Major Toronto Office REIT Cuts Distribution in Half
Major Toronto Office REIT Cuts Distribution in Half
Dream Office Looks to Maintain Capital as Downtown Vacancy Rate Hits Record High
Dream Office REIT, a major player in Canada’s largest city with 28 investment properties, is cutting its dividend in half in a reduction that it said will save $19 million annually.
Dream Office CEO Michael Cooper described a challenging environment for office leasing even as the Toronto-based REIT is seeing slight increases in occupancy.
“Over the last four years, it has been very tough in the office sector,” Cooper said on a call with analysts. “Everything shut down because of COVID, and there was an immediate halt to the use of office space. It’s been two years since public health was an issue, but it’s been a slow recovery.”
Cooper said the board decided that retaining cash was valuable during the very uncertain environment for office landlords.
“This just gives us more shock absorbers,” said Cooper. “It’s not that things have changed, but maintaining capital creates more flexibility.”
For the period that ended Dec. 31, the REIT’s downtown Toronto in-place occupancy rate fell to 82.7% from 85.4% a year ago, while in-place and committed occupancy improved from 87.7% to 89% for the same period. Dream Office owned 3.155 million square feet in the downtown Toronto office market as of Dec. 31. The market’s vacancy hit a record high in the fourth quarter, according to a report from CBRE.
Distribution Cuts Expected
Mark Rothschild, an analyst with Canaccord Genuity, said the risk of Dream Office cutting its distribution was already factored into the unit price.
“With no signs of improvement in fundamentals and the likelihood that it will take longer than expected to improve net operating income, reducing risk and preserving liquidity is of greater importance. This is magnified by the more difficult lending market towards office properties, compounded by the impact of higher interest rates,” Rothschild said in a note.
Dream Office is reportedly looking to sell some of its assets and has hired CBRE and Toronto Dominion Bank to find a buyer for 438 University Ave. Dream has yet to comment. The company sold a building at 720 Bay St. in early 2023.
Dream Office is the latest office REIT to slash its dividend. Toronto-based Slate Office, a landlord in Canada and the U.S., cut its distribution last year and amended its declaration of trust to remove the leverage restrictions.
“We believe we are starting to see green shoots in the office sector and accelerating demand from emerging and established companies looking for high-quality office space,” said Brady Welch, interim chief executive of Slate Office, during a conference call with analysts Thursday.
The REIT said for the period ending Dec. 31, occupancy was 78.6%, down from 79.1% a quarter earlier.
Slate Office announced a 15-year, 107,000-square-foot lease agreement with a top Canadian financial technology company at the West Metro Corporate Centre in the Toronto suburb of Etobicoke. The REIT did not name the tenant.
“In a challenging office market, we have been able to increase occupancy at the property by nearly 20% while extending the average lease term by two years and significantly improving net operating income,” said Welch.
CBRE noted this month that vacancy in downtown Toronto’s office market hit another new high of 16.7% in the fourth quarter of 2023.
“When analyzing climbing vacancy, it is unfair to look at the office sector as one homogenous sector,” said CBRE in its report.
“There is a tranche of inventory that because it is old, it is dated, it is commodity office and more importantly, because it has no pathway to decarbonization, that portion of the market may never recover, at least not in a meaningful way,” said CBRE.
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