Dream Office Real Estate Investment Trst Q3 Earnings Call Highlights

Key Points

• ILAC’s bankruptcy cut Dream Office’s Toronto occupancy outlook: After leasing back 53,000 square feet, about 80,000 square feet remains vacant, representing roughly CAD 4.3 million in annual gross rent. The REIT lowered its year-end Toronto committed occupancy target to 85%–87% and in-place target to 82%–84%.
• Dream Office maintained its 2026 FFO guidance of CAD 2.35–CAD 2.40 per unit and said it remained on track for the high end, supported by cost savings and stronger leasing. Third-quarter diluted FFO was CAD 0.62 per unit, up from CAD 0.60 a year earlier.
• Toronto office conditions improved in the quarter before ILAC’s lease disclaimer: committed occupancy held at 90%, in-place occupancy rose to 83.5%, and downtown Toronto vacancy fell to 13.1%. Net asset value declined CAD 0.59 quarter over quarter to CAD 48.64 per unit, primarily due to property valuation losses.

Dream Office Real Estate Investment Trst TSE: D.UN lowered its year-end Toronto occupancy targets after a major tenant’s bankruptcy, but maintained its 2026 earnings outlook as stronger leasing and lower operating costs helped offset the setback.

The office landlord reported third-quarter diluted funds from operations, or FFO, of CAD 0.62 per unit, up from CAD 0.60 a year earlier and down from CAD 0.65 in the second quarter. Comparative property net operating income rose 4.5% year over year to CAD 24.4 million.

Chair and CEO Michael Cooper said Canadian office market conditions have improved over the past five quarters, particularly in Toronto. But he described the collapse of International Language Academy of Canada, or ILAC, as a surprise to the company.

ILAC bankruptcy reduces occupancy outlook

ILAC filed for bankruptcy on Sept. 18 and ceased operations, said Derrick Lau, senior vice president of portfolio management. Its leases were disclaimed in October, after the third quarter ended. The tenant had occupied 132,000 square feet across two Toronto properties.

Dream Office signed a direct lease for 53,000 square feet at 655 Bay Street with a subtenant already operating there, recovering approximately 40% of ILAC’s former footprint. Director of Asset Management Kingsley Fforis said the rent on the space previously occupied by the subtenant was the same as Dream Office had collected from ILAC. Cooper said the new tenant also took on just under another 10,000 square feet, for which the landlord provided a cash inducement.

After that deal, roughly 80,000 square feet remains to be re-leased, representing approximately 2.7% of occupancy and CAD 4.3 million of annual gross rent beginning in the fourth quarter, Fforis said.

Dream Office reduced its year-end Toronto committed occupancy target to 85%–87% and its in-place occupancy target to 82%–84%. Before ILAC’s announcement, the company had been on track to exceed its previous targets of committed occupancy in the high 80s and in-place occupancy in the mid-80s, Fforis said.

Management is marketing the returned space to school operators, which Fforis said would limit the cost of re-leasing premises configured for educational use. Converting the space for an office tenant would be more expensive, he said.

FFO guidance maintained as leasing improves

Despite the vacancy, Dream Office maintained its 2026 FFO guidance of CAD 2.35 to CAD 2.40 per unit. CFO Jay Jiang said the REIT had generated CAD 1.83 per unit through nine months and was on track to deliver at the high end of the range, helped by operating cost savings, higher straight-line rent and the sale of 212 King.

The company also maintained its full-year comparative property NOI growth targets of 3%–5% for downtown Toronto and 1%–3% for the total portfolio. Fforis said stronger revenue-sharing income and lower operating expenses earlier in the year more than offset ILAC’s impact on full-year Toronto NOI.

For 2027, Jiang said ILAC’s annualized impact was approximately CAD 0.22 per unit before any recovery from re-leasing. Cooper said the ultimate impact should be lower as Dream Office leases the returned space or other vacancies, though management could not yet quantify the offset.

Jiang said the company’s longer-term goal remains within range: At its annual meeting, management said reaching 90% in-place occupancy in Toronto could support approximately CAD 3 of FFO per unit and debt to EBITDA of 10.5 times by 2028. He characterized ILAC’s departure as a delay and said the company expects to provide a clearer picture of timing by the middle of next year.

Toronto occupancy steady in third quarter

Dream Office completed 43,000 square feet of new leases and 49,000 square feet of renewals during the quarter. Toronto committed occupancy held at 90%, while in-place occupancy increased 30 basis points from the prior quarter to 83.5%. Those figures do not reflect ILAC’s post-quarter lease disclaimer.

Fforis said Toronto tenant retention was 71% in the quarter. Adelaide Place was 97.5% committed, while committed occupancy on Bay Street improved to about 85%. He said demand had spread from higher-class buildings to other assets as premium space filled.

Management said the wider market also strengthened. National office vacancy fell 40 basis points from the prior quarter to 16.7%, while downtown Toronto vacancy declined 90 basis points to 13.1%, Lau said. National sublease space dropped by 1.3 million square feet, the largest quarterly decline since 2005, according to Lau.

Balance sheet and property values

Dream Office ended the quarter with approximately CAD 102 million in cash and undrawn revolving credit capacity. Jiang said the company had refinanced its last remaining 2026 debt maturity and was in discussions with lenders about some 2027 maturities.

Net asset value fell CAD 0.59 from the prior quarter to CAD 48.64 per unit, primarily because of CAD 24 million in fair-value losses. Those losses included valuation adjustments at the two properties affected by ILAC’s insolvency. Interest rate swaps gained approximately CAD 7.9 million, partly offsetting the property valuation losses.

A reorganization of Dream Office’s 49.9% interest in Sussex Centre changed its accounting treatment without changing the REIT’s economic interest. The property is now equity accounted and excluded from reported occupancy, debt and assets. Jiang said the change reduced reported debt as a percentage of assets by about 120 basis points to 53.3% and net debt to EBITDA by about 0.6 times to 10.9 times.

Cooper said Dream Office is not currently looking to sell assets in its core Toronto portfolio. Instead, management’s principal approach to reducing debt relative to EBITDA is to grow operating income and EBITDA, he said.

About Dream Office Real Estate Investment Trst (TSE:D.UN)

Dream Office Real Estate Investment Trust is a real estate investment trust that acquires, manages, and leases primarily central business district and suburban office properties in urban areas throughout Canada. The majority of the company's real estate portfolio, in terms of revenue generation, is located in the Canadian province of Ontario. The province of Alberta also brings in a sizable percentage of revenue. The company generates nearly all of its revenue in the form of rental income from mid- to long-term lease agreements with tenants.

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