Dundee REIT Annual Report 2006

Plain-text annual report

DUNDEE REIT 2006 Annual Report I D u n d e e R E T 2 0 0 6 A n n u a l R e p o r t Presence COAST-TO-COAST PRESENCE* Yellowknife 326 Office Saskatoon 193 Office Regina 326 Office Surrey 214 Office Edmonton 192 Office 993 Industrial Calgary 1,949 Office 1,412 Industrial All values shown are in thousands of square feet *Excluding redevelopment properties St. John’s 190 Office National Capital Region 1,404 Office 103 Industrial Québec 1,826 Office 3,336 Industrial Toronto 3,502 Office 2,467 Industrial OFFICE 10,122 INDUSTRIAL 8,311 PORTFOLIO 18,433 Total assets In millions of dollars $2,128 Market cap In millions of dollars $1,676 03 $ 997 04 $1,200 05 $1,508 06 $2,128 03 $ 452 04 $ 633 05 $ 740 06 $1,676 Total revenue In millions of dollars Enterprise value $291 03 $145 04 $187 05 $223 06 $291 $2.9B PAGE 1 Introduction PAGE 2 Letter to unitholders PAGE 6 Vision PAGE 8 Quality PAGE 10 Performance PAGE 12 Portfolio PAGE 20 Performance at-a-glance PAGE 23 Management’s discussion and analysis PAGE 65 Management’s responsibility for ﬁnancial statements PAGE 66 Auditors’ report PAGE 67 Consolidated ﬁnancial statements PAGE 71 Notes to the consolidated ﬁnancial statements PAGE 95 Trustees and ofﬁcers PAGE 96 Corporate information DUNDEE REIT 2006 Annual Report Presence Conﬁdent in our strategy. National in scale. Assured of our ability to identify opportunities, and then realize them. Proven leader in customer service. Committed to creating exceptional unitholder value. Recognized for our performance and our potential. In a market where only the best stand out, Dundee REIT has presence. Dundee Real Estate Investment Trust (“Dundee REIT”; TSX: D.UN) is an unincorporated, open-ended real estate investment trust. We own approximately 19 million square feet of high-quality, affordable ofﬁce and industrial assets across Canada. PAGE 1 DUNDEE REIT 2006 Annual Report MARIO BARRAFATO MICHAEL J. COOPER MICHAEL KNOWLTON Senior Vice President and Chief Financial Ofﬁcer Vice Chairman and Chief Executive Ofﬁcer President and Chief Operating Ofﬁcer Achievement When 2006 ended, Dundee REIT was larger, stronger and more valuable than when it started. Here are some of the year’s accomplishments. DECEMBER 31, 2005 Unit price: $25.70 Market cap: $740 million Total enterprise value: $1.7 billion PAGE 2 Letter to unitholders DUNDEE REIT 2006 Annual Report Solid growth in each of our performance indicators conﬁrms the fundamental strength of our business. We are very pleased that the disciplined execution of our growth strategy is paying off and that our performance is being recognized. The past year was one in which we reached many milestones – both operationally and in the capital markets. All of this translated into a year of exceptional value creation for unitholders. completed transactions We have been very successful in growing Dundee REIT through acquisitions. Throughout the year we totalling nearly $600 million. The properties acquired have helped improve our portfolio, increase diversiﬁcation and fuel our ﬁnancial performance including, most from operations importantly, adjusted funds (“AFFO”). Another valuable outcome of our acquisitions strategy is the larger component of ofﬁce product in our portfolio. Additions to our Calgary portfolio have led to an increased weighting of nearly 40% of net operating income being generated by properties across Western Canada and have provided us with great exposure to the rising rental rate environment in Calgary. Entering into new markets has also proven valuable with the properties in Yellowknife providing a return on equity in excess of our expectations. Overall, our properties are performing very well. Total occupancy remains strong at 96.4% and rental rates continue to edge upwards, presently averaging $10.00 per square foot. Occupancy across our ofﬁce properties increased to 97.0% from 96.3% last year while our industrial occupancy softened slightly to 95.6% from 96.2%. With the evolution of our portfolio, our ofﬁce assets generated 77% of our net operating income in the fourth quarter and helped JANUARY 2006 Acquired 412,000 square feet of ofﬁce and industrial properties in Edmonton, Toronto and Québec APRIL 2006 Raised $70 million, issued 2.52 million units MAY 2006 Completed Princeton Portfolio acquisition, adding 530,000 square feet to our Western Canada portfolio Internalized the property management function PAGE 3 DUNDEE REIT 2006 Annual Report drive an impressive $4.4 million or 5% increase in comparative net operating income over the prior year. This is the sixth consecutive quarter in which we produced comparative property growth. Funds from operations continues to grow, indicating an accretive acquisition program and the overall strength of our business. Driving the 47% increase in funds from operations was additional revenue generated by acquisitions, strong occupancy across our ofﬁce portfolio, rising rental rates and a reduction in our weighted average interest rate. And, despite the growth in our units outstanding, funds from operations per unit increased by 8%. Adjusted funds from operations is a measure used to evaluate the sustainability of distributions, the goal being to produce AFFO in excess of the distributions declared. We believe that in the second half of 2006 our AFFO exceeded declared distributions by a signiﬁcant margin. Maintaining a careful balance between the purchase price of acquisitions, the current and anticipated revenue generated by these properties and the cost of equity used to complete the acquisitions contributed to the 14% improvement in AFFO per unit over the prior year. Also contributing to the improvement was the strong performance of our property management services, which were fully internalized in May. We continued to take advantage of low interest rates during 2006. We assumed $103 million of debt related to acquisitions with an average interest rate of 5.35% and secured $297 million in new debt on existing and acquired assets at a rate of 5.56%. The overall result is that our cost of debt has declined to 5.95% from 7.19% at June 30, 2003. Debt-to-gross book value has been reduced from a high of 62% in the third quarter of 2005 to 51% at the end of 2006. Although the decrease in debt may dampen growth in AFFO, it provides us with downside protection, more ﬂexibility in the future and, ultimately, more sustainability to our cash ﬂow. We are very pleased to see our accomplishments recognized by the capital markets as reﬂected by the eager participation in our equity offerings, the appreciation in our unit price and our inclusion in the S&P/TSX Composite Index. Throughout 2006, we completed three equity offerings totalling $320 million, all of which were well received by investors. Our market capitalization increased to $1.7 billion from $740 million at the end of 2005. And, our unit price increased to $38.65 from $25.70. Including distributions paid throughout the year, the One-year unitholder return 59% JUNE 2006 AUGUST 2006 SEPTEMBER 2006 Raised $100 million, issued 3.56 million units Unit price rises above $30 Completed the Calgary Portfolio acquisition, adding 822,000 square feet to our ofﬁce portfolio AFFO reaches 55.3¢ per unit, exceeding declared distributions Acquired Aviva Corporate Centre in Toronto PAGE 4 DUNDEE REIT 2006 Annual Report overall unitholder return for 2006 was 59% – the highest return of all Canadian commercial property REITs. As a result of ongoing merger and acquisition activity in our sector, the number of real estate investment trusts is dwindling. The desirability of real estate in Canada continues to increase, with many sources of capital eager for exposure to the Canadian real estate market. Any way you look at this, it is positive for Dundee REIT. Our team works very well together and is managing our growth and the changes in the market with expertise and dedication. Dundee REIT’s reputation in the marketplace is very good and our unit price reﬂects our progress. With fewer options for exposure to the national ofﬁce and industrial markets and with the elimination of competition from business trusts because of the new legislation, our units are very desirable. Our rapid growth continues in 2007. During the ﬁrst two months of 2007, we acquired two ofﬁce buildings in Toronto and an ofﬁce building in B.C. for a total of approximately $125.4 million. And, we currently have under contract a 543,000 square foot ofﬁce portfolio in Calgary and 2,132,000 square feet of ofﬁce and industrial properties in Toronto for a total of approximately $424.3 million. To help fund these acquisitions we completed an equity offering totalling $151 million. Our interests are aligned with those of our investors. Our senior ofﬁcers and our Board of Trustees hold a collective 4% interest in Dundee REIT on a diluted basis. A signiﬁcant number of our employees are also unitholders. In addition to our individual commitments to a job well done and to improving our business every day, we have a vested interest in the success of Dundee REIT. The foundation of our business is our properties. Maintaining the buildings and keeping them full are the basic elements to achieving any degree of success. It’s what we do beyond the basics that makes the difference. How tenant relationships are managed, how growth is pursued, how quickly and efﬁciently that growth is integrated into our operations, how our business is ﬁnanced – and how growth, is funded. We are well positioned with a healthy balance sheet and a relatively low level of debt. With internal growth and the returns provided by acquired assets, we expect continued growth across our business in 2007. in particular, MICHAEL J. COOPER (signed) Vice Chairman and Chief Executive Ofﬁcer NOVEMBER 2006 DECEMBER 2006 DECEMBER 2006 Acquired ACCW joint venture development properties, adding 357,000 square feet to our ofﬁce portfolio Raised $150 million, issued 4.11 million units Unit price: $38.65 Inclusion in the S&P/TSX Composite Index Market cap: $1.7 billion Total enterprise value: $2.9 billion PAGE 5 DUNDEE REIT 2006 Annual Report Vision Vision is the ability to see where you are and where you want to go. Our vision is to be Canada’s leading provider of affordable business premises and the investment of choice for those looking to enjoy the beneﬁts of owning commercial real estate. Funds from operations per unit $2.82 Net operating income by region Three months ended December 31, 2006 Toronto, State Street Financial Centre 03* $2.44 04 $2.50 05 $2.61 06 $2.82 *2003 is an annualized amount. Québec 19% National Capital Region 13% Toronto Region 29% Alberta 29% Western Canada 10% To achieve this vision, we focus on continually improving the value of our business through sound ﬁnancial and operational management, growing our portfolio through accretive acquisitions, providing sustainable cash distributions, and increasing distributions based on our performance. It is a simple strategy, and certainly not unique to us, but our execution and delivery set us apart. From the start, we have worked to enhance our overall worth – increasing our total enterprise value from $836 million in June 2003 to $2.9 billion at the end of 2006. We have established a reputation for being able to see where the market is going and identify opportunities. And, while we have grown, we have remained nimble and ﬂexible, in order to act quickly on those opportunities and stay ahead of the competition. When acquiring property, we have been able to adapt to changing circumstances: in some cases, this resulted in our sourcing and acquiring numerous times, we focused our resources on larger portfolio acquisitions. The relationships we have built and the reputation we have earned for being efﬁcient, individual assets; at other PAGE 6 DUNDEE REIT 2006 Annual Report PORTFOLIO GROWTH Thousands of square feet 5,163 5,969 4,547 1,697 1,059 03 04 05 06 Québec 3,572 3,790 4,822 5,163 National Capital Region 912 945 1,600 1,697 Greater Toronto Area 3,084 4,006 4,866 5,969 Alberta 3,035 3,338 3,528 4,547 Western Canada 277 275 275 1,059 By the end of 2006, Dundee REIT’s portfolio had grown to almost 19 million square feet. As you can see, our growth has been focused primarily in Toronto, Alberta and Western Canada. Acquisition highlights in 2006 include a six-building ofﬁce portfolio in downtown and suburban Calgary, the Princeton six-building ofﬁce and industrial portfolio in Western Canada, and an ofﬁce portfolio at the Airport Corporate Centre West in suburban Toronto. Enterprise value $2.9B Calgary, 3250 Sunridge Way NE diligent and true to our word has made it easier to ﬁnd opportunities, and has also brought deals to our doorstep. Consequently, in 3½ years as a real estate investment trust, we have been able to add nearly $1.5 billion of high-quality assets to an already strong portfolio. Creating real value means more than just getting bigger. It means growing in ways that make a difference – to our current and prospective tenants and to our unitholders. It means looking for ways to deliver even better service to our tenants in order to keep our buildings full. It means striving to get the most from our properties by achieving greater operational efﬁciencies. It means pursuing accretive acquisitions – growing where the market fundamentals are strong and where we can build upon established economies of scale. And, while there are beneﬁts that come with scale, we also work to keep a balanced, diversiﬁed portfolio to ensure consistent performance. We are focused on improving and growing our business, but never at the cost of diluting value for our existing unitholders. PAGE 7 DUNDEE REIT 2006 Annual Report Quality As our portfolio has grown, the quality of our assets has also increased. Our national ofﬁce and industrial portfolios are stronger. We have a greater presence in Western Canada and a tenant roster that includes many instantly recognizable names. Acquisitions completed in 2006 $598M including $400 million across Western Canada Ottawa, Entrust Tower A TSX-listed trust, Dundee REIT was added to the S&P/TSX Composite Index in December 2006 With a presence that extends from coast to coast, Dundee REIT is well positioned to prosper in all of its markets, and to expand in growing markets. Currently, Montréal, Ottawa, Toronto, Calgary and Edmonton – our core markets – constitute 93% of the gross leasable area of our total portfolio. We also operate in Surrey, Yellowknife, Regina, Saskatoon, Québec City and St. John’s. Calgary now has the strongest economy, and offers the best growth prospects of any Canadian city. We have been steadily expanding our position in this market, and in 2006 we added just over 0.9 million square feet of ofﬁce space to our Calgary portfolio. Our mid-2006 acquisition of the Princeton Portfolio, with assets in Edmonton, Saskatoon and Yellowknife, strengthened our presence in Western Canada. It also made Dundee REIT the primary landlord of Class A ofﬁce space in Yellowknife, which offers a tenant base dominated by the federal and territorial governments and a strong, natural resource-driven economy. Our western expansion included the acquisition of 50 acres of prime industrial development land In a tight acquisition market, in Edmonton. development projects provide Dundee REIT with another avenue for growth. We are developing the industrial land in Edmonton on our own, but also PAGE 8 DUNDEE REIT 2006 Annual Report TOP 10 TENANTS While the scale of our business has increased, the composition of our tenant roster has also changed considerably. The majority of our 100 largest tenants are nationally recognizable names. 1 2 GOVERNMENT OF GOVERNMENT OF CANADA Canada is among the ten largest economies ONTARIO Ontario, Canada’s economic engine, the only G7 country in surplus. to Canada’s total employment. Moody’s Rating: Aaa. Moody’s Rating: Aa1. in the world and currently contributes about 40% Canada and the second 3 TELUS 4 AVIVA TELUS Corporation is the Aviva is one of the 5 BELL CANADA Canada’s largest largest telecommunications leading Property and communications network. company in Western Casualty insurance groups in Canada. Offering local, long distance and wireless largest in the country. Moody’s Rating: Aa2. telephone service, 6 GOVERNMENT OF THE NORTHWEST TERRITORIES 7 ENTRUST Entrust is a global provider of security software that 8 STATE STREET TRUST COMPANY The world’s leading 9 INTERNATIONAL FINANCIAL DATA SERVICES internet, and satellite. 10 GOVERNMENT OF BRITISH COLUMBIA British Columbia produces NWT is enjoying signiﬁcant secures digital identities ﬁnancial services specialist From investor record- approximately 12% of economic growth in natural and information. focused on meeting the keeping to complete Canada’s total GDP and resources and tourism. The government is one of the largest employers in NWT. Moody’s Rating: Aa1. needs of sophisticated back ofﬁce outsourcing, is the third-largest province investors throughout IFDS offers investment in terms of its population. Canada and the world. companies a powerful Moody’s Rating: Aaa. suite of trusted services. Market cap $1.7B Edmonton, Lee Valley Building have joint venture development projects underway in Ontario. Joint venture development offers several advantages: having a development partner helps mitigate risk, Dundee REIT earns interest on the mezzanine loans provided to the joint ventures, and we have the opportunity to purchase the properties once they are completed. We acquired our ﬁrst joint venture properties in the fourth quarter, which added 357,000 square feet to our ofﬁce portfolio in the Greater Toronto Area. The overall amount we may invest in development properties is strictly limited by our Declaration of Trust, and, without even being close to this limit, the development opportunities in our pipeline could translate into over 2 million square feet of leasable space. In addition to expanding our property portfolio, we have enjoyed signiﬁcant growth in other aspects of our business. In 2006, we issued $320 million in equity to fund our acquisition program and increased our market capitalization from $740 million to $1.7 billion. Our increased market capitalization and the heavy volume of trading activity in our units led to Dundee REIT’s addition to the S&P/TSX Composite Index at the end of the year. PAGE 9 DUNDEE REIT 2006 Annual Report Performance To evaluate a company’s strategy, measure its performance. In 2006, Dundee REIT’s strong performance – a steady 96% occupancy rate, escalating in-place rents, consistent growth in same-property net operating income, growing funds from operations and improvements in all measures of debt management – conﬁrmed that our strategy was sound. Net operating income by segment Three months ended December 31, 2006 Occupancy 96.4% Calgary, Joffre Place Office 77% Industrial 23% 03 92.7% 04 94.5% 05 96.3% 06 96.4% In 2006, Dundee REIT internalized all property management services, and now beneﬁts from receiving 100% of the fees they generate. Our nation-wide team of skilled real estate professionals understands that in order to help us meet our corporate objectives and fulﬁll our commitment to our unitholders, we must keep our buildings full. Consequently, Dundee REIT is committed to providing industry-leading service. Our success in meeting this commitment is demonstrated by a consistently high occupancy rate across our portfolio, and our ability to effectively manage our lease maturity proﬁle. PAGE 10 Internal growth – generated by increased occupancy, capturing higher rents on new leases and renewals, and the operational efﬁciencies created through scale – is also critical to our success. We have long believed that the most valuable growth is seen on a comparative property basis in those assets that we have owned over successive reporting periods. For six quarters in a row, Dundee REIT has produced growth in net operating income on a comparative property basis. And, we expect that we will continue to enjoy strong comparative growth in 2007. DUNDEE REIT 2006 Annual Report TOTAL RETURN IN 2006 158.93 124.73 117.26 100.00 Dundee REIT S&P/TSX Capped REIT Index S&P/TSX Composite Index 12/2005 01/2006 02/2006 03/2006 04/2006 05/2006 06/2006 07/2006 08/2006 09/2006 10/2006 11/2006 12/2006 Calgary, Franklin Atrium Another critical measure of performance in the trust sector is whether adjusted funds from operations exceed the amount of distributions declared to unitholders. We reached this milestone in the third quarter of 2006. Going forward, we fully anticipate that our adjusted funds from operations will continue to grow along with other performance indicators. Equity issued $320M While 2006 was a year of signiﬁcant acquisition activity, we never lost sight of the importance of maintaining a healthy bottom line. A carefully executed strategy enabled us to add nearly $600 million in assets to our portfolio while reducing our overall percentage of debt. We were also able to increase our interest coverage ratio, and ended the year with a 50.6% debt-to-gross book value and a much stronger balance sheet. PAGE 11 DUNDEE REIT 2006 Annual Report Portfolio overview Laval, 400-480 boulevard Armand Frappier Calgary, 3030 Sunridge Way NE Regina, Sherwood Place Ottawa, 700 Palladium Drive Toronto, 2 St. Clair Avenue East PAGE 12 DUNDEE REIT 2006 Annual Report Calgary, McFarlane Tower Edmonton, EPCOR Centre Toronto, 720 Bay Street Montréal, 3901 rue Jarry Est Brampton, 400 Chrysler Drive PAGE 13 DUNDEE REIT 2006 Annual Report Portfolio listing For the year ended December 31, 2006 Ownership interest (%) Owned share of total GLA Occupancy (%) (sq. ft.) Signiﬁcant tenants Ofﬁce properties Scotia Centre, St. John’s 400-480 boulevard Armand Frappier, Laval 9975-9995 avenue Catania, Brossard 7400 boulevard les Galeries d’Anjou, Montréal 1000 boulevard Saint-Jean, Pointe-Claire 8250 boulevard Décarie, Montréal 30-56 du Vallon, Québec City 1400 de la Rive-Sud, Saint Romuald 3-243 Place Frontenac, Pointe-Claire 7450 boulevard les Galeries d’Anjou, Montréal 953-981 boulevard Saint-Jean, Pointe-Claire 8200 boulevard Décarie, Montréal 2800 avenue Marie-Curie, Montréal 25 rue de Lauzon, Boucherville 1 Place du Commerce, Brossard 11 Place du Commerce, Brossard 2310 boulevard Alfred-Nobel, Montréal 768-790 boulevard Décarie, Montréal 2 Place du Commerce, Brossard 9045 Chemin de la Côte de Liesse, Dorval 7150 rue Albert-Einstein, Montréal 8 Place du Commerce, Brossard 3 Place du Commerce, Brossard 1156 de la Rive-Sud, Saint Romuald 85 rue Bombardier, Boucherville 2650 avenue Marie-Curie, Montréal 3669-3681 boulevard des Sources, Dollard-des-Ormeaux 2300 boulevard Alfred-Nobel, Montréal 2525 avenue Marie-Curie, Montréal 7290 rue Frederick-Banting, Montréal 7190 rue Frederick-Banting, Montréal 7200 rue Frederick-Banting, Montréal 7150 rue Frederick-Banting, Montréal 7170 rue Frederick-Banting, Montréal 5 Place du Commerce, Brossard 7210 rue Frederick-Banting, Montréal 9675 chemin de la Côte de Liesse, Dorval 9545 chemin de la Côte de Liesse, Montréal 7220 rue Frederick-Banting, Montréal 1301 Gay Lussac, Boucherville 1135 de la Rive-Sud, Saint Romuald 985 boulevard Saint-Jean, Montréal 975 boulevard Saint-Joseph, Gatineau 222-230 Queen Street (Capitol Square), Ottawa 110 O’Connor Street, Ottawa PAGE 14 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 190,137 197,893 124,146 115,453 109,980 84,041 77,696 77,078 66,700 66,380 62,828 60,558 50,000 43,452 43,083 40,531 36,400 35,804 36,035 31,183 31,169 30,011 27,901 27,091 26,460 26,261 24,585 21,580 21,384 20,859 20,244 20,000 19,623 19,614 19,451 18,739 17,608 18,572 17,500 14,776 12,008 11,800 194,167 204,232 189,173 100.0 93.7 95.0 70.9 94.9 77.6 88.7 100.0 93.9 72.7 91.1 85.3 100.0 79.3 100.0 85.2 100.0 95.5 89.4 79.0 100.0 94.5 100.0 100.0 100.0 100.0 75.3 100.0 100.0 100.0 100.0 100.0 100.0 100.0 86.6 100.0 39.5 100.0 100.0 100.0 100.0 100.0 99.6 100.0 100.0 Bank of Nova Scotia; Husky Oil; Petro-Canada 20-20 Technologies; Labopharm Construction F. Catania Association de la Construction du Québec Société Immobilière du Québec Paging Network of Canada Desjardins Securities Financial Société Immobilière du Québec DMSC Medcorp CFE Desjardins Clearwater Properties Ericsson Communications Solutions Mindready Cegerco Constructeur Société Immobilière du Québec Société Immobilière du Québec Theratechnologies Inc. Starlims Canada Industrielle Alliance Equinox Marketing Services Technoparc St. Laurent Auto Prevention Association Pub Fuzzy Société Immobilière du Québec ITR Acoustique EXFO Protocol Medias Transcontinental ART Aerospatial Recherche & Technologies Methylgene Ecopia Biosciences AstraZeneca Thales Avionics GlaxoSmithKline Biologicals Phagetech Inc. Maple Leaf Foods Methylgene Dicom Express Rolls Royce Methylgene Clark, Drouin, Lefebvre Ville de Levis Buffet Vichy Government of Canada; Amusement Anik Government of Canada; Canada Foundation for Innovation Bell Canada DUNDEE REIT 2006 Annual Report For the year ended December 31, 2006 Ownership interest (%) Owned share of total GLA Occupancy (%) (sq. ft.) Signiﬁcant tenants Entrust Tower, Ottawa 25 Fitzgerald Road, Ottawa 1145 Hunt Club Road, Ottawa 770 Palladium Drive, Ottawa 750 Palladium Drive, Ottawa 1 Antares Drive, Ottawa 35 Fitzgerald Road, Ottawa 700 Palladium Drive, Ottawa 2465 St. Laurent Boulevard, Ottawa 21 Fitzgerald Road, Ottawa Aviva Corporate Centre, Scarborough Woodbine Steeles Corporate Centre, Markham Centennial Centre, Toronto 56 Wellesley Street West, Toronto State Street Financial Centre, Toronto 151 Bloor Street West, Toronto 2400 Skymark Avenue, Mississauga 2 St. Clair Avenue East, Toronto 5055 Satellite Drive, Mississauga 204 King Street East, Toronto 1625 Tech Avenue, Mississauga 1660-1680 Tech Avenue, Mississauga 2285 Speakman Drive, Mississauga 720 Bay Street, Toronto 1685-1705 Tech Avenue, Mississauga 2599 Speakman Drive, Mississauga 21 St. Clair Avenue East, Toronto 5110 Creekbank Road, Mississauga 5 Park Home Avenue, Toronto 110 Sheppard Avenue East, Toronto 1620 Tech Avenue, Mississauga 2121 Argentia Road, Mississauga 2400-2430 Meadowpine Boulevard, Mississauga 70 Richmond Street East, Toronto 2355 Skymark Avenue, Mississauga 40 Bramtree Court, Brampton 5345 Creekbank Road, Mississauga EPCOR Centre, Edmonton Telus Tower, Calgary 840-7th Avenue SW, Calgary McFarlane Tower, Calgary Franklin Atrium, Calgary Roslyn Building, Calgary Joffre Place, Calgary 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 50.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 50.0 100.0 100.0 100.0 100.0 100.0 50.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 50.0 100.0 100.0 100.0 100.0 100.0 146,170 120,000 89,299 85,555 80,550 71,611 63,301 63,052 54,997 41,706 353,031 292,318 236,750 215,729 206,967 170,648 169,004 156,365 151,745 135,707 135,258 131,775 130,335 123,872 116,390 112,967 109,995 101,616 89,405 75,792 73,371 61,185 59,354 34,414 30,091 20,462 7,117 191,961 351,821 260,147 236,005 142,415 132,186 104,647 100.0 100.0 91.5 100.0 100.0 89.0 100.0 100.0 100.0 100.0 100.0 96.3 95.7 100.0 100.0 95.9 100.0 92.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 89.7 100.0 100.0 86.0 100.0 96.4 100.0 100.0 100.0 100.0 100.0 100.0 99.8 100.0 97.4 97.0 100.0 100.0 Entrust Government of Canada PRA IBM Canada Spirent Communications of Ottawa Ltd. Synopsis Government of Ontario DRS Technologies Canada Company Government of Ontario Government of Canada Aviva CGI Group; Markham Executive Suites HMV Canada Government of Ontario; CMRRA International Financial Data Services; State Street Trust Company Canada; Dundee REIT Government of Ontario Pharmacia; Simplex Time Recorder; News America S.I.C. Management Bell Distribution; Loyalty Management Group; Bell Mobility; Source Logistics Alias Symcor NxCare, Unity Life of Canada Atomic Energy of Canada Government of Ontario First Choice Canada Inc Atomic Energy of Canada Canadian Olympic Association Centre of Excellence Government of Ontario Equifax Canada; Eckler Partners Schawk Diversicare Management Kleinfeldt Consultants St. Michael’s Hospital Dictaphone Canada Rockwell Automation Canada Electrical and Utilities Safety Association of Ontario EPCOR Utilities Telus; Government of Alberta; SNC Lavalin; Bantrel Hatch Ltd Alberta Infrastructure Care Factor Computer Services; Guest-Tek Ensign Resource Service Group Wawanesa Mutual Insurance PAGE 15 DUNDEE REIT 2006 Annual Report Portfolio listing For the year ended December 31, 2006 Ownership interest (%) Owned share of total GLA Occupancy (%) (sq. ft.) Signiﬁcant tenants 2891 Sunridge Way, Calgary Kensington House, Calgary AltaLink Place, Calgary ACC Centre, Calgary 2175 29th Street NE, Calgary 2256 29th Street NE, Calgary 2121 29th Street NE, Calgary Mount Royal Place, Calgary Franklin Building, Calgary 2886 Sunridge Way NE, Calgary Geo-X Building, Calgary 3250 Sunridge Way NE, Calgary 3030 Sunridge Way NE, Calgary Station Tower, Surrey Sherwood Place, Regina Victoria Tower, Regina Princeton Tower, Saskatoon Preston Centre, Saskatoon Scotia Centre, Yellowknife Precambrian Building, Yellowknife Northwest Tower, Yellowknife Bellanca Building, Yellowknife Total ofﬁce1 1 Excludes redevelopment properties. Industrial properties 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 87,368 77,161 76,755 64,863 58,001 57,955 57,050 56,958 51,063 44,230 36,428 27,180 26,894 213,632 181,441 144,165 131,707 61,810 101,027 87,484 85,036 52,285 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 99.6 100.0 100.0 81.3 100.0 95.2 90.2 99.7 100.0 Yellow Pages IBI Leaseholds SNC Lavalin Alberta Computer & Cable Mentor Engineering Eaton Yale Columbia Health Care First Calgary Telus Communications Precision Drilling Geo-X Royal Bank Action Direct Sure Northern Energy Government of British Columbia; Government of Canada; Fraser Health Authority Conexus Credit Union; Co-operators Life Insurance; CGI Saskatchewan Property Management HMTQ UMA Engineering Commissioner of NWT PWGSC Municipal and Community Affairs Department of Indian and Northern Affairs 10,121,765 97.0 22000 route Transcanadienne, Baie d’Urfé 3901 rue Jarry Est, Montréal 105-125 Montée de Liesse, Montréal 900-950 boulevard St-Martin, Laval 375-455 rue Deslauriers, Montréal 295-371 rue Deslauriers, Montréal 457-491 & 495-533 rue Deslauriers, Montréal 105-145 rue Deslauriers, Montréal 2580 avenue Dollard, Montréal 350-354 boulevard Lebeau, Montréal 2695 avenue Dollard, Montréal 1415-1531 rue Berlier, Laval 290-316 rue Benjamin-Hudon & 165 rue Deslauriers, Montréal 555 & 604-678 rue Deslauriers, Montréal 9601-9665 chemin de la Côte de Liesse, Dorval 9551-9599 chemin de la Côte de Liesse, Dorval 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 PAGE 16 316,243 174,013 159,848 142,693 138,646 134,673 134,561 116,611 89,500 73,800 70,853 69,856 67,075 66,896 66,542 64,312 100.0 100.0 40.1 100.0 88.5 95.5 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 90.3 84.0 Encore Gourmet Food Corp. Groupe Deschene Paktek Packaging Comark; Québecor (Messageries Dynamiques) Hostman Steinberg Essilor Canada; Satellite Metal Va-Yola Garments; Rideau Recognition Solutions Centura Québec Sandora; Groupe Compass Socadis Direct Source Special Products Le Groupe Master Prosol Distribution Vignoni Tex Les Emballages Esquire Inc. Qualités Meubles DUNDEE REIT 2006 Annual Report For the year ended December 31, 2006 Ownership interest (%) Owned share of total GLA Occupancy (%) (sq. ft.) Signiﬁcant tenants 10113-10161 chemin de la Côte de Liesse, Dorval 100.0 10205-10255 chemin de la Côte de Liesse, Dorval 100.0 100.0 2789-2855 boulevard Le Corbusier, Laval 100.0 4575-4605 rue Hickmore, Montréal 100.0 300 avenue Labrosse, Pointe-Claire 100.0 9501-9521 chemin de la Côte de Liesse, Dorval 115 boulevard Hymus, Montréal 100.0 295-341 rue Benjamin-Hudon & 255 rue Deslauriers, Montréal 9701-9745 chemin de la Côte de Liesse, Dorval 3961-4015 avenue Robert, Montréal 700-740 avenue Renaud, 9125 & 9135 chemin de la Côte de Liesse, Dorval 9 Place du Commerce, Brossard 601-623 rue Le Breton, Longueuil 601-631 rue Bériault, Longueuil 2115-2147 rue de la Provence, Longueuil 605-607 rue Deslauriers, Montréal 500-510 rue Deslauriers, Montréal 220-232 rue Lebeau, Montréal 470-472 rue Deslauriers, Montréal 9335-9395 chemin de la Côte de Liesse, Dorval 7 Place du Commerce, Brossard 9405-9475 chemin de la Côte de Liesse, Dorval 742 avenue Renaud, Dorval 35 rue de Lauzon, Boucherville 874-896 Place Trans-Canada, Longueuil 938-952 Place Trans-Canada, Longueuil 908-926 Place Trans-Canada, Longueuil 982-1002 Place Trans-Canada, Longueuil 200-210 rue Lebeau, Montréal 90 Marie Victorin, Boucherville 5205 Rideau, Québec City 750 Chemin Olivier, Saint Nicolas 735-743 avenue Renaud, Dorval 9010-9060 rue Ryan, Dorval 9245 & 9255 chemin de la Côte de Liesse, Dorval 10 Place du Commerce, Brossard 1351 Gay Lussac, Boucherville 1550 de Coulomb, Boucherville 780 Craig Street, Saint Nicolas 336 Montée Industrielle, Rimouski 2110-2160 Williams Parkway, Brampton 77 Fima Crescent, Toronto 2155 Steeles Avenue East & 7956 Torbram Road, Brampton 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 63,177 62,483 59,370 57,887 55,333 55,090 55,044 53,543 52,660 52,447 51,181 50,600 48,788 48,709 48,174 43,709 39,390 36,000 35,559 31,801 31,500 31,321 30,381 28,140 27,836 27,826 27,645 27,415 26,550 25,000 24,400 23,710 23,386 23,063 19,178 18,300 12,600 10,345 6,000 4,447 228,668 212,110 100.0 46.3 100.0 100.0 100.0 100.0 100.0 100.0 92.1 78.5 Induspac Tree-Pack Les Aliments El Bonita Postes Destination Flyght Canada McCann Equipment Encore Gourmet Food Group Cuisine Uno Caisse Populaire Desjardins Salle de Reception il Giardino Jason Industrial 100.0 Compumédia Design 100.0 Coalision 100.0 Exponent Microport 100.0 CIMA 100.0 Expo TCD 100.0 Laboratoires Colba 45.3 Boulangerie Andalos 100.0 Expo TCD (Presentoirs de Metal AWW) 100.0 Disques RSD 100.0 Alstom Canada 100.0 Constructal Hardware 69.7 Divicell 100.0 Etiquettes Profecta Labels 100.0 SP International 100.0 Distrivin 100.0 Specialités Industrielles Longueuil 100.0 Location Luber 100.0 IBM Canada 100.0 Air Liquide Canada 100.0 Federal Express Canada 100.0 ITR Acoustique 100.0 Canada Direct Database Marketing 100.0 Unisource Technology 70.7 Vesuvius Canada Refractories 100.0 Canada Post 100.0 Cameleon Informatique Robotics 100.0 Dermatus International 43.5 Jyga Concept 100.0 Air Liquide Canada 100.0 100.0 Mapei; Wollin Canada; W.G. Pro-Manufacturing; Eaton Yale Samko Sales; National Rubber 100.0 100.0 154,152 96.4 J.E.T. Contracting; Smart Enterprises PAGE 17 DUNDEE REIT 2006 Annual Report Portfolio listing For the year ended December 31, 2006 Ownership interest (%) Owned share of total GLA Occupancy (%) (sq. ft.) Signiﬁcant tenants 51 Caldari Road, Vaughan 1925 Williams Parkway, Brampton 7600 Danbro Crescent, Mississauga 25 Bramtree Court, Brampton 375-425 Britannia Road, Mississauga 100 Legacy Road, Ottawa 1219 Corporate Drive, Burlington 70 Disco Road, Toronto 1020 Birchmount Road, Scarborough 400 Chrysler Drive, Brampton 2440 Scanlan Street, London 1070-1100 Midway Boulevard, Mississauga 3915 Commerce Road, London 1820 Ironstone Drive, Burlington 199 Traders Boulevard East, Mississauga 35 Bramtree Court, Brampton 120 Valleywood Drive, Markham 4255 14th Avenue, Markham 1020 Lorimar Avenue & 7115 Tomken Road, Mississauga 147 Massey Road, Guelph 3820 Commerce Road, London 55 Idema Road, Markham 1500-1520 Trinity Drive, Mississauga 85 Idema Road, Markham Ford Warehouse, Edmonton 15303 128th Avenue, Edmonton Alberta Park, Edmonton Bonaventure Centre, Edmonton Lee Valley Building, Edmonton Parkway East Building II, Edmonton Park 19, Edmonton Parkway East Building I, Edmonton Central Web Offset, Edmonton Wood Group ESP, Edmonton Ofﬁce 99, Edmonton 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 146,886 143,205 137,728 127,876 121,321 103,438 103,119 98,792 87,161 87,090 84,633 83,368 82,600 81,776 77,449 63,649 59,425 57,377 52,295 41,190 40,200 36,720 29,759 28,605 246,000 178,000 130,162 113,993 72,577 57,777 48,365 48,282 44,500 30,353 23,174 81.3 87.3 100.0 100.0 85.8 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 52.7 100.0 100.0 100.0 100.0 54.3 100.0 100.0 100.0 92.9 100.0 100.0 100.0 98.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Made in Italy Imports Cascades Enviropac; US Consolidators Contract Pharmaceuticals Nico Warehousing; Park Avenue Interiors Badenhurst Properties Summit Food Service Distribution ISPC Wheelabrator Decoustics Limited; Daytech Manufacturing Pﬁzer Cheng Shin Rubber; Holland Imports; Flexcon Canada Dofasco Tubular Products ADM Cocoa Canada; Cimmaster Intier Automotive Pippard Macro Engineering and Technology Sun Rich Fresh Foods POI Abbey Store Fixtures Ltd. Pax-All Manufacturing Purolator Thyssen Krupp Budd Mikeway The Drafting Clinic Shaker-Tomlin Packagers Ford Motor Company of Canada Connect Logistics; Highland Moving McLeod Windows Bridge Brand Foods; Brink’s Canada Lee Valley Tools Ltd. The Salvation Army Boden Fabricating TNT High Pressure Waterworks Central Web Offset Wood Group ESP (Canada) Ltd. Koko Beach Retail Group PAGE 18 DUNDEE REIT 2006 Annual Report For the year ended December 31, 2006 Ownership interest (%) Owned share of total GLA Occupancy (%) (sq. ft.) Signiﬁcant tenants 7102-7220 Barlow Trail SE, Calgary 100.0 222,570 2705-2737 57th Avenue SE, Calgary 7004-7042 30th Street SE, Calgary 4710-4760 14th Street NE, Calgary 2777 23rd Avenue NE, Calgary 2150 29th Street NE, Calgary 1139-1165 40th Avenue NE, Calgary 2151 32nd Street NE, Calgary 501-529 36th Avenue SE, Calgary 4504-4576 14th Street NE, Calgary 2928 Sunridge Way NE, Calgary 4402-4434 10th Street NE, Calgary 2985 23rd Avenue NE, Calgary 535-561 36th Avenue SE, Calgary Highﬁeld Industrial Building, Calgary 2876 Sunridge Way NE, Calgary 6804-6818 30th Street SE, Calgary 6023-6039 Centre Street South, Calgary 4502-4516 10th Street NE, Calgary 6043-6055 Centre Street South, Calgary 530-544 38A Avenue SE, Calgary 1135-1149 45th Avenue NE, Calgary 4620-4640 11th Street NE, Calgary 102-114 61st Avenue SW, Calgary 4001-4019 23rd Street NE, Calgary 2915-2925 58th Avenue SE, Calgary 4515-4519 1st Street SE, Calgary 3503-3521 62nd Avenue SE, Calgary 4501-4509 1st Street SE, Calgary 4523-4529 1st Street SE, Calgary 7122-7126 Barlow Trail SE, Calgary 7128-7132 Barlow Trail SE, Calgary Total industrial Total ofﬁce and industrial 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 108,800 94,208 72,780 67,250 59,386 57,344 57,198 57,145 57,090 56,796 54,000 53,110 41,440 30,130 30,000 30,000 28,800 28,667 25,200 24,000 21,538 21,097 18,900 15,787 15,600 14,340 13,240 13,200 11,400 5,400 5,400 100.0 Magnum Designs; Ecco Heating Products; Sea NG Management Corp. Shanahan’s Alberta 100.0 Control Chemical; Arctic Truck Parts & Service 100.0 Collega 100.0 Sleep Country 100.0 Universal Measurements Solutions 100.0 Instabox 100.0 Coast Wholesale Appliances 100.0 Icon Stone and Tile 100.0 McGregor & Thompson Hardware 97.5 Eversource National Products 100.0 Budrich Industries 100.0 Sembiosys 100.0 The Flower Market 92.8 Air & Gas Compression Systems 100.0 Ametek 100.0 Enterprise Robert Thibert 100.0 Tac Mobility 100.0 Chateau Exteriors 100.0 Wolseley Canada 100.0 Korite Minerals 100.0 International Furniture 100.0 Tele-Mobility 100.0 Rapid Brake Centres; Great Northern Bedding Company 100.0 Mobile Augers & Research 100.0 East-West Express 100.0 Mars Blinds & Shutters 100.0 Eurika-Tech 100.0 100.0 Western High Voltage Test Centre 100.0 Chinook Auto Upholstery; 736859 Alberta (CR Techniques) Thermo & Design Insulation; Sunset Fireworks 100.0 Libertas Industries; Mettler Toledo 100.0 8,311,701 95.6 18,433,466 96.4 Redevelopment properties 2280 boulevard Alfred-Nobel, Montréal Gallery Building, Yellowknife Greenbriar Mall, Atlanta 100.0 100.0 50.0 85,384 14,760 397,695 36.6 12.2 90.0 Total redevelopment 497,839 78.5 PAGE 19 DUNDEE REIT 2006 Annual Report Performance at-a-glance This at-a-glance highlights some of the more signiﬁcant information that is found in the Management’s Discussion and Analysis, which follows on page 23. Annual acquisitions In millions of dollars $598 03 $108 04 $273 05 $351 06 $598 Development pipeline Aside from fuelling our growth through acquisitions, we see value to be gained from pursuing select development opportunities. For the most part, this is accomplished through joint ventures to help mitigate our risk exposure. These investments provide us with a substantial development capacity of approximately 2.5 million square feet. Since Dundee REIT’s inception in 2003, we have continuously increased the volume of our acquisitions. In 2006 alone we completed transactions totalling nearly $600 million, adding 3.4 million square feet of properties to our portfolio. Redevelopment properties Current development Total Investment ($000s) 31,620 19,594 51,214 $ $ Development capacity (sq. ft.) 508,000 2,035,000 2,543,000 A healthy balance sheet through conservative debt management Debt maturities % of maturing debt Since June 2003, we have continuously decreased our weighted average interest rate from 7.19% to 5.95% at the end of 2006. Our interest coverage ratio has risen steadily to 2.46 times, reﬂecting a lower overall level of debt-to-gross book value of 50.6% as well as a lower average interest rate at the end of 2006. 2.4% 07 08 11.3% 09 12.6% 4.0% 10 11 16.4% 12+ 53.3% 6.3%* 53.3% 5.7% *Line graph overlay represents average expiring interest rates. PAGE 20 DUNDEE REIT 2006 Annual Report NOI by segment In millions of dollars 03 $ 41.8 03 $ 23.5 04 $ 58.7 04 $ 37.3* 05 $ 83.8 05 $ 33.5 06 $121.3 06 $ 41.1 Office Industrial $121.3 $41.1 *2004 included flex properties acquired during the year that were moved to the office segment in 2005. Dundee REIT has increased its focus on ofﬁce properties, signiﬁcantly growing the share of net operating income (“NOI”) derived from our ofﬁce portfolio. Comparative properties NOI +5% in 2006 We continue to achieve impressive growth within our existing portfolio, driven by leasing, rising rental rates and increased operational efﬁciency. In total, our comparative properties generated $102 million of NOI in 2006, an increase of 5% over 2005. Acquisitions added another $52 million. Rising rental rates Average in-place net rent (per sq. ft.) Ofﬁce Industrial Portfolio average 2006 $ 13.67 5.47 10.00 2005 $ 13.58 5.24 9.36 AFFO per unit +14% in 2006 Occupancy increased to 96.4% in 2006 Adjusted funds from operations (“AFFO”) is an important measure of our economic performance and our ability to pay distributions. It is generally accepted as one of the most appropriate measures for assessing real estate performance. Our AFFO increased from $1.92 per unit in 2005 to $2.19 per unit in 2006. For more details and a reconciliation of AFFO to cash generated from operating activities see pages 40–42. PAGE 21 DUNDEE REIT 2006 Annual Report Contents 23 Management’s discussion and analysis 58 Section III – Disclosure controls and procedures 23 Section I – Objectives and financial highlights 23 Basis of presentation 23 Our objectives 24 Our strategy 25 Our assets 26 Our equity 27 Key performance indicators 28 Financial overview 28 Outlook 29 Section II – Executing the strategy 29 Our resources and financial condition Rental properties Development and redevelopment properties Liquidity and capital resources Operating activities Investing activities Financing activities 49 Our results of operations Rental properties revenue Interest and fee income Rental properties operating expenses Interest expense Depreciation of rental properties Amortization of deferred leasing costs, tenant improvements and intangibles General and administrative expenses Dilution gain Income tax expense Discontinued operations Related-party transactions and arrangements Net operating income 55 Selected annual information 56 Quarterly information 59 Section IV – Risks and our strategy to manage 59 Real estate ownership 59 Illiquidity of real estate investments 59 Competition in the office, industrial and retail real estate market 60 Environmental risk 60 Financing risk 60 Insurance 61 Joint venture, partnership and co-ownership agreements 61 Development risk 62 Taxation risk 62 Section V – Critical accounting policies 62 Impairment of assets 63 Purchase price allocations 63 Intangible assets and liabilities 63 Depreciation 63 Deferred costs 63 Land 64 Future changes in accounting policies 65 Management’s responsibility for financial statements 66 Auditors’ report 67 Consolidated financial statements 71 Notes to the consolidated financial statements PAGE 22 DUNDEE REIT 2006 Annual Report Management’s discussion and analysis (All dollar amounts in tables are presented in thousands, with the exception of unit and per unit amounts) Section I – Objectives and ﬁnancial highlights Basis of presentation Our discussion and analysis of the ﬁnancial position and results of operations of Dundee Real Estate Investment Trust (“Dundee REIT”) is based on the consolidated ﬁnancial statements of Dundee REIT for the years ended December 31, 2006, and December 31, 2005. This discussion should be read in conjunction with those ﬁnancial statements and related notes. This revised Management’s Discussion and Analysis has been dated as at February 22, 2007. For simplicity, throughout this discussion we may use “REIT Units” in reference to our REIT Units, Series A. Certain market information has been obtained from CB Richard Ellis Market View, 4th Quarter 2006, a publication prepared by a commercial ﬁrm that provides information relating to the 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. 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 Dundee REIT’s control, that 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, general and local economic and business conditions; the ﬁnancial condition of tenants; our ability to reﬁnance maturing debt; leasing risks, including those associated with the ability to lease vacant space; our ability to source and complete accretive acquisitions; and, interest and currency rate functions. Although the forward-looking statements contained in this document are based upon what Dundee REIT believes are reasonable assumptions, there can be no assurance that actual results will be consistent with these forward-looking statements. Certain assumptions made in preparing forward-looking information and our objectives include the assumption that the Canadian economy will remain stable in 2007 and that inﬂation will remain relatively low. We have also assumed that interest rates will remain stable in 2007, that conditions within the real estate market, including competition for acquisitions, will be consistent with the current climate and that the Canadian capital markets will continue to provide Dundee REIT with access to equity and/or debt at reasonable rates. All forward-looking information in this revised Management’s Discussion and Analysis speaks as of February 22, 2007. Dundee REIT does not undertake to update any such forward-looking information whether as a result of new information, future events or otherwise. Additional information about these assumptions and risks and uncertainties is contained in our ﬁlings with securities regulators, including the latest annual information form of Dundee REIT. These ﬁlings are also available on our website at www.dundeereit.com. Our objectives We are committed to: • Providing predictable and sustainable cash distributions to unitholders; • Improving the overall value of our enterprise through effective management of our business and through acquisitions; and • Prudently increasing distributions as the performance of our underlying business warrants. Distributions We currently pay monthly distributions to unitholders of $0.183 per unit or $2.20 on an annual basis. We also have a Distribution Reinvestment and Unit Purchase Plan (“DRIP”), which allows unitholders to have their distributions automatically reinvested into additional units of the Trust. Unitholders who enrol in the DRIP receive a bonus distribution of 4% with each reinvestment. At December 31, 2006, approximately 24% of our total units were enrolled in the DRIP or the equivalent plan for LP Class B Units, Series 1 (“LP B Units”), including 6% of REIT Units, Series A and 100% of LP B Units (please see a description of our equity on page 26). Distribution rate $0.183 $0.183 $0.183 $0.183 $0.183 $0.183 $0.183 $0.183 $0.183 $0.183 $0.183 $0.183 Month-end closing price $26.49 $27.77 $27.80 $28.63 $28.11 $28.20 $28.75 $31.75 $34.58 $34.99 $36.45 $38.65 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec PAGE 23 DUNDEE REIT 2006 Annual Report Our strategy Our strategy is to become Canada’s leading provider of affordable business premises. Our methodology to meet our strategy and objectives includes: Effectively managing our business We work to increase the value of our portfolio through continuous and active analysis of how our properties can achieve optimal performance. We identify strengths and weaknesses of individual properties and our portfolio as a whole, which allows us to quickly reposition assets when warranted. Through ongoing incremental improvements throughout our portfolio, we minimize the requirement for large capital expenditures. We stagger our debt maturities in order to mitigate interest rate exposure and to ensure that there are no signiﬁcant maturities in any given year. Lease maturities are similarly staggered to maintain continuity of income and to avoid signiﬁcant lease turnovers and their associated leasing costs in any given year. Building and maintaining a diversified portfolio Diversifying our real estate portfolio decreases the overall risk of our business. Our portfolio is well diversiﬁed by asset type, geographic location and tenant mix. With approximately 1,800 tenants, renewals are frequent and the exposure to the loss of any single large tenant is minimized. Meeting the needs of our tenants A strong relationship with our tenants is critical to our success. We strive to make Dundee REIT the preferred landlord by meeting and anticipating our tenants’ needs. We believe that providing a consistent, high level of service puts us in a better position to re-lease space to existing tenants and helps to attract new tenants to lease vacant space quickly and cost effectively. Pursuing external growth strategy We make acquisitions that represent an opportunity to improve the overall quality of our portfolio and enhance the sustainability of distributions. Our growth strategy is to acquire ofﬁce and industrial properties mainly in ﬁve key markets – Montréal, Ottawa, Toronto, Calgary and Edmonton – and reposition existing properties where opportunities exist. This allows us to capitalize on operational efﬁciencies and further increase our presence and critical mass in these key markets. >30% DRIP enrolment Throughout 2006, participation in our Distribution Reinvestment Plan averaged over 30% – a good indicator of investor conﬁdence in our business. Unitholders who elected to reinvest their distributions beneﬁt from a 4% bonus distribution in the form of additional units. The Trust beneﬁts from the contribution to our cash ﬂow. PAGE 24 DUNDEE REIT 2006 Annual Report Our assets We provide high-quality, affordable business premises with a primary focus on mid-sized urban and suburban ofﬁce properties as well as industrial and prestige industrial properties. The majority of our assets are concentrated in our target markets: Montréal, Ottawa, Toronto, Calgary and Edmonton. These markets are attractive to us as they represent most of Canada’s largest metropolitan areas, and they have relatively diverse and sound economies and good real estate liquidity. Acquisition activity will generally be concentrated in these areas, as it enables us to take advantage of our established presence and management expertise, build on our current critical mass and achieve even greater operational efﬁciencies. In the past year we have also found compelling acquisition opportunities, offering lower risk and the potential for greater returns, beyond our target markets. We believe that diversifying our portfolio, balancing by asset type, geographic location and tenant mix, decreases our overall risk proﬁle. Industrial properties generally have lower rental rates and lower operating costs than ofﬁce properties and, as a result, are attractive as they offer greater stability and less downside during times of increased vacancy. Ofﬁce properties, although more expensive to carry than industrial properties during weak markets, are attractive as they generate more revenue and offer greater potential for capital appreciation. Having both asset types in our portfolio helps us to realize our objective of providing predictable and sustainable distributions to our unitholders. During the fourth quarter, we purchased seven ofﬁce buildings in Mississauga, a suburb west of Toronto. Six of the buildings are located in the Airport Corporate Centre West (“ACCW”), in close proximity to Toronto’s Pearson International Airport and were developed by and purchased from a joint venture partner. We also acquired an ofﬁce property in Calgary. In total, we acquired $103.3 million of properties during the fourth quarter, totalling 0.5 million square feet. During the year, we acquired 20 properties adding approximately 3.4 million square feet to our portfolio. The aggregate purchase price of the properties, together with our investment in development properties, was $598.5 million. December 31 Québec National Capital Region Toronto Region Alberta Western Canada Total as at December 31 Ofﬁce Industrial Total 1,826,477 1,593,950 3,501,663 2,141,088 1,058,587 3,336,110 103,438 2,467,154 2,404,999 – 5,162,587 1,697,388 5,968,817 4,546,087 1,058,587 2006 % 28 9 32 25 6 Owned gross leasable area (sq. ft.)| 1 Total 4,822,052 1,600,446 4,865,530 3,481,764 275,047 2005 % 32 11 32 23 2 10,121,765 8,311,701 18,433,466 100 15,044,839 100 Percentage Total as at December 31, 2005 Percentage 55% 45% 100% 7,423,728 7,621,111 15,044,839 49% 51% 100% 1 Excludes redevelopment properties and discontinued operations. Office rental properties Dundee REIT owns 110 ofﬁce properties (135 buildings) comprising approximately 10.1 million square feet, excluding redevelopment properties, located in St. John’s, Québec City, Montréal, Ottawa, Toronto, Regina, Saskatoon, Calgary, Edmonton, Yellowknife and Vancouver. Our ofﬁce properties can generally be categorized as high-quality, yet affordable suburban and downtown buildings. Acquisitions completed in 2006 have added 2.7 million square feet of well-occupied ofﬁce properties to our portfolio. These properties are of high quality and have low-maintenance capital expenditure requirements. The Canadian national ofﬁce market performed very well in 2006 with the lowest national vacancy rates in 20 years. The average occupancy rate in our ofﬁce portfolio increased to 97.0% from 96.3% at December 31, 2005, and remains well ahead of the national industry average of 92.3% (CB Richard Ellis, Canadian Ofﬁce Market View, 4th Quarter 2006). Our occupancy rate includes lease commitments for space that is currently being readied for occupancy but for which rent is not yet being recognized. PAGE 25 DUNDEE REIT 2006 Annual Report Industrial rental properties We own 126 prime suburban industrial and prestige industrial properties (143 buildings) comprising approximately 8.3 million square feet, concentrated in Montréal, Toronto, Calgary and Edmonton. Our strategy is to own clusters of properties, allowing us to respond quickly and efﬁciently to tenants’ needs during times of change in their operations or size of their workforce. The acquisitions completed in 2006 have added 0.7 million square feet of well-occupied, high-quality industrial properties to our portfolio. At December 31, 2006, the average occupancy rate across our industrial portfolio was 95.6%, down slightly from 96.2% at December 31, 2005, however, ahead of the national industry average of 94.6% (CB Richard Ellis, Canadian Industrial Market View, 4th Quarter 2006). Development and redevelopment properties We are currently partners in two joint ventures to develop ofﬁce and prestige industrial properties in major Canadian markets. Other than those properties completed on a build-to-suit basis, we have the ﬁrst option to purchase the properties once they reach a predetermined occupancy requirement, at a discount to the then current market value. In addition, we independently own 60 acres of commercial development land, the majority of which is in Edmonton and is in the early stages of development. Three of our properties are currently classiﬁed as redevelopment properties. Properties are generally classiﬁed as redevelopment until the project is completed and produces positive cash ﬂow after servicing speciﬁc debt. Our equity December 31 REIT Units, Series A LP Class B Units, Series 1 Cumulative foreign currency translation adjustment Total 2006 Number of units Amount Number of units Unitholders’ equity 2005 Amount 34,854,553 $ 745,348 20,449,209 $ 376,842 8,565,095 – 147,879 (5,116) 8,337,365 149,056 – (7,180) 43,419,648 $ 888,111 28,786,574 $ 518,718 Our Declaration of Trust authorizes the issuance of an unlimited number of two classes of units: REIT Units and Special Trust Units. The Special Trust Units may only be issued to holders of LP B Units, are not transferable separately from these units, and are used to provide voting rights with respect to Dundee REIT to persons holding LP B Units. The LP B Units are held by Dundee Corporation, a related party to Dundee REIT. Both the REIT Units and Special Trust Units entitle the holder to one “ As a landlord and property manager, one of our main objectives is to have a sound understanding of our diverse tenant base. Our mandate is to help tenants operate their business efﬁciently by taking care of all of their real estate needs. Managing tenants’ expectations and providing exceptional service is key to our success.” FARID MALEK Operations Manager PAGE 26 DUNDEE REIT 2006 Annual Report vote for each unit held at all meetings of the unitholders. The LP B Units are generally exchangeable on a one-for-one basis for REIT Units, Series B at the option of the holder, which can then be converted into REIT Units, Series A. The LP B Units and corresponding Special Trust Units together generally have economic and voting rights equivalent in all material respects to REIT Units, Series A. The REIT Units, Series A and REIT Units, Series B generally have economic and voting rights equivalent in all material respects to each other. There are no REIT Units, Series B outstanding. Effective May 1, 2006, the terms of the LP B Units were amended to provide that they may not be transferred to a third party, other than a subsidiary of Dundee Corporation. As a result, if Dundee Corporation wishes to transfer the LP B Units to a third party, it must ﬁrst convert the LP B Units into REIT Units, Series B. This amendment allows us to treat the outstanding LP B Units as equity for ﬁnancial statement purposes in accordance with Canadian generally accepted accounting principles (“GAAP”). As a result, effective May 1, 2006, all LP B Units are presented as equity. Prior to this date, the LP B Units were presented as non-controlling interest. Key performance indicators Performance is measured by these and other key indicators: Operations Occupancy rate (period end)1 In-place rent per square foot (ofﬁce and industrial)1 Operating results Rental properties revenue Net operating income (“NOI”)2 Funds from operations (“FFO”)3 Adjusted funds from operations (“AFFO”)4 Distributions Distributable income5 Reinvestment to distribution ratio6,7 Cash distribution ratio Financing Weighted average interest rate (period end) Debt-to-gross book value Per unit amounts Basic: FFO Distributable income Distribution rate Total distributions as a % of distributable income AFFO Diluted:8 FFO Distributable income Three months ended December 31 Years ended December 31 2006 2005 2006 2005 $ $ $ $ 96.4% 10.00 81,995 46,258 29,167 22,954 96.3% 9.36 60,391 32,008 17,839 13,646 $ 287,794 $ 220,615 162,441 97,269 75,402 117,257 66,330 48,830 $ 26,654 $ 16,546 $ 89,002 $ 60,430 30.6% 69.4% 43.0% 57.0% 26.4% 73.6% 5.95% 50.6% 0.74 0.67 0.55 83.9% 0.58 $ 42.8% 57.2% 6.16% 59.3% 0.68 0.63 0.55 90.1% 0.52 $ $ $ $ 2.82 2.58 2.20 87.0% 2.19 2.61 2.38 2.20 94.4% 1.92 2.47 2.28 $ 0.71 0.65 $ 0.64 0.60 $ 2.69 2.48 NOI, FFO, distributable income and AFFO are key measures of performance used by real estate operating companies; however, they are not deﬁned by GAAP, do not have standard meanings and may not be comparable with other industries or income trusts. 1 Excludes redevelopment properties. 2 NOI – Rental property revenues less operating expenses, excluding redevelopment and discontinued operations. 3 FFO – The reconciliation of FFO to net income can be found on page 39. 4 AFFO – The reconciliation of AFFO to distributable income can be found on page 42. 5 The reconciliation of distributable income to cash generated from operating activities can be found on page 40. 6 These percentages do not include the additional 4% distributions available under the DRIP. 7 Includes January 15, 2007, reinvestment of distributions declared in December 2006. 8 Diluted amounts assume the conversion of the 6.5% and 5.7% Debentures. PAGE 27 DUNDEE REIT 2006 Annual Report Financial overview Overall occupancy remained strong during 2006 at 96.4%, with tenant rollovers allowing us to take advantage of current market rental rates, especially in our ofﬁce portfolio. Our average ofﬁce and industrial portfolio occupancy rates continue to be above the national industry averages. Details of our leasing proﬁle are provided on page 31. During 2006, we continued to grow our operations through strategic acquisitions and effectively managing our existing portfolio of properties. This has translated into NOI growth of $14.3 million or 45% in the fourth quarter and $45.2 million or 39% for the year when compared to the same periods in 2005. Details of our NOI are provided on page 51. For the year, our distributable income increased to $89.0 million, on which we declared distributions of $76.5 million, resulting in an 85% distribution rate – a favourable improvement from the 93% distribution rate in the prior year. As a result of the high level of participation in our DRIP, our cash payout ratio for the year is 69.4% of declared distributions. Our AFFO increased 54% to $75.4 million for the year, representing $2.19 per unit. In the fourth quarter AFFO was $0.58 per unit. This is a signiﬁcant milestone for Dundee REIT as it marks the second quarter that AFFO has met or exceeded our declared distributions. The improvement reﬂects our commitment to grow our AFFO through acquisitions and effectively managing our leasing and capital costs. Outlook Solid growth in each of our key performance indicators conﬁrms that 2006 was a great year for Dundee REIT. Occupancy rates across our portfolio are strong and rental rates continue to edge upwards. Comparative property growth, driven by leasing, rising rental rates and increased operational efﬁciency, is perhaps the most important and economically efﬁcient way to boost our performance. We have now reported six consecutive quarters of growth from comparative properties. We remain disciplined in the execution of our growth strategy, completing accretive acquisitions in our target markets or those markets with solid economies that offer growth potential. In 2006, we completed nearly $600 million of acquisitions and added 3.4 million square feet of properties to our portfolio. The quality and volume of acquisitions completed not only this year but over the past few years have had a noticeable impact on our performance – from increased portfolio occupancy and rental rates, to revenue growth and stronger net operating income and funds from operations. Entering into new markets has proven valuable, with the properties in Yellowknife, for example, providing a higher than average return on our investment. And, the acquisitions in Calgary, a traditional target market, have provided us with great exposure to the rising rental rate environment. With $125.4 million of acquisitions completed so far in 2007 and $424.3 million of properties under contract, we are quite conﬁdent that our continued growth will match or exceed that achieved in this past year. In general, the Canadian economy remains sound, with Alberta experiencing the strongest period of economic growth ever recorded by a Canadian province. Perhaps with the exception of our Montréal portfolio, we anticipate continued strong performance across our portfolio. Our business is stronger than ever. With a healthy balance sheet, continued strong performance across our portfolio and numerous acquisition opportunities, we anticipate sustained growth throughout the year ahead. PAGE 28 DUNDEE REIT 2006 Annual Report Section II – Executing the strategy Our resources and financial condition Rental properties During the fourth quarter, we completed three acquisitions for $103.3 million, adding approximately 0.5 million square feet to our portfolio. Two of the acquisitions completed are in Mississauga and one is in Calgary. Throughout 2006 we completed 20 transactions, adding approximately 3.4 million square feet to our portfolio. The aggregate purchase price of the properties, including development assets, was $598.5 million. The majority of our activity was in our key markets – Toronto, Calgary, Edmonton and Ottawa; however, we also completed accretive acquisitions in other markets including Québec City, Yellowknife and Regina. In the second quarter of 2006, we sold Kameyosek Shopping Centre in Edmonton, and a 50% interest in Greenbriar Mall in Atlanta. The new co-owner has assumed the property management services for the mall. As they are redeveloping the property, we have reclassiﬁed this asset as “redevelopment”. In the ﬁrst quarter of 2006, we evaluated the classiﬁcation and presentation of the properties in our portfolio. As a result of our analysis we determined that 19 properties, then classiﬁed as industrial, actually possess the characteristics of ofﬁce space. These properties are fully air conditioned and built out as ofﬁce space, or in some cases as laboratory or research and development space, with little or no typical industrial uses such as warehousing or light manufacturing. These properties also attract higher rental rates than typical industrial rental rates. The net book value of segmented rental properties by geography and asset type is set out below. December 31 Québec National Capital Region Toronto Region Alberta Western Canada Total as at December 31 2006| 1,2 Ofﬁce Industrial Total $ 178,643 $ 132,402 $ 311,045 228,007 406,595 404,479 163,310 8,215 135,418 128,122 – 236,222 542,013 532,601 163,310 % 18 13 30 30 9 Total $ 289,797 232,775 416,996 281,002 58,424 2005| 1,2 % 23 18 32 22 5 $ 1,381,034 $ 404,157 $ 1,785,191 100 $ 1,278,994 100 Percentage Total as at December 31, 2005 77% 23% 100% $ 913,866 $ 365,128 $ 1,278,994 Percentage 71% 29% 100% 1 Excludes $24,234 related to Greenbriar Mall and $7,386 related to other redevelopment properties (December 31, 2005 – $49,401). 2 Excludes discontinued operations. Portfolio asset type by net book value At December 31, 2006 Geographic distribution of rental properties by net book value At December 31, 2006 Office 77% Industrial 23% Québec 18% National Capital Region 13% Toronto Region 30% Alberta 30% Western Canada 9% PAGE 29 DUNDEE REIT 2006 Annual Report Market information In an effort to give additional context for our portfolio we provide below some general information with respect to those markets where we have established a critical mass of properties. The source for market occupancy, vacancy and availability rates referenced is CB Richard Ellis Market View, 4th Quarter 2006. It is important to note that occupancy rates for the ofﬁce market inventory are based on Class A occupancy rates and for the industrial market inventory were derived from CB Richard Ellis’ availability rates. Dundee REIT Market Average lease term % total remaining (sq. ft.) (years) Average in-place Estimated net rent Occupancy (%) market rent| 1 Occupancy (%) 9.9 8.6 19.0 10.6 18.1 13.4 7.7 5.4 4.3 4.1 5.1 5.4 4.8 4.5 3.7 3.6 $ 12.47 14.64 12.28 15.47 4.83 5.96 6.39 4.97 90.7 99.0 98.1 99.4 93.2 94.8 99.7 99.7 $ 11.07 15.53 12.84 24.68 4.74 6.10 7.50 4.91 87.9 95.4 91.1 99.0 92.3 94.7 98.3 96.0 (sq. ft.) 1,826,477 1,593,950 3,501,663 1,949,127 3,336,110 2,467,154 1,411,816 993,183 Ofﬁce Montréal Region Ottawa Toronto Region Calgary Industrial Montréal Region Toronto Region Calgary Edmonton 1 Estimates only; subject to change with market conditions. Montréal The Montréal suburban ofﬁce market did not show any signiﬁcant change in 2006 with current vacancy levels indicating healthy supply options for prospective tenants. The occupancy rate in our Montréal portfolio remained ﬂat at 90.7% but was ahead of the market rate. The industrial market showed relatively strong performance in 2006. And, although year-end absorption was substantially lower than in 2005, net asking rents remained stable. Occupancy in our industrial portfolio decreased slightly to 93.2% but also remained ahead of the market rate. Ottawa The overall occupancy rate for ofﬁce space in Ottawa increased substantially in 2006, with signiﬁcant improvements in the Kanata and West/Nepean and South/Airport sub-markets, where a signiﬁcant number of our properties are located. With occupancy at 99.0%, our portfolio is virtually fully leased. The only industrial property we own in this market, which was acquired in the third quarter of 2006, is fully leased. Toronto The ofﬁce market showed improvements with overall occupancy rates across the Greater Toronto Area (“GTA”) rising. The occupancy rates in our ofﬁce portfolio increased signiﬁcantly during the year to a healthy 98.1%. The overall industrial market looked relatively stable in 2006 with availability rates of just over 5% across the GTA. At 94.8%, our portfolio occupancy was in line with the overall market conditions. Calgary Calgary continues to outpace all other downtown ofﬁce markets in North America and the Province of Alberta is experiencing the strongest period of economic growth ever recorded by any Canadian province. Overall vacancy in the Calgary ofﬁce market declined to just 1.0%. Our portfolio reﬂected this positive trend with a 99.4% occupancy rate. The overall availability rate of industrial space remains equally low at 1.7%. With an occupancy rate of 99.7%, our portfolio remains virtually fully leased. Edmonton The Edmonton ofﬁce market continues on an upward trend with increasing occupancy and rental rates across the city. Our only ofﬁce building in downtown Edmonton remains fully leased. The industrial market continues to be driven by businesses catering to the energy sector and is also performing very well. At an occupancy rate of 99.7%, our industrial portfolio was virtually fully leased at the end of 2006. PAGE 30 DUNDEE REIT 2006 Annual Report Leasing profile The following key performance indicators related to our leasing proﬁle inﬂuence the cash generated from operating activities: Performance indicators at December 31 Operating activities (ofﬁce and industrial average) Occupancy level1 Tenant maturity proﬁle – average term to maturity (years) In-place rental rates 1 Includes occupied and committed space. 2 Excludes properties under redevelopment and discontinued operations. 2006| 2 96.4% 4.6 years 2005| 2 96.3% 4.6 years $ 10.00 $ 9.36 The overall percentage of occupied and committed space across our rental properties portfolio was 96.4% at year-end – consistent with prior year. Both our average ofﬁce and industrial portfolio occupancy rates are currently above the national industry averages of 92.3% and 94.6%, respectively (CB Richard Ellis, Canadian Ofﬁce and Industrial Market Views, 4th Quarter 2006). The Dundee REIT occupancy rates discussed in this report include occupied and committed space at December 31, 2006, and exclude space to which the rent supplement (as described on page 52) is applied. Total portfolio Comparative properties (%) December 31 Ofﬁce Québec National Capital Region Toronto Region Alberta Western Canada Total ofﬁce Industrial Québec Toronto Region Alberta Total industrial Overall Excludes redevelopment properties. ALISON FILLINGHAM Leasing Representative 2006 90.7 99.0 98.1 99.5 96.3 97.0 93.2 94.8 99.7 95.6 96.4 2005 90.7 99.1 96.2 99.3 99.1 96.3 94.8 96.5 98.0 96.2 96.3 2006 89.9 99.0 97.6 99.9 99.7 96.7 93.2 93.8 99.5 95.2 95.9 2005 90.7 99.1 96.2 99.3 99.1 96.3 94.8 96.5 98.0 96.2 96.3 “ Building and maintaining good relationships with tenants as well as the brokerage community is a fundamental element of our success as a real estate company. In 2006, we renewed nearly 2 million square feet of leases with existing tenants and completed over 1 million square feet of new deals – increasing our overall occupancy at higher rental rates.” PAGE 31 DUNDEE REIT 2006 Annual Report The percentage of occupied and committed space across our portfolio remains strong. Occupancy across our ofﬁce portfolio trended upward throughout the year, both for the total portfolio as well as for the comparative properties. Occupancy in the Toronto Region ofﬁce portfolio gained strength throughout the year, showing the results of concentrated leasing efforts in our midtown portfolio. The apparent year-over-year decline in occupancy in the Western Canada ofﬁce portfolio is a result of properties acquired with vacancy during the year, which will allow us to take advantage of leasing opportunities and increasing rental rates in these markets. The comparative properties in both the Alberta and Western Canada portfolios remain virtually fully leased. The industrial markets in central Canada continue to feel the impact of overall economic conditions and the strong Canadian dollar. The Québec industrial occupancy rate, while down compared to the prior year, has gained some strength since the ﬁrst quarter. Occupancy in the Toronto Region industrial portfolio was consistent with that of the prior year for much of 2006. The decline in the latter part of the year is the result of the anticipated departure of several large tenancies on the expiry of their leases. Summary of leasing activity to December 31, 2006: (In square feet) Vacant space available – January 1, 2006 Remeasurements Acquisitions Leases terminated/expiring Total space available for lease New tenants Renewals Total space leased Total space available for lease – December 31, 2006 Ofﬁce Industrial Total 277,203 (2,988) 81,461 1,183,659 1,539,335 490,176 747,453 1,237,629 301,706 289,668 (15,576) 9,310 2,071,723 2,355,125 839,181 1,148,742 1,987,923 367,202 566,871 (18,564) 90,771 3,255,382 3,894,460 1,329,357 1,896,195 3,225,552 668,908 Net increase in vacant space 24,503 77,534 102,037 As a result of acquisitions completed throughout the year, our portfolio increased in size by 23% or 3.4 million square feet, including 0.1 million square feet of vacancy. During the fourth quarter, approximately 1.2 million square feet of leases expired or were terminated and we completed approximately 1.2 million square feet of renewals and new leases. Overall, we experienced healthy leasing activity across our portfolio and achieved slightly higher rental rates on both renewals and new leasing. Lease maturity proﬁle as at December 31, 2006 by asset type: (In square feet) Ofﬁce Industrial Total Percentage Current Current vacancy monthly tenancies 2007 2008 2009 2010 2011 and thereafter Total 301,706 367,202 668,908 3.6% 66,201 95,178 952,559 942,418 1,538,606 1,309,957 5,010,318 10,121,765 1,384,811 1,283,139 1,242,358 792,932 3,146,081 8,311,701 161,379 2,337,370 2,225,557 2,780,964 2,102,889 8,156,399 18,433,466 0.9% 12.7% 12.1% 15.1% 11.4% 44.2% 100.0% Excludes redevelopment properties. Looking ahead to 2007, 13% of our leases will be up for renewal. We have a long and successful track record in managing our lease rollovers. With average market rents increasing across the country, particularly in Calgary, our lease maturity proﬁle affords us the opportunity to take advantage of buoyant economic conditions. As a result, we anticipate generating increased cash ﬂow as space is re-leased. PAGE 32 DUNDEE REIT 2006 Annual Report The following table provides average expiring rents across our portfolio as well as an estimate of average market rents as at December 31, 2006: Ofﬁce Industrial Portfolio average Market rents1 Ofﬁce Industrial Market rent average Current monthly tenancies 2007 2008 2009 2010 2011 and thereafter $ $ 8.51 3.67 5.66 9.03 4.79 6.53 $ 12.60 $ 12.15 $ 12.90 $ 13.84 $ 14.42 4.82 7.99 4.82 7.92 4.99 9.37 6.06 10.91 6.11 11.22 $ 14.90 $ 14.43 $ 15.12 $ 16.65 $ 17.06 5.03 9.04 5.08 9.04 5.37 10.76 6.12 12.68 6.24 12.89 1 Estimate only, based on current market rents with no allowance for increases in future years and subject to change with market conditions in each market segment. Our tenant maturity proﬁle has remained consistent over a long period of time. The small decrease in the average term to maturity in the ofﬁce portfolio to 4.7 years from 4.8 years reﬂects the impact of month-to-month tenancies as well as the time elapsed since year-end, partially offset by new leasing activity. Average remaining lease term and other portfolio information is as follows: December 31 Ofﬁce Industrial Portfolio average 2006 Average in-place Average remaining Average tenant lease term (years) size (sq. ft.) net rent Average remaining 1 (per sq. ft.)| lease term (years) Average tenant size (sq. ft.) 4.72 4.36 4.56 8,554 13,024 10,105 $ 13.67 $ 5.47 $ 10.00 4.78 4.33 4.55 9,405 12,750 10,765 2005 Average in-place net rent 1 (per sq. ft.)| $ 13.58 $ $ 5.24 9.36 All amounts exclude redevelopment properties and discontinued operations. 1 Average in-place rents include straight-line rent adjustments. Our estimate of the current average market rental rate is approximately 13% higher than our 2007 expiring rental rate. While this is a positive indicator, the marketplace remains competitive and any uplift in our overall average rent will depend on the amount of space rolling into the higher net rental rates. Our tenant base includes a wide range of high-quality tenants including government, large international corporations and small entrepreneurial businesses across the country. With approximately 1,800 tenants, our risk exposure to any single large lease or tenant is low. The average sizes of our ofﬁce and industrial tenants are approximately 8,600 and 13,000 square feet, respectively, placing us at the lower end of our peer group. Effectively managing this diverse tenant group has become a key strength and has helped us to maintain consistently high occupancy levels. The following graph illustrates the diversity of our tenant base broken down by the percentage contribution to total contract rent. Tenants have been classiﬁed according to their North American Industry Classiﬁcation System (“NAICS”) codes. NAICS is a system used for classifying the industry in which tenants operate. Tenant base by percentage contribution to total contract rent At December 31, 2006 Professional, Scientific and Technical Services 26% Public Administration 16% Manufacturing 15% Finance and Insurance 7% Wholesale Trade 6% Information and Cultural Industries 5% Retail Trade 4% Transportation and Warehousing 3% Other 18% PAGE 33 DUNDEE REIT 2006 Annual Report The stability and quality of our cash ﬂow is further enhanced by government agencies contributing 16% to our gross rental revenue. Our ten largest tenants feature both federal and provincial governments as well as other nationally and internationally recognizable businesses. The table below highlights the quality of these tenancies and outlines their contribution to our cash ﬂow. Tenant Government of Canada Government of Ontario Telus Communications Aviva Bell Canada Government of Northwest Territories Entrust State Street Trust Company International Financial Data Services Government of British Columbia Total Development and redevelopment properties December 31 Land under development Land held for future development Land held for sale Total Owned area in sq. ft. 867,200 508,600 311,100 316,000 307,100 108,700 146,200 93,600 96,000 102,000 2,856,500 % of owned area % of gross rental revenue 4.7 2.8 1.7 1.7 1.7 0.6 0.8 0.5 0.5 0.6 6.3 4.2 3.1 2.4 2.1 1.3 1.3 1.3 1.2 1.1 15.6 24.3 Expiry 2007–2015 2007–2015 2013–2016 2016 2007–2010 2007–2012 2015 2012 2007–2013 2009 $ 2006 31,991 1,021 8,383 $ 41,395 $ $ 2005 – – – – These assets consist of land acquired in 2006 for the purpose of development, as well as capitalized development costs incurred in 2006. A key component of our strategy is to grow our portfolio. Joint venture development activities where we provide mezzanine ﬁnancing offer prudent opportunities for us to expand our portfolio while mitigating development and leasing risks. In 2004, we provided mezzanine ﬁnancing with respect to the development of a six-building portfolio in Airport Corporate Centre West in Mississauga. In November of this year, we acquired all of the properties for a purchase price of $66.3 million, including a 2% discount to the negotiated market value of the properties. At the time of acquisition, the properties were 86% leased. Additional leasing activity completed subsequent to year-end has increased committed occupancy to approximately 97%. On May 26, 2006, we entered into a joint venture agreement with a development partner to acquire land and develop ofﬁce and prestige industrial properties in major Canadian markets. We have a 60% ownership interest in the joint venture. Other than those properties constructed on a build-to-suit basis for third parties, we have the ﬁrst option to acquire the completed properties, once they reach a predetermined occupancy requirement, at a discount to the market value at the date of acquisition. As part of the agreement, we are to provide mezzanine ﬁnancing equal to 90% of any funding requirement not otherwise provided by third-party lenders, up to a maximum of $45 million. We are also required to guarantee, when necessary, 90% of ﬁnancing obtained from third parties. As at December 31, 2006, we have funded $9.2 million and provided a guarantee on $8.3 million of third-party ﬁnancing related to two development projects in suburban Toronto that we expect will yield about 60 acres of developable lands. The acquisition of the Princeton Portfolio on May 16, 2006, included approximately 60 acres of commercial land in Western Canada for which we paid $18.9 million. Included in this total are approximately 50 acres of serviced commercial land in the Sunwapta Business Park in Edmonton. We intend to develop 39 of the 50 acres that are zoned for ofﬁce and industrial and sell the remaining 11 acres that are zoned for retail. The remaining 10 acres are mainly located in Yellowknife and will be held for future development. PAGE 34 DUNDEE REIT 2006 Annual Report Property type Acres Investment Development capacity (sq. ft.) Status Location Redevelopment properties 2280 boul. Alfred Nobel, Montréal Gallery Building, Yellowknife Greenbriar Mall, Atlanta ofﬁce ofﬁce retail Current development Barker Business Park, Richmond Hill (JV) ofﬁce/ind. Tullamore Business Park, Caledon (JV) Sunwapta Business Park, Edmonton industrial ofﬁce/ind. Development opportunities Palladium Lands, Ottawa 10089 and 10079 Jasper Ave., Edmonton Speakman Project, Mississauga Station Tower Lands, Surrey Niven Lake Lands, Yellowknife Held for sale Sunwapta Business Park, Edmonton 19th Street Lands, Saskatoon ofﬁce ofﬁce ofﬁce ofﬁce – retail retail – – – – 40 19 39 98 3 – 14 3 10 30 $ 7,019 85,000 367 24,234 25,000 398,000 $ 31,620 508,000 Construction is complete and the property is 37% leased Planning Property being redeveloped by our co-owner Site work, pre-leasing Site work, pre-leasing Site work, pre-leasing $ 6,204 2,997 10,393 860,000 375,000 800,000 $ 19,594 2,035,000 $ 833 4,683 – 3,841 711 81,000 250,000 100,000 500,000 200,000 $ 10,068 1,131,000 11 0.5 11.5 $ $ 7,572 811 8,383 200,000 – 200,000 Liquidity and capital resources Dundee REIT’s primary sources of capital are cash generated from operating activities, credit facilities, 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 principal and interest payments, mezzanine loans and property acquisitions. We expect to meet all of our ongoing obligations through current cash and cash equivalents, cash ﬂows from operations, conventional mortgage reﬁnancings and, as growth requires, new equity or debt issues. “ We have become focused on ‘green’ building and construction standards. Dundee REIT is currently targeting LEED Silver Certiﬁcation (Leadership in Energy and Environmental Design) for a new development in suburban Toronto. One of its features will be recycling rain water captured from the roof and using it in the irrigation system for the beneﬁt of the property.” PAGE 35 BARRY WHITE Project Manager, Construction DUNDEE REIT 2006 Annual Report The following table details the change in cash and cash equivalents: Cash generated from operating activities Cash utilized in investing activities Cash generated from ﬁnancing activities Increase (decrease) in cash and cash equivalents Three months ended December 31 Years ended December 31 2006 2005 (restated) 2006 2005 (restated) $ 24,003 $ 13,204 $ 87,862 $ 62,992 (93,260) 127,141 $ 57,884 $ (56,491) 53,845 10,558 (470,595) 437,214 (276,725) 212,918 $ 54,481 $ (815) At December 31, 2006, cash and cash equivalents were $71.0 million, an increase of $57.9 million compared to the prior quarter and $54.5 million compared to December 31, 2005. The increase was a result of the cash ﬂows indicated above, including the impact of acquisitions, new ﬁnancing activity and equity issues. The large cash balance on hand at December 31, 2006, was mainly residual from the proceeds from the public offering completed on December 12, 2006, which was mainly used to fund the acquisition of 30 and 55 St. Clair Avenue West, Toronto, completed on January 9, 2007. We have an $80 million revolving credit facility, of which approximately $79.3 million is available to provide further funding for working capital or as a bridge facility to fund acquisitions. Operating activities The following table details the cash generated from operating activities: Three months ended December 31 Years ended December 31 Net income Non-cash items: Amortization of market rent adjustments on acquired leases All other depreciation and amortization Provision for impairment in value of rental properties Internalization of property manager Loss (gain) on disposal of rental properties Deferred unit compensation expense Future income taxes Straight-line rent adjustment Dilution gain Non-controlling interest Deferred leasing costs incurred Change in non-cash working capital Cash generated from operating activities 2006 $ 7,952 $ (1,622) 20,590 – 615 4 354 (111) (767) – – 27,015 (2,352) (660) 2005 (restated) (5,015) (81) 14,032 11,533 – 3,837 243 (4,287) (839) (296) (2,281) 16,846 (1,602) (2,040) 2006 $ 11,218 $ (4,124) 70,591 – 13,678 (3,009) 1,170 2,314 (3,164) – 1,876 90,550 (6,097) 3,409 87,862 2005 (restated) 4,309 (331) 49,267 11,533 – 3,620 830 (3,653) (3,688) (1,890) 1,523 61,520 (4,440) 5,912 $ 24,003 $ 13,204 $ $ 62,992 The change in cash generated from operations during the three- and twelve-month periods primarily reﬂects the impact of acquisitions. The amortization of market rent adjustments on acquired leases represents the impact of leases with below market rents, related to certain properties acquired in Alberta during the year. Below market leases are recorded as intangible liabilities and are amortized to rental property revenue over the terms of the related leases. In the fourth quarter of 2005, when we entered into the commitment to sell 50% of Greenbriar Mall, we recognized a provision for the impairment in value of 50% of our investment in the property. Because the expected proceeds of the sale were less than the carrying amount of the property, the difference was recognized as an impairment loss. The sale was completed in the second quarter of 2006, at which time we recognized an additional $0.2 million loss. PAGE 36 DUNDEE REIT 2006 Annual Report In the second quarter of 2006, we fully internalized our property management function through the purchase of the remaining 50% interest of Dundee Management Limited Partnership (“DMLP”) for $12.6 million. Of this amount, $12.2 million was expensed and $0.4 million was allocated to the net tangible assets acquired. The amount expensed includes $12.2 million related to the 450,000 LP B Units issued on closing. The issue price per LP B Unit of $27.54 was estimated based on the ﬁve-day weighted average trading price of REIT Units on the Toronto Stock Exchange, with the midpoint being May 4, 2006 (the date the substantive terms of the internalization were publicly announced), net of a discount for implied issuance costs. Also on closing, 92,000 LP B Units were issued, placed in trust and enrolled in the DRIP to satisfy the maximum number of units that Dundee Realty Corporation (“DRC”) may be entitled to receive on June 30, 2007, as a result of qualifying property acquisitions being completed by us. The cost of these units will be expensed and added to cumulative capital as qualifying properties are acquired by Dundee REIT. Any units that are not ultimately issued to DRC as additional consideration will be returned to DMLP for cancellation. During the year ended December 31, 2006, we acquired $340.6 million of qualifying properties and accordingly $1.5 million was expensed and added to cumulative capital representing the cost of the additional 55,326 LP B Units that DRC will be entitled to receive on June 30, 2007. The straight-line rent adjustment represents the difference between the straight-line method of rental revenue recognition and the cash rents received. Any cumulative difference is included in accounts receivable. Deferred leasing costs include fees and costs, except for initial leasing costs that are included in rental properties, and deferred leasing costs acquired. Deferred leasing costs are amortized on a straight-line basis over the term of the applicable lease to amortization expense. Deferred leasing costs for the year increased by $1.7 million compared to 2005 due to increased leasing activity. The variance in the change in non-cash working capital over the prior quarter and prior year mainly reﬂects the increase in accounts receivable. We expect to meet all working capital requirements from cash generated from operating activities. Leasing costs and tenant improvements Leasing costs include leasing fees and costs, broker commissions and tenant inducements. Tenant improvements include costs incurred to make leasehold improvements to the leased space. Leasing cost and tenant improvement expenditures 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, and leasing costs associated with ofﬁce space are generally higher than costs associated with industrial space. As a result of new accounting rules, we have reclassiﬁed tenant improvements to investing activities on the statement of cash ﬂows. Leasing costs and tenant improvements were $6.0 million and $13.8 million for the respective three- and twelve-month periods representing increases of $1.9 million and $0.3 million, respectively. Included in leasing costs and tenant improvements in 2006 is $0.3 million related to redevelopment properties. During 2006, ofﬁce leasing activity increased 58% and resulted in 1.1 million square feet of new leasing and renewals. Related expenditures incurred during this period only increased by 47%, reﬂecting our continued commitment to managing expenditures. Industrial leasing activity decreased 8% and resulted in 1.7 million square feet of new leases and renewals. Related expenditures decreased by $1.2 million mainly due to short-term renewals on which we do not incur leasing costs as well as our commitment to managing expenditures. Performance indicators Operating activities Portfolio size (sq. ft.) Occupied and committed Square footage leased and occupied in 2006 Leasing costs ($000s) Tenant improvements ($000s) 1 Excludes redevelopment properties. Ofﬁce| 1 Industrial Total 10,121,765 8,311,701 18,433,466 97.0% 1,111,362 $ $ 4,396 5,552 95.6% 1,657,627 $ $ 1,683 1,833 96.4% 2,768,989 $ $ 6,079 7,385 PAGE 37 DUNDEE REIT 2006 Annual Report The following table summarizes our leasing activity for 2006: 2006 Prepaid Committed expenditures leasing costs leasing costs Incurred (prepaid) prior year Ofﬁce Industrial Total $ 9,948 $ 1,385 $ 1,548 3,516 590 197 $ 13,464 $ 1,975 $ 1,745 $ $ 412 $ 9,699 1,111,362 $ (278) 3,401 1,657,627 134 $ 13,100 2,768,989 $ Total Sq. ft. leased Cost per leasing costs and occupied sq. ft. 8.73 2.05 4.73 The table below provides our annualized estimates of expected leasing activity and leasing costs over a two- to three-year time horizon. These estimates are based on our portfolio at the end of 2006 and assume that market conditions remain consistent with our current experience. Estimated average annual leasing activity (sq. ft.) Average leasing costs (per sq. ft.) Expected average annual leasing costs ($000s) Ofﬁce Industrial 1,180,000 1,790,000 $ $ 8.95 10,561 $ $ 2.10 3,259 Other assets and liabilities Other assets consist of deferred costs, prepaid expenses, intangible assets and liabilities, mezzanine loans, a vendor loan, deposits and restricted cash. Other liabilities consist of intangible liabilities related to below market leases acquired. A full description of these assets and liabilities is provided in Note 2 of the ﬁnancial statements. The net increase in deferred costs during 2006 was $8.2 million. This change includes increases in deferred charges of approximately $14.8 million related to acquisitions and $15.0 million in additional deferred expenditures incurred during the year, net of $4.0 million in dispositions and $17.6 million in amortization. Complete details of deferred costs are provided in Note 5 of the ﬁnancial statements. Intangible assets and liabilities include the value of above and below market leases, in-place leases, lease origination costs and tenant relationships. Complete details of these assets and liabilities are provided in Note 9 of the ﬁnancial statements. As of December 31, 2006, net assets increased $2.3 million from the prior year. This increase is mainly a result of approximately $15.0 million related to acquisitions, offset by $13.0 million in amortization expense. As at December 31, 2006, we had $3.9 million in mezzanine loans outstanding related to our joint venture developments, as discussed in “Development and redevelopment properties” on page 34. In the fourth quarter our mezzanine loan investment with respect to the ACCW project in Mississauga was repaid when we exercised our option to acquire the related properties. On December 14, 2006, the $3.5 million vendor loan with respect to the sale of Northgate Mall in December 2004 was repaid in full. Deposits of $4.6 million represent cash amounts held for repayment of tenant security deposits as required by various lending agreements. The $3.3 million net increase for the year is primarily due to the acquisitions completed during the year. Restricted cash primarily represents tenant rent deposits and cash held as security for certain mortgages. The balance as of December 31, 2006, is $5.6 million, an increase of $1.2 million from the prior year. PAGE 38 DUNDEE REIT 2006 Annual Report 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 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 ﬁnancial statements. Our future minimum commitments under operating, capital and ground leases are as follows: Years ending December 31 Operating lease payments Capital lease payments Ground lease payments 2007 2008 2009 2010 2011 2012 and thereafter Total $ $ 1,315 1,154 962 668 660 1,300 6,059 $ 128 117 – – – – $ 1,141 1,113 1,112 573 32 33 $ 245 $ 4,004 Funds from operations Management believes FFO is an important measure of our operating performance and is indicative of our cash-generating activities. This measurement is generally accepted as one of the most meaningful and useful measures of performance of real estate operations; however, it does not represent cash ﬂow from operating activities as deﬁned by GAAP and is not necessarily indicative of cash available to fund Dundee REIT’s needs. In 2005, the Real Property Association of Canada (“REALpac”) provided guidelines on the deﬁnition of FFO to help promote more consistent disclosure. Until such time as all income trusts adopt this policy, our computation of FFO may not be comparable to other REITs or income trusts. Net income (loss) Add (deduct): Depreciation of rental properties Amortization of deferred leasing costs, tenant improvements and intangibles Imputed amortization of leasing costs related to the rent supplement Internalization of property manager Loss (gain) on disposal of rental properties Provision for impairment in value of rental property Future income tax Amortization of costs not speciﬁc to real estate operations incurred subsequent to June 30, 2003 Dilution gain Non-controlling interest FFO FFO per unit – basic FFO per unit – diluted Three months ended December 31 Years ended December 31 2006 7,952 $ 2005 $ (5,015) $ 2006 11,218 2005 4,309 $ 11,259 9,384 81 615 4 – (111) (17) – – $ $ $ 29,167 0.74 0.71 $ $ $ 8,117 5,918 318 – 3,837 11,533 (4,286) (6) (296) (2,281) 17,839 0.68 0.64 39,908 30,643 694 13,678 (3,009) – 2,314 (53) – 1,876 97,269 2.82 2.69 $ $ $ 29,743 19,985 1,176 – 3,620 11,533 (3,653) (16) (1,890) 1,523 66,330 2.61 2.47 $ $ $ The increase in FFO per unit in both the three- and twelve-month periods is primarily due to additional revenue generated by acquisitions as well as growth in occupancy and rising rental rates. A reduction in our weighted average interest rate also had a positive impact on FFO. Below market rents, which result in a non-cash amortization to our operating results, positively impact our FFO. The impact of below market rents on diluted FFO per unit was $0.04 and $0.13 for the respective three- and twelve-month periods. PAGE 39 DUNDEE REIT 2006 Annual Report Diluted FFO per unit amounts assume the conversion of the 6.5% and 5.7% Debentures. The weighted average number of units outstanding for basic and diluted FFO calculations for the fourth quarter are 39,588,295 and 43,447,393, respectively. Diluted FFO includes interest and amortization adjustments of $1.8 million. Year-to-date, the weighted average number of units outstanding for basic and diluted FFO calculations are 34,446,486 and 40,004,679, respectively. Diluted FFO includes interest and amortization adjustments of $10.2 million. Distributions and distributable income Our Declaration of Trust requires us to make monthly cash distributions to our unitholders equal to at least 80% of distributable income (“DI”) on an annual basis. Amounts retained in excess of the distributions are used to fund leasing costs and capital expenditure requirements. Given that working capital tends to ﬂuctuate with time and should not affect our distribution policy, we disregard it when determining distributable income. In times of working capital deﬁciency, the high participation in our DRIP program provides the necessary cash to temporarily fund cash shortfalls. Distributable income per unit for the year was $2.58 and declared distributions were $2.20, representing an 85% payout ratio. In the prior year comparative period, distributable income per unit was $2.38 per unit and declared distributions were $2.20, representing a 93% payout ratio. Distributable income Cash generated from operating activities Add (deduct): Deferred leasing costs incurred Amortization of deferred ﬁnancing costs incurred prior to June 30, 2003 Amortization of non-recoverable deferred costs incurred prior to June 30, 2003 Amortization of tenant inducement Amortization of costs not speciﬁc to real estate operations incurred subsequent to June 30, 2003 Amortization of deferred ﬁnancing costs Change in non-cash working capital Distributable income Distributable income per unit – basic Distributable income per unit – diluted Distributions Three months ended December 31 Years ended December 31 2006 24,003 $ 2005 $ 13,204 $ 2006 87,862 2005 $ 62,992 2,352 1,602 6,097 4,440 65 16 20 (17) (445) 660 26,654 0.67 0.65 0.55 $ $ $ $ 94 25 – (4) (415) 2,040 16,546 0.63 0.60 0.55 $ $ $ $ 335 73 19 (53) (1,922) (3,409) 89,002 2.58 2.48 2.20 $ $ $ $ 366 111 – (16) (1,551) (5,912) 60,430 2.38 2.28 2.20 $ $ $ $ Funds from operations per unit $2.82 03* $2.44 04 $2.50 05 $2.61 06 $2.82 *2003 is an annualized amount. PAGE 40 Funds from operations per unit is a key measure of our operating performance. Since the inception of the Trust in 2003, we have been able to continuously increase our annual funds from operations – a positive indicator of an accretive acquisition program and the overall strength of our business. DUNDEE REIT 2006 Annual Report Distributable income is not a measure deﬁned by GAAP and therefore may not be comparable to similar measures presented by other real estate investment trusts. Distributable income is deﬁned in our Declaration of Trust to facilitate the determination of distributions to our unitholders. On August 4, 2006, the Canadian Securities Administrators (the “CSA”) issued CSA Staff Notice 52-306 (Revised), “Non-GAAP Financial Measures” (the “Notice”). The Notice provides that in the view of CSA staff, all distributable cash presentations should begin with cash ﬂows from operating activities. In compliance with the Notice, our table reconciles distributable income, as deﬁned by our Declaration of Trust, to cash generated from operating activities. Distributions The distributions presented in the table below comprise $57.8 million relating to REIT Units and $19.7 million relating to LP B Units. Cash distributions were only paid to holders of REIT Units as all of the LP B Units are enrolled in the DRIP. 2006 distributions Paid in cash or reinvested in units Payable at December 31, 2006 Total distributions 2006 reinvestment Reinvested to December 31, 2006 Reinvested on January 15, 2007 Total distributions reinvested Distributions paid in cash Reinvestment to distribution ratio Cash distribution payout ratio Declared distributions 4% additional distributions $ $ $ $ 861 77 938 861 77 938 $ $ $ $ $ 68,575 7,936 76,511 21,528 1,912 23,440 53,071 30.6% 69.4% Total 69,436 8,013 77,449 22,389 1,989 24,378 $ $ $ $ Distributions declared in the year ended December 31, 2006, totalled $76.5 million or 85% of distributable income, an increase of $20.4 million over the comparative period. Of this amount, $23.4 million or 30.6% was reinvested in additional units. The increase in declared distributions arises from an incremental increase in units generated through the DRIP, REIT Units issued as part of public offerings completed in April, June and December 2006, as well as REIT Units issued on the conversion of debentures. As a result of the high level of participation in the DRIP, our cash payout ratio for our distributions is 69.4%. In the year ended December 31, 2006, we declared $19.7 million in distributions on LP B Units, which was satisﬁed by the issuance of 618,853 REIT Units and 61,092 LP B Units. Distributable income In millions of dollars 03* $42.6 03* $38.1 04 $52.1 04 $52.6 05 $60.4 05 $56.1 06 $89.0 06 $76.5 *2003 is an annualized amount. Distributable income Declared distributions $89.0 $76.5 Over the years the dollar amount of declared distributions has increased, corresponding with our expanding unitholder base. Yet, with the strength of our ﬁnancial performance, the growth in distributable income has outpaced the growth in declared distributions. Our Declaration of Trust requires us to pay out at least 80% of our distributable income. In 2006, we paid out 85% of our distributable income, compared to 93% in 2005. PAGE 41 DUNDEE REIT 2006 Annual Report Adjusted funds from operations Distributable income Adjusted for: Normalized leasing costs and tenant improvements Normalized non-recoverable recurring capital expenditures AFFO AFFO per unit – Basic Three months ended December 31 Years ended December 31 2006 26,654 2005 $ 16,546 (3,350) (350) 22,954 0.58 (2,600) (300) 13,646 0.52 $ $ $ $ $ 2006 89,002 (12,200) (1,400) 75,402 2.19 $ $ $ 2005 $ 60,430 (10,400) (1,200) 48,830 1.92 $ $ Management believes adjusted funds from operations (“AFFO”) is an important measure of our economic performance and is indicative of our ability to pay distributions. This measurement is generally accepted as one of the most appropriate measures for assessing real estate performance; however, it does not represent cash ﬂow from operating activities as deﬁned by GAAP and is not necessarily indicative of cash available to fund Dundee REIT’s needs. Please see our description of distributable income, on page 40, which reconciles distributable income to cash ﬂow from operations. Our calculation of AFFO starts with our distributable income and then deducts an estimate of normalized non-recoverable maintenance capital expenditures, leasing costs and tenant improvements that we expect to incur based on our current portfolio and expected average leasing activity. Our estimates of normalized leasing costs and tenant improvements are based on the average of our expected leasing activity over the next two to three years and multiplied by the average cost per square foot that we incurred and committed to in 2006. Our estimates of normalized non-recoverable capital expenditures are based on our expected average expenditure for our current property portfolio. This estimate will differ from actual experience due to the timing of expenditures and the growth in our business resulting from property acquisitions. Adjusted funds from operations per unit $0.58 $0.55 Q1 $0.51 Q2 $0.53 Q3 $0.55 Q4 $0.58 PAGE 42 An important objective is to generate adjusted funds from operations in excess of distributions declared to unitholders. During the year, we achieved this important target. We anticipate continued growth in our performance measures in 2007. DUNDEE REIT 2006 Annual Report Investing activities The following table details our cash utilized in investing activities: Investment in rental properties Investment in tenant improvement Investment in land development Acquisition of rental properties and land Acquisition deposit on rental properties Receipt of mezzanine loan Vendor take-back mortgage repayment Net proceeds from disposal of rental properties Change in restricted cash, net Cash utilized in investing activities Three months ended December 31 Years ended December 31 $ 2006 (2,659) (3,662) (1,047) (98,140) (3,600) 13,142 3,450 (78) (666) $ 2005 (restated) (3,709) (2,508) – (54,521) (705) – – 5,864 (912) 2006 $ (9,173) (7,667) (2,103) $ 2005 (restated) (7,833) (9,033) – (484,667) (275,024) (3,600) 9,487 3,450 24,922 (1,244) (880) (750) – 8,118 8,677 $ (93,260) $ (56,491) $ (470,595) $ (276,725) Key performance indicators in the management of our investment activities are: Performance indicators Investing activities Acquisition of rental properties Building improvements Acquisition of land Three months ended December 31 Years ended December 31 2006 $ $ $ 103,259 3,444 – $ $ $ 2005 71,550 4,555 – 2006 2005 $ $ $ 559,197 9,028 39,292 $ $ $ 349,903 8,529 718 Acquisitions and dispositions During the fourth quarter of 2006, we acquired $103.3 million of rental properties, land and related intangible assets funded by $98.1 million in cash. For the year, we completed acquisitions totalling $598.5 million funded by $484.7 million in cash and $103.0 million in assumed mortgages. Acquisitions completed during 2005 and 2006 have increased net operating income by approximately $12.0 million and $38.5 million for the three- and twelve-month periods, respectively. A component of our acquisition strategy is to acquire properties in our key markets, allowing us to capitalize on our operational efﬁciencies, further increase our presence and critical mass in our target markets and improve the overall quality and rental income stability of our portfolio. Since the formation of the REIT on July 1, 2003, we have invested over $1.3 billion in high-quality properties that are accretive to our performance. “ 2006 was a very active year on the acquisition front. Throughout the year we completed transactions totalling nearly $600 million, adding over 3 million square feet of gross leasable area to our portfolio. Two signiﬁcant portfolio acquisitions substantially increased our exposure to the booming markets in Western Canada and Calgary in particular.” BONNIE CREWS & SUHAN HANNAN Managers, Investments PAGE 43 DUNDEE REIT 2006 Annual Report On June 29, 2006, we completed the sale of Kameyosek Shopping Centre, a 46,143 square foot retail property. We received proceeds of $8.4 million and recognized a gain on sale of $3.3 million. On June 2, 2006, we completed the sale of a 50% interest in Greenbriar Mall, Atlanta, for net proceeds of $16.7 million and recognized a $0.2 million loss on the sale. As a result of the disposition, a $3.7 million cumulative foreign currency loss was released from the foreign currency translation adjustment that was recognized as part of the loss on disposal. In the year ended December 31, 2005, we recorded an impairment loss of $11.5 million relating to Greenbriar Mall. The disposition of Greenbriar Mall has not been presented as a discontinued operation as we still have a signiﬁcant continuing involvement in its operations. Interest acquired Occupancy on Acquired acquisition Property type (%) GLA (sq. ft.) (%) Purchase price Fair value of mortgage assumed Date acquired 100 $ 2,726 $ – January 10, 2006 Year ended December 31, 2006 Park 19, Edmonton 70 Disco Road, Toronto SEC Portfolio, Québec 2440 Scanlan Street, London Sherwood Place, Regina 1400 boul. de la Rive Sud, Québec City 4255 14th Avenue, Markham industrial industrial ofﬁce/industrial industrial ofﬁce ofﬁce industrial Princeton Portfolio, Western Canada ofﬁce/industrial/land 10089 Jasper Avenue, Edmonton Barker Business Park (Phase II), Toronto Calgary Ofﬁce Portfolio, Calgary Tullamore Business Park, Caledon Victoria Tower, Regina 100 Legacy Road, Ottawa 10079 Jasper Avenue, Edmonton land land ofﬁce land ofﬁce industrial land Aviva Corporate Centre, Toronto ofﬁce/industrial Station Tower Lands, Surrey 2121 Argentia Road, Mississauga Airport Corporate Centre West, Mississauga 2891 Sunridge Way NE, Calgary Total land ofﬁce ofﬁce ofﬁce 100 100 100 100 100 100 100 100 100 60 48,000 99,000 265,000 85,000 182,000 77,000 57,000 530,000 86,000 – 100 822,000 – 144,000 103,000 – 438,000 – 61,000 357,000 60 100 100 10 100 100 100 100 100 100 99 100 99 100 100 94 – – 98 – 100 100 – 100 – 96 86 7,577 21,306 6,266 33,206 12,062 5,914 96,818 4,160 8,994 3,117 6,199 3,477 14,442 – – 43,835 – – January 12, 2006 January 27, 2006 April 20, 2006 April 21, 2006 May 1, 2006 May 1, 2006 May 17, 2006 May 29, 2006 June 7, 2006 218,257 23,339 June 15, 2006 3,224 17,815 8,906 310 43,961 3,728 11,270 66,253 25,736 – 8,621 – – July 4, 2006 July 21, 2006 August 1, 2006 August 4, 2006 – September 13, 2006 – September 21, 2006 – November 16, 2006 – November 28, 2006 – December 20, 2006 88,000 100 3,442,000 98 $ 598,489 $ 103,030 Acquisitions subsequent to year-end Subsequent to year-end, we acquired two ofﬁce buildings in Toronto, Ontario, totalling 426,000 square feet for approximately $110.8 million, and an 83,000 square foot ofﬁce building in New Westminster, B.C., for approximately $14.6 million. We currently have under contract, subject to a variety of conditions, approximately $424.3 million of ofﬁce and industrial properties totalling 2.7 million square feet. Building improvements Building improvements Recurring recoverable Recurring non-recoverable Non-recurring Total PAGE 44 Three months ended December 31 Years ended December 31 2006 2,306 440 698 3,444 $ $ 2005 1,855 348 2,352 4,555 $ $ 2006 5,066 637 3,325 9,028 $ $ 2005 2,569 1,169 4,791 8,529 $ $ DUNDEE REIT 2006 Annual Report For the three-month period, capital expenditures or expenditures accrued for rental property building improvements and equipment were $3.4 million (December 31, 2005 – $4.5 million). Recurring recoverable costs incurred in the quarter included $2.3 million for various roof, chiller and elevator replacements, as well as general building maintenance. Non-recurring costs in the quarter included $0.7 million of construction costs related to various projects in our Montréal industrial portfolio. For the year, non-recurring costs included $0.3 million of recoverable costs, $1.3 million to complete a build-to-suit project and $0.9 million in capitalized carrying costs for a property under redevelopment with the remainder relating to miscellaneous construction projects. The tenant took occupancy of the build-to-suit project and began paying rent in May 2006. As part of our acquisition due diligence, we endeavour to identify any near-term capital expenditure requirements and factor those costs into our investment analysis and purchase price negotiations. Such potential expenditures are approved in the acquisition process and will be identiﬁed as incurred. There are no expected non-recoverable capital expenditures associated with acquisitions completed in the fourth quarter. Anticipated non-recoverable capital expenditures associated with acquisitions completed throughout 2006 are expected to be approximately $7.8 million. Financing activities We ﬁnance the ownership of our assets using equity as well as utilizing conventional mortgage ﬁnancing, term debt, ﬂoating rate credit facilities and convertible debentures. Our debt strategy includes staggering our maturity schedule to help mitigate interest rate risk and limit exposure in any given year, as well as ﬁxing the rates and extending loan terms as long as possible when interest rates are favourable. The following table details our cash generated from ﬁnancing activities: Three months ended December 31 Years ended December 31 Mortgages placed, net of costs Mortgage principal repayments Mortgage lump sum repayments Term debt principal repayments Term debt lump sum repayments Term debt placed, net of costs Convertible debentures issued, net of costs Demand revolving credit facility, net Demand non-revolving credit facility Distributions paid on REIT Units Units issued, net of costs Cash generated from ﬁnancing activities 2005 $ 28,821 $ $ 2006 48,323 (6,917) (32,429) (66) – 44 – (10,362) – (15,138) 143,686 $ 127,141 $ (5,204) (6,378) (121) (5,417) – (9) (21,577) – (7,909) 71,639 53,845 2006 294,985 (25,380) (79,486) (364) (14,957) 6,139 – – – (50,074) 306,351 2005 $ 155,621 (17,957) (46,076) (501) (7,492) – 95,443 – (6,107) (31,700) 71,687 $ 437,214 $ 212,918 2006 5.95% 50.6% 2005 6.16% 59.3% 2.46 times 2.22 times 4.7% 5.8 2.2% 7.2% 5.9 1.6% Debt The key performance indicators in the management of our debt are: December 31 Financing activities Average interest rate Level of debt (debt-to-gross book value) Interest coverage ratio Proportion of total debt due with one year Debt – average term to maturity (years) Variable rate debt as percentage of total debt The interest coverage ratio, which reﬂects our ability to cover interest expense requirements, has improved steadily over the year to 2.46 times. This improvement reﬂects the reduction in our overall level of debt-to-gross book value to 50.6%, from 59.3% at the beginning of the year, as well as the lower average interest rate, now at 5.95% compared to 6.16% at the beginning of the year. PAGE 45 DUNDEE REIT 2006 Annual Report As a result of reﬁnancing activity during the quarter, the proportion of total debt due in 2007 decreased to 4.7%. Our variable rate debt as a percentage of total debt increased during the year as a result of a variable rate mortgage placed on a redevelopment property. During the year, we drew $58.1 million from our revolving credit facility, which we repaid by December 31, 2006. The facility is used as an interim measure until conventional mortgage debt or other long-term ﬁnancing is in place. December 31 Mortgages Term debt Demand revolving credit facility Debenture – 6.5% Debenture – 5.7% Total Percentage Fixed Variable 2006 Total Fixed Variable 2005 Total $ 1,036,909 $ 19,402 $ 1,056,311 $ 756,920 $ – $ 756,920 2,238 – 24,438 65,281 5,526 – – – 7,764 – 24,438 65,281 271 – 72,478 98,890 15,062 15,333 – – – – 72,478 98,890 $ 1,128,866 $ 24,928 $ 1,153,794 $ 928,559 $ 15,062 $ 943,621 97.8% 2.2% 100% 98.4% 1.6% 100% Mortgages payable include a $9.6 million marked-to-market adjustment (December 31, 2005 – $8.5 million) reﬂecting the fair value of mortgages assumed in connection with acquisitions. The marked-to-market adjustment and discount are amortized to interest expense over the term to maturity of the related debt. During the year, $82.5 million of debentures were converted into 3,071,257 REIT Units. Amounts recorded as at December 31, 2006 for the 6.5% and 5.7% Debentures are net of the $0.8 million premiums allocated to their conversion features. Further detail on the conversions is provided on page 47. Debt-to-gross book value Our Declaration of Trust limits our overall debt to 65% of gross book value. At December 31, 2006, our debt-to-gross book value decreased to 50.6% (December 31, 2005 – 59.3%) mainly as a result of funding $598.5 million of acquisitions with the proceeds of equity offerings totalling $306.4 million, combined with net proceeds from dispositions totalling $24.9 million. In addition, as a result of the rising trading price of our units, we experienced a large volume of debenture conversions, which also contributed to a signiﬁcant reduction in our debt-to-gross book value. December 31 Total assets Accumulated depreciation Accumulated amortization of acquired intangibles and leasing costs Gross book value Outstanding debt Unamortized discount component of convertible debentures Total debt Debt-to-gross book value 2006 $ 2,127,920 120,353 32,559 $ 2,280,832 $ 1,153,794 794 $ 1,154,588 50.6% We consider our convertible debentures to be debt and treat them as such when computing our debt ratios. Assuming the conversion of all of the 6.5% and 5.7% Debentures, our debt-to-gross book value would decrease to 46.7%. Commencing January 1, 2006, we have included the accumulated amortization of tangible and intangible components related to acquired properties in our calculation of debt-to-gross book value to reﬂect the total cost added to the asset base. Comparative ratios have not been restated. Financing activity During the fourth quarter we secured approximately $48.5 million in new mortgage ﬁnancing, resulting in a year-to-date total of approximately $296.8 million in new mortgages. The new ﬁnancing was completed with an average term to maturity of 8.3 years and an average interest rate of 5.56%. As a result, our overall average interest rate decreased to 5.95% and our average term to maturity was extended to 5.8 years. PAGE 46 DUNDEE REIT 2006 Annual Report Changes in debt levels since December 31, 2005, result from: Mortgages Term debt Revolving credit facility Convertible debentures Total Debt as at December 31, 2005 $ 756,920 $ 15,333 $ New debt assumed on rental property acquisitions New debt placed Vendor take-back term loan Scheduled repayments Lump sum repayments Conversion to unit equity 103,030 296,845 5,355 (25,380) (79,486) – Marked-to-market and other adjustments Debt as at December 31, 2006 (973) $ 1,056,311 $ 217 6,139 1,395 (363) – – 58,096 – – (14,957) (58,096) – – 7,764 $ – – – $ 171,368 $ 943,621 – – – – – (82,460) 103,247 361,080 6,750 (25,743) (152,539) (82,460) 811 89,719 (162) $ 1,153,794 $ In connection with acquisitions completed during the year, we assumed $103.0 million in mortgages, with an average 3.3-year term to maturity and a weighted average interest rate of 5.35%. December 31 2007 2008 2009 2010 2011 2012 and thereafter Total Scheduled principal repayments on Debt maturities non-matured debt Amount $ 23,649 $ 30,538 $ 54,187 110,155 122,963 38,629 160,496 519,905 30,421 26,560 23,819 19,759 46,900 140,576 149,523 62,448 180,255 566,805 % 4.7 12.2 13.0 5.4 15.6 49.1 $ 975,797 $ 177,997 $ 1,153,794 100.0 2006 Weighted average interest rate on balance due at maturity % 6.27 6.51 6.50 5.58 6.30 5.67 5.98 $ 2005 Amount 67,801 53,582 111,186 131,354 53,516 526,182 $ 943,621 Convertible debentures Throughout the year we issued 3,071,257 REIT Units upon the conversion of $82.5 million of the principal amount of 6.5% Debentures and 5.7% Debentures. With respect to the 6.5% Debenture, during the fourth quarter, we issued 177,400 REIT Units upon the conversion of $4.4 million of the principal amount. In total, we issued 1,935,640 REIT Units upon the conversion of $48.4 million of the principal amount in 2006. Subsequent to year-end, we issued an additional 119,960 REIT Units upon the conversion of $3.0 million of the principal amount. The total principal amount outstanding at January 31, 2007, was $21.6 million, and is convertible into 863,360 REIT Units. 50.6% debt-to-gross book value Throughout a year of exceptional growth we have remained focused on a healthy balance sheet. Our debt renewals and new debt ﬁnancings resulted in a further reduction of our weighted average interest rate to 5.95% and a steady improvement of the interest coverage ratio to 2.46 times. PAGE 47 DUNDEE REIT 2006 Annual Report With respect to the 5.7% Debenture, during the fourth quarter, we issued 1,132,652 REIT Units upon the conversion of $34.0 million of the principal amount. In total, we issued 1,135,617 REIT Units upon the conversion of $34.1 million of the principal amount in 2006. Subsequent to year-end, we issued an additional 374,458 REIT Units upon the conversion of $11.2 million of the principal amount. The total principal amount outstanding at January 31, 2007, was $54.7 million, and is convertible into 1,823,233 REIT Units. Equity The following table summarizes the changes in our outstanding equity: REIT Units, Series A LP Class B Units, Series 1 Units issued and outstanding on December 31, 2005 Units issued pursuant to public offerings Units issued pursuant to internalization of property manager Units issued pursuant to DRIP Units issued pursuant to Deferred Unit Incentive Plan Units issued pursuant to Unit Purchase Plan Conversion of 6.5% Debentures Conversion of 5.7% Debentures Exchange of LP B Units Total units outstanding on December 31, 2006 Percentage of all units Units issued pursuant to DRIP on January 15, 2007 Units issued pursuant to Unit Purchase Plan Conversion of 6.5% Debentures Conversion of 5.7% Debentures Exchange of LP B Units Redemption of REIT Units Total units outstanding on January 31, 2007 Percentage of all units 20,449,209 10,190,000 – 811,261 22,888 13,087 1,935,640 1,135,617 296,851 34,854,553 80.3% 49,060 – 119,960 374,458 487,409 (100) 35,885,340 81.6% 8,337,365 – 505,326 19,255 – – – – (296,851) 8,565,095 19.7% 2,307 – – – (487,409) – 8,079,993 18.4% Total 28,786,574 10,190,000 505,326 830,516 22,888 13,087 1,935,640 1,135,617 – 43,419,648 100.0% 51,367 – 119,960 374,458 – (100) 43,965,333 100% Public offering of units On December 12, 2006, we completed a public offering of 4,110,000 REIT Units for gross cash proceeds of $150.0 million at a price of $36.50 per unit. Costs related to the offering were $6.5 million and were charged to unitholders’ equity. On June 8, 2006, we completed a public offering of 3,560,000 REIT Units for gross cash proceeds of $100.0 million at a price of $28.10 per unit. Costs relating to the offering were $4.4 million and were charged directly to unitholders’ equity. On April 7, 2006, we completed a public offering of 2,200,000 REIT Units for gross cash proceeds of $61.0 million at a price of $27.75 per unit. On April 28, 2006, we issued an additional 320,000 REIT Units for gross proceeds of approximately $8.9 million $320 million of equity offerings In 2006, we completed three equity offerings totalling $320 million and issued 10.2 million units. The offerings were very well received and helped increase our market capitalization to $1.7 billion at year-end, up from $740 million a year ago. As a result of our increased market capitalization and heavier trading activity in our units, Dundee REIT was added to the S&P/TSX Composite Index in December. PAGE 48 DUNDEE REIT 2006 Annual Report pursuant to the exercise of the over-allotment option granted to the underwriters. The exercise of the over-allotment option increased the total gross proceeds of the offering to approximately $69.9 million. Costs relating to the offering were $3.2 million and were charged directly to unitholders’ equity. On February 12, 2007 we announced that we have entered into an agreement to issue 3,700,000 REIT Units, at a price of $40.75 per unit for gross proceeds of $150.8 million. Costs relating to the offering are estimated to be $6.6 million. In addition, we have granted the underwriters an over-allotment option up to an additional 555,000 REIT Units, which, if exercised, would increase the gross offering to $173.4 million. Our results of operations Revenues Rental properties revenue Interest and fee income Expenses Rental properties operating expenses Interest Depreciation of rental properties Amortization of deferred leasing costs, tenant improvements and intangibles General and administrative Income before the undernoted items Internalization of property manager Loss on disposal of rental property Provision for impairment in value of rental property Dilution gain Income (loss) before income and large corporations taxes Income taxes Current income and large corporations taxes Future income taxes Income (loss) before non-controlling interest and discontinued operations (Income) loss attributable to non-controlling interest Income (loss) before discontinued operations Discontinued operations Net income (loss) $ Three months ended December 31 Years ended December 31 2006 2005 2006 2005 $ 81,995 $ 60,391 $ 287,794 $ 220,615 1,257 83,252 34,959 17,307 11,259 9,384 1,861 74,770 8,482 (615) 9 – – 7,876 22 (111) (89) 7,965 – 7,965 (13) 7,952 397 60,788 27,190 14,701 8,088 5,908 1,640 57,527 3,261 – – (11,533) 296 (7,976) 49 (4,287) (4,238) (3,738) 1,192 (2,546) (2,469) (5,015) $ 3,646 291,440 122,150 66,052 39,850 30,614 6,812 265,478 25,962 (13,678) (220) – – 12,064 62 2,314 2,376 9,688 (1,840) 7,848 3,370 $ 11,218 $ 2,144 222,759 99,176 53,960 29,459 19,508 5,408 207,511 15,248 – – (11,533) 1,890 5,605 181 (3,653) (3,472) 9,077 (2,511) 6,566 (2,257) 4,309 Rental properties revenue Revenues include net rental or basic income from rental properties as well as the recovery of operating costs, property taxes, parking revenues and other miscellaneous revenues from tenants. The increase in rental property revenue is primarily a result of additional revenues generated by acquisitions as well as receiving 100% of the fees earned by the property manager, effective May 1, 2006. Interest and fee income Interest and fee income represents amounts for items such as fees earned from third-party property management including management, construction and leasing fees, and interest on bank accounts and related fees. These revenues and expenses are not necessarily of a recurring nature and the amounts will vary from quarter to quarter. Our results for the quarter include $0.2 million in one-time leasing fees. PAGE 49 DUNDEE REIT 2006 Annual Report Rental properties operating expenses Operating expenses mainly comprise occupancy costs and property taxes as well as certain expenses that are not recoverable from tenants, the majority of which are related to leasing. Operating expenses ﬂuctuate with occupancy levels, weather, utility costs, taxes, repairs and maintenance. The $7.8 million or 29% increase in operating expenses over the comparative quarter mainly reﬂects the additional costs of managing a larger portfolio of properties. Interest expense The $2.6 million or 18% increase in interest expense for the three-month period was mainly the result of additional debt incurred in connection with acquisitions. Although the overall dollar amount of our debt increased, the impact on interest expense was mitigated to some extent by the reduction in our weighted average interest rate to 5.95% compared with 6.16% at December 31, 2005. Depreciation of rental properties Depreciation increased by $3.2 million or 39% compared with the same quarter in 2005 mainly as a result of acquisitions. Amortization of deferred leasing costs, tenant improvements and intangibles Amortization increased by $3.5 million or 59% over the comparative period, largely due to the allocation of a portion of the purchase price on new acquisitions to intangibles, and the write-off of amounts related to a tenant whose lease was renegotiated. General and administrative expenses General and administrative expenses primarily comprise the expenses related to corporate management, trustees’ fees and expenses, and investor relations for the Trust and its subsidiaries. Expenses for the quarter were $1.9 million, an increase of $0.2 million or 13% over the comparative period reﬂecting the growth of our business and the additional costs resulting from the internalization of the property manager. The increase in expense is offset by increased property management fees as we now own 100% of the property manager. Dilution gain The dilution gain in 2005 resulted from the additional LP B Units issued pursuant to the DRIP, which caused the dilution of our ownership of Dundee Properties Limited Partnership (“DPLP”). As of August 2005, the holders of LP B Units have elected to reinvest their distributions in REIT Units, and as a result our ownership is no longer being diluted. The holder of the LP B Units issued on the internalization of the property manager, including the issued units held in trust, reinvests their distributions in LP B Units. As a result of the reclassiﬁcation of the LP B Units to equity effective May 1, 2006, no further dilution gain will be reported. Income tax expense Dundee REIT distributes or designates all taxable earnings to unitholders and as such, under current legislation, the obligation for tax rests with each unitholder and no tax provision is currently required on the majority of Dundee REIT’s income. Certain Canadian and U.S. subsidiaries of Dundee REIT are taxable and any tax-related costs are reﬂected in the balance sheet and income statement. Discontinued operations Discontinued operations include assets that have been categorized as held for sale or sold and meet speciﬁc criteria as discontinued assets in accordance with GAAP. These assets and operations are disclosed separately on the income statement and balance sheet. Related-party transactions and arrangements From time to time Dundee REIT and its subsidiaries enter into transactions with related parties that are conducted under normal commercial terms. Prior to May 1, 2006, Dundee REIT, DPLP, DMLP and DRC were parties to a property management agreement and an administrative services agreement (the “Management Agreement” and the “Services Agreement”). In addition, DMLP and DRC are parties to a separate administrative services agreement. Effective May 1, 2006, the Trust acquired DRC’s 50% interest in DMLP. As a result, DRC is no longer party to the Management Agreement, other than to its rent supplement obligation, and the Services Agreement. DMLP and DRC have extended the term of the DRC Services Agreement to June 30, 2013. PAGE 50 DUNDEE REIT 2006 Annual Report During the year, we received $1.3 million in fees related to the rent supplement and $1.4 million related to the DRC services agreement. We also incurred $1.9 million of management fee expenses paid under the Management Agreement prior to May 1, 2006. Net operating income Net operating income (“NOI”) is an important measure used by management to evaluate the operating performance of the properties. We deﬁne NOI as the total of rental property revenues less rental property operating expenses. NOI for the quarter increased 45% over the comparative period, primarily due to income generated by properties acquired in 2006, and properties acquired in the fourth quarter of 2005 that are contributing to the full quarter this year. NOI for the year increased 39% or $45.2 million reﬂecting strong growth in our comparative ofﬁce portfolio and the impact of acquisitions completed over the last two years. Our comparative industrial portfolio performance remained stable for the year with growth coming from acquisitions. Redevelopment properties include the results of Greenbriar Mall, Atlanta. Discontinued operations reﬂects the results of Kameyosek Shopping Centre which was sold on June 29, 2006, and 2301 and 2311 Royal Windsor Drive and Simcoe Town Centre, sold in 2005. Three months ended December 31 Years ended December 31 $ 2006 35,699 10,559 46,258 778 – 2005 Amount $ 23,380 $ 12,319 8,628 32,008 1,192 356 1,931 14,250 (414) (356) Growth % 53 22 45 $ 2006 121,347 41,094 162,441 3,203 263 2005 Amount $ 83,793 $ 37,554 33,464 117,257 4,182 1,386 7,630 45,184 (979) (1,123) Growth % 45 23 39 $ 47,036 $ 33,556 $ 13,480 40 $ 165,907 $ 122,825 $ 43,082 35 Three months ended December 31 Years ended December 31 2006 8,569 $ 2005 $ 7,600 $ 6,183 13,310 13,612 4,584 46,258 778 – 5,099 10,841 7,132 1,336 32,008 1,192 356 Growth % 13 21 23 91 Amount 969 1,084 2,469 6,480 3,248 243 14,250 45 (414) (356) $ 2006 34,210 24,210 47,895 42,747 13,379 162,441 3,203 263 2005 $ 27,515 $ 17,013 40,054 27,410 5,265 117,257 4,182 1,386 Growth % 24 42 20 56 Amount 6,695 7,197 7,841 15,337 8,114 154 45,184 39 (979) (1,123) $ 47,036 $ 33,556 $ 13,480 40 $ 165,907 $ 122,825 $ 43,082 35 Ofﬁce Industrial NOI Redevelopment Discontinued operations NOI including redevelopment and discontinued operations Québec National Capital Region Toronto Region Alberta Western Canada NOI Redevelopment Discontinued operations NOI including redevelopment and discontinued operations NOI by segment Three months ended December 31, 2006 NOI by region Three months ended December 31, 2006 Office 77% Industrial 23% Québec 19% National Capital Region 13% Toronto Region 29% Alberta 29% Western Canada 10% PAGE 51 DUNDEE REIT 2006 Annual Report NOI comparative portfolio NOI shown below highlights comparative and non-comparative items to assist in understanding the impact each component has on NOI. We have classiﬁed our remaining interest in Greenbriar Mall as a redevelopment property, reﬂecting the fact that we no longer actively manage the property, which is being redeveloped by our partner. The discontinued operations that contributed to NOI are shown separately to conform with the required income statement presentation. Comparative NOI and acquisitions exclude GAAP adjustments that relate to straight-line rents and amortization of market rent adjustments on acquired leases. Three months ended December 31 Years ended December 31 2006 18,584 7,328 25,912 17,840 150 2,356 46,258 778 – 2005 $ 17,612 $ 7,193 24,805 5,840 458 905 32,008 1,192 356 Growth % 6 2 4 $ Amount 972 135 1,107 12,000 (308) 1,451 14,250 45 (414) (356) 2006 72,691 28,874 101,565 52,394 1,336 7,146 162,441 3,203 263 2005 $ 68,689 $ 28,463 97,152 13,882 2,272 3,951 117,257 4,182 1,386 Growth % 6 1 5 Amount 4,002 411 4,413 38,512 (936) 3,195 45,184 39 (979) (1,123) $ 47,036 $ 33,556 $ 13,480 40 $ 165,907 $ 122,825 $ 43,082 35 2006 5,072 $ $ 3,712 8,868 6,896 1,364 25,912 17,840 150 2,356 46,258 778 – Three months ended December 31 $ 2005 5,183 3,299 8,612 6,366 1,345 24,805 5,840 458 905 32,008 1,192 356 Growth % (2) $ 13 3 8 1 4 Amount (111) 413 256 530 19 1,107 12,000 (308) 1,451 14,250 45 (414) (356) 2006 20,491 14,419 34,530 26,711 5,414 101,565 52,394 1,336 7,146 162,441 3,203 263 Years ended December 31 Growth % 1 8 4 6 3 5 Amount 107 1,108 1,438 1,583 177 4,413 38,512 (936) 3,195 45,184 39 (979) (1,123) 2005 $ 20,384 $ 13,311 33,092 25,128 5,237 97,152 13,882 2,272 3,951 117,257 4,182 1,386 $ 47,036 $ 33,556 $ 13,480 40 $ 165,907 $ 122,825 $ 43,082 35 Ofﬁce $ Industrial Comparative properties Acquisitions Rent supplement GAAP adjustments NOI Redevelopment Discontinued operations NOI including redevelopment and discontinued operations Québec National Capital Region Toronto Region Alberta Western Canada Comparative properties Acquisitions Rent supplement GAAP adjustments NOI Redevelopment Discontinued operations NOI including redevelopment and discontinued operations The increase in comparative NOI was driven by strong performance by our ofﬁce portfolio nationally, and reﬂects occupancy growth as well as rising rental rates. The rent supplement from DRC contributed $0.2 million for the quarter. The rent supplement represents amounts funded by DRC based on speciﬁc vacancies as previously agreed to upon the formation of Dundee REIT and as included in the property management agreement. This rent supplement will ﬂuctuate as leasing of supplemented space occurs. The supplement commenced July 1, 2003, and is effective for ﬁve years for ofﬁce and three years for industrial space. The rent supplement decreased in the quarter as a result of leasing activity in supplemented ofﬁce space, and the expiry of the supplement period for industrial properties on June 30, 2006. PAGE 52 DUNDEE REIT 2006 Annual Report Comparative office portfolio 2006 2,660 $ $ 3,712 6,961 3,887 1,364 18,584 14,928 149 2,038 Three months ended December 31 Growth % (4) $ 13 5 8 1 6 $ 2005 2,763 3,299 6,617 3,588 1,345 17,612 4,609 376 783 Amount (103) 413 344 299 19 972 10,319 (227) 1,255 2006 11,140 14,419 26,612 15,106 5,414 72,691 42,224 555 5,877 Years ended December 31 Growth % 3 8 7 6 3 6 Amount 279 1,108 1,643 795 177 4,002 31,758 (949) 2,743 2005 $ 10,861 $ 13,311 24,969 14,311 5,237 68,689 10,466 1,504 3,134 $ 35,699 $ 23,380 $ 12,319 53 $ 121,347 $ 83,793 $ 37,554 45 Québec National Capital Region Toronto Region Alberta Western Canada Comparative properties Acquisitions Rent supplement GAAP adjustments Ofﬁce NOI Our comparative ofﬁce portfolio remains well occupied with the National Capital Region, Alberta and Western Canada portfolios offering less than 4% vacancy. Growth in comparative NOI from the ofﬁce portfolio is largely a result of improved occupancy and higher rental rates achieved on renewals and new leasing. Our Québec ofﬁce portfolio reported modest NOI growth for the year mainly as a result of an increase in occupancy offset by a $0.2 million bad debt provision related to a single tenant in the fourth quarter. Growth in the National Capital Region was mainly due to increases in rental rates and additional recovery revenue on gross leases that were converted to net leases. Growth in the Toronto Region reﬂects improved occupancy as well as renewals and new leasing occurring at market rates. In the prior year, the Toronto Region’s results were impacted by a $0.4 million one-time expense. Our Alberta portfolio is virtually fully occupied, reﬂecting the market in general. Given the current state of the Alberta rental market, we are well positioned to convert tenant expiries at market rental rates. In 2006, approximately 6% of our Alberta portfolio expired; 2007 expiries are approximately 10% of our portfolio allowing us to continue to re-lease at market rental rates. Total ofﬁce NOI grew by $12.3 million and $37.6 million in the respective three- and twelve-month periods fuelled by the contribution from acquisitions. Comparative properties NOI +5% in 2006 Internal growth – driven by occupancy and rising rental rates – is a critical driver of our success. For six quarters in a row we have produced growth in net operating income on a comparative property basis. And, we expect that the performance of our comparative properties will continue to grow in 2007. PAGE 53 DUNDEE REIT 2006 Annual Report Comparative industrial portfolio 2006 2,412 $ $ 1,907 3,009 7,328 2,912 1 318 Three months ended December 31 $ 2005 2,420 1,995 2,778 7,193 1,231 82 122 Growth % – (4) 8 2 Amount (8) (88) 231 135 1,681 (81) 196 2006 9,351 $ $ 7,918 11,605 28,874 10,170 781 1,269 Years ended December 31 Growth $ 2005 9,523 8,123 10,817 28,463 3,416 768 817 % (2) (3) 7 1 Amount (172) (205) 788 411 6,754 13 452 $ 10,559 $ 8,628 $ 1,931 22 $ 41,094 $ 33,464 $ 7,630 23 Québec Toronto Region Alberta Comparative properties Acquisitions Rent supplement GAAP adjustments Industrial NOI Comparative industrial property performance increased marginally for both the three- and twelve-month periods. Strong occupancy driven results in Alberta offset slightly weaker results in the balance of our industrial portfolio. In our Alberta portfolio, enhanced performance was driven by increased occupancy as well as rental rate uplifts achieved on renewals and new leasing. The decrease in the Québec and Toronto Region portfolios is attributable to a slight decline in occupancy mainly related to isolated tenant failures during 2006. Total NOI improved by $1.9 million and $7.6 million in the respective three- and twelve-month periods, again fuelled by the contribution from acquisitions. Effective July 1, 2006, the rent supplement for industrial space expired. NOI prior quarter comparison Overall, comparative properties are maintaining a high level of occupancy, achieving incremental improvements in rental rates and producing modest growth in NOI. Total NOI grew 3% quarter-over-quarter largely reﬂecting the impact of acquisitions as well as leasing activity in Alberta. Three months ended Ofﬁce Industrial Comparative properties Acquisitions Rent supplement GAAP adjustments NOI Redevelopment Discontinued operations NOI including discontinued operations December 31, 2006 18,584 $ September 30, 2006 $ 18,259 $ 7,328 25,912 17,840 150 2,356 46,258 778 – 7,394 25,653 16,189 323 2,797 44,962 436 (55) Amount 325 (66) 259 1,651 (173) (441) 1,296 342 55 $ 47,036 $ 45,343 $ 1,693 Growth % 2 (1) 1 3 4 PAGE 54 Three months ended Québec National Capital Region Toronto Region Alberta Western Canada Comparative properties Acquisitions Rent supplement GAAP adjustments NOI Redevelopment Discontinued operations NOI including discontinued operations DUNDEE REIT 2006 Annual Report December 31, 2006 5,072 $ $ 3,712 8,868 6,896 1,364 25,912 17,840 150 2,356 46,258 778 – September 30, 2006 5,208 3,620 8,807 6,678 1,340 25,653 16,189 323 2,797 44,962 436 (55) Growth Amount (136) % (3) $ 92 61 218 24 259 1,651 (173) (441) 1,296 342 55 3 1 3 2 1 3 4 $ 47,036 $ 45,343 $ 1,693 Quarter-over-quarter comparative property NOI remained relatively consistent with increased occupancy and rental rates in our ofﬁce portfolio driving the $0.3 million improvement in the fourth quarter. Current and prior year acquisitions contributed an increase of $1.7 million compared to the prior quarter. Selected annual information The following table provides select ﬁnancial information for the past three years: December 31 Revenues Income before discontinued operations Net income Total assets Debt Distributions declared Per unit amounts: Basic income from continuing operations Basic net income Diluted income from continuing operations Diluted net income $ $ 2006 291,440 7,848 11,218 2,127,920 1,153,794 76,511 2005 2004 $ 222,759 $ 186,756 6,566 4,309 14,813 4,353 1,507,713 1,199,792 943,621 56,072 693,155 52,595 $ 0.25 0.35 0.25 0.35 $ 0.38 0.25 0.29 0.16 0.92 0.27 0.82 0.18 PAGE 55 DUNDEE REIT 2006 Annual Report Quarterly information The following tables show quarterly information since January 1, 2005. Q4 2006 Q3 2006 Q2 2006 Q1 2006 Q4 2005 Q3 2005 Q2 2005 Q1 2005 Revenues Rental properties revenue $ 81,995 $ 76,778 $ 66,051 $ 62,970 $ 60,391 $ 57,385 $ 52,720 $ 50,119 Interest and fee income Expenses Rental properties operating expenses Interest Depreciation of rental properties Amortization of deferred leasing costs, tenant improvements and intangibles General and administrative Income before the undernoted items Provision for impairment in value of rental property Internalization of property manager Gain (loss) on disposal of rental property Dilution gain Income (loss) before income and large corporations taxes Income taxes Current income and large corporations taxes Future income taxes (recovery) Income tax expense (recovery) Income (loss) before non-controlling interest and discontinued operations Loss (income) attributable to non-controlling interest Income (loss) before discontinued operations Discontinued operations Net income (loss) Net income (loss) per unit 1,257 83,252 1,038 77,816 852 499 397 410 619 718 66,903 63,469 60,788 57,795 53,339 50,837 34,959 17,307 11,259 9,384 1,861 74,770 8,482 – (615) 9 – 31,380 17,934 10,824 27,744 15,833 9,227 28,067 14,978 8,540 27,190 14,701 8,087 25,216 14,378 7,967 23,427 13,215 6,800 23,343 11,666 6,604 9,007 1,688 6,513 1,755 5,710 1,508 5,907 1,641 5,565 1,362 4,405 1,245 3,630 1,161 70,833 61,072 58,803 57,526 54,488 49,092 46,404 6,983 5,831 4,666 3,262 3,307 4,247 4,433 – 27 – (13,090) (445) – 216 – – – – – (11,533) – – – – – – – – – – – 296 269 652 673 7,876 6,565 (7,043) 4,666 (7,975) 3,576 4,899 5,106 22 (111) (89) 7,965 – 7,965 (13) (81) (202) (283) 76 2,453 2,529 45 174 219 49 (4,286) (4,237) 44 259 303 41 183 224 47 192 239 6,848 (9,572) 4,447 (3,738) 3,273 4,675 4,867 – (517) (1,323) 1,192 (1,007) (1,330) (1,366) 6,848 (10,089) (25) 3,343 3,124 65 (2,546) (2,469) 2,266 (43) 3,345 75 3,501 180 $ 7,952 $ 6,823 $ (6,746) $ 3,189 $ (5,015) $ 2,223 $ 3,420 $ 3,681 Basic Diluted1 $ $ 0.24 0.24 $ $ 0.19 0.19 $ $ (0.23) $ (0.23) $ 0.15 0.15 $ $ (0.28) $ 0.13 $ (0.29) $ 0.12 $ 0.20 0.17 $ $ 0.22 0.18 1 Excludes impact of 6.5% Debentures and 5.7% Debentures, which are currently not dilutive to net income. PAGE 56 DUNDEE REIT 2006 Annual Report Calculation of funds from operations and distributable income Net income (loss) Add (deduct): Q4 2006 7,952 $ Q3 2006 Q2 2006 Q1 2006 Q4 2005 Q3 2005 Q2 2005 Q1 2005 $ 6,823 $ (6,746) $ 3,189 $ (5,015) $ 2,223 $ 3,420 $ 3,681 Depreciation of rental properties 11,259 10,824 9,255 8,570 8,117 8,053 6,884 6,689 Amortization of deferred leasing costs and intangibles Future income tax Imputed amortization of leasing costs related to the rent supplement Amortization of costs not speciﬁc to real estate operations incurred subsequent to June 30, 2003 Dilution gain (Gain) loss on disposal of rental properties Provision for impairment in value of rental property Internalization of property manager Non-controlling interest Funds from operations Funds from operations per unit Basic1 Diluted Cash generated from operating activities Add (deduct): 81 (17) – 4 – 615 – 9,384 (111) 9,007 (202) 6,527 2,453 5,725 174 5,918 (4,286) 5,765 259 4,524 183 3,778 192 68 289 256 318 168 204 487 (18) – (13) – (5) – (6) (296) (4) (269) (3) (652) 415 (3,453) 24 3,837 – 13,090 – – 11,533 – – (27) – – – – 25 – – 527 1,349 (2,281) 986 1,367 1,451 $ 29,167 $ 26,890 $ 21,929 $ 19,282 $ 17,839 $ 17,181 $ 15,952 $ 15,358 $ $ 0.74 0.71 $ $ 0.74 0.70 $ $ 0.67 0.64 $ $ 0.67 0.63 $ $ 0.68 0.64 $ $ 0.68 $ 0.63 $ 0.64 0.60 $ $ 0.62 0.60 $ 24,003 $ 22,058 $ 24,634 $ 17,167 $ 13,204 $ 16,351 $ 19,862 $ 13,575 (5) (673) (242) – – Deferred leasing costs incurred 2,352 972 1,739 1,034 1,602 831 1,034 973 Amortization of deferred ﬁnancing costs incurred prior to June 30, 2003 Amortization of non-recoverable deferred costs incurred prior to June 30, 2003 Amortization of tenant inducements Amortization of costs not speciﬁc to real estate operations incurred subsequent to June 30, 2003 Amortization of deferred leasing costs incurred subsequent to June 30, 2003 Imputed amortization of leasing costs related to the rent supplement Loss (gain) on disposal of rental property Amortization of deferred ﬁnancing costs Change in non-cash working capital 65 16 20 81 17 – 94 19 – 94 21 – 94 25 – 98 78 – 87 4 – 87 4 – (17) (18) (13) (5) (4) (4) (3) (5) – – – – – – (445) 660 (619) 1,378 – – (25) (425) (5,524) – – 25 (433) 77 – – – – – – – – – – – – (415) 2,040 (440) (924) (401) (6,374) (296) (654) Distributable income $ 26,654 $ 23,869 $ 20,499 $ 17,980 $ 16,546 $ 15,990 $ 14,209 $ 13,684 Distributable income per unit Basic1 Diluted Weighted average units outstanding for FFO and DI Basic Diluted $ $ 0.67 0.65 $ $ 0.66 0.63 $ $ 0.63 0.60 $ $ 0.62 0.59 $ $ 0.63 0.60 $ $ 0.63 $ 0.59 $ 0.57 0.54 $ $ 0.55 0.54 39,588,295 36,350,417 32,727,091 28,968,219 26,266,118 25,387,969 25,081,201 24,865,912 43,447,393 42,292,776 38,953,240 35,281,362 32,562,042 31,712,785 31,480,407 27,924,777 1 The LP Class B Units, Series 1 are included in the calculation of Basic FFO per unit and Basic DI per unit. PAGE 57 DUNDEE REIT 2006 Annual Report For the period-end, occupied and committed space is as follows: Q4 2006 97.0 Ofﬁce Q3 2006 Q2 2006 96.4 96.1 (%) Industrial Overall 95.6 96.4 95.9 96.2 95.7 95.9 Excludes properties under redevelopment and properties held for sale for the respective period. Q1 2006 Q4 2005 Q3 2005 Q2 2005 Q1 2005 96.1 95.2 95.6 96.3 96.2 96.3 95.5 97.0 96.1 95.7 96.3 95.8 94.7 96.0 95.2 Section III – Disclosure controls and procedures As of December 31, 2006, the Chief Executive Ofﬁcer and the Chief Financial Ofﬁcer, together with other members of management, have evaluated the design and effectiveness of Dundee REIT’s disclosure controls and procedures, as deﬁned in Multilateral Instrument 52-109. They have concluded that the disclosure controls and procedures were adequate and effective to provide reasonable assurance that material information relating to Dundee REIT and its consolidated subsidiary entities for the year ended December 31, 2006, would have been made known to them. In addition, as of December 31, 2006, the Chief Executive Ofﬁcer and the Chief Financial Ofﬁcer, together with other members of management, have evaluated the design of the Dundee REIT’s internal controls over ﬁnancial reporting. The internal controls were designed to provide reasonable assurance regarding the reliability of ﬁnancial reporting and the preparation of ﬁnancial statements in accordance with Canadian generally accepted accounting principles. They have concluded that the design of the internal controls over ﬁnancial reporting were adequate and effective to provide reasonable assurance that ﬁnancial information is recorded, processed, summarized and reported in a timely manner. There were no signiﬁcant changes made to the internal controls in 2006. Occupancy 03 92.7% 04 94.5% 05 96.3% 06 96.4% PAGE 58 96.4% Our overall occupancy reached an all-time high of 96.4% at year-end. The occupancy rate of our ofﬁce portfolio, at 97.0%, remains well ahead of the national industry average. And, our industrial portfolio occupancy remains strong at 95.6%, also slightly ahead of the industry average. DUNDEE REIT 2006 Annual Report Section IV – Risks and our strategy to manage Dundee REIT is exposed to various risks and uncertainties. Risks and uncertainties inherent in an investment in our units include but are not limited to the following: Real estate ownership Real estate ownership is generally subject to numerous risks, including changes in general economic conditions, such as the availability and cost of mortgage funds, local economic conditions (such as an oversupply of ofﬁce, industrial and retail properties or a reduction in demand for real estate in the area), the attractiveness of properties to potential tenants or purchasers, competition of others with available space, the ability of the owner to provide adequate maintenance at an economic cost and other factors. Our portfolio of properties generates income through rent payments made by our tenants. Upon the expiry of any lease, there can be no assurance that the lease will be renewed or the tenant replaced for a number of reasons. Furthermore, the terms of any subsequent lease may be less favourable than the existing lease. Our ﬁnancial position would be adversely affected if a number of tenants were to become unable to meet their obligations under their leases or if a signiﬁcant amount of available space in the properties were not able to be leased on economically favourable lease terms. In the event of default by a tenant, delays or limitations in enforcing rights as lessor may be experienced and substantial costs in protecting our investment may be incurred. 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 such tenant and, thereby, cause a reduction in the cash ﬂow available to us. Diversity mitigates risk. The diversity of our portfolio by asset type and geographic location helps to minimize our exposure to any single market or asset class. We also attempt to stagger lease maturities to protect against large vacancies in any given year or market. Further, Dundee REIT has a broad tenant base with the largest tenant occupying less than 5% of gross leaseable area and comprising 6.3% of our gross rental revenue. For further information, please see the “Leasing proﬁle” discussion beginning on page 31. Illiquidity of real estate investments 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 making distributions. We manage our portfolio actively and are attentive to market conditions and property values. We review our properties on an ongoing basis to identify strengths and weaknesses of individual properties and our portfolio as a whole, allowing us to quickly reposition assets when warranted or identify non-core or under-performing assets for disposition. Competition in the office, industrial and retail real estate market We compete with other investors, managers and owners of properties in seeking tenants and for the purchase and development of desirable real estate properties. Some of the commercial ofﬁce, industrial and retail properties of our competitors are newer, better located or better capitalized than our properties. Certain of these competitors have greater ﬁnancial and other resources and greater operating ﬂexibility than us. The existence of competing managers and owners could have a material adverse effect on our ability to lease space in our properties and on the rents we are able to charge, and could adversely affect our revenues and our ability to meet our obligations. We strive to deliver a level of service that meets or exceeds tenant expectations. We believe that providing a consistent, high level of service puts us in a better position to re-lease space to existing tenants and helps to attract new tenants to lease vacant space quickly and cost effectively. PAGE 59 DUNDEE REIT 2006 Annual Report Environmental risk As an owner of real property, we are subject to various federal, provincial, state and municipal laws relating to environmental matters. Such laws provide a range of potential liability, including potentially signiﬁcant penalties, and potential liability for the costs of removal or remediation of certain hazardous substances. The presence of such substances, if any, could adversely affect our ability to sell or redevelop such real estate or to borrow using such real estate as collateral and, potentially, could also result in civil claims against us. In order to obtain ﬁnancing for the purchase of a new property through traditional channels, we may be requested to arrange for an environmental audit to be conducted. Although such an audit provides us and our lenders with some assurance, we may become subject to liability for undetected pollution or other environmental hazards on our properties against which we cannot insure, or against which we may elect not to insure where premium costs are disproportionate to our perception of relative risk. We have formal policies and procedures to review and monitor environmental exposure. These policies include the requirement to obtain a Phase I Environmental Site Assessment, conducted by an independent and qualiﬁed environmental consultant, before acquiring any real property or any interest therein. Financing risk Upon the expiry of the term of the ﬁnancing or reﬁnancing of any particular property or operating or acquisition debt facilities, reﬁnancing may not be available in the amounts required or may be available only on terms less favourable to us than existing ﬁnancing. We may require additional ﬁnancing in order to grow and expand our operations. It is possible that such ﬁnancing will not be available or, if it is available, will not be available on favourable terms. Future ﬁnancing may take many forms, including debt or equity ﬁnancing, which could alter the current debt-to-equity ratio or which could be dilutive to our unitholders. It is our intent to reduce the interest rate risk associated with reﬁnancing by ensuring that debt maturities are staggered over several years, with limited exposure in any given year. In 2007, our exposure is limited to $54.2 million rolling at a 6.24% weighted average interest rate, which in the context of our business is not signiﬁcant. For further information, please see the “Our resources and ﬁnancial condition” discussion beginning on page 29. Insurance We carry general liability, umbrella liability and excess liability insurance with a total limit of $61,000,000. For the property risks we carry “All Risks” property insurance including but not limited to ﬂood, earthquake and loss of rental income insurance (with a 24-month indemnity period). We also carry Boiler and Machinery insurance covering all boilers, pressure vessels, HVAC systems and equipment breakdown. There are, however, certain types of risks (generally of a catastrophic nature such as from war or nuclear accident) that are uninsurable under any insurance policy. Furthermore there are other risks that are not economically viable to insure at this time. We currently self-insure against terrorism risk for the entire Canadian 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 the properties, but we would continue to be obligated to repay any recourse mortgage indebtedness on such properties. Additionally, we generally have owners’ title insurance policies with respect to our properties located in the United States. However, the amount of coverage under such policies may be less than the full value of such 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. PAGE 60 DUNDEE REIT 2006 Annual Report Joint venture, partnership and co-ownership agreements We are a participant in joint ventures and partnerships with third parties in respect of four of the properties. A joint venture or partnership involves certain additional risks, including, i ii the possibility that such co-venturers/partners 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 co-venturers/partners 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 co-venturers’/partners’ 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 joint venture or partnership decisions; iii the risk that such co-venturers/partners may, through their activities on behalf of or in the name of the ventures or partnerships, expose or subject us to liability; and iv the need to obtain co-venturers’/partners’ 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 ventures and partnerships 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 venture/partnership within the time frame or otherwise on the basis we desire. Our investment in properties through joint venture and partnership agreements is subject to the investment guidelines set out in our Declaration of Trust. Development risk Due to our involvement in development activities, we are subject to related risks that include, i ii the potential insolvency of a developer; the developer’s failure to use advanced funds in payment of construction costs; iii construction or unanticipated delays; iv incurring construction costs before ensuring rental revenues will be earned from the project; v cost over-runs on the project; and vi the failure of tenants to occupy and pay rent in accordance with lease arrangements. Such risks are minimized by generally not commencing construction until satisfactory levels of pre-leasing/sales are achieved. Our risk exposure is further mitigated by our Declaration of Trust, which limits the amount we are able to commit to development activity at any one time to no more than 10% of unitholders’ equity adjusted for accumulated depreciation and amortization. PAGE 61 DUNDEE REIT 2006 Annual Report Taxation risk On December 21, 2006, the Canadian federal Department of Finance (“Finance”) released draft legislation to amend the Canadian Income Tax Act to implement the new tax regime for income trusts, royalty trusts and other “speciﬁed investment ﬂow-throughs” or “SIFTs”. The changes were ﬁrst announced in a release from Finance on October 31, 2006. The draft legislation will disallow the deductibility of certain distributions made by publicly traded income trusts and partnerships. Certain real estate investment trusts (“REITs”) are excluded from the SIFT deﬁnition and therefore would not be subject to the draft legislation (the “REIT Exception”). Based on the draft legislation it would appear that Dundee REIT, as currently structured, would not qualify for the REIT Exception. The proposals do not fully accommodate the current business structure used by many Canadian REITs and contain a number of technical tests that many Canadian REITs may ﬁnd difﬁcult to satisfy. Finance’s stated intention is to exempt certain REITs from taxation as SIFTs; therefore, it is possible that changes to these technical tests will be made prior to their enactment in order to accommodate some of the existing REITs, including Dundee REIT. There can be no assurance that the draft legislation will be enacted in the form proposed nor of its impact on Dundee REIT, or as to whether Dundee REIT will have the ability to restructure or reorganize its assets and operations in a way that would not materially and adversely affect the amount of income available to distribute to unitholders and the net after-tax cash position of unitholders. The October 31 release stated that, while there is no intention to prevent existing trusts from normal growth prior to 2011, any undue expansion of an existing trust could cause the undue expansion rule to apply. On December 15, 2006, Finance provided further guidance as to what is meant by “normal growth” in the context of the undue expansion rule. Finance stated that it would not recommend any changes to when an entity would be considered a SIFT as long as its equity capital growth, as a result of equity issuances, does not exceed an objective “safe harbour”. We believe that offerings made by us since October 31, 2006, will fall within the safe harbour, including the offering announced on February 12, 2007. The undue expansion rule would only be relevant to Dundee REIT if it did not meet the REIT Exception. As the legislation is still in draft form, there can be no assurance that any additions to the capital or assets of Dundee REIT will not, alone or in combination with each other, constitute an undue expansion. Section V – Critical accounting policies Management of Dundee REIT believes the policies outlined below are those most subject to estimation and management’s judgment. Impairment of assets Under Canadian GAAP, management is required to write down to fair value any long-lived asset that is determined to have been permanently impaired. Dundee REIT’s long-lived assets consist of rental properties and deferred costs relating to those properties. The fair value of rental properties and their associated deferred costs is dependent upon anticipated future cash ﬂows from operations over the anticipated holding period. The review of anticipated cash ﬂows involves subjective assumptions of estimated occupancy, rental rates and a residual value. In addition to reviewing anticipated cash ﬂows, management assesses changes in business climates and other factors that may affect the ultimate value of the property. These assumptions are subjective and may not ultimately be achieved. In the event these factors result in a carrying value that exceeds the sum of the undiscounted cash ﬂows expected to result from the direct use and eventual disposition of the property, an impairment loss would be recognized. On December 21, 2005, the Trust entered into a commitment to sell a 50% interest in a retail rental property located in the United States, which closed in 2006. The carrying amount of the 50% interest exceeds the expected proceeds from the sale, the difference of which was recognized as an impairment loss by reducing the carrying amount of the rental property. PAGE 62 DUNDEE REIT 2006 Annual Report Purchase price allocations For acquisitions initiated on or after September 12, 2003, the purchase price of a rental property is allocated based on estimated fair market values to land, building, deferred leasing costs acquired, lease origination costs associated with in-place leases, the value of above and below market leases and other intangible lease assets. Other intangible lease assets include the value of in-place leases and the value of tenant relationships, if any. For acquisitions initiated prior to September 12, 2003, the purchase price was allocated to land and building based on their respective fair market values. Intangible assets and liabilities Intangible assets and liabilities include the value of above and below market leases, in-place leases, lease origination costs and tenant relationships. Intangible assets and liabilities are stated at historic cost less accumulated amortization and impairment charges, if any. The values of the above and below market leases are amortized on a straight-line basis to rental property revenues over the remaining term of the associated lease. The value associated with in-place leases and tenant relationships is amortized on a straight-line basis over the expected term of the relationship, which includes an estimated probability of the lease renewal and the estimated term. Lease origination costs are amortized on a straight-line basis over the term of the applicable lease. In the event a tenant vacates its leased space prior to the contractual termination of the lease and no rental payments are being made on the lease, any unamortized balance of the related intangible will be expensed. Depreciation The Trust uses the straight-line method of depreciation for rental properties, initial leasing costs and major expansions and renovations. The estimated useful life of the properties continues to be between 30 and 40 years. A signiﬁcant portion of the acquisition cost of each property is allocated to building. The allocation of the acquisition cost to building and the determination of the useful life are based upon management’s estimates. In the event the allocation to building is inappropriate or the estimated useful life of buildings proves incorrect, the computation of depreciation will not be appropriately reﬂected over future periods. Deferred costs During the year, as a result of implementing the provisions of Emerging Issues Committee Abstract No. 156, “Accounting by a Vendor for Consideration Given to a Customer” (“EIC-156”), we have reclassiﬁed tenant improvements, which were previously included in deferred leasing costs, and presented tenant improvements as an investing activity on the statement of cash ﬂows. We have also reclassiﬁed comparative ﬁgures to conform to the current period’s presentation. The adoption of EIC-156 had the effect during the year ended December 31, 2006, of reducing deferred leasing costs incurred, increasing cash generated from operating activities and increasing cash utilized in investing activities by $7.7 million (December 31, 2005 – $9.0 million). Land During 2006, we acquired development land, which we account for as follows: • Land under development includes all related development costs, interest on property-speciﬁc and general debt, property taxes and applicable general and administrative expenses incurred during construction, less miscellaneous revenue earned during the construction period. • Land held for development includes acquisition costs, pre-development costs, interest on speciﬁc debt and property taxes, less miscellaneous revenue earned. Interest on general debt and general and administrative expenses are not capitalized to land held for development. • Land held for sale includes acquisition costs, pre-development costs, interest on speciﬁc debt and property taxes, less miscellaneous revenue earned. Interest on general debt and general and administrative expenses are not capitalized to land held for sale. PAGE 63 DUNDEE REIT 2006 Annual Report Future changes in accounting policies Financial instruments CICA Handbook Section 3855, “Financial Instruments – Recognition and Measurements”, prescribes when a ﬁnancial asset, ﬁnancial liability or non-ﬁnancial derivative is to be recognized on the balance sheet, and at what amount, sometimes using fair value, other times using cost-based measures. The Trust will be impacted as follows: i Deferred ﬁnancing costs related to debt will be netted against the related debt with interest recognized at the new effective interest rate; ii Guarantees provided by the Trust will be recorded as a liability estimated to be the premium that could be charged for providing the guarantee; and iii any features embedded in debt or lease contracts that act as a derivative would be valued at market. Dundee REIT has completed a review of its signiﬁcant contracts and has determined there are no material embedded derivatives within the contracts reviewed. Any adjustments to the Trust’s ﬁnancial statements as a result of adopting Section 3855 will be recognized by restating the balance of opening retained earnings. Comparative periods are not required to be restated. In conjunction with Section 3855, the Trust will also adopt CICA Section 1530, “Comprehensive Income”, which will require the Trust to disclose Other Comprehensive Income (“OCI”) in its ﬁnancial statements. The Trust has determined that accumulated foreign currency gains and losses related to its net investment in Greenbriar Mall will be disclosed as OCI. Previously these amounts were disclosed as a component of unitholders’ equity. Any change as a result of a reduction in the net investment will be disclosed as comprehensive income. The comparative ﬁnancial statements will be restated by reclassifying the cumulative foreign currency translation adjustment to OCI. These standards are applicable to the Trust commencing January 1, 2007. Additional information relating to Dundee REIT, including the latest annual information form of Dundee REIT, is available on SEDAR at www.sedar.com PAGE 64 DUNDEE REIT 2006 Annual Report 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 Dundee Real Estate Investment Trust. These ﬁnancial statements have been prepared in accordance with Canadian GAAP, using management’s best estimates and judgments when appropriate. The Board of Trustees is responsible for ensuring that management fulﬁlls its responsibility for ﬁnancial reporting and internal control. The audit committee, which is comprised of 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. MICHAEL J. COOPER (signed) Vice Chairman and Chief Executive Ofﬁcer MARIO BARRAFATO (signed) Senior Vice President and Chief Financial Ofﬁcer Toronto, Ontario, February 22, 2007 PAGE 65 DUNDEE REIT 2006 Annual Report Auditors’ report To the unitholders of Dundee Real Estate Investment Trust We have audited the consolidated balance sheets of Dundee Real Estate Investment Trust as at December 31, 2006 and 2005 and the consolidated statements of net income, unitholders’ equity and cash ﬂows for the years then ended. These ﬁnancial statements are the responsibility of Dundee Real Estate Investment Trust’s management. Our responsibility is to express an opinion on these ﬁnancial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the ﬁnancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the ﬁnancial statements. An audit also includes assessing the accounting principles used and signiﬁcant estimates made by management, as well as evaluating the overall ﬁnancial statement presentation. In our opinion, these consolidated ﬁnancial statements present fairly, in all material respects, the ﬁnancial position of Dundee Real Estate Investment Trust as at December 31, 2006 and 2005 and the results of its operations and its cash ﬂows for the years then ended in accordance with Canadian generally accepted accounting principles. CHARTERED ACCOUNTANTS (signed) Toronto, Ontario, February 22, 2007 PAGE 66 DUNDEE REIT 2006 Annual Report Note 2006 2005 4 5 6 7 8 9 10 11 12 16 9 13 13 $ 1,816,811 $ 1,328,395 73,455 41,395 18,606 20,240 70,997 86,416 65,285 – 13,378 27,175 16,516 56,964 $ 2,127,920 $ 1,507,713 $ 1,153,794 $ 943,621 40,701 8,013 3,950 33,351 1,239,809 32,260 5,356 1,577 6,181 988,995 – 146,976 888,111 371,742 $ 2,127,920 $ 1,507,713 Consolidated balance sheets (In thousands of dollars) December 31 Assets Rental properties Deferred costs Land Amounts receivable Prepaid expenses and other assets Cash and cash equivalents Intangible assets Liabilities Debt Amounts payable and accrued liabilities Distributions payable Future income tax liability Intangible liabilities Non-controlling interest Unitholders’ equity See accompanying notes to the consolidated ﬁnancial statements On behalf of the Board of Trustees of Dundee Real Estate Investment Trust: NED GOODMAN (signed) Trustee MICHAEL J. COOPER (signed) Trustee PAGE 67 DUNDEE REIT 2006 Annual Report Consolidated statements of net income (In thousands of dollars, except per unit amounts) For the years ended December 31 Revenues Rental properties revenue Interest and fee income Expenses Rental properties operating expenses Interest Depreciation of rental properties Amortization of deferred leasing costs, tenant improvements and intangibles General and administrative Income before the undernoted items Internalization of property manager Loss on disposal of rental property Provision for impairment in value of rental property Dilution gain Income before income and large corporations taxes Income taxes Current income and large corporations taxes Future income taxes Income before non-controlling interest and discontinued operations Income attributable to non-controlling interest Income before discontinued operations Discontinued operations Net income Basic income (loss) per unit Continuing operations Discontinued operations Net income Diluted income (loss) per unit Continuing operations Discontinued operations Net income See accompanying notes to the consolidated ﬁnancial statements PAGE 68 Note 2006 2005 $ 287,794 $ 220,615 3,646 291,440 122,150 66,052 39,850 30,614 6,812 265,478 25,962 (13,678) (220) – – 12,064 62 2,314 2,376 9,688 (1,840) 7,848 3,370 11,218 0.25 0.10 0.35 0.25 0.10 0.35 $ $ $ $ $ 2,144 222,759 99,176 53,960 29,459 19,508 5,408 207,511 15,248 – – (11,533) 1,890 5,605 181 (3,653) (3,472) 9,077 (2,511) 6,566 (2,257) 4,309 0.38 (0.13) 0.25 0.29 (0.13) 0.16 $ $ $ $ $ 15 25 26 26 13 16 22 17 17 Consolidated statements of unitholders’ equity DUNDEE REIT 2006 Annual Report Note Number of units Cumulative capital Cumulative net income Cumulative distributions Cumulative foreign currency translation adjustment Total 20,449,209 $ 446,678 $ 15,844 $ (85,680) $ (5,100) $ 371,742 – – – – – – 10,190,000 830,516 13,087 319,981 24,717 359 1,935,640 48,391 1,135,617 34,069 505,326 22,888 – – – 13,917 1,170 (18,041) – – 11,218 – – – – – – – – – – – – – (63,089) (8,013) – – – – – – – – – – – – – – – – – – – – – 11,218 (63,089) (8,013) 319,981 24,717 359 48,391 34,069 13,917 1,170 (18,041) 3,686 3,686 (1,329) (1,329) (In thousands of dollars, except number of units) Unitholders’ equity, January 1, 2006 Net income Distributions paid Distributions payable Public offering of REIT Units Distribution Reinvestment Plan Unit Purchase Plan Conversion of 6.5% Debentures Conversion of 5.7% Debentures Issue of units on internalization of property manager Deferred Unit Incentive Plan Issue costs 12 12 13 13 13 13 13 25 13 Release of cumulative foreign currency translation adjustment on disposition of revenue property 26 Change in foreign currency translation adjustment Reclassiﬁcation of LP Class B Units, Series 1 Unitholders’ 13 8,337,365 195,884 6,326 (50,504) (2,373) 149,333 equity, December 31, 2006 43,419,648 $ 1,067,125 $ 33,388 $ (207,286) $ (5,116) $ 888,111 (In thousands of dollars, except number of units) Unitholders’ equity, January 1, 2005 Net income Distributions paid Distributions payable Public offering of REIT Units Distribution Reinvestment Plan Unit Purchase Plan Conversion of 6.5% Debentures Redemption of REIT Units Deferred Unit Incentive Plan Issue costs Equity component of 5.7% Debentures Change in foreign currency translation adjustment Unitholders’ Note Number of units Cumulative capital Cumulative net income Cumulative distributions Cumulative foreign currency translation adjustment Total 16,819,963 $ 357,585 $ 11,535 $ (47,449) $ (3,126) $ 318,545 – – – 2,990,000 532,817 8,725 81,040 (100) 16,764 – – – 13 13 13 13 13 10 – – – 74,750 13,785 232 2,026 (2) 830 (3,728) 1,200 – 4,309 – – – – – – – – – – – – (34,462) (3,769) – – – – – – – – – – – – – – – – – – – – 4,309 (34,462) (3,769) 74,750 13,785 232 2,026 (2) 830 (3,728) 1,200 (1,974) (1,974) equity, December 31, 2005 20,449,209 $ 446,678 $ 15,844 $ (85,680) $ (5,100) $ 371,742 See accompanying notes to the consolidated ﬁnancial statements PAGE 69 DUNDEE REIT 2006 Annual Report Consolidated statements of cash flows (In thousands of dollars) For the years ended December 31 Generated from (utilized in) operating activities Net income Non-cash items: Depreciation of rental properties Amortization of deferred leasing costs, tenant improvements and intangibles Amortization of deferred ﬁnancing costs Amortization of marked-to-market adjustment on acquired debt Provision for impairment in value of rental properties Internalization of property manager Loss (gain) on disposal of rental properties Deferred unit compensation expense Future income taxes Amortization of market rent adjustments on acquired leases Straight-line rent adjustment Dilution gain Non-controlling interest Deferred leasing costs incurred Change in non-cash working capital Generated from (utilized in) investing activities Investment in rental properties Investment in tenant improvements Investment in land development Acquisition of rental properties and land Acquisition deposit on rental properties Investment in mezzanine loan Receipt of mezzanine loan Vendor take-back mortgage repayment Net proceeds from disposal of rental properties Change in restricted cash, net Generated from (utilized in) ﬁnancing activities Mortgages placed, net of costs Mortgage principal repayments Mortgage lump sum repayments Term debt principal repayments Term debt lump sum repayments Term debt placed, net of costs Convertible debentures issued, net of costs Demand non-revolving credit facility Distributions paid on REIT Units Units issued for cash, net of costs Increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year See accompanying notes to the consolidated ﬁnancial statements PAGE 70 Note 2006 2005 (restated, see Note 2) $ 11,218 $ 4,309 39,908 30,643 1,922 (1,882) – 13,678 (3,009) 1,170 2,314 (4,124) (3,164) – 1,876 90,550 (6,097) 3,409 87,862 (9,173) (7,667) (2,103) 29,743 19,985 1,551 (2,012) 11,533 – 3,620 830 (3,653) (331) (3,688) (1,890) 1,523 61,520 (4,440) 5,912 62,992 (7,833) (9,033) – (484,667) (275,024) (3,600) (3,680) 13,167 3,450 24,922 (1,244) (470,595) 294,985 (25,380) (79,486) (364) (14,957) 6,139 – – (50,074) 306,351 437,214 54,481 16,516 70,997 $ (880) (750) – – 8,118 8,677 (276,725) 155,621 (17,957) (46,076) (501) (7,492) – 95,443 (6,107) (31,700) 71,687 212,918 (815) 17,331 16,516 $ 24 2 3 12 DUNDEE REIT 2006 Annual Report Notes to the consolidated financial statements (All dollar amounts in thousands, except unit or per unit amounts) 1. Organization Dundee Real Estate Investment Trust (“Dundee REIT” or the “Trust”) is an open-ended investment trust created pursuant to a Declaration of Trust, as amended and restated, under the laws of the Province of Ontario. The consolidated ﬁnancial statements of Dundee REIT include the accounts of Dundee REIT and its subsidiaries, together with Dundee REIT’s proportionate share of the assets and liabilities, and revenues and expenses of joint ventures in which it participates. Included in these accounts are the assets and liabilities acquired by Dundee Properties Limited Partnership (“DPLP”), an indirect subsidiary of Dundee REIT, from Dundee Realty Corporation (“DRC”) on June 30, 2003, comprising: • a portfolio of ofﬁce, industrial and retail rental properties together with their related assets and liabilities; and • a 50% interest in Dundee Management Limited Partnership (“DMLP”), a joint venture with DRC comprising property management operations relating to revenue properties. On May 12, 2006, the Trust acquired the remaining 50% interest in DMLP as discussed in Note 25. At December 31, 2006, Dundee Corporation, the majority shareholder of DRC, indirectly held 127,955 REIT Units, Series A (“REIT Units”) and 8,565,095 LP Class B Units, Series 1 (“LP B Units”), which includes 55,326 LP B Units it is entitled to receive but that are held in trust (2005 – 317,403, 8,337,365 and nil units, respectively). 2. Summary of significant accounting policies These consolidated ﬁnancial statements have been prepared in accordance with the accounting recommendations of The Canadian Institute of Chartered Accountants (“CICA”). The preparation of consolidated ﬁnancial statements in conformity with Canadian generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the recorded amounts of assets and liabilities and the disclosure of contingent assets and liabilities as at the date of the consolidated ﬁnancial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. Revenue recognition Properties are considered operational at the earlier of the achievement of a predetermined level of occupancy or at the expiry of a reasonable period following substantial completion. The Trust has retained substantially all of the beneﬁts and risks of ownership of its rental properties and therefore accounts for leases as operating leases. Revenues from rental properties include base rents, recoveries of operating expenses including property taxes, percentage participation rents, lease cancellation fees, parking income and incidental income. The Trust uses the straight-line method of rental revenue recognition whereby the total of cash rents due over the initial term of a lease is recognized in income evenly over that term. The difference between the amount recorded as revenue under the straight-line method and cash rents received is included in amounts receivable. Recoveries from tenants are recognized as revenues in the period in which the corresponding costs are incurred. Percentage participation rents are recognized on an accrual basis once tenant sales revenues exceed contractual thresholds. Other revenues are recorded as earned. The Trust provides an allowance for doubtful accounts against that portion of amounts receivable that is estimated to be uncollectible. Such allowances are reviewed periodically based on the recovery experience of the Trust and the creditworthiness of the debtor. Rental properties Rental properties are stated at historical cost less accumulated depreciation and impairment charges, if any. Rental properties under development includes interest on project-speciﬁc and general debt, property taxes, carrying charges and applicable general and administrative expenses incurred in the pre-development and construction periods, and initial leasing costs, less incidental revenues and expenses earned prior to the project being declared operational. PAGE 71 DUNDEE REIT 2006 Annual Report The Trust uses the straight-line method of depreciation for rental properties, building improvements, initial leasing costs and major expansions and renovations. The estimated useful life of the properties is between 30 and 40 years. Vehicles, ofﬁce premises improvements, furniture and computer equipment are depreciated on a declining balance basis over their estimated useful lives, which range from 8% to 30% per annum. Building improvements are depreciated over their estimated useful lives, ranging from 10 to 20 years depending on the type of improvement. Land Land under development includes all related development costs, interest on property-speciﬁc and general debt, property taxes and applicable general and administrative expenses incurred during construction, less miscellaneous revenue earned during the construction period. Land held for development includes acquisition costs, pre-development costs, interest on speciﬁc debt and property taxes, less miscellaneous revenue earned. Interest on general debt and general and administrative expenses are not capitalized to land held for development. Land held for sale includes acquisition costs, pre-development costs, interest on speciﬁc debt and property taxes, less miscellaneous revenue earned. Interest on general debt and general and administrative expenses are not capitalized to land held for sale. Purchase price allocations For acquisitions initiated on or after September 12, 2003, the purchase price of a rental property is allocated based on estimated fair market values to land, building, deferred leasing costs acquired, lease origination costs associated with in-place leases, the value of above and below market leases and other intangible lease assets. Other intangible lease assets include the value of in-place leases and the value of tenant relationships, if any. For acquisitions initiated prior to September 12, 2003, the purchase price was allocated to land and buildings based on their respective fair market values. Intangible assets and liabilities Intangible assets and liabilities include the value of above and below market leases, in-place leases, lease origination costs and tenant relationships. Intangible assets and liabilities are stated at historic cost less accumulated amortization and impairment charges, if any. The values of above and below market leases are amortized on a straight-line basis to rental property revenues over the remaining term of the associated lease. The value associated with in-place leases is amortized on a straight-line basis over the remaining term of the lease. The value of tenant relationships is amortized on a straight-line basis over the remaining term of the lease plus an estimated renewal term. Lease origination costs are amortized on a straight-line basis over the term of the applicable lease. In the event a tenant vacates its leased space prior to the contractual termination of the lease and no rental payments are being made on the lease, any unamortized balance of the related intangible will be expensed. Impairment of long-lived assets The Trust uses a two-step process for determining when an impairment of rental properties, land under development, land held for development and intangible assets should be recognized in the consolidated ﬁnancial statements. If events or circumstances indicate that the carrying value of a property may be impaired, a recoverability analysis is performed based on estimated undiscounted future cash ﬂows to be generated from property operations and the property’s projected disposition. If the analysis indicates that the carrying value is not recoverable from future cash ﬂows, the property is written down to its estimated fair value and an impairment loss is recognized. Land held for sale is carried at the lower of capitalized cost and net realizable value. PAGE 72 DUNDEE REIT 2006 Annual Report Deferred costs Deferred costs may include: • Deferred leasing costs, which include leasing fees and costs, except for initial leasing costs that are included in rental properties, and deferred leasing costs acquired. Deferred leasing costs are amortized on a straight-line basis over the term of the applicable lease to amortization expense; • Tenant inducements, which are payments for which the tenant has no obligation to make leasehold improvements to the leased space and which are amortized against rental properties revenue on a straight-line basis over the term of the applicable lease; • Tenant improvements, which include costs incurred to make leasehold improvements to tenants’ space and which are amortized on a straight-line basis over the term of the applicable lease to amortization expense. During the year, as a result of implementing the provisions of Emerging Issues Committee Abstract No. 156, “Accounting by a Vendor for Consideration Given to a Customer” (“EIC-156”), the Trust has reclassiﬁed tenant improvements, which were previously included in deferred leasing costs, and presented tenant improvements as an investing activity on the statement of cash ﬂows. The Trust has reclassiﬁed comparative ﬁgures to conform to the current period’s presentation. The adoption of EIC-156 had the effect during the year ended December 31, 2006, of reducing deferred leasing costs incurred, increasing cash generated from operating activities and increasing cash utilized in investing activities by $7,667 (December 31, 2005 – $9,033); • Deferred recoverable operating expenses, which are amortized to operating expenses over the period during which they are recoverable from tenants; • Deferred ﬁnancing costs, which include debt issue fees and expenses that are amortized to interest expense on a straight-line basis over the term of the debt; and • Direct acquisition fees and costs, which exclude general and administrative costs, and which are deferred until the acquisition is completed and the costs are capitalized to the acquisition, or the acquisition is abandoned and the costs are written off. Impairment of loans receivable Loans receivable are classiﬁed as impaired when, in the opinion of management, there is a reasonable doubt as to the timely collection of principal, interest and the underlying security of the loan. The carrying amount of a loan receivable classiﬁed as impaired is reduced to its estimated fair value. Discontinued operations The Trust classiﬁes properties that meet certain criteria as held for sale and separately discloses any net income/loss and gain/loss on disposal for current and prior periods as discontinued operations. A property is classiﬁed as held for sale at the point in time when it is available for immediate sale, management has committed to a plan to sell the property and is actively locating a buyer for the property at a sales price that is reasonable in relation to the current estimated fair value of the property, and the sale is expected to be completed within a one-year period. Properties held for sale are carried at the lower of their carrying values and estimated fair values less costs to sell. In addition, assets held for sale are no longer depreciated. Convertible debentures Upon issuance, convertible debentures are separated into debt and equity components. These components are measured based on their respective estimated fair values at the date of issuance. The fair value of the debt component 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. The value assigned to the equity component is the estimated fair value ascribed to the holders’ option to convert the debentures into REIT Units. The difference between the fair value of the debt and the face value is recognized as interest expense on a straight-line basis over the term to maturity of the debentures with corresponding accretion to the principal of the debt. Foreign currency translation The Trust’s foreign operations are considered ﬁnancially self-sustaining and operationally independent. Accordingly, assets and liabilities denominated in foreign currencies are translated into Canadian dollars at the rate of exchange in effect at the balance sheet date. Revenues and expenses are translated at the average rate for the period. Translation gains and losses are deferred as a separate component of unitholders’ equity until there is a realized reduction in the net investment in the foreign operation. PAGE 73 DUNDEE REIT 2006 Annual Report Income taxes Dundee REIT uses the liability method of accounting for future income taxes of its incorporated subsidiaries. The net future income tax liability represents the cumulative amount of taxes applicable to temporary differences between the carrying amount of these incorporated subsidiaries’ assets and liabilities and their carrying amounts for tax purposes. In addition, the beneﬁt of tax losses available to be carried forward to future years for tax purposes, which are more likely than not to be realized, are recognized as a reduction of the income tax liability. Future income taxes are measured at the tax rates expected to apply in the future as temporary differences reverse and tax losses are utilized. Changes to future income taxes related to changes in tax rates are recognized in income in the period when the tax rate change is substantively enacted. Unit-based compensation plan Dundee REIT has a Deferred Unit Incentive Plan, as described in Note 13, that provides for the grant of Deferred Trust Units and Income Deferred Trust Units to trustees, ofﬁcers and employees, and afﬁliates and their service providers. The Trust recognizes compensation expense on a straight-line basis over the period that the deferred units vest, based on the market price of REIT Units on the date of grant. Deferred Trust Units that have vested but for which the corresponding REIT Units have not been issued, and where the ultimate issuance of such REIT Units is simply a matter of the passage of time, are considered to be outstanding units from the date of vesting for basic income per unit calculations. Cash and cash equivalents For the purposes of the statements of cash ﬂows, the Trust considers all short-term investments with an original maturity of three months or less to be cash equivalents, and excludes cash subject to restrictions that prevent its use for current purposes. As at December 31, 2006, cash and cash equivalents includes the Trust’s proportionate share of cash balances of joint ventures of $2,688 (December 31, 2005 – $4,509). Excluded from cash and cash equivalents are amounts held for repayment of tenant security deposits as required by various lending agreements. Non-controlling interest On January 19, 2005, the Emerging Issues Committee of the CICA issued EIC-151, “Exchangeable Securities Issued by Subsidiaries of Income Trusts”, which requires income trusts with exchangeable securities issued by their subsidiaries to evaluate whether the exchangeable securities should be presented as unitholders’ equity or non-controlling interest on the consolidated balance sheet. In order to be presented as unitholders’ equity, the exchangeable securities must have distributions that are economically equivalent to distributions on units issued directly by the income trust and must also ultimately be exchanged for units of the income trust. The distributions on the LP B Units are economically equivalent to distributions on the REIT Units. On May 12, 2006, the terms of the LP B Units were amended to restrict the transfer of such units except to a subsidiary of the holder. As a result, if an existing holder of LP B Units wants to transfer the LP B Units to a third party, they must ﬁrst be converted to REIT Units, Series B. This amendment permits the Trust to classify the outstanding LP B Units as equity for ﬁnancial statement purposes in accordance with Canadian GAAP. Prior to the effective date of the amendment on May 1, 2006, because the LP B Units contained no conditions requiring either the conversion to REIT Units or restricting their transferability to third parties, the LP B Units were presented as non-controlling interest in the consolidated ﬁnancial statements. As a result, the Trust had accounted for the investment of the net proceeds from equity offerings in DPLP using the purchase method. In addition, the issuance of LP B Units under the Distribution Reinvestment Plan had resulted in a dilution of the Trust’s ownership of DPLP. Variable Interest Entities On January 1, 2005, the Trust adopted the requirements of CICA Accounting Guideline 15, “Consolidation of Variable Interest Entities” (“AcG-15”), which provides guidance for applying the principles in Section 1590, “Subsidiaries”, to those entities deﬁned as Variable Interest Entities (“VIEs”). This standard considers a VIE to be an entity in which either the equity at risk is not sufﬁcient to permit it to ﬁnance its activities without additional subordinated ﬁnancial support from other parties, or equity investors lack either voting control, or an obligation to absorb expected losses or the right to receive expected residual returns. AcG-15 requires consolidation of VIEs by the Primary Beneﬁciary. The Primary Beneﬁciary is deﬁned as the party who has exposure to the majority of a VIE’s expected losses and/or expected residual returns. The adoption of AcG-15 did not have an impact on the Trust. Comparative figures Certain of the prior year’s ﬁgures have been reclassiﬁed to conform with the current year’s ﬁnancial statement presentation. PAGE 74 DUNDEE REIT 2006 Annual Report 3. Property acquisitions The Trust completed the following acquisitions during the year ended December 31, 2006 and 2005, which have contributed to operating results from the date of acquisition: Interest acquired Occupancy on Acquired acquisition Property type (%) GLA (sq. ft.) (%) Purchase price Fair value of mortgage assumed Date acquired 100 $ 2,726 $ – January 10, 2006 Year ended December 31, 2006 Park 19, Edmonton 70 Disco Road, Toronto SEC Portfolio, Québec 2440 Scanlan Street, London Sherwood Place, Regina 1400 boul. de la Rive Sud, Québec City 4255 14th Avenue, Markham industrial industrial ofﬁce/industrial industrial ofﬁce ofﬁce industrial Princeton Portfolio, Western Canada ofﬁce/industrial/land 10089 Jasper Avenue, Edmonton Barker Business Park (Phase II), Toronto Calgary Ofﬁce Portfolio, Calgary Tullamore Business Park, Caledon Victoria Tower, Regina 100 Legacy Road, Ottawa 10079 Jasper Avenue, Edmonton land land ofﬁce land ofﬁce industrial land Aviva Corporate Centre, Toronto ofﬁce/industrial Station Tower Lands, Surrey 2121 Argentia Road, Mississauga Airport Corporate Centre West, Mississauga 2891 Sunridge Way NE, Calgary Total land ofﬁce ofﬁce ofﬁce 100 100 100 100 100 100 100 100 100 60 48,000 99,000 265,000 85,000 182,000 77,000 57,000 530,000 86,000 – 100 822,000 – 144,000 103,000 – 438,000 – 61,000 357,000 60 100 100 10 100 100 100 100 100 100 99 100 99 100 100 94 – – 98 – 100 100 – 100 – 96 86 7,577 21,306 6,266 33,206 12,062 5,914 96,818 4,160 8,994 3,117 6,199 3,477 14,442 – – 43,835 – – January 12, 2006 January 27, 2006 April 20, 2006 April 21, 2006 May 1, 2006 May 1, 2006 May 17, 2006 May 29, 2006 June 7, 2006 218,257 23,339 June 15, 2006 3,224 17,815 8,906 310 43,961 3,728 11,270 66,253 25,736 – 8,621 – – July 4, 2006 July 21, 2006 August 1, 2006 August 4, 2006 – September 13, 2006 – September 21, 2006 – November 16, 2006 – November 28, 2006 – December 20, 2006 88,000 100 3,442,000 98 $ 598,489 $ 103,030 PAGE 75 DUNDEE REIT 2006 Annual Report Year ended December 31, 2005 Property type (%) GLA (sq. ft.) (%) Purchase price Interest acquired Occupancy on Acquired acquisition Fair value of mortgage assumed Date acquired 2599 Speakman Drive, Mississauga 1219 Corporate Drive, Burlington 204 King Street East, Toronto 2580 avenue Dollard, Montréal Epcor Centre, Edmonton 2465 St. Laurent Blvd., Ottawa 56 Wellesley Street West, Toronto 120 Valleywood Drive, Markham ofﬁce industrial ofﬁce industrial ofﬁce ofﬁce ofﬁce 100 100 100 100 114,000 103,000 135,000 90,000 10| 1 19,000 100 62,000 50| 1 108,000 industrial 50| 1 30,000 100 $ 9,617 $ 4,655 January 13, 2005 100 100 100 100 100 100 100 – 98 100 100 99 96 99 94 100 100 100 95 100 – 95 100 100 – 100 100 100 6,640 20,475 4,700 1,334 8,612 14,150 1,670 5,472 – – January 31, 2005 February 25, 2005 2,600 – 3,222 4,364 828 – March 2, 2005 March 4, 2005 March 8, 2005 April 1, 2005 April 1, 2005 April 8, 2005 16,133 6,762 April 14, 2005 24,548 4,430 10,485 18,310 25,945 35,526 13,161 7,246 33,370 15,984 540 718 6,884 11,927 4,601 833 8,134 6,586 32,590 – – 3,269 9,680 14,483 – – – – April 18, 2005 May 5, 2005 May 30, 2005 June 2, 2005 June 17, 2005 June 20, 2005 June 27, 2005 August 9, 2005 August 18, 2005 7,616 August 30, 2005 – August 30, 2005 – September 23, 2005 3,248 7,348 November 8, 2005 November 9, 2005 – November 17, 2005 – December 16, 2005 4,415 December 20, 2005 1,988 December 23, 2005 – December 23, 2005 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 86,000 112,000 371,000 64,000 121,000 111,000 194,000 198,000 131,000 77,000 190,000 124,000 6,000 – 65,000 63,000 71,000 – 81,000 83,000 146,000 2,955,000 99 $ 350,621 $ 74,478 2280 boul. Alfred-Nobel, Montréal under development 1000 boul. Saint-Jean, Montréal 22000 Trans-Canada Hwy. and 115 boul. Hymus, Montréal 1415-1511 rue Berlier, Laval 375-425 Britannia Road, Mississauga Joffre Place, Calgary 975 boul. Saint-Joseph, Gatineau 400-480 boul. Armand Frappier, Laval 2285 Speakman Drive, Mississauga 199 Traders Blvd. East, Mississauga Scotia Centre, St. John’s 9975-9995 boul. de Catania, Brossard 1523-1531 rue Berlier, Laval ofﬁce industrial industrial industrial ofﬁce ofﬁce ofﬁce ofﬁce industrial ofﬁce industrial industrial 3913-3917 81st Avenue, Leduc under development ACC Centre, Calgary 35 Fitzgerald Road, Ottawa 2695 avenue Dollard, Montréal industrial ofﬁce industrial Palladium Phase III Land, Ottawa held for development 3820 Commerce Road, London and 147 Massey Road, Guelph 3915 Commerce Road, London Entrust Tower, Ottawa Total industrial industrial ofﬁce 1 As a result of this acquisition, the Trust now owns 100% of this property. PAGE 76 DUNDEE REIT 2006 Annual Report 2006 2005 $ 70,585 $ 38,673 458,119 403 301 529,408 29,925 1,015 8,352 195 14,567 – 25,149 5,512 2,020 14,574 630,717 261,449 – 6,189 306,311 – – – – 12,056 177 16,662 4,214 1,788 13,467 354,675 (32,228) (4,054) $ 598,489 $ 350,621 $ 484,667 $ 275,024 710 485,377 103,030 6,750 3,332 450 275,474 74,478 – 669 $ 598,489 $ 350,621 The assets acquired and liabilities assumed in these transactions were allocated as follows: For the years ended December 31 Rental properties Land Buildings Fixed assets and equipment Properties under development Land Under development Held for development Held for sale Third-party management contracts Tenant improvements acquired Tenant loan receivables Intangible assets Value of in-place leases Lease origination costs Value of above market rent leases Value of tenant relationships Intangible liabilities Value of below market rent leases Total purchase price The consideration paid consists of: Cash Paid during the period Deposit Assumed mortgages at fair value Vendor loan Assumed accounts payable and accrued liabilities Total consideration 4. Rental properties December 31 2006 Accumulated Cost depreciation Net book value Cost 2005 Accumulated depreciation Net book value Land Buildings and improvements Fixed assets and equipment Rental properties under development Total $ 300,553 $ – $ 300,553 $ 233,502 $ – $ 233,502 1,627,185 (119,580) 1,507,605 1,170,111 (84,412) 1,085,699 2,040 7,386 (773) – 1,267 7,386 2,661 8,460 (1,927) – 734 8,460 $ 1,937,164 $ (120,353) $ 1,816,811 $ 1,414,734 $ (86,339) $ 1,328,395 PAGE 77 DUNDEE REIT 2006 Annual Report 5. Deferred costs December 31 Deferred leasing costs Tenant improvements Deferred recoverable costs Deferred ﬁnancing costs Other deferred costs Total 2006 Accumulated Cost amortization Net book value Cost 2005 Accumulated amortization Net book value $ 20,903 $ (7,490) $ 72,690 13,816 11,705 1,847 (26,733) (7,409) (4,739) (1,135) 13,413 45,957 6,407 6,966 712 $ 16,347 $ (5,457) $ 54,786 13,462 13,819 1,617 (18,592) (5,970) (3,881) (846) 10,890 36,194 7,492 9,938 771 $ 120,961 $ (47,506) $ 73,455 $ 100,031 $ (34,746) $ 65,285 Amortization of deferred recoverable costs included in operating expenses for the twelve months ended December 31, 2006 is $1,872 (December 31, 2005 – $1,751). 6. Land December 31 Land under development Land held for development Land held for sale Total $ 2006 31,991 1,021 8,383 $ 41,395 $ $ 2005 – – – – 7. Amounts receivable Amounts receivable include straight-line rents receivable of $12,874 (December 31, 2005 – $9,944) and is net of credit adjustments of $6,659 (December 31, 2005 – $3,718). 8. Prepaid expenses and other assets December 31 Prepaid expenses Mezzanine loans Vendor loan Deposits Restricted cash Total $ 2006 6,729 3,893 – 4,020 5,598 $ 2005 5,576 12,513 3,450 1,282 4,354 $ 20,240 $ 27,175 The Trust had provided an $11,226 mezzanine loan to the Airport Corporate Centre West (“ACCW”) joint venture to ﬁnance certain development projects. The loan and all accrued interest was repaid in full in November 2006. On May 26, 2006, the Trust entered into a joint venture agreement with a development partner to jointly own and develop prestige industrial and ofﬁce properties in its target markets. The Trust has a 60% ownership interest in the joint venture. As part of the agreement, the Trust is required to provide mezzanine ﬁnancing equal to 90% of any funding requirement, up to a maximum of $45,000, not otherwise provided by third-party lenders. The Trust is also required to guarantee, when necessary, 90% of ﬁnancing obtained from third parties. As at December 31, 2006, the Trust had advanced $9,201 of the funding requirement for the purchase of approximately 60 acres of serviced land in suburban Toronto. The amount invested is accounted for and comprises a mezzanine loan of $3,893 and land under development of $13,384, net of term debt of $7,534 and accrued liabilities of $542. The Trust has also provided an $8,289 guarantee on the ﬁnancing provided by a third-party lender of which $5,526 is included in term debt. PAGE 78 DUNDEE REIT 2006 Annual Report The Trust has the right to purchase the completed properties, other than any build-to-suit properties that will be sold to third parties. The mezzanine loan to the joint venture bears interest at a rate of 11%, for which no payment has been received to date. As at December 31, 2006, the mezzanine loan comprises principal of $3,681 and interest of $212, which is receivable by June 7, 2011, unless extended under the terms of the mezzanine loan agreement. The estimated fair value of the loan is $4,346. A vendor loan in the principal amount of $3,450 formed a portion of the proceeds from the sale of Northgate Mall in December 2004. The loan was repaid in full on December 14, 2006. Restricted cash primarily represents tenant rent deposits and cash held as security for certain mortgages. 9. Intangible assets and liabilities December 31 Intangible assets 2006 Accumulated Cost amortization Net book value Cost 2005 Accumulated amortization Net book value Value of above market rent leases $ 7,134 $ (2,190) $ 4,944 $ 5,113 $ (1,256) $ Value of in-place leases Lease origination costs Value of tenant relationships Total Intangible liabilities 53,558 13,974 42,168 (16,343) (3,768) (8,117) $ 116,834 $ (30,418) $ 37,215 10,206 34,051 86,416 Value of below market rent leases $ 40,049 $ (6,698) $ 33,351 $ $ 10. Debt December 31 Mortgages Convertible debentures Demand revolving credit facility Term debt Total 28,614 8,465 27,418 (6,413) (1,683) (3,294) 69,610 $ (12,646) $ 3,857 22,201 6,782 24,124 56,964 7,843 $ (1,662) $ 6,181 2006 $ 1,056,311 89,719 – 7,764 2005 $ 756,920 171,368 – 15,333 $ 1,153,794 $ 943,621 Mortgages are secured by charges on speciﬁc rental properties. DRC continues to be contingently liable for certain debt obligations of Dundee REIT. Term debt is secured by charges on speciﬁc development lands and rental properties with certain ﬂexibility to repay ﬂoating rate debt without incurring a penalty. On May 26, 2006, the Trust entered into a joint venture agreement to jointly own and develop industrial and ofﬁce properties. The Trust’s share of term debt of the joint venture as at December 31, 2006, is $7,534, of which $5,526 relates to a demand loan bearing interest at the prime rate plus 1% and is due no later than May 30, 2009. The balance of $2,008 is made up of the Trust’s share of mezzanine ﬁnancing provided to the joint venture by the co-owner and a vendor loan. On April 1, 2005, the Trust issued $100,000 principal amount convertible unsecured subordinated debentures (the “5.7% Debentures”). The 5.7% Debentures bear interest at 5.7% per annum, payable semi-annually on March 31 and September 30 each year, and mature on March 31, 2015. Each 5.7% Debenture is convertible at any time by the debenture holder into 33.33 REIT Units per one thousand dollars of face value, representing a conversion price of $30.00 per unit. The 5.7% Debentures may not be redeemed prior to March 31, 2009. On or after March 31, 2009, but prior to March 31, 2011, the 5.7% 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, provided that the market price for the Trust’s units is not less than $37.50. On or after March 31, 2011, the 5.7% Debentures may be redeemed by the Trust at a price equal to the principal amount plus accrued and unpaid interest. In accordance with Section 3860 of the CICA Handbook, the 5.7% Debentures were initially recorded on the consolidated balance sheet as debt of $98,800 and equity of $1,200. Issue costs of $4,707 and the discount related to the offering are amortized to interest expense over ten years. PAGE 79 DUNDEE REIT 2006 Annual Report On June 21, 2004, the Trust issued $75,000 principal amount convertible unsecured subordinated debentures (the “6.5% Debentures”). The 6.5% Debentures bear interest at 6.5% per annum, payable semi-annually on June 30 and December 31 each year, and mature on June 30, 2014. Each 6.5% Debenture is convertible at any time by the debenture holder into 40 REIT Units per one thousand dollars of face value, representing a conversion price of $25.00 per unit. The 6.5% Debentures may not be redeemed prior to June 30, 2008. On or after June 30, 2008, but prior to June 30, 2010, the 6.5% 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, provided the market price for the Trust’s units is not less than $31.25. On or after June 30, 2010, the 6.5% Debentures may be redeemed by the Trust at a price equal to the principal amount plus accrued and unpaid interest. In accordance with Section 3860 of the CICA Handbook, the 6.5% Debentures were initially recorded on the consolidated balance sheet as debt of $74,400 and equity of $600. Issue costs of $3,605 and the discount related to the offering are amortized to interest expense over ten years. In 2006, conversions of the 5.7% Debentures resulted in the transfer of $34,069 to equity (2005 – nil). The resulting carrying value at December 31, 2006, net of amortized marked-to-market adjustments, was $65,281 (December 31, 2005 – $98,890). Conversions of the 6.5% Debentures resulted in the transfer of $48,391 to equity (2005 – $2,026). The resulting carrying value at December 31, 2006, net of amortized marked-to-market adjustments, was $24,438 (December 31, 2005 – $72,478). A demand revolving credit facility is available up to a formula-based maximum not to exceed $80,000, bearing interest generally at the bank prime rate (6.00% as at December 31, 2006) plus 0.375% or bankers’ acceptance rates. The facility expires on June 19, 2007, and is secured by a ﬁrst ranking collateral mortgage on nine of the Trust’s properties and a second ranking collateral mortgage on one property. As at December 31, 2006, the maximum amount available under this facility was $80,000, of which $733 was utilized in the form of letters of guarantee (December 31, 2005 – $59). As at December 31, 2006, the amount still available under this facility was $79,267. The weighted average interest rates for the ﬁxed and ﬂoating components of debt are as follows: December 31 Fixed rate Mortgages Convertible debentures Term debt Total ﬁxed rate debt Variable rate Mortgages Term debt Demand revolving credit facility Total variable rate debt Total debt Weighted average interest rates 2006 2005 Maturity dates 2006 Debt amount 2005 5.89% 6.08% 7.17% 5.90% 8.40% 7.00% – 8.09% 5.95% 6.17% 6.19% 6.70% 6.17% – 5.65% – 5.65% 6.16% 2007–2019 $ 1,036,909 $ 756,920 2014–2015 2008–2011 2008 2007 – 89,719 2,238 1,128,866 19,402 5,526 – 24,928 171,368 271 928,559 – 15,062 – 15,062 $ 1,153,794 $ 943,621 The variable rate mortgage debt outstanding at December 31, 2006, bears interest generally at the rate of LIBOR plus 3.05% up to a maximum of 8.75%. At December 31, 2006, the LIBOR rate was 5.35%. The variable rate term debt outstanding at December 31, 2006, bears interest at prime plus 1%. At December 31, 2006, the prime rate was 6%. The scheduled principal repayments and debt maturities are as follows: For the years ending December 31 2007 2008 2009 2010 2011 2012 and thereafter PAGE 80 Mortgages Term debt $ 52,676 $ 1,511 $ 140,463 143,997 62,448 179,641 477,086 113 5,526 – 614 – Convertible debentures – – – – – 89,719 Total $ 54,187 140,576 149,523 62,448 180,255 566,805 $ 1,056,311 $ 7,764 $ 89,719 $ 1,153,794 DUNDEE REIT 2006 Annual Report Included in mortgages are $9,567 in marked-to-market adjustments (December 31, 2005 – $8,488) reﬂecting the fair value of mortgages assumed as part of acquisitions. The 6.5% and 5.7% Debentures are net of a $794 premium allocated to their conversion features. The marked-to-market adjustment and discount are amortized to interest expense over the term to maturity of the related debt. The estimated fair value of debt is as follows: December 31 Mortgages Convertible debentures Term debt Total 11. Amounts payable and accrued liabilities December 31 Trade payables Accrued liabilities and other payables Accrued interest Deposits Rent received in advance Total 12. Distributions 2006 $ 1,081,535 121,881 7,733 2005 $ 788,995 170,771 15,354 $ 1,211,149 $ 975,120 $ 2006 1,664 20,104 6,072 9,863 2,998 $ 2005 2,074 15,787 5,428 6,646 2,325 $ 40,701 $ 32,260 The following table sets out distribution payments for the year ended December 31, 2006. Paid in cash Paid by way of reinvestment in REIT Units Paid by way of reinvestment in LP B Units Less: Payable at December 31, 2005 Plus: Payable at December 31, 2006 Total REIT Units, LP Class B Units, Series A Series 1 $ 50,074 $ – $ 5,093 – (3,769) 6,393 19,013 612 (1,587) 1,620 $ 57,791 $ 19,658 $ Total 50,074 24,106 612 (5,356) 8,013 77,449 The amount payable at December 31, 2006, was satisﬁed on January 15, 2006, by way of $6,024 in cash and $369 by way of 9,530 REIT Units, and $1,620 by way of 41,837 LP B Units. Included in the total distributions is $951 representing the 4% bonus distribution that forms part of the Distribution Reinvestment Plan. As of August 15, 2005, the holders of LP B Units elected to receive their distributions in the form of REIT Units. Holders of LP B Units issued on the internalization of the property manager elected to receive their distributions in the form of LP B Units. PAGE 81 DUNDEE REIT 2006 Annual Report 13. Unitholders’ equity December 31 REIT Units, Series A LP Class B Units, Series 1 Cumulative foreign currency translation adjustment Total 2006 Number of units Amount Number of units 2005| 1 Amount 34,854,553 $ 745,348 20,449,209 $ 376,842 8,565,095 – 147,879 (5,116) 8,337,365 149,056 – (7,180) 43,419,648 $ 888,111 28,786,574 $ 518,718 1 In 2005, the 149,056 LP B Units and $2,080 of the cumulative foreign currency translation adjustment, for a total of $146,976, were presented as non-controlling interest. Dundee REIT Units Dundee REIT is authorized to issue an unlimited number of REIT Units and an unlimited number of Special Trust Units. The REIT Units are divided into and issuable in two series: REIT Units, Series A and REIT Units, Series B. REIT Units are redeemable at the option of the holder, generally at any time, subject to certain restrictions, at a redemption price per REIT Unit equal to the lesser of 90% of a 20-day weighted average closing price prior to the redemption date and 100% of the closing market price on the redemption date. The total amount payable by Dundee REIT in any calendar month shall not exceed $50 unless waived by Dundee REIT’s trustees at their sole discretion. Any dollar amount in excess of this monthly dollar maximum, unless waived, will be paid by notes of one of Dundee REIT’s subsidiaries, Dundee Properties Operating Trust A or Dundee Properties Operating Trust B. REIT Units, Series A and REIT Units, Series B represent an undivided beneﬁcial interest in Dundee REIT and in distributions made by Dundee REIT. No REIT Unit, Series A or REIT Unit, Series B has preference or priority over any other. Each REIT Unit, Series A and REIT Unit, Series B entitles the holder to one vote held at all meetings of unitholders. At Dundee REIT’s annual and special meeting held on May 5, 2005, unitholders approved an amendment to the Declaration of Trust authorizing REIT Units, Series B to be convertible at any time at the option of the holder into REIT Units, Series A on a one-for-one basis. Previously, the Trust was obligated to list the REIT Units, Series B separately on the Toronto Stock Exchange. During the year, 296,851 LP B Units were exchanged indirectly by Dundee Corporation for 296,851 REIT Units, Series B, which were then exchanged for 296,851 REIT Units, Series A. The exchanges were measured at a pro rata carrying amount of the LP B Units. On May 12, 2006, the terms of the LP B Units were amended to restrict the transfer of such units except to a subsidiary of the holder. As a result, if an existing holder of LP B Units wants to transfer the LP B Units to a third party, they must ﬁrst be converted into REIT Units, Series B. This amendment permits the Trust to classify the outstanding LP B Units as equity for ﬁnancial statement purposes in accordance with Canadian GAAP. As a result, effective May 1, 2006, the LP B Units are presented as unitholders’ equity. Prior to this date, the LP B Units were presented as non-controlling interest. Special Trust Units are issued in conjunction with LP B Units. The Special Trust Units are not transferable separately from the LP B Units to which they relate and will be automatically redeemed for a nominal amount and cancelled upon surrender or exchange of such LP B Units. Each Special Trust Unit entitles the holder to the number of votes at any meeting of unitholders that is equal to the number of REIT Units, Series B that may be obtained upon the surrender or exchange of the LP B Units to which they relate. At December 31, 2006, 8,565,095 Special Trust Units were issued and outstanding (December 31, 2005 – 8,337,365 issued and outstanding). At December 31, 2006, 92,000 Special Trust Units were held in trust pursuant to the internalization of DMLP (see Note 25), 55,326 of which are included in the outstanding Special Trust Units at December 31, 2006. DRC is currently entitled to receive the Special Trust Units held in trust on June 30, 2007. These Special Trust Units are recorded at a nominal value. Dundee REIT’s Declaration of Trust provides Dundee Corporation with a pre-emptive right pursuant to which Dundee REIT will not issue any REIT Units, or any securities convertible into REIT Units, to any person without ﬁrst making an offer to Dundee Corporation to issue that number of REIT Units, or securities or a comparable number of LP B Units necessary to maintain the percentage of the outstanding voting interest in Dundee REIT held by Dundee Corporation and its afﬁliates at the date of offer. PAGE 82 DUNDEE REIT 2006 Annual Report DPLP units DPLP is authorized to issue an unlimited number of LP Class A and an unlimited number of LP Class B limited partnership units and such other classes as the general partner of DPLP, a wholly owned subsidiary of Dundee REIT, may decide. The LP Class B Units have been issued in two series: LP Class B Units, Series 1 and LP Class B Units, Series 2. The LP Class B Units, Series 1, together with the accompanying Special Trust Units, have economic and voting rights equivalent in all material respects to the REIT Units, Series A and REIT Units, Series B. Generally, each LP Class B Unit, Series 1 entitles the holder to a distribution equal to distributions declared on REIT Units, Series B or, if no such distribution is declared, on REIT Units, Series A. LP Class B Units, Series 1 may be surrendered or indirectly exchanged on a one-for-one basis at the option of the holder, generally at any time, subject to certain restrictions, for REIT Units, Series B. The LP Class B Units, Series 1 are not entitled to vote at any meeting of the limited partners of DPLP. Prior to May 1, 2006, the LP Class B Units, Series 1 were classiﬁed as non-controlling interest in accordance with EIC-151. The LP Class A Units and LP Class B Units, Series 2 are entitled to vote at meetings of the limited partners of DPLP and each unit entitles the holder to a distribution equal to distributions on the LP Class B Units, Series 1. At December 31, 2006, 34,557,702 LP Class A Units (December 31, 2005 – 20,449,209), 8,565,095 LP Class B Units, Series 1 (December 31, 2005 – 8,337,365) and 296,852 LP Class B Units, Series 2 (December 31, 2005 – 1) were issued and outstanding. At December 31, 2006, 92,000 LP Class B Units, Series 1 were held in trust pursuant to the internalization of DMLP, 55,326 of which are included in the outstanding LP Class B Units, Series 1 at December 31, 2006. DRC is currently entitled to receive the units held in trust on June 30, 2007 (see Note 25). As at December 31, 2006, and December 31, 2005, all issued and outstanding LP Class A Units and LP Class B Units, Series 2 of DPLP are owned indirectly by Dundee REIT and have been eliminated in the consolidated balance sheets. REIT Units, Series A LP Class B Units, Series 1 Cumulative foreign currency translation Number of units Amount Number of units Amount adjustment Number of units Total Amount 20,449,209 $ 376,842 – – – 811,261 13,087 22,888 – – 9,961 (51,399) (6,393) 319,981 24,106 359 1,170 (18,041) – – – – – 19,255 – – – $ – $ (5,100) 20,449,209 $ 371,742 1,257 (11,690) (1,620) – 611 – – – – – – – – – – – – – – 10,190,000 830,516 13,087 22,888 11,218 (63,089) (8,013) 319,981 24,717 359 1,170 – (18,041) – 8,337,365 151,706 (2,373) 8,337,365 149,333 Public offering of REIT Units 10,190,000 Unitholders’ equity, January 1, 2006 Net income Distributions paid Distributions payable Distribution Reinvestment Plan Unit Purchase Plan Deferred Unit Incentive Plan Issue costs Reclassiﬁcation of LP B Units Conversion of 6.5% Debentures Conversion of 5.7% Debentures Issue of units on internalization of property manager 1,935,640 48,391 1,135,617 34,069 – – – – 505,326 – – 13,917 (6,302) – – – – Exchange of LP B Units 296,851 6,302 (296,851) Release of cumulative foreign currency translation adjustment on disposition of revenue property (Note 26) Change in foreign currency translation adjustment Unitholders’ – – – – – – – – 3,686 (1,329) 1,935,640 48,391 1,135,617 34,069 505,326 13,917 – – – – 3,686 (1,329) equity, December 31, 2006 34,854,553 $ 745,348 8,565,095 $ 147,879 $ (5,116) 43,419,648 $ 888,111 PAGE 83 DUNDEE REIT 2006 Annual Report LP Class B Units, Series 1 and non-controlling interest Non-controlling interest, January 1, 2006 Income from continuing and discontinued operations Distributions paid Impact of dilution Change in foreign currency translation adjustment Reclassiﬁcation to unitholders’ equity Non-controlling interest, December 31, 2006 LP Class B Units, Series 1 Number of units Amount Cumulative foreign currency translation adjustment Total 8,337,365 $ 149,056 $ (2,080) $ 146,976 – – – – 1,876 (6,347) 7,121 – (8,337,365) (151,706) – – – (293) 2,373 1,876 (6,347) 7,121 (293) (149,333) – $ – $ – $ – Public offering of REIT Units On December 12, 2006, the Trust completed a public offering of 4,110,000 REIT Units for gross proceeds of $150,015 at a price of $36.50 per REIT Unit. Costs relating to the offering of $6,531 were charged directly to unitholders’ equity. On June 8, 2006, the Trust completed a public offering of 3,560,000 REIT Units for gross cash proceeds of $100,036 at a price of $28.10 per unit. Costs relating to the offering of $4,426 were charged directly to unitholders’ equity. As a result of classifying the LP Class B Units, Series 1 as equity, no further purchase price adjustments will result from investing the net proceeds in DPLP. On April 7, 2006, the Trust completed a public offering of 2,200,000 REIT Units for gross cash proceeds of $61,050 at a price of $27.75 per unit. On April 28, 2006, the Trust issued an additional 320,000 REIT Units for gross proceeds of approximately $8,880 pursuant to the exercise of the over-allotment option granted to the underwriters. The exercise of the over-allotment option increased the total gross proceeds of the offering to approximately $69,930. Costs relating to the offering of $3,247 were charged directly to unitholders’ equity. Prior to May 1, 2006, the Trust used the purchase method to account for the investment of the net proceeds in DPLP and recorded a purchase adjustment relating to the fair value increment of rental properties acquired of $5,898. On December 14, 2005, Dundee REIT completed a public offering for gross cash proceeds of $65,000 through the issuance of 2,600,000 REIT Units at a price of $25.00 per unit. On December 22, 2005, Dundee REIT issued an additional 390,000 REIT Units for gross proceeds of $9,750 pursuant to the exercise of the over-allotment option. The exercise of the over-allotment option increased the total gross proceeds of the offering to $74,750. Costs relating to the offering totalled $3,440 and were charged directly to unitholders’ equity. The Trust used the purchase method to account for the investment of the net proceeds in DPLP and recorded a purchase adjustment relating to the fair value increment of rental properties acquired of $5,412. Distribution Reinvestment and Unit Purchase Plan In August 2003, Dundee REIT established a Distribution Reinvestment Plan (“DRIP”) and Unit Purchase Plan for holders of REIT Units, Series A and REIT Units, Series B. The DRIP allows unitholders, other than unitholders who are resident of or present in the United States, to elect to have all cash distributions from Dundee REIT reinvested in additional units. Unitholders who participate in the DRIP receive an additional distribution of REIT Units equal to 4% of each cash distribution that was reinvested. A similar distribution reinvestment arrangement exists for holders of LP B Units. The price per unit is calculated by reference to a ﬁve-day weighted average closing price of the REIT Units on the Toronto Stock Exchange preceding the relevant distribution date, which typically is on or about the 15th day of the month following the declaration. PAGE 84 DUNDEE REIT 2006 Annual Report For the year ended December 31, 2006, 811,261 REIT Units and 19,255 LP B Units were issued under the DRIP for $24,717 (December 31, 2005 – 532,817 REIT Units and 413,281 LP B Units for $24,576). Prior to August 15, 2005, holders of LP B Units had their units enrolled in the LP B Unit DRIP. This was dilutive to the Trust’s effective ownership in DPLP and accordingly the Trust recognized a $1,890 dilution gain in 2005. Since that time, holders of LP B Units have elected to receive their distributions in the form of REIT Units, which are not dilutive to the Trust. In addition, no further dilution gains will be reported as a result of reclassifying the LP B Units as equity. Unit Purchase Plan The Unit Purchase Plan feature of the DRIP allows existing unitholders to purchase additional REIT Units of Dundee REIT. Participation in the Unit Purchase Plan is optional and subject to certain limitations on the maximum number of additional REIT 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, 2006, 13,087 REIT Units were issued under the Unit Purchase Plan for $359 (December 31, 2005 – 8,725 REIT Units for $232). Conversion of debentures During the year ended December 31, 2006, the Trust issued 1,935,640 REIT Units upon conversion of $48,391 principal amount of the 6.5% Debentures (December 31, 2005 – issued 81,040 REIT Units upon conversion of $2,026 principal amount) and 1,135,617 REIT Units upon conversion of $34,069 principal amount of the 5.7% Debentures (December 31, 2005 – nil). Deferred Unit Incentive Plan The Deferred Unit Incentive Plan provides for the grant of Deferred Trust Units and Income Deferred Trust Units to trustees, ofﬁcers and employees, and afﬁliates and their service providers. Deferred Trust Units are granted at the discretion of the trustees while Income Deferred Trust Units are credited to holders of Deferred Trust Units based on distributions paid on the REIT Units. Once vested, each Deferred Trust Unit and Income Deferred Trust Unit entitles the holder to receive a REIT Unit at no cost. Deferred Trust Units vest evenly over a three- or ﬁve-year period on the anniversary date of the grant, while Income Deferred Trust Units vest on the same date as the associated Deferred Trust Unit. Subject to an election for certain participants to postpone receipt of REIT Units, such units will be issued immediately upon vesting. Up to a maximum of 500,000 Deferred Trust Units are issuable under the Deferred Unit Incentive Plan. Compensation expense is recorded based on the fair market value of a REIT Unit at the date of grant and amortized as earned over the vesting period or the remaining service period of the participant, whichever period is less. During the year ended December 31, 2006, $1,170 (December 31, 2005 – $830) of compensation expense was recorded and is included in general and administrative expenses. Income Deferred Trust Units are accounted as a distribution and an issuance of REIT Units when the related Deferred Trust Units vest. No amount in relation to Income Deferred Trust Units is recognized in net income. Outstanding at January 1, 2005 Granted during the period Cancelled Issuance of REIT Units on vesting Fractional units paid in cash Outstanding at December 31, 2005 Granted during the period Cancelled Issuance of REIT Units on vesting Fractional units paid in cash Outstanding and payable at December 31, 2006 Weighted average grant date value $ 22.70 25.67 23.60 22.70 – 23.60 36.37 23.60 23.67 – $ 27.87 Deferred Trust Units 151,143 65,300 (1,600) (14,665) (11) 200,167 88,300 (3,000) (19,265) (2) 266,200 Income Deferred Trust Units 12,542 14,753 (146) (2,099) (9) 25,041 16,919 (237) (3,623) (24) 38,076 Total units 163,685 80,053 (1,746) (16,764) (20) 225,208 105,219 (3,237) (22,888) (26) 304,276 Vested but not issued at December 31, 2006 $ 22.76 72,267 18,459 90,726 PAGE 85 DUNDEE REIT 2006 Annual Report 14. Joint ventures and co-ownerships The Trust participates in incorporated and unincorporated joint ventures, partnerships and co-ownerships (the “joint ventures”) with other parties and accounts for its interests using the proportionate consolidation method. The following amounts represent the total assets and liabilities of rental property joint ventures in which the Trust participates and its proportionate share of the assets, liabilities, revenues, expenses and cash ﬂows therein. December 31 Assets Liabilities For the years ended December 31 Revenues Expenses Cash ﬂow generated from (utilized in): Operating activities Financing activities Investing activities (Decrease) increase in cash and cash equivalents $ 2006 350,555 255,571 Total 2005 $ 302,028 $ 213,300 $ $ $ $ 2006 185,230 130,257 2006 29,927 25,880 4,047 7,944 5,466 (15,231) (1,821) Proportionate share 2005 $ 151,831 106,789 Proportionate share 2005 27,603 22,225 5,378 9,375 (10,492) 1,376 259 $ $ $ $ The Trust is contingently liable for the obligations of the other owners of the unincorporated joint ventures at December 31, 2006, in the aggregate amount of $122,001 (December 31, 2005 – $101,944). In each case, however, the co-owners’ share of assets is available to satisfy these obligations. 15. Interest Interest incurred and charged to earnings is recorded as follows: For the years ended December 31 Interest expense incurred, at stated rate of debt Amortization of deferred ﬁnancing costs Marked-to-market rate adjustment Interest capitalized Interest expense 2006 67,487 $ 2005 $ 54,703 1,922 (1,882) (1,475) 1,523 (2,012) (254) $ 66,052 $ 53,960 Certain debt assumed on acquisitions has been adjusted to fair value using the market interest rate at the time of the acquisition (“marked-to-market”). This marked-to-market adjustment is amortized to interest expense over the remaining life of the debt. Interest capitalized includes interest on speciﬁed and general debt attributed to a recently acquired property considered to be under redevelopment and land under development. PAGE 86 DUNDEE REIT 2006 Annual Report 16. Income and large corporations taxes Dundee REIT Dundee REIT is taxed as a mutual fund trust for income tax purposes. Pursuant to the Declaration of Trust, the Trustees of Dundee REIT will make distributions of, or will designate, all taxable income earned by Dundee REIT, including the taxable portion of net realized capital gains, to unitholders and will deduct such distributions and designations for income tax purposes. As the income tax obligations relating to the distributions are those of the unitholders, no provision for income taxes is required on such amounts. Canadian and U.S. based incorporated subsidiaries are subject to tax on their respective taxable income at their corresponding legislated rates. A future income tax liability as at December 31, 2006, of $3,950 (December 31, 2005 – $1,577) has been recorded to reﬂect the future tax obligations of these subsidiaries and comprises amounts resulting from the differences in tax and book values relating to the underlying rental properties. The reported carrying amount of Dundee REIT’s net assets, excluding those in incorporated subsidiaries at December 31, 2006, exceeds the corresponding tax cost by approximately $154,000 (December 31, 2005 – $164,000). During the current year, the Trust recognized a $2,378 future income tax expense related to the sale of a 50% interest in Greenbriar Mall. During the prior year, the Trust recorded a $4,514 future tax recovery as a result of a provision for impairment in value of rental property recognized on its U.S. retail property. 17. Income per unit The weighted average number of units outstanding was as follows: For the years ended December 31 REIT Units LP B Units Vested Deferred Trust Units Total weighted average number of units outstanding for basic income per unit amounts Add incremental units: LP B Units Unvested Deferred Trust Units Income Deferred Trust Units 2006 25,764,527 5,864,880 53,185 31,682,592 – 26,896 26,243 2005 17,162,997 – 22,352 17,185,349 8,218,753 31,632 15,496 Total weighted average number of units outstanding for diluted income per unit amounts 31,735,731 25,451,230 A reconciliation of income before discontinued operations for basic and diluted per unit amount computations is as follows: For the years ended December 31 Income before discontinued operations for basic income per unit amounts Add: Income attributable to non-controlling interest Depreciation expense Deduct: Dilution gain Income before discontinued operations for diluted per unit amounts 2006 7,848 $ – – – $ 7,848 2005 6,566 2,511 111 (1,890) 7,298 $ $ The 2,763,894 incremental LP B Units for the period from January 1, 2006, to April 30, 2006, have been excluded from the calculation of diluted net income per unit as they are anti-dilutive. The 5,505,054 incremental units of an assumed conversion of both debenture issues for the year ended December 31, 2006 (December 31, 2005 – 5,478,393 incremental units) have been excluded from the calculation of diluted net income per unit as they are anti-dilutive. 18. Employee future benefits The Trust has a deﬁned contribution pension plan available to all full-time employees who have been employed by the Trust for one year. The pension plan covers employees of the Trust, Dundee Realty Management Corp. and any other entity as appointed by the sponsor of the plan. The plan is sponsored by Dundee Realty Management Corp., a wholly owned subsidiary of DMLP. For 2006, the total cost recognized and cash payments for employee future beneﬁts, consisting of cash contributed to the deﬁned contribution plan, was $191 (2005 – $108). PAGE 87 DUNDEE REIT 2006 Annual Report 19. Segmented information The Trust’s rental properties have been segmented into ofﬁce and industrial components. The accounting policies of the segments are as described in the summary of signiﬁcant accounting policies. Certain of the prior year’s ﬁgures have been reclassiﬁed to conform with the current year’s presentation as a result of reclassifying 19 ﬂex properties from the industrial segment to the ofﬁce segment because they possess characteristics closer to ofﬁce properties. The Trust does not allocate interest expense to these segments, since leverage is viewed as a corporate function. The decision as to where to incur the debt is largely based on minimizing the cost of debt and is not speciﬁcally related to the segments. Similarly, income taxes and general and administrative expenses are not allocated to the segment expenses. Discontinued operations are not allocated to individual segments. In June 2006, the Trust disposed of Kameyosek Shopping Centre in Edmonton and a 50% interest in Greenbriar Mall in Atlanta. As a result, the Trust no longer actively operates in the retail segment and has reclassiﬁed the remaining operations as “Other” in comparative ﬁgures to conform to the current period’s presentation. Also, because the Trust’s remaining interest in Greenbriar Mall is not signiﬁcant, the Trust no longer discloses segments by country as virtually all of its operations are conducted in Canada. The category titled “Other” represents the results of operations of the Trust’s interest in redevelopment properties prior to designation for redevelopment. For the year ended December 31, 2006 Operations Segment total Industrial Ofﬁce Other Total Revenues Operating expenses Net operating income Depreciation of rental properties Amortization of deferred leasing costs, tenant improvements and intangibles Segment income Interest expense General and administrative Internalization of property manager Loss on disposal of rental property Interest and fee income Income taxes Income attributable to non-controlling interest Discontinued operations Net income $ 217,199 $ 64,092 $ 281,291 $ 95,852 121,347 29,017 22,998 41,094 9,773 118,850 162,441 38,790 24,691 5,663 30,354 $ 67,639 $ 25,658 $ 93,297 $ 6,503 3,300 3,203 1,060 260 1,883 $ 287,794 122,150 165,644 39,850 30,614 95,180 (66,052) (6,812) (13,678) (220) 3,646 (2,376) (1,840) 3,370 $ 11,218 Segment rental properties $ 1,381,034 $ 404,157 $ 1,785,191 $ 31,620 $ 1,816,811 Capital expenditures Investment in rental properties Investment in tenant improvements Investment in land development Acquisition of rental properties and land Deferred leasing costs Total capital expenditures $ (5,128) $ (3,968) $ (9,096) $ (77) $ (5,552) (1,833) (7,385) – (408,878) (4,396) – (37,892) (1,683) – (446,770) (6,079) (282) (2,103) (37,897) (18) (9,173) (7,667) (2,103) (484,667) (6,097) $ (423,954) $ (45,376) $ (469,330) $ (40,377) $ (509,707) PAGE 88 DUNDEE REIT 2006 Annual Report Ofﬁce Industrial Segment total Other Total $ 158,105 $ 53,532 $ 211,637 $ 74,312 83,793 19,675 20,068 33,464 8,172 94,380 117,257 27,847 14,668 4,526 19,194 $ 49,450 $ 20,766 $ 70,216 $ 8,978 4,796 4,182 1,612 314 2,256 $ 220,615 99,176 121,439 29,459 19,508 72,472 (53,960) (5,408) 1,890 (11,533) 2,144 3,472 (2,511) (2,257) 4,309 $ For the year ended December 31, 2005 Operations Revenues Operating expenses Net operating income Depreciation of rental properties Amortization of deferred leasing costs, tenant improvements and intangibles Segment income Interest expense General and administrative Dilution gain Provision for impairment in value of rental property Interest and fee income Income taxes Income attributable to non-controlling interest Discontinued operations Net income Segment rental properties $ 913,866 $ 365,128 $ 1,278,994 $ 49,401 $ 1,328,395 Capital expenditures Investment in rental properties Investment in tenant improvements Acquisition of rental properties and land Deferred leasing costs Total capital expenditures $ (3,609) $ (3,722) $ (7,331) $ (502) $ (5,599) (195,970) (2,391) (2,805) (79,054) (1,659) (8,404) (275,024) (4,050) (629) – (390) (7,833) (9,033) (275,024) (4,440) $ (207,569) $ (87,240) $ (294,809) $ (1,521) $ (296,330) 20. Related-party transactions and arrangements From time to time Dundee REIT and its subsidiaries enter into transactions with related parties that are conducted under normal commercial terms. Prior to May 1, 2006, Dundee REIT, DPLP, DMLP and DRC were parties to a property management agreement and an administrative services agreement (the “Management Agreement” and the “Services Agreement”). In addition, DMLP and DRC are parties to a separate administrative services agreement. Effective May 1, 2006, the Trust acquired DRC’s 50% interest in DMLP (see Note 25). As a result, DRC is no longer party to the Management Agreement, other than its rent supplement obligation and the Services Agreement. Master property management agreement DPLP has entered into a Management Agreement with DMLP to provide customary property management services to DPLP. The Management Agreement also authorizes DMLP, subject to certain restrictions, to contract on behalf of DPLP with third parties for the provision of certain services as provided for in DMLP’s annual operating plan. DMLP is entitled to be reimbursed by DPLP for its reasonable costs for such services. The Management Agreement provides for a base management fee of 3.5% of gross revenues generated from the managed properties, as well as construction fees, and leasing administration fees for services provided. The initial term of the Management Agreement, which commenced on July 1, 2003, is ﬁve years. With the consent of DMLP, the Management Agreement will be automatically extended for a further ﬁve-year period. Upon expiry of the ﬁrst extension term and with the mutual consent of DMLP and DPLP, the Management Agreement will be automatically extended for further ﬁve-year periods until terminated by the parties. PAGE 89 DUNDEE REIT 2006 Annual Report This Management Agreement also provides that DRC will pay a rent supplement to DPLP for a ﬁve-year period ending June 30, 2008, in the case of certain speciﬁed ofﬁce and retail premises and a three-year period ended June 30, 2006, in the case of certain speciﬁed industrial premises. DRC will pay an amount equal to the difference between: (i) the amount that is the total net rent less amortized leasing costs with respect to the speciﬁed premises plus the additional rents that would be payable with respect to such premises if such premises were leased pursuant to the applicable standard lease for each premises; and (ii) the amount that is the actual base rent and additional rent received by DPLP for such premises, after deduction for amortization of leasing costs including, but not limited to, tenant inducements, landlord’s work, free rent and leasing commissions paid by DPLP to lease any such premises. If at any time any of the premises to which the rent supplement applies is either sold by DPLP or ceases to be managed by DMLP, the amount of the rent supplement will be reduced by the amount attributed to such premises. If DPLP enters into a lease with a tenant, for any of the premises to which the rent supplement applies, that extends beyond the terms of the supplement for such premises, and the tenant meets credit quality thresholds, has occupied the premises and has commenced full rental payment under the lease, the amount of the supplement will be permanently reduced by the actual base rent and additional rent received by DPLP for such premises after deducting amortization of leasing costs. Administrative services agreement Dundee REIT and certain subsidiaries have entered into a Services Agreement with DMLP whereby DMLP will provide certain administrative services to Dundee REIT and its subsidiaries. The Services Agreement provides for a broad range of management and general administrative services, certain asset management services and certain administrative and support services. The agreement provides for a fee sufﬁcient to reimburse DMLP for the actual costs incurred and is not intended to have a proﬁt component. In addition, DMLP will provide, for a fee, services related to property acquisition, property ﬁnancing or reﬁnancing and equity ﬁnancing. This agreement is for an initial ﬁve-year period, which commenced on July 1, 2003, and will terminate on termination of the Management Agreement. DMLP has also entered into a similar administration and support services agreement with DRC to provide certain administration services to DRC and its subsidiaries (“DRC Services Agreement”), the term of which has been extended until June 30, 2013. The portion of fees received from or paid to related parties under the above arrangements were as follows: 2006 For the years ended December 31 Fees received 2005 Rent supplement received by Dundee REIT under the Management Agreement (included in rental properties revenue) Fees, cost recovery and rental income received by Dundee REIT under the DRC Services Agreement (included as a reduction of operating expenses) Fees paid Fees paid by Dundee REIT under the Management Agreement prior to May 1, 2006 Management fees, included in rental properties’ operating expenses Construction fees, capitalized to the related assets Lease administration fees, included in deferred leasing costs Fees paid by Dundee REIT under the Services Agreement prior to May 1, 2006 Acquisition and ﬁnancing fees, capitalized to the related assets $ 1,336 $ 2,272 1,431 534 1,346 98 251 217 3,634 485 839 588 Included in amounts receivable at December 31, 2006, is $231 related to the DRC Services Agreement (December 31, 2005 – $215), as well as $136 related to additional services provided to DRC. Included in accrued liabilities and other payables at December 31, 2006, is nil related to the Management and Services Agreements (December 31, 2005 – $251). Accrued liabilities and other payables at December 31, 2006, also include $316 for amounts collected on behalf of DRC (December 31, 2005 – nil). Included in interest and fee income is $224 related to management services provided to Dundee Corporation, of which the full amount is included in amounts receivable at December 31, 2006. PAGE 90 DUNDEE REIT 2006 Annual Report 21. Financial instruments and risk management For certain of the Trust’s ﬁnancial instruments, including cash and short-term deposits, amounts receivable, vendor loan, amounts payable and accrued liabilities, and distributions payable, carrying amounts approximate fair values due to their immediate or short-term maturity. The fair values of the mezzanine loans, mortgages and term debt are determined by discounting the future contractual cash ﬂows under current ﬁnancing arrangements at discount rates that represent management’s best estimate of borrowing rates presently available to the Trust for loans with similar terms and maturities. Speciﬁc fair values are disclosed in the related notes. The fair value of convertible debentures is based on the market value of the debentures on December 31, 2006. The Trust has some exposure to interest rate risk primarily as a result of its variable rate debt. Variable rate debt at December 31, 2006, was 2.2% of the Trust’s total debt (December 31, 2005 – 1.6%). In order to manage exposure to interest rate risk, the Trust endeavours to maintain an appropriate mix of ﬁxed and ﬂoating rate debt, stagger maturities of ﬁxed rate debt and match the nature of the debt with the cash ﬂow characteristics of the underlying asset. The Trust is exposed to foreign exchange risk as it relates to its self-sustaining U.S. operations due to ﬂuctuations in the exchange rate between the Canadian and U.S. dollars. The impact of foreign exchange ﬂuctuations is deferred as a separate component of equity until there is a realized reduction in the net investment in the foreign operation. Effective from April 1, 2004 to May 31, 2005, the Trust had designated the U.S. dollar loan drawn under the demand non-revolving credit facility as a hedge of a portion of its net investment in its U.S. self-sustaining operation. Gains and losses on translation of the loan have been deferred as a separate component of unitholders’ equity, offsetting translation gains and losses on the net investment in the foreign operation, until there is a realized reduction in the net investment in the foreign operation. The Trust formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for applying hedge accounting. The Trust formally assesses the hedge relationship, both at the hedge’s inception and on an ongoing basis to ensure the hedge is highly effective. The Trust’s assets consist of ofﬁce and industrial rental properties. Credit risk arises from the possibility that tenants in rental properties may not fulﬁll their lease or contractual obligations. Further risks arise in the event that borrowers default on the repayment of their loans to the Trust. The Trust mitigates its credit risks by attracting tenants of sound ﬁnancial standing, diversifying its mix of tenants and ensuring that adequate security has been provided in support of loans. As an owner of real property, the Trust is subject to various federal, provincial, state and municipal laws relating to environmental matters. Such laws provide a range of potential liability, including potentially signiﬁcant penalties, and potential liability for the costs of removal or remediation of certain hazardous substances. The presence of such substances, if any, could adversely affect the Trust’s ability to sell or redevelop such real estate or to borrow using such real estate as collateral and, potentially, could also result in civil claims against the Trust. 22. Discontinued operations The fulﬁllment of obligations and realization of assets of properties noted below that were sold in prior periods have been reclassiﬁed as discontinued operations to comply with the disclosure requirements of the CICA Handbook Section 3475. • On January 14, 2005, the Trust completed the sale of its 25% interest in 2301 and 2311 Royal Windsor Drive, two industrial buildings located in Mississauga, Ontario. A $217 gain was recognized in 2005 on the sale. • On November 15, 2005, the Trust completed the sale of Simcoe Town Centre, a 128,000 square foot retail property. A $3,837 loss was recognized in 2005 on the sale. • On June 29, 2006, the Trust completed the sale of Kameyosek Shopping Centre, a 46,143 square foot retail property. The Trust received proceeds of $8,375 and recognized a gain on sale of $3,274. PAGE 91 DUNDEE REIT 2006 Annual Report For the years ended December 31 Revenues Rental properties revenue Expenses Rental properties operating expenses Interest Depreciation of rental properties Amortization of deferred leasing costs Income before the undernoted item Gain (loss) on sale of rental properties, net Income (loss) from discontinued operations before non-controlling interest (Income) loss attributable to non-controlling interest Income (loss) from discontinued operations 2006 2005 $ 177 $ 2,285 (87) – 58 29 – 177 3,229 3,406 (36) 898 251 284 477 1,910 375 (3,620) (3,245) 988 $ 3,370 $ (2,257) 23. Commitments and contingencies Dundee 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 ﬁnancial statements of Dundee REIT. Dundee REIT’s future minimum commitments under operating, capital and ground leases are as follows: Years ending December 31 Operating lease payments Capital lease payments Ground lease payments 2007 2008 2009 2010 2011 2012 and thereafter Total $ $ 1,315 1,154 962 668 660 1,300 6,059 $ 128 117 – – – – $ 1,141 1,113 1,112 573 32 33 $ 245 $ 4,004 Dundee REIT has four ground leases on three properties. The terms of the ﬁrst two leases extend to 2083 and 2076; the last two extend to 2060, including renewals. The leases are at ﬁxed rates for the entire term with respect to the ﬁrst and the third lease, until September 30, 2007, for the second lease and until June 30, 2010, for the fourth. The renewal terms beyond these dates for the second and fourth leases are deﬁned as variable percentages of the market value of these properties at the date of the renewal. Purchase and other obligations As part of an acquisition in 2004, the Trust acquired leases relating to three buildings in Montréal that allow the tenants, subject to various conditions, to purchase the building they occupy from the Trust. Proceeds from these sales will be at amounts that approximate fair market value. In addition, through acquisitions completed in 2004 and 2005, the Trust has acquired leases that provide, in certain circumstances, for some tenants to require the Trust to expand their existing premises through building construction on certain existing and certain adjacent lands. The terms of these leases include various provisions including renewal obligations on the tenants’ existing premises and agreement on the terms of the new space. Furthermore, certain of these leases include provisions that would allow the Trust to charge rates to recover a reasonable return on its investment. The Trust has entered into lease agreements that require tenant improvement costs of $2,088. The amounts are expected to be paid in 2007. The Trust has entered into a co-ownership agreement that includes typical rights of the co-owners for dispute resolution and a one-time put option exercisable by its co-owner. The put, if exercised, would require Dundee REIT to purchase the remaining 50% of the building, effective April 1, 2009, at the price paid by the Trust for its initial 50% interest in the property. The Trust has entered into conditional contracts to acquire an additional $424,309 of rental properties. PAGE 92 24. Supplementary cash flow information For the years ended December 31 Decrease (increase) in accounts receivable Decrease in deferred costs (other than leasing costs) Increase in prepaid expenses and other assets (excluding restricted cash and mezzanine loans) Increase in accounts payable and accrued liabilities (excluding leasing costs) Increase (decrease) in accounts payable relating to leasing costs Change in non-cash working capital The following amounts were paid on account of interest and income taxes: For the years ended December 31 Interest Income and large corporations taxes DUNDEE REIT 2006 Annual Report $ $ $ 2006 (2,511) 1,249 (2,052) 7,769 (1,046) 3,409 2005 306 560 (1,723) 5,867 902 5,912 $ $ 2006 66,855 175 2005 $ 52,446 186 25. Internalization of property manager On May 12, 2006, through DPLP, the Trust acquired DRC’s 50% interest in DMLP, the entity that provides property management and real estate advisory services. The transaction was effective May 1, 2006, and increased the Trust’s ownership of DMLP to 100%. The consideration for the acquisition will be satisﬁed through the issuance of: a) 450,000 LP B Units that were delivered on closing; and b) up to a formula-based maximum of 100,000 LP B Units held in trust, which may include a maximum of 8,000 REIT Units, to be delivered on June 30, 2007. The number of units to be released is based on the aggregate purchase price of properties acquired by DPLP between April 1, 2006, and June 30, 2007 (other than properties that were subject to existing purchase commitments) as follows: i ii if the aggregate purchase price is less than $315,000, DRC will receive that number of LP B Units equal to 50,000 multiplied by a fraction, the numerator of which is the aggregate purchase price and the denominator of which is $315,000; and if the aggregate purchase price is equal to or more than $315,000, DRC will receive 50,000 LP B Units plus that number of additional LP B Units (not exceeding 50,000) equal to 50,000 multiplied by a fraction, the numerator of which is the aggregate purchase price minus $315,000 and the denominator of which is $240,000. In conjunction with the transaction, DMLP and DRC agreed to extend the term of the DRC Services Agreement under which DMLP provides administrative and advisory services to DRC for an additional ﬁve years to June 30, 2013 (see Note 20). Also, the terms of the LP B Units were amended to provide that they may not be transferred to a third party other than a subsidiary of the holder (see Note 13). On closing, 450,000 LP B Units were issued for total consideration of $12,393, of which $417 was allocated to the net tangible assets of DMLP acquired and $12,154 (including $178 of transaction costs) was expensed. The $27.54 issue price per LP B Unit was estimated based on a ﬁve-day weighted average trading price of REIT Units on the Toronto Stock Exchange with the midpoint being May 4, 2006, the date the substantive terms of the internalization were publicly announced, net of an implied discount for issuance costs. Also on closing, 92,000 LP B Units were issued, placed in trust and enrolled in the DRIP to satisfy the maximum number of units that DRC may be entitled to receive on June 30, 2007. The cost of these units will be expensed and added to cumulative capital as qualifying properties are acquired. Any units that are not ultimately issued to DRC as additional consideration will be returned to DMLP for cancellation. During the year ended December 31, 2006, DPLP acquired $340,568 of qualifying properties and accordingly $1,524 was expensed and added to cumulative capital representing the cost of the additional 55,326 LP B Units DRC will be entitled to receive on June 30, 2007. PAGE 93 DUNDEE REIT 2006 Annual Report 26. Disposition of revenue property On June 2, 2006, the Trust completed the sale of a 50% interest in Greenbriar Mall located in Atlanta for net proceeds of $16,681 and recorded a $220 loss on the sale. As a result of the disposition, the Trust released a $3,686 cumulative foreign currency loss from its foreign currency translation adjustment, which was recognized as part of the loss on disposal. In the year ended December 31, 2005, the Trust recorded an impairment loss of $11,533 relating to Greenbriar Mall. The disposition of Greenbriar Mall has not been presented as a discontinued operation as the Trust still has a signiﬁcant continuing involvement in its operations. 27. Subsequent events Effective January 9, 2007, the Trust completed the purchase of 30 and 55 St. Clair Avenue West in Toronto, Ontario, for a purchase price of $110,752. The properties consist of two ofﬁce buildings totalling 426,000 square feet. Effective January 24, 2007, the Trust completed the purchase of 625 Agnes Street, New Westminster, B.C., for a purchase price of $14,598. The property consists of a 83,000 square foot multi-tenant ofﬁce building. On February 12, 2007, the Trust announced that it had entered into an agreement to issue 3,700,000 REIT Units at a price of $40.75 per unit for gross proceeds of $150,775. Costs relating to the offering are estimated to be $6,605 and will be charged directly to unitholders’ equity. In addition, the Trust has granted the underwriters an over-allotment option up to an additional 555,000 REIT Units, which, if exercised, would increase the gross proceeds to $173,391. PAGE 94 Trustees and officers Trustees Dr. Günther Bautz1 Ulm, Germany Counsellor on Intellectual Property, Braun GmbH Detlef Bierbaum2,4 Köln, Germany Partner, Bankhaus Sal. Oppenheim jr. & Cie, KGaA Donald K. Charter Toronto, Ontario Corporate Director and President, 3C’s Corporation Michael J. Cooper2 Toronto, Ontario Vice Chairman and Chief Executive Ofﬁcer Dundee REIT Peter A. Crossgrove1,3,4 Toronto, Ontario Corporate Director Robert G. Goodall1,3 Mississauga, Ontario President, Canadian Mortgage Capital Corporation David J. Goodman Toronto, Ontario President and Chief Executive Ofﬁcer Goodman & Company Ned Goodman2,3,5 Innisﬁl, Ontario President and Chief Executive Ofﬁcer, Dundee Corporation Duncan Jackman4 Toronto, Ontario Chairman and Chief Executive Ofﬁcer E-L Financial Corporation Limited Robert Tweedy4 Toronto, Ontario Chairman, Useppa Holdings Limited and Chairman, Sklar Peppler Furniture Corporation 1 Member of the Audit Committee 2 Member of the Investment Committee 3 Member of the Compensation Committee 4 Member of the Governance and Environmental Committee 5 Chairman of the Board of Trustees DUNDEE REIT 2006 Annual Report Officers Ned Goodman Chairman Michael J. Cooper Vice Chairman and Chief Executive Ofﬁcer Michael Knowlton President and Chief Operating Ofﬁcer Mario Barrafato Senior Vice President and Chief Financial Ofﬁcer Jane Gavan Corporate Secretary PAGE 95 DUNDEE REIT 2006 Annual Report Corporate information Head office Dundee Real Estate Investment Trust State Street Financial Centre 30 Adelaide Street East, Suite 1600 Toronto, Ontario M5C 3H1 Phone: (416) 365-3535 (416) 365-6565 Fax: Transfer agent (for change of address, registration or other unitholder inquiries) Computershare Trust Company of Canada 100 University Avenue, 9th Floor Toronto, Ontario M5J 2Y1 Phone: (514) 982-7555 or Fax: 1 800 564-6253 (416) 263-9394 or 1 888 453-0330 E-mail: service@computershare.com Auditors PricewaterhouseCoopers LLP Royal Trust Tower, Suite 3000 Toronto-Dominion Centre 77 King Street West Toronto, Ontario M5K 1G8 Corporate counsel Osler, Hoskin & Harcourt LLP Box 50, 1 First Canadian Place Toronto, Ontario M5X 1B8 Investor relations Phone: (416) 365-3536 Toll free: 1 877 365-3535 E-mail: info@dundeereit.com Web site: www.dundeereit.com Taxation of distributions Distributions paid to unitholders in respect of the tax year ending December 31, 2006, are taxed as follows: Other income: 28.9% Taxable capital gains: 1.8% Return of capital: 69.3% Management estimates that 60% of the distributions to be made by the REIT in 2007 will be tax deferred. PAGE 96 Stock exchange listing The Toronto Stock Exchange Listing symbols REIT Units, Series A: D.UN D.DB 6.5% Debentures: D.DB.A 5.7% Debentures: Annual Meeting of Unitholders Thursday, May 3, 2007, at 4:00 p.m. TSX Broadcast Centre – Gallery The Exchange Tower 130 King Street West Toronto, Ontario Distribution Reinvestment and Unit Purchase Plan (“DRIP”) 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 Dundee 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 REIT 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 REIT Units will be purchased. To enrol contact: Computershare Trust Company of Canada 100 University Avenue, 9th Floor Toronto, ON M5J 2Y1 Attention: Dividend Reinvestment Services Or call their Customer Contact Centre at 1 800 564-6253 (toll free) or (514) 982-7555 For more information you may also visit our web site: www.dundeereit.com . L I M m o k ﬁ a r g : g n i t n i r P l n a m x e P w e h t t a M t : y h p a r g o o h P e v i t u c e x E . m o c n g i s e d s k r o w w w w . S K R O W E H T i : n g s e D d n a t p e c n o C I D u n d e e R E T 2 0 0 6 A n n u a l R e p o r t Dundee Real Estate Investment Trust State Street Financial Centre 30 Adelaide Street East, Suite 1600 Toronto, Ontario M5C 3H1 www.dundeereit.com

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