that, I’ll turn it over to Jay.
Jay Jiang
Thanks a lot, Gord. Good morning, everybody. Originally our goal for 2022 have been to minimize before COVID, so we can manage our business in a more normalized operating state, both economically and psychologically. While that has been true to some extent till COVID coming up less in our conversations, we now find ourselves in a rather uncertain economic environment, facing significant supply chain disruptions, high inflationary environment and rising interest rates.
The return to work for larger users of office space in Toronto has lagged a bit, as a result of the summer and a competitive labor market. However, we are seeing good progress and improvements in utilization of both our office buildings and parking garages. We believe post Labor Day, will be a meaningful milestone, see increasing activity from both existing and prospective tenants.
We think despite all these challenges noted above, our company has continuously delivered stable results over the past few years. We own a very well located portfolio of assets in Downtown Toronto, and if we take good care of them through our modernization and decarbonization programs, we can capitalize on flight to quality and have a very valuable and safe portfolio of assets that we will be happy to own for a very long time.
On the quarter, we recorded $0.38 of diluted FFO per unit or flat year-over-year. We had income contribution from completed development and also a share with higher income from our Dream Industrial REIT investments, offset by lower in-place occupancy, higher interest expenses and drop off of onetime income in the comparative periods such as the wage subsidy programs
Our committed occupancy was unchanged quarter-over-quarter at 85%, which consisted of 20 basis points increase in downtown Toronto and 30 basis points decrease in other markets. We have less than 150,000 square feet of expiring consisting of 33 leases for the remainder of the year, which we feel is quite manageable, especially considering that fared against the 150,000 square feet of deals that we are currently in negotiations for.
Now as an update to our internal model. We are currently projecting diluted FFO per unit of approximately $1.50 for 2022. We have factored in higher interest rates as refinancing and variable rates are up 200 basis points since January and also reflected the timing of lease commencements that have been signed to date. Now for clarity, we are tracking well against budget on committed occupancy target of around 90% in downtown Toronto and 80% in other markets.
However, these perspective tenants most of them all is leader restaurants have lagged a bit in taking possession of the space usually longer than anticipated texturing periods, caused by supply chain disruptions and elevated construction costs. We’d like to highlight that the leases signed this quarter we’re at very healthy spreads at 48% higher than expiry in Toronto, and we are getting record rents on our retail and restaurant spaces, which have not yet been reflected in the results.
This means, for the purpose of modeling, some of the budgeted NOI that was originally anticipated in the second half of the year will be recognized in the first half of 2023, which will contribute favorably to stabilize cash flow and value. Our Q2 NAV was $32.83, which is relatively flat quarter-over-quarter. Given the backdrop of interest rate and cap rate sensitivities, we reviewed our valuation assumptions in detail this quarter.
Under the direct cap method, our downtown Toronto assets were 82% of our portfolio by fair value, and using a stabilized cap rate of approximately 4.8% and market rent of just over $31. Our cap rates remain comfortably within the midpoint of ranges of latest published broker increased our cap rate service and our time leases year-to-date ear to date have been hired and published market rents.
When we reconcile this methodology to discount cash flow models and latest available private market trade data, we think our assets’ values are quite reasonable. Our balance sheet remains very safe. We have $145 million of cash availability on our credit facility and $130 million available on the Canadian Infrastructure Bank facility that can be used for building retrofit and GHG emission reduction programs.
We think we have ample liquidity and resources for all operational capital needs for the foreseeable future. For the remainder of the year, unsurprisingly, our focus is to lease space, because that is a driver and outlet for cash flow as to liquidity, value and investor sentiment. We are encouraged that the building capital we invested across Bay Street is starting to show fruition and the restaurant REIT will significantly increase rents, value and tenant appeal across our portfolio.
We intend to adopt a similar type of buildings across all of our capital initiatives, including 2 smaller development projects at 356 Bay and 67 Richmond. We are conscious to improve the value and return on capital on every dollar invested on behalf of our unitholders. Beyond leasing and value add capital, our NCIB program is renewing in August and we intend to continue to repurchase our units on an opportunistic basis given the disconnect between implied valuations versus the price acquired or to grow the new property today.
Overall, we’ll remain cognizant over the challenges of managing a commercial office business. But we just want to say that we remain very committed to the company because we see significant value and quality in our assets.
Operator, we’re happy to take any questions now.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] We have our first question from Sairam Srinivas with Cormark Securities.
Sairam Srinivas
Thank you, operator, good morning, guys. And my first question is for Gord. Gord, in terms of the back-to-office momentum what are you hearing from a tenant in terms of their plans heading into the fall? As well as generally in terms of office utilization rates. I wasn’t been looking for Q2 and right now post quarter?
Gordon Wadley
Yes, that’s a good question. You broke up a little bit on there, but I think you asked, what we’ve been seeing and what kind of types we can see from our tenants on their return to work, it’s the first part of the question?
Sairam Srinivas
Yes.
Gordon Wadley
Effectively what we seen, a lot of our private sector tenants we’ve seen a bit more of an appetite on them working with us to understand what our backward policies or the improvements that we’ve done so they can communicate with their tenants, get them on-boarded feeling comfortable about coming back.
And we’ve seen a big difference to be quite candid, that we’ve seen a big difference at the occupancy levels at our private sector tenants versus our public sector tenants. Our private sector tenants will probably seen in just over about 50% or 60% occupancy ratio based on people coming through doors, checking through.
Our public sector tenants, did a bit of a different story. It’s a bit of a lower occupancy ratio of what we’ve been doing is, communicating with them, working with them. What we are hearing at the federal provincial levels, we’ll start to see a lot more traction after Labor Day and getting people back into the office.
So really for us, just in communicating what our operating protocols are, putting them on paper, sharing them with their tenants, so they can in turn share them with their clients and their staff, so people feel more comfortable getting that. And then doing a lot of tours and walking them through and showing them the improvements how we’ve done around UV technologies and the HVAC in the elevators and just raising the overall comfort level.
So, right now, I’d say, private sector tenants 50% to 60% back in the office. Public sector much lower, but we’re pretty optimistic that the public sector tenants will start to come back in earnest from September. And then, my apologies, the second part of your question, I didn’t quite get, because the phone lines broke up.
Sairam Srinivas
Got it. I think you answered my question, because this was basically on utilization rates. So I think there was a good color. Just probably digging back on the public side, would you say that numbers close to about 30% to 40% I guess, in terms of occupancy?
Gordon Wadley
Yes, you know that it’s really department driven. I’d say that’s a really good number to save, there is a lot of back-office and it says board to above 30% right now. But we have some client facing, this public sector tenants that is at a much higher occupancy levels. So it’s really department specific.
If you’re working at financial revenue for the Federal or Provincial Government, may not need to be in this much, but if you working for passports, immigration, infrastructure, they generally seem to be in a little bit more.
Sairam Srinivas
And that makes sense. Thanks for the color, Gord. And my last question, I guess was for Jay. Jay, I know last quarter you kind of guided in terms of occupancy being or maybe I think in Q4, when you guided for the occupancy being fairly stable for the rest of 2022. Is that something you probably maintained? There is no — do you see any tenants leaving?
Jay Jiang
Yes thanks for the question so most of our maturities happen in the first half of the year. For the rest of the year in my prepared remarks that we only have 150,000 spread across 33 leases. So the point there was, it’s quite manageable one. And two, there is a lot of leases block and tackle. So we feel like we’ve been addressed most of them, and we could stabilize our committed occupancy around the 90%, which was our original goal and that is really what we see as a driver of value and cash flow, looking out into 2023 over quite optimistic today about that.
Just on the in-place occupancy, where we’re a bit lighter. Our comments were that the hands are taking a bit longer than previously or pre-COVID in terms of taking the base and getting their fixtures done. So what we’re seeing now is a lag for a bigger spread between in place and committed occupancy by around 200 basis points. So we’re quite comfortable and getting our committed pretty high year end with we’re really we’re focused on.
But the in place will lag a little bit that our composition of the nature of the leases that we’re signing. They’re a bit more complicated restaurant, larger and more unique tenants and it’s that by saying disruptions that giving them a bit more time to do their construction work.
Sairam Srinivas
That’s great color. Thank you so much, I’ll turn it back.
Operator
Thank you. Our next question comes from Mark Rothschild with Canaccord Genuity.
Mark Rothschild
Thanks and good morning, everyone. Maybe just to start and maybe for Michael, if you could expand a little bit on the capital program as far as how you look at, whether you want to sell more assets or buyback units and you have some projects going on with investment properties. How you look at that over the next year?
Michael Cooper
I think, we started a lot of programs with the idea of comes with the idea of creating excellent buildings and we’re continue with that. On the development front, we are pretty much delayed things a little bit, because we don’t really want to put the capital into it now. We’re still bullish on buying back stock and I think that, we’ve got the liquidity to do that and we’ve got other source of liquidity, if we need it.
So I would say, we’re not looking to do any acquisitions. We’re probably spending less money on our existing that we planned. But the key things we’re continuous. 2200 Eglinton is coming along, and we could bring in a partner there if we choose. And that could help with liquidity and also development. But for the most part, we want to see — just continuing with what we’ve been doing.
Mark Rothschild
Okay, great, thanks. And it does sound like there’s some good leasing going on. The TIs were up in the quarter. To what extent is that a trend or is that maybe just some specific leases this quarter? Obviously, any different quarter could jump around?
Gordon Wadley
Yes, that’s a good question. You pulled it out, Mark. The cost in the TIs have been higher due in large part to construction costs. Jay have done it in his remarks, a little bit by construction cost kind of quarter-over-quarter and escalated quite a bit from materials. And not just the procurement of materials, its securing trades and executing on time and that’s been one of the biggest factors that we’ve seen. We’ve had a little bit more money in the deals, just to try to accelerate and get the space built in time. But it’s just a combination of materials and getting the people to do the work as well, do its — proven a bit of a challenge that I think all that works we’re dealing with right now.
Mark Rothschild
So, is it more to do with from my — you’re saying more to do with just the cost of getting things done and not so much as a change in or increased demands from tenants?
Gordon Wadley
Yes, I’d say, it’s more of cost and getting things done. And to be honest with you too Mark, tenants have a little bit more leverage with the growing vacancy over the last quarter or two that may traditionally have in the past. So we’re starting to see a little bit more requests on potentially free rent, in term free rent as well too, where sometimes we’re breaking that deals and we’ll have TI.
Mark Rothschild
Okay, great, thanks so much.
Gordon Wadley
Welcome.
Operator
We have our next question from Matt Kornack with National Bank Financial.
Matt Kornack
Good morning, guys. With regards to the property you have for sale are in the process of selling in Saskatchewan. Can you give us a sense as to who the buyer is and also what the NOI impact would be from the sale of that if it is – if it goes through?
Jay Jiang
Sure. It will be domestic low buyer, but sort of the capital may be from outside the country and a private buyer and it’s strategic for them. And in terms of the impact on the financials, the cap rate will be between 7% to 8%. But if you want to talk free cash flow, because there’s a lot of capital commitments to it, you’re looking at more on that too.
Matt Kornack
Yes. So sorry, 7% to 8% on in place or is that a stabilized number? Because it looks like most of the occupancies that you’ve disclosed are a little lower in that market.
Jay Jiang
7% to 8% would be the in-place four quarter annualized.
Matt Kornack
Okay, fair enough. And then on 67 Richmond, did that contribute to NOI at all in Q2 or was it already vacated throughout most of the quarter?
Jay Jiang
Very, very [technical difficulty] low. That was basically we had been planning for this building to become our next heart project for over a year now. And I was just fortunate that the tenant leases coming up and we already had approved there a couple of some cases with 357 Bay and the capital we were putting across the State Street and once we are seeing strong traction on the retail and restaurant side, it was natural for us to become the next building and we’re quite excited to bring this to the market when its ready
Matt Kornack
And then I think Gord said 12 million of CapEx associated with the repositioning of that. Is that correct?
Matt Kornack
That’s correct, Matt.
Matt Kornack
Okay and last one, Gord. Just in terms of — I missed your commentary in terms of the timing as to when you’d expect the restaurants to be in their space in this space to be fit out. And then maybe as ancillary question on 357 Bay. Do you have a sense as to when we work with maybe fitting out their space. Just in terms of getting that Bay Street corridor looking to its best shape?
Gordon Wadley
Yes, so for both of your question. So we worked actively, working on this space right now. They anticipate in early Q1, any completion date. I was just in there the other day, doing a tour and it looks incredible. Starting to do a great job, the exterior looks great as well too. And the work we’ve done is really strong. I think on the restaurant side, Matt, there’s going to be a couple of different dates.
Our partners are pretty particular on when they launch. But we are actively doing the construction on one of our very large restaurant spaces right now, we are well underway. And we anticipate that potentially kind of summer or fall of next year, we’ll be in a position to be opening and cash flow in that space.
Matt Kornack
Okay, perfect. And then sorry, Jay, one last follow-up on the timing of the Saskatchewan disposition. Should we expect that to close in the near term or is it that far along in the process?
Jay Jiang
You never know as, trying to sell a building today, but we’re hopeful that we wrap up the rest of the paper work can wrap up the rest of paper work and see by 30, 60 days both.
Matt Kornack
Okay, perfect. Thanks guys.
Operator
We have our next question from Scott Fromson with CIBC.
Scott Fromson
Hi, thanks and good morning, gentlemen. Just wondering, what impact you’re seeing from the tax slowdown in terms of current tenants. I was looking to downsize or put a space upper sublease?
Michael Cooper
Yes. So in our portfolio, Scott, it hasn’t changed too much really since the beginning of the pandemic. Most of our larger tenants, we’ve already had discussions earlier in the past two years. So I don’t foresee us getting any surprises internally from the slowdown. But just as some general market color. I am hearing and seeing that there will be some more sublet space coming on in the financial court and looking West region from some tech users.
But for the most part in the financial court, the buildings that we own, I think we’re going to weather the tech slowdown quite well just because we don’t have as much exposure. And we’ve just been consistently and constantly communicating with them. And one of our larger tenants were actually well underway on doing a blend and extend as well. So we foresee that we’re not going to see much resident [technical difficulty].
Scott Fromson
And Gordon, have you seen a change in tone and volume of discussions with prospective tenants I guess, either intact or other industries?
Gordon Wadley
Yes, I want to be cautiously optimistic about how I see this so, tours have picked up a little bit but to be candid with you, Scott. Deals are just taking longer and there is not the same sense of urgency. There was to get deals over the goal line and seek deals as there were — that we were seeing before 2020. Like I think there is activity there, people are still coming through the door, they’re very keen on seeing what we’ve done and how we can lend ourselves to their business. But the deals in general are just taking longer.
And I think tenants are starting to get reserve to the fact that building their space and mobilizing and will be home work just taking longer as well too. So we’re starting to see a lot of tenants quite frankly, passed the two year mark that may have two years, 2.5 years of term, still on their existing space. Already come a little bit earlier to get a sense of what we’re doing, so they can start to plan ahead on what they’re occupancy decisions are, because it’s just taking a little bit longer overall.
Scott Fromson
And maybe sort of a follow-on on that. Putting aside the retail leasing component of new leases can you comment on expected timing of closing the gap between in place and committed occupancy?
Gordon Wadley
Yes Jay and I were talking about this yesterday and what we’re seeing from in place they committed. We are hoping kind of by next summer, we’ll be in a position where we’ll see that gap closing a little bit for us in our forecast and how we’ve been looking at deals. We’ve been pushing to deals out probably two to three months, it’s usually taking 60 to 90 days more to get these deals commencing.
You get the deal done, but at 60 or 90 days more to do the fixed rent and other things. So it’s taken a little bit longer, so the gap right now is probably two to three months more than we’ve traditionally seen. And we’re hoping things stabilize in terms of the labor and trade market at little bit more towards next summer and we’re in a position where we can see a hybrid completion and cash flow close the gap a little bit.
Jay Jiang
Yes, Just on the key metrics, so I think by year-end, you’ll see some meaningful progress on getting the in-place occupancy is up. And it’s always going to trail a little bit on, any lease flew sort of time from over the next year or so. But a lot of the leases have been committed and so we’ll just start by two more will be pretty good. And then you’ll gradually see the income pick-up in Q1, Q2 by next summer or hopefully our mid occupancy will be a lot higher and you surprised, you’re not to handle on the in-place as well.
Scott Fromson
Thanks, Gordon, Jay and actually maybe just one more for Jay. Are there any other major properties, I mean, I think it’s sort of the like 40 to – 40,000 square feet plus that you’re considering taking offline for redevelopment?
Jay Jiang
At this right now, I think we’re pretty much close to getting through the rest of the base three assets. We will be doing capital programs on a selective basis and finally leverage our CIB program as well to decarbonize the building. But for our entire building re-modernization then re-development, I think that would probably be the last one grow-on.
Scott Fromson
Okay. Thanks, gents. It’s very helpful. I’ll turn it to back. Thank you.
Operator
Thank you. [Operator Instructions] We have our next question from Mario Saric with Scotiabank.
Mario Saric
Good morning, guys. Maybe an operational question for Gord. Maybe bit more detail, but I’m curious, if Dream keep stock on the percentage of tenants on your lease renewals that are kind of expanding versus contracting versus maintaining at least renewal. I guess the occupancy stands will highlight the trend, but just curious to see if there’s more color on that front? And as you can separate out between public versus private tenants and so on?
Gordon Wadley
Yes, now it’s a good question. We don’t per se slackness necessarily on that. What I can say is, few of our bigger tenants as people know State Street and net other groups had downsized a little bit. What we’re seeing from the Government is that, it’s basically kind of a wait and see, stay in place. We’re seeing some shorter-term renewals as it until they’re in a position to make occupancy decisions. So public sector for the most part, we haven’t seen very much downsizing.
Some of our larger tenants earlier on in the pandemic and then as we saw over the course of the last year, we saw some marginal downsizing, one or two tenants we saw — private sector we saw a little bit bigger downsizing. But we’re starting to see some tenants grow as well too. We’ve got a lot of smaller tenants in our portfolio.
So we’re starting to see a lot of private sector tenants, maybe take an extra thousand square feet to put another court room. Maybe do some exterior perimeter offices, so it’s a mix. At this point Mario, I’ll be shooting in the dark, I gave you a specific number, but if I could give you any real color, it would be that our public sector tenants are for the most part just kind of stay there as it is.
Mario Saric
So would it be fair to say then the larger tenants may be give ample little bit of space, but your — like your average 5,000 square feet tenant. Just kind of the bread and butter of the portfolio not necessarily seen a contraction about [technical difficulty] 5,000 square feet to 3,000 square feet, they’re going from 5,000 to zero or growing in the other way?
Gordon Wadley
Exactly you said it exactly right, the 5,000 tenants, they were producing on 5,000 to zero or they’re making up another 10% to 15%.
Mario Saric
Got it okay. And then maybe shifting over to kind of capital allocation on the NCIB would it — would be fair to say that going forward given where leverages, I mean, concerns over cap rates moving up broadly speaking in the space that the NCIB is going to be more directly tied to asset dispositions, whether that’s indirect assets like the one Saskatchewan or Dream Industrial units for example or do you see yourself using liquidity today, if the price remains below $20?
Gordon Wadley
Yes, thanks Mario yes we’re getting kind of steady quite carefully, so we’re quite comfortable with the position we are today. We obviously have a couple of levers. All I mean that, Dream Industrial units have been great to us over the past few years, fantastic fundamentals. But we had that many times, it’s not strategic. But just having them around is a, good support backstop liquidity and we did also margin them.
And they develop an unencumbered asset pool. We do not have any restrictive covenants that prohibit us from having unencumbered pool. We have a, Canadian infrastructure bank program which, cover a lot of capital. So we are quite comfortable with the liquidity to use, but at the same time we are open to selling assets outside of the core. I mean, we’re in the buckets of selling a smaller building, but there may be others.
So we think they have a lot of levers to pull and it’s just the entire program in South we estimate to be about $60 million, so it’s not going to be as a huge use of capital. So I think over the next year, we’re quite comparable with the liquidity and how we navigate it for purpose of NCIB.
Mario Saric
Got it. And then how do you think about — I think Michael mentioned that you could have the potential bringing in a partner at Eglinton and Birchmount. So how do you think about potentially sacrificing some long-term value creation if you bring in a partner in today as opposed to two years from now for liquidity to execute on the NCIB, which is more tangible and more community. How do you think about the short versus long term in terms of capital allocation, I guess the question?
Michael Cooper
Yes, so 2200 Eglinton is – go ahead. Jay.
Jay Jiang
Okay, maybe I’ll start and you can jump in. 2200 Eglinton, we’re working through the final phase in the rezoning right now. And the good thing about that development side is, it could probably we plan to six to eight phases, but we have a lot of flexibility in terms of when to bring in a partner and for whatever – the first phase, I’ll call it.
And I think it’s also residential, so that has a broader appeal right now with different sources of the capital, if we can get good value for it, I think that’s a win-win in terms of monetizing a good value on our books. It will help you lever the balance sheet a little bit and as you said, we’ll be able to use that as a source of liquidity for the NCIB.
Michael Cooper
Yes, I’m going to say that it’s – it would get good value now, because we’re so far down to the rezoning and that project is probably a $1.6 billion project in total. So only half is still a major development and it’s probably more accessible for us than a 100%.
Mario Saric
Maybe my last question and may not be announcing this. But it was mentioned that the goal was to get to net zero by 2035. Is there any way today to think about the cost of doing so in relation to these in fair value of the building?
Jay Jiang
Yes, that’s a really good question. I think even before these initiatives were announced, I think we were quite prudent and looking at ways to make our building more attractive to tenants are all of these initiatives include decarbonization. And we look at these types of programs towards and how we would look at any traditional capital program, which will we expect to get those financial returns in addition to making or going more green.
So on one hand, we’ve already got with lease certification and law certification across a lot of the portfolios, because we’ve been doing it for the last five years. This CIB program was important because, first of all, its a great source of debt in order to fund the 25-year unsecured program and it’s aligned in a way that the more GHG we reduce in the building, the lower the interest rate will be.
So the very important source of capital and making our buildings better. And on the return side, I think the tenants are really supported in a lot of these initiatives. We’d be able to amortize a lot of the common areas, because I mean it’s important to the tenant, they have their own ESG and a mission goes as well. So I think over the next we’ll allow, we’re looking at tackling every single project like how we would look at doing an expansion or a redevelopment. But we think with the capital facility as well as being aligned with the tenant will have a pretty attractive program that can deliver big IRRs.
Gordon Wadley
Yeah, I think it was Scott that mentioned a little bit about closing the gap from commitments to occupancy. And what we’re seeing with this GHG program and what we’re doing in the building, is that its helping us with our absorption and we’re winning business as a result of having this program, showcasing this program. And the feedback that we’ve been getting from government tenants and also too from very sophisticated private sector tenants that have this, ESG verticals as a component of their business, is that it’s a deciding factor in a lot of what we’re doing.
We’re also seeing all of units of this a little bit higher number right now, but we’re also seeing people not only are going to take earlier, but they’re willing to pay more and be a part of it. And they like the reporting that we’re doing, they like the awards that we’re winning and the way that we showcase them. Is there a partner in the building, everybody benefits from the shared success that we have through this program and to be candid with you, it’s helping us win some key — some pretty key business.
Mario Saric
Okay, great, thanks for the color.
Operator
We have our next question from Pammi Bir with RBC Capital Markets.
Pammi Bir
Thanks. Good morning. Just coming back to 2200 Eglinton I just wanted to maybe, I don’t know if you have maybe some color on company? The zoning – is that might be before year-end. And then you mentioned the discussion around bringing in some partners, but I’m curious our talks already in progress on that and any color you can share there would be helpful?
Gordon Wadley
Yeah. I’ll let Michael, talk about the progress of the discussion with partners. You broke up on the first part, but I think you were asking about the size of the rezoning. We’re hoping or optimistic, we’ll be able to get clarity on that before year end. We’re just working through some final milestones with regards to Section-37 in some of the community benefits. There is a lot of that will be post operative but we just need clarity on that and things have moved a bit slow over the summer, but we’re quite optimistic, we’ll be able to get rebounding and really good value out of the site. Michael, do you want to cover partnerships aspect?
Michael Cooper
Okay. Well, on the rezoning, we expect that by the end of the year we’ll be in good shape on the rezoning. We sell at the site plan to go. With the site plan, we haven’t gone far enough on the pricing and pro forma. But so we’ve had some very brief conversation, but we don’t have numbers to show anybody yet until we’re finished with rezoning, so this might be something for next year.
Pammi Bir
Okay. I’m sorry. Michael, just on this – your comment on the site plan if rezoning is successfully received by year end, presumably you would then mark the value on that process or do you have to wait for the site plan approval?
Michael Cooper
That’s a Jay question. I think that the value would be pretty reasonable at that time. But Jay, when do you mark them up?
Jay Jiang
I think if you got rezoning, you did certainly hit one of the milestones. And what I would do is I would front that question to the appraiser. And the same way, it goes through all the analysis. And also question that so they would probably look at the similar sites and the progress with the other landlords and derive a value. But the first mark that we did, we were pretty far off in financing with one of the key milestones because we got offered a piece of debt that was higher than the book value.
So that was probably a good indication it was worth more. We did take one to get rezoning and achieved another significant milestone. So it’s likely worth more and gradually, the level over time to be a completed site. And then, well – I don’t if Michael said before, we’ll take pro forma on an EPS basis to see what will be the economic value from previous value to today. So over time, we expect that to gradually pick up over the next year or so.
Pammi Bir
Okay. Just on the 2023 debt maturities up, it’s very large and I believe a chunk of it relates one property, but just any thoughts on plans for the refinancing of that, maybe any possible consideration of the hedge. I’m just curious, are you thinking about next years?
Jay Jiang
Yeah, you’re right next year the biggest asset actually our head office. We’re sitting in there right now. We’re already starting some conversations with the lenders a bit. Their good appetite, because it doesn’t while lease as well located and also they like the sponsorship. So we are quite confident we’ll be able to get pretty good terms on this asset. With regards to your question, on whether it has the rates.
We’ve had these conversations since January 1. Because, I mean, we are looking at swapping potentially a portion of our credit discipline at that point in time when the rate for in the mid-twos. And interestingly on that part of vendors, we’ve talked to multiples, we’re saying that the fixed rate was probably beyond 1.5 the labor making in six to seven phases and then when the war began, we call the lenders again, and nothing leasing, so we thought out quite interesting.
We did a refinancing within the disclosures for our building in Mississauga and while variable debt was probably keep it simple in the high fours, six was around five. We’re not speculators of interest rates, I think overall we’re quite encouraged that we were able to get up finance on the properties and the lenders see good value in the asset. So what we did and we had a partner for that building, if you half swap on it, so we fix 65 of the 130 and what you end up with the blended rate about 4 or 4.9 for the building next year.
I think typically my preference to go though big, the curve on inverse. So I think it’ll be interesting to see what like the 10-year rate would be. But now obviously a lot has changed. So a lot has changed since 2022, every single month will get data points, so by the time we have been conversations next year, I would say things might be different but will be prepared to make the best decision on the mortgage.
Pammi Bir
Okay. And just to clarify, I think the extended rates about 4%?
Jay Jiang
For this building, I don’t have it off hand, but it sounds about right, because they are the high threes or fours.
Pammi Bir
Okay. And then just lastly, Jay I just wanted to clarify maybe we just not entirely clear on mind, in terms of when it came through. But the – did you say a $1.50 that’s 1.50 for your FFO guidance this year and then if you can also just expand on that implied for NOI growth?
Jay Jiang
Okay. Yes, it is 1.50 at NOI growth, I think for the year will probably slightly negative single-digit. And as we said before, so the income push to next year. So we’re set up quite well both that NOI and asset booked and hopefully occupancy is for 2023.
Pammi Bir
Great, thanks very much. I will turn it back.
Operator
We have our next question from Jenny Ma.
Jenny Ma
Thanks. Good morning. Just got a couple of more questions with regards that $1.50 guidance you gave, Jay. You mentioned that, you’re factoring some higher rates I presume that’s on the floating. Does that factor any expected future increases or just what we’ve seen to date?
Jay Jiang
I would say, its mostly to date, though we try to all that use, but it’s really hard to speculate what will be announced at the next round the meeting. So I think all-in we assume the blended rate on the facility is mid to high four, which is what we’re seeing today. And that also factors in the refinancing of the one property that we talked about earlier with Pammi.
Jenny Ma
Okay. So if I’m hearing you correctly. To the extent there is more bumps in the rate then there could be additional pressure on cash flow?
Jay Jiang
It depends on when the bumps are, but that’s correct. If interest rates go up, our interest goes up and by personally yes.
Jenny Ma
Okay. Are you factoring any more share buyback in the guidance?
Jay Jiang
No, our base case for that do not include any major capital allocation decisions, disposition with that.
Jenny Ma
Okay, great. So it looks like you mentioned earlier that you’re looking at using liquidity to continue to buyback units. And I’m just wondering, given where the floating rate is at and potentially moving to when we think about that, would it be fair to look at the yield on the units sort of as a proxy on the cost of the equity and then comparing the two numbers and thinking about how you would allocate capital?
Jay Jiang
That’s one metric that we look at. We also really look at the value of the — the intrinsic value of the real estate. And on the liquidity, we would certainly factor in the cost of debt both in terms of the impact to FFO in addition to debt to EBITDA, and that’s the gross book value. So we’re cognizant of all those factors. Ultimately, we think the business and the portfolio is incredibly valuable. I think it’s been a tough run for being a commercial office landlord, but I think we’re seeing a lot of positive indicators as well.
And what we’re seeing is probably pretty good to stabilize cash flows and value over the next — not to mention that, replacement cost is running even higher, and we’re sitting in a building today that’s on an implied basis trading in the stock market at around $450. And the one we’ve built across the street, where we’re looking at right now, is probably for $1,500.So we look at our data. We look at stock. We look at employment numbers. We feel pretty good about office buildings, well located ones that don’t require a lot of capital or are well maintained and we want to own more of this.
Jenny Ma
Great, that’s helpful. I guess my next question is when you look at the floating rate debt component pushing 30%. So I know you mentioned you weren’t speculating on interest rates, but would you be comfortable having that creep a little bit higher to the fund unit buybacks or is there some sort of unofficial ceiling on that number, where your comfort level go down.
Jay Jiang
We don’t really have a feeling per se, but we are very aware of not taking on too much variable interest rate. We run a lot of sensitivities as a risk management exercise within the company to – going back to Tommy question. We look at swapping it. We don’t think economically it really makes sense because we would just be paying today’s rate starting off in January. But what we really want to focus on is looking at what the impact of any future increases would have on just how we manage the company.
So I think we have a lot of levers with holding on to a lot of industrial units, working on future dispositions and maybe some fixed debt. We’ll see. But we have lots of plans to exercise the CIB program. The program is tough, as I said before. It really has 2 things. But we’re definitely aware of our variable – full exposure
Jenny Ma
Okay, great and then, one more housekeeping question on the Saskatchewan potential disposition. Is there any debt on that asset?
Jay Jiang
Yes, actually on that building been a challenge for us. So that is actually — a bit more than the asset itself, which is carried our breadth that will be transacted IFRS. So the proceeds of all of that will be used to de lever the balance sheet yes.
Jenny Ma
Okay. Do you have the right handy on that?
Jay Jiang
The rate on the debt?
Jenny Ma
Yes.
Jay Jiang
I think it’s probably in the mid-50.
Jenny Ma
Okay. Great, thank you very much.
Operator
Thank you. We have our next question from Scott Fromson with CIBC.
Scott Fromson
Hi, I had a follow-up on refinancing, but it was covered in the discussion with, Pammi. So I withdraw. Thanks.
Jay Jiang
Thank you.
Operator
And we have no further questions at this time. I will now turn the call back over to Mr. Michael Cooper, for closing remarks.
Michael Cooper
Thank you very much. I appreciate everyone’s interest. Lots of questions, we’ll try to continue to provide you with good information to understand the company. What I would say is, our view of the assets, are very valuable. I don’t believe that the yield on the distribution is a good metric to look at the value of the buildings. As far as floating rate debt, if we want to have less floating rate debt, we would fix it. So I don’t think that’s a capital allocation decision.
So I think that we’ll manage the debt in a way that we’re comfortable with. I think Jay’s point is the right now when you fix the debt, you end up locking in a pretty high interest rate and I don’t think we feel it helps much. But we’ll watching and pick our opportunities and interest rates, we moving around a lot even as of today. But we’re quite bullish of the — about the business in the long term and we just need people to come back to work. But I do thank you all for your interest in the company and we look forward to proving out the results. Thank you very much.
Operator
Ladies and gentlemen, this concludes our conference. We thank you for your participation. You may now disconnect.
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