2018 Annual Report
36 Toronto Street
Toronto, ON
Dream Office REIT owns
well-located, high-quality central
business district office properties
in major urban centres across
Canada, with a focus on downtown
Toronto.
Letter to Unitholders
It is very exciting to end the restructuring and strategic
plan phase as we enter 2019. Even though we have been
making progress on developments, intensification and
increasing our rents, we believe that with the occupancy
at 438 University Avenue in December, we are in a
different era.
We expect growing comparative property income for
the year with the major source of growth coming from
our downtown Toronto assets, which now account for
over two-thirds of our portfolio in value. The market
continues to be very strong as people want to live and
work in downtown Toronto more than anywhere else.
We are seeing a significant shift to office space being a
benefit to employees. This is a major shift as office space
historically was just an expense and provided very little
differentiation. Now office space is making a significant
difference on companies’ ability to hire and retain
employees who have become the scarcest resource for
most businesses.
Our downtown Toronto buildings are uniquely positioned
for upgrading into luxury boutique office buildings that
can provide tenants with space they are excited about
and proud of with abundant amenities. In 2019, we are
focusing our creativity and capital to create the Bay Street
Village which is composed of our eight buildings centred
around Bay Street and Temperance Street. Not only do we
believe that we can achieve returns on our capital that is
exceptional, but we also believe that our efforts will help
define our new business model and will drive rents higher
in all of our other buildings in downtown Toronto.
Effectively, we believe that the downtown Toronto market
will outperform the rest of Canada and will maintain and
increase value based on cash flow growth. In addition,
we believe that there will be a further value premium for
having a portfolio of 3.4 million square feet in one of the
best office markets globally based on the quality of life
and the growth in population, income and tech jobs we
are experiencing.
Although there is new competition from buildings under
development, the demand appears to exceed the new
supply and our buildings are further protected from the
new supply as we appeal to smaller tenants who want
smaller luxury space in the middle of everything.
All of our employees are working together to create unique
buildings with unique experiences for our tenants. We have
seen tenant satisfaction improve and our colleagues are
bringing creativity to our buildings resulting in continual
improvements to the buildings, increased value from the
money spent on operating costs and much higher quality
buildings. Our team is not only focused on the exciting
changes to our portfolio, they are also focused on how
to improve how we run our platform by continuing to find
ways to do more with less. This allows us to keep our best
people fully engaged and reduce costs.
Our portfolio of assets and capital structure today is well
positioned to deliver attractive value and returns for all of
our unitholders. We thank you for your continued support
in Dream Office REIT and look forward to delivering on our
goals in 2019.
Sincerely,
Michael J. Cooper
Chief Executive Officer
February 21, 2019
“We are focused on increasing
the value of all of our assets through
initiatives that provide our tenants
with an even better experience within
our buildings, pursuing intensifica-
tion opportunities and maximizing
our net operating income.”
Michael J. Cooper
Chief Executive Officer
438 University Avenue
Toronto, ON
Dream Office REIT
At a Glance
$3.1 Billion
TOTAL ASSETS
45.0%
NET TOTAL DEBT-TO-NET TOTAL ASSETS
$24.97
NET ASSET VALUE PER UNIT
93.0%
OCCUPANCY
(INCLUDING COMMITTED)
Adelaide Place
Toronto, ON
4%
CALGARY
6%
OTHER MARKETS(2)
14%
OTTAWA/
MONTRÉAL
68%
MISSISSAUGA/
NORTH YORK
8%
TORONTO
DOWNTOWN
Top 10 Tenants with Weighted Average Lease Term of 4.3 Years
TENANT
Government of Canada
Government of Ontario
State Street Trust Company
Government of Québec
National Bank of Canada
AON Canada Inc.
International Financial Data Services
U.S Bank National Association
Medcan Health Management Inc.
TD Canada Trust
Total
GROSS RENTAL
REVENUE
(%)
OWNED AREA
(THOUSANDS OF
SQ. FT.)
OWNED AREA
(%)
CREDIT RATING (3)
11.2
9.3
4.2
2.7
2.7
2.5
2.5
1.8
1.7
1.4
620
613
219
198
237
152
137
185
81
125
9.4
9.3
3.3
3.0
3.6
2.3
2.1
2.8
1.2
1.9
AAA/A-1+
A+/A-1
AA-/A/A-1+
AA-/A-1+
A/A-1
A-/A-2
N/R
AA-/A-1+
N/R
AA-/A-1+
40.0
2,567
38.9
Comparative Properties NOI by Region(4)
Gross Leasable Area by Region(5)
12%
OTTAWA &
MONTRÉAL
11%
MISSISSAUGA
& NORTH YORK
9%
OTHER
MARKETS
7%
CALGARY
7+
7%
CALGARY
16%
OTHER
MARKETS
DOWNTOWN 7+
10%
MISSISSAUGA
& NORTH YORK
16%
OTTAWA &
MONTRÉAL
61%
TORONTO
16 51%
TORONTO
DOWNTOWN
(1) This chart illustrates the fair value of investment properties by region, excluding investment properties for future redevelopment and properties under development, as at December 31, 2018. (2) Other markets
include 1% of S.W. Ontario, 2% U.S. and 3% Saskatchewan based on investment property fair value. (3) Credit ratings are obtained from Standard & Poor’s and may reflect the parent’s or guarantor’s
credit rating. N/R – not rated. (4) For the three months ended December 31, 2018. (5) This chart illustrates the GLA of investment properties by region, excluding investment properties for future redevelopment
and properties under development, as at December 31, 2018.
Geographic Diversification(1)61
+
11
+
12
+
9
51
+
10
+
16
+
Our Values
Integrity
Teamwork
Dealing with stakeholders
Social responsibility
Opportunities
Fun
These values provide the foundation
for our corporate culture – acting as
a strong platform on which to build
sustainability into Dream’s DNA.
Building Better
Communities
Our ambition is to integrate
sustainability objectives throughout
our business. We set quantitative and
qualitative targets to help focus on
reaching our goals.
Our aim is to directly tie
sustainability to our corporate
values, our culture and the way in
which we conduct our business.
Sustainability
Commitment to sustainability
At Dream Office REIT, we have been
integrating best practices into our
environmental platform since 2011.
We’ve been working hard to reduce our
environmental footprint by minimizing
resource consumption and greenhouse gas
emissions. Reducing our energy and water
usage as well as decreasing or diverting
our waste benefits the environment, our
tenants, and future generations.
Tenants are becoming more aware of the
energy performance, carbon footprint
and associated costs of buildings.
Developing and maintaining high-quality,
energy efficient buildings has become
a differentiating factor that allows us
to appeal to a broader range of tenants
and sustain high occupancy rates – an
environmentally sound building is a
desirable building.
At Dream, we also recognize the value
of green buildings. That is why 100% of
all Canadian properties over 100,000
square feet in Dream Office REIT are BOMA
BEST certified with operating standards
requiring smart management of energy,
water and waste. The ongoing monitoring
of resource consumption, environmental
regulations, and continued retro-
commissioning of our buildings help us to
better position our assets for the future.
At the end of 2017, 12% of Dream Office
REIT’s properties were LEED certified, with
an additional 4% in progress.
Improving energy efficiency is an import-
ant part of our operational strategy for our
buildings. It reduces costs and decreases
our contribution to carbon emissions and
climate change. Our initiatives have
resulted in a 10% reduction in energy
consumption and a 9% reduction in water
use in our portfolio from 2014 to 2017.
Further, we have reduced our greenhouse
gas emissions by over 18,000 tonnes in
that same period.
We enable energy efficiency and
conservation through capital investments,
process changes and modifying behaviours.
Accordingly, we have completed energy
audits throughout the portfolio, identifying
areas for improvement and incorporating
them into our ten-year capital plan.
Another example of Dream Office REIT’s
commitment to sustainability was
demonstrated by Dream’s head office at
30 Adelaide Street East in Toronto winning
BOMA’s Race2Reduce CREST Award for
Energy Management Leadership. This award
recognizes those who have demonstrated
their commitment to improve the energy
efficiency and operational best practices
in their building.
As a company, we also support the
communities in which we live and work
through our charitable partnerships and
commitments. In 2018, we prepared and
donated over 1,800 shoeboxes for The
Shoebox Project for Women’s Shelters and
over 400 gifts for seniors through our Tree
of Dreams.
We continue to implement strategies
to improve sustainability practices
throughout our organization and portfolio
and have highlighted a few examples over
the next few pages.
Dream Office REIT Partners
with Tesla Motors
In 2018, Tesla Motors partnered with Dream Office
REIT to provide electric vehicle chargers in several
parking facilities in Dream Office REIT’s properties
throughout downtown Toronto. Tesla provided full
turn-key service for the installation of 80 chargers and
one of every four is equipped with an adapter that will
work for any type of electric vehicle.
The partnership is mutually beneficial as Tesla was
looking to expand the presence of its charging stations
in downtown Toronto and Dream Office REIT is always
looking for ways to lessen our environmental impact.
Sussex Centre to be
Fitwel Certified
Sussex Centre is in the process of becoming Fitwel
certified. Fitwel is a high impact building certification
designed to support healthier workplace environments
and improve occupant health and productivity.
Items to highlight that contribute to Sussex Centre’s
soon-to-be success are its close proximity to multiple
parks, including Kariya Park – a Japanese-inspired
gardens providing a therapeutic landscape amenity
that improves employee mental health, reduces stress
levels and improves productivity. A Walk Score of 70+
adds to improved health by increasing opportunities
for regular physical activity, social interaction, and
access to amenities. The site also has secure, sheltered
bicycle parking to increase and encourage cycling to
work. For more information on the certification please
visit www.fitwel.org
Energy audits
Dream Office REIT recently completed portfolio-wide energy
audits with the goal of putting together an energy efficiency
improvement roadmap to optimize the way we operate and
manage our buildings.
The audit resulted in recommendations such as LED
retrofits, heating and air conditioning upgrades and
retro-commissioning (a process that seeks to improve how
building equipment and systems function together). These
recommendations were added to the ten-year capital plan
enabling Dream Office REIT to be aware of and plan for
future upgrades, thereby capturing economies of scale.
36 Toronto Street
Toronto, ON
Dream head office recognized for
Energy Management Leadership
30 Adelaide Street East
As a proud participant in BOMA’s Race2Reduce, Dream’s head
office at 30 Adelaide Street East in Toronto was recognized
for best-in-class Energy Management Leadership for the
Commercial Real Estate Sustainability Trailblazer (CREST)
Award.
Dream was presented with the Energy Management Leadership
award in the 250,000–500,000 square foot category. The
award recognizes those that have demonstrated commitment to
improve the energy efficiency and operational best practices in
their building. The success is measured by percentage reduction
in energy use intensity from a 2016 baseline.
Race2Reduce is an unprecedented collaboration between
owners, managers and tenants to promote energy efficiency
and operational excellence across the commercial real estate
industry.
30 Adelaide Street East
Toronto, ON
Sustainability Highlights
Environmental*
—
Reduced energy consumption by 10%
from 2014 to 2017
—
Reduced greenhouse gas emissions by
18,500 tonnes (equivalent to removing
over 4,100 cars from the road for one year)
—
Reduced water consumption by
9% from 2014 to 2017
—
12% LEED certified,
with 4% underway
—
100% of all Canadian properties over 100,000
square feet are BOMA BEST certified
Governance
—
43% of Dream Office REIT Board members
and the majority of the senior executives
of Dream’s public companies are women
—
71% of Dream Office REIT Board
members are independent
—
Embedded elements of
sustainability in Board mandates
Social**
—
~1,800+ shoeboxes were donated to
The Shoebox Project for Women’s Shelters
by Dream
—
Close to $1 million was donated to
charities and communities
—
~$325,000 in tuition and professional
development fees was reimbursed to employees
—
National sponsor of The Shoebox Project
for Womens Shelters and partner with Women’s
College Hospital
—
420 gifts were donated to seniors by
Dream Office REIT and its tenants through the
Tree of Dreams
* Environmental highlights are based on 2017
** Social highlights are based on all Dream entities combined
“This is wonderful, we appreciate your time,
effort and generosity. I can’t even put into
words how much this means.”
Bill McMurray Residence for seniors, Tree of Dreams participant
Celina Gomes
Tree of Dreams
For the fourth consecutive year, Dream Office REIT
hosted the Tree of Dreams campaign, in support of local
charities that care for underprivileged seniors. Through
this campaign, Dream Office REIT and its tenants can
send gifts to seniors in our communities who might
otherwise not receive gifts or visits during the holidays.
With your help, we distributed over 400 gifts to seniors
in need, right here in our community.
Table of Contents
Section I
Key Performance Indicators
at a glance
Basis of Presentation
Forward-looking Disclaimer
Our Objectives
Financial Overview
Section II
Our Properties
Comparative portfolio owned gross
leasable area and fair value by
region
Top ten tenants
Our Operations
Comparative portfolio occupancy
Comparative portfolio rental rates
Net rental income
Comparative portfolio leasing costs
and lease incentives
Comparative portfolio lease maturity
profile, lease commitments and
expiring net rental rates
Our Results of Operations
Section III
Investment Properties
Investment property continuity
Properties under development
Valuations of externally appraised
properties
Fair value adjustments to investment
properties
1
2
3
3
4
6
6
6
7
7
9
10
12
13
14
20
20
21
22
22
357 Bay Street
Toronto , ON
Assumptions used in the valuation
of investment properties using the
capitalization rate method
Assumptions used in the valuation
of investment properties using the
discounted cash flow method
Building improvements
Dispositions update
Investment in Dream Industrial REIT
Our Financing
Debt summary
Liquidity & capital resources
Financing activities during the
quarter and year
Demand revolving credit facilities
Debt maturity profile
Commitments & contingencies
Our Equity
Total equity
NAV per unit
Outstanding equity
Normal course issuer bid (“NCIB”)
Substantial issuer bid (“SIB”)
Weighted average number of units
Distribution policy
Cash flows from operating activities
& distributions declared
Selected Annual Information
Section IV
Non-GAAP Measures & Other
Disclosures
Quarterly Information
23
23
23
24
25
26
26
26
27
27
27
28
28
28
29
29
30
30
30
31
31
32
33
39
Key portfolio, leasing, financing and
other capital information
Results of operations
Reconciliation between net income
(loss) and funds from operations
39
39
40
Section V
Disclosure Controls & Procedures
41
Section VI
Risks & Our Strategy to Manage
42
Section VII
Critical Accounting Policies
Section VIII
Asset Listing
Consolidated Financial Statements
Independent auditor’s report
Consolidated balance sheets
Consolidated statements of
comprehensive income
Consolidated statements of
changes in equity
Consolidated statements of
cash flows
Notes to the consolidated financial
statements
46
48
50
51
54
55
56
57
58
Trustees and Management Team
Corporate Information
IBC
IBC
Management’s discussion and analysis
(All dollar amounts in our tables are presented in thousands of Canadian dollars, except for rental rates, unit and per unit amounts, or unless otherwise stated)
SECTION I
KEY PERFORMANCE INDICATORS AT A GLANCE
Performance is measured by these and other key indicators:
Total portfolio(1)
Number of properties
Investment properties value
Gross leasable area (“GLA”)(2)
Comparative portfolio(3)
Occupancy rate – including committed (period-end)
Occupancy rate – in-place (period-end)
Average in-place and committed net rent per square foot (period-end)
Weighted average lease term (“WALT”) (years)
December 31,
2018
September 30,
2018
As at
December 31,
2017
37
37
$
2,778,826 $
2,732,200 $
7.3
7.3
43
2,919,438
8.6
$
93.0 %
91.5 %
20.97 $
5.2
94.2 %
88.3 %
20.87 $
5.0
94.6 %
89.7 %
20.86
5.1
December 31,
2018
September 30,
2018
Three months ended
December 31,
December 31,
December 31,
Year ended
2017
2018
2017
Operating results
Net income
Net rental income
Comparative properties net operating
income (“NOI”)(4)
Funds from operations (“FFO”)(5)
EBITDAFV(6)
Distributions
Total distributions(7)
Per unit amounts
Distribution rate(8)
FFO (diluted)(5)(9)
$
$
$
58,489 $
35,692
41,382 $
37,365
100,731 $
41,655
157,778 $
154,965
134,786
261,930
36,240
25,736
40,260
35,306
26,688
42,370
35,502
32,235
46,239
142,971
115,796
167,436
146,073
197,869
274,011
16,207 $
16,342 $
19,927 $
68,591 $
122,422
0.25 $
0.39
0.25 $
0.40
0.25 $
0.40
1.00 $
1.66
1.25
2.03
Financing
Weighted average face rate of interest on debt (period-end)(10)
Interest coverage ratio (times)(11)(12)
Net total debt-to-adjusted EBITDAFV (years)(11)
Level of debt (net total debt-to-net total assets)(11)
Level of debt (net secured debt-to-net total assets)(11)
Average term to maturity on debt (years)
Unencumbered assets(13)
Available liquidity(14)
Capital (period-end)
Total number of REIT A Units and LP B Units (in millions)(15)
Net asset value (“NAV”) per unit(16)
December 31,
2018
September 30,
2018
As at
December 31,
2017
4.06 %
2.8
9.0
45.0 %
40.2 %
3.8
140,000 $
163,908 $
3.94 %
2.8
9.1
46.2 %
41.4 %
4.0
140,000 $
232,826 $
64.6
24.97 $
65.3
24.40 $
3.90 %
3.2
7.1
39.6 %
30.6 %
4.5
299,000
493,627
78.9
23.46
$
$
$
(1) Total portfolio excludes properties held for sale at the end of each period.
(2) In millions of square feet.
(3) Current and comparative periods exclude properties sold, properties held for future redevelopment and properties under development as at December 31,
2018.
Dream Office REIT 2018 Annual Report | 1
(4) Comparative properties NOI (non-GAAP measure) is defined and reconciled to net rental income in the section “Non-GAAP Measures and Other
Disclosures” under the heading “Comparative properties NOI”.
(5) FFO (non-GAAP measure) – The reconciliation of FFO to net income (loss) can be found in the section “Non-GAAP Measures and Other Disclosures” under
the heading “Funds from operations (“FFO”)”.
(6) EBITDAFV (non-GAAP measure) – The reconciliation of EBITDAFV to net income (loss) can be found in the section “Non-GAAP Measures and Other
Disclosures” under the heading “Earnings before interest, taxes, depreciation, amortization and fair value adjustments (“EBITDAFV”)”.
(7) Total distributions (non-GAAP measure) – The reconciliation of total distributions paid and payable to total distributions paid and payable on REIT A Units
can be found in the section “Non-GAAP Measures and Other Disclosures” under the heading “Total distributions paid and payable”.
(8) Effective with the July 2017 distribution, the Trust revised its monthly distribution to $0.08333 per unit, or $1.00 on an annualized basis.
(9) A description of the determination of diluted amounts per unit can be found in the section “Our Equity” under the heading “Weighted average number of
units”.
(10) Weighted average face rate of interest on debt is calculated as the weighted average face rate of all interest bearing debt balances.
(11) The calculation of the following non-GAAP measures – interest coverage ratio, net total debt-to-adjusted EBITDAFV and levels of debt – are included in the
section “Non-GAAP Measures and Other Disclosures”.
(12) Interest coverage ratio has been restated in the December 31, 2017 comparative period to conform to current period presentation. For further details,
please refer to the “Non-GAAP Measures and Other Disclosures” section under the heading “Interest coverage ratio”.
(13) Unencumbered assets (non-GAAP measure) is defined in the section “Non-GAAP Measures and Other Disclosures” under the heading “Unencumbered
assets”.
(14) Available liquidity (non-GAAP measure) is defined in the section “Non-GAAP Measures and Other Disclosures” under the heading “Available liquidity”.
(15) Total number of REIT A Units and LP B Units includes 5.2 million LP B Units which are classified as a liability under IFRS.
(16) NAV per unit (non-GAAP measure) is defined in the section “Non-GAAP Measures and Other Disclosures” under the heading “NAV per unit” and the
reconciliation of NAV per unit to equity (as per consolidated financial statements) can be found in the section “Our Equity”.
BASIS OF PRESENTATION
Our discussion and analysis of the financial position and results of operations of Dream Office Real Estate Investment Trust
(“Dream Office REIT” or the “Trust”) should be read in conjunction with the audited consolidated financial statements of
Dream Office REIT and the consolidated financial statements of Dream Office REIT for the years ended December 31, 2017 and
December 31, 2018, respectively.
This management’s discussion and analysis (“MD&A”) is dated as at February 21, 2019.
For simplicity, throughout this discussion, we may make reference to the following:
• “REIT A Units”, meaning the REIT Units, Series A of the Trust;
• “REIT B Units”, meaning the REIT Units, Series B of the Trust;
• “REIT Units”, meaning the REIT Units, Series A, and REIT Units, Series B, of the Trust;
• “Units”, meaning REIT Units, Series A, REIT Units, Series B, and Special Trust Units, collectively; and
• “LP B Units” and “subsidiary redeemable units”, meaning the LP Class B, Series 1 limited partnership units of Dream Office
LP (a wholly owned subsidiary of the Trust).
When we use terms such as “we”, “us” and “our”, we are referring to Dream Office REIT and its subsidiaries.
Market rents disclosed throughout the MD&A are management’s estimates at a point in time and are subject to change based
on future market conditions.
In addition, certain disclosure incorporated by reference into this report includes information regarding our largest tenants that
has been obtained from available public information. We have not verified any such information independently.
Dream Office REIT 2018 Annual Report | 2
FORWARD-LOOKING DISCLAIMER
Certain information herein contains or incorporates comments that constitute forward-looking information within the meaning
of applicable securities legislation, including but not limited to statements relating to the Trust’s objectives, strategies to achieve
those objectives, the Trust’s beliefs, plans, estimates, projections and intentions, and similar statements concerning anticipated
future events, future growth, stability of NOI at our properties, results of operations, performance, business prospects and
opportunities, acquisitions or divestitures, tenant base, future maintenance and development plans and costs, capital
investments, financing, the availability of financing sources, income taxes, vacancy, renewal and leasing assumptions, future
leasing costs and lease incentives, litigation and the real estate industry in general (including statements regarding our
disposition targets, the timing of proposed dispositions, use of proceeds from asset sales, redevelopment and intensification
plans and timelines, expected capital requirements and cost to complete development projects, anticipated income and yield
from properties under development, the future composition of our portfolio, future NAV growth, cash flows, debt levels,
liquidity and leverage and our future capital requirements and ability to meet those requirements), in each case that are not
historical facts. Forward-looking statements generally can be identified by words such as “outlook”, “objective”, “may”, “will”,
“would”, “expect”, “intend”, “estimate”, “anticipate”, “believe”, “should”, “could”, “likely”, “plan”, “project”, “budget” or
“continue” or similar expressions suggesting future outcomes or events. Forward-looking information is based on a number of
assumptions and is subject to a number of risks and uncertainties, many of which are beyond Dream Office REIT’s control, which
could cause actual results to differ materially from those disclosed in or implied by such forward-looking information. These risks
and uncertainties include, but are not limited to, general and local economic and business conditions; the financial condition of
tenants; our ability to refinance maturing debt; our ability to sell investment properties at a price which reflects fair value;
leasing risks, including those associated with the ability to lease vacant space; our ability to source and complete accretive
acquisitions; and interest rates.
Although the forward-looking statements contained in this MD&A are based on what we believe are reasonable assumptions,
there can be no assurance that actual results will be consistent with these forward-looking statements. Forward-looking
information is disclosed in this MD&A as part of the sections “Our Objectives” and “Financial Overview”. Factors that could
cause actual results to differ materially from those set forth in the forward-looking statements and information include, but are
not limited to, general economic conditions; local real estate conditions, including the development of properties in close
proximity to the Trust’s properties; timely leasing of vacant space and re-leasing of occupied space upon expiration; dependence
on tenants’ financial condition; costs to complete development activities; NOI from development properties on completion; the
uncertainties of acquisition activity; the ability to effectively integrate acquisitions; interest rates; availability of equity and debt
financing; our continued compliance with the real estate investment trust (“REIT”) exception under the specified investment
flow-through trust (“SIFT”) legislation; and other risks and factors described from time to time in the documents filed by the
Trust with securities regulators.
All forward-looking information is as of February 21, 2019. Dream Office REIT does not undertake to update any such forward-
looking information whether as a result of new information, future events or otherwise, except as required by applicable law.
Additional information about these assumptions, risks and uncertainties is contained in our filings with securities regulators,
including our latest Annual Report and Annual Information Form available on the System for Electronic Document Analysis and
Retrieval (“SEDAR”) at www.sedar.com. Certain filings are also available on our website at www.dreamofficereit.ca.
OUR OBJECTIVES
We have been and remain committed to:
• Managing our business and assets to provide both yield and growth over the longer term;
• Driving superior risk-adjusted returns and NAV growth by investing in our assets through upgrades, intensification and
redevelopment, and selectively disposing of assets with lower long-term return potential;
• Building and maintaining a strong, flexible and resilient balance sheet; and
• Maintaining a REIT status that satisfies the REIT exception under the SIFT legislation in order to provide certainty to
unitholders with respect to taxation of distributions.
Dream Office REIT 2018 Annual Report | 3
FINANCIAL OVERVIEW
• Net income for the quarter and year: For the three months ended December 31, 2018, the Trust generated net income of
$58.5 million, consisting of net rental income of $35.7 million, fair value adjustments to investment properties of
$20.2 million, share of income from our investment in Dream Industrial REIT of $12.7 million and fair value adjustments to
financial instruments of $11.2 million, which was offset by interest expense on debt and subsidiary redeemable units of
$16.3 million, general and administrative expenses of $3.0 million and leasing, net losses on transactions and debt
settlement costs of $2.0 million.
For the year ended December 31, 2018, the Trust generated net income of $157.8 million, consisting of net rental income of
$155.0 million, share of income from our investment in Dream Industrial REIT of $43.1 million and fair value adjustments to
investment properties of $47.5 million, which was offset by interest expense on debt and subsidiary redeemable units of
$66.0 million, general and administrative expenses of $12.5 million, leasing, net losses on transactions and debt settlement
costs of $7.2 million, fair value adjustments to financial instruments of $1.4 million and cumulative other items of
$0.7 million.
• Diluted FFO per unit(1) for the quarter and year: Diluted FFO per unit for the three months ended December 31, 2018 was
$0.39 ($0.40 excluding debt settlement costs on early mortgage refinancing included in FFO), compared to $0.40 at Q3 2018
and $0.40 at Q4 2017. Diluted FFO per unit for the year ended December 31, 2018 was $1.66 ($1.59 excluding debt
settlement costs on early mortgage refinancing, lease termination fees and other non-recurring items) compared to $2.03
($1.97 excluding lease termination fees and other non-recurring items) in the prior year comparative period.
The quarter-over-quarter diluted FFO per unit decreased slightly to $0.39, primarily driven by decreased NOI from sold
properties, offset by increased comparative properties NOI(1) and interest savings.
The year-over-year decrease in diluted FFO per unit for the three months and year ended December 31, 2018 was mainly
due to asset sales (partially offset by unit buybacks and debt reduction) (-$0.02 and -$0.36, respectively), debt settlement
costs on early mortgage refinancing (-$0.01 in both periods), changes in comparative properties NOI(1) (+$0.01 and -$0.04,
respectively) and increase in share of FFO from investment in Dream Industrial REIT (+$0.01 and +$0.04, respectively).
• NAV per unit(1): As at December 31, 2018, our NAV per unit was $24.97, compared to $24.40 at September 30, 2018 and
$23.46 at December 31, 2017, up $0.57 or 2.3% and $1.51 or 6.4%, respectively.
The quarter-over-quarter and year-over-year increase in NAV per unit of $0.57 and $1.51, respectively, were mainly due to
the fair value gains on properties in the Toronto downtown region, unit buybacks and retention of cash flow from
operating activities.
NAV per unit is considered one of the Trust’s key metrics and has increased for seven consecutive quarters since Q2 2017.
• Comparative properties NOI(1) for the quarter and year: For the three months ended December 31, 2018, comparative
properties NOI increased 2.6%, or $0.9 million, when compared with the prior quarter, mainly driven by higher occupancy in
the Toronto downtown region, most notably the new government lease commencement (191 thousand square feet) at
438 University Avenue on December 1, 2018, along with 55 thousand square feet of positive leasing absorption across the
region during the quarter at higher rental rates. The gains in the Toronto downtown region were partially offset by the
continuing leasing challenges in Calgary and Saskatchewan within the Other markets region.
For the three months ended December 31, 2018, comparative properties NOI increased by 2.1%, or $0.7 million, over the
prior year comparative quarter, mainly driven by higher occupancy and rental rates in Toronto downtown, partially offset by
lower occupancy and rental rates in the Other markets and Ottawa and Montréal regions.
•
For the year ended December 31, 2018, comparative properties NOI decreased by 2.1%, or $3.1 million, over the prior year,
primarily driven by previously known large vacancies in downtown Toronto (438 University Ave.) and downtown Montréal
(700 De la Gauchetière St. W.) (“700 DLG”).
In-place occupancy: Comparative portfolio in-place occupancy on a quarter-over-quarter basis increased to 91.5% when
compared to 88.3% at Q3 2018. The increase in in-place occupancy was mainly driven by positive leasing absorption in the
Toronto downtown, Mississauga and North York and Ottawa and Montréal regions, partially offset by negative leasing
absorptions in Calgary and Saskatchewan within the Other markets region.
Comparative portfolio in-place occupancy on a year-over-year basis increased to 91.5% when compared to 89.7% at
Q4 2017. The increase in in-place occupancy was largely due to positive leasing absorption in the Toronto downtown and
Mississauga and North York regions, partially offset by negative leasing absorption in the rest of the regions.
Dream Office REIT 2018 Annual Report | 4
At December 31, 2018, vacant space committed for future occupancy was approximately 96 thousand square feet, bringing
our overall comparative portfolio in-place and committed occupancy to 93.0%. Substantially all of the Trust’s future
committed occupancy is scheduled to take occupancy through 2019.
• Leasing activity: For the three months ended December 31, 2018, approximately 687 thousand square feet of leases
commenced, of which approximately 335 thousand square feet were renewals. The overall retention ratio for the quarter
was 72%. For the year ended December 31, 2018, approximately 1.8 million square feet of leases commenced, of which
approximately 1.1 million were renewed. The overall retention ratio for the year was 70%
To today’s date, we have secured 2019 lease commitments totalling approximately 0.7 million square feet in our
comparative portfolio, representing over 84% of our expected 2019 lease maturities.
Leasing momentum in downtown Toronto remains robust, given low vacancy rates, which remain amongst the lowest in
North America. To date, we have completed over 90% of our 2019 lease maturities in the Toronto downtown region. During
the current quarter, the net rents for lease renewals that commenced in Toronto downtown were approximately 2.8%
above expiring net rents, mainly driven by the commencement of a few large leases which were negotiated in 2016. Further,
as at December 31, 2018, Toronto downtown market rents are estimated to be approximately 23% higher than our in-place
and committed net rents. As a result of when leases are executed, there is typically a lag between leasing spreads relative to
our estimates of the spread between estimated market rents and average in-place and committed net rental rates.
• Dispositions update for the quarter and year: For the three months ended December 31, 2018, the Trust sold four
properties located in Calgary for $99.5 million or approximately $163 per square foot. For the year ended December 31,
2018, the Trust sold ten properties located in Alberta and Saskatchewan totalling $302.2 million or approximately $180 per
square foot.
• REIT A Units repurchased for cancellation for the quarter and year: For the three months and year ended December 31,
2018, the Trust purchased for cancellation approximately 668 thousand REIT A Units ($23.59 per unit for a cost of
$15.7 million) and 14.5 million REIT A Units ($23.54 per unit for a cost of $340.7 million), respectively, pursuant to its
normal course issuer bid (“NCIB”) and pursuant to its substantial issuer bid to purchase for cancellation up to 10 million
REIT A Units at a price of $24.00 per REIT A Unit (“SIB”).
Subsequent to quarter-end, the Trust purchased for cancellation an additional 381,313 REIT A Units under the NCIB at a cost
of approximately $8.5 million or $22.20 per unit.
• Sound capital structure with ample liquidity: The Trust ended the quarter with a level of debt (net total debt-to-net total
assets ratio(1)) of 45.0%, net total debt-to-adjusted EBITDAFV(1) of 9.0 years and interest coverage ratio(1) of 2.8 times. The
Trust’s available liquidity(1) of approximately $164 million comprises undrawn demand revolving credit facilities totalling
approximately $155 million and $9 million of cash and cash equivalents on hand as at December 31, 2018. The overall level
of debt (net total debt-to-net total assets) ratio(1) has declined 120 basis points (“bps”) from 46.2% in Q3 2018 to 45.0% this
quarter from debt repayment with net proceeds from dispositions and fair value increases in investment properties.
As at December 31, 2018, variable rate debt as a percentage of total debt was 26.3%, a slight increase from Q3 2018, due to
the repayment of fixed rate debt on sold properties. On January 2, 2019, the Trust completed a portfolio mortgage totalling
$105 million secured by five investment properties in Toronto. The net proceeds were partially used to make lump sum
repayments on five mortgages prior to their original maturity date and the balance of the net proceeds were used to pay
down drawings on the Trust’s demand revolving credit facilities, reducing our variable rate debt percentage of total debt to
22.9%. We expect leverage and the variable rate debt as a percentage of total debt to further decline using net proceeds
from future asset sales and refinancings.
(1) Diluted FFO per unit, comparative properties NOI, NAV per unit, level of debt (net total debt-to-net total assets), net total debt-to-adjusted EBITDAFV,
interest coverage ratio and available liquidity are non-GAAP measures used by management in evaluating operating and financial performance. Interest
coverage ratio, level of debt (net total debt-to-net total assets), and level of debt (net secured debt-to-net total assets) have been restated in the
comparative periods to conform to current period presentation. Please refer to the “Non-GAAP Measures and Other Disclosures” section of the MD&A for a
full description of these non-GAAP measures and a reconciliation, where available, to the consolidated financial statements.
Dream Office REIT 2018 Annual Report | 5
SECTION II
OUR PROPERTIES
At December 31, 2018, our ownership interests included 7.3 million square feet of GLA across 37 properties, which comprise
34 office properties (6.6 million square feet), two properties under development (0.3 million square feet) and one property held
for future redevelopment (0.4 million square feet).
Comparative portfolio owned gross leasable area and fair value by region
The following pie charts illustrate the Trust’s total GLA and the fair value of investment properties by region, excluding
investment properties held for future redevelopment and properties under development, as at December 31, 2018.
Top ten tenants
Our external tenant base includes municipal, provincial and federal governments as well as a wide range of high-quality large
international corporations, including Canada’s major banks and small- to medium-sized businesses across Canada. With 641
tenants and an average tenant size of approximately 11 thousand square feet in our portfolio, excluding properties held for
future redevelopment and properties under development, our risk of exposure to any single large lease or tenant is mitigated.
The following table outlines the contributions to total gross rental revenue of our ten largest external tenants. Our ten largest
tenants have a weighted average lease term of 4.3 years.
Tenant
Government of Canada
Government of Ontario
State Street Trust Company
Government of Québec
National Bank of Canada
AON Canada Inc.
International Financial Data Services
U.S. Bank National Association
1
2
3
4
5
6
7
8
9 Medcan Health Management Inc.
10
TD Canada Trust
Total
Gross rental Owned area
(thousands
of sq. ft.)
620
613
219
198
237
152
137
185
81
125
2,567
revenue
(%)
11.2
9.3
4.2
2.7
2.7
2.5
2.5
1.8
1.7
1.4
40.0
Credit
Owned area
rating(1)
(%)
9.4
AAA/A-1+
9.3
A+/A-1
3.3 AA-/A/A-1+
3.0
AA-/A-1+
3.6
A/A-1
2.3
A-/A-2
2.1
N/R
2.8
AA-/A-1+
1.2
N/R
1.9
AA-/A-1+
38.9
(1) Credit ratings are obtained from Standard & Poor’s Rating Services Inc. and may reflect the parent’s or guarantor’s credit rating.
N/R – not rated
Dream Office REIT 2018 Annual Report | 6
OUR OPERATIONS
The following key performance indicators related to our operations influence the cash generated from operating activities.
Performance indicators
Comparative portfolio
Occupancy rate – including committed (period-end)
Occupancy rate – in-place (period-end)
Average in-place and committed net rental rates (per sq. ft.) (period-end)
WALT (years)
December 31, 2018(1) September 30, 2018(1) December 31, 2017(1)
$
93.0 %
91.5 %
20.97 $
5.2
94.2 %
88.3 %
20.87 $
5.0
94.6 %
89.7 %
20.86
5.1
(1) Current and comparative periods exclude properties sold, properties held for future redevelopment and properties under development at the end of
Q4 2018.
Comparative portfolio occupancy
The following table details our comparative portfolio in-place and committed occupancy and in-place occupancy rates, by
geographic segment at December 31, 2018, September 30, 2018 and December 31, 2017. Our in-place and committed
occupancy rates include lease commitments for space that is currently being readied for occupancy but for which rent is not yet
being recognized.
Comparative portfolio
(percentage)
Occupancy rate
Calgary
Toronto downtown
Mississauga and North York
Ottawa and Montréal
Other markets
Total
December 31,
2018(1)
In-place and committed occupancy rate
December 31,
2017(1)
September 30,
2018(1)
December 31,
2018(1)
September 30,
2018(1)
In-place occupancy rate
December 31,
2017(1)
88.8
97.8
94.7
91.1
80.6
93.0
94.2
98.1
95.6
90.0
85.1
94.2
91.4
97.3
94.5
93.6
88.6
94.6
85.1
96.9
94.2
90.0
77.1
91.5
90.3
89.6
93.2
85.9
82.8
88.3
89.0
89.5
92.6
92.1
86.1
89.7
(1) Current and comparative periods exclude properties sold, properties held for future redevelopment and properties under development at the end of
Q4 2018.
Comparative portfolio in-place occupancy on a quarter-over-quarter basis increased to 91.5% when compared to 88.3% at
Q3 2018. The major driver of the increase in in-place occupancy was the new government lease commencement (191 thousand
square feet) at 438 University Avenue in the Toronto downtown region on December 1, 2018, along with 55 thousand square
feet of positive leasing absorption across the region during the quarter. In addition, the Trust saw positive leasing absorption of
45 thousand square feet in the Ottawa and Montréal region. Partially offsetting this positive leasing absorption were negative
leasing absorptions of 27 thousand square feet and 59 thousand square feet, respectively, in Calgary and Saskatchewan within
the Other markets region.
The increase in the comparative portfolio in-place occupancy on a year-over-year basis was largely due to the same reasons
noted above for the Toronto downtown region. The year-over-year decline in the Ottawa and Montréal region was mainly due to
Bell Canada vacating approximately 0.2 million square feet of space at 700 DLG in the second quarter of 2018 that was partially
offset by 98 thousand square feet from a tenant which took occupancy immediately and a further 35 thousand square feet of
leasing in Q4 2018. The declines in the Calgary and Other markets regions were mainly due to a 27 thousand square foot tenant
departure at the 444 – 7th Building during the quarter, 31 thousand square feet of negative absorption at London City Centre
during the year and 67 thousand square feet of negative absorption in Saskatchewan during the year.
At December 31, 2018, vacant space committed for future occupancy approximated 96 thousand square feet, bringing our
overall comparative portfolio in-place and committed occupancy to 93.0%. Substantially all of the future committed occupancy
is scheduled to take occupancy some time in 2019.
Dream Office REIT 2018 Annual Report | 7
The following table details the change in occupancy (including committed) for the three months and year ended December 31,
2018:
Three months ended December 31, 2018
As a
percentage
of total
GLA(1)
Thousands
of sq. ft.(1)
Weighted
average
net rents
per sq. ft.
Weighted
average
net rents
per sq. ft.
Year ended December 31, 2018
As a
percentage
of total
GLA(1)
Thousands
of sq. ft.(1)
Occupancy (including vacancy committed for
future leases) – beginning of period
Vacancy committed for future leases
Occupancy in-place at beginning of period
Occupancy related to sold properties, properties
held for sale and future redevelopment and
properties under development
Remeasurements/reclassifications
Occupancy at beginning of period – adjusted
Expiries
Early terminations and bankruptcies
Temporary leases
New leases
Renewals
Occupancy in-place – December 31, 2018
Vacancy committed for future leases
Occupancy (including vacancy committed for
future leases) – December 31, 2018
$
(24.25)
(24.46)
—
21.79
25.42
6,233
(387 )
5,846
94.2 %
(5.9 %)
88.3 %
—
(2 )
5,844
(468 )
(6 )
7
345
335
6,057
96
88.3 %
(7.1 %)
(0.1 %)
0.1 %
5.2 %
5.1 %
91.5 %
1.5 %
$
(21.14 )
(24.37 )
3.74
20.29
20.87
7,399
(347 )
7,052
90.4 %
(4.3 %)
86.1 %
(1,120 )
1
5,933
(1,602 )
(29 )
30
604
1,121
6,057
96
89.6 %
(24.2 %)
(0.4 %)
0.5 %
9.1 %
16.9 %
91.5 %
1.5 %
6,153
93.0 %
6,153
93.0 %
(1) Excludes properties held for future redevelopment and properties under development at period-end.
The table below summarizes the retention ratio with comparison to the renewal and expiring rates for renewals that
commenced for the three months and year ended December 31, 2018. As a result of the timing of lease executions, the renewal
rates shown below were based on commitments signed in previous periods and may not be reflective of the renewal rates on
leases executed during the quarter for future commitments.
Tenant retention ratio
Renewal rate (per sq. ft.)
Expiring rents on renewed space (per sq. ft.)
Renewal to expiring rent spread (per sq. ft.)
Renewal to expiring rent spread
$
Three months ended
December 31, 2018
71.6 %
25.42 $
24.82
0.60
2.4 %
Year ended
December 31, 2018
70.0%
20.87
21.18
(0.31 )
(1.5% )
For the three months ended December 31, 2018, the renewal to expiring rent spread was $0.60 per square foot, or 2.4% higher
than expiring rents on renewed space. This was mainly driven by positive spreads on tenant renewals in the Toronto downtown
region, partially offset by lower rents on tenant renewals in the Ottawa and Montréal region. The Toronto downtown region had
an overall renewal rate of 92% at rates that were $0.70 per square foot or 2.8% higher than expiring net rents on renewed
space. The renewal spreads during the fourth quarter were narrowed by the effect of two large renewals negotiated in 2016
when market rents in Toronto downtown were significantly lower than at present.
The negative renewal to expiring rent spread for the year ended December 31, 2018 was mainly driven by lower rents on tenant
renewals in the Other markets region. Partially offsetting this are positive spreads on tenant renewals in the Toronto downtown
and Mississauga and North York regions. While leasing headwinds in Saskatchewan within our Other markets region put
downward pressure on our renewal rates for the year, the Toronto downtown region had an overall renewal rate of 81% at rates
that were $1.31 per square foot or 5.4% higher than expiring net rents for the year.
Dream Office REIT 2018 Annual Report | 8
Comparative portfolio rental rates
Average in-place and committed net rents across our comparative portfolio increased steadily throughout the year to $20.97 per
square foot at December 31, 2018, compared to $20.87 per square foot at September 30, 2018 and $20.86 per square foot at
December 31, 2017.
The overall increase in our comparative portfolio average in-place and committed net rents on a quarter-over-quarter basis was
mainly driven by the positive renewal to expiring rent spread in Toronto downtown where in-place and committed net rents rose
by $0.21 per square foot. This increase was partially offset by lower in-place and committed net rents in the Calgary region due
to higher net rents rolling off upon expiry and decreases in the Ottawa and Montréal region due to negative spreads on
renewals. All other regions saw modest increases on a quarter-over-quarter basis.
The overall increase in our comparative portfolio average in-place and committed net rents on a year-over-year basis was
primarily driven by the Toronto downtown region with net rents increasing $0.62, or 2.7%. This increase was partially offset by
declines in net rents in the rest of the regions.
The following table details the average in-place and committed net rental rates in our comparative portfolio as at December 31,
2018, September 30, 2018 and December 31, 2017:
Comparative portfolio
(per sq. ft.)
Calgary
Toronto downtown
Mississauga and North York
Ottawa and Montréal
Other markets
Total
December 31, 2018(1)
19.61 $
23.74
20.44
16.73
16.23
20.97 $
$
$
September 30, 2018(1)
Average in-place and committed net rent
December 31, 2017(1)
21.33
23.12
20.67
17.48
16.48
20.86
20.15 $
23.53
20.40
16.84
16.13
20.87 $
(1) Current and comparative periods exclude temporary leases, properties sold, properties held for future redevelopment and properties under development at
the end of Q4 2018.
Market rents represent base rents only and do not include the impact of lease incentives. Market rents reflect management’s
best estimates with reference to recent leasing activity and external market data, which do not take into account allowance for
increases in future years. Market rents are subject to change depending on the market conditions at a particular point in time.
In particular, the market rents in the Calgary region presented in the table below are based on the best available information as
at the current period and may vary significantly from period to period given the changing economic conditions in that particular
region.
As a result of when leases are executed, there is typically a lag between leasing spreads relative to our estimates of the spread
between estimated market rents and average in-place and committed net rental rates.
The following table compares market rents in our comparative portfolio to the average in-place and committed net rent as at
December 31, 2018:
Comparative portfolio
(per sq. ft.)
Calgary
Toronto downtown
Mississauga and North York
Ottawa and Montréal
Other markets
Total
Market rent(2)
Average in-place and
committed net rent
$
$
15.31 $
29.28
20.02
19.87
16.65
24.15 $
19.61
23.74
20.44
16.73
16.23
20.97
December 31, 2018(1)
Market rent/
average in-place and
committed net rent
(%)
(21.9 )
23.3
(2.1 )
18.8
2.6
15.2
(1) Excludes temporary leases, properties held for future redevelopment and properties under development at period-end.
(2) Market rents include office and retail space.
Dream Office REIT 2018 Annual Report | 9
Net rental income
Net rental income is defined by the Trust as the total investment property revenue less investment property operating expenses
plus property management and other service fees.
For a detailed discussion about investment properties revenue and expenses for the three months and year ended
December 31, 2018, refer to the “Our Results of Operations” section.
Comparative properties NOI(1)
Comparative properties NOI is a non-GAAP measure. Comparative properties NOI includes net rental income of the same
properties owned by the Trust in (i) the current and prior year comparative period and (ii) the current and prior quarter, and
excludes: lease termination fees; one-time property adjustments, if any; bad debt expenses; NOI of sold properties, properties
held for sale and future redevelopment, and properties under development; property management and other service fees;
straight-line rent and amortization of lease incentives.
The following pie chart illustrates comparative properties NOI by region for the three months ended December 31, 2018.
For the three months ended December 31, 2018, comparative properties NOI increased by 2.1%, or $0.7 million, over the prior
year comparative quarter, mainly driven by higher occupancy and rental rates in Toronto downtown, partially offset by lower
occupancy and rental rates in the Other markets and Ottawa and Montréal regions.
The Toronto downtown region saw a $2.2 million, or 11.3%, increase in comparative properties NOI over the prior year
comparative quarter due to the new government lease commencement (191 thousand square feet) at 438 University Avenue on
December 1, 2018, along with 57 thousand square feet of positive leasing absorption across the region during the year at higher
rental rates.
The Other markets region saw a $1.4 million, or 29.1%, decrease in comparative properties NOI over the prior year comparative
quarter, largely due to a $0.8 million gross free rent period which commenced in Q3 2018 and ended during the current quarter
for a tenant at Victoria Tower in Regina and 94 thousand square feet of negative leasing absorption in the Saskatchewan region
during the year.
The Ottawa and Montréal region saw a $0.2 million, or 5.1%, decrease in comparative properties NOI over the prior year
comparative quarter, primarily driven by the previously known departure of Bell Canada at 700 DLG in Montréal vacating
185 thousand square feet at the beginning of Q2 2018, of which 98 thousand square feet took occupancy immediately. The Trust
leased a further 37 thousand square feet at 700 DLG during the quarter and is currently marketing the balance of the vacant
space.
For the year ended December 31, 2018, comparative properties NOI decreased by 2.1%, or $3.1 million, over the prior year,
mainly driven by the large vacancy at 438 University Ave. in Toronto downtown for most of the year until the new government
tenant took occupancy on December 1, 2018, the above mentioned large vacancy at 700 DLG in Montréal, and vacancies in
Saskatchewan within the Other markets region, partially offset by higher occupancy in the Calgary region.
(1) Comparative properties NOI (non-GAAP measure) – The reconciliation of comparative properties NOI to net rental income can be found in the section
“Non-GAAP Measures and Other Disclosures” under the heading “Comparative properties NOI”. Comparative properties NOI is an important measure used
by management in evaluating the performance of properties owned by the Trust in the current and comparative periods presented; however, it is not
defined by IFRS, does not have a standardized meaning and may not be comparable with similar measures presented by other REITs.
Dream Office REIT 2018 Annual Report | 10
Lease termination fees and other are not necessarily of a recurring nature and the amounts may vary year-over-year. For the
three months and year ended December 31, 2018, lease termination fees and other adjustments amounted to income of
$45 thousand and $5.9 million, respectively. The significant lease termination and other fees for the year ended December 31,
2018 was largely attributable to the one-time lease termination fee received from a tenant located at 700 DLG in Montréal in
Q1 2018.
In Q3 2018, we reclassified 357 Bay St. in Toronto downtown and 1900 Sherwood Place in Regina from properties held for future
redevelopment to properties under development, as we secured two long-term leases at these properties. As we destabilize and
revitalize these properties in the next couple of years, NOI at these properties is expected to be volatile and will stabilize upon
completion of these development projects. In addition to these properties, the Trust has a 15 acre site in Scarborough located at
the north-west corner of Eglinton Ave. E. and Birchmount Rd. classified as a property held for future redevelopment. In Q3 2017,
Aviva Canada Inc., the major tenant at the Scarborough site, had vacated the premises upon expiry of its lease totalling
approximately 0.3 million square feet, driving NOI to be negative for this site relative to the prior year.
Calgary
Toronto downtown
Mississauga and North York
Ottawa and Montréal
Other markets
Comparative properties NOI(1)
Lease termination fees and other
Properties under development
Properties held for future redevelopment
Straight-line rent
Amortization of lease incentives(2)
Property management and other service fees
Sold properties
Net rental income
$
$
December 31,
December 31,
2017
2,552 $
19,952
3,694
4,658
4,646
35,502
(127 )
819
(727 )
261
(2,726 )
282
8,371
41,655 $
2018
2,562 $
22,200
3,764
4,422
3,292
36,240
45
279
(211 )
249
(2,967 )
665
1,392
35,692 $
Change in
weighted average
occupancy %
0.3
4.7
1.1
(4.3 )
(8.2 )
0.5
In-place
net rent
change %
(5.3 )
2.1
(1.5 )
(6.1 )
(7.2 )
(0.2 )
Three months ended
Change
%
0.4
11.3
1.9
(5.1 )
(29.1 )
2.1
Amount
10
2,248
70
(236 )
(1,354 )
738
172
(540 )
516
(12 )
(241 )
383
(6,979 )
(5,963 )
(1) Comparative properties NOI (non-GAAP measure) – The reconciliation of comparative properties NOI to net rental income can be found in the section
“Non-GAAP Measures and Other Disclosures” under the heading “Comparative properties NOI”.
(2) For the three months ended December 31, 2018 and December 31, 2017, amortization of lease incentives included $0.2 million and $0.6 million,
respectively, related to properties held for future redevelopment, properties under development and sold properties.
Calgary
Toronto downtown
Mississauga and North York
Ottawa and Montréal
Other markets
Comparative properties NOI(1)
Lease termination fees and other
Properties under development
Properties held for future redevelopment
Straight-line rent
Amortization of lease incentives(2)
Property management and other service fees
Sold properties
Net rental income
$
$
December 31,
Amount
December 31,
2017
1,982
9,209 $
82,880
(604 )
157
14,563
20,353
(2,427 )
(2,210 )
19,068
(3,102 )
146,073
(63 )
5,933
(2,624 )
4,174
(3,930 )
2,265
(1,859 )
2,397
2,820
(14,587 )
(2,568 )
4,271
111,404
(95,639 )
261,930 $ (106,965 )
2018
11,191 $
82,276
14,720
17,926
16,858
142,971
5,870
1,550
(1,665 )
538
(11,767 )
1,703
15,765
154,965 $
Year ended
Change
%
21.5
(0.7 )
1.1
(11.9 )
(11.6 )
(2.1 )
Change in
weighted average
occupancy %
9.4
(2.7 )
0.9
(5.8 )
(6.1 )
(2.5 )
In-place
net rent
change %
(3.7 )
4.2
(1.8 )
(8.2 )
1.1
1.1
(1) Comparative properties NOI (non-GAAP measure) – The reconciliation of comparative properties NOI to net rental income can be found in the section
“Non-GAAP Measures and Other Disclosures” under the heading “Comparative properties NOI”.
(2) For the year ended December 31, 2018 and December 31, 2017, amortization of lease incentives included $1.7 million and $7.0 million, respectively, related
to properties held for future redevelopment, properties under development and sold properties.
Dream Office REIT 2018 Annual Report | 11
Comparative properties NOI prior quarter comparison
For the three months ended December 31, 2018, comparative properties NOI increased 2.6%, or $0.9 million, when compared
with the prior quarter, mainly driven by Toronto downtown and modest increases in the Mississauga and North York and Ottawa
and Montréal regions. The increases were partially offset by declines in the Other markets and Calgary regions.
Toronto downtown saw a $2.2 million, or 10.8%, increase in comparative properties NOI over the prior quarter due to strong
leasing in the region, most notably the new government lease commencement (191 thousand square feet) at 438 University
Avenue on December 1, 2018, along with 55 thousand square feet of positive leasing absorption across the region during the
quarter at higher rental rates.
The Other markets region experienced a decrease in comparative properties NOI of $1.2 million, or 26.4%, over the prior
quarter, mainly due to a gross free rent period that took place during the quarter for a tenant at Victoria Tower in Regina and 59
thousand square feet of negative leasing absorption in the Saskatchewan region during the quarter.
Lease termination fees and other are not necessarily of a recurring nature and the amounts may vary from quarter-to-quarter.
For the three months ended December 31, 2018, lease termination fees and other amounted to income of $45 thousand (three
months ended September 30, 2018 – income of $180 thousand).
Calgary
Toronto downtown
Mississauga and North York
Ottawa and Montréal
Other markets
Comparative properties NOI(1)
Lease termination fees and other
Properties under development
Properties held for future redevelopment
Straight-line rent
Amortization of lease incentives(2)
Property management and other service fees
Sold properties(3)
Net rental income
$
$
December 31,
September 30,
2018
2,896 $
20,036
3,604
4,295
4,475
35,306
180
434
(494 )
114
(3,207 )
548
4,484
37,365 $
2018
2,562 $
22,200
3,764
4,422
3,292
36,240
45
279
(211 )
249
(2,967 )
665
1,392
35,692 $
Change in
weighted average
occupancy %
(3.4 )
4.0
0.4
2.3
(4.8 )
1.5
In-place
net rent
change %
(6.3 )
—
0.4
0.9
(9.0 )
(0.9 )
Three months ended
Change
%
(11.5 )
10.8
4.4
3.0
(26.4 )
2.6
Amount
(334 )
2,164
160
127
(1,183 )
934
(135 )
(155 )
283
135
240
117
(3,092 )
(1,673 )
(1) Comparative properties NOI (non-GAAP measure) – The reconciliation of comparative properties NOI to net rental income can be found in the section
“Non-GAAP Measures and Other Disclosures” under the heading “Comparative properties NOI”.
(2) For the three months ended December 31, 2018 and September 30, 2018, amortization of lease incentives included $0.2 million and $0.4 millio n,
respectively, related to properties held for future redevelopment, properties under development and sold properties.
(3) For the three months ended September 30, 2018, NOI from sold properties included post-close adjustments totalling $1.1 million from properties sold in
prior periods that were not previously recorded.
Comparative portfolio leasing costs and lease incentives
Initial direct leasing costs include leasing fees and related costs and broker commissions incurred in negotiating and arranging
tenant leases. Lease incentives include costs incurred to make leasehold improvements to tenant spaces, cash allowances and
landlord works. Initial direct leasing costs and lease incentives are dependent upon asset type, lease terminations and expiries,
the mix of new leasing activity compared to renewals, portfolio growth and general market conditions.
For the three months and year ended December 31, 2018, approximately $13.8 million and $27.8 million, respectively, of initial
direct leasing costs and lease incentives were attributable to leases that commenced in our comparative portfolio during the
respective periods. Average initial direct leasing costs and lease incentives on a comparative portfolio basis for the three months
and year ended December 31, 2018 were $2.83 and $2.87 per square foot per year leased in both periods, representing a
decrease of $3.44 per square foot and $1.23 per square foot, respectively, over the prior year comparative quarter and period.
The reduction in leasing costs per square foot per year relative to the prior year respective periods was primarily due to higher
renewal rates across the portfolio, especially in the Toronto downtown region. The average lease term improved to 7.2 years for
leases that commenced during the quarter mainly driven by a 0.2 million square feet lease commencement in Toronto
downtown for a seven-year term. We expect leasing costs and lease incentives to remain elevated in areas such as the Calgary
region and Saskatchewan within the Other markets region, given the current competitive office leasing environment in those
particular regions.
Dream Office REIT 2018 Annual Report | 12
Performance indicators
Leases that commenced during the period
Leases that commenced during the period
(in thousands of sq. ft.)
Average lease term (years)
Initial direct leasing costs and lease incentives:
In thousands of dollars
Per square foot
Per square foot per year
Three months ended December 31,
2018(1)
2017(1)
Year ended December 31,
2017(1)
2018(1)
680
7.2
13,788 $
20.28 $
2.83 $
$
$
$
160
6.4
6,431
40.22
6.27
$
$
$
1,725
5.6
27,758 $
16.10 $
2.87 $
1,115
6.1
27,672
24.83
4.10
(1) Current period and comparative periods exclude temporary leases, properties sold, properties held for future redevelopment an d properties under
development at the end of Q4 2018.
Comparative portfolio lease maturity profile, lease commitments and expiring net rental rates
The following table details our in-place lease maturity profile, lease commitments and expiring net rental rates by geographic
segment and by year, and excludes properties held for future redevelopment and properties under development as at
December 31, 2018.
(in thousands of square feet)
Calgary
Expiries
Expiring net rents
Commencements
Commencements as a percentage of expiries
Toronto downtown
Expiries
Expiring net rents
Commencements
Commencements as a percentage of expiries
Mississauga and North York
Expiries
Expiring net rents
Commencements
Commencements as a percentage of expiries
Ottawa and Montréal
Expiries
Expiring net rents
Commencements
Commencements as a percentage of expiries
Other markets
Expiries
Expiring net rents
Commencements
Commencements as a percentage of expiries
Total
Expiries
Expiring net rents
Commencements
Commencements as a percentage of expiries
n/a – not applicable
Temporary
leases
2019
2020
2021
2022
2023
2024+
—
— $
n/a
n/a
(35 )
— $
n/a
n/a
—
— $
n/a
n/a
—
— $
n/a
n/a
(7 )
— $
n/a
n/a
(42 )
— $
n/a
n/a
(34 )
21.47 $
28
82 %
(27 )
24.80 $
28
104 %
(18 )
18.44 $
2
11 %
(27 )
17.25 $
—
—
(413 )
22.65 $
327
79 %
(155 )
24.46 $
13
8 %
(723 )
23.03 $
30
4 %
(605 )
25.89 $
12
2 %
(262 )
23.67 $
230
88 %
(57 )
17.80 $
—
—
(82 )
19.00 $
—
—
(19 )
19.61 $
7
37 %
(58 )
14.39 $
13
22 %
(223 )
13.44 $
—
—
(18 )
29.60 $
—
—
(208 )
22.24 $
6
3 %
(109 )
23.19 $
53
49 %
(285 )
17.66 $
16
6 %
(22 )
17.92 $
—
—
(70 )
19.75 $
5
7 %
(876 )
22.43 $
651
74 %
(747 )
18.07 $
57
8 %
(863 )
22.56 $
32
4 %
(929 )
24.23 $
30
3 %
(12 )
17.58 $
—
—
(461 )
25.74 $
191
41 %
(49 )
19.73 $
—
—
(26 )
21.35 $
—
—
(23 )
16.60 $
—
—
(571 )
24.49 $
191
33 %
(295 )
20.27
—
—
(863 )
25.80
1
0%
(128 )
19.21
—
—
(453 )
20.90
—
—
(290 )
12.39
—
—
(2,029 )
21.56
1
0%
Dream Office REIT 2018 Annual Report | 13
OUR RESULTS OF OPERATIONS
Consolidated statement of comprehensive income
(in thousands of Canadian dollars)
Investment properties revenue
Investment properties operating expenses
Net rental income
Other income
Share of income from investment in Dream Industrial REIT
Interest and fee income
Other expenses
General and administrative
Interest:
Debt
Subsidiary redeemable units
Amortization and write-off of intangible assets and depreciation on
property and equipment
Fair value adjustments, leasing, net losses on transactions and
debt settlement costs
Fair value adjustments to investment properties
Fair value adjustments to financial instruments
Leasing, net losses on transactions and debt settlement costs
Income before income taxes
Current and deferred income taxes recovery (expense), net
Net income
Other comprehensive income (loss)
Items reclassified to net income:
Three months ended December 31,
$
2018
66,800 $
(31,108 )
35,692
12,717
255
12,972
2017
79,022 $
(37,367 )
41,655
Year ended December 31,
2018
285,207 $
(130,242 )
154,965
2017
474,046
(212,116 )
261,930
3,409
782
4,191
43,125
1,674
44,799
9,440
1,841
11,281
(2,973 )
(2,556 )
(12,476 )
(10,644 )
(14,971 )
(1,309 )
(15,209 )
(1,307 )
(60,718 )
(5,234 )
(86,560 )
(6,542 )
(509 )
(19,762 )
(616 )
(19,688 )
(2,199 )
(80,627 )
(6,921 )
(110,667 )
20,160
11,172
(1,989 )
29,343
58,245
244
58,489
78,663
(7,063 )
(1,632 )
69,968
96,126
4,605
100,731
47,533
(1,371 )
(7,179 )
38,983
158,120
(342 )
157,778
23,116
(16,771 )
(37,930 )
(31,585 )
130,959
3,827
134,786
Reclassified realized gain on foreign currency translation, net of taxes
—
(5,905 )
—
(5,905 )
Items that will be reclassified subsequently to net income (loss):
Unrealized gain on interest rate swaps and other, net of taxes
Unrealized gain (loss) on foreign currency translation, net of taxes
Share of other comprehensive income (loss) from investment in
Dream Industrial REIT
Comprehensive income
11
1,194
12
110
46
1,192
1,786
2,991
61,480 $
(260 )
(6,043 )
94,688 $
3,311
4,549
162,327 $
$
45
(3,115 )
(260 )
(9,235 )
125,551
Dream Office REIT 2018 Annual Report | 14
Net income
For the three months ended December 31, 2018, the Trust generated net income of $58.5 million, consisting of net rental
income of $35.7 million, fair value adjustments to investment properties of $20.2 million, share of income from our investment
in Dream Industrial REIT of $12.7 million and fair value adjustments to financial instruments of $11.2 million, which was offset
by interest expense on debt and subsidiary redeemable units of $16.3 million, general and administrative expenses of
$3.0 million and leasing, net losses on transactions and debt settlement costs of $2.0 million.
For the year ended December 31, 2018, the Trust generated net income of $157.8 million, consisting of net rental income of
$155.0 million, share of income from our investment in Dream Industrial REIT of $43.1 million and fair value adjustments to
investment properties of $47.5 million, which was offset by interest expense on debt and subsidiary redeemable units of
$66.0 million, general and administrative expenses of $12.5 million, leasing, net losses on transactions and debt settlement costs
of $7.2 million, fair value adjustments to financial instruments of $1.4 million and cumulative other items of $0.7 million.
Investment properties revenue
Investment properties revenue includes base rent from investment properties, recovery of operating costs and property taxes
from tenants, parking services revenue, the impact of straight-line rent adjustments, lease termination fees and other
adjustments as well as fees earned from property management and other service fees, including management, leasing and
construction fees. Leasing, construction and lease termination fees, and other adjustments are not necessarily of a recurring
nature and the amounts may vary year-over-year.
Investment properties revenue for the quarter was $66.8 million compared to $79.0 million in the prior year comparative
quarter. For the year ended December 31, 2018, investment properties revenue was $285.2 million compared to $474.0 million
in the prior year. Overall, the decreases over the prior year comparative periods were primarily driven by dispositions during the
current and prior year and lower weighted average in-place occupancies.
Investment properties operating expenses
Investment properties operating expenses comprise operating costs and property taxes as well as certain expenses that are not
recoverable from tenants. Operating expenses fluctuate with changes in occupancy levels, expenses that are seasonal in nature,
and the level of repairs and maintenance incurred during the period.
Investment properties operating expenses for the quarter was $31.1 million compared to $37.4 million in the prior year
comparative quarter. For the year ended December 31, 2018, investment properties operating expenses was $130.2 million
compared to $212.1 million in the prior year. Overall, the decrease over the prior year comparative periods was mainly driven by
dispositions during the current and prior year and lower weighted average in-place occupancies.
Share of income from investment in Dream Industrial REIT
Share of income from our investment in Dream Industrial REIT for the quarter was $12.7 million, which comprises our share of
net income of $13.7 million, net of an accretion loss of $1.0 million, compared to our share of net income of $4.4 million, net of
an accretion loss of $1.0 million in the prior year comparative quarter (for the year ended December 31, 2018 – $43.1 million,
which comprises our share of net income of $45.1 million, net of an accretion loss of $2.0 million, compared to our share of net
income of $13.5 million, net of an accretion loss of $4.1 million in the prior year). The increase year-over-year for the respective
periods was primarily driven by higher net rental income and fair value gains to investment properties.
Interest and fee income
Interest and fee income mainly comprises mark-to-market adjustments on marketable securities and interest earned on bank
accounts. The income included in interest and fee income is not necessarily of a recurring nature and the amounts may vary
year-over-year.
Interest and fee income for the quarter was $0.3 million, a decrease of $0.5 million when compared to the prior year
comparative quarter. The decrease in interest and fee income was mainly due to dividends in the prior year comparative quarter
on marketable securities sold during the year and reduced interest income on cash balances, offset by the interest earned on
vendor takeback mortgage receivables in the current period of $0.4 million.
For the year ended December 31, 2018, interest and fee income was $1.7 million, a decrease of $0.2 million when compared to
the prior year, due to the same reasons noted above.
Dream Office REIT 2018 Annual Report | 15
General and administrative expenses
The following table summarizes the nature of expenses included in general and administrative expenses:
Three months ended December 31,
Salaries and benefits
Deferred compensation expense
Professional services fees
Management Services Agreement with Dream Asset Management
Corporation (“DAM”)
Other(1)
General and administrative expenses
$
$
2018
(1,046 ) $
(606 )
(609 )
(154 )
(558 )
(2,973 ) $
(1) “Other” comprises public reporting, corporate sponsorships, donations and overhead-related costs.
2017
(320 ) $
(621 )
(312 )
Year ended December 31,
2018
(3,693 ) $
(3,415 )
(1,702 )
2017
(1,521 )
(3,128 )
(1,265 )
(176 )
(1,127 )
(2,556 ) $
(464 )
(3,202 )
(12,476 ) $
(830 )
(3,900 )
(10,644 )
General and administrative (“G&A”) expenses for the quarter was $3.0 million, an increase of $0.4 million over the prior year
comparative quarter, mainly attributable to increases in salaries and benefits and professional services fees, partially offset by a
decrease in charges from DAM pursuant to the Management Services Agreement. The increase in salaries and benefits was
primarily driven by a realignment of certain teams from leasing to corporate roles and the internalization of the Chief Executive
Officer’s (“CEO”) compensation partway during Q1 2018, which have replaced the chargebacks from DAM for the CEO’s
compensation through the Management Services Agreement.
For the year ended December 31, 2018, G&A expenses were $12.5 million, an increase of $1.8 million over the prior year for the
same reasons discussed above along with deferred compensation expense increasing on a year-to-date basis mainly due to units
vesting at a higher unit price over the period.
Interest expense – debt
Interest expense on debt for the quarter was $15.0 million compared to $15.2 million in the prior year comparative quarter. For
the year ended December 31, 2018, interest expense on debt was $60.7 million compared to $86.6 million in the prior year
comparative period.
Overall, the decreases in interest expense on debt over the prior year comparative periods were mainly due to the discharge of debt
related to sold properties, discharge of certain maturing debts (including the 3.424% Series A senior unsecured debentures of the Trust
(“Series A Debentures”) during the second quarter of 2018) in the current and prior year and refinancing of maturing debt at lower
interest rates during the prior year. This was offset by interest incurred on net drawings of our demand revolving credit facilities to
repay the Series A Debentures and to fund the SIB during Q2 2018.
Interest expense – subsidiary redeemable units
Interest expense on subsidiary redeemable units for the quarter was $1.3 million, flat when compared to the prior year
comparative quarter. For the year ended December 31, 2018, interest expense on subsidiary redeemable units was $5.2 million,
a decrease of $1.3 million over the prior year. The decrease relative to the prior year was due to the reduction in monthly
cash distribution from $0.125 per unit to $0.08333 per unit, or $1.00 per unit on an annualized basis, commencing with the
month of July 2017 distribution.
Amortization and write-off of intangible assets and depreciation on property and equipment
Amortization and write-off of intangible assets and depreciation on property and equipment expense for the quarter was
$0.5 million, a decrease of $0.1 million when compared to the prior year comparative quarter (for the year ended December 31,
2018 – $2.2 million, a decrease of $4.7 million over the prior year comparative period), primarily driven by the one-time write-
off of intangible assets of $3.9 million related to certain co-owned properties disposed of during the prior year.
Fair value adjustments to investment properties
Refer to the section “Investment Properties” under the heading “Fair value adjustments to investment properties” for a
discussion of fair value changes for the three months and year ended December 31, 2018.
Fair value adjustments to financial instruments
Fair value adjustments to financial instruments include remeasurements of the carrying value of subsidiary redeemable units
and deferred trust units.
Dream Office REIT 2018 Annual Report | 16
The $11.2 million fair value gain and $1.4 million fair value loss recorded during the three months and year ended December 31,
2018, respectively, were mainly due to the remeasurement of the carrying value of subsidiary redeemable units and deferred
trust units during the quarter and year as a result of changes in the Trust’s unit price over the respective periods.
Leasing, net losses on transactions and debt settlement costs
The following table summarizes the nature of expenses and gains included in leasing, net losses on transactions and debt
settlement costs:
Internal leasing costs
Gain (loss) on sale of investment properties, net(1)
Debt settlement costs, net(2)
Realized foreign exchange gain on the sale of investment property
Charge on cost reduction program
Loss on recognition of net assets related to joint operations
Other
Total
$
Three months ended December 31,
2017
(1,308 ) $
(1,665 )
(3,968 )
5,905
(43 )
—
(553 )
(1,632 ) $
2018
(512 ) $
455
(1,932 )
—
—
—
—
(1,989 ) $
$
Year ended December 31,
2018
(2,683 ) $
(2,347 )
(1,932 )
—
—
—
(217 )
(7,179 ) $
2017
(5,237 )
(20,057 )
(16,255 )
5,905
(1,616 )
(117 )
(553 )
(37,930 )
(1) Net gain (loss) on sale of investment properties comprise transaction costs, commissions and other expenses incurred and adjustments in relation to the
disposal of investment properties. Included in gain (loss) on sale of investment properties for the three months and year ended December 31, 2018 was a
one-time favourable gain of $1.9 million due to the write-off of net working capital payable related to investment properties disposed of in prior years.
(2) Net debt settlement costs comprise expenses and gains on early discharge of mortgages and the write-off of associated mark-to-market adjustments and
deferred financing costs.
For the three months ended December 31, 2018, leasing, net losses on transactions and debt settlement costs was slightly
higher than the prior year comparative quarter mainly due to the one-time foreign exchange gain on sale of a U.S. investment
property in the prior year, partially offset by lower debt settlement costs and gain (loss) on sale of investment properties as a
result of fewer dispositions in the current quarter and savings in internal leasing costs due to the change in roles and
responsibilities of certain individuals.
For the year ended December 31, 2018, the decrease in leasing, net losses on transactions and debt settlement costs over the
prior year was largely due to the same reasons noted above.
Current and deferred income taxes expense, net
Net current and deferred income taxes recovery for the three months ended December 31, 2018 was $0.2 million (for the year
ended December 31, 2018 – expense of $0.3 million). The net tax recovery in the current quarter is as a result of timing
differences on deductible interest in the Trust’s U.S. subsidiary. The net tax expense for the year was primarily due to final tax
assessments in Q3 2018 relating to the sale of an investment property in the United States during 2017.
Other comprehensive income
Other comprehensive income comprises amortization of an unrealized gain on an interest rate swap, unrealized foreign currency
translation gain related to the investment property located in the United States and the Trust’s share of Dream Industrial REIT’s
other comprehensive income. For the three months and year ended December 31, 2018, other comprehensive income
amounted to $3.0 million and $4.5 million, respectively. The changes in overall comprehensive income for the respective periods
were mainly driven by foreign exchange translation adjustments and the Trust’s share of Dream Industrial REIT’s other
comprehensive income, which was mainly as a result of foreign exchange translation gains on its U.S. investment property.
Related party transactions
From time to time, Dream Office REIT and its subsidiaries enter into transactions with related parties that are generally
conducted on a cost recovery basis or under normal commercial terms.
On April 2, 2015, the Trust and DAM entered into a Management Services Agreement pursuant to which DAM provides strategic
oversight of the Trust and the services of senior management as requested on a cost recovery basis. In accordance with the
termination provisions of the Management Services Agreement, the Trust is subject to an incentive fee payable which is based
on 15% of the Trust’s Aggregate Adjusted Funds from Operations (as defined in the Management Services Agreement), including
the net gain on sale of any properties during the term of the agreement, and the deemed sale of the remaining portfolio upon
termination, in excess of $2.65 per REIT A Unit. This agreement gives DAM the right to terminate the agreement upon 180 days’
notice (any time after April 2, 2018) and the Trust has the right to terminate the agreement upon 60 days’ notice. As no
Dream Office REIT 2018 Annual Report | 17
incentive fee would currently be payable in the case of termination of the agreement, no amounts related to the incentive fee
have been recorded in the consolidated financial statements as at December 31, 2018 and December 31, 2017.
On December 1, 2013, Dream Office REIT and DAM entered into a Shared Services Agreement and a Cost Sharing Agreement.
Pursuant to the Reorganization, the Trust and DAM amended the existing Shared Services and Cost Sharing Agreements as of
April 2, 2015. According to the terms of the amended arrangements, DAM will continue to provide administrative and support
services on an as-needed basis and will receive an annual fee to reimburse it for all expenses incurred. The Trust will continue to
reimburse DAM for any shared costs allocated in each calendar year. The amended agreements provide for the automatic
reappointment of DAM for additional one-year terms commencing on January 1 unless and until terminated in accordance with
their terms or by mutual agreement of the parties.
Dream Office Management Corp. (“DOMC”), a wholly owned subsidiary of Dream Office Management LP, and DAM entered into
an Administrative Services Agreement on April 2, 2015. Under this Administrative Services Agreement, DOMC provides certain
administrative and support services to DAM. The terms of this agreement provide that DOMC will be reimbursed by DAM for the
actual costs incurred by it in carrying out these activities on behalf of DAM. This agreement automatically renews for one-year
terms unless and until terminated in accordance with its terms or by mutual agreement of the parties.
On October 25, 2016, the Trust and DAM jointly implemented a cost reduction program to simplify and to establish more
dedicated services on a cost-efficient basis of the Trust’s operating and shared service platform. As a result of implementing this
program, the Trust incurred charges of $nil and $1.6 million for the years ended December 31, 2018 and December 31, 2017,
which are included in leasing, net losses on transactions and debt settlement costs.
During the year ended December 31, 2018, the Trust, along with DAM, entered into a strategic partnership focused on the
property technology market. The Trust and DAM each hold a 25% interest in the partnership, included in equity accounted
investment in other non-current assets. As at December 31, 2018, the Trust had funded $1,541 into the partnership.
The following tables summarize our related party transactions for the three months and years ended December 31, 2018 and
December 31, 2017.
Management Services Agreement with DAM
The following is a summary of cost recoveries charged to the Trust by DAM for the three months and years ended December 31,
2018 and December 31, 2017:
Senior management compensation (included in G&A expenses)
Expense reimbursements related to financing arrangements
(included in debt)
Expense reimbursements related to disposition arrangements
(included in gain (loss) on sale of investment properties)
Professional services and other (included in investment properties
and G&A expenses)
Total costs incurred under the Management Services Agreement
$
Three months ended December 31,
$
2018
(47 ) $
2017
(176 ) $
Year ended December 31,
2018
(357 ) $
2017
(830 )
(72 )
(46 )
(142 )
(138 )
(333 )
(280 )
(576 )
(702 )
(96 )
(261 ) $
(352 )
(808 ) $
(1,300 )
(2,270 ) $
(848 )
(2,956 )
Partway through Q1 2018, the Trust internalized the CEO’s compensation, which has replaced the chargebacks from DAM for the
CEO’s compensation through the Management Services Agreement.
Administrative Services and Shared Services Agreements with DAM
The following is a summary of total costs processed on behalf of DAM and total costs processed by DAM on behalf of the Trust
for the years ended December 31, 2018 and December 31, 2017.
Shared services and costs processed on behalf of DAM
Operating and administration costs of regional offices processed on
behalf of DAM
Total costs processed on behalf of DAM under the Administrative
Services Agreement
Total costs processed by DAM on behalf of the Trust under the Shared
Services Agreement
$
$
$
Three months ended December 31,
2018
1,626 $
2017
1,668 $
Year ended December 31,
2018
6,107 $
2017
5,742
64
74
284
287
1,690
$
1,742
$
6,391
$
6,029
(367 ) $
(221 )
$
(1,207 ) $
(966 )
Dream Office REIT 2018 Annual Report | 18
Services Agreement with Dream Industrial REIT
Effective October 4, 2012, Dream Office Management Corp. and Dream Industrial REIT entered into a Services Agreement,
pursuant to which the Trust provides certain services to Dream Industrial REIT on a cost recovery basis.
The following is a summary of the cost recoveries from Dream Industrial REIT for the three months and years ended
December 31, 2018 and December 31, 2017:
Total cost recoveries from Dream Industrial REIT
Three months ended December 31,
2017
728 $
2018
919 $
$
Year ended December 31,
2018
3,304 $
2017
2,726
Agreements with Dream Hard Asset Alternatives Trust (“DHAAT”)
DOMC provides property management services to the two co-owned investment properties with DHAAT which are accounted
for as joint operations.
Effective July 8, 2014, DOMC and DHAAT entered into a Services Agreement, in which the Trust provides certain services to
DHAAT on a cost recovery basis.
The following is a summary of the amounts that were charged to DHAAT for the three months and years ended December 31,
2018 and December 31, 2017:
Amounts charged to DHAAT under the Services Agreement
Costs processed on behalf of DHAAT related to co-owned properties
Total amount charged back to DHAAT(1)
Three months ended December 31,
2017
64 $
640
704 $
2018
103 $
882
985 $
$
$
Year ended December 31,
2018
330 $
2017
257
5,106
5,363
3,139
3,469 $
(1) Includes Services Agreement with DHAAT and Property Management Agreements for various co-owned and managed DHAAT properties.
Dream Office REIT 2018 Annual Report | 19
SECTION III
INVESTMENT PROPERTIES
Investment property continuity
Changes in the value of our investment properties by region for the three months ended December 31, 2018 are summarized in
the following table:
Three months ended
Building
improvement,
initial direct
leasing costs
and lease
incentives(2)
1,339 $
12,362
936
4,457
3,127
22,221
Fair value
adjustments
(21,190 ) $
53,821
(790 )
(4,408 )
(2,826 )
24,607
3,970
(4,174 )
916
(919 )
Assets held
for sale/sold
properties
— $
—
—
—
—
—
—
—
Amortization of
lease incentives,
foreign exchange
and other
adjustments
(359 ) $
(1,637 )
(148 )
(48 )
2,252
60
(55 )
—
December 31,
2018
115,583
1,798,728
221,464
357,878
167,928
2,661,581
74,585
42,660
(99,493 )
(99,493 ) $
(43 )
27,064 $
646
20,160 $
(190 )
(185 ) $
—
2,778,826
September 30,
2018(1)
135,793 $
$
1,734,182
221,466
357,877
165,375
2,614,693
74,844
42,663
99,080
$ 2,831,280 $
99,080
(99,493 )
(43 )
646
(190 )
—
Calgary
Toronto downtown
Mississauga and North York
Ottawa and Montréal
Other markets
Total comparative portfolio
Add:
Properties under development
Properties held for future
redevelopment
Properties classified as assets held
for sale/sold properties
Total portfolio
Less: Properties classified as assets
held for sale
Total amounts included in
consolidated balance sheets
$ 2,732,200
$
—
$
27,107
$
19,514
$
5
$
2,778,826
(1) Opening balances have been reclassified to exclude sold properties, properties held for sale and future redevelopment and pro perties under development
during the period.
(2) Includes interest capitalized to properties under development.
Dream Office REIT 2018 Annual Report | 20
Changes in the value of our investment properties by region for the year ended December 31, 2018 are summarized in the
following table:
January 1,
2018(1)
135,056 $
$
1,683,817
216,400
355,687
169,780
2,560,740
66,193
40,599
Assets held
for sale/sold
properties
— $
—
—
—
—
—
—
—
Building
improvement,
initial direct
leasing costs
and lease
(2)
incentives
4,750 $
35,670
5,509
8,308
10,459
64,696
Amortization of
lease incentives,
foreign exchange
and other
adjustments
(1,375 ) $
(14,511 )
(533 )
(164 )
2,593
(13,990 )
Fair value
adjustments
(22,848 ) $
93,752
88
(5,953 )
(14,904 )
50,135
Year ended
December 31,
2018
115,583
1,798,728
221,464
357,878
167,928
2,661,581
6,985
1,569
(162 )
74,585
3,805
(1,748 )
4
42,660
303,436
$ 2,970,968 $
(302,194 )
(302,194 ) $
2,990
78,476 $
(2,423 )
47,533 $
(1,809 )
(15,957 ) $
—
2,778,826
51,530
(52,198 )
491
574
(397 )
—
Calgary
Toronto downtown(3)
Mississauga and North York
Ottawa and Montréal
Other markets
Total comparative portfolio
Add:
Properties under development
Properties held for future
redevelopment
Properties classified as assets held
for sale/sold properties
Total portfolio
Less: Properties classified as assets
held for sale
Total amounts included in
consolidated balance sheets
$ 2,919,438
$
(249,996 ) $
77,985
$
46,959
$
(15,560 ) $
2,778,826
(1) Opening balances have been reclassified to exclude sold properties, properties held for sale and future redevelopment and properties under development
during the period.
(2) Includes interest capitalized to properties under development.
(3) Included in fair value and other adjustments within the Toronto downtown region is the impact of a one-time reversal in Q3 2018 of the land transfer tax
accrual of $8.4 million related to past asset acquisitions that are no longer required.
Properties under development
Last quarter, we excluded 357 Bay St. in Toronto downtown and 1900 Sherwood Place in Regina from our comparative portfolio
and presented them separately as properties held for future redevelopment as we were in the process of upgrading these
properties to better serve our future tenancies. During the quarter, we secured two long-term leases at these properties that
will require a major revitalization program in the next couple of years to meet tenant requirements in each of the properties.
Accordingly, these two properties have met the IFRS criteria for presentation as properties under development within the
investment properties note of the consolidated financial statements.
At 357 Bay St. in Toronto downtown, we secured a lease for the entire building with WeWork for approximately 65 thousand
square feet commencing in the second half of 2020 for a term of 15 years, with net rental rates starting at $45 per square foot,
with annual rent escalators. The Trust intends to invest approximately $29 million into the asset over the next two years, which
includes a complete reconstruction of the building interior, all associated capital improvements and fit-outs and tenant
allowances for fixtures. Upon completion, 357 Bay St. will transform into a best-in-class boutique office building in downtown
Toronto. WeWork is a U.S.-based company that operates a global network of real estate solutions and services ranging from
flexible, community-oriented workspace for entrepreneurs to more complex global solutions for Fortune 500 companies.
WeWork has over 400,000 members spanning 400 locations across 99 cities in 26 countries(1). 357 Bay St. will be the first
property that is entirely dedicated to WeWork in Canada and will serve as its headquarter and national flagship location.
(1) Source: WeWork 2018 Economic Impact Report.
Dream Office REIT 2018 Annual Report | 21
At 1900 Sherwood Place in Regina, we secured a lease with the Co-operators for approximately 114 thousand square feet,
commencing in the second half of 2021 for a term of 18 years. The building will be renamed as “The Co-operators Place” and
serve as a hub for the Co-operators’ life and health insurance operations for over 650 employees. As part of the lease, we will be
investing approximately $26 million in leasing and value-add capital into the property over the next three years, which includes a
13 thousand square foot expansion to the building, adding substantially more parking space, replacing the heating, ventilation
and air conditioning system, curtain wall upgrades at the building entrance and exterior and common area updates. These
capital initiatives will enhance the overall experience for the new tenant as well as the existing tenants at the building
once complete.
The table below summarizes select financial information related to the two properties under development as at
December 31, 2018.
(in millions of Canadian dollars)
Property
357 Bay Street, Toronto
1900 Sherwood Place, Regina
24.1 $
42.2
(1) Does not include contractual annual escalators over the term of the leases.
$
Carrying value
at time of
reclassification
Capital invested
to date
Estimated capital
remaining
Estimated NOI(1)
1.0 $
5.6
28 $
20
Estimated yield on
cost and original
carrying value
5.5 %
8.0 %
2.9
5.4
Properties held for future redevelopment
As at December 31, 2018, we have a 15 acre site at the north-west corner of Eglinton Ave. E. and Birchmount Rd. in Scarborough
held for future redevelopment. During the third quarter of 2018, we filed an Official Plan Amendment application, with a view
towards redevelopment for mixed use, either in the form of a major overhaul of the property or as a ground up development. At
this time, this property does not meet the IFRS criteria for presentation as a separate asset class and, accordingly, has not been
reclassified in the consolidated financial statements. However, management anticipates that this property held for future
redevelopment will meet the IFRS criteria as the development project advances in subsequent periods.
Valuations of externally appraised properties
For the year ended December 31, 2018, there were 11 investment properties valued by qualified external valuation
professionals with a fair value of $759.9 million representing 27% of the total investment property values, excluding properties
classified as assets held for sale (for the year ended December 31, 2017 – 27 investment properties with an aggregate fair value
of $2.2 billion, representing 76% of the total investment property values, excluding properties classified as assets held for sale).
Fair value adjustments to investment properties
For the three months ended December 31, 2018, the Trust recorded a fair value gain of $20.2 million, mainly driven by fair value
gains of $53.8 million in the Toronto downtown region, reflecting higher stabilized NOI to account for the higher market rent
assumptions on select properties due to leasing activity during the quarter. The fair value gains were partially offset by fair value
losses in Calgary, Ottawa and Montréal and Other markets arising from the write-off of recurring capital expenditures during the
period and higher discount rates used in discounted cash flow model valuations in Calgary.
For the year ended December 31, 2018, the Trust recorded a fair value gain of $47.5 million, primarily due to the same reasons
noted above, as well as a fair value gain of $1.6 million on our properties under development mainly driven by the favourable
terms of the two long-term leases secured during Q3 2018. Fair value gains for the year ended December 31, 2018 were partially
offset by fair value losses in Calgary, Ottawa and Montréal and Other markets, primarily due to the same reasons noted above.
Dream Office REIT 2018 Annual Report | 22
Assumptions used in the valuation of investment properties using the capitalization rate method
As at December 31, 2018, the Trust’s comparative portfolio, excluding investment properties in Alberta, sold properties,
properties held for sale and future redevelopment, properties under development and certain properties where bids were
received by the Trust, was valued using the capitalization rate (“cap rate”) method. The critical valuation metrics as at
December 31, 2018, September 30, 2018 and December 31, 2017 are set out in the table below by region:
Toronto downtown
Mississauga and North York
Ottawa and Montréal
Other markets
Total comparative portfolio
(excluding Alberta)
December 31, 2018(1)
Weighted
average (%)
4.82
5.97
5.60
7.65
Range (%)
4.50–6.00
5.75–6.25
5.50–6.50
6.00–8.00
September 30, 2018(1)
Weighted
average (%)
4.82
5.97
5.60
7.64
Range (%)
4.50–6.00
5.75–6.25
5.50–6.50
6.00–8.00
Capitalization rates
December 31, 2017(1)
Weighted
average (%)
4.82
5.96
5.60
7.62
Range (%)
4.50–6.00
5.75–6.25
5.50–6.50
6.00–8.00
4.50–8.00
5.19
4.50–8.00
5.19
4.50–8.00
5.19
(1) Excludes certain properties where bids were received by the Trust, sold properties, properties held for future redevelopment and properties under
development in the current period.
Assumptions used in the valuation of investment properties using the discounted cash flow method
As at December 31, 2018, the Trust continues to value its investment properties in Alberta, excluding sold properties, properties
held for sale and certain properties where bids were received by the Trust and assets held for sale, using the discounted cash
flow method in light of the ongoing challenges in that region’s office sector. The critical valuation metrics as at December 31,
2018, September 30, 2018 and December 31, 2017 are set out below:
Discount rates (%)
Terminal cap rates (%)
Market rents(2)
Range
8.00–8.75
7.00–8.25
$12.00–16.50 $
December 31, 2018(1)
Weighted
December 31, 2017(1)
September 30, 2018(1)
Weighted
average
7.82
6.89
15.35 $12.00–16.50 $
Range
7.63–8.75
6.63–8.25
average
8.05
7.13
15.33 $12.00–16.50 $
Range
7.63–8.75
6.63–8.25
Weighted
average
7.82
6.88
15.36
(1) Excludes certain properties where bids were received by the Trust and sold properties in the current period.
(2) Market rents represent year one rates in the discounted cash flow model. Market rents include office space only and exclude retail space.
In addition to the assumptions noted above, leasing cost assumptions for new and renewed leasing were within the range of
$25.00 to $60.00 per square foot, with weighted average stabilized vacancy rate assumptions of 5%.
Building improvements
Building improvements represent investments made to our investment properties to ensure optimal building performance, to
improve the experience of and attractiveness to our tenants, as well as to reduce operating costs. In order to retain desirable
rentable space and to generate adequate revenue over the long term, we must maintain or, in some cases, improve each
property’s condition to meet market demand.
As part of our broader strategy to invest capital in our buildings to improve the experience of and attractiveness to tenants as
well as to reduce operating costs, we expect overall building improvements to remain elevated. By doing so, our tenants will
have a better experience at our buildings, leading to improved tenant retention, quicker leasing of available space and
realization of higher rental rates.
Dream Office REIT 2018 Annual Report | 23
The table below summarizes the building improvements incurred for the three months and years ended December 31, 2018 and
December 31, 2017.
Building improvements
Recoverable
Value-add
Non-recoverable
Total comparative portfolio(1)
Add:
$
Three months ended December 31,
2017
4,446
846
577
5,869
2018
3,954
1,853
339
6,146
$
Properties under development
Interest capitalized to properties under development
Properties held for future redevelopment
Properties classified as assets held for sale/sold properties
Total portfolio
Less: Properties classified as assets held for sale
Total amounts included in consolidated financial statements
$
$
3,229
24
146
—
9,545
—
9,545
$
$
42
—
—
202
6,113
—
6,113
Year ended December 31,
2018
11,647
4,253
760
16,660
3,787
24
931
272
21,674
60
21,614
$
$
$
$
$
$
2017
16,199
1,357
1,198
18,754
174
—
100
8,641
27,669
3,162
24,507
(1) Excludes sold properties, properties held for future redevelopment and properties under development during the period.
For the three months and year ended December 31, 2018, we incurred $9.5 million and $21.7 million, respectively, in
expenditures related to building improvements, the majority of which are recoverable from tenants under current terms of
the leases.
Recoverable building improvements for the three months and year ended December 31, 2018 were $4.0 million and
$11.6 million, respectively, and included safety enhancements, heating, ventilation and air conditioning upgrades, elevator
modernization and recoverable lobby and common area upgrades.
For the three months and year ended December 31, 2018, value-add additions were $1.9 million and $4.3 million, respectively,
the majority of which were invested in pre-development and value enhancing capital at certain properties located in the Toronto
downtown region.
For the three months and year ended December 31, 2018, non-recoverable building improvements were $0.3 million and
$0.8 million, respectively, which include costs for structural and building enhancements.
Dispositions update
For the year ended December 31, 2018, the Trust completed the sale of investment properties totalling approximately
1.7 million square feet, for gross proceeds (net of adjustments) totalling $302.2 million.
Property
Morgex Building, Edmonton
340–450 3rd Avenue N., Saskatoon
2891 Sunridge Way, Calgary
1914 Hamilton Street, Regina
F1RST Tower, Calgary
IBM Corporate Park, Calgary
Date disposed
January 3, 2018
January 18, 2018
February 1, 2018
February 7, 2018
April 10, 2018
August 31, 2018
November 14, 2018 Life Plaza and Joffre Place, Calgary
November 22, 2018 Rocky Mountain Plaza, Calgary
December 27, 2018 14505 Bannister Road, SE, Calgary
Total dispositions for the year ended December 31, 2018
Ownership
(%)
100.0 %
100.0 %
100.0 %
100.0 %
50.0 %
100.0 %
100.0 %
100.0 %
100.0 %
Disposed
share of GLA
(000s sq. ft.)
Sales price(1)
Debt related to
dispositions
53
132
87
82
354
358
344
205
61
1,676 $
302,194 $
(90,697 )
(1) Sales price reflects gross proceeds net of adjustments and before transaction costs.
For the three months ended December 31, 2018, the Trust sold four properties in Calgary for $99.5 million or approximately
$163 per square foot. For the year ended December 31, 2018, the Trust sold ten properties located in Alberta and Saskatchewan
totalling $302.2 million or approximately $180 per square foot.
Dream Office REIT 2018 Annual Report | 24
INVESTMENT IN DREAM INDUSTRIAL REIT
Dream Industrial REIT is an unincorporated, open-ended real estate investment trust listed on the Toronto Stock Exchange under
the symbol “DIR.UN”.
Investment in Dream Industrial REIT
Dream Industrial REIT Units held, end of year
Dream Industrial LP Class B limited partnership units held, end of year
Total Dream Industrial REIT units held, end of year
Ownership %, end of year
$
December 31,
December 31,
2018
266,583 $
7,200,736
18,551,855
25,752,591
23.3 %
2017
220,796
5,431,141
18,551,855
23,982,996
25.6 %
On June 29, 2018, Dream Industrial REIT completed an equity offering of 13.9 million units of Dream Industrial REIT (“Dream
Industrial REIT Units”) at a price of $10.35 per unit for gross proceeds of $144.0 million, including 1.8 million Dream Industrial
REIT Units issued pursuant to the exercise of the over-allotment option granted to the underwriters, to fund acquisitions,
partially fund the redemption of its outstanding 5.25% convertible debentures and for general trust purposes.
On February 13, 2019, Dream Industrial REIT completed a public offering of 13.8 million Dream Industrial REIT Units at a price of
$10.45 per unit for gross proceeds of $144.2 million, including 1.8 million Dream Industrial REIT Units issued pursuant to the
exercise of the over-allotment option granted to the underwriters. The net proceeds are to be used to partially fund the
acquisition of a portfolio of 21 industrial properties located in the United States.
For the three months and year ended December 31, 2018, the Trust purchased Dream Industrial REIT Units through its
distribution reinvestment plan totalling 468,373 and 1,769,595 Dream Industrial REIT Units, respectively, for a total cost of
$4.6 million and $17.3 million, respectively. The Trust’s ownership was 23.3% at December 31, 2018, 23.0% at September 30,
2018 and 25.6% at December 31, 2017. The marginal increase in the Trust’s ownership over the prior quarter was mainly driven
by our participation in Dream Industrial REIT’s distribution reinvestment plan, and the decreases when compared to December
31, 2017 were primarily as a result of an equity offering by Dream Industrial REIT during the second quarter of 2018 as well as
Dream Industrial REIT’s deferred unit incentive plan and unit purchase plan, which collectively diluted our ownership, partially
offset by our participation in Dream Industrial REIT’s distribution reinvestment plan.
The fair value of the Trust’s interest in Dream Industrial REIT of $245.2 million (December 31, 2017 – $211.1 million) was
determined using the Dream Industrial REIT closing unit price of $9.52 per unit at period-end multiplied by the number of units
held by the Trust as at December 31, 2018.
Dream Office REIT 2018 Annual Report | 25
OUR FINANCING
Our discussion of financing activities is based on the debt balance, which includes debt associated with assets held for sale.
Where applicable, a reconciliation to our consolidated financial statements has been included in the tables in this section.
Debt summary
The key performance indicators in the management of our debt are as follows:
Financing and liquidity metrics
Weighted average face rate of interest on debt (period-end)(1)
Interest coverage ratio (times)(2)(3)
Net total debt-to-adjusted EBITDAFV (years)(2)
Level of debt (net total debt-to-net total assets)(2)
Level of debt (net secured debt-to-net total assets)(2)
Average term to maturity on debt (years)
Variable rate debt as percentage of total debt
Unencumbered assets(4)
Available liquidity(2)
Cash and cash equivalents
Undrawn demand revolving credit facilities
Available liquidity
December 31,
September 30,
December 31,
2018
4.06 %
2.8
9.0
45.0 %
40.2 %
3.8
26.3 %
140,000 $
8,769 $
155,139
163,908 $
2018
3.94 %
2.8
9.1
46.2 %
41.4 %
4.0
25.3 %
140,000 $
12,309 $
220,517
232,826 $
2017
3.90 %
3.2
7.1
39.6 %
30.6 %
4.5
8.3 %
299,000
96,960
396,667
493,627
$
$
$
(1) Weighted average face rate of interest on debt is calculated as the weighted average face rate of all interest bearing debt balances.
(2) The calculation of the following non-GAAP measures – interest coverage ratio, net total debt-to-adjusted EBITDAFV, level of debt (net total debt-to-net total
assets), level of debt (net secured debt-to-net total assets) and available liquidity – are included in the “Non-GAAP Measures and Other Disclosures” section
of the MD&A.
(3) Interest coverage ratio has been restated in the December 31, 2017 comparative periods to conform to current period presentation. For further details,
please refer to the “Non-GAAP Measures and Other Disclosures” section under the heading “Interest coverage ratio”.
(4) Unencumbered assets (non-GAAP measure) is defined in the section “Non-GAAP Measures and Other Disclosures” under the heading “Unencumbered assets”.
We ended the quarter with a net total debt-to-net total assets ratio of 45.0%, net total debt-to-adjusted EBITDAFV of 9.0 years,
and interest coverage ratio of 2.8 times. Our available liquidity of approximately $164 million comprises undrawn demand
revolving credit facilities totalling approximately $155 million and $9 million of cash and cash equivalents on hand as at
December 31, 2018. The overall net total debt-to-net total assets ratio has declined 120 bps from 46.2% in Q3 2018 to 45.0%
this quarter, mainly driven by a reduction in our drawings on our credit facilities with net proceeds from dispositions.
As at December 31, 2018, variable rate debt as a percentage of total debt was 26.3%. On January 2, 2019, the Trust completed a
portfolio mortgage totalling $105 million. The net proceeds were partially used to pay down drawings on the Trust’s demand
revolving credit facilities, reducing our variable rate debt percentage of total debt to 22.9%. We expect leverage and the variable
rate debt as a percentage of total debt to further decline using net proceeds from future asset sales.
Liquidity and capital resources
Dream Office REIT’s primary sources of capital are cash generated from operating activities, net proceeds from investment
property dispositions, demand revolving credit facilities, and mortgage financing and refinancing. Our primary uses of capital
include the payment of distributions, costs of attracting and retaining tenants, recurring property maintenance, major property
improvements, debt principal repayments, interest payments and repurchases of REIT A Units. We expect to meet all of our
ongoing obligations with current cash and cash equivalents on hand, cash flows generated from operations, net proceeds from
investment property dispositions, demand revolving credit facilities and conventional mortgage refinancing.
In our consolidated financial statements as at December 31, 2018, our current liabilities exceeded our current assets by
$131.0 million. Typically, real estate entities seek to address liquidity needs by having a balanced debt maturity schedule and
undrawn demand revolving credit facilities. We are able to use our demand revolving credit facilities on short notice, which
eliminates the need to hold significant amounts of cash and cash equivalents on hand. Working capital balances can fluctuate
significantly from period-to-period depending on the timing of receipts and payments. Debt obligations (including debt related
to assets held for sale) that are due within one year include debt maturities of $91.6 million, which we typically refinance with
our undrawn demand credit facilities and mortgages of terms between five and ten years. Amounts payable and accrued
liabilities balances outstanding at the end of any reporting period depend primarily on the timing of leasing costs and capital
expenditures incurred, as well as the impact of transaction costs incurred on dispositions completed during the reporting period.
We continue to maintain high levels of liquidity for capital expenditures to improve the value of our portfolio.
Dream Office REIT 2018 Annual Report | 26
Financing activities during the quarter and year
For the three months and year ended December 31, 2018, the Trust discharged $50.7 million and $99.9 million, respectively, of
mortgage debt. The Trust did not enter into any new mortgages for the three months and year ended December 31, 2018. On
June 13, 2018, the Trust repaid its Series A Debentures with an aggregate principal amount of $140.8 million.
On January 2, 2019, the Trust completed a portfolio mortgage totalling $105 million, secured by five investment properties in
Toronto, Ontario. The portfolio mortgage is interest-only and bears interest at 3.96%, compounded semi-annually, and matures
on January 2, 2029. The net proceeds were used to make lump sum repayments on five mortgages prior to their original
maturity dates totalling $56.6 million, and the balance of the net proceeds were used to pay down drawings on the Trust’s
demand revolving credit facilities. During the three months ended December 31, 2018, the Trust accrued $0.8 million of debt
settlement costs once it was committed to the refinancing.
Demand revolving credit facilities
Refer to Note 11 of the consolidated financial statements for details of our demand revolving credit facilities as at December 31,
2018.
On December 21, 2018, the Trust reduced its existing demand revolving credit facility to $500 million from $575 million. The
Trust had previously increased the facility from $400 million to $575 million and extended the maturity to March 1, 2021 on
April 25, 2018. The interest rate remained in the form of rolling one-month bankers’ acceptances (“BA”) bearing interest at the
BA rate plus 170 bps or at the bank’s prime rate plus 70 bps. As at December 31, 2018, the amended demand revolving credit
facility is secured by seven of the Trust’s investment properties and the Trust’s 18,551,855 Dream Industrial LP Class B limited
partnership units. As at December 31, 2018, the amount available under the $500 million facility was $432.3 million less
$287.5 million in drawings and $2.5 million in the form of letters of credit.
On May 4, 2018, the Trust reduced its existing demand revolving credit facility from $45 million to $20 million and extended the
maturity date to March 31, 2021. The interest rate remained in the form of rolling BAs bearing interest at the BA rate plus
200 bps or at the bank’s prime rate plus 85 bps. The amended demand revolving credit facility is secured by 4,800,587 of the
Trust’s Dream Industrial REIT Units. As at December 31, 2018, the amount available under the $20 million facility was
$20.0 million less $7.2 million in drawings.
Continuity of debt
Refer to Note 11 of the consolidated financial statements for details of the changes in our debt balances for the year ended
December 31, 2018.
Debt maturity profile
Our current debt profile is balanced with staggered maturities over the next nine years. The following table summarizes our debt
maturity profile as at December 31, 2018:
Debt maturities
2019
2020
2021
2022
2023
2024–2027
Subtotal before undernoted items
Demand revolving credit facilities
(2021)
Scheduled principal repayments on
non-matured debt
Subtotal before undernoted items
$
Financing costs
Fair value adjustments
Debt per consolidated financial
statements
Mortgages
Outstanding Weighted
average
interest
rate
4.08 % $
4.44 %
5.10 %
4.14 %
4.47 %
3.60 %
4.10 % $
balance
due at
maturity
72,991
21,170
111,555
184,014
109,951
333,563
833,244
$
$
Demand revolving
credit facilities
Outstanding Weighted
average
interest
rate
— $
—
—
—
—
—
— $
balance
due at
maturity
—
—
—
—
—
—
—
Debentures
Outstanding Weighted
average
interest
rate
— $
4.07 %
—
—
—
—
4.07 % $
balance
due at
maturity
—
150,000
—
—
—
—
150,000
Total
Outstanding Weighted
average
interest
rate
4.08 %
4.12 %
5.10 %
4.14 %
4.47 %
3.60 %
4.09 %
balance
due at
maturity
72,991
171,170
111,555
184,014
109,951
333,563
983,244
—
—
294,702
3.99 %
—
—
294,702
3.99 %
134,182
967,426
(3,463 )
795
—
4.08 % $
—
294,702
—
3.99 % $
—
150,000
—
134,182
4.07 % $ 1,412,128
—
4.06 %
(3,016 )
—
(231 )
—
(6,710 )
795
$
964,758
4.15 % $
291,686
4.41 % $
149,769
4.25 % $ 1,406,213
4.21 %
Dream Office REIT 2018 Annual Report | 27
Commitments and contingencies
Dream Office REIT and its operating subsidiaries are contingently liable under guarantees that are issued in the normal course of
business, on certain debt assumed by purchasers of investment properties, and with respect to litigation and claims that arise
from time to time. In the opinion of management, any liability that may arise from such contingencies would not have a material
adverse effect on the consolidated financial statements of the Trust as at December 31, 2018.
In 2015, a subsidiary of the Trust received notices of reassessment from both the Canada Revenue Agency and the Alberta
Minister of Finance with respect to its 2007, 2008 and 2010 taxation years. These reassessments relate to the deductibility of
certain tax losses claimed by the subsidiary prior to its acquisition by the Trust. These federal and provincial reassessments if
upheld could increase total current taxes payable, including interest and penalties, by $11.7 million. No cash payment is
expected to be made unless it is ultimately established that the Trust has an obligation to make one. Management is of the view
that there is a strong case to support the position as filed and has contested both the federal and provincial reassessments.
Since management believes that it is more likely than not that its position will be sustained, no amounts related to these
reassessments have been recorded in the consolidated financial statements as at December 31, 2018.
At December 31, 2018, Dream Office REIT’s future minimum commitments under operating leases and fixed price contracts to
purchase steam are as follows:
Operating lease payments
Fixed price contracts
Total
Within 1 year
$
2,688 $
151
2,839 $
$
Minimum payments due
1–5 years
> 5 years
4,759 $
604
5,363 $
9,412 $
1,815
11,227 $
Total
16,859
2,570
19,429
Operating leases include a ground lease at one investment property totalling $4.3 million, payable in equal annual amounts over
the next 27 years.
The Trust has entered into lease agreements that may require tenant improvement costs of approximately $1.4 million
(December 31, 2017 – $14.4 million).
The Trust has committed US$6.1 million to fund investments in real estate technologies.
The Trust is contingently liable under guarantees that are issued on certain debt assumed by purchasers of investment
properties totalling $148.7 million (December 31, 2017 – $173.2 million) with a weighted average term to maturity of 4.0 years.
OUR EQUITY
Total equity
Our discussion of equity includes LP B Units (or subsidiary redeemable units), which are economically equivalent to REIT Units.
Pursuant to IFRS, the LP B Units are classified as a liability in our consolidated financial statements.
December 31, 2018
Unitholders’ equity
December 31, 2017
Number of Units
Unitholders’ equity
Deficit
Accumulated other comprehensive income
Equity per consolidated financial statements
Add: LP B Units
Total equity (including LP B Units)(1)
Net asset value (“NAV”) per unit(2)
Amount
2,462,611
(728,934 )
1,946
1,735,623
115,981
1,851,604
23.46
(1) Total equity (non-GAAP measure) is defined in the section “Non-GAAP Measures and Other Disclosures” under the heading “Total equity (including LP B
Amount
2,124,760
(634,513 )
6,495
1,496,742
116,662
1,613,404
24.97
—
—
59,369,278
5,233,823
64,603,101 $
$
—
—
73,705,285
5,233,823
78,939,108 $
$
73,705,285 $
59,369,278 $
Number of Units
Units or subsidiary redeemable units)”.
(2) NAV per unit (non-GAAP measure) is defined in this section under the heading “NAV per unit” and in the section “Non-GAAP Measures and Other
Disclosures” under the heading “NAV per unit”.
Dream Office REIT 2018 Annual Report | 28
The amended and restated Declaration of Trust of Dream Office REIT dated May 8, 2014, as amended or amended and restated
from time to time (the “Declaration of Trust”), authorizes the issuance of an unlimited number of the following classes of units:
REIT Units, issuable in one or more series, Transition Fund Units and Special Trust Units. The Special Trust Units may only be
issued to holders of LP B Units, are not transferable separately from these Units, and are used to provide voting rights with
respect to Dream Office REIT to persons holding LP B Units. The LP B Units are held by DAM, a related party to Dream Office
REIT, and DAM holds an equivalent number of Special Trust Units. Both the REIT Units and Special Trust Units entitle the holder
to one vote for each unit at all meetings of the unitholders. The LP B Units are exchangeable on a one-for-one basis for REIT B
Units at the option of the holder, which can then be converted into REIT A Units. The LP B Units and corresponding Special Trust
Units together have economic and voting rights equivalent in all material respects to REIT A Units. The REIT A Units and REIT B
Units have economic and voting rights equivalent in all material respects to each other.
At December 31, 2018, DAM held 9,284,938 REIT A Units and 5,233,823 LP B Units for a total ownership interest of
approximately 22.5%.
NAV per unit
NAV per unit is calculated as the total equity (including LP B Units) divided by the total number of REIT A Units and LP B Units.
This non-GAAP measurement is an important measure used by the Trust, as it reflects management’s view of the intrinsic value
of the Trust. However, it is not defined by IFRS, does not have a standardized meaning and may not be comparable with similar
measures presented by other income trusts.
In compliance with Canadian Securities Administrators Staff Notice 52-306 (Revised), “Non-GAAP Financial Measures”, the table
below reconciles the major components of NAV per unit to total equity (as per consolidated financial statements).
Total
Per unit
GLA
(in millions
of sq. ft.)
Occupancy –
in-place and
committed (%)
WALT
(years)
0.5
3.4
0.6
1.1
1.0
6.6
88.8 %
97.8 %
94.7 %
91.1 %
80.6 %
93.0 %
6.8
5.0
4.6
5.7
4.7
5.2
Investment properties
Calgary
Toronto downtown
Mississauga and North York
Ottawa and Montréal
Other markets
Total comparative portfolio investment properties
Mortgages
Total comparative portfolio investment properties,
net of mortgages
Properties under development, net of mortgages
Properties held for future redevelopment
Investment in Dream Industrial REIT
Unsecured debentures
Demand revolving credit facilities
Other items
Net asset value
Less: LP B Units
Total equity per consolidated financial statements
$
115,583 $
1,798,728
221,464
357,878
167,928
2,661,581
(933,864 )
1,727,717
43,691
42,660
266,583
(149,769 )
(291,686 )
(25,792 )
1,613,404 $
116,662
1,496,742
$
$
1.79
27.84
3.43
5.54
2.60
41.20
(14.46 )
26.74
0.68
0.66
4.13
(2.32 )
(4.52 )
(0.40 )
24.97
Outstanding equity
The following table summarizes the changes in our outstanding equity:
For the three months ended December 31, 2018
Total units issued and outstanding at October 1, 2018
Percentage of all units
Cancellation of REIT A Units under NCIB
Total units issued and outstanding at December 31, 2018
Percentage of all units
REIT A Units
60,037,435
92.0 %
(668,157 )
59,369,278
91.9 %
LP B Units
5,233,823
8.0 %
—
5,233,823
8.1 %
Total
65,271,258
100.0 %
(668,157 )
64,603,101
100.0 %
Dream Office REIT 2018 Annual Report | 29
For the year ended December 31, 2018
Total units issued and outstanding at January 1, 2018
REIT A Units issued pursuant to Deferred Unit Incentive Plan (“DUIP”)
Cancellation of REIT A Units under NCIB
Cancellation of REIT A Units under SIB
Total units issued and outstanding at December 31, 2018
Percentage of all units
REIT A Units
73,705,285
139,657
(4,475,664 )
(10,000,000 )
59,369,278
91.9 %
LP B Units
5,233,823
—
—
—
5,233,823
8.1 %
Total
78,939,108
139,657
(4,475,664 )
(10,000,000 )
64,603,101
100.0 %
Subsequent to quarter-end, the Trust purchased for cancellation an additional 381,313 REIT A Units under the NCIB at a cost of
approximately $8.5 million or $22.20 per unit.
As at December 31, 2018, there were 903,571 deferred trust units and income deferred trust units outstanding (December 31,
2017 – 889,301) under the Trust’s DUIP.
Normal course issuer bid (“NCIB”)
On February 13, 2018, the NCIB covering the period from August 15, 2017 to August 14, 2018 expired as the Trust purchased the
maximum number of REIT A Units permitted under this NCIB. On August 15, 2018, the Toronto Stock Exchange accepted a notice
filed by the Trust to renew its prior normal course issuer bid for a one-year period. Under the bid, the Trust will have the ability
to purchase for cancellation up to a maximum of 4,954,869 of its REIT A Units (representing 10% of the Trust’s public float of
49,548,697 REIT A Units) through the facilities of the Toronto Stock Exchange. The renewed bid commenced on August 17, 2018
and will remain in effect until the earlier of August 16, 2019 or the date on which the Trust has purchased the maximum number
of REIT A Units permitted under the bid. Daily purchases will be limited to 48,257 REIT A Units, which equals 25% of the average
daily trading volume during the prior six calendar months (being 193,028 REIT A Units per day), other than purchases pursuant
to applicable block purchase exceptions.
On October 23, 2018, the Trust entered into an automatic securities repurchase plan (the “Repurchase Plan”) with its designated
broker in order to facilitate purchases of its REIT A Units under the NCIB. The Repurchase Plan allows for purchases by Dream
Office REIT of REIT A Units at any time including, without limitation, when the Trust would ordinarily not be permitted to make
purchases due to regulatory restrictions or self-imposed blackout periods. Purchases will be made by the Trust’s broker based
upon the parameters prescribed by the TSX and the terms of the parties’ written agreement. Outside of such restricted or
blackout periods, the REIT A Units may also be purchased in accordance with management’s discretion. The Repurchase Plan will
terminate on August 16, 2019.
For the three months and year ended December 31, 2018, the Trust purchased for cancellation 668,157 REIT A Units and
4,475,664 REIT A Units, respectively, under the NCIB, at a cost of approximately $15.7 million and $100.7 million, respectively
(December 31, 2017 – 10,348,734 REIT A Units cancelled for $209.2 million).
Subsequent to quarter-end, the Trust purchased for cancellation an additional 381,313 REIT A Units under the NCIB at a cost of
approximately $8.5 million or $22.20 per unit.
Substantial issuer bid (“SIB”)
On March 22, 2018, the Trust announced the offer to purchase for cancellation up to 10,000,000 of its outstanding REIT A Units
at a purchase price of $24.00 per REIT A Unit.
On May 7, 2018, the Trust took up and paid for 10,000,000 REIT A Units at a price of $24.00 per REIT A Unit for an aggregate cost
of $240 million, excluding fees and expenses relating to the SIB. The REIT A Units purchased for cancellation under the SIB
represented approximately 14% of the issued and outstanding REIT A Units and 13% of all outstanding units immediately prior
to the expiry of the SIB.
Weighted average number of units
The diluted weighted average number of units outstanding used in the FFO per unit calculations includes the weighted average
number of all REIT Units, LP B Units, vested and unvested deferred trust units and the associated income deferred trust units.
Weighted average number of units (in thousands)
Diluted
Three months ended December 31,
2017
80,943
2018
65,839
Year ended December 31,
2017
2018
97,531
69,775
Dream Office REIT 2018 Annual Report | 30
Distribution policy
Our Declaration of Trust provides our trustees with the discretion to determine the percentage payout of income that would be
in the best interest of the Trust.
On June 22, 2017, the Trust announced a revision to its monthly cash distribution from $0.125 per unit to $0.08333 per unit, or
$1.00 per unit on an annualized basis, commencing with the July 2017 distribution in order to maintain a conservative payout
ratio relative to FFO, resulting in higher levels of liquidity for capital expenditures to improve the value of our portfolio.
For the three months and year ended December 31, 2018, total distributions amounted to $16.2 million and $68.6 million,
respectively, with a decrease of $3.7 million over the prior year comparative quarter and a decrease of $53.8 million over the
prior year. The decrease mainly reflects the cancellation of REIT A Units under the NCIB and SIB in the current and prior year and
to a lesser extent the reduction in the monthly cash distribution from $0.125 per unit to $0.08333 per unit, or $1.00 per unit on
an annualized basis, commencing with the month of July 2017 distribution.
Cash flows from operating activities and distributions declared
The Trust anticipates that future cash flows generated from (utilized in) operating activities may be less than total distributions
(non-GAAP measure). With a conservative balance sheet, significant liquidity and a plan to stabilize our portfolio’s operating
performance in the foreseeable future, the Trust does not anticipate cash distributions will be suspended.
To the extent that there are shortfalls in cash flows generated from (utilized in) operating activities when compared to total
distributions (non-GAAP measure), the Trust will fund the shortfalls with cash and cash equivalents on hand and with our
existing demand revolving credit facilities. The use of the demand revolving credit facilities may involve risks compared with
using cash and cash equivalents on hand as a source of funding, such as the risk that interest rates may rise in the future which
may make it more expensive for the Trust to borrow under the demand revolving credit facilities, and the risk associated with
increasing the overall indebtedness of the Trust. In the event that shortfalls exist, the Trust does not anticipate cash distributions
will be suspended in the foreseeable future but does expect that there could be timing differences as a result of our disposition
program and our intensification and redevelopment plans on certain assets within our portfolio. Accordingly, to the extent there
are shortfalls, distributions may be considered an economic return of capital. The Trust determines the distribution rate by,
among other considerations, its assessment of cash flows generated from (utilized in) operating activities. In light of the fact that
the Trust is substantially through its disposition program and expects cash flows from operating activities to be lower as a result,
the Trust reduced its monthly cash distribution from $0.125 per unit to $0.08333 per unit, or $1.00 per unit on an annualized
basis, commencing with the July 2017 distribution. Management reviews the estimated annual distributable cash flows with the
Board of Trustees periodically to assist the Board in determining the targeted distribution rate.
In any given period, the Trust anticipates that net income will continue to vary from total distributions (non-GAAP measure) as
net income includes non-cash items such as fair value adjustments to investment properties and financial instruments and costs
related to our disposition program such as debt settlement costs and gain (loss) on sale of investment properties. Accordingly,
the Trust does not use net income as a proxy for determining distributions.
In any given period, actual cash flows generated from (utilized in) operating activities may differ from total distributions (non-
GAAP measure), primarily due to fluctuations in non-cash working capital and the impact of leasing costs, which fluctuate with
lease maturities, renewal terms, the type of asset being leased, and when tenants fulfill the terms of their respective lease
agreements. These seasonal fluctuations or the unpredictability of when leasing costs are incurred are funded with our cash and
cash equivalents on hand and, if necessary, with our existing demand revolving credit facilities.
The following table summarizes net income, cash flows generated from (utilized in) operating activities (included in consolidated
financial statements) and total distributions (non-GAAP measure) for the three months and year ended December 31, 2018 and
December 31, 2017:
Net income for the period
Cash flows generated from (utilized in) operating activities
(included in consolidated financial statements) for the period
Total distributions(1) for the period
$
$
Three months ended December 31,
2018
58,489 $
2017
100,731 $
Year ended December 31,
2018
157,778 $
2017
134,786
1,048
16,207 $
10,177
19,927 $
46,529
68,591 $
79,820
122,422
(1) Total distributions (non-GAAP measure) is defined in the section “Non-GAAP Measures and Other Disclosures” under the heading “Total distributions paid
and payable”.
Dream Office REIT 2018 Annual Report | 31
As required by National Policy 41-201, “Income Trusts and Other Indirect Offerings”, the following table outlines the difference
between net income and total distributions, as well as the difference between cash flows generated from (utilized in) operating
activities (included in consolidated financial statements) and total distributions, in accordance with the guidelines.
Excess of net income over total distributions(1)
Shortfall of cash flows generated from (utilized in) operating activities
(included in consolidated financial statements) over total distributions(1)
Three months ended December 31,
2017
80,804 $
2018
42,282 $
$
Year ended December 31,
2018
89,187 $
2017
12,364
(15,159 )
(9,750 )
(22,062 )
(42,602 )
(1) Total distributions (non-GAAP measure) is defined in the section “Non-GAAP Measures and Other Disclosures” under the heading “Total distributions paid
and payable”.
For the three months and year ended December 31, 2018, net income exceeded total distributions by $42.3 million and
$89.2 million, respectively, primarily as a result of non-cash items such as fair value adjustments to investment properties and
financial instruments and the pick-up of our share of income from investment in Dream Industrial REIT during the respective
periods. For the three months and year ended December 31, 2017, net income exceeded total distributions by $80.8 million and
$12.4 million, respectively, primarily as a result of fair value adjustments to investment properties.
For the three months and year ended December 31, 2018, total distributions exceeded cash flows generated from (utilized in)
operating activities (included in consolidated financial statements) by $15.2 million and $22.1 million, respectively. The shortfall
of cash flows generated from (utilized in) operating activities (included in consolidated financial statements) over total
distributions is due to fluctuations in non-cash working capital and the impact of leasing costs, which fluctuate with lease
maturities, renewal terms and the type of asset being leased. For the three months and year ended December 31, 2017, total
distributions exceeded cash flows generated from (utilized in) operating activities (included in consolidated financial statements)
by $9.8 million and $42.6 million, respectively, for the same reasons noted in the current year. Furthermore, for the three
months and year ended December 31, 2018, the Trust received monthly distributions from its investment in Dream Industrial
REIT totalling $4.6 million and $17.9 million, respectively (for the three months and year ended December 31, 2017 –
$3.8 million and $14.6 million, respectively), which the Trust has currently elected to reinvest through Dream Industrial REIT’s
distribution reinvestment plan. Had the Trust not reinvested the distributions received from Dream Industrial REIT, management
is of the view such distributions could be used to partially fund any shortfalls of cash flows generated from (utilized in) operating
activities (included in consolidated financial statements) over total distributions, even though distributions received from Dream
Industrial REIT would be included as part of cash flows generated from (utilized in) investing activities in the consolidated
financial statements. Additionally, the Trust has included distributions received from Dream Industrial REIT as part of its
calculation of EBITDAFV (a non-GAAP measurement), consistent with management’s view of the characterization of such cash
flows as operating in nature as opposed to investing activities.
SELECTED ANNUAL INFORMATION
The following table provides selected financial information for the past three years:
Investment properties revenue
Net income (loss)
Total assets
Non-current debt
Total debt
Total distributions
Distribution rate (per unit)
Units outstanding:
REIT Units, Series A
LP Class B Units, Series 1
2018
285,207 $
157,778
3,122,931
1,314,646
1,406,213
68,591
1.00 $
2017
474,046 $
134,786
3,321,983
1,160,689
1,367,650
122,422
1.25(1) $
$
$
2016
667,994
(879,705 )
5,486,516
2,321,530
2,649,790
177,633
1.56(2)
59,369,278
5,233,823
73,705,285
5,233,823
104,806,724
5,233,823
(1) The Trust announced on June 22, 2017 a reduction to its monthly cash distribution from $0.125 per unit to $0.08333 per unit, or $1.00 per unit on an
annualized basis, commencing with the month of July 2017 distribution.
(2) The Trust announced on February 18, 2016 a reduction to its monthly cash distribution from $0.18666 per unit to $0.125 per unit, or $1.50 per unit on an
annualized basis, commencing with the month of February 2016 distribution.
Dream Office REIT 2018 Annual Report | 32
SECTION IV
NON-GAAP MEASURES AND OTHER DISCLOSURES
The following non-GAAP measures are important measures used by management in evaluating the Trust’s underlying operating
performance and debt management. These non-GAAP measures are not defined by IFRS, do not have a standardized meaning
and may not be comparable with similar measures presented by other income trusts.
Available liquidity
Available liquidity is defined as the sum of cash and cash equivalents and undrawn demand revolving credit facilities at period-
end. Management believes that available liquidity, a non-GAAP measurement, is an important measure in determining our
resources available to meet all of our ongoing obligations. This non-GAAP measure does not have a standardized meaning and
may not be comparable with similar measures presented by other income trusts.
In compliance with Canadian Securities Administrators Staff Notice 52-306 (Revised), “Non-GAAP Financial Measures”, available
liquidity has been reconciled to cash and cash equivalents in the table below:
Cash and cash equivalents (per consolidated financial statements)
Undrawn demand revolving credit facilities (per consolidated financial statements)
Available liquidity
$
$
December 31,
September 30,
2018
8,769 $
155,139
163,908 $
2018
12,309 $
220,517
232,826 $
As at
December 31,
2017
96,960
396,667
493,627
Total equity (including LP B Units or subsidiary redeemable units)
One of the components used to determine the Trust’s net asset value per unit is total equity (including LP B Units). Total equity
(including LP B Units) is calculated as the sum of the equity amount per consolidated financial statements and the subsidiary
redeemable units amount. Management believes it is important to include the subsidiary redeemable (LP B) units amount for
the purpose of determining the Trust’s capital management. Management does not consider the subsidiary redeemable units to
be debt or borrowings of the Trust, but rather a component of the Trust’s equity. However, total equity (including LP B Units) is
not defined by IFRS, does not have a standardized meaning and may not be comparable with similar measures presented by
other income trusts.
In compliance with Canadian Securities Administrators Staff Notice 52-306 (Revised), “Non-GAAP Financial Measures”, the table
within the section “Our Equity” under the heading “Total equity” reconciles total equity (including LP B Units) to equity (as per
consolidated financial statements).
Total distributions paid and payable
Total distributions paid and payable is calculated as the sum of the distributions paid and payable on REIT A Units and subsidiary
redeemable units (LP B Units) interest expense per consolidated financial statements. Because management considers the
subsidiary redeemable units to be a component of the Trust’s equity, management considers the interest paid on the subsidiary
redeemable units to be a component of total distributions paid to unitholders. However, total distributions paid and payable is
not defined by IFRS, does not have a standardized meaning and may not be comparable with similar measures presented by
other income trusts.
In compliance with Canadian Securities Administrators Staff Notice 52-306 (Revised), “Non-GAAP Financial Measures”, total
distributions paid and payable has been reconciled to total distributions paid and payable on REIT A Units (included in
consolidated financial statements) in the table below:
Total distributions paid and payable on REIT A Units (included in
consolidated financial statements)
Add: interest on subsidiary redeemable units (included in
consolidated financial statements)
Total distributions paid and payable
$
$
Three months ended December 31,
2017
2018
Year ended December 31,
2018
2017
14,898
$
18,620
$
63,357
$
115,880
1,309
16,207 $
1,307
19,927 $
5,234
68,591 $
6,542
122,422
Dream Office REIT 2018 Annual Report | 33
NAV per unit
NAV per unit is calculated as the total equity (including LP B Units) divided by the total number of REIT A Units and LP B Units.
This non-GAAP measurement is an important measure used by the Trust, as it reflects management’s view of the intrinsic value
of the Trust. However, it is not defined by IFRS, does not have a standardized meaning and may not be comparable with similar
measures presented by other income trusts.
In compliance with Canadian Securities Administrators Staff Notice 52-306 (Revised), “Non-GAAP Financial Measures”, the table
within the section “Our Equity” under the heading “NAV per unit” reconciles NAV per unit to equity (as per consolidated
financial statements).
Unencumbered assets
Unencumbered assets is the value of investment properties, not including properties held for sale, which have not been pledged
as collateral for the Trust’s demand revolving credit facilities or mortgages. This non-GAAP measurement is used by
management in assessing the borrowing capacity available to the Trust. However, it is not defined by IFRS, does not have a
standardized meaning and may not be comparable with similar measures presented by other income trusts.
Funds from operations (“FFO”)
Management believes FFO (including diluted FFO per unit) is an important measure of our operating performance. This non-
GAAP measurement is a commonly used measure of performance of real estate operations; however, it does not represent net
income nor cash flows generated from (utilized in) operating activities, as defined by IFRS, and is not necessarily indicative of
cash available to fund Dream Office REIT’s needs.
In February 2018, REALPAC issued a white paper on Funds From Operations and Adjusted Funds from Operations for IFRS. The
Trust has reviewed the REALPAC FFO white paper guidelines and its determination of FFO is substantially aligned with the
REALPAC FFO white paper guidelines with the exception of the treatment of debt settlement costs due to disposals of
investment properties. These debt settlement costs are primarily funded from net proceeds from dispositions and not from cash
flows from operating activities. Thus, the Trust is of the view that debt settlement costs due to disposals of investment
properties should not be included in the determination of FFO.
Dream Office REIT 2018 Annual Report | 34
In compliance with Canadian Securities Administrators Staff Notice 52-306 (Revised), “Non-GAAP Financial Measures”, FFO has
been reconciled to net income in the table below:
Net income for the period
Add (deduct):
Share of income from investment in
Dream Industrial REIT
Share of FFO from investment in
Dream Industrial REIT(1)
Depreciation, amortization and write-off
of intangible assets
Loss (gain) on sale of investment properties
Interest expense on subsidiary redeemable
units
Fair value adjustments to investment
properties
Fair value adjustments to financial
instruments and DUIP included in G&A
expenses
Debt settlement costs due to disposals of
investment properties, net
Internal leasing costs
Deferred income taxes expense (recovery)
Taxes attributable to dispositions
Foreign exchange gain attributable to
dispositions
Loss on recognition of net assets related to
joint operations
Other
FFO
FFO per unit – diluted(2)
December 31,
2018
58,489 $
$
September 30,
2018
41,382 $
Three months ended
December 31,
2017
100,731 $
December 31,
2018
157,778 $
Year ended
December 31,
2017
134,786
(12,717 )
(5,599 )
(3,409 )
(43,125 )
(9,440 )
5,572
3,477
(455 )
1,309
4,217
3,717
919
1,308
5,063
21,467
3,344
1,665
13,966
2,347
1,307
5,234
18,765
21,509
20,057
6,542
(20,160 )
(24,823 )
(78,663 )
(47,533 )
(23,116 )
(11,066 )
4,493
7,075
1,656
16,673
1,070
512
(288 )
—
—
—
(7 )
25,736 $
0.39 $
—
630
(276 )
625
3,968
1,308
(8,728 )
4,369
1,070
2,683
(452 )
625
16,255
5,237
(7,950 )
4,369
—
(5,717 )
—
(5,905 )
—
95
26,688 $
0.40 $
—
(78 )
32,235 $
0.40 $
—
80
115,796 $
1.66 $
117
(30 )
197,869
2.03
$
$
(1) Included in the Q3 2018 FFO was a $(1.0) million one-time true-up adjustment to our share of FFO from investment in Dream Industrial REIT. Excluding the
adjustment, our share of FFO from investment in Dream Industrial REIT for Q3 2018 was $5.2 million.
(2) The LP B Units are included in the calculation of diluted FFO per unit.
Comparative properties NOI
Comparative properties NOI includes the net rental income of the same properties owned by the Trust in (i) the current and
prior year comparative periods and (ii) the current and prior quarter, and excludes: external property management and lease
termination fees; one-time property adjustments, if any; bad debt expenses; NOI of sold properties, properties held for sale and
properties held for future redevelopment; straight-line rent; amortization of lease incentives; and property management and
other service fees. Comparative properties NOI is an important non-GAAP measure used by management to evaluate the
performance of the same properties owned by the Trust in the current period, comparative periods and prior quarter as
presented. This non-GAAP measure is not defined by IFRS, does not have a standardized meaning and may not be comparable
with similar measures presented by other income trusts.
Dream Office REIT 2018 Annual Report | 35
In compliance with Canadian Securities Administrators Staff Notice 52-306 (Revised), “Non-GAAP Financial Measures”,
comparative properties NOI for the respective periods have been reconciled to net rental income in the table below:
December 31,
2018
September 30,
2018
Three months ended
December 31,
2017
December 31,
2018
Year ended
December 31,
2017
Net rental income (included in consolidated
financial statements)
$
35,692
$
37,365
$
41,655
$
154,965
$
261,930
Less: Property management and other service
fees
Less: Lease termination fees and other
Less: Properties under development
Less: Properties held for future redevelopment
Less: Straight-line rent
Less: Amortization of lease incentives
Less: NOI from sold properties
Comparative properties NOI
$
665
45
279
(211 )
249
(2,967 )
1,392
36,240 $
548
180
434
(494 )
114
(3,207 )
4,484
35,306 $
282
(127 )
819
(727 )
261
(2,726 )
8,371
35,502 $
1,703
5,870
1,550
(1,665 )
538
(11,767 )
15,765
142,971 $
4,271
5,933
4,174
2,265
2,397
(14,587 )
111,404
146,073
Earnings before interest, taxes, depreciation, amortization and fair value adjustments (“EBITDAFV”)
EBITDAFV is defined by the Trust as net income for the period adjusted for: lease termination fees and other, non-cash items
included in investment properties revenue, fair value adjustments to investment properties and financial instruments, share of
income from investment in Dream Industrial REIT, distributions received from Dream Industrial REIT, interest expense on debt
and subsidiary redeemable units, amortization and write-off of intangible assets and depreciation on property and equipment,
leasing, net loss on transactions and debt settlement costs, and net current and deferred income taxes. This non-GAAP
measurement is an important measure used by the Trust in evaluating property operating performance; however, it is not
defined by IFRS, does not have a standardized meaning and may not be comparable with similar measures presented by other
income trusts.
In compliance with Canadian Securities Administrators Staff Notice 52-306 (Revised), “Non-GAAP Financial Measures”, EBITDAFV
has been reconciled to net income in the table below:
Net income for the period
Add (deduct):
Lease termination fees and other
Non-cash items included in investment
properties revenue(1)
Fair value adjustments to investment
properties
Fair value adjustments to financial
instruments
Share of income from investment in
Dream Industrial REIT
Distributions received from
Dream Industrial REIT
Interest – debt
Interest – subsidiary redeemable units
Amortization and write-off of intangible
assets and depreciation on property
and equipment
Leasing, net losses on transactions and debt
settlement costs
Current and deferred income taxes expense
December 31,
$
2018
58,489 $
September 30,
2018
41,382 $
Three months ended
December 31,
2017
100,731 $
December 31,
2018
157,778 $
Year ended
December 31,
2017
134,786
(45 )
2,718
(180 )
3,093
127
(5,870 )
(5,933 )
2,465
11,229
12,190
(20,160 )
(24,823 )
(78,663 )
(47,533 )
(23,116 )
(11,172 )
4,410
7,063
1,371
16,771
(12,717 )
(5,599 )
(3,409 )
(43,125 )
(9,440 )
4,613
14,971
1,309
4,529
15,841
1,308
3,766
15,209
1,307
17,914
60,718
5,234
509
1,989
511
1,549
616
1,632
2,199
7,179
14,627
86,560
6,542
6,921
37,930
(recovery), net
EBITDAFV for the period
(244 )
40,260 $
349
42,370 $
(4,605 )
46,239 $
342
167,436 $
(3,827 )
274,011
$
(1) Includes adjustments for straight-line rent and amortization of lease incentives.
Dream Office REIT 2018 Annual Report | 36
Level of debt (net total debt-to-net total assets and net secured debt-to-net total assets)
Management believes that level of debt (net total debt-to-net total assets and net secured debt-to-net total assets) are
important non-GAAP measures in the management of our debt levels. These non-GAAP measures do not have standard
meanings and may not be comparable with similar measures presented by other income trusts. Net total debt-to-net total
assets as shown below is determined as total debt less cash on hand (which includes debt related to assets held for sale), all
divided by net total assets (being determined as total assets, less cash on hand). Net secured debt-to-net total assets as shown
below is determined as total debt less cash on hand (which includes debt related to assets held for sale) and less unsecured
debt, all divided by net total assets (being determined as total assets, less cash on hand). Effective December 31, 2017, the Trust
revised its calculation of net total debt-to-total assets and net secured debt-to-total assets to exclude the reversal of
accumulated depreciation of property and equipment as management is of the view that such exclusion is more representative
of the current debt levels. Accordingly, the level of debt (net total debt-to-total assets and net secured debt-to-total assets) for
comparative periods have been restated to conform to current period presentation.
In compliance with Canadian Securities Administrators Staff Notice 52-306 (Revised), “Non-GAAP Financial Measures”, the
following table calculates the level of debt (net total debt-to-net total assets and net secured debt-to-net total assets) as at
December 31, 2018 and December 31, 2017:
Non-current debt
Current debt
Total debt
Less: Cash on hand(1)
Net total debt
Less: Unsecured debt
Net total secured debt
Total assets
Less: Cash on hand(1)
Net total assets
Net total debt-to-net total assets
Net secured debt-to-net total assets
Amounts included in
consolidated financial statements as at
December 31,
December 31,
$
$
$
2018
1,314,646 $
91,567
1,406,213
(2,263 )
1,403,950
(149,769 )
1,254,181 $
3,122,931
(2,263 )
3,120,668 $
45.0 %
40.2 %
2017
1,160,689
206,961
1,367,650
(86,474 )
1,281,176
(290,140 )
991,036
3,321,983
(86,474 )
3,235,509
39.6 %
30.6 %
(1) Cash on hand represents cash on hand at period-end, excluding cash held in co-owned properties.
Interest coverage ratio
Management believes that interest coverage ratio, a non-GAAP measurement, is an important measure in determining our
ability to cover interest expense based on our operating performance. This non-GAAP measurement does not have a
standardized meaning and may not be comparable with similar measures presented by other income trusts. Effective January 1,
2018, the Trust has chosen to revise its calculation of interest coverage ratio to be calculated as EBITDAFV divided by interest
expense on total debt, as management is of the view that such revision will align the earnings metric with other non-GAAP
measures such as net total debt-to-adjusted EBITDAFV used by the Trust. Accordingly, the interest coverage ratios for
comparative periods have been restated to conform to current period presentation.
In compliance with Canadian Securities Administrators Staff Notice 52-306 (Revised), “Non-GAAP Financial Measures”, the
following table calculates the interest coverage ratio for the years ended December 31, 2018 and December 31, 2017:
EBITDAFV(1)
Interest expense – debt
Interest coverage ratio (times)
December 31,
December 31,
2018
167,436 $
60,718 $
2.8
2017
274,011
86,560
3.2
$
$
(1) EBITDAFV (a non-GAAP measure) has been reconciled to net income (loss) under the heading “Earnings before interest, taxes, depreciation, amortization and
fair value adjustments (“EBITDAFV”)” within this section.
Dream Office REIT 2018 Annual Report | 37
Net total debt-to-adjusted EBITDAFV
Management believes that net total debt-to-adjusted EBITDAFV, a non-GAAP measurement, is an important measure in
determining the time it takes the Trust, on a go-forward basis, based on its normalized operating performance, to repay our
debt. This non-GAAP measurement does not have a standardized meaning and may not be comparable with similar measures
presented by other income trusts.
Net total debt-to-adjusted EBITDAFV as shown below is calculated as total debt (net of cash on hand), which includes debt
related to assets held for sale, divided by adjusted EBITDAFV – annualized. Adjusted EBITDAFV – annualized is calculated as
annualized quarterly EBITDAFV less NOI of disposed properties for the quarter. EBITDAFV – annualized is calculated as
annualized net income for the period adjusted for: lease termination fees and other, non-cash items included in investment
properties revenue, fair value adjustments to investment properties and financial instruments, share of income from investment
in Dream Industrial REIT, distributions received from Dream Industrial REIT, interest expense, amortization and write-off of
intangible assets and depreciation on property and equipment, leasing, net losses on transactions and debt settlement costs,
and income taxes.
In compliance with Canadian Securities Administrators Staff Notice 52-306 (Revised), “Non-GAAP Financial Measures”, the
following table calculates the annualized net total debt-to-adjusted EBITDAFV for the years ended December 31, 2018 and
December 31, 2017:
Non-current debt
Current debt
Debt before undernoted items
Less: Cash on hand(1)
Net total debt
EBITDAFV(2) – quarterly
Less: NOI of disposed properties for the quarter
Adjusted EBITDAFV – quarterly
Adjusted EBITDAFV – annualized
Net total debt-to-adjusted EBITDAFV (years)
Amounts included in consolidated
financial statements as at
December 31,
December 31,
2018
1,314,646 $
91,567
1,406,213
(2,263 )
1,403,950 $
40,260 $
(1,392 )
38,868 $
155,472 $
9.0
2017
1,160,689
206,961
1,367,650
(86,474 )
1,281,176
46,239
(1,040 )
45,199
180,796
7.1
$
$
$
$
$
(1) Cash on hand represents cash on hand at period-end, excluding cash held in co-owned properties.
(2) EBITDAFV (a non-GAAP measure) has been reconciled to net income (loss) under the heading “Earnings before interest, taxes, depreciation, amortization and
fair value adjustments (“EBITDAFV”)” within this section.
Dream Office REIT 2018 Annual Report | 38
QUARTERLY INFORMATION
The following tables show quarterly information since January 1, 2017.
Key portfolio, leasing, financing and other capital information
Portfolio(1)
Number of properties
GLA (millions of sq. ft.)
Leasing – total portfolio(2)
Occupancy rate – including committed (period-end)
Occupancy rate – in-place (period-end)
Tenant retention ratio
Average in-place and committed net rent per square foot
Q4
Q3
Q2
2018
Q1
Q4
Q3
Q2
2017
Q1
37
7.3
37
7.3
41
8.1
42
8.3
43
8.6
47
9.0
51
9.0
107
15.4
93.0 % 94.2 % 91.8 % 91.3 % 90.4 % 90.3 % 91.5 % 88.6 %
91.5 % 88.3 % 86.4 % 86.3 % 86.1 % 87.4 % 89.0 % 86.5 %
71.6 % 88.8 % 53.0 % 54.3 % 29.2 % 43.3 % 57.1 % 51.6 %
(period-end)
$ 20.97
$ 20.87
$ 21.03
$ 21.13
$ 21.02
$ 20.64
$ 19.90
$ 19.61
Financing
Weighted average face rate of interest on debt
(period-end)(3)
Interest coverage ratio (times)(4)(5)
Net total debt-to-adjusted EBITDAFV (years)(4)
Level of debt (net total debt-to-net total assets)(4)(5)
Capital
Total number of REIT A Units and LP B Units (in millions)(6)
NAV per unit(4)
4.06 % 3.94 % 3.85 % 3.92 % 3.90 % 3.93 % 3.82 % 3.77 %
3.3
7.9
45.0 % 46.2 % 48.1 % 40.7 % 39.6 % 39.7 % 47.6 % 49.8 %
2.8
9.0
3.2
7.1
2.8
9.1
3.2
6.5
3.3
7.6
3.0
7.6
2.8
9.3
64.6
108.6
$ 24.97 $ 24.40 $ 23.95 $ 23.81 $ 23.46 $ 22.40 $ 22.25 $ 22.15
103.4
65.3
78.9
81.1
65.4
75.4
(1) Excludes properties held for sale at the end of each period.
(2) Excludes properties held for sale, properties under development and properties held for future redevelopment at the end of each period.
(3) Weighted average face rate of interest on debt is calculated as the weighted average face rate of all interest bearing debt balances, including debt related to
investment in joint ventures that are equity accounted.
(4) The calculation of the following non-GAAP measures – interest coverage ratio, net total debt-to-adjusted EBITDAFV, level of debt (net total debt-to-net total
assets) and NAV per unit – are included in the “Non-GAAP Measures and Other Disclosures” section of the MD&A.
(5) Interest coverage ratio and level of debt (net total debt-to-net total assets) have been restated for the periods prior to January 1, 2018 to conform to current
period presentation. For further details, please refer to the “Non-GAAP Measures and Other Disclosures” section under the headings “Interest coverage
ratio” and “Level of debt (net total debt-to-net total assets and net secured debt-to-net total assets)”.
(6) Total number of REIT A Units and LP B Units includes 5.2 million LP B Units which are classified as a liability under IFRS.
Results of operations
(in thousands of Canadian dollars)
Investment properties revenue
Investment properties operating
expenses
Net rental income
Other income
Other expenses
Fair value adjustments, leasing, net
losses on transactions and debt
settlement costs
Income (loss) before income taxes
Current and deferred income taxes
recovery (expense), net
Net income (loss) for the period
Other comprehensive income (loss)
Comprehensive income (loss) for
Q4
66,800 $
Q3
69,743 $
Q2
67,989 $
$
2018
Q1
80,675 $
Q4
Q1
79,022 $ 111,323 $ 130,446 $ 153,254
Q2
Q3
2017
(31,108 )
35,692
12,972
(19,762 )
(32,378 )
37,365
6,362
(20,860 )
(30,667 )
37,322
9,555
(20,819 )
(36,089 )
44,586
15,910
(19,186 )
(37,367 )
41,655
4,191
(19,688 )
(50,278 )
61,045
4,421
(27,123 )
(56,709 )
73,737
668
(31,623 )
(67,762 )
85,492
2,002
(32,233 )
29,343
58,245
18,864
41,731
(558 )
25,500
(8,666 )
32,644
69,968
96,126
(38,878 )
(535 )
(7,969 )
34,813
(54,706 )
555
244
58,489
2,991
(349 )
41,382
(771 )
(114 )
25,386
1,135
(123 )
32,521
1,194
4,605
100,731
(6,043 )
(102 )
(637 )
(1,740 )
(257 )
34,556
(1,127 )
(419 )
136
(325 )
the period
$
61,480
$
40,611
$
26,521
$
33,715
$
94,688
$
(2,377 ) $
33,429
$
(189 )
Dream Office REIT 2018 Annual Report | 39
Reconciliation between net income (loss) and funds from operations
(in thousands of Canadian dollars except for unit and per unit amounts)
Q4
58,489 $
Q3
41,382 $
Q2
25,386 $
$
2018
Q1
Q4
32,521 $ 100,731 $
Q3
(637 ) $
Q2
34,556 $
2017
Q1
136
Net income (loss) for the period
Add (deduct):
Share of income from investment
in Dream Industrial REIT
(12,717 )
(5,599 )
(8,932 )
(15,877 )
(3,409 )
(4,009 )
(557 )
(1,465 )
Share of FFO from investment in
Dream Industrial REIT(1)
Depreciation, amortization and
write-offs of intangible assets
Loss (gain) on sale of investment
properties
Interest expense on subsidiary
redeemable units
Fair value adjustments to
investment properties
Fair value adjustments to
financial instruments and DUIP
included in G&A expenses
Debt settlement costs due to
disposals of investment
properties, net
Internal leasing costs
Deferred income taxes expense
(recovery)
Taxes attributable to dispositions
Foreign exchange gain
attributable to dispositions
Loss on recognition of net assets
related to joint operations
Other
FFO(2)
FFO per unit – diluted(3)
Weighted average units
outstanding(4)
Diluted (in thousands)
5,572
4,217
6,204
5,474
5,063
4,826
4,683
4,193
3,477
3,717
3,502
3,270
3,344
4,890
7,377
5,898
(455 )
919
415
1,468
1,665
6,050
6,268
6,074
1,309
1,308
1,309
1,308
1,307
1,309
1,963
1,963
(20,160 )
(24,823 )
(1,777 )
(773 )
(78,663 )
21,009
(6,337 )
40,875
(11,066 )
4,493
853
7,376
7,075
9,086
2,122
(1,610 )
1,070
512
—
630
—
924
—
617
3,968
1,308
957
1,111
3,939
1,312
7,391
1,506
(288 )
—
(276 )
625
21
—
91
—
(8,728 )
4,369
102
—
257
—
—
—
—
—
(5,717 )
—
—
419
—
—
—
(7 )
25,736 $
0.39 $
—
95
26,688 $
0.40 $
—
7
27,912 $
0.40 $
$
$
—
(15 )
—
(78 )
35,460 $ 32,235 $
0.40 $
0.46 $
—
(41 )
44,653 $
0.48 $
—
103
55,686 $
0.53 $
117
(14 )
65,483
0.59
65,839
66,286
70,228
76,881
80,943
93,213
105,880
110,303
(1) Included in the Q3 2018 FFO was a $(1.0) million one-time true-up adjustment to our share of FFO from investment in Dream Industrial REIT. Excluding the
adjustment, our share of FFO from investment in Dream Industrial REIT for that quarter was $5.2 million.
(2) FFO (non-GAAP measure) – Refer to the section “Non-GAAP Measures and Other Disclosures” under the heading “Funds from operations (“FFO”)” for further
details.
(3) The LP B Units are included in the calculation of diluted FFO per unit.
(4) A description of the determination of diluted amounts per unit can be found in the section “Our Equity” under the heading “Weighted average number of
units”.
Dream Office REIT 2018 Annual Report | 40
SECTION V
DISCLOSURE CONTROLS AND PROCEDURES
At December 31, 2018, the financial year-end, the Chief Executive Officer and the Chief Financial Officer (the “Certifying
Officers”), together with other members of management, have evaluated the design and operational effectiveness of Dream
Office REIT’s disclosure controls and procedures, as defined in National Instrument 52-109 – Certification of Disclosure in Issuers’
Annual and Interim Filings (“NI 52-109”). The Certifying Officers have concluded that the disclosure controls and procedures are
adequate and effective in order to provide reasonable assurance that material information has been accumulated and
communicated to management, to allow timely decisions of required disclosures by Dream Office REIT and its consolidated
subsidiary entities, within the required time periods.
Dream Office REIT’s internal control over financial reporting (as defined in NI 52-109) is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external
purposes in accordance with IFRS. Using the framework established in “2013 Committee of Sponsoring Organizations (COSO)
Internal Control Framework”, published by the Committee of Sponsoring Organizations of the Treadway Commission, the
Certifying Officers, together with other members of management, have evaluated the design and operation of Dream Office
REIT’s internal control over financial reporting. Based on that evaluation, the Certifying Officers have concluded that Dream
Office REIT’s internal control over financial reporting was effective as at December 31, 2018.
There were no changes in Dream Office REIT’s internal control over financial reporting during the financial year ended
December 31, 2018 that have materially affected, or are reasonably likely to materially affect, Dream Office REIT’s internal
control over financial reporting.
Dream Office REIT 2018 Annual Report | 41
SECTION VI – RISKS AND OUR STRATEGY TO MANAGE
In addition to the specific risks discussed in this MD&A, we are exposed to various risks and uncertainties, many of which are
beyond our control and could have an impact on our business, financial condition, operating results and prospects. Unitholders
should consider these risks and uncertainties when assessing our outlook in terms of investment potential. For a further
discussion of the risks and uncertainties identified by Dream Office REIT, please refer to our latest Annual Report and Annual
Information Form filed on SEDAR at www.sedar.com.
REAL ESTATE OWNERSHIP
Real estate ownership is generally subject to numerous factors and risks, including changes in general economic conditions
(including market interest rates and the availability of mortgage financings and other types of credit), local economic conditions
(such as an oversupply of office and other commercial properties or a reduction in demand for real estate in the area), the
attractiveness of properties to potential tenants or purchasers, competition with other landlords with similar available space,
and the ability of the owner to provide adequate maintenance at competitive costs.
An investment in real estate is relatively illiquid. Such illiquidity will tend to limit our ability to vary our portfolio promptly in
response to changing economic or investment conditions. In recessionary times, it may be difficult to dispose of certain types of
real estate. The costs of holding real estate are considerable, and during an economic recession, we may be faced with ongoing
expenditures with a declining prospect of incoming receipts. In such circumstances, it may be necessary for us to dispose of
properties at lower prices in order to generate sufficient cash from operations and make distributions and interest payments.
Certain significant expenditures (e.g., property taxes, maintenance costs, mortgage payments, insurance costs and related
charges) must be made throughout the period of ownership of real property, regardless of whether the property is producing
sufficient income to pay such expenses. In order to retain desirable rentable space and to generate adequate revenue over the
long term, we must maintain or, in some cases, improve each property’s condition to meet market demand. Maintaining a rental
property in accordance with market standards can entail significant costs, which we may not be able to pass on to our tenants.
Numerous factors, including the age of the relevant building structure, the material and substances used at the time of
construction, or currently unknown building code violations, could result in substantial unbudgeted costs for refurbishment or
modernization. In the course of acquiring a property, undisclosed defects in design or construction or other risks might not have
been recognized or correctly evaluated during the pre-acquisition due diligence process. These circumstances could lead to
additional costs and could have an adverse effect on our proceeds from sales and rental income of the relevant properties.
DEVELOPMENT RISK
The Trust’s current, prospective and future development projects are subject to development risks. These risks include delays
and cost overruns arising from permitting delays, changing engineering and design requirements, the performance of
contractors, labour disruptions, adverse weather conditions and the availability of financing and other factors. Other
development risks include the failure of prospective tenants to occupy their space upon project completion and inability to
achieve forecasted rates of return.
ROLLOVER OF LEASES
Upon the expiry of any lease, there can be no assurance that the lease will be renewed or the tenant replaced. Furthermore, the
terms of any subsequent lease may be less favourable than those of the existing lease. Our cash flows and financial position would
be adversely affected if our tenants were to become unable to meet their obligations under their leases or if a significant amount of
available space in our properties could not be leased on economically favourable lease terms. In the event of default by a tenant,
we may experience delays or limitations in enforcing our rights as lessor and incur substantial costs in protecting our investment.
Furthermore, at any time, a tenant may seek the protection of bankruptcy, insolvency or similar laws which could result in the
rejection and termination of the lease of the tenant and, thereby, cause a reduction in the cash flows available to us.
CONCENTRATION OF PROPERTIES AND TENANTS
Currently, principally all of our properties are located in Canada, with a concentration in Toronto, Ontario and, as a result, are
impacted by economic and other factors specifically affecting the real estate markets in Toronto, Ontario and the rest of Canada.
These factors may differ from those affecting the real estate markets in other regions. Due to the concentrated nature of our
properties, a number of our properties could experience any of the same conditions at the same time. If real estate conditions in
Toronto, Ontario and the rest of Canada decline relative to real estate conditions in other regions, our cash flows and financial
condition may be more adversely affected than those of companies that have more geographically diversified portfolios
of properties.
Dream Office REIT 2018 Annual Report | 42
FINANCING
We require access to capital to maintain our properties as well as to fund our growth strategy and significant capital
expenditures. There is no assurance that capital will be available when needed or on favourable terms. Our access to third-party
financing will be subject to a number of factors, including general market conditions; the market’s perception of our growth
potential; our current and expected future earnings; our cash flow and cash distributions, and cash interest payments; and the
market price of our REIT A Units.
A significant portion of our financing is debt. Accordingly, we are subject to the risks associated with debt financing, including
the risk that our cash flows will be insufficient to meet required payments of principal and interest, and that, on maturities of
such debt, we may not be able to refinance the outstanding principal under such debt or that the terms of such refinancing will
be more onerous than those of the existing debt. If we are unable to refinance debt at maturity on terms acceptable to us or at
all, we may be forced to dispose of one or more of our properties on disadvantageous terms, which may result in losses and
could alter our debt-to-equity ratio or be dilutive to unitholders. Such losses could have a material adverse effect on our
financial position or cash flows.
The degree to which we are leveraged could have important consequences to our operations. A high level of debt will reduce
the amount of funds available for the payment of distributions to unitholders and interest payments on our debentures; limit
our flexibility in planning for and reacting to changes in the economy and in the industry, and increase our vulnerability to
general adverse economic and industry conditions; limit our ability to borrow additional funds, dispose of assets, encumber our
assets and make potential investments; place us at a competitive disadvantage compared to other owners of similar real estate
assets that are less leveraged and, therefore, may be able to take advantage of opportunities that our indebtedness would
prevent us from pursuing; make it more likely that a reduction in our borrowing base following a periodic valuation (or
redetermination) could require us to repay a portion of then outstanding borrowings; and impair our ability to obtain additional
financing in the future for working capital, capital expenditures, acquisitions, general trust or other purposes.
CHANGES IN LAW
We are subject to applicable federal, provincial, municipal, local and common laws and regulations governing the ownership and
leasing of real property, employment standards, environmental matters, taxes and other matters. It is possible that future
changes in such laws or regulations, or changes in their application, enforcement or regulatory interpretation, could result in
changes in the legal requirements affecting us (including with retroactive effect). In addition, the political conditions in the
jurisdictions in which we operate are also subject to change. Any changes in investment policies or shifts in political attitudes
may adversely affect our investments. Any changes in the laws to which we are subject in the jurisdictions in which we operate
could materially affect our rights and title in and to the properties and the revenues we are able to generate from our
investments.
INTEREST RATES
When entering into financing agreements or extending such agreements, we depend on our ability to agree on terms for
interest payments that will not impair our desired profit, and on amortization schedules that do not restrict our ability to pay
distributions on our REIT A Units and interest payments on our debentures. In addition to existing variable rate portions of our
financing agreements, we may enter into future financing agreements with variable interest rates. An increase in interest rates
could result in a significant increase in the amount we pay to service debt, which could limit our ability to pay distributions to
unitholders and could impact the market price of the REIT A Units and/or the debentures. We have implemented an active
hedging program in order to offset the risk of revenue losses and to provide more certainty regarding the payment of
distributions to unitholders and cash interest payments under the debentures should current variable interest rates increase.
However, to the extent that we fail to adequately manage these risks, including if any such hedging arrangements do not
effectively or completely hedge increases in variable interest rates, our financial results, our ability to pay distributions to
unitholders and cash interest payments under our financing arrangements, and the debentures and future financings may be
negatively affected. Hedging transactions involve inherent risks. Increases in interest rates generally cause a decrease in demand
for properties. Higher interest rates and more stringent borrowing requirements, whether mandated by law or required by
banks, could have a significant negative effect on our ability to sell any of our properties.
Dream Office REIT 2018 Annual Report | 43
ENVIRONMENTAL RISK
As an owner of real property, we are subject to various federal, provincial and municipal laws relating to environmental matters.
Such laws provide a range of potential liability, including potentially significant penalties, and potential liability for the costs of
removal or remediation of certain hazardous substances. The presence of such substances, if any, could adversely affect our
ability to sell or redevelop such real estate or to borrow using such real estate as collateral and, potentially, could also result in
civil claims against us. We have insurance and other policies and procedures in place to review and monitor environmental
exposure, which we believe mitigates these risks to an acceptable level. In order to obtain financing for the purchase of a new
property through traditional channels, we may be requested to arrange for an environmental audit to be conducted. Although
such an audit provides us and our lenders with some assurance, we may become subject to liability for undetected pollution or
other environmental hazards on our properties against which we cannot insure, or against which we may elect not to insure
where premium costs are disproportionate to our perception of relative risk.
We have formal policies and procedures to review and monitor environmental exposure. These policies include the requirement
to obtain a Phase I Environmental Site Assessment, conducted by an independent and qualified environmental consultant,
before acquiring any real property or any interest therein.
JOINT ARRANGEMENTS
We may be, from time to time, a participant in jointly controlled entities and co-ownerships (combined “joint arrangements”)
with third parties. A joint arrangement involves certain additional risks, including:
(i)
(ii)
(iii)
(iv)
the possibility that such third parties may at any time have economic or business interests or goals that will be
inconsistent with ours, or take actions contrary to our instructions or requests or to our policies or objectives with
respect to our real estate investments;
the risk that such third parties could experience financial difficulties or seek the protection of bankruptcy, insolvency or
other laws, which could result in additional financial demands on us to maintain and operate such properties or repay
the third parties’ share of property debt guaranteed by us or for which we will be liable, and/or result in our suffering
or incurring delays, expenses and other problems associated with obtaining court approval of the joint arrangement;
the risk that such third parties may, through their activities on behalf of or in the name of the joint arrangements,
expose or subject us to liability; and
the need to obtain third parties’ consents with respect to certain major decisions, including the decision to distribute
cash generated from such properties or to refinance or sell a property. In addition, the sale or transfer of interests in
certain of the joint arrangements may be subject to rights of first refusal or first offer, and certain of the joint venture
and partnership agreements may provide for buy-sell or similar arrangements. Such rights may be triggered at a time
when we may not desire to sell but may be forced to do so because we do not have the cash to purchase the other
party’s interests. Such rights may also inhibit our ability to sell an interest in a property or a joint arrangement within
the time frame or otherwise on the basis we desire.
Our investment in properties through joint arrangements is subject to the investment guidelines set out in our Declaration of
Trust.
COMPETITION
The real estate market in Canada is highly competitive and fragmented, and we compete for real property acquisitions with
individuals, corporations, institutions and other entities that may seek real property investments similar to those we desire. An
increase in the availability of investment funds or an increase in interest in real property investments may increase competition for
real property investments, thereby increasing purchase prices and reducing the yield on them. If competing properties of a similar
type are built in the area where one of our properties is located or if similar properties located in the vicinity of one of our
properties are substantially refurbished, the net rental income derived from and the value of such property could be reduced.
Numerous other developers, managers and owners of properties will compete with us in seeking tenants. To the extent that our
competitors own properties that are in better locations, of better quality or less leveraged than the properties owned by us, they
may be in a better position to attract tenants who might otherwise lease space in our properties. To the extent that our competitors
are better capitalized or financially stronger, they would be in a better position to withstand an economic downturn. The existence
of competition for tenants could have an adverse effect on our ability to lease space in our properties and on the rents charged or
concessions granted, and could materially and adversely affect our cash flows, operating results and financial condition.
Dream Office REIT 2018 Annual Report | 44
INSURANCE
We carry general liability, umbrella liability and excess liability insurance with limits that are typically obtained for similar real
estate portfolios in Canada and otherwise acceptable to our trustees. For the property risks, we carry “All Risks” property
insurance including, but not limited to, flood, earthquake and loss of rental income insurance (with at least a 24-month
indemnity period). We also carry boiler and machinery insurance covering all boilers, pressure vessels, HVAC systems and
equipment breakdown. However, certain types of risks (generally of a catastrophic nature such as from war or nuclear accident)
are uninsurable under any insurance policy. Furthermore, there are other risks that are not economically viable to insure at this
time. We have insurance for earthquake risks, subject to certain policy limits, deductibles and self-insurance arrangements.
Should an uninsured or underinsured loss occur, we could lose our investment in, and anticipated profits and cash flows from,
one or more of our properties, but we would continue to be obligated to repay any recourse mortgage indebtedness on such
properties. We do not carry title insurance on our properties. If a loss occurs resulting from a title defect with respect to a
property where there is no title insurance or the loss is in excess of insured limits, we could lose all or part of our investment in,
and anticipated profits and cash flows from, such property.
RELIANCE ON DAM FOR CERTAIN MANAGEMENT SERVICES
We rely on DAM for certain management services, as requested. DAM has the right, upon 180 days’ notice, to terminate our
Management Services Agreement for any reason: (i) at any time on or after April 2, 2018; and (ii) at any time on or after April 2,
2017 if the Shared Services and Cost Sharing Agreement has been terminated by Dream Office LP. Our Management Services
Agreement may also be terminated in other circumstances, such as in the event of default or insolvency of DAM within the
meaning of such agreement. Accordingly, there can be no assurance that DAM will continue to provide management services. If
DAM should cease for whatever reason to provide such services, this may adversely impact our ability to meet our objectives
and execute our strategy.
CYBER SECURITY RISKS
As we continue to increase our dependence on information technologies to conduct our operations, the risks associated with
cyber security also increase. We rely on management information systems and computer control systems. Business disruptions,
utility outages and information technology system and network disruptions due to cyber-attacks could seriously harm our
operations and materially adversely affect our operating results. Cyber security risks include attacks on information technology
and infrastructure by hackers, damage or loss of information due to viruses, the unintended disclosure of confidential
information, the misuse or loss of control over computer control systems, and breaches due to employee error. Our exposure to
cyber security risks includes exposure through third parties on whose systems we place significant reliance for the conduct of
our business. We have implemented security procedures and measures in order to protect our systems and information from
being vulnerable to cyber-attacks. However, we may not have the resources or technical sophistication to anticipate, prevent, or
recover from rapidly evolving types of cyber-attacks. Compromises to our information and control systems could have severe
financial and other business implications.
Dream Office REIT 2018 Annual Report | 45
SECTION VII – CRITICAL ACCOUNTING POLICIES
CRITICAL ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS IN APPLYING ACCOUNTING POLICIES
Preparing the consolidated financial statements requires management to make judgments, estimates and assumptions that
affect the amounts reported. Management bases its judgments and estimates on historical experience and other factors it
believes to be reasonable under the circumstances, but which are inherently uncertain and unpredictable, the result of which
forms the basis of the carrying amounts of assets and liabilities. However, uncertainty about these assumptions and estimates
could result in outcomes that could require a material adjustment to the carrying amount of the affected asset or liability in
the future.
Critical accounting judgments
The following are the critical accounting judgments used in applying the Trust’s accounting policies that have the most
significant effect on the amounts in the consolidated financial statements:
Investment properties
Critical judgments are made in respect of the fair values of investment properties. The fair values of these investments are
reviewed at least quarterly by management with reference to independent property appraisals and market conditions existing at
the reporting date, using generally accepted market practices. The independent appraisers are experienced, nationally
recognized and qualified in the professional valuation of office buildings in their respective geographic areas. Judgment is also
applied in determining the extent and frequency of obtaining independent appraisals. At each reporting period, a select number
of properties, determined on a rotational basis, are valued by independent appraisers. For properties not subject to
independent appraisals, valuations are prepared internally during each reporting period.
Critical assumptions used in estimating the fair values of investment properties include cap rates, discount rates that reflect
current market uncertainties, terminal cap rates and market rents. Other key assumptions relating to the estimates of fair values
of investment properties include components of stabilized NOI, leasing costs and vacancy rates. The Trust examines the critical
and key assumptions at the end of each reporting period and updates these assumptions based on recent leasing activity and
external market data available at that time. If there is any change in these assumptions or regional, national or international
economic conditions, the fair value of investment properties may change materially.
The Trust makes judgments with respect to whether lease incentives provided in connection with a lease enhance the value of
the leased space, which determines whether or not such amounts are treated as tenant improvements and added to investment
properties. Lease incentives, such as cash, rent-free periods and lessee or lessor owned improvements, may be provided to
lessees to enter into an operating lease. Lease incentives that do not provide benefits beyond the initial lease term are included
in the carrying amount of investment properties and are amortized as a reduction of rental revenue on a straight-line basis over
the term of the lease.
Judgment is also applied in determining whether certain costs are additions to the carrying amount of the investment property.
For properties under development, the Trust exercises judgment in determining when development activities have commenced,
when and how much borrowing costs are to be capitalized to the development project, and the point of practical completion.
Impairment
The Trust assesses the possibility and amount of any impairment loss or write-down as it relates to the investment in
Dream Industrial REIT and other equity accounted investments, amounts receivable, property and equipment and intangible
assets.
IFRS 9, “Financial Instruments: Recognition and Measurement” (“IFRS 9”), requires management to use judgment in determining
if the Trust’s financial assets are impaired. In making this judgment, the Trust evaluates, among other factors, the credit risk of
the counterparty, whether there are indicators that credit risk on a financial instrument has changed significantly since initial
recognition or the last reassessment of credit risk. Where the credit risk of a financial asset has increased significantly since
initial recognition, the Trust records a loss allowance equal to the lifetime expected credit losses arising from that financial asset.
IAS 36, “Impairment of Assets” (“IAS 36”), requires management to use judgment in determining the recoverable amount of
assets and equity accounted investments that are tested for impairment, including the investment in Dream Industrial REIT and
other equity accounted investments. Judgment is also involved in estimating the value-in-use of the investment in Dream
Industrial REIT and other equity accounted investments, including estimates of future cash flows, discount rates and terminal
rates. The values assigned to these key assumptions reflect past experience and are consistent with external sources of
information.
Dream Office REIT 2018 Annual Report | 46
FUTURE ACCOUNTING POLICY CHANGES
Leases
IFRS 16, “Leases” (“IFRS 16”), sets out the principles for the recognition, measurement and disclosure of leases. IFRS 16 provides
revised guidance on identifying a lease and for separating lease and non-lease components of a contract. IFRS 16 introduces a
single accounting model for all lessees and requires a lessee to recognize right-of-use assets and lease liabilities for leases with
terms of more than 12 months, unless the underlying asset is of low value. Under IFRS 16, lessor accounting for operating and
finance leases will remain substantially unchanged. IFRS 16 is effective for annual periods beginning on or after January 1, 2019,
with earlier application permitted for entities that apply IFRS 15. The Trust has not early adopted IFRS 16.
The Trust has formed an internal working group which is responsible for overseeing the Trust’s transition to IFRS 16. The working
group performed an in-depth assessment of IFRS 16 and the impact the adoption of the standard will have on the Trust’s
consolidated financial statements. The working group reviewed the Trust’s various agreements and identified certain properties
with contractual arrangements that qualified as a lease under IFRS 16 and quantified the right-of-use assets and lease liabilities
to be approximately $4.5 million. These right-of-use assets and lease liabilities will be recognized in the consolidated balance
sheet effective January 1, 2019 along with additional disclosures.
Income taxes
IFRIC 23, “Uncertainty over Income Tax Treatments” (“IFRIC 23”), clarifies the application of the recognition and measurement
requirements in IAS 12, “Income Taxes” (“IAS 12”), for situations where there is uncertainty over income tax treatments. IFRIC 23
specifically addresses whether an entity considers income tax treatments separately; assumptions that an entity makes
regarding the examination of tax treatments by taxation authorities; how an entity determines taxable income or loss, tax bases,
unused tax losses or credits and tax rates; and how an entity considers changes in facts and circumstances. IFRIC 23 does not
apply to taxes or levies outside the scope of IAS 12. IFRIC 23 is effective for annual periods beginning on or after January 1, 2019.
The Trust does not anticipate this amendment to have a material impact on the consolidated financial statements.
Business combinations
The IASB published an amendment to the requirements of IFRS 3 in relation to whether a transaction meets the definition of a
business combination. The amendment clarifies the definition of a business and provides additional illustrative examples,
including those relevant to the real estate industry. A significant change in the amendment is the option for an entity to assess
whether substantially all of the fair value of the gross assets acquired is concentrated in a single asset or group of similar assets.
If such a concentration exists, the transaction is not viewed as an acquisition of a business and no further assessment of the
business combination guidance is required. This will be relevant where the value of the acquired entity is concentrated in one
property, or a group of similar properties. The amendment is effective for periods beginning on or after January 1, 2020 with
earlier application permitted. There will be no impact on transition since the amendments are effective for business
combinations for which the acquisition date is on or after the transition date.
ADDITIONAL INFORMATION
Additional information relating to Dream Office REIT, including the latest Annual Information Form of Dream Office REIT, is
available on SEDAR at www.sedar.com.
Dream Office REIT 2018 Annual Report | 47
SECTION VIII
ASSET LISTING
The following table includes supplementary information on our portfolio as at December 31, 2018.
Property
444 – 7th Building, Calgary
606 – 4th Building & Barclay Parkade, Calgary
Kensington House, Calgary
Centre 70, Calgary(1)
Calgary
Adelaide Place, Toronto
State Street Financial Centre, Toronto
438 University Avenue, Toronto
655 Bay Street, Toronto
74 Victoria Street/137 Yonge Street, Toronto
720 Bay Street, Toronto
36 Toronto Street, Toronto
330 Bay Street, Toronto
20 Toronto Street/33 Victoria Street, Toronto
250 Dundas Street West, Toronto
Victory Building, Toronto
425 Bloor Street East, Toronto(2)
212 King Street West, Toronto
360 Bay Street, Toronto
67 & 69 Richmond Street West, Toronto
350 Bay Street, Toronto
366 Bay Street, Toronto
56 Temperance Street, Toronto
Toronto downtown
50 & 90 Burnhamthorpe Road West, Mississauga
(Sussex Centre)(1)
5001 Yonge Street, North York
Mississauga and North York
700 De la Gauchetière Street West, Montréal(3)
150 Metcalfe Street, Ottawa
Ottawa and Montréal
Saskatoon Square, Saskatoon
275 Dundas Street West, London (London City Centre)(1)
12800 Foster Street, Overland Park, U.S.
Victoria Tower, Regina
Princeton Tower, Saskatoon
Financial Building, Regina
Preston Centre, Saskatoon
234 – 1st Avenue South, Saskatoon
Other markets
Total comparative portfolio(4)
Ownership
100.0 %
100.0 %
100.0 %
15.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
49.9 %
100.0 %
100.0 %
100.0 %
100.0 %
40.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
Owned share of
total GLA (in
thousands of
square feet)
261
126
78
20
485
657
414
323
301
266
248
214
164
158
122
101
84
73
58
54
53
36
32
3,358
Average tenant
size (in
thousands of
square feet)
23
8
4
4
7
9
69
19
12
53
248
5
4
7
7
2
10
7
4
10
4
3
3
9
No. of
tenants
10
14
20
23
67
69
6
17
25
5
1
39
42
24
17
41
8
10
16
5
12
12
9
358
Average
remaining
lease term
(in years)
7.8
6.0
5.4
3.0
6.8
5.8
5.8
7.0
3.6
5.1
2.0
4.5
3.7
7.3
5.8
3.1
6.4
3.7
3.4
5.4
4.0
1.9
4.1
5.0
325
309
634
986
110
1,096
228
216
185
144
134
66
62
10
1,045
6,618
61
20
81
45
23
68
13
20
1
2
12
2
13
4
67
641
10
15
11
20
4
15
13
21
185
72
9
4
5
2
16
11
5.5
3.8
4.6
5.7
5.3
5.7
3.5
5.8
1.9
9.4
4.8
1.2
2.8
3.5
4.7
5.2
In-place and
committed
occupancy
87.9 %
91.8 %
93.3 %
63.7 %
88.8 %
97.5 %
99.7 %
97.9 %
99.7 %
100.0 %
100.0 %
98.2 %
89.6 %
99.9 %
98.8 %
83.0 %
100.0 %
100.0 %
100.0 %
93.3 %
100.0 %
91.5 %
89.4 %
97.8 %
90.1 %
99.6 %
94.7 %
90.8 %
93.3 %
91.1 %
71.5 %
77.3 %
100.0 %
100.0 %
78.3 %
10.9 %
100.0 %
83.4 %
80.6 %
93.0 %
Dream Office REIT 2018 Annual Report | 48
Property
1900 Sherwood Place, Regina
357 Bay Street, Toronto
Total – properties under development
15 acre site (Eglinton Ave. East & Birchmount Rd.), Toronto
Total – properties held for future redevelopment
Total portfolio
Ownership
100.0 %
100.0 %
100.0 %
Owned share of
total GLA (in
thousands of
square feet)
207
64
271
443
443
7,332
Average tenant
size (in
thousands of
square feet)
34
2
14
29
29
11
No. of
tenants
6
11
17
10
10
668
Average
remaining
lease term
(in years)
11.8
1.2
10.7
8.1
8.1
5.5
In-place and
committed
occupancy
99.4 %
38.8 %
85.1 %
65.7 %
65.7 %
91.1 %
(1) Co-owned property.
(2) Property subject to a ground lease.
(3) Includes both an office and a co-owned retail component.
(4) Excludes properties under development and properties held for future redevelopment as at December 31, 2018.
Dream Office REIT 2018 Annual Report | 49
Management’s responsibility for the consolidated financial statements
The accompanying consolidated financial statements, the notes thereto and other financial information contained in this Annual
Report have been prepared by, and are the responsibility of, the management of Dream Office Real Estate Investment Trust.
These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards,
using management’s best estimates and judgments when appropriate.
The Board of Trustees is responsible for ensuring that management fulfills its responsibility for financial reporting and internal
controls. The Audit Committee, which comprises trustees, meets with management as well as the external auditor to satisfy
itself that management is properly discharging its financial responsibilities and to review its consolidated financial statements
and the report of the auditor. The Audit Committee reports its findings to the Board of Trustees, which approves the
consolidated financial statements.
PricewaterhouseCoopers LLP, the independent auditor, has audited the consolidated financial statements in accordance with
Canadian generally accepted auditing standards. The auditor has full and unrestricted access to the Audit Committee, with or
without management present.
“Michael J. Cooper”
Michael J. Cooper
Chief Executive Officer
Toronto, Ontario, February 21, 2019
“Jay Jiang”
Jay Jiang
Chief Financial Officer
Dream Office REIT 2018 Annual Report | 50
Independent auditor’s report
To the Unitholders of Dream Office Real Estate Investment Trust
Our opinion
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects,
the financial position of Dream Office Real Estate Investment Trust and its subsidiaries (together, the
Trust) as at December 31, 2018 and 2017, and its financial performance and its cash flows for the years
then ended in accordance with International Financial Reporting Standards as issued by the International
Accounting Standards Board (IFRS).
What we have audited
The Trust’s consolidated financial statements comprise:
the consolidated balance sheets as at December 31, 2018 and 2017;
the consolidated statements of comprehensive income for the years then ended;
the consolidated statements of changes in equity for the years then ended;
the consolidated statements of cash flows for the years then ended; and
the notes to the consolidated financial statements, which include a summary of significant
accounting policies.
Basis for opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our
responsibilities under those standards are further described in the Auditor’s responsibilities for the audit
of the consolidated financial statements section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
opinion.
Independence
We are independent of the Trust in accordance with the ethical requirements that are relevant to our audit
of the consolidated financial statements in Canada. We have fulfilled our other ethical responsibilities in
accordance with these requirements.
Other information
Management is responsible for the other information. The other information comprises the Management’s
Discussion and Analysis and the information, other than the consolidated financial statements and our
auditor’s report thereon, included in the annual report.
PricewaterhouseCoopers LLP
PwC Tower, 18 York Street, Suite 2600, Toronto, Ontario, Canada M5J 0B2
T: +1 416 863 1133, F: +1 416 365 8215
“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.
51
Our opinion on the consolidated financial statements does not cover the other information and we do not
express any form of assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the
other information identified above and, in doing so, consider whether the other information is materially
inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or
otherwise appears to be materially misstated.
If, based on the work we have performed, we conclude that there is a material misstatement of this other
information, we are required to report that fact. We have nothing to report in this regard.
Responsibilities of management and those charged with governance for the
consolidated financial statements
Management is responsible for the preparation and fair presentation of the consolidated financial
statements in accordance with IFRS, and for such internal control as management determines is necessary
to enable the preparation of consolidated financial statements that are free from material misstatement,
whether due to fraud or error.
In preparing the consolidated financial statements, management is responsible for assessing the Trust’s
ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using
the going concern basis of accounting unless management either intends to liquidate the Trust or to cease
operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Trust’s financial reporting process.
Auditor’s responsibilities for the audit of the consolidated financial statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as
a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s
report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee
that an audit conducted in accordance with Canadian generally accepted auditing standards will always
detect a material misstatement when it exists. Misstatements can arise from fraud or error and are
considered material if, individually or in the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these consolidated financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise
professional judgment and maintain professional skepticism throughout the audit. We also:
Identify and assess the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error, design and perform audit procedures responsive to those risks, and
obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk
of not detecting a material misstatement resulting from fraud is higher than for one resulting from
52
error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the
override of internal control.
Obtain an understanding of internal control relevant to the audit in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Trust’s internal control.
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting
estimates and related disclosures made by management.
Conclude on the appropriateness of management’s use of the going concern basis of accounting and,
based on the audit evidence obtained, whether a material uncertainty exists related to events or
conditions that may cast significant doubt on the Trust’s ability to continue as a going concern. If we
conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report
to the related disclosures in the consolidated financial statements or, if such disclosures are
inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to
the date of our auditor’s report. However, future events or conditions may cause the Trust to cease
to continue as a going concern.
Evaluate the overall presentation, structure and content of the consolidated financial statements,
including the disclosures, and whether the consolidated financial statements represent the
underlying transactions and events in a manner that achieves fair presentation.
Obtain sufficient appropriate audit evidence regarding the financial information of the entities or
business activities within the Trust to express an opinion on the consolidated financial statements.
We are responsible for the direction, supervision and performance of the group audit. We remain
solely responsible for our audit opinion.
We communicate with those charged with governance regarding, among other matters, the planned scope
and timing of the audit and significant audit findings, including any significant deficiencies in internal
control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant
ethical requirements regarding independence, and to communicate with them all relationships and other
matters that may reasonably be thought to bear on our independence, and where applicable, related
safeguards.
The engagement partner on the audit resulting in this independent auditor’s report is Alaina Tennison.
(Signed) “PricewaterhouseCoopers LLP”
Chartered Professional Accountants, Licensed Public Accountants
Toronto, Ontario
February 21, 2019
53
Consolidated balance sheets
(in thousands of Canadian dollars)
Assets
NON-CURRENT ASSETS
Investment properties
Investment in Dream Industrial REIT
Other non-current assets
CURRENT ASSETS
Amounts receivable
Prepaid expenses and other assets
Cash and cash equivalents
Assets held for sale
Total assets
Liabilities
NON-CURRENT LIABILITIES
Debt
Subsidiary redeemable units
Deferred Unit Incentive Plan
Deferred tax liabilities, net
Tenant security deposits
CURRENT LIABILITIES
Debt
Amounts payable and accrued liabilities
Total liabilities
Equity
Unitholders’ equity
Deficit
Accumulated other comprehensive income
Total equity
Total liabilities and equity
Note
December 31,
2018
December 31,
2017
5
6
8
9
10
10
11
12
13
14
11
15
16
16
16, 17
$
$
$
$
2,778,826
266,583
42,500
3,087,909
20,005
6,248
8,769
35,022
—
3,122,931
1,314,646
116,662
18,180
1,957
8,694
1,460,139
91,567
74,483
166,050
1,626,189
2,124,760
(634,513 )
6,495
1,496,742
3,122,931
$
$
$
$
2,919,438
220,796
9,544
3,149,778
14,826
8,889
96,960
120,675
51,530
3,321,983
1,160,689
115,981
17,280
2,214
9,558
1,305,722
206,961
73,677
280,638
1,586,360
2,462,611
(728,934 )
1,946
1,735,623
3,321,983
See accompanying notes to the consolidated financial statements.
On behalf of the Board of Trustees of Dream Office Real Estate Investment Trust:
“Karine MacIndoe”
KARINE MACINDOE
Trustee
“Michael J. Cooper”
MICHAEL J. COOPER
Trustee
Dream Office REIT 2018 Annual Report | 54
Consolidated statements of comprehensive income
(in thousands of Canadian dollars)
Investment properties revenue
Investment properties operating expenses
Net rental income
Other income
Share of income from investment in Dream Industrial REIT
Interest and fee income
Other expenses
General and administrative
Interest:
Debt
Subsidiary redeemable units
Amortization and write-off of intangible assets and depreciation on property and equipment
Fair value adjustments, leasing, net losses on transactions and debt settlement costs
Fair value adjustments to investment properties
Fair value adjustments to financial instruments
Leasing, net losses on transactions and debt settlement costs
Income before income taxes
Current and deferred income taxes recovery (expense), net
Net income for the year
Other comprehensive income (loss)
Items reclassified to net income:
Reclassified realized gain on foreign currency translation, net of taxes
Items that will be reclassified subsequently to net income:
Unrealized gain on interest rate swaps and other, net of taxes
Unrealized gain (loss) on foreign currency translation, net of taxes
Share of other comprehensive income (loss) from investment in Dream Industrial REIT
Comprehensive income for the year
See accompanying notes to the consolidated financial statements.
Note
19 $
Year ended December 31,
2018
285,207 $
(130,242 )
154,965
2017
474,046
(212,116 )
261,930
6
43,125
1,674
44,799
9,440
1,841
11,281
20
(12,476 )
(10,644 )
21
21
10
5, 10
22
23
14
(60,718 )
(5,234 )
(2,199 )
(80,627 )
47,533
(1,371 )
(7,179 )
38,983
158,120
(342 )
157,778
(86,560 )
(6,542 )
(6,921 )
(110,667 )
23,116
(16,771 )
(37,930 )
(31,585 )
130,959
3,827
134,786
17
17
17
6, 17
$
—
(5,905 )
46
1,192
3,311
4,549
162,327 $
45
(3,115 )
(260 )
(9,235 )
125,551
Dream Office REIT 2018 Annual Report | 55
Consolidated statements of changes in equity
(in thousands of Canadian dollars, except for number of units)
Year ended December 31, 2018
Balance at January 1, 2018
Net income for the year
Distributions paid and payable
Deferred trust units exchanged for REIT A Units
Cancellation of REIT A Units under NCIB
Cancellation of REIT A Units under SIB
Issue and cancellation costs
Other comprehensive income
Balance at December 31, 2018
Note
18
13
16
16
17
Number of
REIT A Units
73,705,285 $
—
—
139,657
(4,475,664 )
(10,000,000 )
—
—
59,369,278 $
Unitholdersʼ
equity
2,462,611 $
—
—
3,205
(100,716 )
(240,000 )
(340 )
—
2,124,760 $
Attributable to unitholders of the Trust
Accumulated
other
comprehensive
income
1,946 $
—
—
—
—
—
—
4,549
6,495 $
Deficit
(728,934 ) $
157,778
(63,357 )
—
—
—
—
—
(634,513 ) $
Total equity
1,735,623
157,778
(63,357 )
3,205
(100,716 )
(240,000 )
(340 )
4,549
1,496,742
Attributable to unitholders of the Trust
Year ended December 31, 2017
Balance at January 1, 2017
Net income for the year
Distributions paid and payable
Deferred trust units exchanged for REIT A Units
Cancellation of REIT A Units under NCIB
Cancellation of REIT A Units under SIB
Issue and cancellation costs
Other comprehensive loss
Balance at December 31, 2017
Note
18
13
16
16
17
Number of
REIT A Units
104,806,724 $
—
—
199,675
(10,348,734 )
(20,952,380 )
—
—
73,705,285 $
Unitholdersʼ
equity
3,108,424 $
—
—
3,863
(209,178 )
(440,000 )
(498 )
—
2,462,611 $
Deficit
(747,840 ) $
134,786
(115,880 )
—
—
—
—
—
(728,934 ) $
See accompanying notes to the consolidated financial statements.
Accumulated
other
comprehensive
income (loss)
11,181 $
—
—
—
—
—
—
(9,235 )
1,946 $
Total equity
2,371,765
134,786
(115,880 )
3,863
(209,178 )
(440,000 )
(498 )
(9,235 )
1,735,623
Dream Office REIT 2018 Annual Report | 56
Year ended December 31,
2018
2017
$
157,778 $
134,786
(43,125 )
16,588
(47,533 )
1,371
5,870
(41,506 )
5,234
(8,148 )
46,529
(17,627 )
(3,471 )
(406 )
(1,532 )
261,330
5,157
378
—
—
(165 )
243,664
(19,472 )
837,479
(692,757 )
(90,697 )
(1,391 )
(64,552 )
(5,234 )
(100,716 )
(240,000 )
(1,166 )
(378,506 )
(88,313 )
122
96,960
8,769 $
(9,440 )
22,087
(23,116 )
16,771
22,925
(58,750 )
6,542
(31,985 )
79,820
(28,310 )
—
(390 )
—
1,664,271
—
48
(25,008 )
1,544
275
1,612,430
(40,013 )
1,144,885
(1,603,887 )
(297,102 )
(2,393 )
(122,839 )
(6,760 )
(209,178 )
(440,000 )
(25,242 )
(1,602,529 )
89,721
(428 )
7,667
96,960
Note
6
24
5, 10
22
24
21
24
10, 11
11
10, 11
10, 11
11
18
24
16
16
$
Consolidated statements of cash flows
(in thousands of Canadian dollars)
Generated from (utilized in) operating activities
Net income for the year
Non-cash items:
Share of income from investment in Dream Industrial REIT
Amortization and depreciation
Fair value adjustments to investment properties
Fair value adjustments to financial instruments
Other adjustments
Investment in lease incentives and initial direct leasing costs
Interest expense on subsidiary redeemable units
Change in non-cash working capital
Generated from (utilized in) investing activities
Investment in building improvements
Investment in properties under development
Investment in property and equipment
Investment in equity accounted investment
Net proceeds from disposal of investment properties
Net proceeds from sale of marketable securities
Distributions from investment in Dream Industrial REIT
Purchase of Dream Industrial REIT units
Distributions from investment in joint ventures
Change in restricted cash
Generated from (utilized in) financing activities
Principal repayments
Borrowings
Lump sum repayments
Lump sum repayments on property dispositions
Financing cost additions
Distributions paid on REIT A Units
Interest paid on subsidiary redeemable units
Cancellation of REIT A Units under NCIB
Cancellation of REIT A Units under SIB
Debt settlement and REIT A Units issue and cancellation costs
Increase (decrease) in cash and cash equivalents
Foreign exchange gain (loss) on cash held in foreign currency
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
See accompanying notes to the consolidated financial statements.
Dream Office REIT 2018 Annual Report | 57
Notes to the consolidated financial statements
(All dollar amounts in thousands of Canadian dollars, except for unit, per unit or per square foot amounts)
Note 1
ORGANIZATION
Dream Office Real Estate Investment Trust (“Dream Office REIT” or the “Trust”) is an open-ended investment trust created
pursuant to a Declaration of Trust, as amended and restated, under the laws of the Province of Ontario. The consolidated
financial statements of Dream Office REIT include the accounts of Dream Office REIT and its subsidiaries. Dream Office REIT
primarily owns central business district office properties in major urban centres across Canada. A subsidiary of Dream Office
REIT performs the property management function.
The principal office and centre of administration of the Trust is 30 Adelaide Street East, Suite 301, State Street Financial Centre,
Toronto, Ontario, M5C 3H1. The Trust is listed on the Toronto Stock Exchange (“TSX”) under the symbol “D.UN”. Dream Office
REIT’s consolidated financial statements for the year ended December 31, 2018 were authorized for issuance by the Board of
Trustees on February 21, 2019, after which they may only be amended with the Board of Trustees’ approval.
For simplicity, throughout the Notes, reference is made to the units of the Trust as follows:
• “REIT A Units”, meaning the REIT Units, Series A;
• “REIT B Units”, meaning the REIT Units, Series B;
• “REIT Units”, meaning the REIT Units, Series A, and REIT Units, Series B, collectively;
• “Units”, meaning REIT Units, Series A, REIT Units, Series B, and Special Trust Units, collectively; and
• “subsidiary redeemable units”, meaning the LP Class B Units, Series 1, limited partnership units of Dream Office LP, a
subsidiary of Dream Office REIT.
Note 2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies used in the preparation of these consolidated financial statements are described below:
Basis of presentation and statement of compliance
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as
issued by the International Accounting Standards Board (“IFRS”).
Basis of consolidation
The consolidated financial statements comprise the financial statements of Dream Office REIT and its subsidiaries. Subsidiaries
are fully consolidated from the date of acquisition, the date on which the Trust obtains control, and continue to be consolidated
until the date such control ceases. Control exists when the Trust is exposed to, or has rights to, variable returns from its
involvement with the entity and has the ability to affect those returns through its power over the entity. All intercompany
balances, income and expenses, and unrealized gains and losses resulting from intercompany transactions are eliminated in full.
Equity accounted investments
Equity accounted investments are investments over which the Trust has significant influence, but not control. Generally, the
Trust is considered to exert significant influence when it holds more than a 20% interest in an entity or partnership. However,
determining significant influence is a matter of judgment and specific circumstances and, from time to time, the Trust may hold
an interest of more than 20% in an entity or partnership without exerting significant influence. Conversely, the Trust may hold an
interest of less than 20% and exert significant influence through representation on the Board of Trustees, direction of
management or contractual agreements.
Dream Office REIT 2018 Annual Report | 58
The financial results of the Trust’s equity accounted investments are included in the Trust’s consolidated financial statements
using the equity method, whereby the investment is carried on the consolidated balance sheets at cost, adjusted for the Trust’s
proportionate share of post-acquisition profits and losses and for post-acquisition changes in excess of the Trust’s carrying
amount of its investment over the net assets of the equity accounted investments, less any identified impairment loss. The
Trust’s share of profits and losses is recognized in the share of net earnings from equity accounted investments in the
consolidated statements of comprehensive income (loss). Dilution gains and losses arising from changes in the Trust’s interest in
equity accounted investments are recognized in earnings. If the Trust’s investment is reduced to zero, additional losses are not
provided for, and a liability is not recognized, unless the Trust has incurred legal or constructive obligations, or made payments
on behalf of the equity accounted investment.
At each reporting date, the Trust evaluates whether there is objective evidence that its interest in an equity accounted
investment is impaired. The entire carrying amount of the equity accounted investment is compared to the recoverable amount,
which is the higher of the value-in-use or fair value less costs to sell. The recoverable amount of each investment is considered
separately.
Where the Trust transacts with its equity accounted investments, unrealized profits and losses are eliminated to the extent of
the Trust’s interest in the investment. Balances outstanding between the Trust and equity accounted investments in which it has
an interest are not eliminated in the consolidated balance sheets.
Joint arrangements
The Trust enters into joint arrangements via joint operations and joint ventures. A joint arrangement is a contractual
arrangement pursuant to which the Trust and other parties undertake an economic activity that is subject to joint control,
whereby the strategic financial and operating policy decisions relating to the activities of the joint arrangement require the
unanimous consent of the parties sharing control, and that is referred to as joint operations. Joint arrangements that involve the
establishment of a separate entity or partnership in which each party to the venture has rights to the net assets of the
arrangements are referred to as joint ventures. In a co-ownership arrangement, the Trust owns jointly one or more investment
properties with another party and has direct rights to the investment property and obligations for the liabilities relating to the
co-ownership.
The Trust reports its interests in joint ventures using the equity method of accounting as previously described under “Equity
accounted investments”. The Trust reports its interests in co-ownerships as joint operations by accounting for its share of the
assets, liabilities, revenues and expenses. Under this method, the Trust’s consolidated financial statements reflect only the
Trust’s proportionate share of the assets, its share of any liabilities incurred jointly with the other ventures as well as any
liabilities incurred directly, its share of any revenues earned or expenses incurred by the joint operation and any expenses
incurred directly.
Investment properties
Investment properties are initially recorded at cost, including related transaction costs in connection with asset acquisitions and
include office properties held to earn rental income and/or for capital appreciation and properties that are being constructed or
developed for future use as investment properties. Subsequent to initial recognition, investment properties are accounted for at
fair value. At the end of each reporting period, the Trust determines the fair value of investment properties by:
1) considering current contracted sales prices for properties that are available for sale;
2) obtaining appraisals from qualified external professionals on a rotational basis for select properties; and
3) using internally prepared valuations applying the income approach.
The income approach is derived from two methods: capitalization rate (“cap rate”) method and discounted cash flow method. In
applying the cap rate method, the stabilized net operating income (“stabilized NOI”) of each property is divided by an
appropriate cap rate with adjustments for items such as average lease up costs, long-term vacancy rates, non-recoverable capital
expenditures, management fees, straight-line rents and other non-recurring items. On a quarterly basis, the Trust generally uses
the cap rate method to value investment properties that are more stable and uses the discounted cash flow method on an
annual basis to validate the cap rate value on such properties. On a quarterly basis, for investment properties that are subject to
significant volatility, uncertainty and risk, the Trust generally uses the discounted cash flow method to value such properties.
Properties under development are measured using the discounted cash flow method, net of costs to complete, as of the
consolidated balance sheet dates. Development sites in the planning phases are measured using comparable market prices for
similar assets.
Dream Office REIT 2018 Annual Report | 59
Building improvements are added to the carrying amount of investment properties only when it is probable that future
economic benefits associated with the expenditure will flow to the Trust and the cost of the item can be measured reliably.
Repairs and maintenance costs are recorded in investment properties operating expenses when incurred.
Initial direct leasing costs incurred in negotiating and arranging tenant leases are added to the carrying amount of investment
properties. Lease incentives, which include costs incurred to make leasehold improvements to tenants’ space and cash
allowances provided to tenants, are added to the carrying amount of investment properties and are amortized on a straight-line
basis over the term of the lease as a reduction to investment properties revenue. Internal leasing costs are expensed in the
period that they are incurred.
Borrowing costs associated with direct expenditures on properties under development are capitalized during the period of
active development. The amount of capitalized borrowing costs is determined first by reference to project-specific borrowings,
where relevant, and otherwise by applying a weighted average cost of borrowings to eligible expenditures after adjusting for
borrowings associated with other specific developments. Where borrowings are associated with specific developments, the
amount capitalized is the gross cost incurred on those borrowings less any investment income arising on their temporary
investment. Borrowing costs are capitalized from the commencement of active construction until the date of practical
completion when the property is substantially ready for its intended use. The capitalization of borrowing costs is suspended if
there are prolonged periods when development activity is interrupted. Practical completion is when the property is capable of
operating in the manner intended by management. Generally, this occurs on completion of construction and receipt of all
necessary occupancy and other material permits.
If the Trust has pre-leased space at or prior to the start of the development, and the lease requires tenant improvements that
enhance the value of the property, practical completion is considered to occur when such improvements are completed.
Investment properties and investment properties held for sale are derecognized on disposal or when no future economic
benefits are expected from their use or disposal. Any transaction costs arising on derecognition of an investment property are
included in the consolidated statements of comprehensive income during the reporting period the asset is derecognized.
Straight-line rent receivables are added to the carrying amount of investment properties.
Assets held for sale
Assets and liabilities (or disposal groups) are classified as held for sale when their carrying amount is to be recovered principally
through a sale transaction and a sale is considered highly probable. Investment properties continue to be measured at fair value
and the remainder of the disposal group is stated at the lower of the carrying amount and fair value less costs to sell.
Other non-current assets
Other non-current assets include a vendor takeback mortgage receivable, property and equipment, deposits, restricted cash, an
equity accounted investment and intangible assets. Property and equipment are stated at cost less accumulated depreciation
and accumulated impairment losses. Depreciation of property and equipment is calculated using the straight-line method to
allocate their cost, net of their residual values, over their expected useful lives of four to seven years. The residual values and
useful lives of all property and equipment are reviewed and adjusted, if appropriate, at least once a year. Cost includes
expenditures that are directly attributable to the purchase and expenditures for replacing part of the property and equipment
when that cost is incurred, if the recognition criteria are met. Subsequent costs are included in the asset’s carrying amount or
recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item
will flow to the Trust and the cost of the item can be measured reliably. All other repairs and maintenance are charged to
consolidated statements of comprehensive income during the reporting period in which they are incurred.
Other non-current assets are derecognized on disposal or when no future economic benefits are expected from their use or
disposal. Any gain or loss arising on derecognition of an asset (calculated as the difference between the net disposal proceeds
and the carrying amount of the asset) is included in the consolidated statements of comprehensive income during the reporting
period the asset is derecognized.
Cash and cash equivalents
Cash and cash equivalents include all short-term investments with an original maturity of three months or less, and exclude cash
subject to restrictions that prevent its use for current purposes. Excluded from cash and cash equivalents are amounts held for
repayment of tenant security deposits, as required by various lending agreements. Restricted cash is included in other
non-current assets (see Note 8).
Dream Office REIT 2018 Annual Report | 60
Financial instruments
Effective January 1, 2018, the Trust has adopted IFRS 9, “Financial Instruments” (“IFRS 9”) prospectively (see Note 3). The
comparative period is reported under IAS 39, “Financial Instruments” (“IAS 39”). The adoption has no impact on the carrying
amount of the Trust’s financial instruments. Primary changes as a result of the adoption include: new classification categories for
financial assets and liabilities and the implementation of a forward-looking “expected loss” impairment model.
Classification and measurement of financial instruments
The following summarizes the Trust’s classification and measurement of financial assets and financial liabilities:
IFRS 9 – Classification and measurement
IAS 39 – Classification and measurement
Financial assets
Amounts receivable
Vendor takeback mortgage receivable(1)
Marketable securities(2)
Restricted cash and deposits(2)
Cash and cash equivalents
Financial liabilities
Amounts payable and accrued liabilities
Tenant security deposits
Deferred Unit Incentive Plan
Subsidiary redeemable units
Mortgages(3)
Demand revolving credit facilities(3)
Debentures(3)
Financial asset at amortized cost
Financial asset at amortized cost
Loans and receivables at amortized cost
Loans and receivables at amortized cost
Financial asset at fair value through profit or loss Financial asset at fair value through profit or loss
Loans and receivables at amortized cost
Loans and receivables at amortized cost
Financial asset at amortized cost
Financial asset at amortized cost
Financial liability at amortized cost
Financial liability at amortized cost
Financial liability at amortized cost
Financial liability at amortized cost
Financial liability at amortized cost
Financial liability at amortized cost
Financial liability at amortized cost
Other liabilities at amortized cost
Other liabilities at amortized cost
Other liabilities at amortized cost
Other liabilities at amortized cost
Other liabilities at amortized cost
Other liabilities at amortized cost
Other liabilities at amortized cost
(1) Included within other non-current assets in the consolidated balance sheets.
(2) Included within prepaid expenses and other assets in the consolidated balance sheets.
(3) Included within debt in the consolidated balance sheets.
Financial assets
Classification (IFRS 9)
The Trust classifies its financial assets in the following measurement categories:
•
•
those to be measured subsequently at fair value (either through other comprehensive income, or through profit or loss);
and
those to be measured at amortized cost.
The classification depends on the Trust’s business model for managing the financial assets and the contractual terms of the cash
flows.
Measurement (IFRS 9)
At initial recognition, the Trust initially measures a financial asset at its fair value, less any related transaction costs. Subsequent
measurement depends on the Trust’s business model for managing the financial assets and the contractual terms of the cash
flows. There are three measurement categories in which the Trust classifies its financial assets:
• Amortized cost: Assets that are held for the collection of contractual cash flows and those cash flows represent solely
payments of principal and interest;
• Fair value through other comprehensive income: Assets that are held for the collection of contractual cash flows and for
selling the financial assets, and those cash flows represent solely payments of principal and interest; and
• Fair value through profit or loss: Assets that do not meet the criteria for amortized cost or fair value through other
comprehensive income.
Dream Office REIT 2018 Annual Report | 61
Impairment
IFRS 9: The Trust recognizes an allowance for expected credit losses for all financial assets not held at fair value through profit or
loss. For amounts receivable, the Trust applies the simplified approach permitted by IFRS 9, which requires expected lifetime
losses to be recognized upon initial recognition of the receivables. To measure the expected credit losses, the Trust has
established a provision matrix that is based on its historical credit loss experience based on days past due, adjusted for forward-
looking factors specific to the tenant and the economic environment. The Trust considers a financial asset in default when
contractual payment is over 90 days past due. However, in certain cases, the Trust may also consider a financial asset to be in
default when internal or external information indicates that it is unlikely to receive the outstanding contractual amounts in full.
IAS 39: A provision for impairment is established when there is objective evidence that collection will not be possible under the
original terms of the contract. Indicators of impairment include delinquency of payment and significant financial difficulty of the
tenant. Trade receivables that are less than three months past due are not considered impaired unless there is evidence that
collection is not possible. A provision for impairment is recorded through an allowance account, and the amount of the loss is
recognized in comprehensive income within investment properties operating expenses. Bad debt write-offs occur when the
Trust determines collection is not possible. Any subsequent recoveries of amounts previously written off are credited against
investment properties operating expenses in comprehensive income.
Derecognition
Financial assets are derecognized only when the contractual rights to the cash flows from the financial asset expire or the Trust
transfers substantially all risks and rewards of ownership.
Financial liabilities
Classification (IFRS 9)
The Trust classifies its financial liabilities in the following measurement categories:
•
•
those to be measured subsequently at fair value (either through other comprehensive income, or through profit or loss);
and
those to be measured at amortized cost.
Measurement (IFRS 9)
At initial measurement, financial liabilities are recognized at fair value, less any related transaction costs.
For financial liabilities measured subsequently at fair value, the liability is remeasured at fair value each reporting period, with
changes in fair value recognized in comprehensive income.
For financial liabilities measured subsequently at amortized cost, the liability is amortized using the effective interest method.
Under the effective interest method, any transaction fees, costs, discounts and premiums directly related to the financial
liabilities are recognized in comprehensive income over the expected life of the obligation.
Derecognition
A financial liability is derecognized when the obligation under the liability is discharged, cancelled or expired.
Equity
The Trust presents REIT Units as equity, notwithstanding the fact that the Trust’s REIT Units meet the definition of a financial
liability. Under IAS 32, the REIT Units are considered a puttable financial instrument because of the holder’s option to redeem
REIT Units, generally at any time, subject to certain restrictions, at a redemption price per unit equal to the lesser of 90% of a
20-day weighted average closing price prior to the redemption date or 100% of the closing market price on the redemption date.
The total amount payable by Dream Office REIT in any calendar month will not exceed $50 unless waived by Dream Office REIT’s
Board of Trustees at their sole discretion. The Trust has determined the REIT Units can be presented as equity and not financial
liabilities because the REIT Units have all of the following features, as defined in IAS 32 (hereinafter referred to as the “puttable
exemption”):
• REIT Units entitle the holder to a pro rata share of the Trust’s net assets in the event of its liquidation. Net assets are those
assets that remain after deducting all other claims on the assets;
• REIT Units are the class of instruments that are subordinate to all other classes of instruments as they have no priority over
other claims to the assets of the Trust on liquidation, and do not need to be converted into another instrument before they
are in the class of instruments that is subordinate to all other classes of instruments;
• All instruments in the class of instruments that is subordinate to all other classes of instruments have identical features;
Dream Office REIT 2018 Annual Report | 62
• Apart from the contractual obligation for the Trust to redeem the REIT Units for cash or another financial asset, the REIT
Units do not include any contractual obligation to deliver cash or another financial asset to another entity, or to exchange
financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the Trust,
and it is not a contract that will or may be settled in the Trust’s own instruments;
• The total expected cash flows attributable to the REIT Units over their lives are based substantially on the profit or loss, and
the change in the recognized net assets and unrecognized net assets of the Trust over the life of the REIT Units; and
• REIT Units are initially recognized at the fair value of the consideration received by the Trust. Any transaction costs arising
on the issuance of REIT Units are recognized directly in unitholders’ equity as a reduction of the proceeds received.
Distributions
Distributions to unitholders are recognized in the period in which the distributions are declared and are recorded as a reduction
to retained earnings.
Unit-based compensation plan
As described in Note 13, the Trust has a Deferred Unit Incentive Plan (“DUIP”) that provides for the granting of deferred trust
units and income deferred trust units to trustees, officers, employees and employees of affiliates.
Over the vesting period, deferred units are recorded as a liability, and compensation expense is recognized at amortized cost
based on the fair value of the units. Once vested, the liability is remeasured at each reporting date at amortized cost, based on
the fair value of the corresponding REIT A Units, with changes in fair value recognized in the consolidated statements of
comprehensive income as a fair value adjustment to financial instruments. Deferred trust units and income deferred units are
only settled in REIT A Units.
Revenue recognition
Effective January 1, 2018, the Trust has adopted IFRS 15, “Revenue from Contracts with Customers” (“IFRS 15”) on a modified
retrospective basis with no restatement of comparatives (see Note 3). Base rental income and property tax recoveries earned
from leases (“rental income”) is outside the scope of IFRS 15 and is therefore not impacted by the new standard. The prior
comparative period was reported under IAS 18, “Revenue” (“IAS 18”). The adoption has no impact on the timing and amount of
revenue recognized.
Rental income
The Trust accounts for tenant leases as operating leases given that it has retained substantially all of the risks and rewards of
ownership of its investment properties. Lease revenue from investment properties includes base rents, recoveries of property
taxes, percentage participation rents and lease termination fees. Revenue recognition under a lease commences when the
tenant has a right to use the leased asset. The total amount of contractual rent to be received from operating leases is
recognized on a straight-line basis over the term of the lease; a straight-line rent receivable, which is included in investment
properties, is recorded for the difference between the rental revenue recognized and the contractual amount received. Property
tax recoveries are recognized as revenues in the period in which the corresponding obligation arises and collectability is
reasonably assured. Percentage participation rents are recognized on an accrual basis once tenant sales revenues exceed
contractual thresholds. All other lease revenues are recorded as earned.
IAS 18: The above discussion also applies to recoveries of operating expenses in the 2017 fiscal year.
Revenue from contracts with customers (IFRS 15)
The Trust has obligations to provide ongoing services related to its leases. These services include common area maintenance
services, utilities and other services at its properties (collectively “CAM services”). The Trust’s performance obligations on CAM
services are satisfied over time as services are provided during the period which tenants occupy the premises. When providing
CAM services, the Trust is entitled to recoveries from tenants to the extent of costs incurred to provide such services. The Trust
recognizes revenue as the CAM services are provided over time, at the best estimate of the amounts earned for those services,
which reflects actual costs incurred. Tenants are billed monthly based on estimates. To the extent that costs exceed billings, a
receivable is recognized; if the billings exceed costs, a payable is recognized. These current assets or liabilities are settled with
tenants annually.
The Trust provides parking services to its properties’ tenants and visitors. Tenant parking revenue is recognized evenly over the
terms of the related contract. Transient parking revenue is recognized as the parking service is used.
The consideration received from tenants under the lease arrangements is allocated between the leased premises, CAM services
and parking services, if applicable, based on relative stand-alone selling prices.
Dream Office REIT 2018 Annual Report | 63
Pursuant to certain property management agreements, the Trust has an obligation to provide property management services to
third parties and Dream Hard Asset Alternatives Trust (“DHAAT”). The Trust recognizes revenue over time as it provides property
management services calculated as a percentage of the related property revenues for that period.
Pursuant to the Administrative Services Agreement with Dream Asset Management Corporation (“DAM”) and the Services
Agreements with Dream Industrial REIT and DHAAT, the Trust arranges for administrative and support services to be provided to
related parties on a cost-recovery basis. The Trust has determined that it is acting as an agent for these services and the fees are
netted against the related expenses with the exception of fees related to the occupation of office space. In providing office
space to related parties, the Trust is acting as the principal in the arrangement and the revenues and related expenses are
presented separately in the consolidated statements of comprehensive income. The Trust recognizes revenues monthly in
accordance with the terms of the agreement.
For all revenue streams from contracts with customers, revenue is measured at the best estimate of the amount the Trust
expects to receive for performing the services. Revenue is recognized only to the extent that it is highly probable that a
significant amount of the cumulative revenue recognized for a contract will not be reversed. The Trust is obligated to continue to
provide CAM services over the remaining term of each lease contract. The Trust will recognize revenue on these remaining
performance obligations based on the actual cost incurred to fulfill the CAM services in the period.
Any receivables arising from revenue contracts with customers are tested for impairment using the same model as for amounts
receivable as described below.
Significant judgments in applying IFRS 15
The application of IFRS 15 requires the Trust to make the following significant judgments:
Estimation of transaction prices
The Trust exercises judgment in estimating the transaction price for contract revenues with customers. The Trust exercises
judgment with regards to the amount and timing of the revenue recognized for CAM service contracts which are satisfied over
time. The amount of revenue recognized for CAM services with variable consideration is constrained by the actual costs incurred
and any restrictions in lease agreements. The revenues related to these obligations are recorded over time as the obligation of
the Trust is to provide the CAM services on an as needed basis throughout the contract period. The Trust considers this to be a
faithful depiction of the transfer of services.
Scoping of revenues
The Trust exercises judgment in determining which of its revenue streams that arise from lease agreements are in scope of
IFRS 15 and which are not. Specifically, the Trust considers whether a revenue stream related to a lease agreement is for the
lease of an asset or is for the provision of a distinct service. Revenues of the latter type are determined to be in scope of IFRS 15,
while the former are in scope of IAS 17, “Leases”.
Principal versus agent determination
The Trust exercises judgment in determining whether it is acting as a principal or an agent in providing services under the
Administrative Services Agreement with DAM and the Services Agreements with Dream Industrial REIT and DHAAT. In making
this determination, the Trust considers which party controls the service and the nature of the obligation that the Trust has to
DAM, Dream Industrial REIT and DHAAT. In making this determination, the Trust considers whether it is primarily responsible for
fulfilling the promise to provide the service; whether it bears inventory risk; and whether it has discretion to set the price for
the service.
Interest on debt
Interest on debt includes coupon interest, amortization of ancillary costs incurred in connection with the arrangement of
borrowings and amortization of fair value adjustments on assumed debt. Financing costs are amortized to interest expense.
Income taxes
Dream Office REIT is taxed as a mutual fund trust for Canadian income tax purposes. The Trust expects to distribute all of its
taxable income to its unitholders, which enables it to deduct such distributions for income tax purposes. As the income tax
obligations relating to the distributions are those of the individual unitholder, no provision for income taxes is required on such
amounts. The Trust expects to continue to distribute its taxable income and to qualify as a real estate investment trust (“REIT”)
for the foreseeable future.
Dream Office REIT 2018 Annual Report | 64
For U.S. subsidiaries, income taxes are accounted for using the asset and liability method. Under this method, deferred income
taxes are recognized for the expected future tax consequences of temporary differences between the carrying value of balance
sheet items and their corresponding tax values. Deferred income taxes are computed using substantively enacted income tax
rates or laws for the years in which the temporary differences are expected to reverse or settle. Deferred tax assets are
recognized only to the extent that they are realizable.
Provisions
Provisions for legal claims are recognized when the Trust has a present legal or constructive obligation as a result of past events;
it is probable an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated.
Provisions are not recognized for future operating losses.
Where there are a number of similar obligations, the likelihood an outflow will be required in settlement is determined by
considering the class of obligations as a whole. A provision is recognized even if the likelihood of an outflow with respect to any
one item included in the same class of obligations may be small.
Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a rate
that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the
provision due to passage of time is recognized as interest expense.
Impairment
The Trust assesses the possibility and amount of any impairment loss or write-down as it relates to the investment in
Dream Industrial REIT, property and equipment and intangible assets.
IAS 28, “Investments in Associates and Joint Ventures” (“IAS 28”), requires management to use judgment in determining the
recoverable amount of equity accounted investments that are tested for impairment, including the investment in Dream
Industrial REIT. Judgment is also involved in estimating the value-in-use of the investment in Dream Industrial REIT, including
estimates of future cash flows, discount rates and terminal rates. The values assigned to these key assumptions reflect past
experience and are consistent with external sources of information.
Segment reporting
A reportable operating segment is a distinguishable component of the Trust that is engaged either in providing related products
or services (business segment) or in providing products or services within a particular economic environment (geographic
segment), which is subject to risks and rewards that are different from those of other reportable segments. The Trust’s primary
format for segment reporting is based on geographic segments. Operating segments are reported in a manner consistent with
the internal reporting provided to the chief operating decision-maker, determined to be the Chief Executive Officer (“CEO”) of
the Trust. The operating segments derive their revenue primarily from rental income from lessees. All of the Trust’s business
activities and operating segments are reported within the geographic segments.
Foreign currencies
The consolidated financial statements are presented in Canadian dollars, which is the functional currency of the Trust and the
presentation currency for the consolidated financial statements.
Assets and liabilities related to properties held in a foreign entity with a functional currency other than the Canadian dollar are
translated at the rate of exchange at the consolidated balance sheet dates. Revenues and expenses are translated at average
rates for the period, unless exchange rates fluctuate significantly during the period, in which case the exchange rates at the
dates of the transactions are used. The resulting foreign currency translation adjustments are recognized in other
comprehensive income (loss).
Critical accounting judgments, estimates and assumptions
Preparing the consolidated financial statements requires management to make judgments, estimates and assumptions that
affect the amounts reported. Management bases its judgments and estimates on historical experience and other factors it
believes to be reasonable under the circumstances, but which are inherently uncertain and unpredictable, the result of which
forms the basis of the carrying amounts of assets and liabilities. However, uncertainty about these assumptions and estimates
could result in outcomes that could require a material adjustment to the carrying amount of the affected asset or liability in
the future.
Dream Office REIT 2018 Annual Report | 65
Critical accounting judgments
The following are the critical accounting judgments used in applying the Trust’s accounting policies that have the most
significant effect on the amounts in the consolidated financial statements:
Investment properties
Critical judgments are made in respect of the fair values of investment properties. The fair values of these investments are
reviewed at least quarterly by management with reference to independent property appraisals and market conditions existing at
the reporting date, using generally accepted market practices. The independent appraisers are experienced, nationally
recognized and qualified in the professional valuation of office buildings in their respective geographic areas. Judgment is also
applied in determining the extent and frequency of obtaining independent appraisals. At each reporting period, a select number
of properties, determined on a rotational basis, are valued by independent appraisers. For properties not subject to
independent appraisals, valuations are prepared internally during each reporting period.
Critical assumptions used in estimating the fair values of investment properties include cap rates, discount rates that reflect
current market uncertainties, terminal cap rates and market rents. Other key assumptions relating to the estimates of fair values
of investment properties include components of stabilized NOI, leasing costs and vacancy rates. The Trust examines the critical
and key assumptions at the end of each reporting period and updates these assumptions based on recent leasing activity and
external market data available at that time. If there is any change in these assumptions or regional, national or international
economic conditions, the fair value of investment properties may change materially.
The Trust makes judgments with respect to whether lease incentives provided in connection with a lease enhance the value of
the leased space, which determines whether or not such amounts are treated as tenant improvements and added to investment
properties. Lease incentives, such as cash, rent-free periods and lessee or lessor owned improvements, may be provided to
lessees to enter into an operating lease. Lease incentives that do not provide benefits beyond the initial lease term are included
in the carrying amount of investment properties and are amortized as a reduction of rental revenue on a straight-line basis over
the term of the lease.
Judgment is also applied in determining whether certain costs are additions to the carrying amount of the investment property.
For properties under development, the Trust exercises judgment in determining when development activities have commenced,
when and how much borrowing costs are to be capitalized to the development project, and the point of practical completion.
Impairment
The Trust assesses the possibility and amount of any impairment loss or write-down as it relates to the investment in
Dream Industrial REIT and other equity accounted investments, amounts receivable, property and equipment and intangible
assets.
IFRS 9 requires management to use judgment in determining if the Trust’s financial assets are impaired. In making this judgment,
the Trust evaluates, among other factors, the credit risk of the counterparty, whether there are indicators that credit risk on a
financial instrument has changed significantly since initial recognition or the last reassessment of credit risk. Where the credit
risk of a financial asset has increased significantly since initial recognition, the Trust records a loss allowance equal to the
lifetime expected credit losses arising from that financial asset.
IAS 36, “Impairment of Assets” (“IAS 36”), requires management to use judgment in determining the recoverable amount of
assets and equity accounted investments that are tested for impairment, including the investment in Dream Industrial REIT and
other equity accounted investments. Judgment is also involved in estimating the value-in-use of the investment in Dream
Industrial REIT and other equity accounted investments, including estimates of future cash flows, discount rates and terminal
rates. The values assigned to these key assumptions reflect past experience and are consistent with external sources of
information.
Dream Office REIT 2018 Annual Report | 66
Note 3
CHANGES IN ACCOUNTING POLICIES AND DISCLOSURES
The Trust has adopted the following new and revised standards, along with any consequential amendments, effective January 1,
2018. These changes were made in accordance with the applicable transitional provisions as described below.
Revenue from contracts with customers
Effective January 1, 2018, the Trust has applied IFRS 15. The IFRS 15 revenue recognition model requires management to
exercise significant judgment and make estimates that affect revenue recognition.
The Trust has adopted IFRS 15 on a modified retrospective basis effective January 1, 2018. In applying IFRS 15, the Trust used the
practical expedient in the standard that permits contracts which were completed prior to the transition date to not be assessed.
As a result of adopting IFRS 15, there were no adjustments to the consolidated balance sheets as at January 1, 2018. The
accounting policies applied under the new standard are disclosed in Note 2.
Financial instruments
IFRS 9, “Financial Instruments” (“IFRS 9”), was issued by the IASB and replaced IAS 39, “Financial Instruments: Recognition and
Measurement” (“IAS 39”).
The Trust performed an in-depth assessment of IFRS 9 to determine the impact of the adoption of the standard on the Trust’s
consolidated financial statements. The Trust determined that all financial assets, with the exception of marketable securities,
meet the test that the resulting cash flows are payments on specified dates that are solely payments of principal and interest
and held in accordance with the Trust’s business model of holding them for collecting contractual cash flows. Consequently, the
Trust is continuing to carry these assets at amortized cost. Marketable securities continue to be carried at fair value through
profit or loss. The Trust has not modified any of its existing borrowings in prior periods. As a consequence, there was no need to
retrospectively restate the carrying amount of the borrowings for changes to the accounting for revaluation gains or losses.
There was no dollar impact on the carrying value of the Trust’s trade receivables or to the classification and measurement of its
financial assets.
Investment properties
IAS 40, “Investment Properties” (“IAS 40”), was amended to clarify when an entity should transfer property, including property
under construction or development, between investment properties and other categories such as inventories or own-use
properties. The revised standard states that a change in use occurs when the property meets, or ceases to meet, the definition
of investment property and there is evidence of the change in use. A mere change in management’s intentions for the use of a
property does not provide evidence of a change in use. The amendments to IAS 40 were adopted effective January 1, 2018. This
amendment did not have an impact on the Trust’s consolidated financial statements.
Share-based payments
IFRS 2, “Share-Based Payments” (“IFRS 2”), clarifies how to account for certain types of share-based payment transactions. It
was amended to address (i) certain issues related to the accounting for cash settled awards, and (ii) the accounting for equity
settled awards that include a “net settlement” feature in respect of employee withholding taxes. The amendments to IFRS 2
were adopted effective January 1, 2018. This amendment did not have an impact on the Trust’s consolidated financial
statements.
Note 4
FUTURE ACCOUNTING POLICY CHANGES
Leases
IFRS 16, “Leases” (“IFRS 16”), sets out the principles for the recognition, measurement and disclosure of leases. IFRS 16 provides
revised guidance on identifying a lease and for separating lease and non-lease components of a contract. IFRS 16 introduces a
single accounting model for all lessees and requires a lessee to recognize right-of-use assets and lease liabilities for leases with
terms of more than 12 months, unless the underlying asset is of low value. Under IFRS 16, lessor accounting for operating and
finance leases will remain substantially unchanged. IFRS 16 is effective for annual periods beginning on or after January 1, 2019,
with earlier application permitted for entities that apply IFRS 15. The Trust has not early adopted IFRS 16.
Dream Office REIT 2018 Annual Report | 67
The Trust has formed an internal working group which is responsible for overseeing the Trust’s transition to IFRS 16. The working
group performed an in-depth assessment of IFRS 16 and the impact the adoption of the standard will have on the Trust’s
consolidated financial statements. The working group reviewed the Trust’s various agreements and identified certain properties
with contractual arrangements that qualified as a lease under IFRS 16 and quantified the right-of-use assets and lease liabilities
to be approximately $4,500. These right-of-use assets and lease liabilities will be recognized in the consolidated balance sheet
effective January 1, 2019 along with additional disclosures.
Income taxes
IFRIC 23, “Uncertainty over Income Tax Treatments” (“IFRIC 23”), clarifies the application of the recognition and measurement
requirements in IAS 12, “Income Taxes” (“IAS 12”) for situations where there is uncertainty over income tax treatments. IFRIC 23
specifically addresses whether an entity considers income tax treatments separately; assumptions that an entity makes
regarding the examination of tax treatments by taxation authorities; how an entity determines taxable income or loss, tax bases,
unused tax losses or credits and tax rates; and how an entity considers changes in facts and circumstances. IFRIC 23 does not
apply to taxes or levies outside the scope of IAS 12. IFRIC 23 is effective for annual periods beginning on or after January 1, 2019.
The Trust does not anticipate this amendment to have a material impact on the consolidated financial statements.
Business combinations
The International Accounting Standards Board published an amendment to the requirements of IFRS 3, “Business Combinations”
(“IFRS 3”), in relation to whether a transaction meets the definition of a business combination. The amendment clarifies the
definition of a business and provides additional illustrative examples, including those relevant to the real estate industry. A
significant change in the amendment is the option for an entity to assess whether substantially all of the fair value of the gross
assets acquired is concentrated in a single asset or group of similar assets. If such a concentration exists, the transaction is not
viewed as an acquisition of a business and no further assessment of the business combination guidance is required. This will be
relevant where the value of the acquired entity is concentrated in one property, or a group of similar properties. The
amendment is effective for periods beginning on or after January 1, 2020, with earlier application permitted. There will be no
impact on transition since the amendments are effective for business combinations for which the acquisition date is on or after
the transition date.
Dream Office REIT 2018 Annual Report | 68
Note 5
INVESTMENT PROPERTIES
Balance, beginning of year
Additions:
Note
$
Building improvements
Lease incentives and initial direct leasing costs
Capitalized interest
Recognition of investment properties related to joint operations
7
Total additions to investment properties
Transfers, dispositions, assets held for sale and other:
Active properties transferred to properties under
development
Investment properties disposed of during the year
Investment properties classified as held for sale during the year 10
Other
Total transferred, disposed, classified as held for sale and other
Changes included in net income:
Fair value adjustments to investment properties
Change in straight-line rent
Amortization and write-off of lease incentives
Total changes included in net income
Change included in other comprehensive income (loss):
Foreign currency translation adjustment
Total change included in other comprehensive income (loss)
Balance, end of year
Change in unrealized income included in net income for the year
Change in fair value of investment properties
$
$
Active
properties
2,919,438 $
Properties under
development
Year ended December 31,
2018
Investment
properties
2,919,438 $
Investment
properties
4,836,355
2017
21,590
56,371
24
—
77,985
—
(97,418 )
(152,578 )
(8,393 )
(258,389 )
46,959
535
(11,490 )
36,004
24,507
50,871
—
60,000
135,378
—
(70,852 )
(2,004,150 )
—
(2,075,002 )
38,443
2,845
(13,044 )
28,244
— $
3,447
3,152
24
—
6,623
66,348
—
—
—
66,348
1,693
(11 )
(68 )
1,614
18,143
53,219
—
—
71,362
(66,348 )
(97,418 )
(152,578 )
(8,393 )
(324,737 )
45,266
546
(11,422 )
34,390
3,788
3,788
2,704,241 $
—
—
74,585 $
3,788
3,788
2,778,826 $
(5,537 )
(5,537 )
2,919,438
48,264 $
1,693 $
49,957 $
50,425
Investment properties includes $18,893 (December 31, 2017 – $21,530) related to straight-line rent receivables.
Investment properties excluding assets held for sale with a fair value of $2,030,937 as at December 31, 2018 (December 31,
2017 – $2,084,942) are pledged as security for mortgages.
Investment properties excluding assets held for sale with a fair value of $607,624 as at December 31, 2018 (December 31,
2017 – $535,198) are pledged as security for the demand revolving credit facilities.
Valuations of externally appraised properties
For the year ended December 31, 2018, there were 11 investment properties valued by qualified external valuation
professionals with a fair value of $759,868 representing 27% of the total investment property values (for the year ended
December 31, 2017 – 27 investment properties with an aggregate fair value of $2,207,640, representing 76% of the total
investment property values).
Fair value adjustments to investment properties
For the year ended December 31, 2018, the Trust recorded a fair value gain in our investment properties totalling $46,959 and a
fair value gain of $574 recorded in our investment properties classified as assets held for sale (see Note 10). During the year, a
previous land transfer tax accrual of $8,393 that had been included in property transaction costs was reversed as payment was
no longer probable. As a result of this adjustment to transaction costs, the fair value adjustment to investment properties
recorded in the year was correspondingly increased.
For the year ended December 31, 2017, the Trust recorded a fair value gain in our investment properties totalling $38,443,
partially offset by a fair value loss of $15,327 recorded in our investment properties classified as assets held for sale (see
Note 10).
Dream Office REIT 2018 Annual Report | 69
The fair value of the investment properties as at December 31, 2018 represents the Trust’s best estimate based on the internally
and externally available information as at the end of the reporting period. If there are any changes in the critical and key
assumptions used in valuing the investment properties, or regional, national or international economic conditions, the fair value
of investment properties may change materially.
Assumptions used in the valuation of investment properties using the capitalization rate method
As at December 31, 2018, the Trust’s investment properties, excluding investment properties in Alberta, properties under
development, assets held for sale and certain properties where bids were received during the quarter, were valued using the
capitalization rate (“cap rate”) method. The critical valuation metrics as at December 31, 2018 and December 31, 2017 are set
out below:
Cap rates(1)
December 31, 2018
Weighted
average (%)
5.19
Range (%)
4.50–8.00
December 31, 2017
Range (%)
4.50–8.00
Weighted
average (%)
5.23
(1) Excludes investment properties in Alberta, properties under development, assets held for sale and certain properties where bids were received by the Trust
at the end of each period.
Sensitivities on assumptions
Generally, an increase in stabilized net operating income (“NOI”) will result in an increase to the fair value of an investment
property. An increase in the cap rate will result in a decrease to the fair value of an investment property. The cap rate magnifies
the effect of a change in stabilized NOI, with a lower rate resulting in a greater impact to the fair value of an investment property
than a higher rate.
If the weighted average cap rate were to increase by 25 basis points (“bps”), the fair value of investment properties (excluding
investment properties in Alberta, assets held for sale and certain properties where bids were received by the Trust) would
decrease by $116,300. If the cap rate were to decrease by 25 bps, the fair value of investment properties (excluding investment
properties in Alberta, assets held for sale and certain properties where bids were received by the Trust) would increase
by $128,520.
Assumptions used in the valuation of investment properties using the discounted cash flow method
As at December 31, 2018, the Trust’s investment properties in Alberta were valued using the discounted cash flow method. The
critical valuation metrics as at December 31, 2018 and December 31, 2017 are set out below:
Discount rates (%)(1)
Terminal cap rates (%)(1)
Market rents (in dollars per square foot)(1)(2)
December 31, 2018
Weighted
average
8.05
7.13
15.33 $
Range
8.00–8.75
7.00–8.25
12.00–16.50 $
$
December 31, 2017
Range
7.50–8.75
6.63–8.25
10.00–16.50 $
Weighted
average
8.07
7.09
14.46
(1) Excludes assets held for sale and certain properties where bids were received by the Trust at the end of each period.
(2) Market rents represent year one rates in the discounted cash flow model. Market rents include office space only and exclude retail space.
In addition to the assumptions noted above, leasing cost assumptions for new and renewed leasing were within the range of
$25.00 and $60.00 per square foot, with a weighted average vacancy rate assumption of 5%.
Sensitivities on assumptions
The following sensitivity table outlines the potential impact on the fair value of investment properties in Alberta, excluding
assets held for sale, assuming a change in the weighted average discount rates and terminal cap rates by a respective 25 bps as
at December 31, 2018.
Increase (decrease) in value
$
Impact of change to
weighted average discount rates
–25 bps
2,183
+25 bps
(2,132 )
$
Impact of change to
weighted average terminal cap rates
+25 bps
(2,226 ) $
–25 bps
2,389
$
Dream Office REIT 2018 Annual Report | 70
The following sensitivity table outlines the potential impact on the fair value of investment properties in Alberta, excluding
assets held for sale, assuming the market rental rates were to change by $1.00 per square foot and if the leasing costs per
square foot were to change by $5.00 per square foot as at December 31, 2018.
Increase (decrease) in value
Impact of change to
market rental rates
Impact of change to
leasing costs per square foot
+$1.00
3,443
$
–$1.00
(3,446 )
$
+$5.00
(1,274 ) $
–$5.00
1,274
$
Generally, a decrease in vacancy rate assumptions will result in an increase to the fair value of investment properties in Alberta,
excluding assets held for sale, while an increase in vacancy rate assumptions will result in a decrease to the fair value of
investment properties in Alberta, excluding assets held for sale.
Note 6
INVESTMENT IN DREAM INDUSTRIAL REIT
Dream Industrial Real Estate Investment Trust (“Dream Industrial REIT”) is an unincorporated, open-ended real estate
investment trust listed on the Toronto Stock Exchange under the symbol “DIR.UN”.
On June 29, 2018, Dream Industrial REIT completed an equity offering of 13,915,000 units of Dream Industrial REIT (“Dream
Industrial REIT Units”) at a price of $10.35 per unit for gross proceeds of $144,020, including 1.8 million Dream Industrial REIT
Units issued pursuant to the exercise of the over-allotment option granted to the underwriters.
On November 21, 2017, Dream Industrial REIT completed an $86,538 equity offering to partially fund the acquisition of a
portfolio of four light industrial properties located in the United States. Concurrently with the equity offering, the Trust
subscribed for 2,858,000 Dream Industrial REIT units through a private placement totalling $25,008.
On February 13, 2019, Dream Industrial REIT completed a public offering of 13,800,000 Dream Industrial REIT Units at a price of
$10.45 per unit for gross proceeds of $144,210, including 1,800,000 REIT Units issued pursuant to the exercise of the over-
allotment option granted to the underwriters. The net proceeds will be used to partially fund the acquisition of a portfolio of
21 industrial properties located in the United States.
For the year ended December 31, 2018, the Trust purchased Dream Industrial REIT Units through its distribution reinvestment
plan totalling 1,769,595 Dream Industrial REIT Units for a total cost of $17,265 (for the year ended December 31, 2017 –
1,690,668 Dream Industrial REIT Units for a total cost of $14,481).
Balance, beginning of year
Dream Industrial REIT Units purchased during the year
Dream Industrial REIT Units purchased through distribution reinvestment plan
Distributions received on Dream Industrial LP Class B limited partnership units
Distributions received on Dream Industrial REIT Units
Share of net income
Net accretion loss
Share of other comprehensive income (loss)
Balance, end of year
Dream Industrial REIT Units held, end of year(1)
Dream Industrial LP Class B limited partnership units held, end of year(2)
Total Dream Industrial REIT units held, end of year
Ownership %, end of year
$
$
Year ended December 31,
2018
220,796 $
—
17,265
(13,376 )
(4,538 )
45,091
(1,966 )
3,311
266,583 $
7,200,736
18,551,855
25,752,591
23.3 %
2017
186,754
25,008
14,481
(13,473 )
(1,154 )
13,567
(4,127 )
(260 )
220,796
5,431,141
18,551,855
23,982,996
25.6 %
(1) 4,800,587 Dream Industrial REIT Units are pledged as security for the $20,000 demand revolving credit facility.
(2) 18,551,855 Dream Industrial LP Class B limited partnership units are pledged as security for the $500,000 demand revolving credit facility.
The fair value of the Trust’s interest in Dream Industrial REIT of $245,165 (December 31, 2017 – $211,050) was determined using
the Dream Industrial REIT closing unit price of $9.52 per unit at period-end multiplied by the number of units held by the Trust
as at December 31, 2018.
Dream Office REIT 2018 Annual Report | 71
Pursuant to the Management Services Agreement between the Trust and DAM (see Note 26), the Trust granted DAM a right of
first offer to purchase up to 18,551,855 Dream Industrial LP Class B limited partnership units, in the event the Trust sells its
interest in Dream Industrial REIT.
Under IAS 28, “Investments in Associates and Joint Ventures”, a significant or prolonged decline in the fair value of an
investment in an equity instrument below its cost is an indicator of impairment. While the original cost of the Trust’s investment
in Dream Industrial REIT exceeded the market value of the units as at December 31, 2018, the Trust does not consider the
difference to be significant or prolonged, and no impairment test was performed.
The following amounts represent the Trust’s ownership interest in the assets, liabilities, revenues, expenses and cash flows of
Dream Industrial REIT:
Non-current assets
Current assets
Total assets
Non-current liabilities
Current liabilities
Total liabilities
Net assets
Add-back: Subsidiary redeemable units
Investment in Dream Industrial REIT
Net rental income
Other revenue and expenses, fair value adjustments and
other items
Net income (loss)
Other comprehensive income (loss)
Comprehensive income (loss) before the undernoted
adjustments
Add-back:
Interest on subsidiary redeemable units
Fair value adjustments to subsidiary redeemable units
Share of comprehensive income from investment in
Dream Industrial REIT
Add (deduct):
Net accretion loss
Share of other comprehensive income (loss) from investment
in Dream Industrial REIT
Share of income from investment in Dream Industrial REIT
At 100%
At % ownership interest
2018
2,141,907 $
18,668
2,160,575 $
1,059,289
111,961
1,171,250 $
989,325 $
December 31,
2017
1,729,622
78,129
1,807,751
957,650
137,855
1,095,505
712,246
$
$
$
$
2018
489,730 $
4,268
493,998 $
378,430
25,598
404,028 $
89,970 $
176,613
266,583 $
December 31,
2017
436,200
19,704
455,904
363,597
34,767
398,364
57,540
163,256
220,796
$
$
$
$
$
At 100%
At % ownership interest
Year ended December 31,
2018
2017
116,778 $
133,744 $
Year ended December 31,
2018
32,729 $
2017
29,867
$
23,784
157,528
12,082
(82,119 )
34,659
(266 )
(14,371 )
18,358
3,311
(34,685 )
(4,818 )
(260 )
169,610
34,393
21,669
(5,078 )
$
13,376 $
13,357
13,376
5,009
48,402
13,307
(1,966 )
(4,127 )
$
(3,311 )
43,125 $
260
9,440
Dream Office REIT 2018 Annual Report | 72
Note 7
JOINT ARRANGEMENTS
On January 1, 2017, the Trust and H&R REIT terminated the joint venture agreement and entered into a co-ownership
agreement. As a result of this change, the Trust derecognized its investment in the joint venture of F1RST Tower on January 1,
2017 at its carrying amount of $15,189 and recognized the Trust’s 50% interest in the assets and liabilities amounting to $61,940
and $46,868, respectively, of F1RST Tower in the consolidated balance sheet. This resulted in the Trust recognizing a loss on
January 1, 2017 of $117 in the consolidated statements of comprehensive income related to the initial recognition at fair value
of the Trust’s 50% share of the assets and liabilities compared to the carrying values of the joint ventures (see Note 23). The
newly formed co-ownership entered into a property management agreement with H&R REIT to provide property management
services to F1RST Tower.
On April 10, 2018, the Trust completed the sale of its 50% interest in F1RST Tower in Calgary (see Note 10) and derecognized the
Trust’s 50% interest in the assets and liabilities amounting to $53,493 and $40,000, respectively, of F1RST Tower in the
consolidated balance sheets.
Co-owned investment properties
The Trust’s interests in co-owned investment properties are accounted for based on the Trust’s share of interest in the assets,
liabilities, revenues and expenses of the investment properties.
Property
700 De la Gauchetière Street West – retail
50 & 90 Burnhamthorpe Road West (Sussex Centre)(1)
275 Dundas Street West (London City Centre)(1)
Centre 70
F1RST Tower(2)
Location
Montréal, Québec
Mississauga, Ontario
London, Ontario
Calgary, Alberta
Calgary, Alberta
Ownership interest (%)
December 31,
December 31,
2018
79.2
49.9
40.0
15.0
—
2017
79.2
49.9
40.0
15.0
50.0
(1) The Trust co-owns these two investment properties with DHAAT, a related party of the Trust (see Note 26).
(2) On January 1, 2017, the Trust derecognized its investment in the joint venture of F1RST Tower and recognized the Trust’s 50% interest in the assets, liabilities,
revenues and expenses of this investment property in the consolidated financial statements. On April 10, 2018, the Trust completed the sale of its 50%
interest in F1RST Tower in Calgary (see Note 10).
The following amounts represent the Trust’s ownership interest in the assets, liabilities, revenues and expenses of the co-owned
properties in which the Trust participates.
Non-current assets
Current assets
Total assets
Non-current liabilities
Current liabilities
Total liabilities
Net assets
$
$
143,939 $
2,859
146,798
78,170
3,654
81,824
64,974 $
2017
195,493
5,073
200,566
78,001
44,392
122,393
78,173
Net assets at % ownership interest
December 31, December 31,
(2)
(1)
2018
(1) On April 10, 2018, the Trust completed the sale of its 50% interest in F1RST Tower in Calgary (see Note 10).
(2) On January 1, 2017, the Trust derecognized its investment in the joint venture of F1RST Tower and recognized the Trust’s 50% interest in the assets and
liabilities of this investment property in the consolidated financial statements.
Dream Office REIT 2018 Annual Report | 73
Net rental income
Other income and expenses, fair value adjustments, leasing, net losses on transactions and debt
settlement costs
Share of net income from co-owned properties
$
$
Share of net income at
% ownership interest
for the year ended December 31,
(2)
(1)
2018
8,558 $
2017
36,811
(4,079 )
4,479 $
(2,415 )
34,396
(1) On April 10, 2018, the Trust completed the sale of its 50% interest in F1RST Tower in Calgary (see Note 10).
(2) On January 1, 2017, the Trust derecognized its investment in the joint venture of F1RST Tower and recognized the Trust’s 50% interest in the revenues and
expenses of this investment property in the consolidated financial statements.
Note 8
OTHER NON-CURRENT ASSETS
Vendor takeback mortgage receivable
Property and equipment, net of accumulated depreciation of $12,136
(December 31, 2017 – $10,433)
Restricted cash
Intangible assets, net of accumulated amortization of $3,454
(December 31, 2017 – $3,008)
Equity accounted investment, deposits and other
Total
Note
10 $
December 31,
2018
34,100 $
3,767
1,247
1,416
1,970
42,500 $
26
$
December 31,
2017
—
5,500
1,082
1,862
1,100
9,544
On April 10, 2018, the Trust completed the sale of its 50% interest in F1RST Tower in Calgary (see Note 10). As partial
consideration for the sale, the Trust received a vendor takeback mortgage (“VTB mortgage”) receivable of $34,100. This interest-
only VTB mortgage receivable bears interest at 4.5%, matures on April 10, 2022 with an option to extend to April 10, 2023, may
be repaid at any time and is secured by a first-ranking charge on the property. The expected credit loss for the VTB mortgage is
nominal as a result of the value of the secured property.
Property and equipment primarily includes leasehold improvements, information and technology hardware, and furniture and
fixtures. Restricted cash primarily represents tenant rent deposits and cash held as security for certain mortgages. Intangible
assets represent the value attributed to the remaining co-ownership management contracts at the time of the Whiterock Real
Estate Investment Trust business combination in 2012, net of accumulated amortization. Equity accounted investment, deposits
and other comprise amounts provided by the Trust in connection with an equity accounted investment in real estate
technologies and utility deposits.
Note 9
AMOUNTS RECEIVABLE
As at December 31, 2018, amounts receivable are net of credit adjustments aggregating to $3,044 (December 31, 2017 –
$6,532).
Trade receivables
Less: Provision for impairment of trade receivables
Trade receivables, net
Other amounts receivable
Total
Note
26
December 31,
2018
8,590 $
(923 )
7,667
12,338
20,005 $
$
$
December 31,
2017
7,159
(1,486 )
5,673
9,153
14,826
The carrying value of amounts receivable approximates fair value due to their current nature. Amounts receivable are written off
when it is ultimately determined that the probability of collection is remote based on lease terms, the tenant’s financial
condition and other factors.
Dream Office REIT 2018 Annual Report | 74
The Trust leases office properties to tenants under operating leases. Minimum rental commitments, including joint operations,
on non-cancellable tenant operating leases over their remaining terms are as follows:
No more than 1 year
1–5 years
5+ years
$
December 31, 2018
129,240
449,815
192,780
771,835
$
Note 10
ASSETS HELD FOR SALE AND DISPOSITIONS
Assets held for sale
As at December 31, 2018 and December 31, 2017, the Trust classified certain properties as assets held for sale totalling $nil and
$51,530, respectively.
As at December 31, 2017, management had committed to a plan of sale of the underlying properties and the sales were
considered to be highly probable. As a result, these properties were classified as assets held for sale as at December 31, 2017.
Investment properties held for sale
Balance, beginning of year
Add (deduct):
Building improvements
Lease incentives and initial direct leasing costs
Investment properties disposed of during the year
Investment properties classified as held for sale during the year
Fair value adjustment to investment properties
Amortization of lease incentives and other
Foreign currency translation adjustment
Balance, end of year
Note
5
$
$
Year ended December 31,
2017
321,232
2018
51,530
$
60
431
(204,776 )
152,578
574
(397 )
—
—
$
3,162
9,322
(2,268,720 )
2,004,150
(15,327 )
(1,966 )
(323 )
51,530
As at December 31, 2018, assets held for sale includes $nil (December 31, 2017 – $302) related to straight-line rent receivables.
As at December 31, 2018, held for sale investment properties with a fair value of $nil (December 31, 2017 – $30,977) are
pledged as security for the demand revolving credit facilities.
Debt related to investment properties held for sale
Balance, beginning of year
Cash items:
Principal repayments
Lump sum repayments
Lump sum repayment on property dispositions
Non-cash items:
Debt classified as liabilities related to assets held for sale(1)
Debt assumed by purchaser on disposal of investment properties
Foreign currency translation adjustment
Other adjustments(2)
Balance, end of year
Note
11
$
$
Year ended December 31,
2017
209,228
2018
—
$
—
—
(90,697 )
90,697
—
—
—
—
$
(4,274 )
(13,956 )
(264,168 )
799,762
(720,990 )
(236 )
(5,366 )
—
(1) Debt classified as liabilities related to investment properties held for sale includes $264 of unamortized deferred financing costs.
(2) Other adjustments includes write-off and amortization of financing costs and fair value adjustments.
Dream Office REIT 2018 Annual Report | 75
Dispositions
For the year ended December 31, 2018, the Trust disposed of the following properties:
Property
Morgex Building, Edmonton
340–450 3rd Avenue N., Saskatoon
2891 Sunridge Way, Calgary
1914 Hamilton Street, Regina
F1RST Tower, Calgary
IBM Corporate Park, Calgary
Date disposed
January 3, 2018
January 18, 2018
February 1, 2018
February 7, 2018
April 10, 2018
August 31, 2018
November 14, 2018 Life Plaza and Joffre Place, Calgary
November 22, 2018 Rocky Mountain Plaza, Calgary
December 27, 2018 14505 Bannister Road, SE, Calgary
Total dispositions for the year ended December 31, 2018
Ownership Disposed share of GLA
(%)
100.0 %
100.0 %
100.0 %
100.0 %
50.0 %
100.0 %
100.0 %
100.0 %
100.0 %
(thousands of sq. ft.)
Sales price(1)
53
132
87
82
354
358
344
205
61
1,676 $
302,194
(1) Sales price reflects gross proceeds net of adjustments and before transaction costs.
On April 10, 2018, the Trust completed the sale of its 50% interest in F1RST Tower in Calgary for gross proceeds net of
adjustments and before transaction costs of $53,493. As partial consideration for the sale, the Trust received a vendor takeback
mortgage (“VTB mortgage”) receivable of $34,100. The VTB mortgage receivable bears interest at 4.5%, matures on April 10,
2022 with an option to extend to April 10, 2023 and is secured by the property. The VTB mortgage receivable has been included
in other non-current assets in the consolidated balance sheets. In addition, the Trust has committed to a construction loan
facility of up to $12,500 on the same terms as the VTB mortgage receivable. To date, the Trust has not funded any amounts
under the construction loan facility.
On November 22, 2018, the Trust completed the sale of Rocky Mountain Plaza in Calgary. As partial consideration for the sale,
the Trust received a short-term VTB mortgage receivable of $3,800. The VTB mortgage receivable matures March 22, 2019 and
bears interest at 7% for the first 60 days escalating to 10% until maturity. This VTB mortgage may be repaid by the purchaser at
any time and is secured by the property. The short-term VTB mortgage receivable has been included in prepaid expenses and
other assets in the consolidated balance sheets.
For the year ended December 31, 2017, the Trust disposed of 10.9 million square feet of investment properties for gross
proceeds net of adjustments and before transaction costs of $2,339,572. As a result of the disposition of certain co-owned
properties during 2017, the Trust wrote off $3,914 of intangible assets.
As part of the sale of a portfolio of properties in Etobicoke and Fredericton on April 25, 2017, the Trust received as partial
consideration 646,128 units of a Canadian publicly traded real estate investment trust totalling $5,234. These securities were
sold in the third quarter of 2018.
On March 28, 2017, a VTB mortgage of $78,775 related to a sale of investment properties in 2016 was repaid in full.
Note 11
DEBT
Mortgages(1)(2)
Demand revolving credit facilities(2)(3)(4)
Debentures(5)
Total
Less: Current portion
Non-current debt
(1) Net of financing costs of $3,463 (December 31, 2017 – $4,664).
(2) Secured by charges on specific investment properties (see Note 5).
(3) Secured by certain Dream Industrial REIT Units and Dream Industrial LP Class B limited partnership units.
(4) Net of financing costs of $3,016 (December 31, 2017 – $3,192).
(5) Net of financing costs of $231 (December 31, 2017 – $615).
Dream Office REIT 2018 Annual Report | 76
December 31,
2018
964,758 $
291,686
149,769
1,406,213
91,567
1,314,646 $
$
$
December 31,
2017
1,080,702
(3,192 )
290,140
1,367,650
206,961
1,160,689
Continuity of debt
The following tables provide a continuity of debt for the years ended December 31, 2018 and December 31, 2017:
Balance as at January 1, 2018
Cash items:
Principal repayments
Borrowings
Lump sum repayments
Financing costs additions
Non-cash items:
Note
Mortgages
$ 1,080,702 $
Year ended December 31, 2018
Demand
revolving
credit
facilities
(3,192 ) $
Debentures
Total
290,140 $ 1,367,650
(19,472 )
—
(9,225 )
—
—
837,479
(542,777 )
(1,391 )
—
—
(140,755 )
—
(19,472 )
837,479
(692,757 )
(1,391 )
Debt classified as liabilities related to assets held for sale
Foreign currency translation adjustment
Other adjustments(1)
10
Balance as at December 31, 2018
(90,697 )
2,523
927
964,758 $
—
—
1,567
291,686 $
—
—
384
(90,697 )
2,523
2,878
149,769 $ 1,406,213
$
(1) Other adjustments includes amortization and write-offs of financing costs and fair value adjustments.
Balance as at January 1, 2017
Cash items:
Principal repayments
Borrowings
Lump sum repayments
Financing costs additions
Lump sum repayments on property dispositions
Non-cash items:
Note
Mortgages
$ 2,027,172 $
Year ended December 31, 2017
Demand
revolving
credit
facilities
173,790 $
Debentures
Total
448,828 $ 2,649,790
—
985,005
(1,163,005 )
(1,216 )
—
—
—
(159,245 )
—
—
(35,739 )
1,144,885
(1,589,931 )
(2,393 )
(32,934 )
—
—
—
2,234
(3,192 ) $
—
—
—
557
(799,762 )
40,000
(3,181 )
(3,085 )
290,140 $ 1,367,650
(35,739 )
159,880
(267,681 )
(1,177 )
(32,934 )
(799,762 )
40,000
(3,181 )
(5,876 )
Debt classified as liabilities related to assets held for sale
Recognition of debt related to joint operations
Foreign currency translation adjustment
Other adjustments(1)
10
7
Balance as at December 31, 2017
$ 1,080,702 $
(1) Other adjustments includes amortization and write-offs of financing costs and fair value adjustments.
On December 20, 2018, the Trust entered into a portfolio mortgage totalling $105,000, secured by five investment properties in
Toronto, Ontario. The portfolio mortgage is interest-only and bears interest at 3.96%, compounded semi-annually, and matures
on January 2, 2029. On January 2, 2019, the portfolio mortgage closed and the net proceeds were used to make lump sum
repayments on five mortgages prior to their original maturity dates totalling $56,650 and the balance of the net proceeds were
used to pay down drawings on the Trust’s demand revolving credit facilities.
Demand revolving credit facilities
On December 21, 2018 the Trust reduced its existing demand revolving credit facility from $575,000 to $500,000. The Trust had
previously increased the facility from $400,000 to $575,000 and extended the maturity to March 1, 2021 on April 25, 2018. The
interest rate remained in the form of rolling one-month bankers’ acceptances (“BA”) bearing interest at the BA rate plus 170
basis points (“bps”) or at the bank’s prime rate plus 70 bps. As at December 31, 2018, the amended demand revolving credit
facility is secured by seven of the Trust’s investment properties and the Trust’s 18,551,855 Dream Industrial LP Class B limited
partnership units.
On May 4, 2018, the Trust reduced its existing demand revolving credit facility from $45,000 to $20,000 and extended the
maturity date to March 31, 2021. The interest rate remained in the form of rolling BAs bearing interest at the BA rate plus
200 bps or at the bank’s prime rate plus 85 bps. The amended demand revolving credit facility is secured by 4,800,587 of the
Trust’s Dream Industrial REIT Units.
Dream Office REIT 2018 Annual Report | 77
The amounts available and drawn under the demand revolving credit facilities as at December 31, 2018 and December 31, 2017
are as follows:
Formula-based maximum not to exceed
$500,000(1)
Formula-based maximum not to exceed
$20,000(2)
Maturity date
March 1, 2021
March 31, 2021
Interest rates on
drawings
BA + 1.70% or
Prime + 0.70%
BA + 2.00% or
Prime + 0.85%
Face
interest
rate
Borrowing
capacity
Drawings
Letters of
credit
Amount
available
December 31, 2018
3.97 % $ 432,348
$ (287,500 ) $
(2,507 ) $ 142,341
4.80 %
3.99 % $ 452,348 $ (294,702 ) $
(7,202 )
20,000
—
12,798
(2,507 ) $ 155,139
(1) The $500,000 demand revolving credit facility is secured by seven investment properties and 18,551,855 Dream Industrial LP Cl ass B limited partnership
units.
(2) The $20,000 demand revolving credit facility is secured by 4,800,587 Dream Industrial REIT Units.
Maturity date
Formula-based maximum
not to exceed $400,000
March 1, 2020
Formula-based maximum
not to exceed $45,000
April 30, 2018
Interest rates on
drawings
BA + 1.70% or
Prime + 0.70%
BA + 2.00% or
Prime + 0.85%
n/a – not applicable
Secured
investment
properties
Face
interest
rate
Borrowing
capacity
Drawings
Letters of
credit
Amount
available
December 31, 2017
8
n/a $ 371,483
$
—
$
(660 ) $ 370,823
2
10
n/a
25,844
$ 397,327 $
—
— $
—
25,844
(660 ) $ 396,667
Debentures
Series A Debentures
On June 13, 2013, the Trust completed the issuance of $175,000 aggregate principal amount of Series A senior unsecured
debentures (“Series A Debentures”). The Series A Debentures bear interest at a coupon rate of 3.424% per annum with a
maturity date of June 13, 2018. Interest on the Series A Debentures is payable semi-annually on June 13 and December 13, with
the first payment commencing on December 13, 2013. Costs related to the issuance of the Series A Debentures totalled $1,590.
The Trust has the option to redeem the Series A Debentures at a redemption price equal to the greater of the Canada Yield Price
and par plus any accrued and unpaid interest. The Canada Yield Price is defined as the amount that would return a yield on
investment for the remaining term to maturity equal to the Canada bond rate with equal term to maturity plus a spread
of 0.475%.
On June 13, 2018, the Trust repaid Series A Debentures with an aggregate principal amount of $140,755.
During the year ended December 31, 2017, the Trust purchased and cancelled $34,245 of Series A Debentures.
Series B Debentures
On October 9, 2013, the Trust completed the issuance of $125,000 aggregate principal amount of Series B floating senior
unsecured debentures (“Series B Debentures”). The Series B Debentures bear interest at a three-month Canadian Dealer Offered
Rate (“CDOR”) rate plus 1.7% per annum with a maturity date of January 9, 2017. Interest on the Series B Debentures is payable
quarterly in arrears on January 9, April 9, July 9 and October 9, with the first payment commencing on January 9, 2014. Costs
related to the issuance of the Series B Debentures totalled $720.
On January 9, 2017, the Trust repaid Series B Debentures with an aggregate principal amount of $125,000.
Series C Debentures
On January 21, 2014, the Trust completed the issuance of $150,000 aggregate principal amount of Series C senior unsecured
debentures (“Series C Debentures”). The Series C Debentures bear interest at a rate of 4.074% with a maturity date of
January 21, 2020. Interest on the Series C Debentures is payable semi-annually on January 21 and July 21, with the first payment
commencing on July 21, 2014. Costs related to the issuance of the Series C Debentures totalled $1,400.
Dream Office REIT 2018 Annual Report | 78
The Trust has the option to redeem the Series C Debentures at a redemption price equal to the greater of the Canada Yield Price
and par plus any accrued and unpaid interest. The Canada Yield Price is defined as the amount that would return a yield on
investment for the remaining term to maturity equal to the Canada bond rate with equal term to maturity plus a spread of
0.525%.
The principal amount outstanding and the carrying value for each series of debentures are as follows:
Debentures
Date issued
Maturity date
Series A
Original
principal
Face Outstanding
principal
interest rate
December 31, 2018
Carrying Outstanding
principal
value
December 31, 2017
Carrying
value
Debentures
June 13, 2013
June 13, 2018 $ 175,000
3.42 % $
—
$
—
$ 140,755
$ 140,609
Series C
Debentures
January 21, 2014
January 21, 2020
150,000
4.07 %
150,000
$ 150,000
Debt weighted average effective interest rates and maturities
149,769
149,531
$ 149,769 $ 290,755 $ 290,140
150,000
Fixed rate
Mortgages
Debentures
Total fixed rate debt
Variable rate
Mortgages
Demand revolving credit facilities
Total variable rate debt
Total debt
Weighted average
effective interest rates(1)
December 31, December 31,
2017
2018
4.14 %
4.25 %
4.16 %
4.23 %
4.41 %
4.37 %
4.21 %
4.09 %
3.96 %
4.06 %
3.32 %
—
3.32 %
4.00 %
Maturity
dates
(2)
December 31,
2018
Debt amount
December 31,
2017
2019–2027 $
2020
887,234 $
149,769
1,037,003
963,346
290,140
1,253,486
2019–2022
2021
$
77,524
291,686
369,210
1,406,213 $
117,356
(3,192 )
114,164
1,367,650
(1) The effective interest rate method includes the impact of financing costs and fair value adjustments on assumed debt.
(2) As at December 31, 2018.
The following table summarizes the aggregate of the scheduled principal repayments and debt maturities:
2019
2020
2021
2022
2023
2024–2027
Financing costs
Fair value adjustments
Mortgages
93,552
48,517
136,522
205,456
124,957
358,422
967,426
(3,463 )
795
964,758
$
$
Demand revolving
credit facilities
—
—
294,702
—
—
—
294,702
(3,016 )
—
291,686
$
$
Debentures
—
150,000
—
—
—
—
150,000
(231 )
—
149,769
$
$
Total
93,552
198,517
431,224
205,456
124,957
358,422
1,412,128
(6,710 )
795
1,406,213
$
$
Dream Office REIT 2018 Annual Report | 79
Note 12
SUBSIDIARY REDEEMABLE UNITS
The Trust has the following subsidiary redeemable units outstanding:
Balance, beginning of year
Remeasurement of carrying value of
subsidiary redeemable units
Balance, end of year
Year ended December 31, 2018
Year ended December 31, 2017
Note
Number of units
issued and outstanding
5,233,823 $
Amount
115,981
22
—
5,233,823 $
681
116,662
Number of units
issued and outstanding
5,233,823 $
—
5,233,823 $
Amount
102,321
13,660
115,981
During the year ended December 31, 2018, the Trust incurred $5,234 (December 31, 2017 – $6,542) in distributions on the
subsidiary redeemable units, which is included as interest expense in the consolidated statements of comprehensive income
(see Note 21).
Dream Office LP, a subsidiary of Dream Office REIT, is authorized to issue an unlimited number of LP Class B limited partnership
units. These units have been issued in two series: subsidiary redeemable units and LP Class B Units, Series 2. The subsidiary
redeemable units, together with the accompanying Special Trust Units, have economic and voting rights equivalent in all
material respects to REIT A Units. Generally, each subsidiary redeemable unit entitles the holder to a distribution equal to
distributions declared on REIT Units, Series B, or if no such distribution is declared, on REIT Units, Series A. Subsidiary
redeemable units may be surrendered or indirectly exchanged on a one-for-one basis at the option of the holder, generally at
any time subject to certain restrictions, for REIT Units, Series B.
Holders of the LP Class B Units, Series 2 are entitled to vote at meetings of the limited partners of Dream Office LP and each Unit
entitles the holder to a distribution equal to distributions on the subsidiary redeemable units. As at December 31, 2018 and
December 31, 2017, all issued and outstanding LP Class B Units, Series 2 are owned indirectly by the Trust and have been
eliminated in the consolidated balance sheets.
Special Trust Units are issued in connection with subsidiary redeemable units. The Special Trust Units are not transferable
separately from the subsidiary redeemable units to which they relate and will be automatically redeemed for a nominal amount
and cancelled on surrender or exchange of such subsidiary redeemable units. Each Special Trust Unit entitles the holder to the
number of votes at any meeting of unitholders that is equal to the number of REIT B Units that may be obtained on the
surrender or exchange of the subsidiary redeemable units to which they relate.
As at December 31, 2018 and December 31, 2017, 5,233,823 Special Trust Units were issued and outstanding.
Note 13
DEFERRED UNIT INCENTIVE PLAN
The Deferred Unit Incentive Plan (“DUIP”) provides for the grant of deferred trust units to trustees, officers and employees as
well as employees of affiliates. Deferred trust units are granted at the discretion of the trustees and earn income deferred trust
units based on the payment of distributions. Once granted, each deferred trust unit and the related distribution of income
deferred trust units vest evenly over a three- or five-year period on the anniversary date of the grant. Subject to an election
option available for certain participants to postpone receipt of REIT A Units, such units will be issued immediately on vesting.
As at December 31, 2018 and December 31, 2017, up to a maximum of 2.55 million deferred trust units are issuable under
the DUIP.
The movement in the DUIP balance was as follows:
Balance, beginning of year
Compensation expense
REIT A Units issued for vested deferred trust units
Remeasurements of carrying value of deferred trust units
Balance, end of year
Note
20
22
$
$
Year ended December 31,
2018
17,280
3,415
(3,205 )
690
18,180
$
$
2017
14,796
3,236
(3,863 )
3,111
17,280
Dream Office REIT 2018 Annual Report | 80
Outstanding and payable at beginning of year
Granted
Income deferred trust units
REIT A Units issued
Fractional REIT A Units paid in cash
Cancelled
Outstanding and payable at end of year(1)
Year ended December 31,
2018
889,301
120,618
37,950
(139,657 )
(64 )
(4,577 )
903,571
2017
907,972
128,985
57,735
(199,675 )
(100 )
(5,616 )
889,301
(1) Includes 621,043 of vested but not issued deferred trust units as at December 31, 2018 (December 31, 2017 – 556,854).
For the year ended December 31, 2018, 120,618 deferred trust units were granted to trustees, officers and employees as well as
employees of affiliates with the grant price ranging from $21.11 to $24.66 per unit. Of the units granted, 48,318 units relate to
key management personnel. For the year ended December 31, 2017, 128,985 deferred trust units were granted to trustees,
officers and employees as well as employees of affiliates with the grant price ranging from $19.17 to $21.15 per unit. Of the
units granted, 86,685 units relate to key management personnel.
Note 14
INCOME TAXES
The Trust is subject to taxation in the United States (“U.S.”) on the taxable income earned by its investment properties located in the
U.S. at a rate of approximately 26.53% as at December 31, 2018 (December 31, 2017 – 39.41%). A deferred tax asset arises from the
loss carry-forwards of the U.S. subsidiaries, and is recognized only to the extent that it is realizable. A deferred tax liability arises
from the temporary differences between the carrying value and the tax basis of the net assets of the U.S. subsidiaries.
On October 31, 2017, the Trust completed the sale of a single-tenant distribution centre located in Nashville, Tennessee to
Dream Industrial REIT (see Note 26). As a result of the disposition, the timing differences pertaining to this property were
realized, effectively reducing the deferred tax liability balance. The loss carry-forward balance was fully utilized at that time.
On December 22, 2017, Public law no. 115-97, also known as Tax Cuts and Jobs Act (TCJA), was enacted in the U.S. One of the
changes introduced by TCJA was the reduction of the corporate income tax rate from graduated rates with a maximum rate of
35% to a flat rate of 21% for the taxation years starting from January 1, 2018.
The tax effects of the remaining temporary differences that give rise to the recognition of deferred tax assets and liabilities are
presented below:
Deferred tax assets
Deferred financing costs
Financial instruments
Deductible interest timing differences
Deferred tax liabilities
Investment property
Deferred tax liabilities, net
December 31,
2018
96 $
211
460
767
December 31,
2017
130
273
—
403
(2,724 )
(1,957 ) $
(2,617 )
(2,214 )
$
$
A reconciliation between the expected income taxes based upon the 2018 and 2017 statutory rates and the income tax expense
recognized during the years ended December 31, 2018 and December 31, 2017 is as follows:
Income taxes computed at the statutory rate of nil that is applicable to the Trust
Current income taxes expense on a U.S. property
Deferred income taxes recovery on a U.S. property
December 31,
2018
$
$
— $
(794 )
452
(342 ) $
December 31,
2017
—
(4,123 )
7,950
3,827
Dream Office REIT 2018 Annual Report | 81
As part of the deferred tax balance, $141 is a result of a foreign exchange difference for the remaining property in the U.S. (for
the year ended December 31, 2017 – $560). This amount is included as part of accumulated other comprehensive income under
unrealized foreign currency translation gain (loss).
Note 15
AMOUNTS PAYABLE AND ACCRUED LIABILITIES
Trade payables
Building improvement and leasing cost accruals
Investment properties operating expense accruals
Non-operating expense and other accruals
Accrued interest
Rent received in advance
Distributions payable
Total
Note 16
EQUITY
Note
26
18
December 31,
2018
4,042 $
25,581
20,749
7,906
6,904
4,354
4,947
74,483 $
$
$
December 31,
2017
3,847
7,302
26,211
14,961
6,886
8,328
6,142
73,677
Unitholders’ equity
Deficit
Accumulated other comprehensive income
Total
Note
17
December 31, 2018
December 31, 2017
Number of
REIT A Units
59,369,278 $
—
—
59,369,278 $
Amount
2,124,760
(634,513 )
6,495
1,496,742
Number of
REIT A Units
73,705,285 $
—
—
73,705,285 $
Amount
2,462,611
(728,934 )
1,946
1,735,623
Dream Office REIT Units
Dream Office REIT is authorized to issue an unlimited number of REIT Units and an unlimited number of Special Trust Units. The
REIT Units are divided into and issuable in two series: REIT A Units and REIT B Units. The Special Trust Units may only be issued
to holders of subsidiary redeemable units.
REIT A Units and REIT B Units represent an undivided beneficial interest in Dream Office REIT and in distributions made by
Dream Office REIT. No REIT A Unit or REIT B Unit has preference or priority over any other. Each REIT A Unit and REIT B Unit
entitles the holder to one vote at all meetings of unitholders.
Normal course issuer bid (“NCIB”)
On February 13, 2018, the NCIB covering the period from August 15, 2017 to August 14, 2018 expired as the Trust purchased the
maximum number of REIT A Units, totalling 7,197,095 REIT A Units, permitted under this NCIB. On August 15, 2018, the Toronto
Stock Exchange accepted a notice filed by the Trust to renew its prior normal course issuer bid for a one-year period. Under the
bid, the Trust will have the ability to purchase for cancellation up to a maximum of 4,954,869 of its REIT A Units (representing
10% of the Trust’s public float of 49,548,697 REIT A Units) through the facilities of the Toronto Stock Exchange. The renewed bid
commenced on August 17, 2018 and will remain in effect until the earlier of August 16, 2019 or the date on which the Trust has
purchased the maximum number of REIT A Units permitted under the bid. Daily purchases are limited to 48,257 REIT A Units,
which equals 25% of the average daily trading volume during the prior six calendar months (being 193,028 REIT A Units per day),
other than purchases pursuant to applicable block purchase exceptions.
On October 23, 2018, the Trust entered into an automatic securities repurchase plan (the “Repurchase Plan”) with its designated
broker in order to facilitate purchases of its REIT A Units under the NCIB. The Repurchase Plan allows for purchases by Dream
Office REIT of REIT A Units at any time including, without limitation, when the Trust would ordinarily not be permitted to make
purchases due to regulatory restrictions or self-imposed blackout periods. Purchases will be made by the Trust’s broker based
upon the parameters prescribed by the TSX and the terms of the parties’ written agreement. Outside of such restricted or
blackout periods, the REIT A Units may also be purchased in accordance with management’s discretion. The Repurchase Plan will
terminate on August 16, 2019.
Dream Office REIT 2018 Annual Report | 82
For the year ended December 31, 2018, the Trust purchased for cancellation 4,475,664 REIT A Units under the NCIB at a cost of
$100,716 (for the year ended December 31, 2017 – 10,348,734 REIT A Units cancelled for $209,178).
Subsequent to quarter-end, the Trust purchased for cancellation an additional 381,313 REIT A Units under the NCIB at a cost
of $8,466.
Substantial issuer bid (“SIB”)
On March 22, 2018, the Trust announced the offer to purchase for cancellation up to 10,000,000 of its outstanding REIT A Units
at a purchase price of $24.00 per REIT A Unit.
On May 7, 2018, the Trust took up and paid for 10,000,000 REIT A Units at a price of $24.00 per REIT A Unit for an aggregate cost
of $240,000, excluding fees and expenses relating to the SIB. The REIT A Units purchased for cancellation under the SIB
represented approximately 14% of the issued and outstanding REIT A Units immediately prior to the expiry of the SIB.
On June 22, 2017, the Trust announced the offer to purchase for cancellation up to 24,444,444 of its REIT A Units for an
aggregate purchase price not to exceed $440,000 through a “modified Dutch auction” within a price range of not less than
$18.00 per REIT A Unit and not more than $21.00 per REIT A Unit (in increments of $0.25 per REIT A Unit within that range).
On August 14, 2017, the Trust took up and paid for 20,952,380 REIT A Units at a price of $21.00 per REIT A Unit for an aggregate
cost of $440,000, excluding fees and expenses relating to the SIB. The REIT A Units purchased for cancellation under the SIB
represented approximately 21.3% of the issued and outstanding REIT A Units immediately prior to the expiry of the SIB.
Note 17
ACCUMULATED OTHER COMPREHENSIVE INCOME
Unrealized gain (loss) on interest rate swaps,
net of taxes
Realized and unrealized gain (loss) on foreign
currency translation, net of taxes
Opening
balance
January 1
Net change
during the
year
2018
Closing
balance
December 31
Opening
balance
January 1
Net change
during the
year
2017
Closing
balance
December 31
Year ended December 31,
$
(283 ) $
46 $
(237 ) $
(328 ) $
45 $
(283 )
2,489
1,192
3,681
11,509
(9,020 )
2,489
Share of other comprehensive income (loss) from
investment in Dream Industrial REIT
Accumulated other comprehensive income
$
(260 )
1,946 $
3,311
4,549 $
3,051
6,495 $
—
11,181 $
(260 )
(9,235 ) $
(260 )
1,946
Note 18
DISTRIBUTIONS
Dream Office REIT’s Declaration of Trust, as amended and restated, provides the Board of Trustees with the discretion to
determine the percentage payout of income that would be in the best interest of the Trust. The Trust determines the
distribution rate by, among other considerations, its assessment of cash flows generated from (utilized in) operating activities.
Cash flows from operating activities may differ from distributions declared, primarily due to: fluctuations in non-cash working
capital; the impact of leasing costs, which fluctuate with lease maturities, renewal terms, the type of asset being leased, and
when tenants fulfill the terms of their respective lease agreements; and the impact of investments in building improvements,
which fluctuates with timing and extent of the capital projects, as well as age, type and condition of asset. These seasonal
fluctuations or the unpredictability of when leasing costs are incurred are funded with our cash and cash equivalents on hand
and, if necessary, with our existing demand revolving credit facilities. Monthly distribution payments to unitholders are payable
on or about the 15th day of the following month.
On June 22, 2017, the Trust announced a revision to its monthly cash distribution from $0.125 per REIT A Unit to $0.08333, or
$1.00 per REIT A Unit on an annualized basis, effective for the month of July 2017 distribution.
For the years ended December 31, 2018 and December 31, 2017, the Trust declared distributions totalling $1.00 per unit and
$1.25 per unit, respectively.
Dream Office REIT 2018 Annual Report | 83
The following table summarizes distribution payments for the years ended December 31, 2018 and December 31, 2017:
Paid in cash
Less: Payable at December 31, 2017 (December 31, 2016)
Plus: Payable at December 31, 2018 (December 31, 2017)
Total distributions paid and payable
Note
15
Year ended December 31,
2018
64,552 $
(6,142 )
4,947
63,357 $
$
$
2017
122,839
(13,101 )
6,142
115,880
On December 19, 2018, the Trust announced a cash distribution of $0.08333 per REIT A Unit for the month of December 2018.
The December 2018 distribution was paid in cash on January 15, 2019, totalling $4,947.
On January 21, 2019, the Trust announced a cash distribution of $0.08333 per REIT A Unit for the month of January 2019. The
January 2019 distribution was paid in cash on February 15, 2019, totalling $4,916.
On February 19, 2019, the Trust announced a cash distribution of $0.08333 per REIT A Unit for the month of February 2019. The
February 2019 distribution will be payable on March 15, 2019 to unitholders of record at February 28, 2019.
Note 19
INVESTMENT PROPERTIES REVENUE
Rental revenue
CAM and parking services revenue
Property management and other service fees
Note 20
GENERAL AND ADMINISTRATIVE EXPENSES
Salaries and benefits
Deferred compensation expense
Professional service fees
Management Services Agreement
Public reporting, corporate sponsorships, donations and other overhead related costs
General and administrative expenses
$
$
$
$
Note
13
26
Year ended December 31,
2018
177,305 $
106,199
1,703
285,207 $
2017
301,051
168,724
4,271
474,046
Year ended December 31,
2018
(3,693 ) $
(3,415 )
(1,702 )
(464 )
(3,202 )
(12,476 ) $
2017
(1,521 )
(3,128 )
(1,265 )
(830 )
(3,900 )
(10,644 )
Dream Office REIT 2018 Annual Report | 84
Note 21
INTEREST
Interest on debt
Interest on debt incurred and charged to the consolidated statements of comprehensive loss is recorded as follows:
Interest expense incurred, at contractual rate of debt
Amortization of financing costs
Amortization of fair value adjustments on assumed debt
Capitalized interest
Interest expense on debt
Add (deduct):
Amortization of financing costs
Amortization of fair value adjustments on assumed debt
Change in accrued interest
Cash interest paid
Note
5
Year ended December 31,
2018
58,178 $
2,872
(308 )
(24 )
60,718
2017
85,981
3,514
(2,935 )
—
86,560
(2,872 )
308
754
58,908 $
(3,514 )
2,935
(3,889 )
82,092
$
$
For the year ended December 31, 2018, interest was capitalized to properties under development at a weighted average
effective interest rate of 4.15%.
Certain debts assumed in connection with acquisitions have been adjusted to fair value using the estimated market interest rate
at the time of the acquisition (“fair value adjustments”). Fair value adjustments are amortized to interest expense over the
expected life of the debt using the effective interest rate method. Non-cash adjustments to interest expense are recorded as a
change in non-cash working capital in the consolidated statements of cash flows.
Interest on subsidiary redeemable units
Interest payments charged to comprehensive income are recorded as follows:
Paid in cash
Less: Interest payable at December 31, 2017 (December 31, 2016)
Plus: Interest payable at December 31, 2018 (December 31, 2017)
Interest expense on subsidiary redeemable units
Note 22
FAIR VALUE ADJUSTMENTS TO FINANCIAL INSTRUMENTS
Remeasurement of carrying value of subsidiary redeemable units
Remeasurement of carrying value of deferred trust units
Year ended December 31,
2018
5,234 $
(436 )
436
5,234 $
2017
6,760
(654 )
436
6,542
$
$
Note
12
13
$
$
Year ended December 31,
2018
(681 ) $
(690 )
(1,371 ) $
2017
(13,660 )
(3,111 )
(16,771 )
Dream Office REIT 2018 Annual Report | 85
Note 23
LEASING, NET LOSSES ON TRANSACTIONS AND DEBT SETTLEMENT COSTS
Internal leasing costs
Gain (loss) on sale of investment properties, net(1)
Debt settlement costs, net(2)
Realized foreign exchange gain on sale of investment property
Charge on cost reduction program
Loss on recognition of net assets related to joint operations
Other
Total
Note
17
26
7
Year ended December 31,
2018
(2,683 ) $
(2,347 )
(1,932 )
—
—
—
(217 )
(7,179 ) $
2017
(5,237 )
(20,057 )
(16,255 )
5,905
(1,616 )
(117 )
(553 )
(37,930 )
$
$
(1) Gain (loss) on sale of investment properties comprise transaction costs, commissions and other expenses incurred and adjustments in relation to the disposal
of investment properties.
(2) Net debt settlement costs comprise charges on early discharge of mortgages and the write-off of associated financing costs and fair value adjustments.
Note 24
SUPPLEMENTARY CASH FLOW INFORMATION
The components of amortization and depreciation under operating activities include:
Amortization and write-off of lease incentives
Amortization and write-off of intangible assets
Amortization of financing costs
Amortization of fair value adjustments on assumed debt
Depreciation on property and equipment
Total amortization and depreciation
The components of changes in other adjustments under operating activities include:
Deferred unit compensation expense
Straight-line rent adjustment
Deferred income taxes recovery
Gain (loss) on sale of investment properties, net
Debt settlement costs, net
Loss on recognition of net assets related to joint operations
Realized foreign exchange gain on sale of investment property
Total other adjustments
Note
5, 10
8
21
21
Note
13
14
23
23
23
23
The components of the changes in non-cash working capital under operating activities include:
Decrease (increase) in amounts receivable
Decrease in prepaid expenses and other assets
Decrease in other non-current assets
Decrease in amounts payable and accrued liabilities
Decrease in tenant security deposits
Change in non-cash working capital
$
$
$
$
$
$
Dream Office REIT 2018 Annual Report | 86
Year ended December 31,
2018
11,825 $
446
2,872
(308 )
1,753
16,588 $
2017
14,587
4,809
3,514
(2,935 )
2,112
22,087
Year ended December 31,
2018
3,415 $
(538 )
(452 )
2,347
1,098
2017
3,236
(2,885 )
(7,950 )
20,057
16,255
117
(5,905 )
22,925
—
—
5,870 $
Year ended December 31,
2018
(4,901 ) $
1,514
795
(4,692 )
(864 )
(8,148 ) $
2017
1,686
3,622
518
(29,261 )
(8,550 )
(31,985 )
The following amounts were paid on account of interest:
Interest:
Debt
Subsidiary redeemable units
Note
21
21
Year ended December 31,
2018
2017
$
58,908 $
5,234
82,092
6,760
Note 25
SEGMENTED INFORMATION
For the years ended December 31, 2018 and December 31, 2017, the Trust’s reportable operating segments of its investment
properties and results of operations were segmented geographically, namely Calgary, Toronto downtown, Mississauga and North
York, Ottawa and Montréal, and Other markets. The chief operating decision-maker considers the performance of assets held for
sale and future redevelopment, properties under development, and sold properties separately from properties in the regional
segments. Accordingly, revenue, expenses and fair value adjustments related to these properties have been reclassified to
“Other” for segment disclosure along with property management and other service fees, corporate amounts, lease termination
fees, bad debt expense, straight-line rent and amortization of lease incentives at December 31, 2018 and December 31, 2017.
Properties held for future redevelopment are those properties which are held with a view towards redevelopment, but which do
not yet meet the criteria for presentation as properties under development. The Trust did not allocate interest expense to these
segments since leverage is viewed as a corporate function. The decision as to where to incur the debt is largely based on
minimizing the cost of debt and is not specifically related to the segments. Similarly, other income, other expenses, fair value
adjustments to financial instruments, leasing, net losses on transactions and debt settlement costs, and income taxes were not
allocated to the segments.
Dream Office REIT 2018 Annual Report | 87
Year ended December 31, 2018
Operations
Investment properties revenue
Investment properties operating
expenses
Net rental income (segment income)
Other income
Other expenses
Fair value adjustments, leasing,
net losses on transactions and
debt settlement costs
Income (loss) before income taxes
Current and deferred income
taxes, net
Net income (loss) for the year
$
Calgary
Toronto
downtown
Mississauga
and
North York
Ottawa and
Montréal
Other
markets
Segment
total
Other(1)
Total
$
17,465 $
144,945 $
24,572 $
37,449 $
28,867 $
253,298 $
31,909 $
285,207
(6,274 )
11,191
—
—
(22,848 )
(11,657 )
—
(11,657 ) $
(62,669 )
82,276
—
—
(9,852 )
14,720
—
—
(19,523 )
17,926
—
—
(12,009 )
16,858
—
—
(110,327 )
142,971
—
—
93,752
176,028
88
14,808
—
176,028 $
—
14,808 $
(5,953 )
11,973
—
11,973 $
(14,904 )
1,954
50,135
193,106
—
1,954 $
—
193,106 $
(19,915 )
11,994
44,799
(80,627 )
(11,152 )
(34,986 )
(342 )
(35,328 ) $
(130,242 )
154,965
44,799
(80,627 )
38,983
158,120
(342 )
157,778
Year ended December 31, 2018
Capital expenditures(4)
Investment properties
Total
77,985
— $ 2,778,826
(1) Includes revenue, expenses and fair value adjustments related to properties held for sale and future redevelopment, propertie s under development, and sold properties at year-
35,670 $
115,583 $ 1,798,728 $
Other(2) Reconciliation(3)
13,780 $
(491 ) $
117,245 $
5,509 $
221,464 $
8,308 $
357,878 $
4,750 $
Calgary
$
$
Segment
Other
total
markets
10,459 $
64,696 $
167,928 $ 2,661,581 $
Ottawa and
Montréal
Toronto
downtown
Mississauga
and
North York
end, property management and other service fees, corporate amounts, lease termination fees, bad debt expense, straight-line rent and amortization of lease incentives.
(2) Includes properties held for future redevelopment, properties under development and sold properties at year-end.
(3) Includes assets held for sale during the year.
(4) Includes building improvements, initial direct leasing costs and lease incentives and interest capitalized to properties under development.
Year ended December 31, 2017
Operations
Investment properties revenue
Investment properties operating
expenses
Net rental income (segment income)
Other income
Other expenses
Fair value adjustments, leasing,
net losses on transactions and
debt settlement costs
Income (loss) before income taxes
Deferred income taxes recovery,
net
Net income (loss) for the year
$
Calgary
Toronto
downtown
Mississauga
and
North York
Ottawa and
Montréal
Other
markets
Segment
total
Other(1)
Total
$
15,842 $
145,826 $
23,808 $
39,830 $
31,044 $
256,350 $
217,696 $
474,046
(6,633 )
9,209
—
—
(62,946 )
82,880
—
—
(4,785 )
4,424
228,551
311,431
—
4,424 $
—
311,431 $
(9,245 )
14,563
—
—
(2,088 )
12,475
—
12,475 $
(19,477 )
20,353
—
—
(11,976 )
19,068
—
—
(110,277 )
146,073
—
—
(101,839 )
115,857
11,281
(110,667 )
(4,402 )
15,951
(102,172 )
(83,104 )
115,104
261,177
(146,689 )
(130,218 )
—
15,951 $
—
(83,104 ) $
—
261,177 $
3,827
(126,391 ) $
(212,116 )
261,930
11,281
(110,667 )
(31,585 )
130,959
3,827
134,786
Year ended December 31, 2017
Capital expenditures(4)
Investment properties
Total
75,378
(12,484 ) $
(51,530 ) $ 2,919,438
(1) Includes revenue, expenses and fair value adjustments related to properties held for sale and future redevelopment, properties under development, and sold properties at year-
Calgary
14,148 $
21,787 $
135,055 $ 1,683,820 $
Other(2) Reconciliation(3)
36,166 $
410,227 $
total
51,696 $
169,779 $ 2,560,741 $
3,600 $
216,400 $
7,256 $
355,687 $
4,905 $
$
$
Toronto
downtown
Mississauga
and
North York
Ottawa and
Montréal
Other
markets
Segment
end, property management and other service fees, corporate amounts, lease termination fees, bad debt expense, straight-line rent and amortization of lease incentives.
(2) Includes properties held for future redevelopment, properties under development and sold properties at year-end.
(3) Includes assets held for sale during the year and at year-end.
(4) Includes building improvements and initial direct leasing costs and lease incentives.
Dream Office REIT 2018 Annual Report | 88
Note 26
RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
From time to time, Dream Office REIT and its subsidiaries enter into transactions with related parties that are generally
conducted on a cost recovery basis or under normal commercial terms.
Related party transactions
At December 31, 2018, DAM held 9,284,938 REIT A Units and 5,233,823 subsidiary redeemable units (December 31, 2017 –
8,512,730 REIT A Units and 5,233,823 subsidiary redeemable units collectively held by DAM and DHAAT).
On October 31, 2017, the Trust completed the sale of a 0.7 million square foot single-tenant distribution centre located in
Nashville, Tennessee to Dream Industrial REIT for gross proceeds (net of adjustments) totalling $60,855. The gross proceeds, net
of adjustments, were satisfied by $30,592 in cash, $28,917 in assumed debt and $1,346 of other adjustments. The Trust
incurred $709 in transaction costs with respect to this sale which was included in leasing, net losses on transactions and debt
settlement costs.
Agreements with DAM
On April 2, 2015, the Trust and DAM entered into a Management Services Agreement pursuant to which DAM provides strategic
oversight of the Trust and the services of senior management as requested on a cost recovery basis. In accordance with the
termination provisions of the Management Services Agreement, the Trust is subject to an incentive fee payable which is based
on 15% of the Trust’s Aggregate Adjusted Funds from Operations (as defined in the Management Services Agreement), including
the net gain on sale of any properties during the term of the agreement, and the deemed sale of the remaining portfolio upon
termination, in excess of $2.65 per REIT A Unit. This agreement gives DAM the right to terminate the agreement upon 180 days’
notice (any time after April 2, 2018) and the Trust has the right to terminate the agreement upon 60 days’ notice. As no
incentive fee would currently be payable in the case of termination of the agreement, no amounts related to the incentive fee
have been recorded in the consolidated financial statements as at December 31, 2018 and December 31, 2017.
On December 1, 2013, Dream Office REIT and DAM entered into a Shared Services Agreement and a Cost Sharing Agreement.
Pursuant to the Reorganization, the Trust and DAM amended the existing Shared Services and Cost Sharing Agreements as of
April 2, 2015. According to the terms of the amended arrangements, DAM will continue to provide administrative and support
services on an as-needed basis and will receive an annual fee to reimburse it for all expenses incurred. The Trust will continue to
reimburse DAM for any shared costs allocated in each calendar year. The amended agreements provide for the automatic
reappointment of DAM for additional one-year terms commencing on January 1 unless and until terminated in accordance with
their terms or by mutual agreement of the parties.
Dream Office Management Corp. (“DOMC”), a wholly owned subsidiary of Dream Office Management LP, and DAM entered into
an Administrative Services Agreement on April 2, 2015. Under this Administrative Services Agreement, DOMC provides certain
administrative and support services to DAM. The terms of this agreement provide that DOMC will be reimbursed by DAM for the
actual costs incurred by it in carrying out these activities on behalf of DAM. This agreement automatically renews for one-year
terms unless and until terminated in accordance with its terms or by mutual agreement of the parties.
On October 25, 2016, the Trust and DAM jointly implemented a cost reduction program to simplify and to establish more
dedicated services on a cost-efficient basis of the Trust’s operating and shared service platform. As a result of implementing this
program, the Trust incurred charges of $nil and $1,616 for the years ended December 31, 2018 and December 31, 2017, which
are included in leasing, net losses on transactions and debt settlement costs (see Note 23).
During the year ended December 31, 2018, the Trust, along with DAM, entered into a strategic partnership focused on the
property technology market. The Trust and DAM each hold a 25% interest in the partnership, included in equity accounted
investment in other non-current assets. As at December 31, 2018, the Trust had funded $1,541 into the partnership.
Management Services Agreement with DAM
The following is a summary of fees incurred for the years ended December 31, 2018 and December 31, 2017:
Senior management compensation (included in G&A expenses)
Expense reimbursements related to financing arrangements (included in debt)
Expense reimbursements related to disposition arrangements (included in gain (loss) on sale of
investment properties)
Professional services and other (included in investment properties and G&A expenses)
Total costs incurred under the Management Services Agreement
Dream Office REIT 2018 Annual Report | 89
Year ended December 31,
2018
(357 ) $
(333 )
2017
(830 )
(576 )
(280 )
(1,300 )
(2,270 ) $
(702 )
(848 )
(2,956 )
$
$
Administrative Services and Shared Services Agreements with DAM
The following is a summary of total costs processed on behalf of DAM and total costs processed by DAM on behalf of the Trust
for the years ended December 31, 2018 and December 31, 2017.
Shared services and costs processed on behalf of DAM
Operating and administration costs of regional offices processed on behalf of DAM
Total costs processed on behalf of DAM under the Administrative Services Agreement
Total costs processed by DAM on behalf of the Trust under the Shared Services Agreement
Year ended December 31,
2018
6,107 $
284
6,391 $
(1,207 ) $
2017
5,742
287
6,029
(966 )
$
$
$
Services Agreement with Dream Industrial REIT
Effective October 4, 2012, DOMC and Dream Industrial REIT entered into a Services Agreement, pursuant to which the Trust
provides certain services to Dream Industrial REIT on a cost recovery basis.
The following is a summary of the cost recoveries from Dream Industrial REIT for the years ended December 31, 2018 and
December 31, 2017:
Total cost recoveries from Dream Industrial REIT
Year ended December 31,
2018
3,304 $
2017
2,726
$
Agreements with DHAAT
DOMC provides property management services to the two co-owned investment properties with DHAAT which are accounted
for as joint operations (see Note 7).
Effective July 8, 2014, DOMC and DHAAT entered into a Services Agreement, in which the Trust provides certain services to
DHAAT on a cost recovery basis.
The following is a summary of the amounts that were charged to DHAAT for the years ended December 31, 2018 and
December 31, 2017:
Amounts charged to DHAAT under the Services Agreement
Costs processed on behalf of DHAAT related to co-owned properties
Total amount charged back to DHAAT(1)
$
$
Year ended December 31,
2018
330 $
2017
257
5,106
5,363
3,139
3,469 $
(1) Includes Services Agreement with DHAAT and Property Management Agreements for various co-owned and managed DHAAT properties.
Amounts due from (to) related parties
Amounts due from DAM
Administrative Services Agreement with DAM
Total amounts due from DAM (included in amounts receivable)
Amounts due to DAM
Various agreements with DAM(1)
Distributions payable to DAM(2)
Subsidiary redeemable interest payable to DAM(3)
Total amounts due to DAM (included in amounts payable and accrued liabilities)
December 31,
December 31,
2018
988 $
988 $
2017
763
763
December 31,
2018
(531 ) $
(774 )
(436 )
(1,741 ) $
December 31,
2017
(894 )
(499 )
(436 )
(1,829 )
$
$
$
$
(1) Includes Management Services Agreement and Shared Services Agreement.
(2) Distributions payable is in relation to the 9,284,938 REIT A Units held by DAM (December 31, 2017 – 5,992,583 REIT A Units held by DAM).
(3) Subsidiary redeemable interest payable is in relation to the 5,233,823 subsidiary redeemable units held by DAM.
Dream Office REIT 2018 Annual Report | 90
Amounts due from Dream Industrial REIT
Services Agreement with Dream Industrial REIT
Distributions receivable from Dream Industrial REIT(1)
Total amounts due from Dream Industrial REIT (included in amounts receivable)
December 31,
2018
387 $
1,535
1,922 $
$
$
December 31,
2017
302
1,431
1,733
(1) Distributions receivable is in relation to the 7,200,736 Dream Industrial REIT Units and 18,551,855 Dream Industrial LP Class B limited partnership units held
by the Trust at December 31, 2018 (December 31, 2017 – 5,431,141 Dream Industrial REIT Units and 18,551,855 Dream Industrial LP Class B limited
partnership units). Included in distribution receivable are the bonus distributions pursuant to Dream Industrial REIT’s distribution reinvestment plan.
Amounts due to Dream Industrial REIT
Funds received on behalf of Dream Industrial REIT
Total amounts due to Dream Industrial REIT (included in amounts payable and accrued liabilities)
Amounts due from DHAAT
Various agreements with DHAAT(1)
Total amounts due from DHAAT (included in amounts receivable)
(1) Includes Services Agreement and Property Management Agreements.
Amounts due to DHAAT
Distributions payable to DHAAT(1)
Total amounts due to DHAAT (included in amounts payable and accrued liabilities)
(1) Distributions payable is in relation to the 2,520,147 REIT A Units held by DHAAT as at December 31, 2017.
December 31,
2018
(855 ) $
(855 ) $
December 31,
2017
(299 )
(299 )
December 31,
2018
363 $
363 $
December 31,
2017
538
538
December 31,
2018
— $
— $
December 31,
2017
(210 )
(210 )
$
$
$
$
$
$
Compensation of key management personnel and trustees
Compensation of key management personnel and trustees for the years ended December 31, 2018 and December 31, 2017 is as
follows:
Compensation and benefits
Unit-based awards(1)
Total
Year ended December 31,
2018
1,640 $
1,121
2,761 $
2017
1,417
1,489
2,906
$
$
(1) Deferred trust units granted to officers vest over a five-year period with one-fifth of the deferred trust units vesting each year. Deferred trust units granted to
trustees vest when granted. Amounts are determined based on the grant date fair value of deferred trust units multiplied by t he number of deferred trust
units granted in the year.
Note 27
COMMITMENTS AND CONTINGENCIES
Dream Office REIT and its operating subsidiaries are contingently liable under guarantees that are issued in the normal course of
business, on certain debt assumed by purchasers of disposed investment properties, and with respect to litigation and claims
that arise from time to time. In the opinion of management, any liability that may arise from such contingencies would not have
a material adverse effect on the consolidated financial statements as at December 31, 2018 and December 31, 2017.
In 2015, a subsidiary of the Trust received notices of reassessment from both the Canada Revenue Agency and the Alberta
Minister of Finance with respect to its 2007, 2008 and 2010 taxation years. These reassessments relate to the deductibility of
certain tax losses claimed by the subsidiary prior to its acquisition by the Trust. These federal and provincial reassessments if
upheld could increase total current taxes payable, including interest and penalties, by $11,700. No cash payment is expected to
be made unless it is ultimately established that the Trust has an obligation to make one. Management is of the view that there is
a strong case to support the position as filed and has contested both the federal and provincial reassessments. Since
management believes that it is more likely than not that its position will be sustained, no amounts related to these
reassessments have been recorded in the consolidated financial statements as at December 31, 2018.
Dream Office REIT 2018 Annual Report | 91
At December 31, 2018, Dream Office REIT’s future minimum commitments under operating leases and fixed price contracts to
purchase steam are as follows:
Operating lease payments
Fixed price contracts
Total
Within 1 year
$
2,688 $
151
2,839 $
$
Minimum payments due
1–5 years
> 5 years
4,759 $
604
5,363 $
9,412 $
1,815
11,227 $
Total
16,859
2,570
19,429
Operating leases include a ground lease at one investment property totalling $4,300, payable in equal annual amounts over the
next 27 years.
During the year ended December 31, 2018, the Trust paid $3,281 (December 31, 2017 – $1,908) in minimum lease payments,
which has been included in the consolidated statements of comprehensive income for the year.
The Trust has entered into lease agreements that may require tenant improvement costs of approximately $1,401
(December 31, 2017 – $14,412).
The Trust has committed US$6,075 to fund investments in real estate technologies.
The Trust is contingently liable under guarantees that are issued on certain debt assumed by purchasers of investment
properties totalling $148,733 (December 31, 2017 – $173,188).
Note 28
CAPITAL MANAGEMENT
The primary objective of the Trust’s capital management is to ensure it remains within its quantitative banking covenants.
The Trust’s capital consists of debt, including mortgages, demand revolving credit facilities, debentures, subsidiary redeemable
units and unitholders’ equity. The Trust’s objectives in managing capital are to ensure adequate operating funds are available to
maintain consistent and sustainable unitholder distributions, to fund leasing costs and capital expenditure requirements. The
Trust’s maximum credit exposure is equal to the trade receivables as at December 31, 2018 and December 31, 2017.
Various debt, equity and earnings distribution ratios are used to ensure capital adequacy and to monitor capital requirements.
The primary ratios used for assessing capital management are the interest coverage ratio and net debt-to-gross carrying value.
Other significant indicators include weighted average interest rate, average term to maturity of debt and variable debt as a
portion of total debt. These indicators assist the Trust in assessing whether the debt level maintained is sufficient to provide
adequate cash flows for unitholder distributions, leasing costs, and capital expenditures, and for evaluating the need to raise
funds for further expansion. Various mortgages have debt covenant requirements that are monitored by the Trust to ensure
there are no defaults. These covenants include loan-to-value ratios, cash flow coverage ratios, interest coverage ratios and debt
service coverage ratios. These covenants are measured at the subsidiary limited partnership level, and all have been complied
with in all material respects.
The Trust’s equity consists of REIT Units, in which the carrying value is impacted by earnings and unitholder distributions.
Amounts retained in excess of the distributions are used to fund leasing costs, capital expenditures and working capital
requirements. Management monitors distributions to ensure adequate resources are available by comparing total distributions
to adjusted cash flows from operating activities, a non-IFRS measure.
During the year, there were no events of default on any of the Trust’s obligations under its demand revolving credit facilities or
mortgage loans.
Dream Office REIT 2018 Annual Report | 92
Note 29
FINANCIAL INSTRUMENTS
Risk management
IFRS 7, “Financial Instruments: Disclosures” (“IFRS 7”), places emphasis on disclosures about the nature and extent of risks
arising from financial instruments and how the Trust manages those risks, including market, credit and liquidity risks.
Market risk is the risk the fair value or future cash flows of a financial instrument will fluctuate because of changes in market
prices. Market risk consists of interest rate risk, foreign currency risk and other market price risk. The Trust has exposure to
interest rate risk primarily as a result of its variable rate debt. In addition, there is interest rate risk associated with the Trust’s
fixed rate debt due to the expected requirement to refinance such debts in the year of maturity. The Trust is exposed to the
variability in market interest rates and credit spreads on maturing debt to be renewed. Variable rate debt at December 31, 2018
was 26.3% of the Trust’s total debt (December 31, 2017 – 8.3%). In order to manage exposure to interest rate risk, the Trust
endeavours to maintain an appropriate mix of fixed and variable rate debt, manage maturities of fixed rate debt and match the
nature of the debt with the cash flow characteristics of the underlying asset.
The following interest rate sensitivity table outlines the potential impact of a 1% change in the interest rate on variable rate
financial assets and liabilities for the prospective 12-month period. A 1% change is considered a reasonable level of fluctuation
on variable rate financial assets and liabilities.
Financial assets
Cash and cash equivalents(1)
Financial liabilities
Fixed rate debt due to mature in 2019
and total variable debt
$
$
Amounts as at
December 31, 2018
Income
-1 %
Equity
Income
Interest rate risk
+1%
Equity
8,769
$
(88 )
$
(88 )
$
88
$
88
372,582
$
3,726
$
3,726
$
(3,726 )
$
(3,726 )
(1) Cash and cash equivalents are short-term investments with an original maturity of three months or less, and exclude cash subject to restrictions that prevent
the Trustʼs use for current purposes. These balances generally receive interest income at the bankʼs prime rate less 1.85% to 2.00%. Cash and cash
equivalents as at December 31, 2018 are short term in nature and may not be representative of the balance during the year.
The Trust is not exposed to significant foreign currency risk.
The Trust’s assets mainly consist of investment properties. Credit risk arises from the possibility that tenants in investment
properties may not fulfill their lease or contractual obligations. The Trust mitigates its credit risks by attracting tenants of sound
financial standing and by diversifying its mix of tenants. As at December 31, 2018, the Government of Canada represented
11.2% of the Trust’s gross rental revenue. No other tenant accounts for more than 10% of the Trust’s gross rental revenue. The
Trust also monitors tenant payment patterns and discusses potential tenant issues with property managers on a regular basis.
The Trust manages its credit risk on debt assumed by purchasers of investment properties by monitoring the ongoing repayment
of assumed debt by the purchasers and evaluating market conditions which would affect the purchasers’ ability to repay
assumed debt. The Trust manages its credit risk on VTB mortgage receivables by lending to reputable purchasers of properties,
retaining security interests in the sold investment properties, monitoring compliance with repayment schedules and evaluating
the progress and estimated rates of returns of financed projects. Cash and cash equivalents, deposits and restricted cash carry
minimal credit risk as all funds are maintained with highly reputable financial institutions.
Liquidity risk is the risk the Trust will encounter difficulty in meeting obligations associated with the maturity of financial
obligations. As at December 31, 2018, current liabilities exceeded current assets by $131,028 (December 31, 2017 – current
liabilities exceeded current assets by $108,433). The Trust’s main sources of liquidity are its cash and cash equivalents on hand,
revolving credit facilities and unencumbered assets. The Trust is able to use its revolving credit facilities on short notice which
eliminates the need to hold a significant amount of cash and cash equivalents on hand. Working capital balances fluctuate
significantly from period to period depending on the timing of receipts and payments. The Trust manages maturities of the fixed
rate debts, monitors the repayment dates and maintains adequate cash and cash equivalents on hand and availability on the
demand revolving credit facilities to ensure sufficient capital will be available to cover obligations as they become due.
Dream Office REIT 2018 Annual Report | 93
Note 30
FAIR VALUE MEASUREMENT
Fair value of financial instruments
Quoted market prices represent a Level 1 valuation. When quoted market prices are not available, the Trust maximizes the use
of observable inputs. When all significant inputs are observable, the valuation is classified as Level 2. Valuations that require the
significant use of unobservable inputs are considered Level 3. The Trust’s policy is to recognize transfers in and transfers out of
fair value hierarchy levels as of the date of the event or change in circumstances that caused the transfer. There were no
transfers between Levels 1, 2 and 3 for the years ended December 31, 2018 and December 31, 2017.
The following tables summarize fair value measurements recognized in the consolidated financial statements by class of asset or
liability and categorized by level according to the significance of the inputs used in making the measurements.
Recurring measurements
Non-financial assets
Investment properties
Recurring measurements
Financial instruments
Marketable securities
Non-financial assets
Note
Carrying value as at
December 31, 2018
Fair value as at December 31, 2018
Level 1
Level 2
Level 3
5 $
2,778,826 $
— $
— $ 2,778,826
Note
Carrying value as at
December 31, 2017
Fair value as at December 31, 2017
Level 1
Level 2
Level 3
$
5,259 $
5,259 $
— $
—
Investment properties
Investment properties classified as held for sale
5
10
2,919,438
51,530
—
—
—
—
2,919,438
51,530
Financial instruments carried at amortized cost where the carrying value does not approximate fair value are noted below:
Fair values disclosed
Mortgages
Demand revolving credit facilities
Debentures
Investment in Dream Industrial REIT
Non-current VTB mortgage receivable
Fair values disclosed
Mortgages
Demand revolving credit facilities
Debentures
Investment in Dream Industrial REIT
Note
Carrying value as at
December 31, 2018
Fair value as at December 31, 2018
Level 1
Level 2
Level 3
11 $
11
11
6
8, 10
964,758 $
291,686
149,769
266,583
34,100
— $
—
150,923
68,551
—
— $
294,702
—
176,614
—
971,424
—
—
—
33,214
Note
Carrying value as at
December 31, 2017
Fair value as at December 31, 2017
Level 1
Level 2
Level 3
11 $
11
11
6
1,080,702 $
(3,192 )
290,140
220,796
— $
—
292,346
47,794
— $ 1,087,274
—
—
—
—
—
163,256
Amounts receivable, cash and cash equivalents, short-term VTB mortgage receivable, tenant security deposits, and amounts
payable and accrued liabilities are carried at amortized cost which approximates fair value due to their short-term nature.
Subsidiary redeemable units and the Deferred Unit Incentive Plan are carried at amortized cost, which approximates fair value as
they are readily redeemable financial instruments.
Dream Office REIT 2018 Annual Report | 94
Investment properties
The Trust’s accounting policy as indicated in Note 2 is applied in determining the fair value of investment properties by using the
income approach, which is derived from one of two methods: overall cap rate method and discounted cash flow method. As a
result, these measurements are classified as Level 3 in the fair value hierarchy. Valuations of investment properties are most
sensitive to changes in discount rates and cap rates. In applying the overall cap rate method the stabilized NOI of each property
is divided by any appropriate cap rate.
The critical and key assumptions in the valuation of investment properties are as follows:
Cap rate method
• Cap rates – based on actual location, size and quality of the properties and taking into account any available market data at
the valuation date.
• Stabilized NOI – normalized property operating revenues less property operating expenses.
Discounted cash flow method
• Discount and terminal rates – reflecting current market assessments of the return expectations.
• Market rents – reflecting management’s best estimates with reference to recent leasing activity and external market data.
•
Leasing costs – reflecting recent leasing activity and external market data.
• Vacancy rates – reflecting recent leasing activity and external market data.
• Capital expenditures – reflecting management’s best estimates of costs to complete development projects.
As at December 31, 2018, there were no investment properties classified as assets held for sale. In accordance with IFRS 5,
“Non-Current Assets Held for Sale and Discontinued Operations”, the Trust classified certain investment properties as assets held
for sale totalling $51,530 as at December 31, 2017. The fair value of the assets held for sale approximates the carrying value of
the assets.
Investment properties are valued on a highest-and-best-use basis. For all of the Trust’s investment properties the current use is
considered the highest and best use.
Investment properties valuation process
The Trust is responsible for determining the fair value measurements included in the consolidated financial statements. At the
end of each reporting period, the Trust determines the fair value of investment properties by:
1) considering current contracted sales prices for properties that are available for sale;
2) obtaining appraisals from qualified external professionals on a rotational basis for select properties; and
3) using internally prepared valuations applying the income approach.
The fair values of these investments are reviewed at least quarterly by management with reference to independent property
appraisals and market conditions existing at the reporting date, using generally accepted market practices. The independent
appraisers are experienced, nationally recognized and qualified in the professional valuation of office buildings in their
respective geographic areas. Judgment is also applied in determining the extent and frequency of obtaining independent
appraisals. At each reporting period, a select number of properties, determined on a rotational basis, are valued by independent
appraisers. For properties not subject to independent appraisals, valuations are prepared internally during each reporting
period.
The Trust uses the following techniques in determining the fair value disclosed for the following financial liabilities classified as
Level 1, 2 and 3:
Mortgages
The fair value of mortgages as at December 31, 2018 and December 31, 2017 are determined by discounting the expected cash
flows of each mortgage using market discount rates. The discount rates are determined using the Government of Canada
benchmark bond yield for instruments of similar maturity adjusted for the Trust’s specific credit risk. In determining the
adjustment for credit risk, the Trust considers market conditions, the fair value of the investment properties that the mortgages
are secured by and other indicators of the Trust’s creditworthiness.
Dream Office REIT 2018 Annual Report | 95
Debentures
The fair value of debentures that are traded as at December 31, 2018 and December 31, 2017 are based on the debentures’
trading price on or about December 31, 2018 and December 31, 2017, respectively.
Non-current VTB mortgage receivable
The fair value of the non-current VTB mortgage receivable as at December 31, 2018 is determined by discounting the expected
cash flows of the VTB mortgage receivable using market discount rates. The discount rates are determined using the
Government of Canada benchmark bond yield for instruments of similar maturity adjusted for the counterparty’s specific credit
risk. In determining the adjustment for credit risk, the Trust considers market conditions and indicators of the counterparty’s
creditworthiness.
Note 31
COMPARATIVE FIGURES
Certain comparative figures included in the consolidated financial statements have been reclassified to conform to the current
period presentation.
Dream Office REIT 2018 Annual Report | 96
Management Team
Michael J. Cooper
Chief Executive Officer
Jay Jiang
Chief Financial Officer
Trustees
Detlef BierbaumInd.,1,2
Köln, Germany
Corporate Director
Donald K. CharterInd.,1,3,4,6
Toronto, Ontario
Corporate Director
Michael J. Cooper2,5
Toronto, Ontario
President and Chief Responsible Officer
Dream Unlimited Corp.
Jane Gavan
Toronto, Ontario
Chief Executive Officer
Dream Global REIT
Robert GoodallInd.,3,4
Toronto, Ontario
President
Canadian Mortgage Capital Corp.
The Hon. Dr. Kellie LeitchInd.,3
Creemore, Ontario
Member of Parliament for Simcoe–Grey
Karine MacIndoeInd.,1,4
Toronto, Ontario
Corporate Director
Legend:
Ind. Independent
1. Member of the Audit Committee
2. Member of the Investment Committee
3. Member of the Governance and
Nominating Committee
4. Member of the Compensation,
Health and Environmental Committee
5. Chair of the Board of Trustees
6.
Independent Lead Trustee
Corporate Information
HEAD OFFICE
TRANSFER AGENT
CORPORATE COUNSEL
Dream Office
Real Estate Investment Trust
State Street Financial Centre
30 Adelaide Street East, Suite 301
Toronto, Ontario M5C 3H1
Phone: (416) 365-3535
Fax: (416) 365-6565
INVESTOR RELATIONS
Phone: (416) 365-3535
Toll free: 1 877 365-3535
Email: officeinfo@dream.ca
Website: www.dreamofficereit.ca
(for change of address, registration
or other unitholder enquiries)
Computershare Trust
Company of Canada
100 University Avenue, 8th Floor
Toronto, Ontario M5J 2Y1
Phone: (514) 982-7555 or 1 800 564-6253
Fax: (416) 263-9394 or 1 888 453-0330
Website: www.computershare.com
Email: service@computershare.com
AUDITOR
PricewaterhouseCoopers LLP
PwC Tower, 18 York Street, Suite 2600
Toronto, Ontario M5J 0B2
Osler, Hoskin & Harcourt LLP
Box 50, 1 First Canadian Place, Suite 6200
Toronto, Ontario M5X 1B8
STOCK EXCHANGE LISTING
The Toronto Stock Exchange
Listing Symbol: REIT Units, Series A: D.UN
For more information, please visit
dreamofficereit.ca
Corporate Office
State Street Financial Centre
30 Adelaide Street East, Suite 301
Toronto, Ontario M5C 3H1
Phone: 416.365.3535
Fax: 416.365.6565
Website: www.dreamofficereit.ca
Email: officeinfo@dream.ca