D-UN.TOD-UN.TOTSX
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Operator: Good morning, ladies and gentlemen. Welcome to the Dream Office REIT Q4 2025 Conference Call for Friday, February 20, 2026. 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 security 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. [Operator Instructions] Your host for today will be Mr. Michael Cooper, Chair and CEO of Dream Office REIT. Mr. Cooper, please go ahead.
Michael J. Cooper: Thank you. Welcome, everybody, to our fourth quarter conference call. Today, as always, we have Jay Jiang, our CFO, but Kingsley Foris, our Director of Asset Management; and Derrick Lau, Senior Vice President of Portfolio Management, will be participating in the call. And maybe for some comments later questions, we've got the original Gord with us as it's been quite an interesting time. I guess in August conference call, I was saying that I think that we're starting to see some real evidence that the market had changed, and if it continues for a number of quarters, it could make a difference. And in the 2 quarters that have followed, we really have seen a difference in what's happening in the market. I was speaking to a guy who runs a large company, at least hundreds of thousands of square feet in the fourth quarter and he mentioned that normally, they would go to the Board, but because of timing and the concern that they were losing opportunities to rent large pieces of space, they moved ahead on the deal without going to the Board. So I think a lot of the big pieces of space has been full. Yesterday, I saw an article that CIBC SQUARE is 100% leased for both buildings. So the big buildings are full. And we definitely are seeing a waterfall. We're pleased that we hit the numbers we had hoped for, for the year in terms of committed occupancy, but we did a little bit better. We're seeing some significant tenants. I think Kingsley will walk through how we want to hit our numbers with some specific spaces we think we can lease. So I'd say that we clearly are seeing a change in the office environment. We would expect that we'll see increased occupancy over time, but measured, it takes a while, and that takes a while for the tenants to take place. But we're clearly in a much better spot than we've been in, and it's a great celebration for March of 2026, that's been 6 years since COVID took place. When the federal government orders or people back to start in May or June, it will be over 6 years since some of those buildings have been used. I have no idea what they're going to find, whether they've been properly taken care of. And I think that we're going to see governments as a new -- new to the market in terms of like the federal government really hasn't leased any space in 6 years. And I think we're going to start to see more action from the federal government and the Ontario government. So it's shaping up pretty good, and we also started to see that the leasing is sort of water falling down from the top buildings to the type of good buildings we have in good markets. So with that, I'm going to turn it over to Derrick.
Siu-Ming Lau: Thank you, Michael, and good morning. In Q4 2025, we saw encouraging signs across the Canadian office sector with national vacancy decreasing by 40 basis points to 18%. The decrease was led by Toronto, which realized 1 million square feet of positive absorption and overall vacancy decreasing by 120 basis points to 15.9%. With much of the absorption occurring in Class A buildings, tighter conditions are expected to have a trickle-down effect into remaining office spaces. We are also seeing a decrease in sublease space, which returned to 2017 levels. This reflects increasing return to office mandates and a decrease in corporate space optimization efforts. In 2025, Dream Office delivered its strongest leasing year since before the pandemic. We completed approximately 830,000 square feet of leasing with Toronto accounted for roughly 85% of that volume. Activity accelerated through the year with new lease economics outperforming our internal budget. We ended the year with downtown Toronto committed occupancy at 87.4% and in-place occupancy at 79.4%. The bulk of the spread is scheduled to commence in 2026. In other markets, we completed 130,000 square feet of leasing, largely comprised of renewables, which is in line with our recent historical pace. Committed occupancy decreased by 340 basis points this quarter to 72.1%. This largely reflects the sale of Kansas City asset. Excluding this, committed occupancy would have been largely flat quarter-over-quarter. Moving to specific projects. At 606-4th Street in Calgary, our conversion from office to residential is progressing well with project timelines and costs in line with expectations. We continue to target first occupancy in the third quarter of 2027. In downtown Toronto, we completed the redevelopment at 67 Richmond. We are pleased to announce that we have secured a 32,000 square foot lease, which represents the entire remaining vacancy. The leases to a high-quality TAM has raised nearly USD 3 billion in capital. Base rents are starting at $35 per square foot, an increase to nearly $48 over the 10-year term. The economic lease commencement will occur in stages starting in June 2026 and the remainder in December. For 2026, we are targeting committed occupancy in downtown Toronto to be in the 88% to 89% range by year-end and in-place occupancy to range between 82% and 85%. Based on this, leasing momentum, we are targeting comparative NOI growth for downtown Toronto of 2% to 5% for 2026. Compared with NOI growth for the total portfolio, inclusive of our other markets is expected to be approximately 1% to 3%. We had good leasing results in 2025. Looking ahead, if we were to continue this momentum and achieve average in-place occupancy of 90% in the downtown Toronto portfolio, this would generate incremental NOI of approximately $15 million to $20 million, all else being equal. This would bring downtown Toronto comparative NOI to $95 million to $100 million, including 67 Richmond. Our leasing priorities include 74 Victoria, 30 Adelaide and our Bay Street assets, where we have seen good leasing at our mall suites. At 74 Victoria, we are seeing increased traction. This follows the recent renovation of 2-model suite floors with several tours and a recent broker event that was well attended. Overall, we have made good leasing progress in 2025, and we are encouraged by the recent improvement in office fundamentals. This includes return to office mandates and broader market activity in the back half of the year. As the sector continues to rebound, our team has stayed focused on proactive leasing, disciplined risk management and maintaining high-quality assets. That focus has translated into results, including at Adelaide Place. With AAA vacancy below 4%, we are seeing the impact of our efforts at our highest quality assets, and we are starting to see this in our Bay Street collection. We have delivered steady gains to committed occupancy in downtown Toronto and stability in our other markets. While we recognize that the sector remains challenging, we are well positioned to actively manage these risks through 2026. I will now turn the call over to Kingsley, who will provide some more deal color and what we're seeing on the ground.
Kingsley Foris: Thanks a lot, Derrick, and good morning, everyone. I hope you're all keeping well. As Derrick noted, 2025 was a strong year of leasing for Dream Office. We completed 830,000 square feet of transactions across 140 deals nationally. Toronto represented the majority of that activity with 700,000 square feet across 115 deals. This was comprised of 390,000 square feet of new leases and 310,000 square feet of renewals. Overall, deal economics in Toronto were consistent with our internal budgets with a weighted average NER of $20 per square foot. Importantly, we saw a meaningful improvement in these NERs as the year progressed. For some additional context on this point, NERs increased more than 10% year-over-year, up from $22 in the second half of 2024 to $25 in the second half of 2025. With net rents largely in line with budget, the outperformance was driven by longer lease terms on new deals, which reduced our annualized leasing costs. The weighted average lease term on new deals in 2025 was 9 years compared to our standard underwriting assumption of 5 years. Turning to other markets. We completed 130,000 square feet of leasing, including 30,000 square feet of new leases and 100,000 square feet of renewals. This is broadly in line with the 3-year average of approximately 135,000 square feet annually in other markets. New lease economics and other markets outperformed expectations. We achieved NERs of approximately $13 per square foot compared to a low single-digit budget. Renewal economics were in line with budget at approximately $10 per square foot. On our Q3 2025 call, we guided to 86.5% committed occupancy in Toronto. The strong leasing completed in Q4, we're pleased to report that we exceeded that target by 90 basis points achieving 87.4% committed occupancy at year-end 2025. This growth was driven by positive absorption on key assets, including our Bay Street properties, which are nearly 85% committed, in Adelaide Place, which is above 95% committed. To provide some additional context on leasing velocity, over the past 3 years, we've done approximately 550,000 square feet of transactions annually in Toronto. With 700,000 square feet completed in 2025, we exceeded that average by nearly 30% despite having fewer assets in the portfolio. These volumes are what drove the 360 basis point growth on committed occupancy year-over-year in Toronto. Looking ahead, I'd like to highlight what's working well in the portfolio and what we're focused on in 2026. A significant portion of our leasing on vacant space has been driven by our model suite program. To date, we've delivered 120,000 square feet of model suites across the portfolio. And of that, we've leased 110,000 square feet or 90%. Importantly, these deals have closed within 6 months of delivery. This has materially reduced the downtime we typically face on these spaces. In Q2 2026, we'll deliver an additional 30,000 square feet of model suites, of which approximately 40% are already pre-leased. We'll continue rolling this program through the Bay Street portfolio to further drive occupancy gains. One of our key priorities in 2026 is leasing 74 Victoria. It represents a disproportionate share of our portfolio vacancy. As a reminder, the government partially vacated the building in 2024, reducing occupancy from 100% to approximately 45%. Since then, we've completed 50,000 square feet of leasing with 100,000 square feet remaining to be filled. The 50,000 square feet that we completed is in model suite condition, and it looks great. We're using this as a marketing tool for the asset, and it's been very well received by the brokerage community. As Derrick noted, we're targeting committed occupancy of 88% to 89% for Toronto by year-end 2026. To achieve this, we need to lease 150,000 square feet of vacant space and secure a retention ratio of 57%. For the vacant leasing, we're targeting 50,000 square feet at 74 Victoria, 40,000 square feet at 30 Adelaide, 40,000 square feet on Bay Street and 20,000 square feet at Adelaide Place. With regards to our retention, we have already secured 50% on our 2026 expiries, so we feel very good about our 57% target. I also want to speak to some expectations on in-place occupancy for the year. We currently have more than 200,000 square feet of contractual commitments scheduled to commence on vacant space throughout 2026. As a result, we expect a meaningful increase in in-place occupancy reaching 82% to 85% by Q4 2026. Given the majority of these deals commence between Q2 and Q4, we do expect a modest dip in Toronto in-place occupancy in Q1 2026. This is from lease expiries at the start of the year that we did not renew. However, occupancy will recover into the low 80% range by the end of Q2 2026 and will continue to trend upward through the balance of the year. In closing, we remain confident in our ability to build on the momentum from 2025 and further stabilize the portfolio in 2026. I'd like to thank the team for their continued hard work. And with that, I'll turn it over to Jay to walk through the financials.
Jay Jiang: Thank you, Derrick and Kingsley, and good morning, everyone. Today, I will provide an overview of our fourth quarter financial performance to close off the year and also provide our outlook and guidance for 2026. Now that we have had several consecutive quarters of improvement in leasing, we are confident that we will see increasing occupancy and NOI, and we will continue to have ample liquidity. For the fourth quarter of 2025, our diluted funds from operations was $0.56. Our full year 2025 FFO per unit reached $2.46, which is just above our guidance range of $2.40 to $2.45 per unit on our August and November conference calls. We also delivered full year same-property net operating income growth of 0.5%, which is on the lower end of our guidance of flat to low single-digit growth. The REIT achieved several notable key financial objectives this year. We successfully addressed all of our $741 million of debt maturities in 2025, which represents 60% of our total debt stack. We also successfully extended our $375 million revolving credit facility until September of 2028. In 2026, we have already addressed $140 million of the $166 million of maturing mortgages. We have minimal refinancing risk in 2026 and are in the process of finalizing all of our renewals. As part of our refinancing initiatives, we were able to increase our liquidity, including cash and undrawn revolving credit facilities from $69.3 million in Q3 to $97.6 million at the end of the year. Last month, we closed the sale of our remaining office building in the United States near Kansas City for approximately CAD 9.6 million, which further improved liquidity. Prior to the sole tenant vacancy in November of 2025, the building generated NOI of approximately $4.5 million. By selling the asset, we have eliminated potential holding losses of $1.5 million per year for empty building, but the sale will reduce our 2026 NOI by $4.5 million. Our year-end net asset value per unit was $49.92, utilizing a weighted average cap rate of 6.3% on our total income portfolio. Relative to last quarter, NAV declined $1.75 or 3.4% as a result of appraisal valuation cap rate increasing 15 basis points, which resulted in $41 million of fair value decrease. We have also not capitalized maintenance capital into our portfolio to reflect a more conservative view of building values. We externally appraised $344 million or 17% of our total portfolio in Q4, which brings up the total appraisal percentage for the year to 31%. We observed that CBRE investment cap rates are improving, and Q4 Toronto office cap rates compressed 13 basis points quarter-over-quarter to a midpoint of 6.6% and we are encouraged to see office buildings trade in Toronto as investors reenter the market. Looking ahead, we are projecting 2026 FFO per unit of $2.25 to $2.30 per unit, which represents a decline of approximately 7.5% or approximately $3.5 million at the midpoint on a year-over-year basis. To explain the variances in a simplified manner and in rounded numbers, we are projecting approximately $7.5 million of positive variances versus 2025, consisting of the following: $3 million of positive comparative property net operating income, $3 million of higher straight-line rent as we will have more tenants take control of their space for fixturing in preparation for the rent commencement date, $1 million of interest expense savings from lower debt balance, offset by higher weighted average interest rate, $0.5 million from G&A savings as we continue to reduce costs and operate more efficiently. The total above is offset by roughly $11 million of negative variances consisting of $4.5 million of reduction in income from our assets sold in Kansas City, $1.5 million of reduction in income from our 606-4th Street building in Calgary as a result of moving out the tenants to commence the construction of the office to residential conversion, $3 million of partial period income recognized in 2025 from previously sold assets in 2025, including 438 University, $5.6 million of Dream Industrial REIT units and our vendor take-back mortgage in Calgary that will no longer be earned in 2026. And lastly, $1.5 million of other items, including lease termination and other income, which were earned in 2025, but we do not forecast in our 2026 FFO. In our model, we assume no acquisitions or disposition of assets. We also assume we maintain our dollar per unit of distributions. Overall, we want to highlight that the key metric we are focused on is the increase in comparative property NOI as that will be the main driver of value improvement for the business. Our net total debt to net total assets was 54.2% and net total debt-to-EBITDA on a trailing 12-month period was 11.6x. The leverage is higher than what we will want longer term and we expect debt-to-EBITDA to improve meaningfully as we increase occupancy and income. Our focus is to aim to achieve 90% occupancy and in-place across downtown Toronto within 2 years. At that point, we estimate that the portfolio will be able to generate $95 million to $100 million in Toronto stabilized annually or an increase of $15 million to $20 million for the EBITDA. At that occupancy, we estimate that the REIT will be able to generate approximately $3 per unit in annualized FFO and improve debt-to-EBITDA to mid-10x. We believe our business is well positioned to improve income and debt metrics quickly if the office market continues to improve. We look forward to providing more updates on our progress over the course of the year. Thank you for listening, and the team is now happy to answer any questions.
Michael J. Cooper: Just before we do that, the one area we haven't talked about that I think is really fascinating is that we're seeing more trades of office properties. And there's some large ones that have been completed in Vancouver and in Toronto. There's other deals going on that aren't public yet. But what's different about the last 6 months is the last couple of years, most of the trades have been from an owner who is an investor in office buildings to a user like George Brown College or the Ontario government. But these -- all of these transactions are investors buying office buildings to generate an office return. And we've done some work on what would be the assumptions in order to justify the prices that they're trading at. And it's actually quite illuminating where it looks as if new investors are using as an assumption for the longer term, 95% occupancy. And here looking at leasing costs about halfway between where they were in 2019 and where they are now. And that's very encouraging. So we're starting to have a decent market for trading office properties. And if the purchases are right, it would be very bullish for the values of Dream Offices we're using much higher cost for leasing and much lower occupancy. So here's hoping. Anyway, now we'd be happy to answer questions.
Operator: [Operator Instructions] Your first question comes from Sam Damiani with TD Cowen.
Sam Damiani: Thank you very much for the comprehensive presentation and outlook, much appreciated. Michael, just with the disposition or the transaction market more active, prices firming up, bid-ask spreads obviously narrowing. You talked about getting to 90% in-place occupancy downtown Toronto gets you to 10.5x EBITDA. Does that -- like are you more motivated to think about disposing assets to improve the balance sheet today? And is there something -- should we expect some activity within the next year or 2?
Michael J. Cooper: I don't think so. I mean, we've been in our other market section, I could see us selling assets. We sold -- I mean I think we sold about 75% of the total assets we owned in 2016. So at this point, I don't see us selling a lot of assets. I was really making the reference for -- we're getting some real clarity in the private markets because for literally 5 years, we don't know other than the stock market, how to value stuff. So that was the point of what I was saying. But we'll see what happens over the time being, but we don't -- I figured the stock. NAV could be much higher than it is now and we continue to see trades and then see the leasing that we're expected to come through. So that's the exciting part. And if that's the case, we're actually going to get the -- and I think this is Jay was alluding to -- yes. We have quite a bit of vacancy. If we lease that up, if we increase our NOI, our debt-to-EBITDA will come down just because we'll be in the 90s. So I think that will get us to a good spot.
Sam Damiani: Okay. And my other question, Kingsley, thank you very much for the detailed comments there. Just on your outlook for 2026 included some in-place occupancy targets. I just wanted to clarify, was that for downtown Toronto or the total portfolio?
Kingsley Foris: The 82% to 85% is for downtown Toronto.
Operator: The next question comes from Mario Saric with Scotiabank.
Mario Saric: I'd echo the gratitude for the comprehensive overview on the '26 outlook. It takes care of a lot of the questions. Just a couple of side questions. On the -- for [indiscernible] on the 82% to 85% in-place expectation for Toronto, what are some of the factors that bridge the gap between 82% to 85%.
Kingsley Foris: Really, at the end of the day, it's either we beat our retention ratio or we absorb more new leases. We feel really good about our retention. As I mentioned, we're currently at 50% and to hit that target, we need to reach 57%. We have a clear direction there. So I would say the renewals are the best way to surpass that.
Mario Saric: Okay. And then maybe a more general question for Michael. There's been a lot of discussion over AI disruption in the marketplace in recent months. More recently, it's been focused on software companies, but the discussion, I'd say, has also put a spotlight on potential pressure on office occupancy over time if it means less people in buildings, which has impacted office REIT sentiment in North America. It is an open-ended question, but I just wanted to hear your thoughts on the subject of perhaps how you think REIT is positioned in that regard.
Michael J. Cooper: You know what I've been actually fascinated by what's happening in AI. It feels like in the last month, there has been tremendous progress. And I think what they're doing is they're going from I mean, they're developing learning models. I think they're continuing to develop and make advancements, but I think what the real excitement is, we're getting into applications to do things. And I think that's really, really important because otherwise, it's kind of a toy. So will it replace most of the accounting? Probably. But I think -- I've been reading a lot about it. And I read an article that talked about seen versus unseen implications of new technology and what I was saying was that generally, what's initially seen is negative because most new technology, by definition, is an advancement. And the unseen is sort of the improvements. And there's a story about a guy who discovered the loom in like 1,450, 600 years ago. And back then, he was in England. You had to get the Queen's consent to get a patent and she refused because people are going to lose their jobs. Well, a few years later, they got it a patent. They started using a loom, and the U.K. became the leading textile manufacturer for the whole world. So I think that while it's easy to identify jobs that may be eliminated, what's harder is to say, well, what's going to happen when things get easier and how are we going to advance in terms of how we run our businesses. So I think it's overdone in terms of that everybody is going to be unemployed and become [indiscernible] or something like that. I don't see anything like that. I think what's going to happen is a lot of people are going to be able to elevate their contributions and a lot of the menial work will be done, and I think we're going to see big increases in productivity. And I don't know if we're going to have more people or less people, but I think the impending doom is about the 7,000th time I've heard about impending doom in just the last 10 years, and it's kind of not as bad as people say, in my opinion. But I kept it general if that helps.
Mario Saric: I know that's interesting. My last question just pertains to kind of the residential density under Dream Office's portfolio, which albeit the residential market isn't that great today, but eventually, that will turn or that will change. How should we think about the REIT opportunity and capability set to maybe extract that value, not necessarily in '26, but over the next 2 to 3 years.
Michael J. Cooper: It's a great question. We're very active on 250 Dundas. And between the programs that the federal government and the city come up with, that could be a go. There's a lot of work to get everything lined up, but we can see that starting within the next 24 months. When you look at our site of Birchmount in Edlington. Good news is, I understand the LRT is now functioning. That's a big improvement. We've got our zoning, but the actual site plan is taken about 7 years, and nobody can build anything yet. Well, what happens is in Scarborough, the rents are low, it's going to take a lot of work. So that one will definitely be delayed. And then we think about something like we looked at 30 Adelaide, which is on 1.5 acres. It's got 400,000 square feet of density. If we tore the building down, we could probably do 1.2 million square foot development. That value is -- that opportunity is still here. It's just that the numbers don't work. So it's kind of like a -- it's just something for the future. We wouldn't include that in any way when we talk about values or cash flow or anything, but it's -- when the market turns, maybe there will be an opportunity there.
Operator: Your next question comes from [ Roger Lafontaine ] with United Capital Partners.
Unknown Analyst: Michael, congratulations on an amazing quarter. I had a couple of questions, and this is just kind of a follow-up of your answers. When you say that the market is improving in Toronto for office liquidity, I was wondering if you could touch base if Dream office is receiving inbound queries and whether they would perhaps resemble the kind you received with, say, Alexandria REIT a few years ago, if it's [ something ] and that if you're seeing improved market liquidity in other markets, too, for Dream Office.
Michael J. Cooper: Yes. No, great questions. Firstly, we are getting inbounds and they're not interesting at this point to get more liquidity and have a smaller company. We're already really small. So it is interesting. And you get inbounds -- sorry, for a lot of years, we didn't get any. Now we're getting some. They're not necessarily real. But I think 70 -- I'm not sure of this, but I thought 70 York was sold based on an inbound to the owner. So they do -- they can turn it into meaningful deals. But we haven't been focused on selling any of our key assets. In Calgary, we're converting 1 of the office buildings into a residential building, and that's really quite exciting. It's not a very big building. But it's exciting. That leaves with 2 in Calgary. I think they certainly can't think those are marketable, but that's our head office for all of Dream's business in Western Canada. We got a building in Saskatoon, another one in Regina, if we got good offers, that would be great. Sussex Centre is one that's kind of like if somebody had a better idea, that would be great. But as far as the core downtown buildings, we're pretty happy with that. We want to keep them. Is that a complete answer?
Unknown Analyst: Yes, thank you very much for that answer. And I was wondering because Morguard Corporation, for example, they sold a big office yesterday. They reveal that and it looks like it was the government. And I was wondering, is the office market coming back for those kind of buildings because Dream Office has got a lot nicer buildings than that, in my opinion, that are situated in Toronto. So I thought that was encouraging. And I was wondering if you would be able to touch base on whether the federal government mandate is impacting the market liquidity in a good way for Dream Office in those other markets. That was a great answer.
Michael J. Cooper: You seem like a very kind person. I appreciate that. I think the Morguard building was by the [ Province ], and we sold 438 University in province. The Province has been pretty active using this opportunity to actually buy offices for their people. I'm curious how much appetite the Province has for space, but we are getting in our conversations with them, and they've been a big tenant of ours over the years. It looks like they may be a bit expansive. The real wildcard is the federal government. I mean it is inconceivable. The buildings haven't been used for 6 years. People haven't been in the office for 6 years. From what I understand, there's going to be a lot of work required to figure out who's going to go where. And I think it may be surprising that in Ottawa and Toronto and other places, they're going to want either more space or to upgrade their space. So they could be a serious player in the market. So a lot of these things put together are pretty positive.
Operator: Your next question comes from Matt Kornack with National Bank Capital Markets.
Matt Kornack: Can you just give us a sense as to the nature of the type of tenants that you're seeing taking space in downtown Toronto and how that's changed? It sounds like you're hopeful that the government will come back. But who are you seeing right now in terms of incremental demand?
Gordon Wadley: Good question, Matt. It's Gord Wadley. We're seeing a lot of tour traffic from government's agencies as well to contractors that are affiliated with the government. We've got a couple of live paper right now on a couple of big vacancies with 1 quasi-Crown corp as well. So to Michael's point, a lot of groups that do work with the government are starting to spin off and look for space, especially in core markets. So the tour velocity around there has picked up. We're also starting to see some rebound on tech as well. We're seeing some tech tenants, especially on our Bay Street assets. We're starting to see some tenants coming through there that are in the tech sector.
Michael J. Cooper: Yes. Not really related to that, but we did do a deal with the tech company recently. And I think it's probably public, but when we lease -- we want to look at the company's financials and see if they're going to be able to pay us rent over a long period of time. And we got comfortable with it, but we did talk about it. And then prior to them moving in, but after they sign the lease, they raised $1 billion at a $36 billion valuation. So tell you how good we are at our job. But it really is a mix of types of tenants.
Gordon Wadley: And you know what's precipitating on the tech tenants, Matt, is the sublet availability has dried up. And there's been a ton of sublet absorption. So we're starting to see tenants that are trying to scale that have typically gone to the sublet market for a bit of a discount on their space now have to come for direct space. And that's really helped us in our smaller pockets that are kind of sub-7,500 square feet. And it's also helped us on the renewal side as well, too. We've been able to do a little bit better on an effective basis on our renewal deals this past quarter and looking forward in large part because there's just such a decline in sublet availability. So a lot less for these tenants on renewal to try to leverage.
Matt Kornack: Okay. Interesting. On the forecast, you've done most of the work for us, which is nice, but I'm going to ask you to maybe do a tiny bit more. I think you had around -- yes, maybe. I just need to get '26 right. I think you had around $23 million of net rental income prior period tax refund. There's 700,000 or so for the property held for sale. So you go down to presumably somewhere in the $22.5 million range. How does it ramp up from there to kind of the end of the year on a dollar as opposed to occupancy.
Gordon Wadley: Fair question, Matt. I think the easiest way to follow based on the conference call is Kingsley gave some guidance on occupancy and we would say that in Q2 and Q4 is where the movements go up. So for Q1, it might trend down a little bit to go up by probably $1 million in Q2. And then Q4, you have another pickup of about $1 million or so.
Operator: Your next question comes from Tal Woolley with CIBC.
Tal Woolley: Just on the model suites, what's the -- like rough construction cost per square foot to set those up.
Kingsley Foris: So generally, we spend about $100 to $120 on a full model suite. We do have efficiencies on a lot of the units that we do. We're between $80 and $90, and that's all inclusive with furniture.
Tal Woolley: And does that change like sort of the structure of the leases, like in terms of the incentives like he is more rent free versus TIs? Is that sort of the trade?
Kingsley Foris: I wouldn't say like when we lease these spaces, look, we don't put additional money into them, right? Because they're fully built and ready to go. So there's no additional cost going into those units. Generally, we'll be able to get a bit higher rents on the model suites. The big kicker for us is it really reduces the downtime that we face on leasing those spaces, especially in Bay Street.
Michael J. Cooper: I also think that it makes it a little bit easier maybe to have a shorter term to have a good tenant come in because you already spent the money rather than spending the money for a specific tenant. These are pretty generic. We think we can lease them. So it's fine to do 5 years and they'll probably renew and if they don't renew, we'll get somebody else.
Tal Woolley: Got it. Just -- obviously, like when all the brokerages sort of came out this year, very constructive views on office in general and that things are turning around. I would say the one thing I didn't kind of notice across the board was just not a particularly strong view on rent growth. And I'm wondering, like is it just a matter of time where we need to get to a certain occupancy level before you really think rent growth can accelerate? Or is there sort of a house view just on how you think rents evolve?
Michael J. Cooper: So what's happened over the last 6 years is that the rents have basically maintained the same level. And the way landlords have gotten deal done is they've increased the tenant inducements. And I think that what we're seeing is a tempered reduction in inducement. So we've already seen continuous reduction in tenant inducements and it results in some significant increases in net effective rents. So we're seeing net effective rents going up. But I think what we'll see is when we get down to under 90 -- when the market gets to like 10% vacant or less, we might start to see the face rents move. But the real action is in the inducements and getting the net effect rents up.
Tal Woolley: Okay. And then, Jay, just yields are bouncing around. I'm wondering if you sort of have a rough estimate of where you think your marginal refinancing cost is right now?
Jay Jiang: Yes, sure. So simple 5-year mortgage financing is probably GLC plus about 200 basis points. On our revolver, it's a bit lower. So I would model probably 4.5.
Tal Woolley: Got it. Okay. And then Dream Industrial had a nice run here. Just wondering if -- I know you probably don't have any immediate plans for that kind of liquidity, but you did sort of mention wanting to get leverage lower. What are sort of the thoughts about keeping the holding -- the Dream Industrial holding at Dream Office for 2026?
Michael J. Cooper: We keep it in a red box, and it says break in case of emergency. No, seriously, the returns on it are really quite good. And if we sold it and took cash and paid down debt, it's really dilutive. We have a high degree of conviction for the industrial units. And we figured we wouldn't sell them unless we needed them.
Tal Woolley: Got it. Okay. And then just lastly, in your conversation just about moving towards 90% in-place occupancy, I believe that was within 2 years. Is what you were saying?
Michael J. Cooper: Yes.
Tal Woolley: Okay. So that would sort of take that, you worked down to kind of like a $3 FFO per share, that would sort of be like a 2028 kind of phenomenon in that range if everything goes according to plan.
Michael J. Cooper: So we're talking about in-place now. So first, you have to do the leases. So we've done a ton of leasing, but our in-place isn't high enough. That's going to increase if we have reasonable renewals. And the plan is to lease some vacancy as well so we can see it move up. If we end the year at a higher occupancy level, that will be great for '27. So you're absolutely right, '26 and '27, if we do the leasing in those years, we really get the benefit in '28 from the leasing in '27.
Operator: Your next question comes from Pammi Bir with RBC Capital Markets.
Pammi Bir: Just when you look at the demand in the market, do you see -- and all the pipeline you see from a leasing standpoint, do you see this as sort of a multiyear recovery process? Or is the visibility maybe just more so good for the next 12 months, but maybe a little less so when you think about 2027, just maybe given where the economy is at this point?
Gordon Wadley: Yes. Great question, Pammi. And it's Gord again. So I think it is going to be a bit of a multiyear process. We were talking earlier, I've been in this sector for about 20 years. And just seeing the past quarter was kind of the first real green shoot that we've been anticipating. When you see just under 1.5 million square feet of net absorption in the core where we have the bulk of our holdings, that gives us a lot of optimism going forward. But yes, I think it's going to be a multiyear process. And we just got to continue to keep -- we've seen our space and hitting our retention targets.
Michael J. Cooper: I mean I know that for our company, and I suspect for all the other office companies. For years, they've been saying the tours are really good, but people are slow to make decisions. And like literally, we heard the same thing for years. And what I was referring to earlier is we're now seeing people saying, "I need to grab the space that's available." So that's -- I mean, I think we're going to find that in some of our bigger spots in 74 Victoria and at Adelaide Place and at 30 Adelaide. I wouldn't be surprised if those ones are fully booked in the not-too-distant future. We're seeing improvements in the Bay Street collection. But I think what we tried to say is if we can be up 1.5% a year, that would be good, maybe 2, maybe 1, but it will add up. So the key thing is just the psychology has changed dramatically. And hopefully, that will continue through this year and next, at least.
Siu-Ming Lau: Yes. One thing to keep an eye on to, Pammi, is just contiguous pockets of square feet over 50,000. And that's reducing at a pretty quick pace even though we're saying the recovery may take a little bit more time, the absorption on those large pockets in the sector -- have been reducing quick, and that's really going to help us on a property like 74 Victoria, where we've been taking in more inbounds than usual.
Pammi Bir: Got it. Yes. And I guess if you look at maybe what you're projecting for your portfolio, let's say, in the next couple of years, or even maybe just as we think about just the next 12 months, do you see the pace of recovery in occupancy maybe. Do you expect to sort of outpace what the market is doing or kind of just track kind of in line with the broader office markets in Toronto?
Siu-Ming Lau: We've been tracking largely in line with the broader office markets. We've always been probably about 150 to 200 basis points better, but we anticipate we're going to track largely in line. What's really going to help us, Kingsley did a great job touching on it earlier, is just getting the absorption at 74 Victoria, and given the denominator of our space, it's going to make a big difference. And I just want to toss it over to Kingsley. He's got some more insight. He's been very active on that asset.
Kingsley Foris: Yes, like 74 Victoria is obviously a huge focus for us in 2026. We had an event there last week. We have the top 2 floors in model suite conditions, so that's about 50,000 square feet. Our leasing team hosted an event there last week to showcase to The Street, what that space looked like. We had over 70 brokers come, which for us is an incredible turnout to an event like that. So we're really excited about 74 Victoria, we're hosting a lot of tours there, and we're eager to get it leased up.
Pammi Bir: That's great. Last one. Some very good color in terms of the demand sources and some of your retention expectations. In that though, are there any maybe larger nonrenewals that you're aware of taking place or that will hit in 2026. And I guess the last part of that is, what segments of maybe the tenant base are you maybe still nervous about?
Siu-Ming Lau: Just to be honest with you, the team has done a good job getting in front of our renewals. We've got a pretty strong retention ratio that we're tracking for this year. There isn't 1 specific tenant or sector that we're nervous about right now, Pammi, for the balance of 2026. And if we're looking at just kind of the landscape of tenancies, I actually feel like everybody is doing a little bit better. Michael touched on the government. We're seeing the most inbounds from the province and the feds, but even like the professional service firms and the tech firms we're dealing with, we're finding -- they're making decisions a little bit quicker, and they all feel a little bit more optimistic about their business.
Michael J. Cooper: And specifically, like in November, U.S. bank left our building in Kansas City, and we knew that was coming. And the year before, we knew the federal government was leaving 74 Victoria. I'm not aware of anything like that -- and I think that's what your question is. We're not aware of a building going empty because the tenant isn't interested anymore. I think we've got quite a diverse group of tenants. None of them are too big. And as an example, with IFDS, they reduced their space by half. We replaced them and we're no longer sort of vulnerable to what happens when their lease comes up. So I think we've done a lot of that over the last couple of years. So we've had a few of those before. We don't see anything similar in the next few years.
Operator: The next question comes from Matteo Sepac with Cormark.
Matteo Sepac: Just asking a couple of questions on behalf of Sai. So firstly, while we initially saw a spike in demand for large floor spaces and Class A assets in downtown, are you guys seeing that demand trickle down?
Michael J. Cooper: Yes. Kingsley, you want to talk about that?
Kingsley Foris: Yes. For sure. So like we look at the absorption we had last year. Really, a lot of the movement started at Adelaide Place. Derrick mentioned AAA vacancy sub-4% in the market. Adelaide Place was one of our first buildings to really benefit from that. Committed occupancy at Adelaide Place last year moved from 85% to north of 97%. So while it's over 6 years there, it's essentially a stabilized asset. The next tranche we saw was Bay Street. So our Bay Street assets last year went from 76% to 84%. So we're definitely seeing the demand move portfolio.
Matteo Sepac: Great. Great. And then secondly, so in the quarter, renewal spreads were down roughly 15%. Was that more specific to a particular lease? And then how are leasing spreads trending on the 2026 commencements?
Kingsley Foris: It is specific to an individual lease. So in Q4, Dream took 2 floors from 30 Adelaide moved over to 74 Victoria. We were in 40,000 square feet at 30 Adelaide, that will be closer to 55 at 74 Vic. So we took an additional 15,000 square feet but the rent we're charging on that space remain the same as it was at 30 Adelaide, 74 Vic is just a bit of a lower rent building than 30 Adelaide is.
Siu-Ming Lau: We also did that deal to be clear because 30 Adelaide is arguably one of our best buildings with Adelaide Place. We've got a tremendous amount of inbounds. We've done a great job backfilling vacancy when we get vacancy in this building and we're actually trading paper on the balance of the space that we'll be moving out of. So it just made more sense for us to plug vacancy.
Michael J. Cooper: Kingsley, are you getting interest? Are you on 74 Victoria?
Kingsley Foris: We are. Yes. For sure. We're speaking to a lot of tenants at 74 Vic and 30 Adelaide.
Matteo Sepac: Okay. And then finally, just -- I know there was some commentary already about NERs. Can you provide some additional color on how they've trended, I guess, relative to prior years?
Kingsley Foris: Yes. So we look at NERs. We looked at it year-over-year, '24 versus '25. If you look at the second half of '24 versus the second half of '25, NERs are up from $22 to $25 in Toronto. So it's a 10% increase year-over-year. As I mentioned, a lot of that is because we're getting longer WALTs on our deals, which is allowing us to annualize those leasing costs over a longer period.
Operator: This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Cooper for any closing remarks.
Michael J. Cooper: Yes. I don't have much left to say, but thank you for participating in today's call, and feel free to reach out to any of us if you have further questions. Thank you.
Operator: This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.