Annual Report 2014 Dream Global REIT D R E A M G L O B A L R E I T 2 0 1 4 A N N U A L R E P O R T Letter to Unitholders In 2014, Dream Global accomplished some significant milestones in the continued progress and transformation of our business. We added over $400 million of office properties in some of the best markets in Germany to our portfolio and continued to expand our local management platform. In addition, we were able to realize gains on some of our newer assets and leverage our operating platform through our joint venture with Public Official Benefits Association (“POBA”). Throughout 2014, we continued our strong leasing performance with over one million square feet of new leases and renewals. As a result of our accretive acquisitions and our strong leasing performance, adjusted funds from operations increased by 5% to 83 cents per unit in 2014 from 79 cents in 2013. A key achievement in 2014 was the successful joint venture with POBA. During the fourth quarter of 2014, we closed the sale of a 50% interest in seven properties to POBA for gross proceeds of approximately $315 million. We quickly deployed the sales proceeds into comparable or higher quality assets at more attractive cap rates and lower borrowing rates than the assets we sold. In January 2015, the Trust further expanded its partnership with POBA through the sale of a 50% interest in Officium, one of our office properties located in Stuttgart. This joint venture serves as an endorsement of Dream Global’s strong operating platform in Germany and highlights POBA’s confidence in our ability to source accretive acquisitions. The transaction provided a new source of capital for the Trust to continue to take advantage of the attractive investment environment, and allowed us to leverage our operating platform by generating joint venture management income. Our focus since the initial public offering has been to improve the stability and quality of the underlying cash flows in our portfolio. Throughout 2014, we continued to demonstrate our ability to execute on this strategy through high- quality office property acquisitions on attractive borrowing terms, dispositions and recycling capital. Over the last three years, we have added over $1.8 billion in high-quality assets and have been amongst the top three buyers of German office properties. Over 70% of our assets are now located in the “Big 7” office markets in Germany. Leasing remained a key operational focus in 2014 with the completion of over one million square feet of new leases and renewals. From our initial public offering in August 2011 to the end of 2014, our exposure to Deutsche Post has been reduced from 85% to less than 30% of the REIT’s gross rental income and will further decline as we continue to grow and diversify our portfolio. The German economy continues to perform well with the country’s unemployment rate amongst the lowest in Europe. The German real estate market also performed well, with vacancy in the seven largest office markets reaching its lowest level since 2002 and global investment capital continuing to identify Germany as a key target. In 2014, Dream Global completed the sale of 35 non-core properties for total sales proceeds of approximately $131 million, representing 101% of their book value. As part of our active capital recycling program we sold, or put under contract for sale, over $200 million of assets since 2012. The proceeds from these dispositions were redeployed into newer, high-quality properties. Looking ahead, we will continue to remain committed to our key objective of providing predictable and sustainable distributions to our investors. We have been recognized for establishing an excellent operating platform in Germany and will seek further opportunities to leverage our platform and to grow our asset base. On behalf of our management team and our Board of Trustees, I would like to thank you for your continued support. P. Jane Gavan President and Chief Executive Officer March 15, 2015 Portfolio at-a-Glance DECEMBER 31, 2014 Dream Global REIT is an owner and operator of 14.8 million square feet of office and mixed-use space in Germany and provides a unique opportunity to gain exposure to the German real estate market through an established Canadian platform and six local offices in Europe. 14% HAMBURG 3% HANNOVER 4% BERLIN 14% DÜSSELDORF 11% COLOGNE GERMANY 10% FRANKFURT 7% STUTTGART 6% NUREMBERG 7% MUNICH Geographic Diversification (% of gross rental income in key markets) Photos: 1. Oasis III, Stuttgart | 2. Cologne Tower, Cologne | 3. My Falkenried, Hamburg | 4. Europahaus, Darmstadt | 5. Officium, Stuttgart | 6. Millerntorplatz 1, Hamburg 1 2 $2.4B TOTAL ASSETS 6 LOCAL OFFICES IN EUROPE 5 266 PROPERTIES Diversified, High-Quality Tenants TENANT COMPOSITION Deutsche Post Freshfields Bruckhaus Deringer ERGO Direkt Lebensversicherungs AG Imtech Deutschland GmbH & Co. KG BNP Paribas Fortis SA/NV Deutsche Postbank AG CinemaxX Entertainment GmbH & Co. KG Maersk Deutschland A/S & Co. KG Google Germany GmbH Grohe AG Other third-party tenants Total In-place Rent (per square foot per year) 10.00€ 9.00€ 8.00€ 7.00€ 6.00€ 5.00€ 4.00€ 3.00€ 2.00€ 1.00€ 0.00€ TOTAL ANNUALIZED GRI (%) 29.5 3.5 3.1 2.4 1.9 1.8 1.6 1.4 1.3 1.3 52.2 100.0 CREDIT RATING BBB+ n/a AA- n/a A+ A+ n/a BBB+ AA n/a n/a 2014 Adjusted Funds from Operations (“AFFO”) (Q4/2014) €8.86 35% INITIAL PROPERTIES 65% NEW ACQUISITIONS 2011 2012 3 2013 2014 4 1M SQUARE FEET OF LEASING IN 2014 69% TENANT RETENTION 6 5% INCREASE IN 2014 AFFO/UNIT $400M+ ACQUISITIONS IN 2014 0.21 0.20 0.19 0.18 0.17 0.16 0.15 Q4-12 Q1-13 2 Table of Contents Management’s discussion and analysis 1 Management’s responsibility for the consolidated financial statements Independent auditor’s report Consolidated financial statements 50 51 52 Notes to the consolidated financial statements 56 Trustees IBC Corporate information IBC 1 3 4 Photos: 1. Feldmuehleplatz, Dusseldorf 2. Z-UP, Stuttgart 3. k26, Frankfurt 4. ABC Bogen, Hamburg Management’s discussion and analysis All dollar amounts in our tables are presented in thousands of Canadian dollars, except rental rates, unit and per unit amounts. SECTION I – OVERVIEW AND FINANCIAL HIGHLIGHTS KEY PERFORMANCE INDICATORS Portfolio Number of properties(1) Gross leasable area (“GLA”) (in square feet)(1) Occupancy rate – including committed (period-‐end)(1)(2) Occupancy rate – in-‐place (period-‐end)(1)(2) Average in-‐place net rent per square foot (period-‐end)(1) Market rents above in-‐place net rents(1) Operating results Investment properties revenue(4) Net rental income(5) Total portfolio Initial Properties Acquisition Properties Funds from operations (“FFO”)(6) Adjusted funds from operations (“AFFO”)(7) Distributions Declared distributions DRIP participation ratio (for the period) Per unit amounts(8) Distribution Basic: FFO AFFO Diluted: FFO AFFO Payout ratio:(9) Distribution/AFFO (basic) As at December 31, 2014 As at September 30, 2014 As at December 31, 2013 266 14,839,661 85.3% 84.7% 279 15,839,035 87.1% 85.9% € 8.86 € 2.9% 8.90 € 2.0% 296 15,705,425 86.4% 85.9% 8.46 2.2% Three months ended December 31, 2013(3) 2014(3) Year ended December 31, 2013(3) 2014(3) $ 61,690 $ 62,528 $ 257,725 $ 220,220 43,069 16,537 26,532 23,428 22,401 41,872 20,033 21,839 24,235 22,259 179,464 76,202 103,262 97,496 91,370 144,853 79,126 65,727 84,422 78,007 $ 22,263 $ 16% 21,910 $ 17% 88,547 $ 16% 79,784 13% $ 0.20 $ 0.20 $ 0.80 $ 0.21 0.20 0.21 0.20 0.22 0.20 0.22 0.20 100% 100% 0.88 0.83 0.87 0.82 96% 0.80 0.85 0.79 0.84 0.79 101% Dream Global REIT 2014 Annual Report | 1 Financing Weighted average effective interest rate on debt (period-‐end)(1) Weighted average face rate of interest on debt (period-‐end)(1) Interest coverage ratio(1)(10)(11) Debt-‐to-‐adjusted EBITDFV (years)(1)(10)(11) Level of debt (net debt-‐to-‐gross book value, net of cash)(1)(10)(11) Debt – average term to maturity (years)(1)(11)(12) Unsecured convertible debentures As at December 31, 2014 As at September 30, 2014 As at December 31, 2013 3.54% 3.63% 3.72% 3.23% 3.26 times 9.18 51% 4.3 152,365 $ 3.28% 3.30 times 9.56 56% 4.1 151,841 $ 3.37% 3.40 times 8.80 54% 4.6 150,326 $ (1) Reflects Owned Share of joint venture properties starting in Q4 2014. Number of properties includes the joint venture properties. Joint venture properties are accounted for using the equity method in our consolidated financial statements. (2) Occupancy rates as at December 31, 2014 and September 30, 2014 include space covered by a head lease that was classified as vacant space in the prior year. The December 31, (3) (4) 2013 occupancy rate has not been restated. Results from operations were converted into Canadian dollars from euros using the average exchange rates found on page 30. Investment properties revenue (non-‐GAAP measure) is defined as total revenue, including the share of investment property revenue from investments in joint ventures from the date of closing of the sale of the respective properties. The reconciliation of investment property revenue can be found in the section “Non-‐GAAP measures and other disclosures”. (5) Net rental income (non-‐GAAP measure) is defined as total of net rental income, including the share of net rental income from investment in joint ventures from the date of (6) (7) (8) closing of the sale of the respective properties. The reconciliation of net rental income can be found in the section “Non-‐GAAP measures and other disclosures”. FFO (non-‐GAAP measure) – The reconciliation of FFO to net income can be found in the section “Our results of operations” under the heading “Funds from operations and adjusted funds from operations”. AFFO (non-‐GAAP measure) – The reconciliation of AFFO cash flow from operations can be found in the section “Non-‐GAAP measures and other disclosures” under the heading “Cash generated from operating activities to AFFO reconciliation”. A description of the determination of basic and diluted amounts per unit can be found in the section “Non-‐GAAP measures and other disclosures” under the heading “Weighted average number of units”. Payout ratio is calculated as the ratio of the distribution rate divided by basic AFFO per unit. (9) (10) The calculation of the following non-‐GAAP measures are included in the section “Non-‐GAAP measures and other disclosures” under the headings “Interest coverage ratio”, “Debt-‐to-‐adjusted EBITDFV” and “Level of debt (debt-‐to-‐gross book value)”. (11) This metric includes the REIT’s share of the mortgages on the POBA properties starting in Q4 2014. (12) This metric excludes the revolving credit facility. Dream Global REIT 2014 Annual Report | 2 FINANCIAL OVERVIEW The fourth quarter results were in line with our expectations with funds from operations (“FFO”) and adjusted funds from operations (“AFFO”) of $23.4 million and $22.4 million, respectively, compared with $24.2 million and $22.3 million, respectively, for Q4 2013. The acquisitions completed over the course of 2014 were able to compensate for the impact from the Deutsche Post lease terminations and the Lonestar guarantee expiry, which were effective July 1, 2014. For the year, FFO and AFFO increased to $97.5 million and $91.4 million, respectively, from $84.4 million and $78.0 million, respectively, in 2013. On a per unit basis, basic FFO and basic AFFO both increased in 2014 to 88 cents and 83 cents, respectively, from 85 cents and 79 cents, respectively, in 2013. The increases in 2014 are a result of the acquisitions we completed in 2013 and 2014 as well as the strong leasing activity in 2014. In the fourth quarter, we completed the sale of a 50% interest in seven assets from our Acquired Properties portfolio to the Public Officials Benefit Association (“POBA”) joint venture and were able to reinvest over two-‐thirds of the net proceeds into new acquisitions. The balance of the proceeds will be invested in Q1 2015 with the closing of the Millerntorplatz property in Hamburg. Our retained 50% interest in the joint venture assets is reflected as an investment in joint ventures on the consolidated balance sheet and is equity accounted for in our consolidated financial statements. Leasing momentum and the leasing pipeline remain strong going into 2015, despite negative leasing absorption in the fourth quarter of 2014. During the fourth quarter, the previously identified expiry of short-‐term lease extensions in connection with Deutsche Post’s 2014 lease terminations resulted in negative leasing absorption for the quarter. The sale of the 50% interest in the seven assets also impacted our leasing and occupancy metrics in that we reflect only our 50% share of the properties we sold. Our overall in-‐place and committed occupancy was 85.3% at the end of 2014, a year-‐over-‐year decrease of 1.1% from 86.4% at the end of 2013. Contributing to the decline were the Deutsche Post terminations as well as the sale of 50% of the joint venture assets. The overall effect of the 2014 terminations was significantly mitigated by strong leasing and renewals across our entire portfolio as well as the acquisitions we completed. Year-‐over-‐year, in-‐place rents increased from €8.46 per square foot in Q4 2013 to €8.86 in Q4 2014, largely due to the completed acquisitions, which have a higher average per square foot rent. At €9.12 per square foot, average market rents in our portfolio remain approximately 2.9% above in-‐place rents at the end of Q4 2014. The Trust’s average face interest rate decreased to 3.23% at the end of Q4 2014, from 3.37% at the end of Q4 2013. Our leverage declined to 51% (net of cash) at the end of Q4 2014 from 54% at the end of Q4 2013, largely as a result of the sale to POBA of our 50% interest in seven assets, which resulted in slightly higher cash balances at the end of 2014 compared to 2013. Also contributing to the reduction in our leverage was the increase in valuations of our investment properties in 2014. Subsequent to the closing of the Millerntorplatz acquisition in Q1 2015, the leverage ratio will increase and we will continue to operate in the targeted range of 50% to 60% debt-‐to-‐book value (net of cash). On an overall basis, management was pleased with the Trust’s performance in Q4 2014. Dream Global REIT 2014 Annual Report | 3 OUTLOOK The fourth quarter of 2014 was an exciting quarter for the REIT with the closing of the POBA joint venture. Subsequent to year-‐ end, we further expanded our partnership with POBA through the sale of a 50% interest in Officium, one of our recent acquisitions in Stuttgart. With the closing of the acquisition of Millerntorplatz 1 in Hamburg for $136.1 million (€95.9 million) on February 6, 2015, the balance of the proceeds from the sale to POBA is fully redeployed. Our ability to reinvest the proceeds from these sales into properties of equal or better value will enable us to continue to grow and develop our platform. The Millerntorplatz office property becomes the Trust’s largest asset in Hamburg. The multi-‐tenant property, built in 1997 and situated in a vibrant city centre location in Hamburg, is leased to a variety of tenants including Deutsche Rentenversicherung, Germany’s largest state pension fund, and the City of Hamburg. The Trust acquired the property at a going-‐in cap rate of 6.1% and has financed it with a ten-‐year mortgage at an interest rate of 1.71%. We continued with our dispositions program in Q4 and sold 14 properties from our Initial Properties for gross proceeds of $69.4 million. In total for 2014, we sold 35 properties for $130.7 million, which represented 101% of book value for those assets. For 2015, we will continue to dispose of properties from our Initial Properties portfolio and redeploy the proceeds into newer multi-‐tenant properties located in major German office markets. The German economy continues to perform well in a difficult global environment and benefits from strong domestic demand. The fundamentals in the office sector in our key markets remain solid with overall net absorption of office space continuing to be positive across the “Big 7” office markets and a further decline in the office vacancy rates. Our focus since the initial public offering has been to improve the stability and quality of the underlying cash flows in our portfolio. Throughout 2014, we continued to execute on this goal and for 2015, this goal will remain our focus. BASIS OF PRESENTATION Our discussion and analysis of the financial position and results of operations of Dream Global Real Estate Investment Trust (“Dream Global REIT”, the “REIT” or the “Trust”) should be read in conjunction with the audited consolidated financial statements of the Trust for the year ended December 31, 2014. The Trust’s basis of financial reporting is International Financial Reporting Standards (“IFRS”). The REIT complies with IFRS 11, Joint Arrangements, and accounts for investments in joint ventures in its audited consolidated financial statements using the equity method of accounting. All references herein to “consolidated” refer to amounts as reported under IFRS. For the purpose of this management’s discussion and analysis (“MD&A”), all references to “REIT’s Interest” or “Owned Share” refer to a non-‐GAAP financial measure representing Dream Global REIT’s proportionate share of the financial position and results of operations of its entire portfolio, including equity accounted investments, under the assumption that all investments in joint ventures have been proportionately consolidated. For a reconciliation of the Trust’s results of operations and statement of financial position, please see “Non-‐GAAP measures and other disclosures” in this MD&A. Entities that are consolidated in our consolidated financial statements are included at 100% for the purpose of the MD&A. This MD&A has been dated as at February 18, 2015. For simplicity, throughout this discussion, we may make reference to the following: • • • • • • • “Debentures”, meaning the 5.5% convertible unsecured subordinated debentures of the Trust due July 31, 2018; “GLA”, meaning gross leasable area; “GRI”, meaning gross rental income; “Initial Properties”, meaning the income-‐producing properties we acquired on August 3, 2011; “Acquisition Properties”, meaning the income-‐producing properties acquired subsequent to the Trust’s initial public offering on August 3, 2011; “Units”, meaning the Units of the Trust; and “POBA”, meaning Public Officials Benefit Association. Certain information has been obtained from CB Richard Ellis Germany (“CBRE”), Colliers International (“Colliers”) and Jones Lang LaSalle (“JLL”), commercial firms that provide information relating to the German real estate industry. Although we believe this information is reliable, the accuracy and completeness of this information is not guaranteed. We have not independently verified this information and make no representation as to its accuracy. Dream Global REIT 2014 Annual Report | 4 When we use terms such as “we”, “us” and “our”, we are referring to the REIT and its subsidiaries. When we refer to Deutsche Post as being the lessee or the tenant of the Initial Properties, we are referring to Deutsche Post Immobilien GmbH (“DPI”), which is a wholly owned subsidiary of Deutsche Post. Deutsche Post has provided a letter of support with respect to DPI and its ability to carry out its obligations under leases for the Initial Properties. Market rents disclosed throughout the MD&A are management’s estimates and are based on current leasing fundamentals. The current estimated market rents are 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 publicly available information. We have not independently verified any such information. Certain information herein contains or incorporates comments that constitute forward-‐looking information within the meaning of applicable securities legislation. Forward-‐looking information is based upon a number of assumptions and is subject to a number of risks and uncertainties, many of which are beyond Dream Global REIT’s control, which could cause actual results to differ materially from those that are disclosed in or implied by such forward-‐looking information. These risks and uncertainties include, but are not limited to, global and local economic, business and government conditions; the financial condition of tenants; concentration of our tenants; our ability to refinance maturing debt; leasing risks, including those associated with the ability to lease vacant space and the timing of lease terminations; our ability to source and complete accretive acquisitions; changes in tax and other laws or the application thereof; and interest and currency rate fluctuations. Although the forward-‐looking statements contained in this management’s discussion and analysis are based upon what we believe are reasonable assumptions, there can be no assurance that actual results will be consistent with these forward-‐looking statements. 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; the uncertainties of acquisition activity; the ability to effectively integrate acquisitions; interest rates; availability of equity and debt financing; the Trust’s continued exemption from the specified investment flow-‐through trust (“SIFT”) rules under the Income Tax Act (Canada); 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 18, 2015, except where otherwise noted. Dream Global 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 law. Additional information about these assumptions and risks and uncertainties is contained in our filings with securities regulators. These filings are also available on our website at www.dreamglobalreit.ca. BACKGROUND Dream Global REIT is an unincorporated, open-‐ended real estate investment trust that was formed to provide investors with the opportunity to invest in real estate exclusively outside of Canada. Dream Global REIT was founded by Dream Asset Management Corporation (“DAM”), a subsidiary of Dream Unlimited Corp. (TSX: DRM), which is our asset manager. Our Units are listed on the Toronto Stock Exchange under the trading symbol DRG.UN. As at December 31, 2014, our portfolio consisted of 266 properties comprising approximately 14.8 million square feet of GLA located in Germany, including seven properties held within a joint venture of which Dream Global REIT retained a 50% ownership interest. We will be exempt from the SIFT rules, taking into account all proposed amendments to such rules, as long as we comply at all times with our investment guidelines which, among other things, only permit us to invest in properties or assets located outside of Canada. We do not rely on the REIT exception under the Income Tax Act (Canada) in order to be exempt from the SIFT rules. As a result, we are not subject to the same restrictions on our activities as those that apply to Canadian real estate investment trusts that do rely on the REIT exception. This gives us flexibility in terms of the nature and scope of our investments and other activities. Because we do not own taxable Canadian property, as defined in the Income Tax Act (Canada), we are not subject to restrictions on our ownership by non-‐Canadian investors. Dream Global REIT 2014 Annual Report | 5 OUR OBJECTIVES We are committed to: • managing our investments to provide stable, sustainable and growing cash flows through investments in commercial real estate located outside of Canada. To date, 100% of our portfolio is located in Germany; • • • • building a diversified portfolio of commercial properties; capitalizing on internal growth and seeking accretive acquisition opportunities in our target markets; increasing the value of our assets and maximizing the long-‐term value of our Units through the active and efficient management of our assets; and providing predictable cash distributions per unit, on a tax-‐efficient basis. Distributions We currently pay monthly distributions to unitholders of 6.667 cents per unit, or 80 cents per unit on an annual basis. At December 31, 2014, approximately 15.2% of our total Units were enrolled in the Distribution Reinvestment and Unit Purchase Plan (“DRIP”). Annualized distribution rate Monthly distribution rate Period-‐end closing unit price Annualized distribution yield on $ $ $ December 31, 2013 0.80 $ 0.0667 $ 8.42 $ 2014 0.80 $ 0.0667 $ 8.57 $ September 30, 2013 0.80 $ 0.0667 $ 9.41 $ 2014 0.80 $ 0.0667 $ 9.08 $ 2014 0.80 $ 0.0667 $ 9.82 $ June 30, 2013 0.80 $ 0.0667 $ 9.94 $ 2014 0.80 $ 0.0667 $ 9.28 $ March 31, 2013 0.80 0.0667 10.64 closing unit price 9.33% 9.50% 8.81% 8.50% 8.15% 8.05% 8.62% 7.52% OUR STRATEGY Our core strategy to meet our objectives includes the following: Optimizing the performance, value and long-‐term cash flow of our properties We manage our properties to optimize their performance, value and long-‐term cash flow. We seek to do this by achieving high occupancy and rental rates. Together with our management team in Canada, we also have an established management team in Germany and Luxembourg, bringing a history with our Initial Properties, deep market knowledge and established relationships with other market participants. Leasing, capital expenditure and construction initiatives are either internally managed or overseen by us, while property management services, including general maintenance, rent collection and administration of operating expenses and tenant leases, are carried out by third-‐party service providers under the oversight of our internal team. Diversifying our portfolio to mitigate risk We continuously seek to diversify our portfolio to increase value on a per unit basis, further improve the sustainability of our distributions and strengthen our tenant profile. We focus on adding high-‐quality tenants in the most desirable office markets in Germany in addition to increasing our overall asset base in the largest office markets in Germany. A key criterion when considering potential acquisitions is the multi-‐tenant nature of a property. Investing in stable income-‐producing properties outside of Canada When considering acquisition opportunities, we look for properties with quality tenancies and strong occupancy, and assess how acquisition opportunities complement our properties and have the potential to create additional value. In considering future acquisitions, we intend to focus on countries with a stable business and operating environment, a liquid market for real estate investments, a legal framework that provides adequate rights and protections for owners of property, and a manageable foreign investment regime. We will consider investment opportunities in income-‐producing properties that are accretive, provide stable, sustainable and growing cash flows, and enable us to realize synergies within our portfolio of properties. The execution of this strategy will be continuously reviewed and will also include dispositions of properties and optimizing our capital structure. Dream Global REIT 2014 Annual Report | 6 Maintaining and strengthening a conservative financial profile We operate our investments in a disciplined manner, with a focus on financial analysis and balance sheet management to ensure we maintain a prudent capital structure and conservative financial profile. We intend to generate stable cash flows sufficient to fund our distributions while maintaining a conservative debt ratio. Our preference will be to stagger our debt maturities to mitigate our interest rate risk and limit refinancing exposure in any particular period. We have also implemented a foreign exchange hedging strategy to provide greater certainty regarding the payment of distributions to unitholders and interest to debenture holders. OUR ASSETS Throughout this document, we make reference to the following two asset categories: Initial Properties As at December 31, 2014, this category included 237 national and regional administration offices, mixed use retail, banking and distribution properties and regional logistics headquarters of Deutsche Post. The properties are generally strategically located near central train stations and main retail areas and are easily accessible by public transportation. Acquisition Properties As at December 31, 2014, this category included 29 office properties, which were acquired since the beginning of 2012. These properties are high-‐quality, multi-‐tenant office buildings located in Germany’s largest office markets and are generally newer or recently refurbished buildings. A 50% interest in seven of the 29 properties was sold during the year and these seven properties are now jointly owned with POBA, a South Korean pension fund. The majority of our portfolio is concentrated in Germany’s largest office markets: Geographic composition of portfolio(1) Berlin Cologne Düsseldorf Frankfurt Hamburg Hannover Munich Nuremberg Stuttgart Other Total (1) Reflects the REIT’s Owned Share basis. Total GLA (sq. ft.) 506,436 984,938 1,745,214 1,173,287 1,312,376 810,208 552,157 627,357 752,527 6,375,161 14,839,661 Total GLA (%) 3 7 12 8 9 5 4 4 5 43 100 Total GRI (%) 4 11 14 10 14 3 7 6 7 24 100 TENANTS Through an active acquisitions and dispositions program that commenced in 2012, the Trust continues to focus on the diversification of its tenant base. The table below highlights the diversification away from the single-‐tenant nature of our Initial Properties. At the end of Q4 2014, Deutsche Post’s GRI was approximately 29.5% of the Trust’s overall occupied and committed GRI, down from 37.3% at the end of 2013. Dream Global REIT 2014 Annual Report | 7 Tenant composition(1) Deutsche Post Freshfields Bruckhaus Deringer ERGO Direkt Lebensversicherungs AG Imtech Deutschland GmbH & Co. KG BNP Paribas Fortis SA/NV Deutsche Postbank AG CinemaxX Entertainment GmbH & Co. KG Maersk Deutschland A/S & Co. KG Google Germany GmbH Grohe AG Other third-‐party tenants Total (1) Reflects the REIT’s Owned Share. (2) Source: Standard & Poor’s, Fitch. (3) n/a means not applicable. Total annualized GRI (%) 29.5 3.5 3.1 2.4 1.9 1.8 1.6 1.4 1.3 1.3 52.2 100.0 Credit rating(2)(3) BBB+ n/a AA-‐ n/a A+ A+ n/a BBB+ AA n/a n/a Deutsche Post Deutsche Post is an integral part of the German economy and continues to be an important part of day-‐to-‐day life in Germany. Through its acquisition of DHL in 2002, Deutsche Post DHL has become a global logistics market leader. It employs approximately 480,000 people in more than 220 countries and territories.(1) As the only provider of universal postal services in Germany, Deutsche Post must provide certain minimum levels of service to German residents. Some of the space leased to Deutsche Post is occupied by Postbank, a public company controlled by Deutsche Bank and integral to its retail banking business. Postbank offers retail financial services in its branches within Deutsche Post’s network, which generates increased traffic through the postal services offered in those branches. As at December 31, 2014, our portfolio featured approximately 165 Postbank branches, allowing for the delivery of integrated financial and postal services. Leases for 45 Postbank branches are direct leases. Postbank branches are typically located at ground level with a view to attracting a high volume of retail and business customers seeking financial or postal services. Freshfields Bruckhaus Deringer (“Freshfields”) Freshfields is the second largest tenant in our portfolio as measured by GRI. Freshfields is an international law firm with offices in Europe, Asia, North America and the Middle East.(2) Freshfields occupies 71% of the space in our property located at Feldmühleplatz 1 and generated approximately 3.5% of the REIT’s overall GRI as at December 31, 2014. ERGO Direkt Lebensversicherungs AG (“ERGO”) ERGO is the third largest tenant in our portfolio as measured by GRI. With approximately 46,000 employees in over 30 countries, ERGO is one of the largest insurance companies in Germany.(3) ERGO, which belongs to the Munich RE group of companies, occupies the entire space in our property located at Karl-‐Martell-‐Strasse 60 in Nuremberg, and generated approximately 3.1% of the REIT’s overall GRI as at December 31, 2014. Imtech Deutschland GmbH & Co. KG (“Imtech”) Imtech Germany & Eastern Europe is a leader in the energy and technical building equipment sector in Germany, Poland, Austria, Hungary, Romania, Russia and Switzerland. Imtech Germany & Eastern Europe employs approximately 5,000 people and is part of the Royal Imtech N.V. Group, which is based in the Netherlands and employs approximately 23,000 people.(4) This tenant occupies the entire space in our property located at Hammer Strasse 30–34 in Hamburg, which is Imtech’s German head office, and generated approximately 2.4% of the REIT’s overall GRI as at December 31, 2014. (1) As disclosed at Deutsche Post DHL’s website at www.dpdhl.com (2) As disclosed at Freshfields’ website at www.freshfields.com (3) As disclosed at ERGO’s website at www.ergo.com (4) As disclosed at Imtech’s website at www.imtech.de Dream Global REIT 2014 Annual Report | 8 BNP Paribas Fortis SA/NV (“BNP Paribas Fortis”) BNP Paribas Fortis is a financial services provider, offering services to private and professional clients, corporate clients and public entities through a number of networks. The company is owned approximately 75% by the BNP Paribas Group and 25% by the Belgian State.(5) BNP Paribas Fortis occupies approximately 55% of the space in Cäcilienkloster in Cologne as well as 8% in Z-‐UP in Stuttgart and generated approximately 1.9% of the REIT’s overall GRI as at December 31, 2014. Deutsche Postbank AG (“Postbank”) Postbank is one of Germany’s largest financial service providers with approximately 14 million clients, 14,900 employees and total assets of approximately €158 billion. Postbank mainly focuses on private customers and small to medium-‐sized companies and has the densest branch network of any bank in Germany with 1,100 of its own branches, 4,500 Deutsche Post partner branches as well as 700 Postbank advisory centres.(6) As at December 31, 2014, Postbank generated approximately 1.8% of the REIT’s overall GRI. CinemaxX Entertainment GmbH & Co. KG (“CinemaxX”) CinemaxX is a well-‐known cinema chain in Germany and Denmark with 33 cinemas and 2,000 employees in these two countries.(7) CinemaxX occupies approximately 62% of the GLA in our property located at Bertoldstrasse 48/Sedanstrasse 7 in Freiburg and generated approximately 1.6% of the REIT’s overall GRI as at December 31, 2014. Maersk Deutschland A/S & Co. KG (“Maersk”) Maersk is one of the world’s largest shipping companies and operates in approximately 130 countries. Through its various divisions, the group employs approximately 89,000 people and generated over US$47 billion in revenues in 2013.(8) Maersk occupies approximately 70% of the GLA in Humboldt House, our property located at Am Sandtorkai 37 in Hamburg. Maersk generated approximately 1.4% of the REIT’s overall GRI as at December 31, 2014. Google Germany GmbH (“Google”) Google is an American multinational corporation specializing in internet-‐related services and products and employs over 40,000 people worldwide.(9) Google Hamburg is the company’s commercial headquarters for Germany, Austria, Switzerland and the Nordics and occupies approximately 75% of the GLA in ABC Bogen, our property located in the heart of Hamburg at ABC Strasse 19. Google generated approximately 1.3% of the REIT’s overall GRI as at December 31, 2014. Grohe AG (“Grohe”) Grohe AG, a subsidiary of the Grohe Group, is Europe’s largest provider of sanitary fittings and has a worldwide presence in more than 130 countries. The Grohe Group employs more than 9,000 employees and had revenues of approximately €1.45 billion in 2013.(10) Grohe occupies approximately 29% of the GLA in Feldmühleplatz 15 in Düsseldorf and generated approximately 1.3% of the REIT’s overall GRI as at December 31, 2014. (5) As disclosed at BNP Paribas’ website at www.bnpparibas.com (6) As disclosed at Deutsche Postbank AG’s website at www.postbank.com (7) As disclosed at CinemaxX’s website at www.cinemaxx.com (8) As disclosed at Maersk’s website at www.maersk.com (9) As disclosed at Google’s website at www.google.com and www.google.ca/about/jobs/locations/hamburg (10) As disclosed at Grohe’s website at www.grohe.com Dream Global REIT 2014 Annual Report | 9 MARKET OVERVIEW – GERMANY German economy The German economy has long been a driver as well as a beneficiary of a globalized economy. Germany has established itself as a key location for production sites and is a country with a favourable business environment. Similar to Canada, Germany is a country with a history of political, legal and financial stability and provides an attractive climate for long-‐term investment. Recent developments Overall, the German economy continues to be the main driving force of Europe. Germany’s labour market is very robust and its unemployment rate at 4.5%(1) at the end of December 2014 remains among the lowest in the European Union. The German government posted gross domestic product (“GDP”) growth of 1.5% in 2014, higher than the GDP growth in the previous number of years as well as throughout the eurozone. The German economy performed well in a difficult global environment and continued to benefit from strong domestic demand in 2014. Economic impact on the German real estate sector Germany remains one of the most highly sought-‐after real estate investment markets in Europe, benefiting from strong international investor demand. In 2014, the total investment volume for commercial real estate reached €39.8 billion(2), the best annual result since 2007. The office sector remains the dominant asset class, with 51%(2) of all transactions in 2014 taking place in this category. In total, approximately €20.3 billion(2) was invested in German office properties during this period. International investors contributed approximately 46%(2) of the total capital invested in German office properties, a year-‐over-‐year increase of 98%, highlighting the global demand in this market. The share of investments in secondary markets continued to increase, reflecting diversification of the German economy and the attractiveness of risk-‐return characteristics in these markets. The underlying fundamentals in the office sector remain strong with overall net absorption of office space continuing to be positive across the “Big 7” office markets. Office vacancies further declined year-‐over-‐year by 60 basis points (“bps”) to 7.6%(3) at December 31, 2014, the lowest level since 2002, and average market rents increased on average by 2%(3) in these markets in 2014. ILO labour market statistics overview, Destatis – Germany’s Federal Statistical Office (1) (2) CBRE MarketView, Germany Investment Quarterly Q4 2014 (3) Jones Lang LaSalle Office Market Overview Q4 2014 SECTION II – EXECUTING THE STRATEGY OUR OPERATIONS Occupancy Overall in-‐place and committed occupancy was 85.3% at the end of 2014, a year-‐over-‐year decrease of 1.1% from 86.4% at the end of 2013 and a decrease of 1.8% quarter-‐over-‐quarter from 87.1% at the end of Q3 2014. The year-‐over-‐year decrease results primarily from the 2014 Deutsche Post terminations, which were effective July 1, 2014. The quarter-‐over-‐quarter decrease was largely the result of the expiry of short-‐term lease extensions entered into by Deutsche Post for space originally terminated as at July 1, 2014. Occupancy in our Initial Properties decreased from 83.2% at the end of 2013 to 80.1% at the end of 2014, primarily due to the 2014 Deutsche Post terminations, offset by strong leasing performance in 2014. Occupancy in our Acquisition Properties increased from 96.3% at the end of 2013 to 97.9% at the end of 2014, primarily due to the acquisitions we completed in 2014 as well as leasing activity in 2014, which more than offset the impact from the sale of a 50% interest in seven assets to POBA. Dream Global REIT 2014 Annual Report | 10 The table below details the percentage of occupied and committed space for the total portfolio as well as the comparative portfolio. The comparative portfolio comprises properties owned by the Trust at December 31, 2013 and December 31, 2014, and excludes properties that were acquired or sold during 2014. Comparative portfolio December 31, Portfolio (%) 2013 Initial Properties 82.5 Acquisition Properties 96.4 Total 85.8 (1) Occupancy in Q4 2014 includes space covered by a head lease that was classified as vacant space prior to Q1 2014. This change in presentation results in a December 31, 2014(1) 80.1 98.2 84.4 2014(1) 80.1 97.9 (2) 85.3 Total portfolio December 31, 2013 83.2 96.3 86.4 December 31, 27 bps increase in overall occupancy in Q4 2014. (2) Reflects the REIT’s Owned Share. Vacancy schedule The tables below highlight our leasing activity for the three-‐month and twelve-‐month periods ended December 31, 2014. During Q4 2014, our overall space available for lease increased by approximately 128,200 square feet. The primary reason for the increase in vacancy was negative leasing absorption of approximately 236,700 square feet, largely due to the expiry of short-‐ term lease extensions in connection with Deutsche Post’s 2014 terminated space. The negative impact was significantly mitigated by an otherwise high retention rate across the entire portfolio of 73% and high overall leasing volumes during Q4 2014. For the three months ended December 31, 2014 (in square feet) Available for lease – September 30, 2014 Change in vacancy due to acquisitions Change in vacancy due to dispositions(2) Remeasurements Subtotal – Available for lease Expiries Early termination and bankruptcies Deutsche Post extension expiries New leases Renewals Future leases for the period Initial Properties 1,954,677 -‐ (91,792) (10,952) 1,851,933 82,316 5,207 231,311 (24,582) (42,857) (17,712) Acquisition Properties(1) 96,280 -‐ (6,022) 264 90,522 128,007 13,007 -‐ (13,007) (110,947) (14,061) Available for lease – December 31, 2014 (1) Reflects the REIT’s Owned Share. (2) The reduction in vacancy in our Acquisition Properties resulted from the sale of a 50% interest in seven properties to POBA. 2,085,616 93,521 Total 2,050,957 -‐ (97,814) (10,688) 1,942,455 210,323 18,214 231,311 (37,589) (153,804) (31,773) 2,179,137 Dream Global REIT 2014 Annual Report | 11 For the twelve months ended December 31, 2014 Total 2,051,021 37,870 (162,110) (13,681) 1,913,100 702,229 89,975 1,855,803 231,311 (194,220) (482,855) (1,592,200) (344,006) 2,179,137 (in square feet) Available for lease – January 1, 2014 Change in vacancy due to acquisitions Change in vacancy due to dispositions(2) Remeasurements Subtotal – Available for lease Expiries Early termination and bankruptcies Deutsche Post terminations Deutsche Post extension expiries New leases Renewals Deutsche Post/Postbank renewals and extensions Future leases for the period Initial Properties 1,984,185 -‐ (156,088) (6,771) 1,821,326 231,900 39,747 1,855,803 231,311 (160,185) (106,891) (1,592,200) (235,195) Acquisition Properties(1) 66,836 37,870 (6,022) (6,910) 91,774 470,329 50,228 -‐ -‐ (34,035) (375,964) -‐ (108,811) Available for lease – December 31, 2014 (1) Reflects the REIT’s Owned Share. (2) The reduction in vacancy in our Acquisition Properties resulted from the sale of a 50% interest in seven properties to POBA. 2,085,616 93,521 Excluding the Deutsche Post terminations, the Trust was able to achieve a 69% tenant retention rate in 2014. Dream Global REIT 2014 Annual Report | 12 The table below highlights our occupancy, leasing activity and rental rates for the last eight quarters. Committed occupancy includes in-‐place occupancy as well as space for which leases have been signed but do not commence until a future quarter. Q4 2014(1)(2) Q3 2014(1) Q2 2014(1) Q1 2014(1) Q4 2013 Q3 2013 Q2 2013 Q1 2013 Occupancy Committed occupancy (square feet) 12,660,524 13,788,078 13,787,918 13,874,523 13,577,298 13,403,456 13,205,395 12,686,411 Committed occupancy 85.3% 87.1% 87.9% 87.7% 86.4% 86.2% 85.7% 84.7% In-‐place occupancy (square feet) In-‐place occupancy Leasing activity Expiries Early termination and bankruptcies New leases Renewals Future leases Net leasing absorption (before DP terminations) Deutsche Post terminations Expiries of Deutsche Post extensions Deutsche Post/ Postbank renewals and extensions Net leasing absorption Average in-‐place rent (€/sq. ft./year) % change 12,568,632 13,603,696 13,644,620 13,753,248 13,496,358 13,183,857 13,010,931 12,578,484 84.7% 85.9% 87.0% 86.9% 85.9% 84.8% 84.5% 83.9% (210,323) (203,087) (175,716) (113,105) (168,754) (130,075) (89,824) (113,970) (18,214) (38,709) 37,589 153,804 89,075 143,271 31,773 101,670 (8,908) 21,370 133,149 68,328 (24,143) 46,185 52,633 142,236 (2,489) 35,285 115,914 30,840 (22,021) 51,992 111,609 60,250 (7,418) 36,689 75,373 98,003 (556) 41,198 41,985 38,118 (5,371) 92,220 38,223 103,806 10,796 71,755 112,823 6,775 (99,214) (1,756,589) (231,311) -‐ 99,214 1,492,986 (171,383) (236,682) €8.86 (0.4)% €8.90 1.8% -‐ -‐ -‐ 38,223 €8.74 0.3% -‐ -‐ -‐ 103,806 €8.72 3.0% -‐ -‐ -‐ 10,796 €8.46 3.5% (22,021) -‐ -‐ 49,734 €8.17 0.4% -‐ -‐ -‐ 112,823 €8.14 3.5% -‐ -‐ -‐ 6,775 €7.87 25.8% (1) Occupancy includes space covered by a head lease that was previously classified as vacant space. (2) Reflects the REIT’s Owned Share. In-‐place rental rates In-‐place rents have increased from approximately €8.46 per square foot/year at December 31, 2013 to approximately €8.86 per square foot/year at December 31, 2014, reflecting higher in-‐place rents in the Acquisition Properties as well as leasing activity across the portfolio. The majority of the leases in the Acquisition Properties include rent adjustment clauses linked to an increase in the consumer price index (“CPI”). Overall, average market rents for our portfolio remain approximately 2.9% above in-‐place rents at December 31, 2014. The difference between in-‐place rents and market rents in our Initial Properties is approximately 12.5%, allowing for rental growth in this segment of our portfolio, which has approximately 0.8 million square feet expiring over the next two years. For certain Acquisition Properties, where in-‐place rents exceeded market rents, the purchase price was adjusted at the time of underwriting these acquisitions to reflect such above-‐market rents. The gap between market and in-‐place rental rates is narrowing, reflecting the underlying market conditions, a trend which is expected to continue. The weighted average remaining lease term is 5.3 years for this category of assets, which allows for sufficient time for the market rents to increase. Dream Global REIT 2014 Annual Report | 13 The table below provides a comparison between in-‐place rents and market rents in our portfolio as at December 31, 2014. (per square foot/year) Initial Properties – Deutsche Post Initial Properties – third party Total Initial Properties Acquisition Properties(1) Overall (1) Reflects the REIT’s Owned Share. In $ (as at December 31, 2014) In € (as at December 31, 2014) In-‐place rent Market rent $ 8.54 8.74 8.59 21.05 $ 12.80 $ 7.47 8.18 7.63 21.83 $ 12.44 In-‐place rent € 5.32 5.82 5.44 15.55 € 8.86 Market rent € 6.08 6.23 6.12 14.99 € 9.12 % of market rents above (below) in-‐place rents 14.3 7.0 12.5 (3.0) 2.9 Market rent represents management’s best estimate of the net rental rate that would be achieved in the event that a unit becomes vacant in a new arm’s length lease after a reasonable marketing period with an inducement and lease term appropriate for the particular space. Market rent by property is determined on a quarterly basis by our leasing and portfolio management teams. The basis of calculating market rents depends on leasing deals that are completed for similar space in comparable properties in the area. Market rents may differ by property or by unit within the property and depend upon a number of factors. Some of the factors include the condition of the space, the location within the building, the extent of office build-‐out for the units, appropriate lease term and normal tenant inducements. Market rental rates are also compared against the external appraisal information that is gathered on a quarterly basis, as well as other external market data sources. At December 31, 2014, the weighted average remaining lease term (“WALT”) of all leases was approximately 4.4 years. The WALT of the Acquisition Properties was 5.3 years. (years)(1) Initial Properties – Deutsche Post Initial Properties – third party Total Initial Properties Acquisition Properties(2) Overall WALT at December 31, 2014 WALT at December 31, 2013 3.5 5.4 3.9 5.3 4.4 4.1 5.1 4.3 6.0 4.8 (1) For the purpose of calculating WALT, month-‐to-‐month leases are reflected as leases with a one-‐year term. (2) Reflects the REIT’s Owned Share. The WALT for the Initial Properties declined in 2014, reflecting the Deutsche Post terminations, partially offset by strong leasing activity. The WALT for the Acquisition Properties declined in 2014, primarily due to the sale of a 50% interest in seven assets to POBA. Leasing and tenant profile Lease rollover profile The following table outlines our lease maturity profile by asset type as at December 31, 2014. Our lease maturity profile remains staggered with only approximately 16% (excluding space leased on a month-‐to-‐month basis) of our portfolio expiring prior to 2018. (in square feet) Initial Properties Acquisition Properties Total Total (%) Current vacancy 2,085,616 Month-‐to-‐ month 296,060 2015 614,892 2016 204,559 2017 177,763 2018 5,026,640 2019 to 2039 2,055,783 Total 10,461,313 93,521 2,179,137 14.7% 35,106 331,166 2.2% 212,480 827,372 5.6% 597,922 802,481 5.4% 544,098 721,861 4.9% 331,764 5,358,404 36.1% 2,563,457 4,619,240 31.1% 4,378,348 14,839,661 100% Dream Global REIT 2014 Annual Report | 14 Deutsche Post leases The leases with Deutsche Post, which generally expire on June 30, 2018 (many of which provide Deutsche Post with an option to extend the term until June 30, 2023), and contractual extensions described below comprise approximately 43% of the portfolio’s GLA and account for approximately 29.5% of the portfolio’s GRI. Of the total leases, less than 7% expire prior to 2018. Deutsche Post lease expiries Q1 2015 Q2 2015 Q3 2015 Q4 2015 Total near-‐term lease expiries 2016 2017 2018(1) 2019 2020 2023 Total Deutsche Post lease expiries (1) Subject to lease extensions. Total GLA (sq. ft.) 308,765 45,069 13,307 -‐ 367,141 37,091 29,145 4,971,982 679,581 325,026 5,745 6,415,711 Rent adjustment The rents under the Deutsche Post leases are subject to automatic adjustments (up or down) in relation to the CPI for Germany. If the consumer price index for Germany changes by more than 4.3 index points as compared to the index at the commencement of the applicable lease or the previous rent adjustment, the rent payable under the Deutsche Post leases is automatically adjusted by 100% of the index change, with effect as of the time of the index change. Based on the index at the last CPI adjustment date, the index will have to exceed 107.2 index points before the next adjustment will become effective. CPI numbers from December 2014 indicate that the CPI has reached 106.7 index points. Termination rights and head lease In general, the Deutsche Post leases have a fixed term of ten years, expiring on June 30, 2018. These leases entitle Deutsche Post to terminate space in 2012, 2014 and 2016, subject to certain limitations and requirements. The rights of Deutsche Post to terminate a lease are limited by various tests that apply collectively to the Deutsche Post leases and the leases in respect of the remaining properties forming the portfolio that the vendor acquired from Deutsche Post in July 2008 (the “Caroline DP Leases”), considered as a whole. Deutsche Post exercised or waived their termination rights with respect to 2012 and 2014. In addition, by June 30, 2017, Deutsche Post is required to provide the REIT with a list of Deutsche Post leases and/or Caroline DP Leases that have no termination options and for which the term of such lease shall be extended for two additional years. This list must amount to at least 33.33% of the total Reference Rent of all Deutsche Post leases and Caroline DP Leases, considered as a whole, that at the beginning of the lease had no termination options. 2012 termination rights One of the opportunities that Deutsche Post terminations afforded the REIT is the ability to take advantage of the large blocks of contiguous vacant space that the tenant left, making the terminated space more attractive for re-‐leasing to some prospective tenants. When combined with higher rents that we generally achieve on the terminated space, we see this reflected in the overall performance of the terminated properties. Through our leasing efforts, as of December 31, 2014, we have been able to successfully replace approximately 79%(1) of the GRI generated by the terminated properties prior to the 2012 terminations. (1) Compared to GRI of the terminated properties as of Q2 2012, excluding properties sold, under contract for sale. GRI as of December 31, 2014 includes in-‐ place leases and leases committed for future occupancy. Dream Global REIT 2014 Annual Report | 15 2014 termination rights On July 1, 2014, Deutsche Post terminated a total of approximately 1,757,000 square feet of space, of which approximately 1,493,000 square feet were either extended by Deutsche Post or re-‐leased to Postbank. Of the 1,493,000 square feet, approximately 812,000 square feet will not expire until 2019 or later. Through our efforts in negotiating lease extensions with Deutsche Post and Postbank, as well as third-‐party leases for 2014 terminated buildings, we have been able to replace approximately 77%(1) of the GRI generated from the 2014 terminated properties as at December 31, 2014. (1) Compared to GRI of the terminated properties as of Q2 2014, excluding properties sold, under contract for sale and a redevelopment asset in Mannheim. GRI as of December 31, 2014 includes in-‐place leases and leases committed for future occupancy. 2016 termination rights Excluding dispositions and early renewals, Deutsche Post has the right to terminate up to approximately 484,000 square feet effective as at June 30, 2016. In 2014, the Trust reduced its exposure to 2016 terminable space from approximately 821,000 to 484,000 square feet through lease negotiation leading to Deutsche Post waiving its termination rights for six properties amounting to approximately 85,000 square feet and the sale of properties comprising 252,000 square feet of space. OUR RESOURCES AND FINANCIAL CONDITION Investment properties As at December 31, 2014, the value of our investment property portfolio was $2.1 billion (December 31, 2013 – $2.4 billion). The primary reason for the decrease compared to December 31, 2013 was the sale of a 50% interest in seven assets to POBA, which is subject to equity accounting, offset by acquisitions during the year. For IFRS reporting purposes, as a result of the sale and the co-‐ownership arrangement with POBA over these assets, the REIT must derecognize the investment properties. The REIT’s retained 50% interest in these assets is reflected as an investment in joint ventures. The REIT’s management is responsible for determining fair value measurements included in the consolidated financial statements, including fair values of investment properties, which are valued on a highest-‐and-‐best-‐use basis. Fair values for investment properties are calculated using both the direct income capitalization and discounted cash flow (“DCF”) methods. The results of both methods are evaluated by considering the reasonableness of the range of values calculated under both methods. Fair value of a property is determined at the point within that range that is most representative of the fair value in the circumstances. Dream Global REIT 2014 Annual Report | 16 Changes in the value of our investment properties for the year ended December 31, 2014 and for the year ended December 31, 2013 are summarized in the table below as follows: Balance at beginning of year Additions Acquisitions Building improvements Lease incentives and initial direct leasing costs Amortization of lease incentives Disposals (Initial Properties) Reclassified to assets held for sale POBA joint venture assets reclassified to assets held for sale Fair value adjustments Foreign currency translation Balance at end of year (per consolidated financial statements) Investment properties held for sale Balance at beginning of year Building improvements Lease incentives and initial direct leasing costs Investment properties reclassified as held for sale Investment properties reclassified as held for sale – POBA joint venture assets Fair value adjustments Disposals Disposals – POBA joint venture assets Foreign currency translation Balance at end of year For the year ended December 31, 2014 2,390,244 $ For the year ended December 31, 2013 1,182,757 $ 422,166 12,730 14,908 (1,458) (144) (161,174) (573,521) 76,639 (100,719) 2,079,671 For the year ended December 31, 2014 21,147 11 (131) 161,174 573,521 (4,392) (130,746) (573,521) (4,166) 42,897 $ $ $ 1,075,558 5,821 6,055 (616) (23,943) (21,147) -‐ (57,032) 222,791 2,390,244 For the year ended December 31, 2013 -‐ -‐ -‐ 21,147 -‐ -‐ -‐ -‐ -‐ 21,147 $ $ $ During the year ended December 31, 2014, seven of the Acquisition Properties were reclassified as assets held for sale and then subsequently sold to POBA at a fair value of $573.5 million. In addition, we reclassified other properties from the initial portfolio valued at $161.2 million as assets held for sale. We acquired one property during Q4, bringing our year-‐to-‐date total to five property acquisitions valued at $419.9 million (including transaction costs). In addition, we recorded $2.3 million of acquisition cost adjustments related to 2013 acquisitions. During the year ended December 31, 2014, due primarily to capitalization rate (“cap rate”) compression, the fair value of the Acquisition Properties increased by $110.7 million, partially reduced by a write-‐off of $20.9 million of capitalized transaction costs, resulting in a net increase in fair value adjustments of $89.8 million. During the year ended December 31, 2014, the fair value of the Initial Properties decreased by $13.2 million, primarily due to an increase in vacancies relating to the Deutsche Post terminations. Due to depreciation of the euro against the Canadian dollar since December 31, 2013, the investment property value decreased by $100.7 million, representing an unrealized foreign exchange loss. Dream Global REIT 2014 Annual Report | 17 Acquisitions During the year ended December 31, 2014, we completed the following acquisitions: Office property Werner-‐Eckert-‐Straße 8, 10, 12, Munich My Falkenried, Hamburg Liebknechtstr. 33/35, Heßbrühlstr. 7 (Officium), Stuttgart Robert-‐Bosch-‐Str. 9–11 (Europahaus), Darmstadt Im Mediapark 8 (Cologne Tower), Cologne Total (1) Excludes transaction costs of $18.2 million. Acquired GLA (sq. ft.) 64,735 221,243 268,034 210,662 296,699 1,061,373 Occupancy at acquisition (%) 91 100 89 99 100 96 Purchase price(1) 22,120 92,183 68,410 57,045 161,923 401,681 $ $ Date acquired February 14, 2014 March 31, 2014 July 31, 2014 September 30, 2014 November 14, 2014 Dispositions The REIT completed the sale of 14 properties, excluding the seven properties sold to POBA, during the last quarter ended December 31, 2014, for an aggregate sales price of approximately $69.4 million. A portion of the net proceeds of $31.2 million was used to reduce our term loan credit facility. During 2014, we disposed a total of 35 investment properties for $130.7 million, which represented 101% of book value at the last reporting period date prior to their sale. Five of the assets were reclassified as assets held for sale at December 31, 2013. As of December 31, 2014, we have also entered into agreements to dispose of an additional 12 properties with a total fair value of $42.9 million. These 12 properties have been reclassified as assets held for sale on the balance sheet and excluded from the value of investment properties, as the REIT has committed to a plan of sale for these investment properties. In total, we realized a fair value loss of $4.4 million on these properties and dispositions. Building improvements Building improvements represent investments made in our investment properties to ensure our buildings are operating at an optimal level. During the three and twelve months ended December 31, 2014, we spent $4.9 million and $12.7 million, respectively, in building improvements. In general, building improvements are non-‐recoverable from the tenants unless specifically provided for in the lease agreement. Initial direct leasing costs and lease incentives Initial direct leasing costs include external 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 and cash allowances. Initial direct leasing costs and lease incentives are dependent on asset type, lease terminations and expiries, the mix of new leasing activity compared to renewals, portfolio growth and general market conditions. Short-‐term leases generally have lower costs than long-‐term leases. During the three and twelve months ended December 31, 2014, we incurred $4.9 million and $14.9 million, respectively, of lease incentives and initial direct leasing costs. As at December 31, 2014, we had outstanding initial direct leasing cost commitments of $3.2 million, on average for lease terms in excess of ten years. Dream Global REIT 2014 Annual Report | 18 OUR CAPITAL Liquidity and capital resources Dream Global REIT’s primary sources of capital are cash generated from operating activities, a credit facility, mortgage financing and refinancing and equity and debt issues. Our primary uses of capital include the payment of distributions, costs of attracting and retaining tenants, recurring property maintenance, major property improvements, debt amortization and interest payments, and property acquisitions. We expect to meet all of our ongoing obligations through current cash and cash equivalents, cash flows from operations, credit facility, debt refinancings and, as growth requires and when appropriate, new equity or debt issues. As at December 31, 2014, we had $121.9 million of cash on hand. After reserving for current payables and operating requirements, and the equity required for the Millerntorplatz acquisition, approximately $25.0 million is available for general purposes. Our debt-‐to-‐book value excluding cash, at December 31, 2014, is 51%. Excluding cash and convertible debentures, our debt-‐to-‐book value (non-‐GAAP measure) is 45%. Debt Total debt Less debt related to: Investment in joint venture Debt (per consolidated financial statements) Mortgage debt Less mortgage debt related to: Investment in joint ventures Mortgage debt (per consolidated financial statements) December 31, December 31, 2014 $ 1,381,132 $ 2013 1,424,312 152,736 1,228,396 $ -‐ 1,424,312 December 31, 2014 854,061 December 31, 2013 825,014 152,736 701,325 -‐ 825,014 $ $ $ Debt strategy Our debt strategy is to obtain secured mortgage financing on a fixed rate basis, with a term to maturity that is appropriate in relation to the lease maturity profile of our portfolio. Our preference is to have staggered debt maturities to mitigate interest rate risk and limit refinancing exposure in any particular period. We also intend to enter into long-‐term loans at fixed rates when borrowing conditions are favourable. This strategy will be complemented with the use of unsecured convertible debentures and floating rate credit facilities. We operate within a targeted debt-‐to-‐book value range of 50% to 60% (net of cash). The decrease in the debt-‐to-‐book value ratio at December 31, 2014 compared to December 31, 2013 reflects the increase in cash on hand compared to December 31, 2013 as well as the increase in the underlying valuation of the investment properties during 2014. During the fourth quarter of 2014, the Trust entered into agreements to refinance a $23.2 million mortgage on Grammophon Business Park located at Podbielskistrasse 158–168 in Hannover for a term of eight years. In addition, we extended the term to maturity on three additional mortgages comprising $150.5 million by two years for Cäcilienkloster 2–10, Moskauer Strasse 25–27 and My Falkenried. The weighted average interest rate for these four mortgages was 1.99%, representing an interest rate reduction of 44 bps before mark-‐to-‐market adjustments. Dream Global REIT 2014 Annual Report | 19 The key performance indicators in the management of our debt are as follows: For the year For the year ended ended December 31, December 31, 2014 2013 3.23% 45% 51% 3.26 times 9.2 5.3% 4.3 1% 3.37% 48% 54% 3.40 times 8.8 1.4% 4.6 5% Financing activities Weighted average interest rate(1)(2) Level of debt (debt-‐to-‐book value, net of cash, net of convertible debentures)(2)(3) Level of debt (debt-‐to-‐book value, net of cash)(2)(3) Interest coverage ratio(2)(3) Debt-‐to-‐adjusted EBITDFV (years)(2)(3)(4) Proportion of total debt due in current year(2) Debt – average term to maturity (years)(2) Variable rate debt as percentage of total debt(2) (1) Weighted average interest rate is calculated as the weighted average face rate of all interest bearing debt. (2) Reflects the REIT’s Owned Share. (3) Level of debt, interest coverage ratio and debt-‐to-‐adjusted EBITDFV are non-‐GAAP measures. Calculations for each reconciled to IFRS balances can be found commencing on page 42. (4) Calculated as total debt divided by adjusted EBITDFV. We currently use cash flow performance and debt level indicators to assess our ability to meet our financing obligations. Our current interest coverage ratio for the year is 3.26 times and reflects our ability to cover interest expense requirements. We also monitor our debt-‐to-‐adjusted EBITDFV ratio to gauge our ability to pay off existing debt. Our current debt-‐to-‐adjusted EBITDFV ratio is 9.2 years, and reflects the approximate amount of time to pay off all debt from operating cash flows. Financing activities We finance our ownership of assets using equity as well as conventional mortgage financing, term debt, floating rate credit facilities and convertible debentures. New debt During the year ended December 31, 2014, we obtained the following new mortgages: Property Werner-‐Eckert-‐Straße 8, 10, 12, Munich My Falkenried, Hamburg Liebknechtstr. 33/35, Heßbrühlstr. 7 (Officium), Stuttgart Robert-‐Bosch-‐Str. 9–11 (Europahaus), Darmstadt Im Mediapark 8 (Cologne Tower), Cologne Total Mortgage ($000s) 13,237 € 55,765 Mortgage (€000s) 8,700 36,840 41,556 35,317 97,500 243,375 € 28,500 24,500 69,100 167,640 $ $ Face rate 1.98% 2.33% Date of funding March 28, 2014 April 29, 2014 Date of maturity March 31, 2019 February 26, 2021 July 31, 2014 January 31, 2022 1.99% 1.82% October 20, 2014 September 30, 2022 1.77% November 14, 2014 November 14, 2024 On November 14, 2014, the Trust withdrew a mortgage with a principal balance of €69.1 million ($97.5 million) at a fixed rate of 1.77% per annum, maturing on November 14, 2024, in connection with the acquisition of Im Mediapark 8 (Cologne Tower). During the last quarter of 2014, the REIT sold a 50% interest in seven Acquisition Properties as part of a joint venture agreement with POBA. In conjunction with this sale, $314.4 million of the mortgage debt relating to the seven assets was sold to the joint venture (net of deferred financing costs – $310.8 million). As the REIT still retained a 50% interest in the POBA joint venture, the REIT still owed a $157.2 million mortgage debt through its obligations in the joint venture investments. Subsequent to year-‐end on February 6, 2015, the Trust drew down a mortgage with a principal balance of €59.4 million ($84.3 million) at a fixed rate of 1.71% per annum, maturing on February 6, 2025, in connection with the acquisition of Millerntorplatz in Hamburg. Dream Global REIT 2014 Annual Report | 20 Debt composition Term loan credit facility(1) Mortgage debt(1)(3) Debentures(1) Total Reclass debt related to assets held for sale $ $ $ Variable 7,957 -‐ -‐ 7,957 $ $ Fixed 366,749 (2) $ 854,061 152,365 1,373,175 December 31, 2014 Total 374,706 854,061 152,365 1,381,132 $ -‐ -‐ -‐ Variable 74,474 -‐ -‐ 74,474 $ $ Fixed 384,604 (2) $ 825,014 150,326 1,359,944 December 31, 2013 Total 459,078 825,014 150,326 1,434,418 $ (10,106) -‐ $ 64,368 5% 1,359,944 95% $ (10,106) 1,424,312 100% $ $ $ Percentage (1) Balance shown is net of deferred financing costs and mark-‐to-‐market adjustments. $ 7,957 1% 1,373,175 99% $ 1,381,132 100% (2) As at December 31, 2014, 98% of the term loan credit facility is subject to an interest rate swap in place until August 3, 2016. Pursuant to the term loan credit facility agreement, we are required to have a minimum of 80% subject to an interest rate swap. The portion subject to the swap has been presented as fixed rate debt. Includes the REIT’s share of mortgages related to the POBA joint venture. (3) Amounts recorded as at December 31, 2014 for the Debentures are net of $4.7 million of premiums allocated to their conversion features on issuance. The premiums are amortized to interest expense over the term to maturity of the related debt using the effective interest rate method. Term loan credit facility Concurrent with the closing of our initial public offering, we obtained a term loan credit facility (the “Facility”) from a syndicate of German and French banks for gross proceeds of $448.4 million (€328.5 million). During the year ended December 31, 2014, we repaid $67.0 million (€46.6 million) in connection with the disposition of 35 properties as well as mandatory repayments. As at December 31, 2014, the remaining principal balance on the term loan credit facility was $375.0 million (€267.2 million). The initial term of the Facility is five years with a two-‐year renewal option. Variable rate interest is payable quarterly under the Facility at a rate equal to the three-‐month EURIBOR, plus a margin of 200 basis points and agency fees of 10 basis points. Pursuant to the requirements of the Facility, we entered into an interest rate swap to fix 80% of the interest payments at 1.89% plus margin and agency fees, and purchased an instrument to cap 10% of the Facility, such that the interest rate does not exceed 5% on that portion. As at December 31, 2014, the weighted average rate of the Facility was 4.21%. Including financing costs, the effective interest rate under the Facility was 4.21%. At December 31, 2013, the weighted average rate was 4.09% and the effective rate was 4.13%. The Facility requires that, at each interest rate payment date, the debt service coverage ratio be equal to or above 145% and that the loan-‐to-‐value ratio not exceed 59% during the first three years the loan is outstanding and 54% during the final two years. As at December 31, 2014, we were in compliance with these covenants. Under the terms of the Facility, we were required to pay additional interest of 1% per annum beginning on August 3, 2013 on €100 million plus a 15% prepayment amount, less any amounts repaid. Mandatory repayments of between 110% and 125% (with the average being 115%) of the principal allocated to a particular Initial Property are required for any Initial Property sold or refinanced by the Trust. Since the initial public offering, the Trust has repaid $87.2 million (€61.3 million) in principal payments including prepayment amounts on various property dispositions. Opportunities to repay the balance of €53.7 million will come from maximizing the leverage on new acquisitions and from additional dispositions of non-‐core properties. Revolving credit facility On October 9, 2013, the Trust entered into a credit agreement with a Canadian bank to provide a revolving credit facility not to exceed €25 million. The interest rate on Canadian dollar advances is prime plus 200 basis points and/or bankers’ acceptance rates plus 300 basis points. The interest rate for euro advances is 300 basis points over the three-‐month EURIBOR rate. The revolving credit facility has a term of two years. On August 14, 2014, the Trust entered into an amending agreement to increase this facility to €50 million with no changes in the interest rate spreads or covenant requirements. The revised facility expires on September 25, 2016. The revolving credit facility was undrawn at December 31, 2014, except for a letter of credit commitment for €1.2 million. Dream Global REIT 2014 Annual Report | 21 Convertible debentures As at December 31, 2014, the total principal amount of Debentures outstanding was $161.0 million, convertible into an aggregate of 12,384,619 Units. The Debentures bear interest at 5.5% per annum, are payable semi-‐annually on July 31 and January 31 each year, and mature on July 31, 2018. Each $1,000 principal amount of the Debentures is convertible at any time by the holder into 76.9231 Units, representing a conversion price of $13.00 per unit. On or after August 31, 2014, and prior to August 31, 2016, the Debentures may be redeemed by the Trust, in whole or in part, at a price equal to the principal amount plus accrued and unpaid interest on not more than 60 days’ and not less than 30 days’ prior written notice, provided the weighted average trading price for the Units for the 20 consecutive trading days, ending on the fifth trading day immediately preceding the date on which notice of redemption is given, is not less than 125% of the conversion price. On or after August 31, 2016, and prior to July 31, 2018, the maturity date, the Debentures may be redeemed by the Trust at a price equal to the principal amount plus accrued and unpaid interest. The conversion feature of the Debentures is remeasured in each reporting period to fair value, with changes in fair value recorded in comprehensive income. During the three-‐month period ended December 31, 2014, the fair value loss attributed to the conversion feature increased by $0.9 million. During the twelve-‐month period ended December 31, 2014, the fair value gain attributed to the conversion feature increased by $0.2 million. The table below highlights our debt maturity profile: 2015 2016 2017 2018 2019 2020 and thereafter Acquisition date fair value adjustments Transaction costs Total(1) (1) Includes the REIT’s share of mortgages related to the POBA joint venture. Scheduled principal repayments on non-‐matured debt Debt maturities $ $ 48,930 $ 332,399 70,143 343,347 30,781 481,148 1,306,748 $ 24,573 $ 20,153 14,752 11,099 9,829 13,433 93,839 $ $ Total 73,503 352,552 84,895 354,446 40,610 494,581 1,400,587 (4,682) (14,773) 1,381,132 Commitments and contingencies We are contingently liable with respect to guarantees that are issued in the normal course of business and with respect to litigation and claims that may 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 our condensed consolidated financial statements. As at December 31, 2014, the REIT’s future minimum commitments under operating leases are as follows: Less than 1 year 1–5 years Longer than 5 years Total $ Operating lease payments 730 1,151 -‐ 1,881 $ During the three and twelve months ended December 31, 2014, the Trust paid $0.2 million and $0.9 million in minimum lease payments, respectively, which have been included in comprehensive income for the period. Dream Global REIT 2014 Annual Report | 22 Foreign currency contracts At December 31, 2014, we had various currency forward contracts in place to sell euros for Canadian dollars for the next 36 months. On settlement of a contract, we realize a gain or loss on the difference between the forward rate and the spot rate. We also mark the contracts to market quarterly and recorded an unrealized gain of $1.1 million and $6.4 million for the three-‐ and twelve-‐month periods ended December 31, 2014, respectively. The Trust currently has foreign exchange forward contracts to sell €121.2 million in total from January 2015 to December 2017 at an average exchange rate of $1.417 per euro. Equity The table below highlights our outstanding equity: Units December 31, 2014 Unitholders’ equity December 31, 2013 Number of Units 111,466,697 Amount 1,120,220 $ Number of Units 109,698,977 Amount 1,034,005 $ Units Our Declaration of Trust authorizes the issuance of an unlimited number of two classes of units: Units and Special Trust Units. The Special Trust Units may only be issued to holders of securities exchangeable for Units, are not transferable and are used to provide holders of such securities with voting rights with respect to Dream Global REIT. Each Unit and Special Trust Unit entitles the holder thereof to one vote for each Unit at all meetings of unitholders of the Trust. The Trust has a Deferred Unit Incentive Plan (“DUIP”) that provides for the grant of deferred trust units and income deferred units to trustees, officers, employees, affiliates and their service providers, including DAM, our asset manager. The following table summarizes the changes in our outstanding equity: Total Units outstanding on December 31, 2013 Units issued pursuant to the DUIP Units issued pursuant to the DRIP(1) Total Units outstanding on December 31, 2014 Units issued pursuant to the DRIP on January 15, 2015 Total Units outstanding on January 31, 2015 (1) Distribution Reinvestment and Unit Purchase Plan. Units 109,698,977 86,415 1,681,305 111,466,697 134,206 111,600,903 For the year ended December 31, 2014, 86,415 Units were issued pursuant to the Deferred Unit Incentive Plan (December 31, 2013 – 17,632 Units) to trustees, officers and employees. 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. Amounts retained in excess of the declared distributions are used to fund leasing costs and capital expenditure requirements. Given that working capital tends to fluctuate over time and should not affect our distribution policy, we disregard it when determining our distributions. We also exclude the impact of leasing costs, which fluctuate with lease maturities, renewal terms and the type of asset being leased. We evaluate the impact of leasing activity based on averages for our portfolio over a two-‐ to three-‐year time frame. We exclude the impact of transaction costs expensed on business combinations as these are considered to be non-‐recurring. In order to manage the exposure to currency risk of unitholders and holders of Debentures, the Trust has entered into foreign exchange forward contracts. For the quarter ended December 31, 2014, distributions declared amounted to $22.3 million. Of this amount, $3.5 million was reinvested in additional Units pursuant to the DRIP, resulting in a cash payout ratio of 84.5%. Distributions declared for the year ended December 31, 2014 were $88.5 million. Of this amount, $14.5 million was reinvested in additional units pursuant to the DRIP, resulting in a cash payout ratio of 83.6%. Dream Global REIT 2014 Annual Report | 23 Three months ended December 31, 2014 Year ended December 31, 2014 Declared amounts 4% bonus distribution Total Declared amounts 4% bonus distribution 2014 distributions Paid in cash or reinvested in Units Payable at December 31, 2014 Total distributions 2014 reinvestment Reinvested to December 31, 2014 Reinvested on January 15, 2015 Total distributions reinvested Distributions paid in cash Reinvestment to distribution ratio (for the period) Cash payout ratio $ $ $ $ $ $ $ $ $ 14,832 7,431 22,263 2,320 1,131 3,451 18,812 15.5% 84.5% 93 -‐ 93 93 45 138 $ $ $ $ 14,925 7,431 22,356 2,413 1,176 3,589 $ $ $ $ $ 535 -‐ 535 535 45 580 $ $ $ $ $ $ $ $ 81,116 7,431 88,547 13,365 1,131 14,496 74,051 16.4% 83.6% Total 81,651 7,431 89,082 13,900 1,176 15,076 We currently pay monthly distributions to unitholders of $0.06667 per unit, or $0.80 per unit on an annual basis. At December 31, 2014, approximately 15.2% of our total Units were enrolled in the DRIP. Dream Global REIT 2014 Annual Report | 24 OUR RESULTS OF OPERATIONS Basis of accounting Our discussion of results of operations includes our share of income from investments in joint ventures. Refer to “Non-‐GAAP measures and other disclosures” for a reconciliation to our consolidated financial statements. Investment properties revenue Investment properties operating expenses Net rental income Other income Interest and other income Share of net income from investment in other joint ventures Other expenses Portfolio management General and administrative Depreciation and amortization Interest expense Fair value adjustments, loss on sale of investment properties and other activities Fair value adjustments to investment properties Fair value adjustments to financial instruments Internal direct leasing costs Gain (loss) on sale of investment properties Contract termination fees incurred on sale to POBA Income before income taxes Current income taxes recovery (expense) Deferred income taxes recovery (expense) Recovery of (provision for) income taxes Net income Total earnings for the year attributable to: Unitholders of the Trust Shareholders of the subsidiaries Net income Foreign currency translation adjustments for the period attributable to: Unitholders of the Trust Shareholders of the subsidiaries Three months ended December 31, 2013(1) 62,528 $ 2014(1) 61,690 $ $ (18,621) 43,069 (20,656) 41,872 Year ended December 31, 2013(1) 220,220 (75,367) 144,853 2014(1) 257,725 $ (78,261) 179,464 396 7 403 (1,067) (4,763) (45) (12,063) (17,938) (11,173) 876 (324) 44,332 (510) 33,201 58,735 107 1,455 1,562 60,297 $ 59,388 $ 909 60,297 352 10 362 (409) (3,332) (16) (11,288) (15,045) 891 (9,460) (679) (550) -‐ (9,798) 17,391 (142) (2,019) (2,161) 15,230 $ 15,230 $ -‐ 15,230 432 26 458 (4,571) (17,058) (138) (48,571) (70,338) 73,950 3,056 (1,954) 41,873 (510) 116,415 225,999 (1,328) (15,734) (17,062) 208,937 $ 208,028 $ 909 208,937 (10,068) (98) (10,166) 57,950 -‐ 57,950 (54,671) (98) (54,769) 1,547 28 1,575 (3,173) (12,226) (88) (38,506) (53,993) (57,032) (11,450) (2,191) (1,142) -‐ (71,815) 20,620 (689) 2,834 2,145 22,765 22,765 -‐ 22,765 109,133 -‐ 109,133 $ $ Comprehensive income for the year attributable to: Unitholders of the Trust Shareholders of the subsidiaries 131,898 -‐ 131,898 (1) Results from operations were converted into Canadian dollars from euros using the following average exchange rates: the three-‐ and twelve-‐month periods ended December 31, 2014 were converted at $1.419:€1 and $1.467:€1, respectively; for 2013, the three-‐ and twelve-‐month periods ended December 31, 2013 were converted at $1.430:€1 and $1.369:€1, respectively. 153,357 811 154,168 $ 49,320 811 50,131 $ 73,180 -‐ 73,180 $ $ Dream Global REIT 2014 Annual Report | 25 Investment properties revenue Investment properties revenue includes net rental income from investment properties as well as the recovery of operating costs and property taxes from tenants. Investment properties revenue for the quarter was $61.7 million, a decrease of $0.8 million, or 1.3%, over the prior year comparative quarter. Excluding the $0.5 million negative impact of foreign currency translation, the decrease of $0.3 million was mainly the result of a $6.2 million negative impact caused by our disposition program with respect to our Initial Properties, largely offset by a $5.9 million increase in revenue due to acquisitions. For the year ended December 31, 2014, investment properties revenue was $257.7 million, an increase of $37.5 million, or 17.0%, over the prior year comparative period. The increase was mainly attributable to acquisitions completed in 2013 and 2014, offset by the disposition of some of our Initial Properties. Investment properties operating expenses Investment properties operating expenses comprises occupancy costs and property taxes as well as certain expenses that are not recoverable from tenants, the majority of which are related to major repairs and maintenance. Operating expenses fluctuate with changes in occupancy levels and levels of repairs and maintenance. Investment properties operating expenses for the quarter was $18.6 million, a decrease of $2.0 million, or 9.9%, over the prior year comparative quarter mainly due to dispositions of some Initial Properties, partially offset by an increase due to acquisitions in 2013 and 2014. For the year ended December 31, 2014, investment properties operating expenses were $78.3 million, an increase of $2.9 million, or 3.8%, over the prior year. The increase was mainly attributable to the acquisitions completed in 2013 and 2014, offset by dispositions during 2014. Interest and other income Interest and other income comprises interest earned on notes receivable, the POBA loan facility and bank accounts. Except for the interest earned on the notes receivable and the POBA loan facility, the income included in interest income is not necessarily of a recurring nature and the amounts may vary quarter-‐over-‐quarter. Interest and other income for the quarter was $0.4 million, unchanged from the prior year comparative quarter. Interest and other income for the year ended December 31, 2014 was $0.4 million, a decrease of $1.1 million from the previous year. The decrease is mainly due to lower overall excess cash on hand in 2014 compared to 2013, resulting in lower interest income in 2014, partially offset by interest earned on the notes receivable and the POBA loan facility. Statement of comprehensive income results Net rental income Initial Properties Acquisition Properties Net rental income $ $ Three months ended December 31, 2013 20,033 21,839 41,872 2014 16,537 26,532 43,069 $ $ $ $ Year ended December 31, 2013 2014 79,126 76,202 65,727 103,262 144,853 179,464 $ $ For the three months ended December 31, 2014, net rental income was $43.1 million, representing an increase of $1.2 million compared to the same quarter in 2013. Excluding the $0.3 million negative impact of a weaker euro against the dollar, net rental income increased by $1.5 million compared to the same quarter last year, mainly as a result of contributions from new acquisitions since October 2013, neutralizing the impact from the Deutsche Post terminations as well as the end of scheduled Lonestar head lease payments in July 2014. On a comparative property basis, net rental income for the Acquisition Properties was 6.4% higher in 2014 compared to 2013. Dream Global REIT 2014 Annual Report | 26 The table below summarizes our revenue and operating expenses in euros: Investment properties revenue Investment properties operating expenses Net rental income Three months ended December 31, 2013 43,738 (14,449) 29,289 2014 43,487 € (13,126) 30,361 € € € Year ended December 31, 2013 160,885 (55,061) 105,824 2014 175,670 € (53,344) 122,326 € € € Portfolio management Our portfolio management team comprises the employees of our advisory subsidiaries in Germany and Luxembourg who are responsible for providing asset management services for the investment properties, including asset strategy and leasing activities. Portfolio management expense was $1.1 million for the three months ended December 31, 2014, higher than that of the same period in 2013 due to an increase in staff costs to support our growth. For the year ended December 31, 2014, an expense of $4.6 million was recorded, representing an increase of $1.4 million compared to the same period in 2013, reflecting the need to add resources to support our business growth and corporate strategy. General and administrative General and administrative expenses totalled $4.8 million and $17.1 million for the three and twelve months ended December 31, 2014, respectively, representing increases of $1.4 million and $4.8 million over the same periods last year. The increase mainly resulted from higher asset management fees, regulatory and corporate compliance costs associated with the new acquisitions, and higher corporate general and administrative expenses, as well as the impact of a strengthening euro against the dollar. Interest expense Interest expense was $12.1 million for the three-‐month period ended December 31, 2014, an increase of $0.8 million compared to the same quarter last year. New mortgage debt placed on properties we acquired in 2013 and 2014 accounted for a $1.0 million increase. The increasing use of our revolving credit facility to bridge the investing and financing activities contributed to a $0.3 million increase. These increases were partially reduced by repayments on our term credit facility during the year relating to property dispositions, resulting in interest savings of $0.5 million. Interest expense was $48.6 million for the year ended December 31, 2014, an increase of $10.1 million compared to the same period last year. Excluding the unfavourable exchange rate impact of $2.5 million, interest expense increased by $6.9 million as a result of new mortgage debt placed on properties we acquired in 2013 and 2014. In addition, included in interest expense is a $0.5 million increase related to our revolving credit facility and a $0.2 million increase related to the term credit facility reflecting the additional 1% interest payable on $100 million (plus 15% prepayment amount) principal effective August 3, 2013, offset by interest savings from term debt repayment over the course of 2014 relating to our property dispositions. We currently have interest rate swaps in place that fix the interest rate payable on €260.1 million at an underlying rate of 1.89%. The REIT does not apply hedge accounting in relation to these swaps and, as a result, their impact is not included in interest expense but accounted for through the fair value adjustments as described below. During the quarter, $1.7 million of swaps were settled, the same amount as in the same quarter last year. During the year ended December 31, 2014, $6.5 million of swaps were settled compared to $6.2 million in the same period last year. Excluding the impact of the strengthening of the euro, the swap settlement was slightly higher, reflecting the slight decrease in underlying interest rates. Including the swaps and the additional 1% interest rate on the Facility, the actual weighted average interest rate on the Facility as at December 31, 2014 is 4.21%. Any adjustments arising from the interest rate swaps are reflected in the fair value adjustments to financial instruments and not in interest expense. Dream Global REIT 2014 Annual Report | 27 Fair value adjustment to investment properties For the three months ended December 31, 2014, a loss of $11.2 million was recognized compared to a gain of $0.9 million in the comparative quarter last year. The loss in the current quarter was driven by a $12.6 million fair value loss on the Initial Properties due to an increase in vacancies relating to the Deutsche Post terminations and a $7.7 million fair value loss on properties sold and properties under contract for sale (properties held for sale) during the quarter. A $12.9 million gain is recognized for Acquisition Properties due to yield compressions experienced in certain markets, offset by a $4.0 million fair value loss mainly related to transaction costs of the two properties acquired in the period. The gain in the comparative quarter in 2013 comprised a $0.9 million gain in fair value due to an increase in fair value of Acquisition Properties net of transaction costs incurred on properties. For the year ended December 31, 2014, the fair value adjustment to investment properties amounted to a gain of $74.0 million compared to a loss of $57.0 million during the same period in 2013. The gain for the year ended December 31, 2014 comprises a $112.4 million gain recognized for Acquisition Properties due to yield compressions experienced in certain markets and positive leasing developments for some assets, reduced by a $13.2 million fair value loss on the Initial Properties, a $4.4 million loss related to properties sold and properties under contract for sale and a $20.9 million loss on transaction costs incurred on properties acquired during the year ended December 31, 2014. The loss for the year ended December 31, 2013 was mainly due to the write-‐off of transaction costs related to the acquisition of 18 assets during 2013. Fair value adjustment to financial instruments For the three months ended December 31, 2014, we incurred an unrealized gain in the fair value of financial instruments of $0.9 million compared to a loss of $9.5 million in the comparative period. The fair value adjustments in the quarter mainly comprise the following components: • • • • a $0.1 million loss recognized on the fair value change in the interest rate swaps and cap as a result of the settlement of one contract in the quarter for $1.7 million and a decrease in the forward price of interest rates. A $1.1 million loss was recognized in the comparative quarter last year due to a similar decrease in the forward price of interest rates; a $0.9 million fair value loss recognized on the conversion feature of the convertible debentures mainly reflecting an increase in the credit spread and risk-‐free interest rate applicable to our Units, compared to a similar loss of $0.4 million in the same period in 2013; an unrealized gain of $1.1 million was recognized related to our foreign currency forward contracts due to a depreciation of the euro compared to the Canadian dollar, versus a $8.0 million unrealized loss during the comparative quarter due to a depreciation of the Canadian dollar compared to the euro; and a $0.7 million gain was recognized related to our DUIP, mainly reflecting a decrease in the market price of our Units, compared to a loss of $0.1 million in the same period in 2013. For the year ended December 31, 2014, we incurred an unrealized gain in the fair value of financial instruments of $3.1 million compared to a loss of $11.5 million in the comparative period. The fair value adjustments in the year mainly comprise the following components: • • • • a $3.9 million loss recognized on the fair value change in the interest rate swaps and cap as a result of the settlement of four contracts in the period for $6.5 million and a decrease in the forward price of interest rates. A $0.2 million gain was recognized in the comparative period last year due to an increase in the forward price of interest rates; a $0.2 million fair value gain recognized on the conversion feature of the convertible debentures mainly reflecting a decrease in credit spread and risk-‐free interest rate applicable to the valuation of our Units, compared to a gain of $3.8 million in the same period in 2013 reflecting a decrease in the price of our Units; an unrealized gain of $6.4 million was recognized related to our foreign currency forward contracts due to a depreciation of the euro compared to the Canadian dollar, versus a $16.0 million unrealized loss during the comparative quarter due to a depreciation of the Canadian dollar compared to the euro; and a $0.3 million gain was recognized related to our DUIP, mainly reflecting a change in discounts applied in valuating of our Units, compared to a gain of $0.6 million in the same period in 2013. Dream Global REIT 2014 Annual Report | 28 Internal direct leasing costs During the first quarter of 2014, we adopted a change in accounting policy regarding the accounting treatment of incremental internal leasing costs governed by International Accounting Standard (“IAS”) 17, after consideration of an IFRS Interpretations Committee agenda decision issued in April 2014. Incremental internal leasing costs are now expensed during the period incurred. Prior to adopting this interpretation, incremental leasing costs were capitalized to investment properties; however, we have restated all affected prior periods to give effect to this change in accounting policy. This interpretation does not affect the accounting treatment of leasing costs paid to third parties, which will continue to be capitalized in accordance with IAS 17. In accordance with IAS 17, a total of $0.3 million and $2.0 million of incremental internal leasing staff costs incurred during the three and twelve months ended December 31, 2014 have been classified as internal direct leasing costs of the respective properties. In the comparative periods in 2013, leasing staff costs of $0.7 million and $2.2 million were incurred, which were originally capitalized but have been restated to remain consistent with the policy adopted in the current year. Gain (loss) on sale of investment properties Gain on sale of investment properties for the quarter was $44.3 million, an increase of $44.9 million over the prior year comparative quarter. For the twelve months ended December 31, 2014, gain on sale of investment properties was $41.9 million, an increase of $43.0 million over the prior year comparative period. The increase was mainly attributable to the $46.3 million gain on sale of seven Acquisition Properties to the POBA joint venture during the quarter, reduced by loss on sale of investment properties during the quarter and sale of 35 properties during the year. This compares to $0.6 million and $1.1 million loss on the sale of investment properties during the same quarter last year and 15 properties for the entire 2013 year. Contract termination fee Under the terms of the POBA joint venture agreement, the REIT terminated an asset management agreement that was in place on certain of the Acquired Portfolio assets including three joint venture assets and was required to pay a cancellation fee. The portion of the cancellation fee relating to the non-‐joint venture assets has been recorded as a one-‐time contract termination fee of $0.5 million. Income taxes We recognized current income tax recovery of $0.1 million and income tax expenses of $1.3 million for the three and twelve months ended December 31, 2014, respectively, compared to current income tax expenses of $0.1 million and $0.7 million for the comparative periods in 2013. We also recognized deferred income tax recovery of $1.5 million and income tax expense of $15.7 million for the three and twelve months ended December 31, 2014, respectively, compared to a deferred income tax expense of $2.0 million and income tax recovery of $2.8 million for the comparative periods in 2013. The difference is mainly a result of the deferred income tax impact associated with the loss carry-‐forwards, fair value adjustments related to investment properties net of tax depreciation, and fair value changes related to financial instruments. Asset management fee On August 3, 2011, DAM elected to receive the base asset management fees payable on the Initial Properties acquired on August 3, 2011 by way of deferred trust units under the Asset Management Agreement for up to $3.5 million per year for the next five years. These deferred trust units vest 20% annually, commencing on the fifth anniversary date of being granted. On termination of the Asset Management Agreement, unvested trust units will vest immediately. During the three and twelve months ended December 31, 2014, asset management expenses pertaining to the Initial Properties were $0.6 million and $2.5 million, respectively. A total of 86,716 and 422,171 deferred units were granted during the respective periods as compensation for the fees. An additional 30,410 deferred units were granted on January 1, 2015 pertaining to the asset management fee for the month of December 2014. As at January 1, 2015, 1,364,659 unvested deferred and income deferred units were outstanding with respect to the Asset Management Agreement. The asset management fees were recorded based on the fair value of the deferred units issued, with an appropriate discount applied to reflect the restricted period of exercise. In addition, the Trust paid in cash an asset management fee of $1.3 million and $4.9 million, respectively, for the three and twelve months ended December 31, 2014, for properties acquired since the acquisition of our Initial Properties. It further paid a financing fee of $0.1 million and $0.4 million related to mortgage financing services provided during the three and twelve months ended December 31, 2014, respectively, and acquisition fees of $1.2 million and $2.8 million related to properties acquired during the three and twelve months ended December 31, 2014, respectively. Dream Global REIT 2014 Annual Report | 29 During the three and twelve months ended December 31, 2014, the REIT also reimbursed DAM for out-‐of-‐pocket and incidental costs of $0.1 million and $0.6 million for the three and twelve months ended December 31, 2014, respectively. Shared Services and Cost Sharing Agreement The Trust entered into a shared services and cost sharing agreement with DAM on December 1, 2013. The agreement is for a one-‐year term and will be automatically renewed for further one-‐year terms unless and until the agreement is terminated in accordance with its terms or by mutual agreement of the parties. Pursuant to the agreement, DAM will be providing additional administrative and support services in order to expand and improve DAM’s service capability in connection with the provision of its asset management services. DAM will receive an annual fee sufficient to reimburse it for all the expenses incurred in providing these additional administrative and support services. Additionally, the Trust will also reimburse DAM in each calendar year for its share of costs incurred in connection with certain business transformation services provided by DAM. During the year ended December 31, 2014, the Trust recorded an amount of $0.2 million payable to DAM pursuant to the Shared Services and Cost Sharing Agreement. The Trust’s future commitment under the Shared Services and Cost Sharing Agreement over the next six years is $1.2 million. Impact of foreign exchange Exchange rate fluctuations between the Canadian dollar and the euro impact the Trust’s reported revenues, expenses, income, cash flows, assets and liabilities. The table below summarizes changes in the exchange rates. Average exchange rate (Cdn. dollars to one euro) Exchange rate at period-‐end (Cdn. dollars to one euro) Three months ended December 31, Change 2013 2014 -‐0.8% 1.430 1.419 -‐4.2% 1.466 1.404 2014 1.467 1.404 Year ended December 31, Change 7.2% -‐4.2% 2013 1.369 1.466 Comprehensive income was impacted by a foreign currency translation loss of $10.1 million and $54.7 million for the three and twelve months ended December 31, 2014, respectively. The exchange rates decreased from $1.466:€1 as at December 31, 2013 to $1.404:€1 as at December 31, 2014. The quarterly results of our euro-‐denominated operations included in net income were translated at an average exchange rate of $1.419:€1 compared to $1.430:€1 in the same quarter last year. For the year ended December 31, 2014, results were translated at an average exchange rate of $1.467:€1 compared to $1.369:€1 in the same period last year. Dream Global REIT 2014 Annual Report | 30 Funds from operations and adjusted funds from operations Net income for the period Add (deduct): Net income attributable to non-‐controlling interest Net FFO impact attributable to non-‐controlling interests Amortization of lease incentives Internal direct leasing costs Net (gain) loss on sale of investment properties Tax on gains on sale of investment properties Deferred income taxes Cash settlement on interest rate swap Loss on settlement of foreign currency contracts Fair value adjustments to investment properties Fair value adjustments to financial instruments FFO Add (deduct): Amortization of financing costs Amortization of initial discount on convertible debentures Amortization of fair value adjustment on acquired debt Contract termination fees incurred on sale to the POBA joint venture Deferred unit compensation expense Deferred asset management fees Straight-‐line rent Deduct: Normalized leasing costs and tenant incentives Normalized non-‐recoverable recurring capital expenditures AFFO Funds from operations FFO FFO per unit – basic FFO per unit – diluted Excluding the impact of undeployed cash: FFO per unit – basic FFO per unit – diluted $ $ $ $ $ $ $ $ $ Three months ended December 31, 2013 15,230 2014 60,297 $ Year ended December 31, 2014 2013 22,765 208,937 $ $ (909) 634 554 324 (44,332) (159) (1,455) (1,695) (128) 11,173 (876) 23,428 859 281 (96) 510 377 616 (129) 25,846 $ $ -‐ 3 259 679 550 (33) 2,019 (1,585) (1,456) (891) 9,460 24,235 794 260 (92) -‐ 313 539 (440) 25,609 $ $ (909) 535 1,467 1,954 (41,873) 342 15,734 (6,493) (5,192) (73,950) (3,056) 97,496 3,484 1,092 (387) 510 1,648 2,541 (657) 105,727 $ $ (1,938) (1,507) 22,401 $ (1,884) (1,466) 22,259 $ (8,076) (6,281) 91,370 $ -‐ 3 616 2,191 1,142 62 (2,834) (6,179) (1,826) 57,032 11,450 84,422 2,651 1,008 (402) -‐ 1,313 2,113 (1,510) 89,595 (6,518) (5,070) 78,007 Three months ended December 31, 2013 24,235 0.22 0.22 2014 23,428 0.21 0.21 $ $ $ Year ended December 31, 2014 2013 84,422 97,496 0.85 0.88 0.84 0.87 $ $ $ $ $ $ 0.22 0.22 $ $ 0.24 0.24 $ $ 0.89 0.88 $ $ 0.94 0.93 Total FFO for the quarter was $23.4 million, a decrease of $0.8 million or 3.3% over the prior year comparative quarter, reflecting the impact from Deutsche Post lease terminations and Lonestar head lease payments cessation starting in July 2014, largely offset by completed acquisition and leasing activity. Total FFO for the year ended December 31, 2014 was $97.5 million, an increase of $13.1 million, or 15.5%, over the prior year comparative period. For the quarter ended December 31, 2014, basic FFO on a per unit basis was $0.21 per unit, slightly lower than prior year comparative quarter. For the year ended December 31, 2014, basic FFO increased to $0.88 per unit from $0.85 per unit over the prior year comparative period. For the quarter ended December 31, 2014, diluted FFO on a per unit basis was also $0.21 per unit, also slightly lower than the prior year comparative quarter. For the year ended December 31, 2014, diluted FFO increased to $0.87 per unit from $0.84 per unit over the prior year comparative period, a 3.6% increase. Assuming this excess cash had been invested, basic FFO per unit would have been $0.22 per unit for the quarter and $0.89 per unit for the year. Dream Global REIT 2014 Annual Report | 31 Adjusted funds from operations AFFO AFFO per unit – basic AFFO per unit – diluted Excluding the impact of undeployed cash: AFFO per unit – basic AFFO per unit – diluted $ $ $ $ $ Three months ended December 31, 2013 22,259 2014 22,401 Year ended December 31, 2014 2013 78,007 91,370 $ $ $ 0.20 0.20 $ $ $ 0.20 0.20 $ $ $ 0.83 0.82 0.79 0.79 0.21 0.20 $ $ 0.22 0.22 $ $ 0.84 0.83 $ $ 0.88 0.87 Total AFFO for the quarter ended December 31, 2014 was $0.1 million higher than the prior year comparative quarter, reflecting the impact of acquisitions completed subsequent to the second quarter of 2013, reduced by the impact of terminated Deutsche Post space as well as the cessation of the Lonestar head lease payments, both coming into effect on July 1, 2014. Total AFFO for the year ended December 31, 2014 was $91.4 million, an increase of $13.4 million, or 17.1%, over the prior year comparative period. For the quarter ended December 31, 2014, basic AFFO on a per unit basis was $0.20 per unit, same as the prior year comparative quarter. For the year ended December 31, 2014, diluted AFFO on a per unit basis increased from $0.79 per unit to $0.82 per unit over the prior year comparative period, an increase of 3.8%. Assuming this excess cash had been invested, basic AFFO per unit would have been $0.21 per unit for the quarter and $0.84 per unit for the year. SELECTED ANNUAL INFORMATION The following table provides selected information for the past three years: Investment properties revenue(1) Net income Total assets(1) Non-‐current liabilities(1) Distributions declared REIT Units (1) Reflects the REIT’s Owned Share. For the year ended December 31, 2014 257,725 $ 208,937 2,588,425 1,323,081 $ 89,134 $ For the year ended December 31, 2013 220,220 $ 22,765 2,558,674 1,428,461 $ 80,173 $ 111,466,697 109,698,977 $ $ $ For the year ended December 31, 2012 138,661 10,916 1,400,269 752,846 43,568 72,232,494 Dream Global REIT 2014 Annual Report | 32 QUARTERLY INFORMATION (per consolidated financial statements) The following table shows quarterly information since January 1, 2013: Investment properties revenue Investment properties operating expenses Net rental income Other income Interest and other income Share of net losses from investment in joint ventures Other expenses Portfolio management General and administrative Amortization and depreciation Interest expense Fair value adjustments, loss on sale of investment properties and other activities Fair value adjustments to investment properties Fair value adjustments to financial instruments Internal direct leasing costs Gain (loss) on sale of investment properties Contract termination fees Income (loss) before taxes Current income taxes recovery (expense) Deferred income taxes recovery (expense) Recovery of (provision for) income taxes Net income (loss) Total income for the period attributable to: Unitholders of the Trust Shareholders of the subsidiaries Net income (loss) Add (deduct): Income allocated to non-‐controlling interest Net FFO impact attributable to non-‐controlling interests Amortization of lease incentives Internal direct leasing costs (Gain) loss on sale of investment properties Tax on gains on sale of investment properties Deferred income taxes Term debt swap settlement Gain (loss) on settlement of Forex contracts Fair value adjustments to investment properties Fair value adjustments to financial instruments FFO FFO per unit – basic FFO per unit – diluted Funds from operations Add (deduct): Amortization of financing costs Accretion of debenture conversion feature Amortization of fair value adjustment of debt Contract termination fees incurred on sale to the POBA joint venture Deferred compensation expense Deferred asset management expense Straight-‐line rent Deduct: Normalized leasing costs and tenant incentives Normalized non-‐recoverable recurring capital expenditures AFFO AFFO per unit – basic AFFO per unit – diluted Weighted average number of Units: Basic Diluted Quarterly average exchange rate ($:€1) $ Q4 2014 60,042 $ (18,325) 41,717 Q3 2014 Q2 2014 Q1 2014 Q4 2013 Q3 2013 Q2 2013 61,388 $ (17,872) 43,516 67,514 $ (20,435) 47,079 67,133 $ (21,333) 45,800 62,528 $ (20,656) 41,872 56,915 $ (17,436) 39,479 54,413 $ (18,222) 36,191 Q1 2013 46,364 (19,053) 27,311 382 2,494 2,876 (1,067) (4,557) (45) (11,690) (17,359) (12,876) 876 (324) 44,332 (510) 31,498 58,732 110 1,455 1,565 60,297 $ 8 7 15 (1,019) (4,295) (30) (12,221) (17,565) 49,335 6,914 (577) (1,172) -‐ 54,500 80,466 (857) (8,223) (9,080) 71,386 $ (28) 9 (19) (1,207) (4,350) (38) (12,273) (17,868) 42,011 3,434 (541) (811) -‐ 44,093 73,285 (383) (8,140) (8,523) 64,762 $ 56 3 59 (1,278) (3,650) (25) (12,014) (16,967) (6,223) (8,168) (512) (476) -‐ (15,379) 13,513 (195) (826) (1,021) 12,492 $ 352 10 362 (409) (3,332) (16) (11,288) (15,045) 891 (9,460) (679) (550) -‐ (9,798) 17,391 142 (2,019) (2,161) 15,230 $ 351 (2) 349 (1,006) (3,399) (33) (10,441) (14,879) (3,901) (1,808) (586) (79) -‐ (6,374) 18,575 100 (983) (883) 17,692 $ 446 13 459 (882) (3,045) (24) (9,700) (13,651) (8,352) (4,570) (374) (252) -‐ (13,548) 9,451 (316) (128) (444) 9,007 $ 398 7 405 (876) (2,450) (15) (7,077) (10,418) (45,670) 4,388 (552) (261) -‐ (42,095) (24,797) (331) 5,964 5,633 (19,164) 59,388 $ 909 60,297 $ 71,386 $ 64,762 $ 12,492 $ 15,230 $ 17,692 $ 9,007 $ -‐ -‐ -‐ -‐ -‐ -‐ 71,386 $ 64,762 $ 12,492 $ 15,230 $ 17,692 $ 9,007 $ (19,164) -‐ (19,164) (909) -‐ -‐ -‐ -‐ -‐ -‐ -‐ 634 554 324 (44,332) (159) (1,455) (1,695) (128) 11,173 (876) 23,428 $ 0.21 $ 0.21 23,428 $ 859 281 (96) 510 377 616 (129) 25,846 (29) 110 577 1,172 337 8,223 (1,628) (666) (49,335) (6,914) 23,233 $ 0.21 $ 0.21 23,233 $ 904 276 (96) -‐ 394 638 (182) 25,167 (34) 424 541 811 98 8,140 (1,567) (1,651) (42,011) (3,434) 26,079 $ 0.24 $ 0.23 26,079 $ 909 270 (97) -‐ 538 645 (378) 27,966 (36) 379 512 476 66 826 (1,603) (2,747) 6,223 8,168 24,756 $ 0.23 $ 0.22 24,756 $ 812 265 (98) -‐ 339 642 32 26,748 3 259 679 550 (33) 2,019 (1,585) (1,456) (891) 9,460 24,235 $ 0.22 $ 0.22 24,235 $ 794 260 (92) -‐ 313 539 (440) 25,609 -‐ 108 586 79 (126) 983 (1,574) (456) 3,901 1,808 23,001 $ 0.21 $ 0.21 23,001 $ 744 254 (88) -‐ 356 529 (268) 24,528 -‐ 112 374 252 79 128 (1,533) 52 8,352 4,570 21,393 $ 0.22 $ 0.21 21,393 $ 666 250 (84) -‐ 378 523 (623) 22,503 -‐ 137 552 261 142 (5,964) (1,487) 34 45,670 (4,388) 15,793 0.20 0.20 15,793 447 244 (138) -‐ 266 522 (179) 16,955 (1,938) (1,958) (2,119) (2,061) (1,884) (1,776) (1,629) (1,229) $ $ $ $ $ $ $ $ (1,507) 22,401 $ 0.20 $ 0.20 (1,523) 21,686 $ 0.20 $ 0.20 (1,648) 24,199 $ 0.22 $ 0.22 (1,603) 23,084 $ 0.21 $ 0.21 (1,466) 22,259 $ 0.20 $ 0.20 (1,381) 21,371 $ 0.20 $ 0.20 (1,267) 19,607 $ 0.20 $ 0.20 (956) 14,770 0.19 0.19 111,301,061 125,355,097 110,878,351 124,824,789 110,469,257 124,295,625 109,987,243 123,638,848 109,482,435 123,028,441 109,116,985 122,552,770 99,037,061 112,358,396 1.419 1.442 1.496 1.512 1.430 1.376 1.337 79,267,113 92,382,159 1.332 Dream Global REIT 2014 Annual Report | 33 NON-‐GAAP MEASURES AND OTHER DISCLOSURES The following additional 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. Funds from operations (“FFO”) Management believes FFO is an important measure of our operating performance. This non-‐IFRS measurement is a commonly used measure of performance of real estate operations; however, it does not represent net income or cash flow from operating activities as defined by IFRS and is not necessarily indicative of cash available to fund Dream Global REIT’s needs. In compliance with Canadian Securities Administrators Staff Notice 52-‐306 (Revised), “Non-‐GAAP Financial Measures”, FFO has been reconciled to net income in the section “Our results of operations” under the heading “Funds from operations and adjusted funds from operations”. Adjusted funds from operations (“AFFO”) Management believes AFFO is an important measure of our economic performance and is indicative of our ability to pay distributions. This non-‐IFRS measurement is commonly used for assessing real estate performance; however, it does not represent cash flow from operating activities as defined by IFRS and is not necessarily indicative of cash available to fund Dream Global REIT’s needs. Our calculation of AFFO includes an estimated amount (8% of net rental income) of normalized non-‐recoverable capital expenditures, as well as initial direct leasing costs and tenant incentives that we expect to incur based on our current portfolio and expected average leasing activity over time. Our estimates of initial direct leasing costs and lease incentives are based on the average of our expected leasing activity over the next two to three years multiplied by the average cost per square foot that we expect to incur. Our estimates of normalized non-‐recoverable capital expenditures are based on our expected average expenditures for our current property portfolio. This estimate will differ from actual experience due to the timing of expenditures and any growth in our business resulting from property acquisitions. In compliance with Canadian Securities Administrators Staff Notice 52-‐306 (Revised), “Non-‐GAAP Financial Measures”, AFFO has been reconciled to cash generated from operating activities in this section under the heading “Cash generated from operating activities to AFFO reconciliation”. Net operating income (“NOI”) NOI is defined by the Trust as the total investment property revenue less investment property operating expenses, including the share of net rental income from investment in joint ventures. 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 standard 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”, NOI has been reconciled to net rental income in the table below: Net rental income (per consolidated financial statements) Add: Share of net rental income from investments in joint ventures NOI $ $ Three months ended December 31, 2013 41,872 $ 2014 41,717 $ Year ended December 31, 2014 2013 144,853 178,112 $ 1,352 43,069 $ -‐ 41,872 $ 1,352 179,464 $ -‐ 144,853 Dream Global REIT 2014 Annual Report | 34 Weighted average number of units The basic weighted average number of Units outstanding used in the FFO and AFFO calculations includes all Units. The diluted weighted average number of Units assumes the conversion of the Debentures and incremental unvested deferred trust units related to the Deferred Unit Incentive Plan represented by the potential Units that would have to be purchased in the open market to fund the unvested obligation. The weighted average number of Units outstanding for basic and diluted FFO and AFFO calculations for the three and twelve months ended December 31, 2014 is noted in the table below. Diluted FFO and AFFO include interest and amortization adjustments related to the Debentures of $2.2 million and $10.3 million for the three and twelve months ended December 31, 2014. Weighted average Units outstanding for basic per unit amounts Weighted average Units outstanding for diluted per unit amounts Three months ended December 31, 2013 109,482,435 123,028,441 2014 111,301,061 125,355,097 Year ended December 31, 2014 2013 99,335,779 110,663,178 112,691,725 124,534,099 Over the course of the quarter, the REIT had approximately $39.6 million on average of excess undeployed cash available for acquisitions. We estimate that these funds, if invested, would generate a return on equity of approximately 9.5%, which is consistent with historic returns for acquired investment properties, and would have contributed $0.9 million to FFO and AFFO for the quarter ended December 31, 2014. Dream Global REIT 2014 Annual Report | 35 Investment in joint ventures The Trust’s proportionate share of the financial position and results of operation of its investment in joint ventures, which are accounted for using the equity method in the consolidated financial statements and as presented and discussed throughout the MD&A using the proportionate consolidation method, is a non-‐GAAP measure. A reconciliation of the financial position and results of operations to the consolidated balance sheets and consolidated statements of comprehensive income is included in the following tables. Balance sheet reconciliation to consolidated financial statements Assets NON-‐CURRENT ASSETS Investment properties Investment in joint ventures Amount in escrow Deferred income tax assets Other non-‐current assets CURRENT ASSETS Amounts receivable Prepaid expenses Amount in escrow Cash Assets held for sale Total assets Liabilities NON-‐CURRENT LIABILITIES Debt Deposits Derivative financial instruments Deferred Unit Incentive Plan Deferred income tax liabilities CURRENT LIABILITIES Debt Amounts payable and accrued liabilities Income tax payable Deferred rent Derivative financial instruments Distributions payable Liabilities related to assets held for sale Total liabilities December 31, 2014 Amounts per consolidated financial statements Share from investment in POBA joint ventures Total December 31, 2013 $ $ $ $ 2,079,671 $ 159,967 4,930 -‐ 1,698 2,246,266 17,455 2,360 -‐ 121,939 141,754 44,363 2,432,383 $ 1,157,882 $ 1,802 3,420 9,365 719 1,173,188 70,514 49,485 1,268 -‐ 8,853 7,431 137,551 1,424 1,312,163 $ 284,417 $ (134,237) -‐ -‐ 484 150,664 2,364,088 $ 25,730 4,930 -‐ 2,182 2,396,930 2,228 28 -‐ 3,122 5,378 -‐ 156,042 $ 19,683 2,388 -‐ 125,061 147,132 44,363 2,588,425 $ 149,747 $ 146 -‐ -‐ -‐ 149,893 1,307,629 $ 1,948 3,420 9,365 719 1,323,081 2,989 3,111 49 -‐ -‐ -‐ 6,149 -‐ 156,042 $ 73,503 52,596 1,317 -‐ 8,853 7,431 143,700 1,424 1,468,205 $ 2,390,244 -‐ -‐ 12,313 2,288 2,404,845 18,149 1,962 6,220 106,292 132,623 21,206 2,558,674 1,403,956 1,900 16,299 6,306 -‐ 1,428,461 20,356 32,940 523 6,220 13,772 7,314 81,125 15,083 1,524,669 Dream Global REIT 2014 Annual Report | 36 During Q3 2014, the REIT entered into a joint venture agreement with POBA to sell a 50% interest in seven of the Acquisition Properties, which were each held in separate subsidiaries. The closings were completed in three tranches over the course of Q4 2014. Pursuant to this arrangement, the REIT co-‐owns these seven assets and, as such, has classified its 50% interest in each of these entities as investments in joint ventures and accounted for the investment using the equity method. As a result, seven Acquisition Properties valued at $573.5 million, and the related mortgages valued at $314.5 million were derecognized at December 31, 2014. The total consideration to the REIT for the 50% interest in the investment properties was $311.3 million. The consideration consisted of the assumption of working capital of $2.2 million, POBA assuming 50% of the outstanding mortgages, which totalled $157.2 million, with the balance of $156.3 million paid to the REIT in cash. The REIT incurred transaction costs of $4.5 million relating to the sale, resulting in net proceeds to the REIT of $151.9 million. In selling a 50% interest in the seven properties, the REIT and POBA entered into a co-‐ownership arrangement regarding these assets. Under these circumstances, IFRS requires the REIT to derecognize the assets and record the gain that accrued prior to selling control on 100% of the assets sold. The purchase price consideration paid by POBA and the fair value of the REIT’s retained interest in the joint venture exceeded the carrying value of the net assets held within each subsidiary entity. As such, the REIT recorded a gain on the sale of $46.3 million, net of transaction costs of $4.5 million, of which $25.6 million relates to remeasuring the retained interest in the joint venture at fair value. The gain on sale also includes $3.1 million relating to the derecognition of deferred tax liability on the sale. As at December 31, 2014, the carrying value of the investment in the POBA joint venture is $159.8 million, which includes the fair value remeasurement of $25.6 million. As part of the arrangement with POBA, the REIT has extended a loan facility to POBA to fund POBA’s share of the loan amortization payments over the term of the outstanding mortgages assumed on the seven properties. The REIT has received prepaid interest of $2.8 million, which will be amortized over the term of the respective mortgages. In addition, POBA will pay the REIT the interest savings on its 50% share of the interest saved from the loan amortization payments. The balance of the loan facility outstanding at the time of maturity of the respective mortgages is due and payable to the REIT. Dream Global REIT 2014 Annual Report | 37 Statement of comprehensive income reconciliation to consolidated financial statements Investment properties revenue Investment properties operating expenses Net rental income Other income Interest and other income Share of net income from investment in joint ventures Share of net income from investment in other joint ventures Other expenses Portfolio management General and administrative Depreciation and amortization Interest expense Fair value adjustments, loss on sale of investment properties and other activities Fair value adjustments to investment properties Fair value adjustments to financial instruments Internal direct leasing costs Gain (loss) on sale of investment properties Contract termination fees incurred on sale to the POBA joint venture Income before income taxes Current income taxes recovery (expense) Deferred income taxes recovery (expense) Recovery of (provision for) income taxes Net income Total earnings for the year attributable to: Unitholders of the Trust Shareholders of the subsidiaries Net income Three months ended December 31, 2013 2014 Amounts included in consolidated financial statements Share of income from investments in POBA joint ventures $ 60,042 $ (18,325) 41,717 1,648 $ (296) 1,352 Total 61,690 $ (18,621) 43,069 62,528 (20,656) 41,872 382 2,487 7 2,876 (1,067) (4,557) (45) (11,690) (17,359) (12,876) 876 (324) 44,332 (510) 31,498 58,732 110 1,455 1,565 $ $ 60,297 $ 59,388 $ 909 60,297 14 (2,487) -‐ (2,473) -‐ (206) -‐ (373) (579) 1,703 -‐ -‐ -‐ 396 -‐ 7 403 (1,067) (4,763) (45) (12,063) (17,938) (11,173) 876 (324) 44,332 -‐ 1,703 3 (3) -‐ (3) -‐ $ (510) 33,201 58,735 107 1,455 1,562 60,297 $ 352 -‐ 10 362 (409) (3,332) (16) (11,288) (15,045) 891 (9,460) (679) (550) -‐ (9,798) 17,391 (142) (2,019) (2,161) 15,230 -‐ $ -‐ -‐ 59,388 $ 909 60,297 15,230 -‐ 15,230 Foreign currency translation adjustments for the year attributable to: Unitholders of the Trust Shareholders of the subsidiaries (10,068) (98) (10,166) -‐ -‐ -‐ (10,068) (98) (10,166) 57,950 -‐ 57,950 Comprehensive income for the year attributable to: Unitholders of the Trust Shareholders of the subsidiaries 49,320 811 50,131 $ $ -‐ -‐ -‐ $ 49,320 811 50,131 $ 73,180 -‐ 73,180 Dream Global REIT 2014 Annual Report | 38 Investment properties revenue Investment properties operating expenses Net rental income Other income Interest and other income Share of net income from investment in joint ventures Share of net income from investment in other joint ventures Other expenses Portfolio management General and administrative Depreciation and amortization Interest expense Fair value adjustments, loss on sale of investment properties and other activities Fair value adjustments to investment properties Fair value adjustments to financial instruments Internal direct leasing costs Gain (loss) on sale of investment properties Contract termination fees incurred on sale to the POBA joint venture Income before income taxes Current income taxes expense Deferred income taxes recovery (expense) Recovery of (provision for) income taxes Net income Total earnings for the year attributable to: Unitholders of the Trust Shareholders of the subsidiaries Net income Amounts per consolidated financial statements 256,077 $ (77,965) 178,112 $ Share of income from investments in POBA joint ventures 1,648 $ (296) 1,352 Year ended December 31, 2013 2014 Total 257,725 $ (78,261) 179,464 220,220 (75,367) 144,853 418 2,487 26 2,931 (4,571) (16,852) (138) (48,198) (69,759) 72,247 3,056 (1,954) 41,873 (510) 114,712 225,996 (1,325) (15,734) (17,059) 208,937 $ 208,028 $ 909 208,937 $ $ 14 (2,487) -‐ (2,473) -‐ (206) -‐ (373) (579) 1,703 -‐ -‐ -‐ 432 -‐ 26 458 (4,571) (17,058) (138) (48,571) (70,338) 73,950 3,056 (1,954) 41,873 -‐ 1,703 3 (3) -‐ (3) -‐ $ (510) 116,415 225,999 (1,328) (15,734) (17,062) 208,937 $ 1,547 -‐ 28 1,575 (3,173) (12,226) (88) (38,506) (53,993) (57,032) (11,450) (2,191) (1,142) -‐ (71,815) 20,620 (689) 2,834 2,145 22,765 -‐ $ -‐ -‐ 208,028 $ 909 208,937 22,765 -‐ 22,765 Foreign currency translation adjustments for the year attributable to: Unitholders of the Trust Shareholders of the subsidiaries (54,671) (98) (54,769) -‐ -‐ -‐ (54,671) (98) (54,769) 109,133 -‐ 109,133 Comprehensive income for the year attributable to: Unitholders of the Trust Shareholders of the subsidiaries 153,357 811 154,168 $ $ -‐ -‐ -‐ $ 153,357 811 154,168 $ 131,898 -‐ 131,898 Dream Global REIT 2014 Annual Report | 39 Cash generated from operating activities to AFFO reconciliation AFFO is not defined by IFRS and, therefore, may not be comparable to similar measures presented by other real estate investment trusts. In compliance with Canadian Securities Administrators Staff Notice 52-‐306 (Revised), “Non-‐GAAP Financial Measures”, the table below reconciles AFFO to cash generated from operating activities. Cash generated from operating activities Add (deduct): Change in non-‐cash working capital Share of net income from investment in POBA joint venture $ Internal direct leasing costs Non-‐cash impact of income attributable to non-‐controlling interest Depreciation and amortization Unrealized loss (gain) on settlement of foreign exchange contracts Tax on gains on sale of investment properties Investment in lease incentives and initial direct leasing costs Contract termination fees Adjustments for investment in joint ventures: Fair value adjustments to investment properties Amortization of lease incentives Normalized leasing costs and tenant incentives Normalized non-‐recoverable recurring capital expenditures AFFO $ Three months ended December 31, 2013 29,798 2014 29,366 $ Year ended December 31, 2014 2013 85,228 96,065 $ $ (10,507) 2,487 324 (271) (45) 975 (159) 4,859 510 (1,703) 10 (1,938) (1,507) 22,401 $ (6,704) -‐ 679 13 (16) (519) (33) 2,391 -‐ -‐ -‐ (1,884) (1,466) 22,259 $ (11,092) 2,487 1,954 (351) (138) 2,866 342 14,777 510 (1,703) 10 (8,076) (6,281) 91,370 $ (2,568) -‐ 2,191 31 (88) (1,316) 62 6,055 -‐ -‐ -‐ (6,518) (5,070) 78,007 Net income, cash flows from operating activities and distributions declared In any given period, actual distributions declared may differ from cash generated from (utilized in) operating activities, primarily due to seasonal 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. These seasonal or short-‐term fluctuations are funded, if necessary, with our existing credit facilities. The Trust determines the distribution rate by, among other considerations, its assessment of cash flow as determined using adjusted cash flows from operating activities (a non-‐GAAP measure), which includes cash flows from operating activities of our investments in joint ventures that are equity accounted and excludes the fluctuations in non-‐cash working capital, transaction costs on business combinations and investment in lease incentives and initial direct leasing costs. In any given period, the Trust anticipates that actual distributions declared will, in the foreseeable future, continue to vary from net income as net income includes non-‐cash items such as fair value adjustments to investment properties and fair value adjustments to financial instruments. Accordingly, the Trust does not use net income as a proxy for distributions. Dream Global REIT 2014 Annual Report | 40 As required by National Policy 41-‐201, “Income Trusts and Other Indirect Offerings”, the following table outlines the differences between cash generated from (utilized in) operating activities (per condensed consolidated financial statements) and distributions declared, as well as the differences between net income and distributions declared, in accordance with the guidelines. When the Trust determines its cash available for distribution, it uses adjusted cash flows from operating activities, which excludes fluctuations in working capital, transaction costs on business combinations and investment in lease incentives and initial direct leasing costs. The Trust funds its working capital needs and investments in lease incentives and initial direct leasing costs with cash and cash equivalent on hand and its credit facilities. Accordingly, management believes adjusted cash flows from operating activities is an important measure that reflects our ability to pay cash distributions. This non-‐GAAP measurement does not represent cash flow from operating activities, as defined by GAAP. Net income for the period Cash generated from operating activities (per consolidated financial statements) Add: Investment in joint ventures’ cash flows from operating activities Cash flow from operating activities (including investment $ in joint ventures) Add (deduct): Lease incentives and initial direct leasing costs Change in non-‐cash working capital Adjusted cash flows from operating activities Distributions declared Adjusted surplus of cash flow from operating activities over distributions declared Surplus (shortfall) of net income (loss) over distributions declared Surplus of cash flow from operating activities over distributions declared Surplus of cash flow from operating activities (per consolidated Three months ended December 31, 2013 15,230 2014 60,297 $ Year ended December 31, 2013 2014 22,765 208,937 $ $ 29,366 29,798 96,065 85,228 518 -‐ 518 -‐ 29,884 29,798 96,583 85,228 5,088 (10,430) 24,542 22,263 2,391 (6,704) 25,485 21,910 15,006 (11,015) 100,574 88,547 6,055 (2,568) 88,715 79,784 2,279 3,575 12,027 8,931 38,034 (6,680) 120,390 (57,019) 7,621 7,888 8,036 5,444 financial statements) over distributions declared $ 7,103 $ 7,888 $ 7,518 $ 5,444 Adjusted cash flow from operating activities exceeded distributions paid and payable for the three months ended December 31, 2014 by $2.3 million and net income exceeded distributions paid and payable by $38.0 million for the same period. This compares to a surplus of $3.6 million of adjusted cash flow from operations over distributions paid and payable for the three months ended December 31, 2013 and a shortfall of $6.7 million of net income over distributions paid and payable for the same period in 2013. Adjusted cash flow from operating activities exceeded distributions paid and payable for the year ended December 31, 2014 by $12.0 million and net income exceeded distributions paid and payable by $120.4 million for the same period. This compares to a surplus of $8.9 million of adjusted cash flow from operations over distributions paid and payable for the year ended December 31, 2013 and a shortfall of $57.0 million of net income over distributions paid and payable for the same period in 2013. As a general rule, we do not take fluctuations in working capital into consideration and we use a normalized amount as a proxy for leasing and building improvement costs in establishing our distribution policy. The surplus or shortfall in net income for each period reflects mainly fair value adjustments to financial instruments and investment properties. These non-‐cash items do not impact cash flows and are not considered when we establish our distribution policy. Dream Global REIT 2014 Annual Report | 41 Level of debt (debt-‐to-‐gross book value) Management believes this non-‐GAAP measurement is an important measure in the management of our debt levels. Level of debt as shown below is determined as total debt, divided by total assets. In compliance with Canadian Securities Administrators Staff Notice 52-‐306 (Revised), “Non-‐GAAP Financial Measures”, the table below calculates the level of debt. Non-‐current debt(1) Current debt Total debt Debt related to assets held for sale Total adjusted debt Less cash Total adjusted debt, net of cash Total assets Adjustments: Investment in joint ventures Amounts per consolidated financial statements $ December 31, 2014 Share of amounts from investment in joint ventures Total 1,157,882 $ 70,514 1,228,396 -‐ 1,228,396 121,939 1,106,457 2,432,383 (159,967) 2,272,416 121,939 2,150,477 $ 149,747 $ 2,989 152,736 -‐ 152,736 3,122 149,614 156,042 159,967 316,009 3,122 312,887 $ 1,307,629 $ 73,503 1,381,132 -‐ 1,381,132 125,061 1,256,071 2,588,425 -‐ 2,588,425 125,061 2,463,364 $ December 31, 2013 1,403,956 20,356 1,424,312 10,106 1,434,418 106,292 1,328,126 2,558,674 -‐ 2,558,674 106,292 2,452,382 56% 54% 48% Less cash Total assets, net of cash Debt-‐to-‐gross book value Debt-‐to-‐gross book value, net of cash Debt-‐to-‐gross book value, net of cash, net of convertible debentures (1) Non-‐current debt includes convertible debentures valued at $152,365 and $150,326 at December 31, 2014 and December 31, 2013, respectively. 53% 51% 45% $ Interest coverage ratio Management believes this non-‐GAAP measurement is an important measure in determining our ability to cover interest expense based on our operating performance. Interest coverage ratio as shown below is calculated as net rental income plus interest and fee income, less general and administrative expenses and portfolio management expenses, all divided by interest expense on total debt. In compliance with Canadian Securities Administrators Staff Notice 52-‐306 (Revised), “Non-‐GAAP Financial Measures”, the table below calculates the interest coverage ratio. Net rental income Add: Interest and other income Less: General and administrative expenses Less: Portfolio management expenses Interest expense Interest coverage ratio Amounts per consolidated financial statements $ 178,112 $ 418 16,852 4,571 157,107 For the year ended December 31, 2014 Share of amounts from investment in joint ventures 1,352 $ 14 206 -‐ 1,160 373 $ Total 179,464 $ 432 17,058 4,571 158,267 48,571 $ 3.26 For the year ended December 31, 2013 144,853 1,547 12,226 3,173 131,001 38,506 3.40 $ 48,198 $ Dream Global REIT 2014 Annual Report | 42 Debt-‐to-‐adjusted EBITDFV Management believes this non-‐GAAP measurement is an important measure in determining the time it takes the Trust, based on its operating performance, to repay its debt. Debt-‐to-‐adjusted EBITDFV as shown below is calculated as total debt divided by the sum of net income for the quarter adjusted for fair value adjustments to investment properties and financial instruments, gain/loss on sale of investment properties, interest expense, depreciation and income taxes. A further adjustment is made for properties acquired during the quarter to reflect net rental income as if the properties were held for the full quarter. In compliance with Canadian Securities Administrators Staff Notice 52-‐306 (Revised), “Non-‐GAAP Financial Measures”, the table below calculates the debt-‐to-‐adjusted EBITDFV. Amounts per consolidated financial statements 1,157,882 $ 70,514 1,228,396 -‐ 1,228,396 57,810 12,876 (876) 324 (44,332) 45 11,690 (1,565) 892 36,864 Non-‐current debt Current debt Total debt Debt related to assets held for sale Total adjusted debt Net income for the quarter Fair value adjustments to investment properties Fair value adjustments to financial instruments Internal direct leasing costs (Gain) loss on sale of investment properties Depreciation and amortization Interest expense Provision for income taxes Adjusted net rental income of properties acquired in the quarter EBITDFV EBITDFV – adjusted for foreign exchange(1) Debt-‐to-‐adjusted EBITDFV (three months ended) Debt-‐to-‐adjusted EBITDFV (years) annualized (1) EBITDFV is adjusted to the period-‐end exchange rate from the quarterly average exchange rate. $ $ Share of amounts from investment in joint ventures 149,747 2,989 152,736 -‐ 152,736 2,487 (1,703) -‐ -‐ -‐ -‐ 373 3 -‐ 1,160 $ December 31, 2014 $ $ $ Total 1,307,629 $ 73,503 1,381,132 -‐ 1,381,132 60,297 11,173 (876) 324 (44,332) 45 12,063 (1,562) 892 38,024 $ 37,627 $ 36.7 9.2 December 31, 2013 1,403,956 20,356 1,424,312 10,106 1,434,418 15,230 679 9,460 (891) 550 16 11,288 2,161 1,296 39,789 40,788 35.2 8.8 Dream Global REIT 2014 Annual Report | 43 SECTION III – DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL REPORTING For the December 31, 2014 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 Global 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 Global REIT and its consolidated subsidiary entities, within the required time periods. Dream Global 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 financial statements for external purposes in accordance with generally accepted accounting principles (“GAAP”). Using the framework established in “Risk Management and Governance: Guidance on Control (COCO Framework)”, published by The Canadian Institute of Chartered Accountants, the Certifying Officers, together with other members of management, have evaluated the design and operation of Dream Global REIT’s internal control over financial reporting. Based on that evaluation, the Certifying Officers have concluded that Dream Global REIT’s internal control over financial reporting was effective as at December 31, 2014. There were no changes in Dream Global REIT’s internal control over financial reporting during the financial year ended December 31, 2014 that have materially affected, or are reasonably likely to materially affect, Dream Global REIT’s internal control over financial reporting. SECTION IV – RISKS AND OUR STRATEGY TO MANAGE We are exposed to various risks and uncertainties, many of which are beyond our control. The following is a review of the material risks and uncertainties that could materially affect our operations and future performance. A more detailed description of our business environment and risks is contained in our Annual Information Form, which is posted on our website at www.dreamglobalreit.ca or at www.sedar.com. REAL ESTATE OWNERSHIP Real estate ownership is generally subject to numerous factors and risks, including changes in general economic conditions (such as the availability, terms and cost 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 for operations and for making 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. Dream Global REIT 2014 Annual Report | 44 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. The majority of the Deutsche Post leases expire in 2018. Deutsche Post has early termination rights entitling it to terminate certain leases prior to their expiry upon twelve months’ prior notice. As of the date hereof, these termination rights pertain to approximately 3% of the Trust’s GLA at December 31, 2014. CONCENTRATION OF PROPERTIES AND TENANTS Currently, all of our properties are located in Germany and, as a result, are impacted by economic and other factors specifically affecting the real estate markets in Germany. 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 Germany 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. We derive a significant portion of our rental income from Deutsche Post. Consequently, these revenues are dependent on the ability of Deutsche Post to meet its rent obligations and our ability to collect rent from Deutsche Post. CHANGE IN INDEXATION FOR INFLATION The rents payable under the Deutsche Post leases are automatically adjusted if the consumer price index for Germany changes by more than 4.3 index points. This means that our rental income will increase if the consumer price index for Germany increases by more than 4.3 index points. However, it also means that our rental income will decrease if the consumer price index for Germany decreases by more than 4.3 index points. As a result, a significant decrease in the consumer price index for Germany could have a material and adverse effect on our cash flows, operating results and financial condition. The fixed rents payable under other lease agreements in respect of the Initial Properties and other properties we may acquire will not normally provide for adjustments following a general change in prices. As a result, our revenues adjusted for inflation could be materially and adversely affected from an unexpected rise in inflation, which could have a materially adverse effect on our cash flows, operating results or financial condition. 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; cash interest payments; and the market price of our 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. Dream Global REIT 2014 Annual Report | 45 The degree to which we are leveraged could have important consequences for 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 the 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. TAX MATTERS Although we have been structured with the objective of maximizing after-‐tax distributions, tax charges and withholding taxes in various jurisdictions in which we invest will affect the level of distributions made to us by our subsidiaries. No assurance can be given as to the level of taxation suffered by us or our subsidiaries. Currently, our revenues are derived from our investments located in Germany. As a result of legislation passed on November 29, 2013, certain of our subsidiaries are subject to German corporate income tax on their net rental income and capital gains from the sale of properties. Although we have previously structured our tax affairs on the assumption that those subsidiaries will be subject to German corporate income tax (with a view to minimizing, to the extent possible, the amount of taxable income from operations in Germany), there is no certainty that we will not pay German corporate income tax. In addition, German real estate transfer tax (“RETT”) is triggered when, among other things, there is a transfer of legal title of properties from one legal person to another. In the case of the initial reallocation of our properties, legal title was not transferred and, consequently, no RETT should be payable in connection therewith. However, if, unexpectedly, RETT does become payable as a result of the reallocation of our properties, we will be required to pay 50% of such RETT. Our debt financing agreements with third parties and affiliates require us to pay principal and interest. Several rules in German tax laws restrict the tax deductibility of interest expenses for corporate income and municipal trade tax purposes. Such rules have been changed considerably on several occasions in the recent past. As a result, major uncertainties exist as to the interpretation and application of such rules, which are not yet clarified by the tax authorities and the tax courts. Accordingly, there is a risk of additional taxes being triggered on the rental income and capital gains in the event the tax authorities or the tax courts adopt deviating views on such rules. We have structured our affairs to ensure that none of the Luxembourg entities through which we hold our real property investment in Germany (our fonds communs de placement – “FCPs”) has a permanent establishment in Germany, which is relevant for determining whether they would also be liable to municipal trade tax. If it is determined that any of our subsidiaries does have a permanent establishment in one or more German municipalities, the overall rate of German income tax applicable to taxable income could materially increase. CHANGES IN LAW We are subject to applicable federal, state, 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 to and title in the properties and the revenues we are able to generate from our investments. Dream Global REIT 2014 Annual Report | 46 FOREIGN EXCHANGE RATE FLUCTUATIONS Substantially all of our investments and operations will be conducted in currencies other than Canadian dollars; however, we pay distributions to unitholders and interest payments on our Debentures in Canadian dollars. We also raise funds primarily in Canada from the sale of securities in Canadian dollars and invest such funds indirectly through our subsidiaries in currencies other than Canadian dollars. As a result, fluctuations in such foreign currencies against the Canadian dollar could have a material adverse effect on our financial results, which will be denominated and reported in Canadian dollars, and on our ability to pay cash distributions to unitholders and cash interest payments on our Debentures. We have implemented active hedging programs in order to offset the risk of revenue losses and to provide more certainty regarding the payment of distributions to unitholders and interest payments on our Debentures if the Canadian dollar increases in value compared to foreign currencies. However, to the extent that we fail to adequately manage these risks, including if any such hedging arrangements do not effectively or completely hedge changes in foreign currency rates, our financial results, and our ability to pay distributions to unitholders and cash interest payments on our Debentures, may be negatively impacted. Hedging transactions involve the risk that counterparties, which are generally financial institutions, may be unable to satisfy their obligations. If any counterparties default on their obligations under the hedging contracts or seek bankruptcy protection, it could have an adverse effect on our ability to fund planned activities and could result in a larger percentage of future revenue being subject to currency changes. INTEREST RATES When entering into financing agreements or extending such agreements, we depend on our ability to obtain 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 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 paid by us to service debt, which could limit our ability to pay distributions to unitholders and could impact the market price of the 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, and our ability to pay distributions to unitholders and cash interest payments under our financing arrangements, 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. See “Foreign exchange rate fluctuations” above. ENVIRONMENTAL RISK We are subject to various laws relating to environmental matters. Our properties may contain ground contamination, hazardous substances, wartime relics or other residual pollution and environmental risks. Buildings and their fixtures might contain asbestos or other hazardous substances above the allowable or recommended thresholds, or the buildings could bear other environmental risks. Actual and contingent liabilities may be imposed on us under applicable environmental laws to assess and, if required, undertake remedial action on contaminated sites and in contaminated buildings. These obligations may relate to sites we currently own or operate, sites we formerly owned or operated, or sites where waste from our operations has been deposited. Furthermore, actions for damages or remediation measures may be brought against us, including under the German Federal Soil Protection Act (Bundesbodenschutzgesetz). According to this Act, not only the polluter but also its legal successor, the owner of the contaminated site and certain previous owners may be held liable for soil contamination. The costs of any removal, investigation or remediation of any residual pollution on such sites or in such buildings, as well as costs related to legal proceedings, including potential damages, regarding such matters, may be substantial, and it may be impossible, for a number of reasons, for us to have recourse against a polluter and/or former seller of a contaminated site or building or the party that may otherwise be responsible for the contamination. Furthermore, the discovery of any residual pollution on the sites and/or in the buildings, particularly in connection with the lease or sale of properties or borrowing using the real estate as security, could trigger claims for rent reductions or termination of leases for cause or for damages or other breach of warranty claims against us. Environmental laws may also impose liability on us for the release of certain materials into the air or water from a property, including asbestos, and such release could form the basis for liability to third persons for personal injury or other damages. Dream Global REIT 2014 Annual Report | 47 JOINT ARRANGEMENTS We are 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. ORGANIZATIONAL STRUCTURE We hold a 50% equity interest in Lorac, which is the manager of our FCPs and the registered owner on title to our Initial Properties. Lorac is also the manager of another fund and the registered owner on title to a portfolio of properties on behalf of that other fund. We and the owner of the remaining Lorac shares have entered into a shareholders’ agreement, which provides us with the right to appoint three of the six directors of Lorac. In addition, the directors of Lorac have adopted governance rules pursuant to which, subject to applicable law, our appointed directors generally have responsibility for matters relating to our properties, and the other three directors, who are nominated by the other owner of the Lorac shares, generally have responsibility for matters affecting other properties of which Lorac is the registered owner on title. Pursuant to such shareholders’ agreement and the governance rules, certain matters such as filing tax returns and shared employee matters will require the approval of a majority of the directors. Each of the directors has a fiduciary duty to act in the best interests of Lorac and Lorac has a duty to manage our FCPs and the other fund in the best interests of the respective unitholders. However, it is possible that we will need the approval of a majority of the directors of Lorac with respect to certain matters involving our properties and there can be no assurance that such matters will be approved at all or on the terms requested. Any matter with respect to which our appointed directors and those appointed by the other owner of the Lorac shares cannot agree will be submitted to the Lorac shareholders. However, since we have only 50% of the voting shares of Lorac, there can be no assurance that any such matter will be approved in the manner in which we would hope. Such dispute could have a material and adverse effect on our cash flows, financial condition and results of operations, and on our ability to make distributions on the Units or cash interest payments on the Debentures. As manager of the other fund since 2008, Lorac has incurred and will continue to incur liabilities as a result of managing that other fund and its assets. To the extent that the other fund is unable to satisfy such liabilities, a third party could seek recourse against Lorac. If Lorac is unable to satisfy such liabilities, Lorac could be required to seek protection from creditors under applicable bankruptcy or insolvency legislation. Taking such steps could result in Lorac being replaced as the manager of our FCPs, with the result that legal title to our properties would be required to be transferred to a new manager. This would result in the payment of RETT in Germany. The amount of such taxes could have a material and adverse effect on our cash flows, financial condition and results of operations. We have negotiated certain limited indemnities from the other fund in connection with any prior existing liabilities of the other fund and with those that may arise as a result of actions or omissions of the other fund. In addition to the foregoing, we have been advised by our Luxembourg counsel that creditors of the other fund could only seek recourse against the assets of the other fund and could not seek recourse against the assets of our FCPs regardless of the fact that Lorac may have entered into the contract on behalf of the other fund or our FCPs creating such right to a claim. New properties acquired by the Trust are held through Luxembourg limited liability entities outside of the Lorac arrangement. Dream Global REIT 2014 Annual Report | 48 COMPETITION The real estate market in Germany 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 operating 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 better located, 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 stronger financially, they will be better able 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. INSURANCE We carry general liability, umbrella liability and excess liability insurance with limits that are typically obtained for similar real estate portfolios in Germany 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 partially self-‐insure against terrorism risk for our entire portfolio. 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. SECTION V – 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 reported amounts of assets, liabilities, revenue and expenses, and the disclosures of contingent liabilities. Management bases its judgments and estimates on historical experience and other factors it believes to be reasonable under the circumstances, but that 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 in the future to the carrying amounts of the asset or liability affected. Dream Global REIT’s critical accounting judgments, estimates and assumptions in applying accounting policies are described in Note 4 to the consolidated financial statements. CHANGES IN ACCOUNTING ESTIMATES AND CHANGES IN ACCOUNTING POLICIES Accounting policy changes Dream Global REIT’s future accounting policy changes are described in Note 5 to the audited consolidated financial statements. Additional information relating to Dream Global REIT, including our Annual Information Form dated March 31, 2014, is available on SEDAR at www.sedar.com. Dream Global REIT 2014 Annual Report | 49 Management’s responsibility for 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 Global 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 as 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 auditors to satisfy itself that management is properly discharging its financial responsibilities and to review its consolidated financial statements and the report of the auditors. The audit committee reports its findings to the Board of Trustees, which approves the consolidated financial statements. PricewaterhouseCoopers LLP, the independent auditors, have audited the consolidated financial statements in accordance with Canadian generally accepted auditing standards. The auditors have full and unrestricted access to the audit committee, with or without management present. P. Jane Gavan President and Chief Executive Officer Toronto, Ontario, February 18, 2015 Rene D. Gulliver Chief Financial Officer Dream Global REIT 2014 Annual Report | 50 Independent auditor’s report To the Unitholders of Dream Global Real Estate Investment Trust We have audited the accompanying consolidated financial statements of Dream Global Real Estate Investment Trust and its subsidiaries, which comprise the consolidated balance sheets as at December 31, 2014 and December 31, 2013 and the consolidated statements of net income and comprehensive income, changes in equity and cash flows for the years ended December 31, 2014 and December 31, 2013 and the related notes, which comprise a summary of significant accounting policies and other explanatory information. Management’s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, 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. Auditor’s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements 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 entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Dream Global Real Estate Investment Trust and its subsidiaries as at December 31, 2014 and December 31, 2013 and their financial performance and their cash flows for the years then ended in accordance with International Financial Reporting Standards. Chartered Professional Accountants, Licensed Public Accountants Toronto, Ontario, February 18, 2015 Dream Global REIT 2014 Annual Report | 51 Consolidated balance sheets (in thousands of Canadian dollars) Assets NON-‐CURRENT ASSETS Investment properties Investment in joint ventures Notes receivable Deferred income tax assets Other non-‐current assets CURRENT ASSETS Amounts receivable Prepaid expenses Amount in escrow Cash Assets held for sale Total assets Liabilities NON-‐CURRENT LIABILITIES Debt Deposits Derivative financial instruments Deferred Unit Incentive Plan Deferred income tax liabilities CURRENT LIABILITIES Debt Amounts payable and accrued liabilities Income tax payable Deferred rent Derivative financial instruments Distributions payable Liabilities related to assets held for sale Total liabilities Equity Unitholders’ equity Deficit Accumulated other comprehensive income Total Unitholders’ equity Non-‐controlling interest Total equity Total liabilities and equity See accompanying notes to the consolidated financial statements. On Behalf of the Board of Trustees of Dream Global Real Estate Investment Trust: MICHAEL J. COOPER Trustee P. JANE GAVAN Trustee Dream Global REIT 2014 Annual Report | 52 December 31, December 31, Note 2014 2013 7 9 22 21 10 11 8 18 12 13 14 21 12 15 8 13 16 18 22 17 $ $ $ $ $ $ 2,079,671 159,967 4,930 -‐ 1,698 2,246,266 17,455 2,360 -‐ 121,939 141,754 44,363 2,432,383 1,157,882 1,802 3,420 9,365 719 1,173,188 70,514 49,485 1,268 -‐ 8,853 7,431 137,551 1,424 1,312,163 1,091,317 (8,808) 31,516 1,114,025 6,195 1,120,220 2,432,383 $ $ 2,390,244 -‐ -‐ 12,313 2,288 2,404,845 18,149 1,962 6,220 106,292 132,623 21,206 2,558,674 1,403,956 1,900 16,299 6,306 -‐ 1,428,461 20,356 32,940 523 6,220 13,772 7,314 81,125 15,083 1,524,669 1,075,520 (127,702) 86,187 1,034,005 -‐ 1,034,005 2,558,674 Consolidated statements of net income and comprehensive income (in thousands of Canadian dollars) Investment properties revenue Investment properties operating expenses Net rental income Other income Interest and other income Share of net income from investment in joint ventures Other expenses Portfolio management General and administrative Depreciation and amortization Interest expense Fair value adjustments, loss on sale of investment properties and other activities Fair value adjustments to investment properties Fair value adjustments to financial instruments Internal direct leasing costs Gain (loss) on sale of investment properties Contract termination fees incurred on sale to the joint venture Income before income taxes Current income taxes expense Deferred income taxes recovery (expense) Recovery of (provision for) income taxes Net income Total earnings for the year attributable to: Unitholders of the Trust Shareholders of the subsidiaries Net income Foreign currency translation adjustments for the year attributable to: Unitholders of the Trust Shareholders of the subsidiaries Comprehensive income for the year attributable to: Unitholders of the Trust Shareholders of the subsidiaries See accompanying notes to the consolidated financial statements. Note $ Year ended December 31, 2013 2014 220,220 256,077 $ (75,367) (77,965) 144,853 178,112 9 19 7, 18 20 3 7, 9 9 21 22 $ $ 418 2,513 2,931 (4,571) (16,852) (138) (48,198) (69,759) 72,247 3,056 (1,954) 41,873 (510) 114,712 225,996 (1,325) (15,734) (17,059) 208,937 $ 208,028 $ 909 208,937 (54,671) (98) (54,769) 153,357 811 154,168 $ $ 1,547 28 1,575 (3,173) (12,226) (88) (38,506) (53,993) (57,032) (11,450) (2,191) (1,142) -‐ (71,815) 20,620 (689) 2,834 2,145 22,765 22,765 -‐ 22,765 109,133 -‐ 109,133 131,898 -‐ 131,898 Dream Global REIT 2014 Annual Report | 53 Consolidated statements of changes in equity (in thousands of Canadian dollars, except number of Units) Note Number of Units Unitholders’ equity Attributable to unitholders of the Trust Accumulated other comprehensive income Deficit Total unitholders’ equity Non-‐ controlling interest Total $ 1,075,520 $ (127,702) $ 86,187 $ 1,034,005 $ -‐ $ 1,034,005 Balance at January 1, 2014 Net income for the year Distributions paid Distributions payable 109,698,977 -‐ -‐ -‐ 16 16 Contribution from non-‐controlling interest Distribution Reinvestment Plan Unit Purchase Plan Deferred Unit Incentive Plan 6, 22 17 17 17 -‐ 1,677,622 3,683 86,415 Issue costs Reclassification from amounts payable and accrued liabilities Foreign currency translation adjustment Balance at December 31, 2014 -‐ -‐ -‐ 111,466,697 $ -‐ -‐ -‐ -‐ 15,222 34 793 (252) -‐ 208,028 (81,703) (7,431) -‐ -‐ -‐ -‐ -‐ -‐ -‐ -‐ -‐ -‐ -‐ -‐ -‐ -‐ -‐ 208,028 (81,703) (7,431) -‐ 15,222 34 793 (252) 909 -‐ -‐ 4,599 -‐ -‐ -‐ -‐ 208,937 (81,703) (7,431) 4,599 15,222 34 793 (252) -‐ 785 785 -‐ 1,091,317 $ -‐ (8,808) $ (54,671) 31,516 $ (54,671) (98) 1,114,025 $ 6,195 $ (54,769) 1,120,220 (in thousands of Canadian dollars, Number Unitholders’ Attributable to unitholders of the Trust Accumulated other comprehensive except number of Units) Note of Units equity Deficit income (loss) Total Balance at January 1, 2013 72,232,494 $ 689,318 $ (70,294) $ (22,946) $ 596,078 Net income for the year Distributions paid Distributions payable Public offering of Units Distribution Reinvestment Plan Unit Purchase Plan Deferred Unit Incentive Plan Issue costs Foreign currency translation adjustment Balance at December 31, 2013 16 16 17 17 17 -‐ -‐ -‐ -‐ -‐ -‐ 22,765 (72,859) (7,314) 36,375,000 1,066,792 7,059 17,632 393,859 10,145 72 164 -‐ (18,038) -‐ -‐ -‐ -‐ -‐ -‐ -‐ -‐ 22,765 (72,859) (7,314) 393,859 10,145 72 164 (18,038) 109,133 86,187 $ 109,133 1,034,005 -‐ -‐ -‐ -‐ -‐ -‐ -‐ 109,698,977 $ -‐ 1,075,520 $ (127,702) $ See accompanying notes to the consolidated financial statements. Dream Global REIT 2014 Annual Report | 54 Consolidated statements of cash flows (in thousands of Canadian dollars) Generated from (utilized in) operating activities Net income Non-‐cash items: Share of net income from investment in joint ventures Deferred income taxes (recovery) Amortization of lease incentives Amortization of financing costs Amortization of fair value adjustment on acquired debt Amortization of initial discount on convertible debentures (Gain) loss on sale of investment properties Depreciation and amortization Deferred unit compensation expense and deferred asset management fees Straight-‐line rent adjustment Fair value adjustments to financial instruments Fair value adjustments to investment properties Cash settlement on foreign exchange contracts Cash settlement on interest rate swap Lease incentives and initial direct leasing costs Change in non-‐cash working capital Generated from (utilized in) investing activities Investment in building improvements Acquisition of investment properties Net proceeds from sale of interest to POBA Cash disposed to the POBA joint venture Notes receivable Net proceeds from disposal of investment properties Distributions from investment in joint ventures Generated from (utilized in) financing activities Mortgage proceeds Financing costs on debts placed Mortgage principal repayments Repayment of term loan credit facility Drawdown on revolving credit facility Revolving credit facility repayments Units issued for cash Unit issue costs Distributions paid on Units Increase (decrease) in cash Effect of exchange rate changes on cash Cash, beginning of year Cash, end of year See accompanying notes to the consolidated financial statements. Dream Global REIT 2014 Annual Report | 55 Note Year ended December 31, 2013 2014 $ 208,937 $ 22,765 (2,513) 15,734 1,458 3,453 (387) 1,092 (41,873) 138 4,189 (624) (3,056) (72,247) (8,058) (6,493) (14,777) 11,092 96,065 (12,741) (411,077) 151,889 (7,604) (4,930) 126,425 682 (157,356) 243,374 (4,459) (16,467) (67,036) 164,223 (164,209) 34 (252) (73,795) 81,413 20,122 (4,475) 106,292 121,939 (28) (2,834) 616 2,651 (402) 1,008 1,142 88 3,426 (1,510) 11,450 57,032 (510) (6,179) (6,055) 2,568 85,228 (5,821) (1,080,279) -‐ -‐ -‐ 22,801 -‐ (1,063,299) 625,817 (9,305) (11,197) (16,779) 35,925 (36,810) 393,931 (18,604) (67,530) 895,448 (82,623) 7,296 181,619 106,292 $ 14 20 7, 18 23 7, 18 6 9 7 17 16 $ Notes to the consolidated financial statements (All dollar amounts in thousands of Canadian dollars, except unit amounts) Note 1 ORGANIZATION Dream Global Real Estate Investment Trust (the “REIT” or the “Trust”), formerly called Dundee International REIT, is an open-‐ ended investment trust created pursuant to a Declaration of Trust dated April 21, 2011, under the laws of the Province of Ontario, and is domiciled in Ontario. The consolidated financial statements of the REIT include the accounts of the REIT and its consolidated subsidiaries. The REIT’s portfolio comprises office, industrial and mixed use properties located in Germany. The address of the Trust’s registered office is 30 Adelaide Street East, Suite 1600, Toronto, Ontario, Canada M5C 3H1. The Trust is listed on the Toronto Stock Exchange under the symbol DRG.UN. The Trust’s consolidated financial statements for the year ended December 31, 2014 were authorized for issue by the Board of Trustees on February 18, 2015, after which date the consolidated financial statements may only be amended with Board approval. Note 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Statement of compliance These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). Basis of presentation The consolidated financial statements are prepared on a going concern basis and have been presented in Canadian dollars, which is also the Trust’s functional currency. All financial information has been rounded to the nearest thousand except when otherwise indicated. The accounting policies set out below have been applied consistently in all material respects. Certain future accounting standards and guidelines relevant to the Trust that were issued at the date of approval of the consolidated financial statements, but not yet effective for the current accounting period, are described in Note 5. The consolidated financial statements have been prepared on the historical cost basis except for investment properties, the conversion feature of the convertible debentures, and financial derivatives, which are measured at fair value, and the Deferred Unit Incentive Plan, which is measured at amortized cost impacted by the fair value of the Trust’s units. Basis of consolidation The consolidated financial statements comprise the financial statements of the REIT and its subsidiaries. Subsidiaries are fully consolidated from the date of acquisition, which is the date on which the Trust obtains control, and continue to be consolidated until the date that such control ceases. Control exists when the Trust has the power over the entity, has exposure to variable returns from its involvement with the entity and has the ability to use its power over the investee to affect its returns. All intercompany balances, income and expenses, and unrealized gains and losses resulting from intercompany transactions are eliminated in full. Where the REIT consolidates a subsidiary in which it does not have 100% ownership, the non-‐controlling interest is classified as a component of equity. 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. 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 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 through contractual agreements. Dream Global REIT 2014 Annual Report | 56 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 income from investments in joint venture in the consolidated statements of comprehensive income. 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 with 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 is referred to as a joint operation. Joint arrangements that involve the establishment of a separate entity in which each 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 described under “Equity accounted investments” above. 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 venturers as well as any liabilities incurred directly, its share of any revenues earned or expenses incurred by the joint venture and any expenses incurred directly. Note 3 ACCOUNTING POLICIES SELECTED AND APPLIED FOR SIGNIFICANT TRANSACTIONS AND EVENTS The significant accounting policies used in the preparation of these consolidated financial statements are described below: Investment properties Investment properties are initially recorded at cost including related transaction costs in connection with asset acquisitions, except if acquired in a business combination, in which case they are initially recorded at fair value, and include primarily office properties held to earn rental income and/or for capital appreciation. Investment properties are subsequently measured at fair value, determined based on available market evidence, at the consolidated balance sheet dates. Related fair value gains and losses are recorded in comprehensive income in the period in which they arise. The fair value of each investment property is based on, among other things, rental income from current leases and assumptions about rental income from future leases reflecting market conditions at the consolidated balance sheet dates, less future estimated cash outflows in respect of such properties. To determine fair value, the Trust first considers whether it can use current prices in an active market for a similar property in the same location and condition, and subject to similar leases and other contracts. The Trust has concluded there is insufficient market evidence on which to base investment property valuation using this approach and has therefore determined to use the income approach. The income approach is one in which the fair value is estimated by capitalizing the net operating income that the property can reasonably be expected to produce over its remaining economic life. The income approach is derived from two methods: the overall capitalization rate method whereby the net operating income is capitalized at the requisite overall capitalization rate; and/or the discounted cash flow method in which the income and expenses are projected over the anticipated term of the investment plus a terminal value discounted using an appropriate discount rate. Valuations of investment properties are most sensitive to changes in discount rates and capitalization rates. Dream Global REIT 2014 Annual Report | 57 Third-‐party initial direct leasing costs incurred in negotiating and arranging tenant leases are added to the carrying amount of investment properties. Internal direct leasing costs are expensed as incurred in the consolidated statements of net income and comprehensive income. 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 of investment properties revenue. Fair value hierarchy Fair value measurements recognized in the consolidated balance sheets or disclosed in the Trust’s consolidated financial statements for financial or non-‐financial assets and liabilities are categorized by level in accordance with the significance of the observable market inputs used in making the measurements, as follows: • • • Level 1 – quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date; Level 2 – use of a model with inputs (other than quoted prices included in Level 1) that are directly or indirectly observable market data; and Level 3 – use of a model with inputs that are not based on observable market data. Non-‐controlling interest Non-‐controlling interest represents equity interests in subsidiaries owned by outside parties. The share of net assets, net earnings and other comprehensive income of subsidiaries attributable to non-‐controlling interest is reported in equity. Assets held for sale Assets and liabilities 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 and assets held for sale continue to be measured at fair value. Segment reporting The Trust owns and operates investment properties located in Germany. In measuring performance, the Trust does not distinguish or group its operations on a geographic or any other basis and, accordingly, has a single reportable segment for disclosure purposes. The Trust’s major tenant is Deutsche Post, accounting for approximately 30% of the gross rental income generated by the Trust’s properties for the year ended December 31, 2014 (December 31, 2013 – 37%). Foreign currency translation Functional and presentation currency Items included in the financial statements of each of the group’s entities are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The functional currency of the REIT’s operating subsidiaries is the euro. The consolidated financial statements are presented in Canadian dollars, which is the group’s presentation currency. Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are remeasured. Foreign exchange gains and losses resulting from the settlement of such transactions, and from the translation at year-‐end exchange rates of monetary assets and liabilities denominated in foreign currencies, are recognized in the consolidated statements of comprehensive income except when deferred in other comprehensive income as qualifying cash flow hedges and qualifying net investment hedges. Foreign exchange gains and losses are presented in the consolidated statements of comprehensive income. Dream Global REIT 2014 Annual Report | 58 Group companies The results and financial position of all the group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows: (i) (ii) assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; income and expenses for each statement of comprehensive income are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions); and (iii) all resulting exchange differences are recognized in other comprehensive income. On consolidation, exchange differences arising from the translation of the net investment in foreign operations, and of borrowings and other currency instruments designated as hedges of such investments, are taken to other comprehensive income. When a foreign operation is partially disposed of or sold, exchange differences that were recorded in equity are recognized in the consolidated statements of net income as part of the gain or loss on sale. Fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. Other non-‐current assets Other non-‐current assets include equity accounted investments, office furniture and computer equipment, and straight-‐line rent receivables. Office furniture and computer equipment are stated at cost less accumulated depreciation and impairment losses. Depreciation of office furniture and computer equipment is calculated using the straight-‐line method to allocate their cost, net of their residual values, over their expected useful lives of three to ten years. The residual values and useful lives of all assets are reviewed and adjusted, if appropriate, at least at each financial year-‐end. Cost includes expenditures that are directly attributable to the acquisition and expenditures for replacing part of the office furniture and computer 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 comprehensive income during the financial 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 comprehensive income in the year the asset is derecognized. 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 that 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. 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 risk specific to the obligation. The increase in the provision due to passage of time is recognized as interest expense. Revenue recognition The Trust accounts for leases with tenants as operating leases, as it has retained substantially all of the risks and benefits of ownership of its investment properties. Revenues from investment properties include base rents, recoveries of operating expenses including property taxes, lease termination fees, parking income and incidental income. 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 other non-‐current assets, is recorded for the difference between the rental revenue recognized and the contractual amount received. Recoveries from tenants are recognized as revenues in the period in which the corresponding costs are incurred and collectability is reasonably assured. Other revenues are recorded as earned. Dream Global REIT 2014 Annual Report | 59 Business combinations The purchase method of accounting is used for acquisitions meeting the definition of a business. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued, and liabilities incurred or assumed at the date of exchange. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their acquisition date fair values irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Trust’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the Trust’s share of the net assets acquired, the difference is recognized directly in comprehensive income for the year as an acquisition gain. Any transaction costs incurred with respect to the business combination are expensed in the period incurred. Distributions Distributions to unitholders are recognized as a liability in the period in which the distributions are approved by the Board of Trustees and are recorded as an increase to the deficit. Income taxes The REIT is taxed as a mutual fund trust under the Income Tax Act (Canada). The REIT is not a specified investment flow-‐through trust (“SIFT”), and will not be, provided the REIT complies at all times with its investment restrictions, which preclude the REIT from investing in any entity other than a portfolio investment entity or from holding any non-‐portfolio property. The Trust intends to distribute all taxable income directly earned by the REIT to unitholders and to deduct such distributions for income tax purposes. The tax deductibility of the REIT’s distributions to unitholders represents, in substance, an exception from current Canadian tax, and from deferred tax relating to temporary differences in the REIT, so long as the REIT continues to expect to distribute all of its taxable income and taxable capital gains to its unitholders. Accordingly, no net current Canadian income tax expense or deferred income tax assets or liabilities have been recorded in these consolidated financial statements. The tax expense related to non-‐Canadian taxable subsidiaries for the year comprises current and deferred taxes. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the consolidated balance sheet date where the subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred income tax is recognized, using the asset and liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the consolidated balance sheet date, and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. Deferred income tax assets are recognized only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. Unit-‐based compensation plan The Trust has a Deferred Unit Incentive Plan (“DUIP”), as described in Note 17, that provides for the grant of deferred trust units and income deferred trust units to trustees, officers, employees, affiliates and their service providers (including the asset manager). Unvested deferred trust units are recorded as a liability and compensation expense and, where applicable, asset management expense. Grants to trustees, officers and employees are recognized as compensation expense and included in general and administrative expense. The grants are recognized over the vesting period at the 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 units, with changes in fair value recognized in comprehensive income, as a fair value adjustment to the financial instruments. Deferred units granted to Dream Asset Management Corporation (“DAM”), formerly called Dundee Realty Corporation or “DRC”, for payment of asset management fees are included in general and administrative expense during the year for accounting purposes as they relate to services provided during the year, and the units and fees are initially measured by applying a discount to the fair value of the corresponding units. The discount is estimated by applying the Black Scholes option pricing model, taking into consideration the volatility of the Canadian REIT equity market and the German real estate industry. Once recognized, the liability is remeasured at each reporting date at a discount to the fair values of the corresponding units, with the change recognized in comprehensive income as a fair value adjustment to financial instruments. Cash Cash excludes cash subject to restrictions that prevent its use for current purposes. Excluded from cash are amounts held for repayment of tenant security deposits as required by various lending agreements. Dream Global REIT 2014 Annual Report | 60 Financial instruments Designation of financial instruments The following summarizes the Trust’s classification and measurement of financial assets, liabilities and financial derivatives: Financial assets Amounts receivable Cash Financial liabilities Mortgage debt Term loan credit facility Convertible debentures – host instrument Deposits Deferred Unit Incentive Plan Amounts payable and accrued liabilities Distributions payable Income taxes payable Classification Loans and receivables Loans and receivables Other liabilities Other liabilities Other liabilities Other liabilities Other liabilities Other liabilities Other liabilities Other liabilities Measurement Amortized cost Amortized cost Amortized cost Amortized cost Amortized cost Amortized cost Amortized cost Amortized cost Amortized cost Amortized cost Financial derivatives Derivative assets Derivative liabilities Conversion feature of the convertible debentures Fair value through profit or loss Fair value through profit or loss Fair value through profit or loss Fair value Fair value Fair value Financial assets The Trust classifies its financial assets on initial recognition as loans and receivables. All financial assets are initially measured at fair value, less any related transaction costs. Subsequently, financial assets are measured at amortized cost. Amounts receivable are initially measured at fair value and are subsequently measured at amortized cost less provision for impairment. 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. The carrying amount of the asset is reduced through an allowance account, and the amount of the loss is recognized in the consolidated statements of comprehensive income within investment property 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 property operating expenses in the consolidated statements of comprehensive income. Trade receivables that are less than three months past due are not considered impaired unless there is evidence collection is not possible. If in a subsequent period the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed, to the extent that the carrying value of the asset does not exceed its amortized cost at the reversal date. Any subsequent reversal of an impairment loss is recognized in the consolidated statements of net income and comprehensive income. 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 The Trust classifies its financial liabilities on initial recognition as either fair value through profit or loss or other liabilities measured at amortized cost. Financial liabilities classified as other liabilities are initially recognized at fair value (net of transaction costs) and are subsequently measured at amortized cost using the effective interest rate method. Under the effective interest rate 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 debt. Dream Global REIT 2014 Annual Report | 61 Term loans are initially recognized at fair value less attributable transaction costs, or at fair value when assumed in a business or asset acquisition. Subsequent to initial recognition, term loans are recognized at amortized cost. On issuance, convertible debentures are separated into two financial liability components: the host instrument and the conversion feature. This presentation is required because the conversion feature permits the holder to convert the debenture into Units that, except for the available exemption under IAS 32, “Financial Instruments: Presentation” (“IAS 32”), would normally be presented as a liability because of the redemption feature attached to the Units. Both components are measured based on their respective estimated fair values at the date of issuance. The fair value of the host instrument is net of any related transaction costs. The fair value of the host instrument is estimated based on the present value of future interest and principal payments due under the terms of the debenture using a discount rate for similar debt instruments without a conversion feature. Subsequent to initial recognition, the host instrument is accounted for at amortized cost. The conversion feature is accounted for at fair value with changes in fair value recognized in comprehensive income each year. When the holder of a convertible debenture converts its interest into Units, the host instrument and conversion feature are reclassified to unitholders’ equity in proportion to the units converted over the total equivalent units outstanding. The DUIP is measured at amortized cost because it is settled in Units, which in accordance with IAS 32 are liabilities. Consequently, the DUIP is remeasured each year based on the fair value of Units, with changes in the liabilities recorded in comprehensive income. A financial liability is derecognized when the obligation under the liability is discharged, cancelled or expired. Financial derivatives Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value. The method of recognizing the resulting gain or loss depends on whether the derivative is designated as a hedging instrument and, if so, the nature of the item being hedged. Derivative instruments are recorded in the consolidated balance sheets at fair value. Changes in fair value of derivative instruments that are not designated as hedges for accounting purposes are recognized in fair value adjustments to financial instruments. The Trust has not designated any derivatives as hedges for accounting purposes. Interest Interest on debt includes coupon interest on term loans, mortgage debt, revolving credit facilities and debentures, amortization of premiums allocated to the conversion features of the convertible debentures, amortization of ancillary costs incurred in connection with the arrangement of borrowings, and net settlement of financial interest rate derivatives. Finance costs are amortized to interest expense unless they relate to a qualifying asset. Internal direct leasing costs Prior to January 1, 2014, the Trust capitalized incremental internal leasing costs within initial direct leasing costs to investment properties, where these costs would not be incurred had no leasing activity taken place and are directly attributable to the leasing activity. On April 2, 2014, IFRIC issued an agenda decision indicating that internal leasing costs, such as salary costs of permanent staff involved in negotiating and arranging new leases, do not qualify as incremental costs. As a result, the Trust has adopted an accounting policy of recognizing all salary costs of permanent staff involved in negotiating and arranging new leases in internal direct leasing costs as incurred. This accounting policy has been applied retrospectively. The impact to the years ended December 31, 2014 and December 31, 2013 is an incurrence of internal direct leasing costs of $1,954 and $2,191, respectively, and a corresponding decrease in fair value adjustments to investment properties of $1,954 and $2,191, respectively. This change did not result in an impact to the consolidated balance sheets. Dream Global REIT 2014 Annual Report | 62 Equity The Trust classifies the Units as equity, notwithstanding the fact that the Trust’s Units meet the definition of a financial liability. Under IAS 32, the Units are considered a puttable financial instrument because of the holder’s option to redeem 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 the REIT in any calendar month shall not exceed $50 unless waived by the REIT’s trustees at their sole discretion. The Trust has determined that the Units can be presented as equity and not financial liabilities because the Units have the following features, as defined in IAS 32 (hereinafter referred to as the “puttable exemption”): • Units entitle the holder to a pro rata share of the Trust’s net assets in the event of the Trust’s liquidation. The Trust’s net assets are those assets that remain after deducting all other claims on its assets. • Units are the class of instruments that are subordinate to all other classes of instruments because 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 are subordinate to all other classes of instruments have identical features. • Apart from the contractual obligation for the Trust to redeem the Units for cash or another financial asset, the 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 Units over their life are based substantially on the profit or loss, the change in the recognized net assets and unrecognized net assets of the Trust over the life of the Units. In addition to the Units meeting all of the above criteria, the REIT has determined it has no other financial instrument or contract that has total cash flows based substantially on the profit or loss, the change in the recognized assets, or the change in the fair value of the recognized and unrecognized net assets of the REIT. The REIT also has no other financial instrument or contract that has the effect of substantially restricting or fixing the residual return to unitholders. Units are initially recognized at the fair value of the consideration received by the Trust. Any transaction costs arising on the issue of Units are recognized directly in unitholders’ equity as a reduction of the proceeds received. Note 4 CRITICAL ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS IN APPLYING ACCOUNTING POLICIES The preparation of the consolidated financial statements requires management to make judgments, estimates and assumptions that affect the amounts reported. Management bases its judgments and estimates on experience in the industry and other various 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 values 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 asset or liability affected in the future. Critical accounting judgments The following are the critical judgments made in applying the Trust’s accounting policies that have the most significant effect on the amounts in the consolidated financial statements: Valuation of investment properties Critical judgments are made by the Trust in respect of the fair values of investment properties. The fair value of these investments is reviewed regularly by management with reference to independent property valuations and market conditions existing at the reporting date, using generally accepted market practices. Judgment is also applied in determining the extent and frequency of independent appraisals. Dream Global REIT 2014 Annual Report | 63 The determination of fair values requires management to make estimates and assumptions that affect the values presented, such that actual values in sales transactions may differ from those presented. The Trust’s critical assumptions relating to the estimates of fair values of investment properties include the receipt of contractual rents, expected future market rents, renewal rates, maintenance requirements, discount rates that reflect current market uncertainties, capitalization rates, and current and recent property investment prices. 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 REIT determines the fair value of an investment property at the end of each reporting period using the following methods: • • External appraisals – by an independent appraisal firm, according to professional appraisal standards and IFRS. Internal valuation – performed by management using the income approach and primarily consisting of reviewing the key assumptions from previous appraisals and updating the value for changes in the property cash flow, physical condition and changes in market conditions. In applying the income approach to valuation, management may use the direct income capitalization method or the discounted cash flow method, both of which are consistent with professional appraisal standards and IFRS. The selection of the method for each property is made based on the following criteria: • • Regulatory requirements – the Initial Properties are held indirectly through regulated entities that require an external appraisal annually. Property type – this includes an evaluation of a property's complexity, time since acquisition, and other specific opportunities or risks with properties. Recently acquired properties will generally receive a value update. • Market risks – specific risks in a region may warrant a full external appraisal for certain properties. • Changes in overall economic conditions – significant changes in overall economic conditions may increase the number of external appraisals performed. • Business needs – financings or acquisitions and dispositions may require an external appraisal. The REIT makes no adjustments for portfolio premiums and discounts, nor for any value attributable to the REIT’s management platform. Investment properties are appraised at highest and best use, primarily based on stabilized cash flows from tenancies, since purchasers typically focus on expected income. Judgment is also applied in determining whether certain costs are additions to the carrying amount of the investment property or are of a repair and maintenance nature. Income tax treatment The REIT indirectly owns its remaining initial properties through 15 FCPs (fonds communs de placement). The income tax treatment of non-‐German residents, such as the FCP unitholders indirectly owned by the REIT, is not entirely clear and is subject to significant judgment, and accordingly it is not currently possible to determine with certainty whether the FCP unitholders will or will not be taxable in Germany on their net rental income and capital gains. In light of this uncertainty, the REIT has structured its affairs assuming that the FCP unitholders would be subject to corporate income tax in Germany, and has prepared these consolidated financial statements on that basis. The German federal government has indicated it intends to reform the Investment Tax Act in the future. It is unclear what exactly the consequences of the reform would be and how it would impact the FCPs or the FCP unitholders. Currently, the German fiscal authorities view foreign investment funds such as the FCPs or the FCP unitholders as potentially subject to corporate income tax in Germany. However, the REIT believes that the consequences of the uncertainty of the tax status of the FCPs would be the same from a German corporate tax perspective irrespective of whether it is the FCPs or the FCP unitholders that are determined to be the taxpayer. Dream Global REIT 2014 Annual Report | 64 The Trust computes current and deferred income taxes included in the consolidated financial statements based on the following: • • The rate of corporate tax payable on German taxable income is 15.825%, including a 5.5% solidarity surcharge; Taxable income for German corporate income tax purposes is determined by deducting certain expenses incurred in connection with the acquisition and ownership of real property as well as certain operating expenses, provided that the costs are incurred under arm’s length terms; • Buildings can generally be amortized on a straight-‐line basis at a rate of 2% to 3% depending on the age and the use of the property; and • The deduction of interest expense, which must reflect arm’s length terms, is generally restricted by the so-‐called “interest capping rules”. These rules apply to limit the deduction of all interest expense incurred up to a maximum of 30% of the taxable earnings before interest, tax, depreciation and amortization. However, an exception is available when annual interest expense is less than €3,000 for each taxpayer. Business combinations Accounting for business combinations under IFRS 3, “Business Combinations” (“IFRS 3”), only applies if it is considered that a business has been acquired. Under IFRS 3, a business is defined as an integrated set of activities and assets conducted and managed for the purpose of providing a return to investors or lower costs or other economic benefits directly and proportionately to the Trust. A business generally consists of inputs, processes applied to those inputs, and resulting outputs that are, or will be, used to generate revenues. In the absence of such criteria, a group of assets is deemed to have been acquired. If goodwill is present in a transferred set of activities and assets, the transferred set is presumed to be a business. The Trust applies judgment in determining whether property acquisitions qualify as a business combination in accordance with IFRS 3 or as an asset acquisition. When determining whether the acquisition of an investment property or a portfolio of investment properties is a business combination or an asset acquisition, the Trust applies judgment when considering the following: • whether the investment property or properties are capable of producing outputs • whether the market participant could produce outputs if missing elements exist In particular, the Trust considers the following: • whether employees were assumed in the acquisition • whether an operating platform has been acquired Currently, when the Trust acquires properties or a portfolio of properties and does not take on or assume employees or does not acquire an operating platform, it classifies the acquisition as an asset acquisition. Impairment The Trust uses judgments, estimates and assumptions when it assesses the possibility and amount of any impairment loss or write-‐down as it relates to amounts receivable and other assets. Estimates and assumptions The Trust makes estimates and assumptions that affect the carrying amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amount of other comprehensive income for the year. Actual results could differ from those estimates. The estimates and assumptions critical to the determination of the amounts reported in the consolidated financial statements relate to the following: Valuation of financial instruments The Trust makes estimates and assumptions relating to the fair value measurement of the DUIP, the convertible debenture conversion feature, derivative instruments, and the fair value disclosure of the convertible debentures, mortgages and term loans. The critical assumptions underlying the fair value measurements and disclosures include the market price of Units, market interest rates for debt and interest rate derivatives, unsecured debentures and foreign currency derivatives. Dream Global REIT 2014 Annual Report | 65 Note 5 FUTURE ACCOUNTING POLICY CHANGES The following are future accounting policy changes to be implemented by the Trust in future years: Revenue recognition IFRS 15, “Revenue from Contracts with Customers” (“IFRS 15”), provides a comprehensive five-‐step revenue recognition model for all contracts with customers. The IFRS 15 revenue recognition model requires management to exercise significant judgment and make estimates that affect revenue recognition. IFRS 15 is effective for annual periods beginning on or after January 1, 2017, with earlier application permitted. The Trust is currently evaluating the impact of adopting this standard in the consolidated financial statements. Financial instruments The final version of IFRS 9, “Financial Instruments” (“IFRS 9”), was issued by the IASB in July 2014 and will replace IAS 39, “Financial Instruments: Recognition and Measurement”. IFRS 9 introduces a model for classification and measurement, a single, forward-‐looking “expected loss” impairment model and a substantially reformed approach to hedge accounting. The new single, principle-‐based approach for determining the classification of financial assets is driven by cash flow characteristics and the business model in which an asset is held. The new model also results in a single impairment model being applied to all financial instruments, which will require more timely recognition of expected credit losses. It also includes changes in respect of own credit risk in measuring liabilities elected to be measured at fair value, so that gains caused by the deterioration of an entity’s own credit risk on such liabilities are no longer recognized in profit or loss. IFRS 9 is effective for annual periods beginning on or after January 1, 2018; however, it is available for early adoption. In addition, the own credit changes can be early adopted in isolation without otherwise changing the accounting for financial instruments. The Trust has yet to assess the full impact of IFRS 9 and has not yet determined when it will adopt the new standard. Note 6 PROPERTY ACQUISITIONS Detailed below are the acquisitions completed during the year ended December 31, 2014: Werner-‐Eckert-‐Straße 8, 10, 12, Munich My Falkenried, Hamburg Liebknechtstr. 33/35, Heßbrühlstr. 7 (Officium), Stuttgart Robert-‐Bosch-‐Str. 9–11 (Europahaus), Darmstadt Im Mediapark 8 (Cologne Tower), Cologne Greifswalder Str. 154–156 and Erich-‐Weinert-‐Str. 145 (Goldpunkt-‐Haus), Berlin – earnout amount Prior year acquisition cost adjustments Total (1) Includes transaction costs. Property type Office Office Office Office Office Interest acquired 100% $ 100% 100% 100% 95% $ Date acquired February 14, 2014 March 31, 2014 July 31, 2014 September 30, 2014 November 14, 2014 Purchase price(1) 23,431 97,578 72,893 61,204 164,748 419,854 933 1,379 422,166 On February 14, 2014, the REIT acquired Werner-‐Eckert-‐Straße 8, 10, 12, an office property located in Munich, Germany, for $23,431. In connection with the acquisition, the REIT entered into a mortgage agreement with a principal balance of $13,237. The mortgage was drawn on March 28, 2014. On March 31, 2014, the REIT acquired Strassenbahnring 15, 17–19, Hoheluftchaussee 18-‐20 and Lehmweg 8, 8a, 7 (“My Falkenried”), an office property located in Hamburg, Germany, for $97,578. In connection with the acquisition, the REIT entered into a mortgage agreement with a principal balance of $55,765. The mortgage was drawn on April 29, 2014. On July 31, 2014, the REIT acquired Liebknechtstr. 33/35, Heßbrühlstr. 7 (Officium), an office property located in Stuttgart, Germany, for $72,893. The acquisition was partially financed by a new mortgage of $41,556. Dream Global REIT 2014 Annual Report | 66 On September 30, 2014, the REIT acquired Robert-‐Bosch-‐Str. 9–11 (Europahaus), an office property located in Darmstadt, Germany, for $61,204. In connection with the acquisition, the REIT entered into a mortgage agreement with a principal balance of $35,317. The mortgage was drawn on October 20, 2014. On November 14, 2014, the REIT acquired Im Mediapark 8 (Cologne Tower), an office property located in Cologne, Germany, for $164,748. The acquisition was partially financed by a new mortgage of $97,500. Pursuant to the terms of the purchase and sale agreement related to the acquisition of Goldpunkt-‐Haus, Berlin on December 7, 2012, the REIT paid a final purchase price adjustment of $933 to the vendor for successfully leasing certain vacant space on April 14, 2014 (December 31, 2013 – $2,074). Detailed below are the acquisitions completed during the year ended December 31, 2013: For the year ended December 31, 2013 Hammer Strasse 30–34, Hamburg Neue Mainzer Strasse 28 (K26), Frankfurt Dillwächterstrasse 5 and Tübinger Strasse 11, Munich Schlossstrasse 8a–8g, Hamburg ABC-‐Strasse 19 (ABC Bogen), Hamburg Moskauer Strasse 25, 27, Düsseldorf Cäcilienkloster 2, 6, 8, 10, Cologne Vordernbergstrasse 6/Heilbronner Strasse 35 (Z-‐UP), Stuttgart Bertoldstrasse 48, 50/Sedanstrasse 7, Freiburg Lörracher Strasse 16–16a, Freiburg Westendstrasse 160, 162/Barthstrasse 24, 26, Munich Am Stadtpark 2/Bayreuther Str. 33 (Parcside), Nuremberg Speicherstrasse 55 (Werfthaus), Frankfurt Reichskanzler-‐Müller-‐Strasse 21, 23, 25, Mannheim Löwenkontor, Berlin Marsstrasse 20–22, Munich Leitzstrasse 45 (Oasis lll), Stuttgart Feldmühleplatz 1 + 15, Düsseldorf Greifswalder Str. 154–156 and Erich-‐Weinert-‐Str. 145 (Goldpunkt-‐Haus), Berlin – additional purchase price adjustment Other prior year acquisition cost adjustments Total (1) Includes transaction costs. Property type office office office office office office office office office office office office office office office office office office office office Date acquired January 31, 2013 February 15, 2013 March 2, 2013 March 12, 2013 March 12, 2013 March 12, 2013 March 12, 2013 March 13, 2013 March 13, 2013 March 13, 2013 March 13, 2013 March 13, 2013 March 14, 2013 March 14, 2013 April 30, 2013 June 28, 2013 September 30, 2013 November 29, 2013 Interest acquired 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 95% 100% 100% $ Purchase price(1) 59,788 86,298 25,920 45,606 99,479 66,705 102,527 40,998 43,015 11,516 32,301 35,175 86,778 32,101 58,258 90,331 46,509 109,632 2,074 547 $ 1,075,558 The assets acquired and liabilities assumed in the transactions were allocated as follows: Investment properties(1) Total purchase price The consideration paid consists of: Cash Working capital adjustments Net transaction costs Non-‐controlling interest Total consideration (1) Includes transaction costs. Dream Global REIT 2014 Annual Report | 67 For the year For the year ended ended December 31, December 31, 2014 2013 422,166 422,166 $ $ 1,075,558 1,075,558 411,077 2,641 3,849 4,599 422,166 $ $ 1,080,279 763 (5,484) -‐ 1,075,558 $ $ $ $ Note 7 INVESTMENT PROPERTIES The REIT has determined that it has two asset classes of investment properties reflecting their distinct nature, characteristics and risks. Initial Properties The Initial Properties consist of the properties that were acquired on August 3, 2011. These properties consist of national and regional administration offices, mixed use retail, banking and distribution properties and regional logistics headquarters of Deutsche Post. The properties are generally situated in city centres and geographically dispersed throughout Germany and are smaller and older than the properties acquired subsequent to 2011. Acquisition Properties These investment properties were acquired during 2012 to 2014, consist of high-‐quality office buildings located in Germany’s largest office markets and are generally newer or recently refurbished buildings. Total $ 2,390,244 $ Initial Properties 985,212 $ Acquisition Properties 1,405,032 422,166 12,730 14,908 449,804 -‐ 9,949 11,085 21,034 422,166 2,781 3,823 428,770 (144) (144) -‐ (573,521) (161,174) (734,839) 76,639 (1,458) 75,181 -‐ (161,174) (161,318) (13,186) (1,247) (14,433) (573,521) -‐ (573,521) 89,825 (211) 89,614 (100,719) (100,719) 2,079,671 $ (35,133) (35,133) 795,362 $ (65,586) (65,586) 1,284,309 36,405 $ (11,541) $ 47,946 Balance as at January 1, 2014 Purchase of investment properties: Acquisition of properties Building improvements Lease incentives and initial direct leasing costs Total additions to investment properties Disposal of investment properties: Sales of investment properties Transfers to disposal groups classified as assets held for sale – POBA joint venture assets(1) Transfers to disposal groups classified as assets held for sale Total disposal of investment properties Gains and losses included in net income: Change in fair value of investment properties Amortization of lease incentives Total gains (losses) included in net income Gains and losses included in other comprehensive income: Foreign currency translation loss Total losses included in other comprehensive income Balance as at December 31, 2014 Changes in unrealized gain (loss) included in net income for the year ended December 31, 2014: Change in fair value of investment properties (1) POBA joint venture refers to the Public Officials Benefit Association joint venture. $ $ Dream Global REIT 2014 Annual Report | 68 Balance as at January 1, 2013 Purchase of investment properties: Acquisition of properties Building improvements Lease incentives and initial direct leasing costs Total additions to investment properties Disposal of investment properties: Sales of investment properties Transfers to disposal groups classified as assets held for sale(1) Total disposal of investment properties Losses included in net income: Change in fair value of investment properties Amortization of lease incentives Total losses included in net income Gains included in other comprehensive income: Foreign currency translation gain Total gains included in other comprehensive income Balance as at December 31, 2013 Changes in unrealized losses included in net income for the year ended December 31, 2013: Change in fair value of investment properties (1) Of the total transferred to assets held for sale, $21,147 were subsequently sold. $ $ Total $ 1,182,757 $ Initial Properties 919,814 $ Acquisition Properties 262,943 1,075,558 5,821 6,055 1,087,434 (23,943) (21,147) (45,090) (57,032) (616) (57,648) -‐ 5,057 5,120 10,177 (23,943) (21,147) (45,090) (5,580) (530) (6,110) 1,075,558 764 935 1,077,257 -‐ -‐ -‐ (51,452) (86) (51,538) 222,791 222,791 2,390,244 $ 106,421 106,421 985,212 $ 116,370 116,370 1,405,032 (59,365) $ (7,145) $ (52,220) Straight-‐line rent receivable, composed of free rent and contractual rent increases accrued to rental revenue, of $1,429 (December 31, 2013 – $1,896) has been included in other non-‐current assets. During the year ended December 31, 2014, the balances of the investment properties went down by $310,573, reflecting the reclassification to assets held for sale of $161,174 and the sale of Acquisition Properties to POBA, partially offset by acquisitions during the year totalling $422,166. (Refer to Note 6 for details of the acquisitions.) Seven of the Acquisition Properties were sold to the POBA joint venture at a fair value of $573,521. The REIT retained a 50% interest in those entities, which is classified as an investment in joint ventures. The REIT recognized a gain of $46,337 on the sale transaction. (Refer to Note 9 for details on joint arrangements.) During the year ended December 31, 2014, the fair value of the Acquisition Properties increased by $110,691, partially reduced by a write-‐off of $20,866 of capitalized transaction costs, resulting in a net increase in fair value adjustments of $89,825. Of the increase in fair value, $41,880 was recorded in Q2 in relation to the seven assets sold to POBA. During Q3, the remaining assets in the Acquisition Properties not part of the POBA sale increased in value by $57,595. During Q4, the fair value of the Acquisition Properties increased by a further $11,216. During the year ended December 31, the fair value of the Initial Properties decreased by $13,186. During the year ended December 31, 2014, the REIT disposed of 35 investment properties that were acquired in 2011 as part of the Initial Properties, five of which were reclassified as assets held for sale as at December 31, 2013. Net proceeds of $126,425 (December 31, 2013 – $22,801) were received on these sales and a loss on sale of $4,464 (December 31, 2013 – $1,142) related to the transaction costs incurred was recorded. As at December 31, 2014, the REIT entered into binding purchase and sale agreements to sell 12 additional properties valued at $42,897 and these properties have been reclassified as assets held for sale. In total, The REIT also recorded a fair value loss of $4,392 on these properties. (Refer to Note 18 for details on the assets held for sale.) Dream Global REIT 2014 Annual Report | 69 Future minimum contractual rent (excluding service charges) under current operating leases is as follows: Less than 1 year 1–5 years Longer than 5 years Total (1) Includes income from head lease. $ December 31, 2014(1) 142,033 390,571 168,727 $ 701,331 Fair value hierarchy Investment properties measured at fair value in the consolidated balance sheets are categorized by level according to the significance of the inputs used in making the measurements. Recurring measurements Investment properties Initial Properties Acquisition Properties Total Non-‐recurring measurements Properties reclassified to assets held for sale Quoted prices in active markets for identical instruments (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) December 31, 2014 $ $ $ 795,362 $ 1,284,309 2,079,671 $ -‐ $ -‐ -‐ $ -‐ $ -‐ -‐ $ 795,362 1,284,309 2,079,671 42,897 $ -‐ $ 42,897 $ -‐ The REIT’s policy is to recognize transfers into and transfers out of fair value hierarchy levels as of the date of the event or change in circumstances that caused the transfer. For the year ended December 31, 2014, investment properties valued at $42,897 were transferred out of Level 3 fair value measurements to Level 2 fair value measurements as these properties were under contract for sales during the year. Valuation techniques underlying management’s estimates of fair value Fair values for investment properties are calculated using both the direct income capitalization and discounted cash flow methods, which results in these measurements being classified as Level 3 in the fair value hierarchy. The REIT’s management is responsible for determining fair value measurements included in the consolidated financial statements, including Level 3 fair value of investment properties. Investment properties are valued on a highest-‐and-‐best-‐use basis. For all of the REIT’s investment properties, the current use is considered to be the highest and best use. Investment properties with a fair value of $1,284,309 (Acquisition Properties) have been valued using the direct income capitalization method. In applying this method, the stabilized net operating income (“NOI”) of each property is divided by an appropriate capitalization rate. The following are the significant assumptions used in determining the value: Capitalization rate based on actual location, size and quality of the property and taking into account any available market data at the valuation date. Stabilized NOI revenue less property operating expenses adjusted for items such as new leasing, average lease up costs, long-‐term vacancy rates, non-‐recoverable capital expenditures, management fees, straight-‐line rents and other non-‐recurring items. Generally, an increase in stabilized NOI will result in an increase in the fair value of an investment property. An increase in the capitalization rate will result in a decrease in the fair value of an investment property. The capitalization rate magnifies the effect of a change in stabilized NOI, with a lower capitalization rate resulting in a greater impact of a change in stabilized NOI than a higher capitalization rate. Dream Global REIT 2014 Annual Report | 70 Investment properties with a value of $795,362 (Initial Properties) were valued using the discounted cash flow (“DCF”) method. In applying this method, the income and expenditures of a specific property are projected assuming a ten-‐year hold period plus the forecasted net proceeds from the re-‐sale of the property at the end of the hold period using a discount rate reflecting the risks of the property being valued. The most significant assumptions incorporated into the DCF analysis include growth rates, exit capitalization rates and discount rates: Discount rate reflects the internal rate of return of a specific property. The discount rate is determined by analyzing sales of similar properties and yields of alternative investments. Consideration is given to ten-‐year bond yields and yields of high-‐quality corporate bonds to which an upward adjustment is made to reflect the increased risk associated with real estate investments and the specific risk associated with each asset. Exit capitalization rate based on the initial rate of return applicable to a property adjusted slightly upward to reflect the risk in negotiating new leases, older building age and the risk associated with a future sale. Growth rate based on the average increase in the consumer price index for Germany over the past three years and ranges from 1.4% to 2.0%. The weighted average growth rate used for the Initial Properties is 1.7%. Valuation processes Initial Properties At December 31, 2014 and 2013, the REIT obtained external valuations for the Initial Properties including assets held for sale, representing approximately 39% of the investment property portfolio. In 2014, properties with a value of $838,259 (€597,136) were valued externally (2013 – $1,006,359 [€686,700]). The external valuations are prepared by independent, professionally qualified appraisers who hold a recognized, relevant professional qualification and have recent experience in the location and category of the respective property. For properties subject to an independent valuation report, the management team verifies all major inputs to the valuation and reviews the results with the independent appraisers. Significant unobservable inputs in Level 3 valuations related to the Initial Properties including assets held for sale are as follows: Valuation method Discounted cash flow Input Discount rate Exit capitalization rate Annual cash flow Range 5.0%–25.7% 4.0%–20.0% n/a December 31, 2014 Weighted average 8.4% 7.3% 58,370 $ If both the discount rate and exit capitalization rate were to increase by 25 bps, the value of Initial Properties would decrease by $35,080. If both the discount rate and exit capitalization rate were to decrease by 25 bps, the value of the Initial Properties would increase by $38,096. Acquisition Properties At December 31, 2014 and 2013, the REIT performed internal valuations for Acquisition Properties. In 2014, properties with a value of $1,284,309 (€914,880) were subject to internal valuations (2013 – $1,405,032 [€958,739]). The valuations are prepared by management with inputs based on market observations and corroborated, in specific cases, through discussions with professionally qualified appraisers. Significant unobservable inputs in Level 3 valuations related to the Acquisition Properties are as follows: Valuation method Direct income capitalization Input Capitalization rate Annual cash flow Range 4.7%–7.7% n/a December 31, 2014 Weighted average 6.2% 83,140 $ If the capitalization rate were to increase by 25 bps, the value of Acquisition Properties would decrease by $52,067. If the capitalization rate were to decrease by 25 bps, the value of Acquisition Properties would increase by $56,699. Dream Global REIT 2014 Annual Report | 71 Note 8 AMOUNT IN ESCROW AND DEFERRED RENT Amount in escrow Deferred rent December 31, December 31, $ 2014 -‐ -‐ $ 2013 6,220 6,220 Note 9 JOINT ARRANGEMENTS The Trust participates in partnerships (“joint ventures”) with other parties that own investment properties and accounts for its interests using the equity method. During Q3 2014, the REIT entered into a joint venture agreement with POBA to sell a 50% interest in seven of the Acquisition Properties, which were each held in separate subsidiaries. The closings were completed in three tranches over the course of Q4 2014. Pursuant to this arrangement, the REIT no longer has control of these property subsidiaries and as such, has classified its 50% interest in each of these entities as investments in joint ventures and accounted for the investment using the equity method. As a result, seven Acquisition Properties valued at $573,521 and the related mortgages valued at $314,454 were derecognized at December 31, 2014. The total consideration to the REIT for the 50% interest in the investment properties was $311,326. The consideration consisted of the assumption of working capital of $2,246, POBA assuming 50% of the outstanding mortgages, which totalled $157,227, with the balance of $156,345 paid to the REIT in cash. The REIT incurred transaction costs of $4,456 relating to the sale, resulting in net proceeds to the REIT of $151,889. In selling a 50% interest in the seven properties, the REIT and POBA entered into a co-‐ownership arrangement regarding these assets. Under these circumstances, IFRS requires the REIT to derecognize the assets and record the gain that accrued prior to selling control on 100% of the assets sold. The purchase price consideration paid by POBA and the fair value of the REIT’s retained interest in the joint venture exceeded the carrying value of the net assets held within each subsidiary entity. As such, the REIT recorded a gain on the sale of $46,337, including $3,099 of deferred tax gain and net of transaction costs of $4,456. Of this total gain, $25,570 relates to remeasuring the retained interest in the joint venture at fair value. As at December 31, 2014, the carrying value of the investment in the POBA joint venture is $159,807, which includes the fair value remeasurement of $25,570. As part of the arrangement with POBA, the REIT has extended a loan facility to POBA to fund POBA’s share of the loan amortization payments over the term of the outstanding mortgages assumed on the seven properties. The REIT has received prepaid interest of $2,807, which will be amortized over the term of the respective mortgages. In addition, POBA will pay the REIT the interest savings on its 50% share of the interest saved from the loan amortization payments. The balance of the loan facility outstanding at the time of maturity of the respective mortgages is due and payable to the REIT. Under the terms of the POBA joint venture agreement, the REIT terminated an asset management agreement that was in place on certain Acquisition Properties, including three POBA joint venture assets, and paid a cancellation fee. The portion of the cancellation fee relating to the non-‐POBA joint venture assets has been recorded as a contract termination fee for $510 and included in the statements of income and comprehensive income. The investment properties that the joint ventures hold are consistent in terms of the class and type of properties held in the Trust’s portfolio. Dream Global REIT 2014 Annual Report | 72 Name POBA joint venture Löwenkontor Vordernbergstrasse 6/Heilbronner Strasse 35 (Z-‐UP) Speicherstrasse 55 (Werfthaus) Derendorfer Allee 4–4a (doubleU) Neue Mainzer Strasse 28 (K26) ABC-‐Strasse 19 (ABC Bogen) Marsstrasse 20–22 Lorac Investment Management S.à r.l. Location Berlin, Germany Stuttgart, Germany Frankfurt, Germany Düsseldorf, Germany Frankfurt, Germany Hamburg, Germany Munich, Germany Luxembourg, Luxembourg Name Löwenkontor Vordernbergstrasse 6/Heilbronner Strasse 35 (Z-‐UP) Speicherstrasse 55 (Werfthaus) Derendorfer Allee 4–4a (doubleU) Neue Mainzer Strasse 28 (K26) ABC-‐Strasse 19 (ABC Bogen) Marsstrasse 20–22 Investment in POBA joint venture Lorac Investment Management S.à r.l.(1) Total investment in joint ventures (1) The prior year Lorac balance is included in other non-‐current assets on the consolidated balance sheet. Name Löwenkontor Vordernbergstrasse 6/Heilbronner Strasse 35 (Z-‐UP) Speicherstrasse 55 (Werfthaus) Derendorfer Allee 4–4a (doubleU) Neue Mainzer Strasse 28 (K26) ABC-‐Strasse 19 (ABC Bogen) Marsstrasse 20–22 Share of net income from POBA joint venture Lorac Investment Management S.à r.l. Share of net income from investment in joint ventures December 31, 2014 Ownership interest (%) December 31, 2013 50 50 50 50 50 50 50 50 -‐ -‐ -‐ -‐ -‐ -‐ -‐ 50 Net assets at % ownership interest December 31, 2013 -‐ -‐ -‐ -‐ -‐ -‐ -‐ -‐ 203 203 December 31, 2014 21,038 $ 11,553 21,064 20,162 28,170 33,830 23,990 159,807 160 159,967 $ Share of net income (loss) at % ownership interest for year ended December 31, 2013 -‐ -‐ -‐ -‐ -‐ -‐ -‐ -‐ 28 28 2014 1,713 $ (36) 704 202 (217) (40) 161 2,487 26 2,513 $ $ $ $ $ Dream Global REIT 2014 Annual Report | 73 The following amounts represent 100% and the Trust’s ownership interest in the assets, liabilities, revenues, expenses and cash flows in the equity accounted investments in which the Trust participates. Non-‐current assets Investment properties Other non-‐current assets Current assets Amounts receivable Prepaid expenses Cash Total assets Non-‐current liabilities Debt Deposits Current liabilities Debt Amounts payable and accrued liabilities Income tax payable Total liabilities Net assets Investment properties revenue Investment properties operating expenses Net rental income Other income Interest income and other income Other expenses General and administrative Interest expense Fair value adjustments to investment properties Fair value adjustments to investment properties Income before income taxes Current income taxes Net income for the year POBA joint venture December 31, 2014 At 50% At 100% $ 568,834 $ 968 569,802 4,456 56 6,244 10,756 580,558 299,494 292 299,786 5,978 6,222 98 12,298 312,084 268,474 $ $ 284,417 484 284,901 2,228 28 3,122 5,378 290,279 149,747 146 149,893 2,989 3,111 49 6,149 156,042 134,237 $ POBA joint venture December 31, 2014 At 50% 1,648 (296) 1,352 At 100% 3,296 $ (592) 2,704 28 28 (412) (746) (1,158) 3,406 4,980 (6) 4,974 $ $ 14 14 (206) (373) (579) 1,703 2,490 (3) 2,487 Dream Global REIT 2014 Annual Report | 74 POBA joint venture December 31, 2014 At 50% At 100% 1,036 $ (500) (1,896) (1,360) $ 518 (250) (948) (680) Cash flow generated from (utilized in):(1) Operating activities Investing activities Financing activities $ Decrease in cash (1) The decrease in cash reflects payments made by the joint venture entities relating to working capital items that were in existence prior to the joint venture $ being formed. Note 10 OTHER NON-‐CURRENT ASSETS Other assets Fixtures and computer equipment Straight-‐line rent receivable Total Note 11 AMOUNTS RECEIVABLE Trade receivables Less: Provision for impairment of trade receivables Trade receivables, net Other amounts receivable Total December 31, 2014 37 232 1,429 1,698 $ $ $ December 31, 2013 240 152 1,896 2,288 $ December 31, 2014 12,509 (1,165) 11,344 6,111 17,455 $ $ $ $ December 31, 2013 8,071 (655) 7,416 10,733 18,149 As at December 31, 2014, other amounts receivable include amounts receivable from tenants in relation to operating cost recoveries of $2,244 (December 31, 2013 – $7,358). The carrying amount of amounts receivable approximates fair value due to their current nature. As at December 31, 2014, trade receivables of approximately $3,599 (December 31, 2013 – $741) were past due but not considered impaired as the Trust has ongoing relationships with these tenants and the aging of these trade receivables is not indicative of default. Note 12 DEBT Mortgage debt Convertible debentures Term loan credit facility Total Less: Current portion Non-‐current debt December 31, 2014 701,325 152,365 374,706 1,228,396 70,514 1,157,882 $ $ December 31, 2013 825,014 150,326 448,972 1,424,312 20,356 1,403,956 $ $ First-‐ranking mortgages on all of the investment properties have been provided as security for either the mortgage debt or the term loan credit facility. Dream Global REIT 2014 Annual Report | 75 Mortgage debt On February 14, 2014, the Trust committed to a mortgage agreement with a principal balance of €8,700 ($13,237) at a fixed rate of 1.98% per annum, maturing on March 31, 2019, in connection with the acquisition of Werner-‐Eckert-‐Straße 8, 10, 12, Munich. The Trust received the proceeds of the mortgage on March 28, 2014. The mortgage requires quarterly repayments with a principal amortization of 1.75% per annum of the initial loan amount. On March 4, 2014, the Trust committed to a mortgage agreement with a principal balance of €36,840 ($55,765) at a fixed rate of 2.33% per annum, maturing on February 26, 2021, in connection with the acquisition of My Falkenried in Hamburg. The Trust received the proceeds of the mortgage on April 29, 2014. The mortgage requires quarterly repayments with a principal amortization of 1% per annum of the initial loan amount. On July 31, 2014, the Trust drew on a mortgage with a principal balance of €28,500 ($41,556) at a fixed rate of 1.99% per annum, maturing on January 31, 2022, in connection with the acquisition of Officium in Stuttgart. The mortgage requires quarterly repayments with a principal amortization of 1.6% per annum of the initial loan amount. On September 30, 2014, the Trust committed to a mortgage agreement with a principal balance of €24,500 ($35,317) at a fixed rate of 1.819% per annum, maturing on September 30, 2022, in connection with the acquisition of Europahaus in Darmstadt. The Trust received the proceeds of the mortgage on October 20, 2014. The mortgage requires quarterly repayments with a principal amortization of 1.00% per annum of the initial loan amount. On November 14, 2014, the Trust drew on a mortgage with a principal balance of €69,100 ($97,500) at a fixed rate of 1.77% per annum, maturing on November 14, 2024, in connection with the acquisition of Im Mediapark 8 (Cologne Tower), Cologne. The mortgage requires quarterly repayments with a principal amortization of 1.6% per annum of the initial loan amount. During the last quarter of 2014, the REIT sold a 50% interest in seven Acquisition Properties as part of a joint venture agreement with POBA. In conjunction with this sale, 50% of the mortgage debt relating to the seven assets was assumed by POBA. Since the investment in the joint venture is equity accounted, 100% of the debt on the seven properties has been removed from mortgage debt in the Trust’s financial statements. (Refer to Note 9 for details on investment in joint ventures.) Convertible debentures On August 3, 2011, the Trust issued a $140,000 principal amount of convertible unsecured subordinated debentures (the “Debentures”). On August 29, 2011, the Trust issued an additional $21,000 principal amount of Debentures. The Debentures bear interest at 5.5% per annum, payable semi-‐annually on July 31 and January 31 each year, and mature on July 31, 2018. Each Debenture is convertible at any time by the debenture holder into 76.9231 Units per one thousand dollars of face value, representing a conversion price of $13.00 per REIT Unit. On or after August 31, 2014, and prior to August 31, 2016, the Debentures may be redeemed by the Trust, in whole or in part, at a price equal to the principal amount plus accrued and unpaid interest on not more than 60 days’ and not less than 30 days’ prior written notice, provided the weighted average trading price for the Trust’s Units for the 20 consecutive trading days, ending on the fifth trading day immediately preceding the date on which notice of redemption is given, is not less than 125% of the conversion price. On or after August 31, 2016, and prior to July 31, 2018, the maturity date, the Debentures may be redeemed by the Trust at a price equal to the principal amount plus accrued and unpaid interest. The Debentures were initially recorded on the consolidated balance sheets as debt of $152,894 less costs of $6,931. In addition, the Trust allocated $8,106 to the conversion feature on initial recognition, which was deducted from the principal balance and will be accreted to the principal amount of the Debenture over its term. As at December 31, 2014, the outstanding principal amount is $161,000 (December 31, 2013 – $161,000). Term loan credit facility On August 3, 2011, the Trust obtained a term loan credit facility (the “Facility”) for gross proceeds of €328,500 ($448,395). Costs relating to the Facility were $10,896. These costs were reduced by proceeds of $9,555 received from the vendor to compensate the Trust for higher than expected financing costs. The Facility initially had a term of five years, which could be extended for a further two years, subject to the satisfaction of certain conditions precedent at the time of the extension. Variable rate interest is calculated and payable quarterly under the Facility at a rate equal to the aggregate of the three-‐month EURIBOR plus a margin of 200 basis points (the “margin”) and an agency fee of 10 basis points. Pursuant to the Facility, the Trust was required to enter into an interest rate swap that fixed 80% of the variable interest rate payable under the Facility (the “Fixed Rate Portion”) at a fixed interest rate not to exceed 3.5%, excluding the margin, and was required to purchase a cap instrument to cover 10% of the variable rate interest payable so that such interest rate does not exceed 5% (excluding the margin). The remaining 10% of interest payable would continue to be calculated quarterly on a variable rate basis. To comply with the Facility’s requirement, on the day of closing the Trust entered into an interest rate swap to pay a fixed rate of 4.05% on 80% of the Facility and an interest rate cap of 5.00% on 10% of the Facility at a cost of $9,986. Dream Global REIT 2014 Annual Report | 76 No amortization of principal under the Facility is required during the first three years of the Facility term. Thereafter, interest together with amortization of principal equal to 2% per annum of the initial loan amount will be payable on a quarterly basis (including the extension term, if any). Effective August 3, 2013, the Trust was required to pay the additional interest of 1% on the portion of the €100,000 plus a 15% prepayment amount, less any amounts repaid. Additionally, an applicable prepayment fee of 0.6% is payable for repayments made prior to August 3, 2014 and 0.25% for repayments made prior to August 3, 2015. No repayment fee is payable for repayments made in the final year of the Facility. During the year ended December 31, 2014, the Trust repaid €46,561 ($67,036) in connection with the disposed properties including prepayment amounts, and mandatory repayments, in accordance with the terms of the Facility. For the year ended December 31, 2012, the Trust repaid €2,665 ($3,426) in connection with the disposition of five properties. During the year ended December 31, 2013, the Trust repaid €10,115 ($14,007) in connection with the disposition of 15 properties including prepayment amounts and made a lump sum repayment of €2,000 ($2,772). As a result of these dispositions, the €100,000 plus 15% prepayment portion has been reduced to €53,659 as at December 31, 2014, of which €47,986 ($67,363) was allocated to the Fixed Rate Portion of the Facility and the remainder was allocated to the variable rate portion of the debt. Factoring the additional 1% the Trust has to pay on the €53,659 ($75,327), the Trust paid a rate of 4.23% (December 31, 2013 – 4.24%) on the Fixed Rate Portion of €261,486 and a rate of 3.23% (December 31, 2013 – 3.37%) on the €5,673 variable portion of the Facility (December 31, 2013 – €50,921), resulting in a blended rate of 4.21% as at December 31, 2014 (December 31, 2013 – 4.09%). The Facility requires certain bank accounts to be pledged, and that all net rental income from the Initial Properties be paid into a rent collections account established by the Trust, to be released only after budgeted non-‐recoverable operating expenses (including an agreed property and asset management fee) are paid. The Facility includes default and cash trap covenants requiring the Trust to maintain certain loan-‐to-‐value and debt service coverage ratios, each of which are calculated on a quarterly basis. The Facility agreement requires the debt service coverage ratio to be equal to or above 145% at each interest payment date. If these ratios are not met at any time, the lenders may withhold 50% of the excess cash flow on a monthly basis as additional security for the Facility until the ratios are once again satisfied. On satisfaction of the relevant ratio, the excess cash flow may again be distributed to the Trust; however, any cash previously trapped will not be released and will be used at the time of each future quarterly testing date until the ratio is satisfied for two consecutive quarters. As at December 31, 2014, the Trust was in compliance with its loan covenants. In addition, the Facility required that DAM and Dundee Corporation combined maintained at least $120,000 of equity in the REIT for a two-‐year period until August 3, 2013 and continue to maintain at least $48,000 of equity for the remainder of the term of the Facility. As at December 31, 2014, DAM and Dundee Corporation combined are in compliance with the requirements. Revolving credit facility On October 10, 2013, the REIT entered into an agreement with a Canadian bank to provide a revolving credit facility not to exceed €25,000. The REIT increased the revolving credit facility to €50,000 on August 14, 2014, with no change to the covenants or interest rate spreads, and the term has been extended to September 25, 2016. The requirement to provide a pledge of 10% of outstanding equity of a subsidiary as collateral has been removed. Instead, the REIT has provided a general security agreement. The interest rate on any Canadian dollar advances is prime plus 200 basis points and/or bankers’ acceptance rates plus 300 basis points. For euro advances, the rate is 300 basis points over the three-‐month EURIBOR rate. Total financing costs incurred amounted to $765 as at December 31, 2014. The revolving credit facility agreement requires the Trust to maintain: a debt-‐to-‐book value rating not to exceed 0.6:1; a minimum interest coverage ratio of 2:1; and a minimum net worth of $700,000. During the year, the revolving credit facility had been drawn and repaid multiple times to bridge investing and mortgage financing activities. As at December 31, 2014, the outstanding balance of the credit facility was €nil ($nil) and the Trust was in compliance with the covenants of the revolving credit facility. As at December 31, 2014, the Trust had an undrawn letter of credit in the amount of $1,684 committed against the credit facility. Dream Global REIT 2014 Annual Report | 77 The weighted average interest rates for the fixed and floating components of debt are as follows: Face interest rates Weighted average effective interest rate December 31, December 31, 2013 2014 December 31, December 31, 2013 2014 Maturity dates December 31, 2014 Debt amount December 31, 2013 Fixed rate Mortgage debt Term loan credit facility(1) Convertible debentures Total fixed rate debt Variable rate Term loan credit facility 64,368 Total variable rate debt 64,368 1,424,312 Total debt (1) As at December 31, 2014, 98% of the term loan credit facility is subject to an interest rate swap in place until August 3, 2016, pursuant to the term loan credit 701,325 $ 366,749 152,365 1,220,439 825,014 384,604 150,326 1,359,944 7,957 7,957 1,228,396 $ 2015–2024 2016 2018 2.33% 4.23% 5.50% 3.30% 2.49% 4.23% 7.31% 3.61% 2.84% 4.28% 7.31% 3.74% 2.57% 4.24% 5.50% 3.37% 3.22% 3.22% 3.61% 3.23% 3.23% 3.30% 3.40% 3.40% 3.72% 3.37% 3.37% 3.37% 2016 $ $ facility agreement, and has been presented as fixed rate debt. The scheduled principal repayments and debt maturities are as follows: Mortgages 32,486 12,511 65,036 146,760 38,730 414,525 710,048 $ $ $ $ Term loan 38,028 337,010 -‐ -‐ -‐ -‐ 375,038 $ $ Convertible debentures -‐ -‐ -‐ 161,000 -‐ -‐ 161,000 Total 70,514 349,521 65,036 307,760 38,730 414,525 1,246,086 (4,682) (13,008) 1,228,396 $ $ 2015 2016 2017 2018 2019 2020 and thereafter Acquisition date fair value adjustments Transaction costs Note 13 DERIVATIVE FINANCIAL INSTRUMENTS Interest rate swaps (Note 26) Interest rate cap (Note 26) Foreign exchange forward contracts (Note 26) Conversion feature of the Debentures (Notes 12 and 26) Total Less: Current portion Non-‐current portion December 31, 2014 December 31, 2013 $ 10,623 $ 13,764 -‐ 1,492 158 12,273 8,853 $ 3,420 $ (18) 15,941 384 30,071 13,772 16,299 For the year ended December 31, 2014 $ $ 384 (226) 158 The movement in the conversion feature on the convertible debentures was as follows: Balance at beginning of year Remeasurement of conversion feature Balance at end of year Dream Global REIT 2014 Annual Report | 78 Foreign currency contracts The Trust has various currency forward contracts in place to sell euros for Canadian dollars for the next 36 months. The Trust currently has foreign exchange forward contracts to sell €121,166 total from January 2015 to December 2017 at an average exchange rate of $1.417 per euro. Note 14 DEFERRED UNIT INCENTIVE PLAN The movement in the Deferred Unit Incentive Plan balance was as follows: As at January 1, 2013 Compensation during the year Asset management fees during the year Issue of deferred units Remeasurements of carrying value As at December 31, 2013 Compensation during the year Asset management fees during the year Issue of deferred units Remeasurements of carrying value As at December 31, 2014 $ $ 3,629 1,313 2,113 (164) (585) 6,306 1,648 2,541 (793) (337) 9,365 On August 3, 2011, DAM elected to receive the first $3,500 of the base asset management fees payable on the properties acquired on August 3, 2011 by way of deferred trust units under the Asset Management Agreement in each year for the next five years. The deferred trust units granted to DAM vest annually over five years, commencing on the fifth anniversary date of the units being granted. On termination of the Asset Management Agreement, unvested trust units granted to DAM vest immediately. Deferred units granted to DAM for payment of asset management fees are initially measured, and subsequently remeasured at each reporting date, at fair value. The deferred units are considered to be restricted stock, and the fair value is estimated by applying a discount to the market price of the corresponding Units. The discount is estimated based on a hypothetical put–call option, valued using a Black Scholes option pricing model, which takes into consideration the volatility of the Canadian REIT and the German real estate equity markets, the respective holding period of the deferred units, and the risk-‐free interest rate. The carrying value of the deferred units granted to DAM is most sensitive to changes in volatility and the relative weighting of the put option and call option values. The fair value of the deferred trust units is based on the market price of Dream Global REIT units and the application of an appropriate discount rate to reflect the vesting period. The significant unobservable inputs used in determining the discount include the following: Risk-‐free rate Expected volatility 2014 1.3%–1.5% 27% 2013 2.0%–2.3% 28% The volatility of the units is estimated based on comparable companies in both the German and Canadian real estate markets. The discount rate used to value the deferred trust units is determined by a put-‐and-‐call model calculated using the Black Scholes option pricing model. A higher volatility or risk-‐free rate will decrease the value of the deferred trust units and vice versa. Dream Global REIT 2014 Annual Report | 79 Units at December 31, 2014, closing price of $8.57 per unit Discount rate of 24% per unit for units issued in 2011 Discount rate of 25% per unit for units issued in 2012 Discount rate of 46% per unit for units issued in 2013 Discount rate of 49% per unit for units issued in 2014 Units at December 31, 2013, closing price of $8.42 per unit Discount rate of 35% per unit for units issued in 2011 Discount rate of 37% per unit for units issued in 2012 Discount rate of 38% per unit for units issued in 2013 Fair value as at December 31, 2014 11,695 $ (244) (771) (1,576) (2,043) 7,061 $ Fair value as at December 31, 2013 7,680 $ (345) (1,113) (1,403) 4,819 $ During the year ended December 31, 2014, $2,541 of asset management fees were recorded (December 31, 2013 – $2,113) based on the fair value of the deferred units issued, with an appropriate discount to reflect the restricted period of exercise, and are included in general and administrative expenses. The fees were settled by the grant of 422,171 deferred trust units during the year (December 31, 2013 – 373,160) and 30,410 deferred trust units granted on January 1, 2015 (January 1, 2014 – 34,031). As at January 1, 2014, 1,364,659 unvested deferred trust units and income deferred units (January 1, 2014 – 912,078) were outstanding with respect to the asset management fee. Compensation expense of $1,648 for the period (December 31, 2013 – $1,313) was also included in general and administrative expenses. On February 26, 2014, 110,300 deferred trust units were granted to senior management and trustees. Of the 110,300 units granted, 67,000 relate to trustees and key management personnel. The grant date value for the deferred trust units of the grant was $8.88. On May 7, 2014, 26,000 deferred trust units were granted to trustees and an additional 23,723 deferred trust units were granted to trustees who elected to receive their 2014 annual retainer in the form of deferred units rather than cash. On February 21, 2013, 174,500 deferred trust units were granted to senior management and trustees. Of the 174,500 units granted, 102,000 relate to trustees and key management personnel. The grant date value for the deferred trust units of the grant was $11.04. On May 9, 2013, 25,347 deferred trust units were granted to trustees who elected to receive their 2013 annual retainer in the form of deferred units rather than cash. Note 15 AMOUNTS PAYABLE AND ACCRUED LIABILITIES Trade payables Accrued liabilities and other payables Accrued interest Total December 31, December 31, 2014 11,473 34,253 3,759 49,485 $ $ 2013 9,447 19,589 3,904 32,940 $ $ Dream Global REIT 2014 Annual Report | 80 Note 16 DISTRIBUTIONS The following table breaks down distribution payments for the year ended December 31: Paid in cash Paid by way of reinvestment in Units Less: Payable at December 31, 2013 (December 31, 2012) Plus: Payable at December 31, 2014 (December 31, 2013) Total $ $ 2014 73,795 15,222 (7,314) 7,431 2013 67,530 10,145 (4,816) 7,314 $ 89,134 $ 80,173 The distribution for the month of December 2014 in the amount of $0.0667 per unit, declared on December 17, 2014 and payable on January 15, 2015, amounted to $7,431. The amount payable as at December 31, 2014 was satisfied on January 15, 2014 by $6,301 cash and $1,130 through the issuance of 128,771 Units. The distribution for the month of January 2015 was declared in the amount of $0.0667 per unit, payable on February 15, 2015. The Trust declared distributions of $0.0667 per unit per month for the months of January 2014 to December 2014. Note 17 EQUITY Total December 31, 2014 December 31, 2013 Number of Units 111,466,697 $ Amount 1,120,220 Number of Units 109,698,977 $ Amount 1,034,005 REIT Units The REIT is authorized to issue an unlimited number of Units and an unlimited number of Special Trust Units. The Special Trust Units may only be issued to holders of Exchangeable Notes. Distribution Reinvestment and Unit Purchase Plan The Distribution Reinvestment Plan (“DRIP”) allows holders of Units, other than unitholders who are resident of or present in the United States of America, to elect to have all cash distributions from the REIT reinvested in additional Units. Unitholders who participate in the DRIP receive an additional distribution of Units equal to 4% of each cash distribution that was reinvested. The price per unit is calculated by reference to a five-‐day weighted average closing price of the Units on the Toronto Stock Exchange preceding the relevant distribution date, which is typically on or about the 15th day of the month following the declaration. For the year ended December 31, 2014, 1,677,622 Units were issued pursuant to the DRIP for $15,222 (December 31, 2013 – 1,066,792 Units for $10,145). The Unit Purchase Plan feature of the DRIP facilitates the purchase of additional Units by existing unitholders. Participation in the Unit Purchase Plan is optional and subject to certain limitations on the maximum number of additional Units that may be acquired. The price per unit is calculated in a similar manner to the DRIP. No commission, service charges or brokerage fees are payable by participants in connection with either the reinvestment or purchase features of the DRIP. For the year ended December 31, 2014, 3,683 Units were issued under the Unit Purchase Plan for $34 (December 31, 2013 – 7,059 Units for $72). 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 affiliates and their service providers, including the asset manager. Deferred trust units are granted at the discretion of the trustees and earn income deferred trust units based on the payment of distributions. Once issued, 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 except for certain deferred trust units granted to DAM under the Asset Management Agreement. Subject to an election option available for certain participants to postpone receipt of Units, such Units will be issued immediately on vesting. Up to a maximum of 2,074,000 deferred trust units are issuable under the DUIP. For the year ended December 31, 2014, 86,415 Units were issued to trustees, officers and employees pursuant to the DUIP for $793 (December 31, 2013 – 17,632 Units for $164). Dream Global REIT 2014 Annual Report | 81 Note 18 ASSETS HELD FOR SALE As at December 31, 2014, the Trust classified 12 properties as held for sale. Management has committed to a plan of sale, and therefore, the properties have been reclassified as current assets for sale. Investment properties Other non-‐current assets Prepaid expenses and other assets Assets held for sale Debt Amounts payable and accrued liabilities Liabilities related to assets held for sale Net assets Investment properties held for sale Balance at beginning of year Building improvements Lease incentives and initial direct leasing costs Investment properties reclassified as held for sale Investment properties reclassified as held for sale – POBA joint venture assets Fair value adjustments Disposals Disposals – POBA joint venture assets Foreign currency translation Balance at end of year Note 19 INTEREST EXPENSE Interest on debt Interest on debt incurred and charged to comprehensive income is recorded as follows: Interest on term loan credit facility Interest on convertible debentures Interest on mortgage debt Standby fees on revolving credit facility Amortization of financing costs, discounts and fair value adjustments on acquired debt Interest expense December 31, 2014 42,897 1 1,465 44,363 -‐ (1,424) (1,424) 42,939 $ $ December 31, 2013 21,147 13 46 21,206 (10,106) (4,977) (15,083) 6,123 $ $ For the year ended December 31, 2014 21,147 $ 11 (131) 161,174 573,521 (4,392) (130,746) (573,521) (4,166) 42,897 $ For the year ended December 31, 2013 -‐ -‐ -‐ 21,147 -‐ -‐ -‐ -‐ -‐ 21,147 $ $ Year ended December 31, 2014 11,972 8,862 22,371 835 4,158 48,198 $ $ 2013 10,940 8,862 15,114 333 3,257 38,506 $ $ Dream Global REIT 2014 Annual Report | 82 Note 20 FAIR VALUE ADJUSTMENTS TO FINANCIAL INSTRUMENTS Fair value gain (loss) on interest rate swaps and cap Fair value gain on conversion feature of convertible debentures Fair value gain on Deferred Unit Incentive Plan Fair value gain (loss) on foreign exchange forward contracts Note 21 INCOME TAXES Reconciliation of tax expense Income before income taxes Income attributable to shareholders of subsidiaries Income before income taxes attributable to Unitholders of the Trust Tax calculated at the German corporate tax rate of 15.825% Increase (decrease) resulting from: Expenses not deductible for tax Effect of different tax rates in countries in which the group operates Income distributed and taxable to unitholders Tax benefits not previously recognized Impact from sale of assets Other items Provision for (recovery of) income taxes Deferred income tax assets (liabilities) consist of the following: Deferred tax asset (liability) related to difference in tax and book basis of investment properties Deferred tax asset related to difference in tax and book basis of financial instruments Deferred tax asset related to tax loss carry-‐forwards Deferred tax asset related to differences in tax and book basis of financing costs Deferred tax liability related to investment in joint venture Total deferred income tax assets (liabilities) $ Year ended December 31, $ 2014 (3,898) 226 337 6,391 2013 226 3,761 585 (16,022) $ 3,056 $ (11,450) Year ended December 31, 2014 2013 20,620 225,996 (909) -‐ 20,620 225,087 3,263 35,620 $ 436 (526) (9,710) (110) (8,488) (163) 17,059 $ 424 (546) (5,286) (33) -‐ 33 (2,145) December 31, December 31, 2014 (14,619) 2,110 11,443 390 (43) (719) $ $ 2013 1,813 3,001 6,744 755 -‐ 12,313 $ $ $ $ Dream Global REIT 2014 Annual Report | 83 Note 22 RELATED PARTY TRANSACTIONS AND ARRANGEMENTS The REIT entered into an asset management agreement with DAM (“Asset Management Agreement”) pursuant to which DAM provides certain asset management services to the REIT and its subsidiaries. The Asset Management Agreement provides for a broad range of asset management services for the following fees: • • • • • base annual management fee calculated and payable on a monthly basis, equal to 0.35% of the historical purchase price of the properties; incentive fee equal to 15% of the REIT’s adjusted funds from operations per unit in excess of $0.93 per unit; increasing annually by 50% of the increase in the weighted average consumer price index (or other similar metric as determined by the trustees) of the jurisdictions in which the properties are located; capital expenditures fee equal to 5% of all hard construction costs incurred on each capital project with costs in excess of $1,000, excluding work done on behalf of tenants or any maintenance capital expenditures; acquisition fee equal to: (a) 1.0% of the purchase price of a property, on the first $100,000 of properties in each fiscal year; (b) 0.75% of the purchase price of a property on the next $100,000 of properties acquired in each fiscal year; and (c) 0.50% of the purchase price on properties in excess of $200,000 in each fiscal year. DAM did not receive an acquisition fee in respect of the acquisition of the Initial Properties; and financing fee equal to 0.25% of the debt and equity of all financing transactions completed on behalf of the REIT to a maximum of actual expenses incurred by DAM in supplying services relating to financing transactions. DAM did not receive a financing fee in respect of the acquisition of the Initial Properties. Pursuant to the Asset Management Agreement, DAM may elect to receive all or part of the fees payable to it for its asset management services in deferred trust units under the Deferred Unit Incentive Plan. The number of deferred trust units issued to DAM will be calculated by dividing the fees payable to DAM by the fair value for this purpose on the relevant payment date of the Units. Fair value for this purpose is the weighted average closing price of the Units on the principal market on which the Units are quoted for trading for the five trading days immediately preceding the relevant payment date. The deferred trust units will vest on a five-‐year schedule, pursuant to which one-‐fifth of the deferred trust units will vest, starting on the sixth anniversary date of the grant date for deferred trust units granted during the first five years of the Asset Management Agreement and starting on the first anniversary date of the grant date thereafter. Income deferred trust units will be credited to DAM based on distributions paid by the Trust on the Units and such income deferred trust units will vest on the same five-‐year schedule as their corresponding deferred trust units. For accounting purposes, the deferred units relate to services provided during the year and the corresponding expense is recognized during the year. DAM has irrevocably elected to receive the first $3,500 of the fees payable to it in each year for the first five years for its asset management services in deferred trust units. Deferred units granted to DAM for payment of asset management fees are included in general and administrative expenses during the year as they relate to services provided during the year, and the units and fees are initially measured by applying a discount to the fair value of the corresponding Units. The discount is estimated by applying the Black Scholes option pricing model, taking into consideration the volatility of the Canadian REIT equity market and the German real estate industry. Once recognized, the liability is remeasured at each reporting date at a discount to the fair values of the corresponding Units, with the change being recognized in comprehensive income as a fair value adjustment to financial instruments. During the year ended December 31, 2014, the REIT recognized $7,432 (year ended December 31, 2013 – $5,438) in relation to asset management fees under the Asset Management Agreement with DAM, which is included in general and administrative expenses. Of this total, $2,541 (year ended December 31, 2013 – $2,113) was payable in deferred trust units and $4,891 (year ended December 31, 2013 – $3,325) was payable in cash. As at January 1, 2015, 1,364,659 (January 1, 2014 – 912,077) deferred trust units and income deferred trust units were granted under this agreement and remained unvested. The REIT also paid $2,845 for asset acquisition fees incurred on acquisitions completed in the year ended December 31, 2014 (year ended December 31, 2013 – $5,892), which were capitalized as acquisition costs and then written off on remeasurement of the investment properties. The REIT also incurred $421 in financing fees related to the mortgage financing service during the year (year ended December 31, 2013 – $518). The fees were either charged to prepaid financing costs or deferred financing costs and amortized over the term of the mortgage financing. During the year ended December 31, 2014, the REIT also reimbursed DAM for out-‐of-‐pocket and incidental costs of $585, pursuant to the terms of the Asset Management Agreement, which has been included in general and administrative expenses. Dream Global REIT 2014 Annual Report | 84 Included in amounts payable as at December 31, 2014 is $3,871 (December 31, 2013 – $2,523) related to the Asset Management Agreement with DAM. Included in amounts receivable as at December 31, 2014 is $1,185 (December 31, 2013 – $nil) related to the Asset Management Agreement with DAM. Shared Services and Cost Sharing Agreement The Trust entered into a shared services and cost sharing agreement with DAM on December 1, 2013. The agreement is for a one-‐year term and will be automatically renewed for further one-‐year terms unless and until the agreement is terminated in accordance with its terms or by mutual agreement of the parties. Pursuant to the agreement, DAM will be providing additional administrative and support services in order to expand and improve DAM’s service capability in connection with the provision of its asset management services. DAM will receive an annual fee sufficient to reimburse it for all the expenses incurred in providing these additional administrative and support services. Additionally, the Trust will also reimburse DAM in each calendar year for its share of costs incurred in connection with certain business transformation services provided by DAM. During the year ended December 31, 2014, the Trust recorded an amount of $240 payable to DAM pursuant to the Shared Services and Cost Sharing Agreement. The Trust’s future commitment under the Shared Services and Cost Sharing Agreement over the next six years is $1,160. Non-‐controlling interest and notes receivables DAM has co-‐invested with the Trust in properties with their share of interest ranging from 0.26% to 5.2%. At the year ended December 31, 2014, the non-‐controlling interest and net income attributable to DAM amounted to $6,195 and $909, respectively. As part of the co-‐investing transactions, the Trust provided interest bearing loans to DAM for financing its equity interests, bearing interest at 8.5% per annum for a ten-‐year term. At the year ended December 31, 2014, the notes receivable outstanding and interest accrued amounted to $4,930 and $111, respectively. Note 23 SUPPLEMENTARY CASH FLOW INFORMATION Increase (decrease) in amounts receivable Decrease (increase) in prepaid expenses and other assets Increase in amounts payable and accrued liabilities Increase in tenant deposits Change in non-‐cash working capital The following amounts were paid on account of interest: Debt $ $ $ $ Year ended December 31, 2014 2013 (1,701) 5,640 2,365 (1,968) 899 7,222 1,005 198 2,568 11,092 $ Year ended December 31, 2013 2014 35,306 44,175 $ Note 24 COMMITMENTS AND CONTINGENCIES The REIT and its operating subsidiaries are contingently liable under guarantees that are issued in the normal course of business 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 REIT. Dream Global REIT 2014 Annual Report | 85 As at December 31, 2014, the REIT’s future minimum commitments under operating leases are as follows: Less than 1 year 1–5 years Longer than 5 years Total Operating lease payments $ $ 730 1,151 -‐ 1,881 During the year ended December 31, 2014, the Trust paid $885 in minimum lease payments, respectively, which have been included in comprehensive income for the year. The REIT also has commitments for lease incentives and initial direct leasing costs of approximately $3,195. Note 25 CAPITAL MANAGEMENT At December 31, 2014, the Trust’s capital consists of debt and unitholders’ equity. The primary objective of the Trust’s capital management is to ensure it remains within its quantitative banking covenants as well as to ensure the Trust can meet its obligations and continue to grow. Specifically, the Trust intended to ensure adequate operating funds are available to maintain consistent and sustainable unitholder distributions, to fund capital expenditure requirements and to meet debt obligations. Various debt, equity and earnings distribution ratios are used to ensure capital adequacy and monitor capital requirements. The primary ratios used for assessing capital management are the interest coverage and debt-‐to-‐book value ratios. 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 that the debt level maintained is sufficient to provide adequate cash flows for unitholder distributions and capital expenditures, and for evaluating the need to raise funds for further expansion. The Trust’s equity consists of Units, in which the carrying value is impacted by earnings and unitholder distributions. The Trust endeavours to make annual distributions of $0.80 per unit. Amounts retained in excess of the distributions are used to fund leasing costs, capital expenditures and working capital requirements. Management monitors distributions through various ratios to ensure adequate resources are available. These ratios include the proportion of distributions paid in cash, DRIP participation ratio, and total distributions as a percentage of adjusted funds from operations (“AFFO”). The Trust monitors debt capital primarily using a debt-‐to-‐book value ratio, which is calculated as the amount of outstanding debt divided by total assets. During the year, the Trust did not breach any of its loan covenants, nor did it default on any other of its obligations under its loan agreements. The term loan credit facility agreement, which relates only to the Initial Properties, requires the debt service coverage ratio to be equal to or above 145% at each interest rate payment date as well as debt-‐to-‐ book value ratio not to exceed 59%. For the year ended December 31, 2014, the REIT’s debt service coverage ratio was 258%, and the debt-‐to-‐book value ratio was 44%, and therefore, in compliance with the term loan credit facility’s requirement. Note 26 FINANCIAL INSTRUMENTS Risk management IFRS 7, “Presentation of Financial Statements” (“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 risk. Market risk is the risk that 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, currency risk and other market price risk. The Trust has exposure to interest rate risk primarily as a result of its term loan credit facility, which has a variable rate of interest. In order to manage exposure to interest rate risk, the Trust endeavours to maintain an appropriate mix of fixed and floating rate debt, manage maturities of fixed rate debt and match the nature of the debt with the cash flow characteristics of the underlying asset. Additionally, the Trust has entered into interest rate swaps and caps to economically hedge the variable rate debt. The Trust entered into foreign exchange forward contracts to manage its currency risk from paying distributions and debt servicing in Canadian dollars. The Trust is also exposed to interest rate risk on its derivatives. Dream Global REIT 2014 Annual Report | 86 The following interest rate sensitivity table outlines the potential impact of a 1% change in the interest rate on variable rate assets and liabilities for a twelve-‐month period. A 1% change is considered a reasonable level of fluctuation on variable rate assets and debts. Carrying amount Income -‐1% Equity Interest rate risk 1% Equity Income Financial assets Cash(1) Financial liabilities Term loan credit facility $ $ 121,939 $ (1,219) $ (1,219) $ 1,219 $ 1,219 7,957 $ 80 $ 80 $ (80) $ (80) (1) Cash excludes cash subject to restrictions that prevent its use for current purposes. These balances generally receive interest income at bank prime less 1.85%. Cash and cash equivalents are short-‐term in nature and the current balance may not be representative of the balance for the rest of the year. The Trust is exposed to currency risk. The Trust’s functional and presentation currency is Canadian dollars. The Trust’s operating subsidiaries’ functional currency is the euro; accordingly, the assets and liabilities are translated at the prevailing rate at year-‐ end, and comprehensive income is translated at the average rate for the year. In order to manage the exposure to currency risk of unitholders and holders of Debentures, the Trust has entered into foreign exchange forward contracts. The Trust has various currency forward contracts in place to sell euros for Canadian dollars for the next 36 months. The Trust currently has foreign exchange forward contracts to sell €121,166 total from January 2015 to December 2017 at an average exchange rate of $1.4175 per euro. The Trust is exposed to credit risk from its leasing activities and from its financing activities and derivatives. The Trust manages credit risk by requiring tenants to pay rents in advance and by monitoring the credit quality of the tenants on a regular basis. The Trust monitors tenant payment patterns and discusses potential tenant issues with property managers on a regular basis. Credit risk with respect to financing activities and derivatives is managed by entering into arrangements with highly reputable institutions. The Trust does not use derivatives for speculative purposes. Liquidity risk is the risk that the Trust will encounter difficulty in meeting obligations associated with the maturity of financial obligations. The Trust manages maturities of its debts, and monitors the repayment dates to ensure sufficient capital will be available to cover obligations. Interest rate derivatives The following table provides details on interest rate derivatives outstanding as at December 31, 2014: Interest rate swaps Interest rate cap Notional 367,074 46,115 413,189 $ $ Rate 4.05% 5.00% Maturity 2016 2016 Carrying value (10,623) -‐ (10,623) $ $ Dream Global REIT 2014 Annual Report | 87 Foreign currency derivatives The following table provides details on foreign currency forward contracts outstanding as at December 31, 2014 and December 31, 2013: Hedging currency Euro Hedging currency Euro € € Notional amount of future contracts Blended exchange rate Forward contracts start date Forward contracts end date Carrying value 121,166 1.417 January 15, 2015 December 15, 2017 $ (1,492) For the year ended December 31, 2014 Notional amount of future contracts Blended exchange rate Forward contracts start date Forward contracts end date Carrying value 120,412 1.334 January 15, 2014 June 15, 2016 $ (3,715) For the year ended December 31, 2013 Fair value measurements The following tables summarize fair value measurements recognized in the consolidated balance sheets or disclosed in the Trust’s 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 Financial liabilities Interest rate derivatives Foreign currency derivatives Conversion feature on the convertible debentures Fair values disclosed Mortgage debt Convertible debenture excluding conversion feature Recurring measurements Financial liabilities Interest rate derivatives Foreign currency derivatives Conversion feature on the convertible debentures Fair values disclosed Mortgage debt Convertible debenture excluding conversion feature Carrying value as at December 31, 2014 Level 1 Fair value as at December 31, 2014 Level 3 Level 2 $ $ (10,623) (1,492) (158) (701,325) (152,365) -‐ -‐ -‐ -‐ -‐ $ $ (10,623) (1,492) -‐ -‐ -‐ (158) -‐ -‐ (722,208) (160,037) Carrying value as at December 31, 2013 Level 1 Fair value as at December 31, 2013 Level 3 Level 2 $ $ (13,746) (15,941) (384) (825,014) (150,326) -‐ -‐ -‐ -‐ -‐ $ $ (13,746) (15,941) -‐ -‐ -‐ (384) -‐ -‐ (827,471) (158,201) Amounts receivable, amounts in escrow, cash, the Deferred Unit Incentive Plan, deposits, amounts payable and accrued liabilities, income taxes payable and distributions payable are carried at amortized cost, which approximates fair value due to their short-‐term nature. The carrying value of the term loan credit facility approximates fair value due to the short-‐term nature of its rates, which are reset every three months. Transfers between levels in the fair value hierarchy are recognized as of the date of the event or change in circumstances that resulted in the transfer. There were no transfers in or out of Level 3 fair value measurements during the year. Valuation processes The REIT’s management is responsible for determining fair value measurements included in the consolidated financial statements, including Level 3 fair values. The inputs, processes and results for recurring measurements, including those valuations calculated by an independent consultant, are reviewed each quarter by senior management to ensure conformity with IFRS. Dream Global REIT 2014 Annual Report | 88 The Trust uses the following techniques to determine the fair value measurements categorized in Level 2: Interest rate derivatives The fair value of interest rate derivatives was calculated as the present value of the estimated future cash flows based on observable yield curves. The implied floating rates ranged from 0.05% to 0.08%, and the discount rate applied ranged from 0.06% to 0.07%. A higher implied floating rate will decrease the value of the interest rate derivatives. The following table shows the changes in fair value of the interest rate derivatives from a 5% increase or 5% decrease in implied floating rates, all other inputs being constant: Increase/(decrease) in fair value as at December 31, 2014 Impact of change to implied floating rates Decrease -‐5% 19 Increase +5% (19) $ $ Foreign currency derivatives The fair value of foreign currency derivatives was determined using forward exchange market rates ranging from $1.404 to $1.465 to €1 at the measurement date, with the resulting value discounted back to present value using the risk-‐free Canadian bond rate of 1%, plus a credit spread of 411 basis points. A higher forward exchange market rate will increase the value of the foreign currency derivatives. The following table shows the changes in fair value of the foreign currency derivatives from a 5% increase or 5% decrease in forward exchange market rates, all other inputs being constant: Increase/(decrease) in fair value as at December 31, 2014 Impact of change to forward exchange market rates Decrease -‐5% (8,104) 8,104 $ Increase +5% $ The Trust uses the following techniques to determine the fair value measurements categorized in Level 3: Convertible debentures The convertible debentures have two components of value – a conventional bond and a call on the equity of the Trust through conversion. Based on its terms, the conversion feature is an embedded derivative and has been separated from the host contract and classified as a financial liability through profit or loss. Effective April 1, 2013, the Trust has utilized a valuation technique based on the paper by K. Tsiveriotis and C. Fernandes to determine the fair value of the conversion feature. This model uses significant unobservable inputs; therefore, the resulting valuation is classified as Level 3. In this model, a convertible bond consists of two components, an equity component and a debt component, and these components have different default risks. The equity component is discounted at the risk-‐free interest rate. The equity component has no default risk since the Trust can always issue its own units. The debt component is discounted at the risk-‐free interest rate plus a credit spread. The fair value measurement of the interest rate swaps was valued by a qualified independent valuation professional. The fair value measurement of the conversion feature of the convertible debentures was valued by a qualified independent valuation consultant. The significant unobservable inputs used in the fair value measurement of the conversion feature of the convertible debentures as at December 31, 2014 are the following: • Volatility: Expected volatility as at December 31, 2014 was derived from the historical prices of the REIT. Historical prices were not available for a term equal to the term to maturity of the debenture; as such, the consultant used the entire historical data up until December 31, 2014. The volatility used was 17.2724%. • Credit spread: The credit spread of the convertible debentures was imputed from the traded price of the convertible debenture as at December 31, 2014. The credit spread used was 4.1092%. A higher volatility will increase the value of the conversion feature. A lower credit spread will decrease the value of the conversion feature. Dream Global REIT 2014 Annual Report | 89 The following table shows the changes in fair value of the conversion feature of the convertible debentures from a 5% increase or decrease in volatility and a 1% increase or decrease in credit spread, all other inputs being constant: Increase/(decrease) in fair value as at December 31, 2014 $ 578 $ (151) $ Impact of change to volatility Decrease -‐5% Increase +5% Increase +1% Impact of change in credit spread Decrease -‐1% (1,712) 79 $ The Trust also used the following techniques in determining the fair values disclosed for the following financial liabilities classified as Level 3: Mortgage debt The fair value of the mortgage debt as at December 31, 2014 has been calculated by discounting the expected cash flows of each debt using discount rates ranging from 1.235% to 2.660%. The discount rates are determined using the six-‐month EURIBOR rate for instruments of similar maturity adjusted for the REIT’s specific credit risk. In determining the adjustment for credit risk, the REIT considers market conditions, the value of the properties that the mortgages are secured by and other indicators of the REIT’s creditworthiness. Note 27 SUBSEQUENT EVENTS On January 30, 2015, the REIT closed the sale of a property to a joint venture with POBA. The property was Officium, located in Stuttgart, and the sale resulted in net proceeds of €11,527. On February 6, 2015, the REIT completed the acquisition of an office building, Millerntorplatz in Hamburg, Germany, for €95,944, excluding transaction costs. The acquisition was partially financed by a new mortgage of €59,400 with a fixed interest rate of 1.71% for a term of ten years. Dream Global REIT 2014 Annual Report | 90 Appendix Address Acquisition Properties: Im Mediapark 8 Karl-‐Martell-‐Straße 60 Liebknechtstraße 33/35, Heßbrühlstraße 7 Feldmuhleplatz 1+15 Greifswalder Str. 154-‐156 Straßenbahnring 15, 17-‐19/Hoheluftchausee 18-‐20/ Lehmweg 8, 8a, 7 Moskauer Str. 25-‐27 Podbielskistraße 158-‐168 Robert-‐Bosch-‐Str. 9-‐11 Cäcilienkloster 2, 6, 8, 10 Hammer Str. 30-‐34 Oasis III Schlossstr. 8 Leopoldstr. 252 Beuthstraße 6-‐8/Seydelstraße 2-‐5 Westendstr. 160-‐162/Barthstr. 24-‐26 Bertoldstr. 48/Sedanstr. 7 Marsstraße 20-‐22 Am Sandtorkai 37 Reichskanzler-‐Müller-‐Str. 21-‐25 Am Stadtpark 2 Dillwächterstr. 5/Tübinger Str. 11 ABC-‐Str. 19 Speicherstr. 55 Derendorfer Allee 4 Werner-‐Eckert-‐Straße 8-‐12 Neue Mainzer Str. 28 Lörracher Str. 16/16a Vordernbergstr. 6/Heilbronner Str. 35 Total Acquisition Properties Initial Properties: Grüne Str. 6-‐8/Kurfürstenstr. 2 Am Hauptbahnhof 16-‐18 Poststr. 4-‐6/Göbelstr. 30, Bismarckstr. 156 H-‐v-‐Stephan-‐Str. 1-‐15/W-‐Brandt-‐Pl. 13 Kurfürstenallee 130 Gradestr. 22 Karlstal 1-‐21/Werftstr. 201 Franz-‐Zebisch-‐Str. 15 E.-‐Kamieth-‐Str. 2b Überseering 17/Mexikoring 22 Am Neumarkt 40/Luetkensallee 49 City Köln Nürnberg Stuttgart Düsseldorf Berlin Hamburg Düsseldorf Hannover Darmstadt Köln Hamburg Stuttgart Hamburg München Berlin München Freiburg München Hamburg Mannheim Nürnberg München Hamburg Frankfurt Düsseldorf München Frankfurt Freiburg Stuttgart Dortmund Saarbrücken Darmstadt Mannheim Bremen Hannover Kiel Weiden Halle Hamburg Hamburg State Nordrhein-‐Westfalen Bavaria Baden-‐Württemberg Nordrhein-‐Westfalen Berlin Hamburg Nordrhein-‐Westfalen Niedersachsen Hessen Nordrhein-‐Westfalen Hamburg Baden-‐Württemberg Hamburg Bavaria Berlin Bavaria Baden-‐Württemberg Bavaria Hamburg Baden-‐Württemberg Bavaria Bavaria Hamburg Hessen Nordrhein-‐Westfalen Bavaria Hessen Baden-‐Württemberg Baden-‐Württemberg Nordrhein-‐Westfalen Saarland Hessen Baden-‐Württemberg Bremen Niedersachsen Schleswig-‐Holstein Bavaria Sachsen-‐Anhalt Hamburg Hamburg Owned GLA (sq. ft.) Occupancy (Dec. 31, 2014) 296,693 268,931 267,901 246,376 242,779 221,391 217,173 211,882 209,357 200,915 172,306 170,120 165,534 154,773 129,179 122,102 121,553 115,322 113,391 100,603 94,652 81,907 79,218 75,911 71,114 64,727 61,641 56,582 44,317 4,378,348 299,567 293,737 232,300 227,298 203,949 195,783 180,837 166,601 161,156 160,785 160,397 100% 100% 88% 100% 98% 100% 97% 90% 100% 99% 100% 100% 97% 99% 99% 98% 100% 100% 99% 98% 100% 87% 100% 100% 99% 100% 95% 100% 100% 97.9% 100% 12% 82% 96% 93% 4% 96% 100% 39% 93% 89% Dream Global REIT 2014 Annual Report | 91 Address Bahnhofstr. 82-‐86 Czernyring 15 Marienstr. 80 Rüppurrer Str. 81, 87, 89/Ettlinger 67 Gerokstr. 14-‐20 Hindenburgstr. 9/Heeserstr. 5 Zimmermannstr. 2/Eisenstr. Friedrich-‐Karl-‐Str. 1-‐7 Blücherstr. 12 Kaiserstr. 24 Bahnhofsplatz 2, 3, 4/Pepperworth 7 Klubgartenstr. 10 Pausaer Str. 1-‐3 Am Hauptbahnhof 2 Bahnhofstr. 33 Husemannstr. 1 Kapellenstr. 44 Kommandantenstr. 43-‐51 Stresemannstr. 15 Bahnhofsring 2 Heinrich-‐von-‐Bibra-‐Platz 5-‐9 Kaiser-‐Karl-‐Ring 59-‐63/Dorotheenstr. 103 Bürgerreuther Str. 1 Bahnhofplatz 10 77er Str. 54 Wiener Str. 43 Logenstr. 37 Bahnhofsplatz 1 Rathausplatz 2 Auhofstr. 21 Bahnhofstr. 40 Joachim-‐Campe-‐Str. 1/3/5/7, Posthof 15 Heinrich-‐von-‐Stephan-‐Str. 8-‐10 Am Bahnhof 5 Friedrich-‐Ebert-‐Str. 28 Paulinenstr. 52 Postplatz 3 Ostbahnstr. 5 Poststr. 2 U. 3 Poststr. 5-‐7 Bahnhofsplatz 9 Kavalierstr. 30-‐32 Friedrich-‐Ebert-‐Str. 75-‐79 Hainstr. 5 A Baarstr. 5 Marktstr. 9 City Gießen Heidelberg State Hessen Baden-‐Württemberg Offenbach am Main Hessen Karlsruhe Dresden Siegen Marburg Oberhausen Koblenz Gütersloh Hildesheim Goslar Plauen Mülheim Böblingen Gelsenkirchen Einbeck Duisburg Wuppertal Leer Fulda Bonn Bayreuth Fürth Celle Stuttgart Kaiserslautern Schweinfurt Wilhelmshaven Aschaffenburg Flensburg Salzgitter Leverkusen Zwickau Pinneberg Detmold Bautzen Landau Helmstedt Heide Emden Dessau Bremerhaven Bad Hersfeld Iserlohn Völklingen Baden-‐Württemberg Sachsen Nordrhein-‐Westfalen Hessen Nordrhein-‐Westfalen Rheinland-‐Pfalz Nordrhein-‐Westfalen Niedersachsen Niedersachsen Sachsen Nordrhein-‐Westfalen Baden-‐Württemberg Nordrhein-‐Westfalen Niedersachsen Nordrhein-‐Westfalen Nordrhein-‐Westfalen Niedersachsen Hessen Nordrhein-‐Westfalen Bavaria Bavaria Niedersachsen Baden-‐Württemberg Rheinland-‐Pfalz Bavaria Niedersachsen Bavaria Schleswig-‐Holstein Niedersachsen Nordrhein-‐Westfalen Sachsen Schleswig-‐Holstein Nordrhein-‐Westfalen Sachsen Rheinland-‐Pfalz Niedersachsen Schleswig-‐Holstein Niedersachsen Sachsen-‐Anhalt Bremen Hessen Nordrhein-‐Westfalen Saarland Dream Global REIT 2014 Annual Report | 92 Owned GLA (sq. ft.) Occupancy (Dec. 31, 2014) 150,866 133,379 114,114 111,778 110,434 101,498 99,751 97,606 94,569 94,488 87,330 86,571 85,443 84,303 82,628 80,591 80,500 80,122 79,215 78,627 77,606 75,815 75,534 73,631 73,391 72,192 71,465 67,503 64,970 64,264 61,826 61,602 61,011 60,738 59,218 57,614 57,571 53,645 53,468 53,363 53,327 52,206 51,781 51,207 51,027 49,577 57% 64% 96% 97% 87% 92% 98% 94% 68% 61% 52% 47% 76% 81% 100% 94% 91% 100% 60% 82% 100% 100% 100% 72% 62% 92% 36% 87% 97% 96% 98% 46% 79% 67% 100% 20% 68% 98% 20% 92% 98% 83% 94% 100% 93% 9% Address Rathausplatz 4 Europaplatz 17 Unter den Zwicken 1-‐3 Stadtparkstr. 2 Schützenstr. 17, 19 Willy-‐Brandt-‐Str. 6 Bahnhofstr. 2 Theodor-‐Heuss-‐Platz 13 Stembergstr. 27-‐29 Poststr. 14 Bahnhofplatz 3, 5 Poststr. 2 Königstr. 12 Möllner Landstr. 47-‐49/Reclamstr 20 Lippertor 6 Südbrede 1-‐5 Münchener Str. 1 Bahnhofstr. 169 Vegesacker Heerstr. 111 Palleskestr. 38 Koblenzer Str. 67 Kardinal-‐Galen-‐Ring 84/86 Martinistr. 19 Kalkumer Str. 70 Robert-‐Wahl-‐Str. 7/7a Poststr. 2 Falkenbergstr. 17-‐23 Balhornstr. 15, 17/B. Köthenbürger-‐Str. August-‐Bebel-‐Str. 6 Cavaillonstr. 2 City Lüdenscheid Bad Kreuznach Halberstadt Schwabach Peine Auerbach Cham Neuss Arnsberg Rastatt Heidenheim Gummersbach Rottweil Hamburg Lippstadt Ahlen State Nordrhein-‐Westfalen Rheinland-‐Pfalz Sachsen-‐Anhalt Bavaria Niedersachsen Sachsen Bavaria Nordrhein-‐Westfalen Nordrhein-‐Westfalen Baden-‐Württemberg Baden-‐Württemberg Nordrhein-‐Westfalen Baden-‐Württemberg Hamburg Nordrhein-‐Westfalen Nordrhein-‐Westfalen Bad Kissingen Bavaria Bietigheim-‐Bissingen Baden-‐Württemberg Bremen Frankfurt am Main Bonn Rheine Recklinghausen Düsseldorf Balingen Deggendorf Norderstedt Paderborn Torgau Weinheim Bremen Hessen Nordrhein-‐Westfalen Nordrhein-‐Westfalen Nordrhein-‐Westfalen Nordrhein-‐Westfalen Baden-‐Württemberg Bavaria Schleswig-‐Holstein Nordrhein-‐Westfalen Sachsen Baden-‐Württemberg Hauptstr. 279/Hommelstr. 2 Idar-‐Oberstein Rheinland-‐Pfalz Bismarckstr. 21-‐23 Hindenburgstr. 8/Hohenstauf 9, 17, 19 Steinerother Str. 1 U. 1a Heinrich-‐von-‐Stephan-‐Platz 6 Mühlenstr. 5-‐7 Alsenberger Str. 61 Lübecker Str. 23-‐25 Apostelweg 4-‐6 Brückenstr. 21 Lönsstr. 20-‐22 Friedrich-‐Wilhelm-‐Str. 52 U. 54 Kurt-‐Schumacher-‐Str. 5 Lilienstr. 3 Stadtring 3-‐5 Ölmühlweg 12 Bünde Bocholt Betzdorf Naumburg Delmenhorst Hof Bad Oldesloe Hamburg Neunkirchen Nordrhein-‐Westfalen Nordrhein-‐Westfalen Rheinland-‐Pfalz Sachsen-‐Anhalt Niedersachsen Bavaria Schleswig-‐Holstein Hamburg Saarland Castrop-‐Rauxel Nordrhein-‐Westfalen Eschwege Lünen Leipzig Nordhorn Königstein Hessen Nordrhein-‐Westfalen Sachsen Niedersachsen Hessen Dream Global REIT 2014 Annual Report | 93 Owned GLA (sq. ft.) Occupancy (Dec. 31, 2014) 49,529 48,549 47,145 46,877 46,532 46,512 46,129 46,128 45,820 45,659 45,656 45,558 45,494 45,371 44,341 44,130 43,971 43,620 43,484 43,409 42,774 42,191 41,847 41,781 41,487 41,378 41,249 40,927 40,745 40,540 39,192 38,276 37,925 37,679 37,612 37,266 36,687 36,290 36,273 35,971 35,795 35,433 35,290 35,234 35,189 34,984 27% 39% 15% 78% 56% 56% 61% 95% 99% 92% 83% 98% 88% 90% 89% 91% 74% 99% 90% 64% 100% 76% 97% 52% 89% 97% 98% 93% 86% 91% 48% 96% 99% 95% 91% 99% 65% 15% 97% 100% 90% 27% 100% 97% 81% 100% Address Bahnhofsplatz 10, 12, 14 Goethestr. 2-‐6 Im Bungert 6-‐8 Gerstenstr. 5 Gustav-‐König-‐Str. 42 Große Str. 29-‐33 Worthingtonstr. 15 Zwieseler Str. 27-‐29 Markendorfer Str. 10 Hellersdorfer Str. 78 Kreuzstr. 20-‐24 City Kleve Duisburg State Nordrhein-‐Westfalen Nordrhein-‐Westfalen Bergisch Gladbach Nordrhein-‐Westfalen Neubrandenburg Mecklenburg-‐Vorpommern Sonneberg Rotenburg Crailsheim Regen Thüringen Niedersachsen Baden-‐Württemberg Bavaria Frankfurt an der Oder Brandenburg Berlin Bonn Berlin Nordrhein-‐Westfalen Bahnhofstr. 6/Luisenstr. 4-‐5 Villingen-‐Schwenningen Baden-‐Württemberg Tunnelweg 1 Waschgrabenallee 3-‐5 Poststr. 30 Bahnhofsplatz 2 König-‐Heinrich-‐Str. 11 Poststr. 24-‐26 Konrad-‐Adenauer-‐Str. 49-‐51 Feldschlößchenstr./Kunadstr. o. Nr. Bahnhofstr. 29 Poststr. 12 Petristr. 26 Dr.-‐Friedrich-‐Uhde-‐Str. 18 Augsburger Str. 380 Gartenstr. 29/30 Poststr. 1-‐3 Poststr. 48 Bahnhofstr. 2 Ruthenstr. 19/21 Bahnhofanlage 2-‐4 Königswiese 1 Saßstr. 12 Wilhelmstr. 11/Kamperdickstr. 29 Kaiserstr. 140 Ludwigsplatz 1 Goldbacher Str. 74 Klosterstr. 6-‐10 In der Trift 10/12 Bahnhofstr. 6 Zwickauer Str. 438 Alleestr. 6 Uferstr. 2 Lindenstr. 11 Bahnhofsplatz 8 Bahnhofstr. 32 Husum Neustadt Albstadt Herborn Merseburg Ratingen Tübingen Dresden Meppen Lehrte Schleswig-‐Holstein Schleswig-‐Holstein Baden-‐Württemberg Hessen Sachsen-‐Anhalt Nordrhein-‐Westfalen Baden-‐Württemberg Sachsen Niedersachsen Niedersachsen Heilbad Heiligenstadt Thüringen Einbeck Stuttgart Pirna Korbach St Ingbert Gifhorn Hameln Schwetzingen Gelsenkirchen Leipzig Kamp-‐Lintfort Radevormwald Alsfeld Aschaffenburg Annaberg-‐Buchholz Olpe Quakenbrück Chemnitz Neustadt Höxter Bitterfeld Niedersachsen Baden-‐Württemberg Sachsen Hessen Saarland Niedersachsen Niedersachsen Baden-‐Württemberg Nordrhein-‐Westfalen Sachsen Nordrhein-‐Westfalen Nordrhein-‐Westfalen Hessen Bavaria Sachsen Nordrhein-‐Westfalen Niedersachsen Sachsen Bavaria Nordrhein-‐Westfalen Sachsen-‐Anhalt Marktredwitz Sulzbach-‐Rosenberg Bavaria Bavaria Dream Global REIT 2014 Annual Report | 94 Owned GLA (sq. ft.) Occupancy (Dec. 31, 2014) 34,871 34,839 34,737 34,347 33,959 33,296 33,136 32,676 32,330 32,296 32,253 32,191 31,116 30,188 30,014 29,746 29,472 29,445 29,341 29,236 29,056 28,764 28,205 27,793 27,775 27,771 27,502 27,051 26,922 26,895 26,658 26,468 26,214 26,159 25,643 25,477 25,153 25,084 24,894 24,446 23,640 23,495 23,240 23,183 22,710 22,634 100% 86% 100% 100% 46% 94% 100% 89% 97% 75% 99% 97% 89% 94% 14% 91% 13% 100% 98% 100% 90% 88% 68% 65% 93% 67% 100% 96% 92% 93% 100% 100% 79% 94% 74% 98% 95% 72% 94% 97% 77% 100% 79% 86% 95% 77% Address Bahnhofstr. 46 Marktplatz 5 Poststr. 19-‐23 Bahnhofsplatz o. Nr. Brückenstr. 26 Bahnhofstr. 27 Lindenstr. 15 Lindenstr. 42 Hörder Semerteichstr. 175 Am Plärrer 11 Innungsstr. 57-‐59 Wilhelmstr. 5 Geistmarkt 17 Lyoner Passage 14 Moltkestr. 6 City Unna Nordenham Hilden Oranienburg Miltenberg Öhringen Landstuhl Grevenbroich Dortmund Lauf Berlin Ibbenbüren Emmerich Köln Hattingen State Nordrhein-‐Westfalen Niedersachsen Nordrhein-‐Westfalen Brandenburg Bavaria Baden-‐Württemberg Rheinland-‐Pfalz Nordrhein-‐Westfalen Nordrhein-‐Westfalen Bavaria Berlin Nordrhein-‐Westfalen Nordrhein-‐Westfalen Nordrhein-‐Westfalen Nordrhein-‐Westfalen Martin-‐Pöhlmann-‐Str. 5/Friedrich-‐Ebert-‐Str. 34 Selb Bavaria Steinstr. 6 Am Markt 4-‐5 Am Stadtpark 5 Leistikowstr. 19 Saarbrücker Str. 292-‐294 Poststr. 12 Speckweg 24-‐26 Kasseler Str. 1-‐7 Lübecker Str./Wedringer Str. o. Nr. Pulheim Norden Papenburg Fürstenwalde Saarbrücken Schmölln Mannheim Warburg Magdeburg Nordrhein-‐Westfalen Niedersachsen Niedersachsen Brandenburg Saarland Thüringen Baden-‐Württemberg Nordrhein-‐Westfalen Sachsen-‐Anhalt Ooser Karlstr. 21/23/25 Baden-‐Baden Baden-‐Württemberg Güterstr. 2-‐4 Eisenbahnstr. 15 Poststr. 6 Bismarckstr. 12/Fr. Hoffmann-‐Str. Lagerstr. 1 Bahnhofstr. 3 Bahnhofstr. 43 Bahnhofstr. 33 U. 33A Friedrichstr. 2 Königstr. 20 Kornmarkt 15 Marktstr. 51 Übacher Weg 4 Niederwall 3 Hochstr. 31/Postgasse 5 Sattigstr. 33 Robert-‐Koch-‐Str. 3 Kaiserstr. 35 Bahnhofstr. 8-‐10 Poststr. 28 Bitburg Tuttlingen Beckum Steinfurt Meschede Osterburken Riesa Stendal Monheim Brilon Osterode Essen Alsdorf Lübbecke Bochum Görlitz Laatzen Minden Borken Hemer Rheinland-‐Pfalz Baden-‐Württemberg Nordrhein-‐Westfalen Nordrhein-‐Westfalen Nordrhein-‐Westfalen Baden-‐Württemberg Sachsen Sachsen-‐Anhalt Nordrhein-‐Westfalen Nordrhein-‐Westfalen Niedersachsen Nordrhein-‐Westfalen Nordrhein-‐Westfalen Nordrhein-‐Westfalen Nordrhein-‐Westfalen Sachsen Niedersachsen Nordrhein-‐Westfalen Nordrhein-‐Westfalen Nordrhein-‐Westfalen Dream Global REIT 2014 Annual Report | 95 Owned GLA (sq. ft.) Occupancy (Dec. 31, 2014) 22,627 22,480 22,454 22,153 22,017 21,801 21,726 21,668 21,659 21,603 21,187 21,031 20,942 20,742 20,681 20,681 20,670 20,668 20,578 20,437 20,433 20,403 20,128 19,985 19,454 19,444 19,340 19,047 18,831 18,800 18,683 18,498 18,275 18,200 18,156 17,733 17,690 17,661 16,991 16,563 16,359 16,279 16,126 16,043 15,893 15,782 100% 100% 87% 76% 89% 96% 99% 64% 96% 100% 100% 100% 100% 100% 100% 75% 100% 81% 17% 59% 92% 88% 90% 86% 100% 93% 99% 97% 100% 87% 100% 100% 90% 93% 100% 76% 100% 100% 100% 100% 100% 100% 100% 99% 98% 100% Address Bahnhofstr. 33 Am Bahnhof 2 Melanchthonstr. 96 Hauptstr. 141 Republikstr. 34 Poststr. 1/2 Im Kusterfeld 1 Herrlichkeit 7 Grenzstr. 24 Mercedesstr. 5 Am Buchhorst 35 Bahnhofstr. 41 Kolpingstr. 4 Münchner Str. 50 Schönbornstr. 1 Langener Landstr. 237-‐239 Löbauer Str. 63 Albert-‐Steiner-‐Str. 10 Fritz-‐Brandt-‐Str. 25 Dahmestr. 17 Bünder Str. 36 Poststr. 1 Gorsemannstr. 22 Bahnhofstr. 11 Märkische Str. 58 Mönchenstr. 15-‐18 Poststr. 3-‐5 Prochaskaplatz 7 Kürbsweg 9 Bahnhofstr. 49/49a Gutachstr. 56 Unterstr. 14 Am Markt 4 Hauptstr. 40 Sandstr. 4 Rensefelder Str. 2 Langfuhren 9 Weinbergstr. 50 De-‐Lenoncourt-‐Str. 2 Rosenstr. 1/Fünfhausenstr. 19/21 Melcherstätte 8 Wetterstr. 20/Poststr. 2 Total Initial Properties Total Portfolio City Sulz Meldorf Bretten State Baden-‐Württemberg Schleswig-‐Holstein Baden-‐Württemberg Rheda-‐Wiedenbrück Nordrhein-‐Westfalen Schönebeck Spremberg Backnang Syke Halle Hannover Potsdam Eberbach Sachsen-‐Anhalt Brandenburg Baden-‐Württemberg Niedersachsen Sachsen-‐Anhalt Niedersachsen Brandenburg Baden-‐Württemberg Georgsmarienhütte Niedersachsen Fürstenfeldbruck Geisenheim Bremerhaven Bautzen Herzogenrath Zerbst Mittenwalde Löhne Erftstadt Bremen Alpirsbach Düsseldorf Jüterbog Barsinghausen Dannenberg Seevetal Aalen Titisee-‐Neustadt Bochum St. Georgen Bavaria Hessen Bremen Sachsen Nordrhein-‐Westfalen Sachsen-‐Anhalt Brandenburg Nordrhein-‐Westfalen Nordrhein-‐Westfalen Bremen Baden-‐Württemberg Nordrhein-‐Westfalen Brandenburg Niedersachsen Niedersachsen Niedersachsen Baden-‐Württemberg Baden-‐Württemberg Nordrhein-‐Westfalen Baden-‐Württemberg Porta Westfalica Nordrhein-‐Westfalen Germersheim Bad Schwartau Bad Säckingen Rheinland-‐Pfalz Schleswig-‐Holstein Baden-‐Württemberg Bad Neuenahr-‐Ahrweiler Rheinland-‐Pfalz Dillingen Springe Stuhr Herdecke Saarland Niedersachsen Niedersachsen Nordrhein-‐Westfalen Dream Global REIT 2014 Annual Report | 96 Owned GLA (sq. ft.) Occupancy (Dec. 31, 2014) 15,774 15,549 15,501 15,178 14,985 14,763 14,634 14,560 14,533 14,504 14,042 13,936 13,725 13,326 13,117 12,803 12,686 12,667 12,654 12,631 12,625 12,498 12,379 12,112 11,997 11,731 11,597 11,334 11,175 11,050 10,813 10,732 10,324 10,315 10,132 9,777 9,717 9,023 8,995 8,881 8,196 7,702 82% 97% 90% 100% 77% 80% 99% 94% 100% 100% 100% 100% 100% 100% 90% 100% 100% 79% 100% 100% 100% 100% 100% 65% 100% 100% 100% 95% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 10,461,313 14,839,661 80.1% 85.3% Trustees Detlef Bierbaum 1, 2, 3, 4 Köln, Germany Corporate Director Michael J. Cooper 2 Toronto, Ontario Vice Chairman Dream Global REIT P. Jane Gavan 2 Park City, Utah, United States of America President and Chief Executive Officer Dream Global REIT Duncan Jackman 1, 3 Toronto, Ontario Chairman, President and CEO E-L Financial Corporation Limited Johann Koss 2, 3 Toronto, Ontario Chief Executive Officer Right to Play John Sullivan 1 Toronto, Ontario President and Chief Executive Officer Cadillac Fairview Corporation Limited Corporate Information HEAD OFFICE CORPORATE COUNSEL Osler, Hoskin & Harcourt LLP Box 50, 1 First Canadian Place, Suite 6100 Toronto, Ontario M5X 1B8 TAXATION OF DISTRIBUTIONS Distributions paid to unitholders in respect of the tax year ended December 31, 2014 are taxed as follows: Foreign non-business income: 48.3% Capital gains: 1.4% Return of capital: 50.3% STOCK EXCHANGE LISTING The Toronto Stock Exchange Listing symbols: REIT Units: DRG.UN 5.5% Convertible Debentures: DRG.DB ANNUAL MEETING OF UNITHOLDERS Wednesday, May 6, 2015 at 4:00 pm (EST) Corporate office of Dream Global REIT 30 Adelaide Street East, Suite 300 Toronto, Ontario, Canada Dream Global Real Estate Investment Trust State Street Financial Centre 30 Adelaide Street East, Suite 1600 Toronto, Ontario M5C 3H1 Phone: (416) 365-3535 Fax: (416) 365-6565 INVESTOR RELATIONS Phone: (416) 365-3538 Toll free: 1 877 365-3535 From Germany: 0 800 189-0344 E-mail: globalinfo@dream.ca Website: www.dreamglobalreit.ca TRANSFER AGENT (for change of address, registration or other unitholder enquiries) Computershare Trust Company of Canada 100 University Avenue, 9th Floor Toronto, Ontario M5J 2Y1 Phone: (514) 982-7555 or 1 800 564-6253 Fax: (416) 263-9394 or 1 888 453-0330 E-mail: service@computershare.com AUDITORS PricewaterhouseCoopers LLP PwC Tower, 18 York Street, Suite 2600 Toronto, Ontario M5J 0B2 m o c . n g i s e d s k r o w w w w . . d t L s n o i t a c i n u m m o C n g i s e D s k r o W e h T : n g i s e D 1 Member of the Audit Committee 2 Member of the Executive Committee 3 Member of the Governance, Compensation and Environmental Committee 4 Chairman of the Board of Trustees DISTRIBUTION REINVESTMENT AND UNIT PURCHASE PLAN The purpose of our Distribution Reinvestment and Unit Purchase Plan (“DRIP”) is to provide unitholders with a convenient way of investing in additional units without incurring transaction costs such as commissions, service charges or brokerage fees. By participating in the Plan, you may invest in additional units in two ways: Distribution reinvestment: Unitholders will have cash distributions from Dream Global REIT reinvested in additional units as and when cash distributions are made. Cash purchase: Unitholders may invest in additional units by making cash purchases. If you register in the DRIP you will also receive a “bonus” distribution of units equal to 4% of the amount of your cash distribution reinvested pursuant to the Plan. In other words, for every $1.00 of cash distributions reinvested by you under the Plan, $1.04 worth of units will be purchased. D R E A M G L O B A L R E I T 2 0 1 4 A N N U A L R E P O R T dream.ca/global