dundee reit 2012 annual report + Owns high-quality, stable and diversified prOperties hard-tO-replace assets with Organic grOwth strOng management team with sOlid understanding Of the marketplace Largest Pure-PLay office reit in canada dundee reit owns and oPerates high-quaLity, weLL-Located and coMPetitiveLy Priced business PreMises. our PortfoLio coMPrises aPProxiMateLy 23 MiLLion square feet of centraL business district and suburban office ProPerties Located in canada’s key office Markets. i Letter to unithoLders iii highLights iv PortfoLio at-a-gLance 1 ManageMent’s discussion and anaLysis 47 ManageMent’s resPonsibiLity for financiaL stateMents 48 indePendent auditor’s rePort 49 consoLidated financiaL stateMents 53 notes to the consoLidated financiaL stateMents 101 trustees and officers ibc corPorate inforMation Cover 150 York Street, Toronto HSBC Bank Place, Edmonton (inset top) 441 5th Avenue, Calgary (inset bottom) Inside front cover 181 University Avenue, Toronto DunDee Reit 2012 Annual Report Letter to unithoLders Dundee REIT is finishing its tenth year of operations and has become one of the market leaders in the Canadian REIT sector. The execution of $2.6 billion of acquisitions and $680 million of dispositions throughout 2012 has resulted in Dundee REIT becoming Canada’s largest pure-play office REIT, with a market capitalization of almost $3.8 billion at year-end. We have thoughtfully assembled a national portfolio of high-quality assets, in key office markets, that would be difficult to replicate. Overall portfolio occupancy remains sound, rental rates are increasing and our risk exposure to any single tenant is mitigated by the scale of the business. Financially, we continue to reduce our level of debt, have made progress in realizing significant interest savings on refinancing our mortgage maturities, and continue to look for opportunities to take advantage of lower interest rates and longer terms. In 2012, Dundee REIT delivered a total return of 21.3% to its unitholders, outperforming both the S&P/TSX Capped REIT Index’s 17% and the S&P/TSX Composite Index’s 7.2%. Overall, the business has never been stronger and our unitholders are benefiting from increasing AFFO per unit, better liquidity, a stable and growing yield, and capital appreciation. The first half of 2012 was incredibly busy with the completion of $2.5 billion of acquisitions, including purchasing a two-thirds interest in Scotia Plaza in Toronto, a marquee, institutional- quality asset that we successfully acquired and financed without diluting our business. The third quarter was relatively quiet with only a handful of dispositions and, for the first time since 2009, not a single acquisition. The big news in the fourth quarter was not the $154 million of properties added to our portfolio, but rather the $575 million sale of our industrial portfolio to a newly created entity, which we sponsored, Dundee Industrial REIT (TSX: DIR.UN). This transaction, together with the sale of other non-strategic assets, completed Dundee’s transformation into a pure-play office REIT. Altogether, throughout the year we acquired $2.6 billion of properties and sold $680 million. In addition to conventional mortgage financings, acquisition purchase prices were satisfied by two equity offerings completed in the first half of the year as well as a mortgage bond. The cash proceeds from the industrial portfolio were primarily used to redeem $126.5 million of convertible debentures that carried a weighted average effective interest rate of 6.8%, making a significant contribution to reducing our overall debt level, as well as our overall weighted average cost of debt. PAGe I DunDee Reit 2012 Annual Report Our strategy is not just about getting bigger, it’s about getting better. Along with the benefits derived from the increased scale of our operations, the new properties have also improved the overall quality of our portfolio, further diversified our tenant mix and strengthened our cash flows. Nearly 70% of our net operating income is now derived from assets located in central business districts. Our properties are considered to be well located, competitively priced and appealing to tenants. And, with a well- staggered lease maturity profile and in-place rents that are about 12% below estimated market rents, we have embedded growth within our portfolio. Also contributing to our cash flow are the cost savings achieved through repaying debt with the proceeds of asset sales and refinancing debt at lower interest rates. At year-end, our debt-to-gross book value was down to 48% and our weighted average interest rate was 4.3%. The strength of the business is further demonstrated by the continued growth in AFFO per unit. In 2012 we grew our AFFO per unit to $2.41, resulting in our lowest ever reported payout ratio, at 90%. Looking ahead, AFFO per unit is expected to continue to grow. With this in mind, management and our trustees believe that it is appropriate to increase the annual distribution rate for the first time. In February, we announced that beginning in May 2013 our annual distribution rate will become $2.24 per unit, an increase of four cents per unit. While we have been very focused on the appropriate composition of our portfolio, we have also dedicated a great deal of attention to our organizational structure and the resources necessary to ensure the proper management of our assets and tenant relationships. To this end, we were very pleased to announce the appointment of Ana Radic as Chief Operating Officer of Dundee REIT. Ana has been with Dundee since 1997, with the exception of a brief three-year hiatus, and has made significant contributions to building our platform in Eastern Canada. We are confident that Dundee REIT will benefit from her experience and her dedicated focus on the operations of the entire portfolio. After nearly 30 years of working in the real estate industry, I remain completely enthusiastic about the sector and excited by the different avenues that can be followed in the pursuit of value creation. I believe that there remain many opportunities ahead of us to continue improving Dundee REIT on a per unit basis. We have enjoyed high returns for many years and I believe that we can continue to generate our current and increasing yield and generate capital appreciation. On a final note, I would like to express my great appreciation to our trustees, to my colleagues and to our employees. Last year was very demanding yet each of you met the challenges with energy and enthusiasm. As the CEO and, more importantly, as an investor, I express my sincere gratitude. There are many reasons to be optimistic about 2013. I look forward to seeing our past successes contribute to our future performance and also to the opportunities that are yet to be uncovered. michael J. cOOper Vice Chairman and Chief Executive Officer March 15, 2013 PAGe II DunDee inDustRiAl Reit 2012 Annual Report TOTAL ASSETS (1) (in millions of dollars) $6,353 $4,466 $1,316 $1,335 $2,583 ’08 ’09 ’10 ’11 ’12 (1) Results reported under previous GAAP. NET OPERATING INCOME (in thousands of dollars) $385,821 $261,137 $115,829 $120,954 $160,965 ’08 ’09 ’10 ’11 ’12 ADJUSTED FUNDS FROM OPERATIONS (per unit) $2.24 $2.16 $2.08 $2.41 $2.33 ’08 ’09 ’10 ’11 ’12 debt-to-gross book vaLue interest coverage ratio 48% 2.7x Adelaide Place, Scotia Plaza and 36 Toronto Street, Toronto PAGe III DunDee inDustRiAl Reit 2012 Annual Report PortfoLio at-a-gLance caLgary 3,684 yeLLowknife 330 edMonton 1,940 saskatoon 481 regina 614 victoria 149 vancouver 934 geograPhic diversification (thousands of square feet) diversified, high-quaLity tenants (December 31, 2012) Tenant Bank of Nova Scotia Government of Canada Government of Ontario Bell Canada Government of Québec Enbridge Pipelines TELUS State Street Trust Company Government of Alberta Government of Saskatchewan total PAGe IV Owned area (square feet) % of owned area % of gross rental revenue 915,177 1,574,670 479,184 376,694 695,629 247,019 289,103 244,936 346,810 334,240 4.0% 6.9% 2.1% 1.6% 3.0% 1.1% 1.3% 1.1% 1.5% 1.5% 7.9% 6.9% 2.3% 2.0% 2.0% 1.5% 1.5% 1.5% 1.3% 1.3% 5,503,462 24.1% 28.2% us 944 Average remaining lease term (years) 11.6 3.8 6.5 5.3 13.7 5.9 3.3 9.3 2.6 4.2 6.6 Credit rating AA AA+ AA+ BBB+ A+ A- BBB+ AA- AA+ AA+ nuMber of ProPerties occuPied and coMMitted Market rent/in-PLace rent 173 95.1% 11.9% % noi centraL business district 69% average tenant size (square feet) gross LeasabLe area (thousands of square feet) 11,146 22,948 average reMaining Lease terM (years) 5.49 southwestern ontario 1,560 toronto 8,929 MontréaL 1,279 atLantic canada 265 québec city 669 ottawa 1,170 OCCUPANCY Dundee REIT Office National Office (CBRE) BALANCED LEASE EXPIRIES 96.6% 96.7% 95.8% 93.3% 90.1% 90.5% 95.4% 95.1% 91.9% 91.5% 15.6% 13.1% 17.2% 8.3% 9.2% 8.7% 8.2% 5.9% 4.4% 4.4% ’08 ’09 ’10 ’11 ’12 ’ 13 ’14 ’15 ’16 ’17 ’18 ’19 ’20 ’21 ’22+ PAGe V 700 rue de la Gauchetière ouest, Montréal Scotia Plaza, Toronto Airport Corporate Centre, Calgary 1 ManageMent’s discussion and analysis 1 section i — oBJectiVes and Financial HigHligHts 1 Basis of presentation 2 our oBjectives 2 our strategy 3 our assets 4 Key performance indicators 5 financial overview 6 outlooK 6 section ii — eXecuting tHe stRategy 6 our operations 12 our resources and financial condition 17 our financing 24 our equity 27 our results of operations 39 selected annual information 40 quarterly information 42 section iii — disclosuRe contRols and PRoceduRes 43 section iV — RisKs and ouR stRategy to Manage 46 section V — cRitical accounting Policies 46 critical accounting judgments, estimates and assumptions in applying accounting policies 46 changes in accounting estimates and changes in accounting policies 47 ManageMent’s ResPonsiBility FoR Financial stateMents 48 indePendent auditoR’s RePoRt 49 consolidated Financial stateMents 53 notes to tHe consolidated Financial stateMents DUNDEE REIT 2012 Annual Report Management’s discussion and analysis (All dollar amounts in our tables are presented in thousands, except rental rates, unit and per unit amounts) Section I – Objectives and fi nancial highlights Basis of presentation Our discussion and analysis of the financial position and results of operations of Dundee Real Estate Investment Trust (“Dundee REIT” or the “Trust”) should be read in conjunction with the audited consolidated financial statements of Dundee REIT for the year ended December 31, 2012. Unless otherwise indicated, our discussion of assets, liabilities, revenue and expenses includes our investment in joint ventures that are equity accounted for at our proportionate share of assets, liabilities, revenue and expenses. On October 4, 2012, the Trust completed the sale of its industrial segment comprising 77 properties (the “Industrial Portfolio”) to Dundee Industrial Real Estate Investment Trust (“Dundee Industrial”) for a total sale price of approximately $575.5 million (including working capital adjustments). The sale price of the 77 industrial properties was satisfi ed by cash consideration of approximately $136.3 million and the issuance of $160.3 million of limited partnership units of Dundee Industrial Limited Partnership (a subsidiary of Dundee Industrial), which are exchangeable for units of Dundee Industrial, promissory notes receivable from Dundee Industrial of $42.0 million, offset by the mortgages assumed on dispositions and working capital adjustments. The Trust is now discharged from all rights and obligations relating to the 77 industrial properties. As a result of the sale, these properties and their contribution to our operating performance have been reclassifi ed in the consolidated fi nancial statements and in this management’s discussion and analysis (“MD&A”) as discontinued operations. Dundee REIT’s retained interest in Dundee Industrial at December 31, 2012, is approximately 30.9% and is accounted for as an equity investment. On February 11, 2013, Dundee Industrial announced that it has entered into an agreement to sell 9.1 million units on a bought deal basis at a price of $11.00 per unit to a syndicate of underwriters for gross proceeds of $100.1 million. As a result of this offering, Dundee REIT’s interest in Dundee Industrial will be further diluted to 26.4%. Unless otherwise indicated, our operating metrics and fi nancial information for the current period and prior periods refl ect the investment property portfolio excluding assets sold and held for sale as well as the 77 industrial properties sold to Dundee Industrial. This MD&A is dated as at January 31, 2013, except where otherwise noted. For simplicity, throughout this discussion, we may make reference to the following: • “REIT A Units”, meaning the REIT Units, Series A • “REIT B Units”, meaning the REIT Units, Series B • “REIT Units”, meaning the REIT Units, Series A, and REIT Units, Series B • “LP B Units” and “subsidiary redeemable units”, meaning the LP Class B Units, Series 1 Certain market information has been obtained from CB Richard Ellis, Canadian Offi ce MarketView, Fourth Quarter 2012, a publication prepared by a commercial firm that provides information relating to the real estate industry. Although we believe this information is reliable, its accuracy and completeness 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 on a number of assumptions and is subject to a number of risks and uncertainties, many of which are beyond Dundee REIT’s control, which could cause actual results to differ materially from those disclosed in or implied by such forward-looking information. These risks and uncertainties include, but are not limited to, general and local economic and business conditions; the financial condition of tenants; our ability to refinance maturing debt; leasing risks, including those associated with the ability to lease vacant space; our ability to source and complete accretive acquisitions; and interest rates. Although the forward-looking statements contained in this MD&A are based on what we believe are reasonable assumptions, there can be no assurance that actual results will be consistent with these forward-looking statements. Factors that could cause actual results to differ materially from those set forth in the forward-looking statements and information include, but are not limited to, general economic conditions; local real estate conditions, including the development of properties in PAGE 1 6042_Dundee_REIT_AR_2012.indd 1 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report close proximity to the Trust’s properties; timely leasing of vacant space and re-leasing of occupied space upon expiration; dependence on tenants’ financial condition; the uncertainties of acquisition activity; the ability to effectively integrate acquisitions; interest rates; availability of equity and debt financing; and that we continue to comply with the real estate investment trust (“REIT”) exemption under the specifi ed investment fl ow-through trust (“SIFT”) legislation; and other risks and factors described from time to time in the documents filed by the Trust with securities regulators. All forward-looking information is as of January 31, 2013, except where otherwise noted. 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 our latest Annual Information Form. Certain filings are also available on our website at www.dundeereit.com. Our objectives We are committed to: • managing our business to provide growing cash flow and stable and sustainable returns through adapting our strategy and tactics to changes in the real estate industry and the economy; • building and maintaining a diversified, growth-oriented portfolio of office properties in Canada, based on an established platform; • providing predictable and sustainable cash distributions to unitholders and prudently managing distributions over time; and • maintaining a REIT that satisfies the REIT exception under the SIFT legislation in order to provide certainty to unitholders with respect to taxation of distributions. Distributions We currently pay monthly distributions to unitholders of $0.183 per unit, or $2.20 per unit on an annual basis. At December 31, 2012, approximately 16% of our total units were enrolled in the Distribution Reinvestment and Unit Purchase Plan (“DRIP”), including 16% of the REIT A Units and 11% of the LP B Units. There is no equivalent program for the REIT B Units (see a description of Our Equity on page 24). 2012 Distribution rate Month -end closing price Jan Feb March Dec $0.183 $0.183 $0.183 $0.183 $0.183 $0.183 $0.183 $0.183 $0.183 $0.183 $0.183 $0.183 $33.47 $34.40 $35.20 $36.88 $36.02 $38.19 $38.43 $38.24 $37.66 $36.65 $36.20 $37.43 June Sept April Nov May Aug Oct July Our strategy With the sale of substantially all of our Industrial Portfolio in the fourth quarter, Dundee REIT’s core strategy is to invest in office properties in key markets across Canada, providing a solid platform for stable and growing cash flows. The majority of our portfolio comprises central business district office properties concentrated in nine of Canada’s top ten office markets. The execution of our strategy is continuously reviewed, including acquisitions and dispositions, our capital structure and our analysis of current economic conditions. Our executive team is seasoned, knowledgeable and highly motivated to continue to increase the value of our portfolio and provide stable, reliable and growing returns for our unitholders. In addition, Dundee REIT is steadfast in maintaining its status as a REIT under the SIFT legislation. Dundee REIT’s methodology to execute its strategy and to meet its objectives includes: Investing in high-quality office properties Dundee REIT has an established presence in key urban markets across Canada. Our portfolio comprises high-quality offi ce properties that are well-located and attractively priced and produce consistent cash flow. When considering acquisition opportunities, we look for quality tenancies, strong occupancy, the appeal of the property to future tenants, how it complements our existing portfolio and how we can create additional value. PAGE 2 6042_Dundee_REIT_AR_2012.indd 2 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report Optimizing the performance, value and cash flow of our portfolio We manage our properties to optimize long-term cash flow and value. With a fully internalized property manager, we offer a strong team of highly experienced real estate professionals who are focused on achieving more from our assets. Occupancy rates across our portfolio have remained steady and strong for a number of years. We view this as compelling evidence of the appeal of our properties and our ability to meet and exceed tenant expectations. Dundee REIT has a proven ability to identify and execute value-add opportunities and a track record for outperforming the real estate index. Diversifying our portfolio to mitigate risk Since 2009, we have carefully repositioned our portfolio through an impressive number of accretive acquisitions. In addition to expanding and diversifying our geographic footprint across the country, the acquisitions have served to enhance the stability of our business, diversifying and strengthening the quality of our revenue stream and increasing cash flow. Our existing tenant base is well diversifi ed, representing a number of industries and different space requirements and with strong fi nancial covenants. Our lease maturity profi le is well staggered over the next ten years. We will continue to pursue opportunities for growth but only when it enhances our overall portfolio, further improves the sustainability of distributions, strengthens our tenant profile and mitigates risk. We have experience in each of Canada’s key markets and have the flexibility to pursue acquisitions in whichever markets offer compelling investment opportunities. Maintaining and strengthening our conservative financial profile We have always operated our business in a disciplined manner, with a keen eye on financial analysis and balance sheet management to ensure that we maintain a prudent capital structure. We continue to generate cash fl ow sufficient to fund our distributions while maintaining a conservative debt ratio and staggered debt maturities. Our assets Dundee REIT provides high-quality, well-located and attractively priced business premises. Our portfolio comprises central business district and suburban office properties predominantly located in major urban centres across Canada including Toronto, Calgary, Edmonton, Montréal, Kitchener-Waterloo, Ottawa, Vancouver, Regina, Saskatoon, Quebec City, Yellowknife and Halifax. At December 31, 2012, our ownership interests included 173 office properties (205 buildings) totalling approximately 23.1 million square feet of gross leasable area (“GLA”), including 22.9 million square feet of offi ce properties, 0.1 million square feet of properties classifi ed as held for sale and 0.1 million square feet of redevelopment properties. The assets classifi ed as held for sale were sold subsequent to year-end. The occupancy rate across our office portfolio remains high at 95.1%, well ahead of the national industry average occupancy rate of 91.5% (CB Richard Ellis, Canadian Office MarketView, Fourth Quarter 2012). Our occupancy rates include lease commitments for space that is currently being readied for occupancy but for which rent is not yet being recognized. Western Canada Calgary Toronto Eastern Canada(1) Total(2) December 31, 2012 Owned GLA (sq. ft.) December 31, 2011 Total 4,447,819 3,684,326 10,489,256 4,326,892 22,948,293 % 19 16 46 19 100 Total 3,351,617 3,872,766 5,767,793 2,104,062 % 22 26 38 14 15,096,238 100 (1) Includes two properties located in the U.S. (2) Excludes development and redevelopment properties, discontinued operations – industrial properties and properties held for sale. Throughout the year we completed $2.6 billion of acquisitions, adding 9.9 million square feet to our portfolio, including Scotia Plaza and the Whiterock Portfolio for approximately $2.3 billion. Along with increasing the scale of our operations, the new assets serve to improve the quality of our portfolio, further diversify our tenant mix, strengthen our cash fl ows and make Dundee REIT stronger overall. PAGE 3 6042_Dundee_REIT_AR_2012.indd 3 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report In addition to pursuing accretive acquisitions, management kept a strong focus on portfolio analysis and pruning assets that no longer fi t within our strategy focused in the offi ce segment. Throughout the year we completed the sale of approximately $680.3 million of non-strategic industrial and other non-core assets, comprising 5.8 million square feet. Proceeds from asset sales were redeployed in a variety of ways to strengthen the business, including redeeming $126.5 million of convertible debentures, which reduced our overall level of debt and lowered interest costs. Key performance indicators Performance is measured by these and other key indicators: Operations Occupancy rate (period-end)(1) Average in-place net rent per square foot (period-end)(1) Operating results Investment properties revenue(2) Net operating income (“NOI”)(2)(3)(4) Comparative properties NOI(2)(3)(4) Funds from operations (“FFO”)(3)(5) Adjusted funds from operations (“AFFO”)(3)(6) Fair value increase to investment properties, excluding transaction costs(2) Distributions Declared distributions Distributions paid in cash DRIP participation ratio Financing Weighted average effective interest rate on debt (year-end) Interest coverage ratio Per unit amounts(7) Basic: FFO(3) AFFO(3) Distribution rate Diluted: FFO(3) Three months ended December 31, Years ended December 31, 2012 2011 2012 2011 95.1% 95.4% $ 17.22 $ 16.92 $ 191,999 $ 126,912 $ 686,564 $ 404,774 105,853 42,477 68,905 58,060 70,065 41,034 48,210 41,047 385,821 166,993 263,488 221,960 229,439 162,717 159,397 137,675 49,719 168,861 123,363 272,171 $ 55,357 $ 36,549 $ 203,596 $ 131,168 43,613 21% 29,456 19% 160,024 21% 4.33% 2.7 times 107,860 18% 4.96% 2.6 times $ $ $ 0.68 0.57 0.55 0.68 0.73 0.62 0.55 0.73 $ 2.86 2.41 2.20 2.85 2.69 2.33 2.20 2.69 (1) December 31, 2012 excludes redevelopment properties, discontinued operations – industrial properties and properties held for sale. December 31, 2011 amounts are those reported for offi ce properties. (2) Includes investment in joint ventures and excludes discontinued operations. (3) NOI, FFO and AFFO are key measures of performance used by real estate operating companies; however, they are not defi ned by IFRS, do not have standard meanings and may not be comparable with other industries or income trusts. (4) NOI is defined as net rental income, excluding net rental income from discontinued operations and properties sold and held for sale. The reconciliation of NOI to net rental income can be found on page 31. (5) FFO – The reconciliation of FFO to net income can be found on page 36. (6) AFFO – The reconciliation of AFFO to FFO can be found on page 36. (7) A description of the determination of basic and diluted amounts per unit can be found on page 37. PAGE 4 6042_Dundee_REIT_AR_2012.indd 4 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report Financial overview Dundee REIT remains focused on its strategy, including strong portfolio and property management and maintaining a prudent capital structure. During the year, we added approximately 9.9 million square feet of central business district and suburban offi ce properties to our portfolio, including Scotia Plaza and the strategic acquisition of the Whiterock Portfolio, for approximately $2.3 billion. These acquisitions were mainly funded by two equity offerings and a mortgage bond totalling approximately $1.0 billion. In addition, during the fourth quarter, we completed the sale of our industrial segment to Dundee Industrial as well as other non-core assets to become substantially a pure-play offi ce REIT. AFFO for the year increased to $2.41 per unit, up 3.4% over the prior year, refl ecting the impact of accretive acquisitions completed in 2011 and 2012 as well as growth in comparative property NOI. Total AFFO for the year was $222.0 million, up 61.2% over the prior year. On a quarterly basis, AFFO was $58.1 million, a 41.4% increase over the prior year fourth quarter. On a per unit basis, AFFO was $0.57, down by 8.1% over the prior year comparative quarter mainly due to the sale of the industrial segment at the beginning of the fourth quarter and the use of proceeds from this sale being deployed at the end of the quarter. Diluted FFO per unit for the year was $2.85, up 5.9% over the prior year, primarily driven by accretive acquisitions as well as growth in comparative property NOI. Included in FFO is the favourable impact of straight-line rents as well as the amortization of fair value adjustments recorded on assumed debt. On a quarterly basis, diluted FFO per unit was $0.68, down by 6.8% over the prior year comparative quarter mainly due to the sale of the industrial segment at the beginning of the fourth quarter and the use of proceeds from this sale being deployed at the end of the quarter. NOI from comparative properties increased 3.5%, or $1.4 million, for the fourth consecutive quarter, and 2.6%, or $4.3 million, for the year. Total NOI grew $35.8 million over the prior year comparative quarter, including $35.0 million generated by acquired properties. NOI including income from discontinued operations, properties sold and other assets held for sale was $106.8 million, comprising $105.8 million from continuing operations, $0.4 million from discontinued operations (Industrial Portfolio) and $0.6 million from properties sold and held for sale. Year-over-year, comparative property NOI increased 2.6%, or $4.3 million, primarily in Western Canada and Calgary. In-place and committed occupancy at year-end remained strong at 95.1% versus 95.4% at the end of 2011. The stable occupancy rates evidence our ability to attract and retain our tenants. Average in-place net rents and market rents continue to grow across the portfolio. Average in-place net rents per square foot for the quarter were $17.22, up from $17.18 in the prior quarter and up from $16.92 in the prior year, mainly driven by the impact of acquisitions and rental rate growth in certain geographical locations. Market rents per square foot at December 31, 2012 were $19.27, an increase of $0.03 over the prior quarter and an increase of $0.48 over the prior year. Our average in-place net rents are approximately 11.9% below market representing an opportunity to capture rental rate increases when space is leased or renewed. During the quarter, we completed $35.1 million of gross fi nancings at a weighted average face rate of 3.62% with an average term to maturity of six years. In addition, we repaid and discharged $46.4 million of mortgages at a weighted average face rate of 4.40% (weighted average effective interest rate – 3.71%) during the quarter. Furthermore, we redeemed $126.5 million principal amount of convertible debentures outstanding. The redeemed convertible debentures bore interest at a weighted average face rate of 6.0% and a weighted average effective rate of 7.0%. During the year we secured $908.1 million in new mortgages at a weighted average face rate of 3.59% (weighted average effective interest rate – 3.85%) for an average term of 6.8 years. During the quarter, we completed the sale of the industrial segment for gross proceeds of $575.5 million (including working capital adjustments), together with $225.6 million of related debt at a weighted average face rate of 4.70% (weighted average effective interest rate – 4.36%) that was assumed by Dundee Industrial and four properties for gross proceeds of $26.2 million, together with $7.0 million of related debt at a weighted average face rate of 5.43% (weighted average effective interest rate – 3.79%) that was either assumed by the purchaser or discharged. For the 12-month period, we sold 10 properties for gross proceeds of $104.8 million, together with $36.1 million of related debt. PAGE 5 6042_Dundee_REIT_AR_2012.indd 5 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report Outlook This past year was a true turning point for Dundee REIT. Throughout the year we completed approximately $2.6 billion of acquisitions, adding approximately 9.9 million square feet to our portfolio. In addition, we completed the sale of approximately $680.3 million of non-strategic assets, totalling approximately 5.8 million square feet. The asset sales completed our transformation into a pure-play offi ce REIT and the proceeds were redeployed in a variety of ways to strengthen the business. The acquisitions increased the scale of our operations, and also improved the overall quality of our portfolio, further diversifying our tenant mix, strengthening our cash fl ows and making Dundee REIT stronger overall. Entering our tenth year, Dundee REIT is positioned as one of the market leaders in the Canadian REIT sector. We are the third largest REIT and the largest pure-play offi ce REIT in Canada. Financially, our overall level of debt is down, lower interest rates are contributing to increased cash fl ow and AFFO per unit is strong. Operationally, occupancy remains sound; the business is suffi ciently large that there is minimal risk exposure to any single tenant; and rental rates continue to increase incrementally. Our current operating metrics, including embedded rent steps, a manageable lease rollover profi le and below market expiring rents, set the stage for continued organic growth. Looking forward into 2013, we have a portfolio of high-quality assets that are generating high-quality income and, on a per unit basis, AFFO is comfortably in excess of distributions. We will remain focused on our strategy, including strong asset and property management, maintaining a prudent capital structure and seeking ways to continue strengthening the business. Section II – Executing the strategy Our operations The following key performance indicators related to our operations influence the cash generated from operating activities. Performance indicators Occupancy rate Average in-place net rent rates (per sq. ft.) Tenant maturity profile – average term to maturity (years) (1) Excludes redevelopment properties, discontinued operations – industrial properties and other properties held for sale. (2) December 31, 2011 amounts are those reported for offi ce properties. December 31, December 31, 2012(1) 95.1% 17.22 5.49 $ 2011(2) 95.4% 16.92 4.63 $ PAGE 6 6042_Dundee_REIT_AR_2012.indd 6 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report Occupancy At December 31, 2012, the overall percentage of occupied and committed space across our total and comparative property portfolios remained strong at 95.1%, consistent with Q3 2012 and remaining well above the national industry average of 91.5%. Occupancy rates discussed in this report with respect to our portfolio include occupied and committed space at December 31, 2012. On a comparative property basis, the occupancy rate across our portfolio increased slightly to 95.2% (September 30, 2012 – 95.1%), primarily driven by gains in downtown Calgary, Montréal and Ottawa, offset by declines in Vancouver and Saskatoon. (percentage) Offi ce Western Canada Calgary Toronto Eastern Canada Total offi ce December 31, 2012 Total portfolio(1) September 30, 2012 Comparative properties(2) December 31, 2012 September 30, 2012 94.3 94.4 94.7 97.8 95.1 95.2 93.7 94.6 97.4 95.1 94.6 94.4 94.5 97.8 95.2 95.2 93.7 94.6 97.4 95.1 (1) Excludes redevelopment properties, discontinued operations – industrial properties and other properties held for sale. (2) Comparative properties include all properties owned by the Trust at September 30, 2012, excluding redevelopment properties, discontinued operations – industrial properties and other properties held for sale. The table below details the percentage of occupied and committed space for the last eight quarters, demonstrating the strength and consistency of our leasing profi le. (percentage)(1) Office Industrial(2) Overall Q4 95.1 – 95.1 Q3 95.1 – 95.1 Q2 95.2 97.1 95.6 2012 Q1 95.2 97.4 95.6 Q4 95.4 96.6 95.6 Q3 95.7 96.1 95.8 Q2 96.1 97.9 96.5 2011 Q1 95.8 97.0 96.1 (1) Excludes redevelopment properties and other properties held for sale. (2) As of September 30, 2012, the industrial properties were reclassifi ed as discontinued operations and subsequently sold. 6042_Dundee_REIT_AR_2012.indd 7 4/8/13 4:23 PM PAGE 7 DUNDEE REIT 2012 Annual Report Vacancy schedule During the quarter, vacancy was reduced by approximately 43,700 square feet. Leasing activity included approximately 497,300 square feet of renewals and approximately 277,300 square feet of new leases, more than offsetting approximately 727,600 square feet of lease expiries and terminations. At year-end, another approximately 163,500 square feet of vacancy was committed for future occupancy. (in square feet) Available for lease Vacancy committed for future leases Vacant space at beginning of period Acquired vacancy Vacant space – restated Remeasurements/reclassifi cations Expiries Early terminations and bankruptcies New leases Renewals Vacant space – December 31, 2012 Vacancy committed for future occupancy Available for lease – December 31, 2012 Three months ended December 31, 2012(1) 1,096,783 189,300 1,286,083(2) 37,707 1,323,790 3,279 694,246 33,393 (277,287) (497,319) 1,280,102 163,536 1,116,566 (1) Excludes assets related to discontinued operations – industrial properties and properties held for sale and properties sold. (2) Opening vacancy has been restated for discontinued operations – industrial properties and properties held for sale and properties sold. In-place net rental rates Average in-place net rents across our total portfolio increased to $17.22 per square foot from $17.18 at September 30, 2012, primarily refl ecting gains in the Toronto market. Estimated market rents remain approximately 12% higher than our portfolio average in-place net rents, affording us a competitive advantage in attracting and retaining tenants as well as the opportunity to surface additional value as leases roll over. Total portfolio Office Western Canada Calgary Toronto Eastern Canada Total December 31, 2012 September 30, 2012 Average in-place net rent(1)(2) Market rent Market rent/ in -place rent (%) Average in -place net rent(1)(2) Market rent Market rent/ in -place rent (%) $ 18.24 $ 19.53 18.18 12.08 17.22 $ $ 20.58 24.86 19.20 13.31 19.27 12.8 27.3 5.6 10.2 11.9 $ 18.31 $ 19.79 17.98 12.17 $ 17.18 $ 21.18 24.57 19.06 13.31 19.24 15.7 24.2 6.0 9.4 12.0 (1) Average in-place net rents include straight-line rent adjustments. (2) Excludes discontinued operations – industrial properties and properties held for sale. PAGE 8 6042_Dundee_REIT_AR_2012.indd 8 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report Leasing and tenant profile The average remaining lease term and other portfolio information are detailed in the following table. The portfolio average remaining lease term at December 31, 2012, is 5.49 years (September 30, 2012 – 5.58 years), refl ecting the impact of acquisitions in Western Canada in the fourth quarter with lower average remaining lease terms. December 31, 2012(1) Average remaining lease term (years) Average Average in-place Average net rent(2) remaining lease term (years) (per sq. ft.) tenant size (sq. ft.) September 30, 2012(1) Average tenant size (sq. ft.) Average in-place net rent(2) (per sq. ft.) Office Western Canada Calgary Toronto Eastern Canada Total 4.17 3.90 5.29 8.58 5.49 9,736 $ 9,260 10,959 18,308 11,146 $ 18.24 19.53 18.18 12.08 17.22 4.41 3.71 5.32 8.77 5.58 9,647 $ 9,149 10,951 17,944 11,061 $ 18.31 19.79 17.98 12.17 17.18 (1) Excludes properties held for sale. (2) Average in-place net rents include straight-line rent adjustments. The following table details our lease maturity profile by geographic segment at December 31, 2012. The table distinguishes between lease maturities that have yet to be renewed or re-leased and maturities for which we have a leasing commitment. The uncommitted line should be referenced when considering future leasing risks or opportunities, and the committed line should be referenced when considering the impact of leasing activity. Our lease maturity profi le remains staggered with 12% of leases expiring in 2013, 10% expiring in 2014, 9% expiring in 2015 and 16% expiring in 2016. Approximately 0.9 million square feet of the space expiring in 2013 is already committed for future occupancy. (in sq. ft.) Current vacancy Current monthly tenancies 2013 2014 2015 2016 2017 to 2031 Total Western Canada – uncommitted 252,952 6,378 478,488 459,754 378,774 756,429 1,837,437 4,170,212 Western Canada – committed Total Western Canada Calgary – uncommitted Calgary – committed Total Calgary Toronto – uncommitted Toronto – committed Total GTA/Toronto Eastern Canada – uncommitted Eastern Canada – committed Total Eastern Canada Total – uncommitted Total – committed Total(1) – – 229,649 9,119 28,569 540 9,730 277,607 252,952 6,378 708,137 468,873 407,343 756,969 1,847,167 4,447,819 206,058 740 371,152 581,002 295,046 868,254 940,521 3,262,773 – – 286,723 36,130 27,137 1,492 70,071 421,553 206,058 740 657,875 617,132 322,183 869,746 1,010,592 3,684,326 560,547 16,911 911,583 869,581 919,059 1,735,394 4,544,617 9,557,692 – – 351,803 168,281 6,315 24,232 380,933 931,564 560,547 16,911 1,263,386 1,037,862 925,374 1,759,626 4,925,550 10,489,256 97,009 – 153,856 197,784 403,249 209,572 3,127,297 4,188,767 – 97,009 – – 46,273 8,365 – – 83,487 138,125 200,129 206,149 403,249 209,572 3,210,784 4,326,892 1,116,566 24,029 1,915,079 2,108,121 1,996,128 3,569,649 10,449,872 21,179,444 – – 914,448 221,895 62,021 26,264 544,221 1,768,849 1,116,566 24,029 2,829,527 2,330,016 2,058,149 3,595,913 10,994,093 22,948,293 (1) Excludes discontinued operations – industrial properties and properties held for sale. 6042_Dundee_REIT_AR_2012.indd 9 4/8/13 4:23 PM PAGE 9 DUNDEE REIT 2012 Annual Report The following table details expiring rents across our portfolio as well as our estimate of average market rents based on current leasing activity in comparable properties at December 31, 2012. Expiring rents and market rents represent base rates and do not include the impact of lease incentives. Currently, our 2013 expiring rents are approximately 5% below market and our 2014 expiring rents are 11% below market, which, when coupled with our well-staggered lease rollover profi le, positions us to continue capturing gains on rates with new leasing. Expiring rents(1) Offi ce Western Canada Calgary Toronto Eastern Canada Portfolio average Market rents(2) Offi ce Western Canada Calgary Toronto Eastern Canada Market rent average Current monthly tenancies 2013 2014 2015 2016 $ 8.18 $ 17.42 $ 17.51 $ 16.76 $ 17.57 $ 26.25 3.73 – 21.95 15.16 14.88 19.83 16.20 14.54 14.46 15.08 16.22 20.45 16.60 16.13 $ 5.60 $ 17.02 $ 17.33 $ 15.54 $ 17.71 $ $ 16.86 $ 18.77 $ 19.18 $ 18.85 $ 19.50 $ 26.73 15.16 – 23.72 15.83 14.66 26.40 16.19 14.42 22.99 16.82 15.34 28.07 17.92 16.52 $ 15.97 $ 18.00 $ 19.49 $ 17.81 $ 20.64 $ 2017 to 2031 21.70 22.45 21.89 12.72 19.47 22.17 23.58 21.46 12.65 19.46 (1) Excludes properties held for sale. (2) Estimate only; based on current market rents with no allowance for increases in future years. Subject to changes in market conditions in each market segment. Initial direct leasing costs and lease incentives Initial direct leasing costs include leasing fees and related costs and broker commissions incurred in negotiating and arranging tenant leases. Lease incentives include costs incurred to make leasehold improvements to tenant spaces and cash allowances. Initial direct leasing costs and lease incentives are dependent upon asset type, lease terminations and expiries, the mix of new leasing activity compared to renewals, portfolio growth and general market conditions. 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 fl ex offi ce and industrial space. For the year ended December 31, 2012, we incurred $24.0 million in leasing costs and lease incentives, representing an average of $8.16 per square foot leased. Performance indicators Operating activities (continuing portfolio)(1)(2) Portfolio size (sq. ft.) Occupied and committed Square footage leased and occupied in 2012 Lease incentives and initial direct leasing costs paid in 2012 (1) Includes investment in joint ventures. (2) Excludes redevelopment properties, discontinued operations – industrial properties and properties held for sale. Total 22,948,293 95.1% 2,940,136 $ 23,979 PAGE 10 6042_Dundee_REIT_AR_2012.indd 10 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report Tenant base profile Our tenant base includes municipal, provincial and federal governments as well as a wide range of high-quality large international corporations, including Canada’s third largest bank and three of Canada’s prominent law fi rms, and small to medium-sized businesses across Canada. With approximately 2,290 tenants, our risk exposure to any single large lease or tenant is low. The average size of our office tenants is approximately 11,000 square feet. Effectively managing this diverse tenant base is one of our key strengths and has helped us to maintain consistently high occupancy levels and to continually capitalize on rental rate increases. The stability and quality of our cash flow is further enhanced by the fact that rental revenue from government and government agencies comprises approximately 17% of our total rental revenue. The list of our 20 largest tenants includes both federal and provincial governments as well as other nationally and internationally recognizable high-quality corporations and businesses. The following table outlines their contributions to our rental revenue. Owned area (%) Gross rental revenue (%) Weighted average remaining lease term (years) Tenant Bank of Nova Scotia Government of Canada Government of Ontario Bell Canada Government of Quebec Enbridge Pipelines Inc. TELUS State Street Trust Company Government of Alberta Government of Saskatchewan Borell Management Aviva Canada Inc. Government of British Columbia Loyalty Management Miller Thomson Winners Merchants International SNC-Lavalin Inc. Cassels Brock Blackwell International Financial Data Services Daimler Chrysler Canada Inc. Total Owned area (sq. ft.) 915,177 1,574,670 479,184 376,694 695,629 247,019 289,103 244,936 346,810 334,240 135,436 335,900 278,158 194,018 146,922 219,685 192,092 94,507 134,522 132,500 4.0 6.9 2.1 1.6 3.0 1.1 1.3 1.1 1.5 1.5 0.6 1.5 1.2 0.8 0.6 1.0 0.8 0.4 0.6 0.6 7.9 6.9 2.3 2.0 2.0 1.5 1.5 1.5 1.3 1.3 1.2 1.2 1.1 1.0 0.9 0.8 0.8 0.8 0.8 0.7 7,367,202 32.2 37.5 11.6 3.8 6.5 5.3 13.7 5.9 3.3 9.3 2.6 4.2 4.0 3.6 4.4 4.8 5.2 2.5 7.3 12.0 10.8 9.7 7.0 PAGE 11 6042_Dundee_REIT_AR_2012.indd 11 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report Our resources and fi nancial condition Investment properties For the year ended December 31, 2012, the fair value of our investment property portfolio, including those assets held in investment in joint ventures and excluding redevelopment properties and assets held for sale, increased to $6.5 billion from $4.0 billion at December 31, 2011, representing a weighted average capitalization rate (“cap rate”) of 6.35%. During Q4 2012, we: • acquired our co-owner’s interest in nine properties for $75.8 million, including transaction costs; • acquired our joint venture partner’s share in a property for $78.8 million, including transaction costs; • completed the disposition of 77 industrial properties with a fair value of $551.5 million; • sold other non-core assets for gross proceeds of $26.2 million; • incurred $9.6 million in building improvements and $9.6 million in lease incentives; and • recorded fair value gains of $45.1 million (excluding assets related to discontinued operations and other assets held for sale). During Q3 2012, we: • sold non-core assets for gross proceeds of $70.9 million; • incurred $4.2 million in building improvements and $5.0 million in lease incentives; • recorded fair value gains of $24.5 million (excluding assets related to discontinued operations and other assets held for sale); and • reclassifi ed nine buildings with a total fair value of $46.4 million as assets held for sale. During Q2 2012, we: • acquired a two-thirds interest in the Scotia Plaza complex for $875.5 million, including transaction costs; • acquired one offi ce building for $36.0 million, including transaction costs; • incurred building improvement costs totalling $3.8 million and lease incentive costs totalling $5.7 million; • recorded fair value gains of $14.8 million (fair value losses of $17.1 million including transaction costs); and • reclassifi ed one property owned as at December 31, 2011, with a total fair value of $6.9 million, to assets held for sale. During Q1 2012, we: • acquired the Whiterock Portfolio for $1.4 billion; of which $106.8 million was reclassifi ed as assets held for sale; • acquired two offi ce buildings for $127.5 million (including transaction costs) and parking lots adjacent to one of our offi ce properties for $18.2 million (including transaction costs); • sold an offi ce property for $7.7 million, which was classifi ed as held for sale at December 31, 2011; • incurred $2.8 million in building improvement costs and $4.6 million in lease incentive costs; • spent $1.9 million to fi nalize the Gallery Building in Yellowknife, which was substantially completed in February 2012; • recorded fair value gains of $47.4 million (fair value gains of $42.2 million including transaction costs); and • reclassifi ed two properties with a total fair value of $28.8 million, to assets held for sale. Fair values were determined using the direct capitalization method and/or the discounted cash flow method. The direct capitalization method applies a cap rate to stabilized NOI and incorporates allowances for vacancy and management fees. The resulting capitalized value is further adjusted for extraordinary costs to stabilize income and non-recoverable capital expenditures, where applicable. Individual properties were valued using cap rates in the range of 5.25% to 9.25%. The discounted cash flow method discounts the expected future cash flows, generally over a term of ten years, and uses discount rates and terminal capitalization rates specific to each property. PAGE 12 6042_Dundee_REIT_AR_2012.indd 12 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report The fair value of our investment properties, including investment in joint ventures, is set out below. Office Western Canada Calgary Toronto Eastern Canada Total Add: Redevelopment properties Assets related to discontinued operations – industrial properties Other assets held for sale Total portfolio Less: Investment in joint ventures Assets related to discontinued operations – industrial properties Other assets held for sale Amount per consolidated balance sheet December 31, 2012 September 30, 2012(1) Total portfolio December 31, 2011(1) $ 1,272,704 $ 1,183,879 $ 974,587 1,148,522 3,257,009 827,492 6,505,727 10,700 – 20,295 1,102,480 3,174,647 826,079 1,025,315 1,466,066 494,142 6,287,085 3,960,110 10,700 551,522 46,448 10,700 396,658 58,915 $ 6,536,722 $ 6,895,755 $ 4,426,383 1,038,867 1,116,952 – 20,295 551,522 46,448 264,505 396,658 58,915 $ 5,477,560 $ 5,180,833 $ 3,706,305 (1) Certain properties owned at September 30, 2012 and December 31, 2011 have been reclassifi ed to conform with the December 31, 2012 presentation. The fair value of our total portfolio (before redevelopment properties, assets related to discontinued operations and other assets held for sale) increased by $218.6 million in Q4 2012, including fair value gains of $45.1 million, acquisitions of approximately $154.5 million, and capital expenditures and leasing costs of approximately $19.0 million. The increase in fair value is primarily attributable to cap rate compression in downtown Calgary where our weighted average cap rate declined from 6.99% at September 30, 2012, to 6.76% at December 31, 2012. The weighted average cap rate across our portfolio compressed to 6.35% from 6.39% in the prior quarter. Office Western Canada Calgary Toronto Eastern Canada Total Add: Redevelopment properties Assets related to discontinued operations – industrial properties Other assets held for sale Total portfolio Less: Investment in joint ventures Assets related to discontinued operations – industrial properties Other assets held for sale Total comparative properties December 31, 2012 September 30, 2012(2) Change Comparative properties(1) $ 1,197,728 $ 1,183,879 $ 13,849 1,148,522 3,172,286 827,492 6,346,028 10,700 – 20,295 1,102,480 3,174,647 826,079 6,287,085 10,700 551,522 46,448 46,042 (2,361) 1,413 58,943 – (551,522) (26,153) $ 6,377,023 $ 6,895,755 $ (518,732) 1,123,430 1,116,952 – 20,295 551,522 46,448 6,478 (551,522) (26,153) $ 5,233,298 $ 5,180,833 $ 52,465 (1) Comparative properties are properties owned by the Trust on September 30, 2012. (2) Certain properties owned at September 30, 2012 and December 31, 2011, have been reclassifi ed to conform with the December 31, 2012 presentation. PAGE 13 6042_Dundee_REIT_AR_2012.indd 13 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report On a comparative property basis, the fair value of our Calgary office portfolio increased by $46.0 million, primarily reflecting weighted average cap rate compression of 23 basis points (“bps”). The Toronto office portfolio was fl at for the quarter. The fair value of the Western Canada office portfolio increased by $13.8 million, primarily driven by cap rate compression in our Saskatoon market. Our Eastern Canada office portfolio remained relatively flat quarter-over-quarter. The key valuation metrics for investment properties, including properties accounted for using the equity method, are set out in the table below: Western Canada Calgary Toronto Eastern Canada Total December 31, 2012 Weighted average (%) 6.63 6.76 6.05 6.48 6.35 Range (%) 5.75–9.25 5.75–8.50 5.25–9.25 5.75–7.75 5.25–9.25 Capitalization rates(1) Total portfolio September 30, 2012 Weighted average (%) 6.67 6.99 6.06 6.46 6.39 Range (%) 5.80–9.25 6.00–8.50 5.21–9.50 5.75–7.75 5.21–9.50 (1) Capitalization rates do not include assets related to discontinued operations – industrial properties and other assets held for sale. Investing activities Key performance indicators in the management of our investing activities include the following: Investing activities(1) Acquisition of investment properties(2)(3) Acquisition of equity accounted interest in Scotia Plaza(2)(3) Acquisition of Whiterock Portfolio(2) Acquisition of Realex Portfolio(2) Building improvements Development projects Three months ended December 31, Years ended December 31, 2012 2011 2012 2011 $ 155,041 – – – 9,609 – $ 21,390 – – – 5,195 3,661 $ 336,265 875,509 1,419,899 – 20,410 1,945 $ 1,202,972 – – 363,697 8,284 13,215 (1) Includes investment in joint ventures, assets related to discontinued operations – industrial properties and properties held for sale. (2) Amount represents the purchase price, which does not refl ect the actual cash transactions. (3) Includes transaction costs. PAGE 14 6042_Dundee_REIT_AR_2012.indd 14 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report Acquisitions During the year ended December 31, 2012, we completed the following acquisitions: 5001 Yonge Street, Toronto 67 Richmond Street West, Toronto Whiterock Portfolio Parking lots, Saskatoon 1 Riverside Drive, Windsor Scotia Plaza, Toronto Interest acquired (%) Acquired GLA (sq. ft.) Occupancy on acquisition (%) Property type Purchase price(1) Date acquired offi ce 100.0 309,138 100.0 $ 112,984 January 19, 2012 offi ce offi ce/industrial/retail offi ce offi ce offi ce 100.0 100.0 100.0 100.0 44,996 7,368,679 9,567 235,915 66.7 1,317,795 100.0 14,464 January 30, 2012 97.6 1,419,899 March 2, 2012 100.0 78.0 99.5 18,242 36,014 875,509(2) March 12, 2012 April 26, 2012 June 15, 2012 Trans America Group properties, Edmonton 30 Adelaide Street East (State Street Financial Centre), Toronto Total offi ce/industrial 60.0 373,121 88.7 75,787 October 4, 2012 offi ce 50.0 206,967 99.9 78,774 December 28, 2012 9,866,178 97.2 $ 2,631,673 (1) Includes transaction costs. (2) Investment in joint venture that is equity accounted. Signifi cant transactions completed during the year include the acquisition of Scotia Plaza as well as the acquisition of the Whiterock Portfolio. On June 15, 2012, we completed the acquisition of a two-thirds interest in the Scotia Plaza complex in the heart of Toronto’s fi nancial district for $844.3 million, excluding transaction costs. At the time of acquisition, Scotia Plaza was 99.5% occupied by outstanding tenants, including The Bank of Nova Scotia and three of Canada’s prominent law fi rms, and had a weighted average remaining lease term of 10.6 years. Scotia Plaza is accounted for using the equity accounting method, and is jointly managed pursuant to a joint venture agreement with our co-owner, H&R REIT. The acquisition was fi nanced by way of a private placement of $650.0 million of mortgage bonds completed by the joint venture, with our proportionate share being $433.3 million. The remainder of the purchase price was funded by the issuance of 10,392,550 REIT A Units at $35.90 per unit, for gross proceeds of $373.1 million, and by drawing on existing revolving credit facilities. The acquisition of Whiterock was completed on March 2, 2012, and was accounted for as a business combination. The acquisition included $1.4 billion of investment properties. The purchase was funded with $159.8 million in cash and the issuance of 12,580,347 REIT A Units, valued at $34.56 per unit, representing a total consideration of $594.6 million. Mortgages assumed in connection with the acquisitions completed in the fourth quarter totalled $68.8 million (including fair value adjustments). Mortgages assumed in connection with acquisitions completed in Q1 2012 totalled $758.0 million (including fair value adjustments). 6042_Dundee_REIT_AR_2012.indd 15 4/8/13 4:23 PM PAGE 15 DUNDEE REIT 2012 Annual Report The following acquisitions were completed during the year ended December 31, 2011: Year ended December 31, 2011 Property type Interest acquired (%) Acquired GLA (sq. ft.) Occupancy on acquisition (%) Purchase price(1) Date acquired Saskatoon Square, Saskatoon 400 Cumberland Road, Ottawa offi ce offi ce 100 100 209,593 174,921 Realex Portfolio offi ce/industrial 100 1,837,277 55 King Street West, Kitchener 586 Argus Road, Oakville Morgex Building (11120 178th Street), Edmonton offi ce offi ce offi ce Multivesco Portfolio, Gatineau offi ce/industrial 700 de la Gauchetière, Montréal 13888 Wireless Way, Richmond 81 Wright Avenue and 170 Joseph Zatzman Drive, Halifax offi ce offi ce 100 100 100 100 100 100 124,100 74,570 39,750 148,198 987,706 116,530 Blackstone Portfolio, Ontario and Alberta offi ce 100 2,661,914 industrial 100 109,737 100 $ 51,349 January 4, 2011 100 96 73 95 100 100 94 100 98 94 January 17, 2011 39,179 363,697(2) February 8, 2011 March 31, 2011 13,506 16,986 May 2, 2011 9,877 15,999 287,766 32,447 May 19, 2011 June 9, 2011 July 11, 2011 July 12, 2011 7,631 July 27, 2011 703,365 August 15, 2011 Richmond Place (8100 Granville Avenue), Richmond Total offi ce 100 94,646 100 24,867 November 22, 2011 6,578,942 95 $ 1,566,669 (1) Includes transaction costs. (2) Includes $20.8 million of investments in joint ventures that are equity accounted. Building improvements Building improvements represent investments made to ensure optimal building performance. For the three and 12 months ended December 31, 2012, we incurred $9.6 million and $20.4 million of expenditures, respectively, related to building improvements, including sustainability and environmental initiatives, substantially all of which are recoverable from tenants. Also included are certain amounts relating to acquired properties, which were identifi ed at the time of acquisition. Recurring recoverable expenditures for the three and 12 months ended December 31, 2012 were $7.7 million and $15.2 million, respectively, and included elevator modernization, roofing upgrades, HVAC and chiller work. During the fourth quarter, approximately $0.2 million ($2.0 million year-to-date) was spent on sustainability and environmental initiatives, substantially all of which is recovered from tenants. Non-recurring building improvements include major capital expenditures that generally would not be expected to recur over the useful life of the building. The table below represents amounts either paid or accrued during the period: Building improvements(1) Recurring recoverable Recurring non-recoverable Non- recurring Sustainability and environmental initiatives Total Three months ended December 31, Years ended December 31, 2012 2011 2012 2011 $ 7,717 $ 4,798 $ 15,244 $ 7,848 212 1,492 188 5 392 – 314 2,828 2,024 12 424 – $ 9,609 $ 5,195 $ 20,410 $ 8,284 (1) Includes investment in joint ventures that are equity accounted, assets related to discontinued operations – industrial properties and properties held for sale. PAGE 16 6042_Dundee_REIT_AR_2012.indd 16 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report Development During the fi rst quarter of 2012, we completed construction of the Gallery Building, an offi ce property in Yellowknife that is fully leased to the Government of Canada for a ten-year term, which commenced in March 2012. During the fi rst quarter, $1.9 million was spent to complete the construction. The Gallery Building was reclassifi ed to investment properties effective February 1, 2012, upon substantial completion of the development project. Dispositions Pursuant to the strategic repositioning of our portfolio, we completed the following dispositions in the year: ARAM Building, Calgary West Chambers, Edmonton 4250 Albert Street, Regina 885 Don Mills Road, Toronto 12804 137th Avenue, Edmonton Bisma Centre, Calgary 998 Parkland Drive, Halifax 193 Malpeque Road, Charlottetown 655 University Avenue, Charlottetown Disposed GLA (sq. ft.) Gross proceeds(1) Mortgages/ term loan discharged 36,428 $ 7,700 $ – $ Property type offi ce offi ce 92,560 retail 41,238 offi ce 59,449 retail 54,514 offi ce 27,496 retail retail retail 33,857 41,573 26,043 24,200 9,600 8,975 18,900 9,200 7,170 5,100 3,800 6,786 5,126 4,547 12,633 – 4,624 – 2,357 Industrial Portfolio industrial 5,134,114 575,469 225,592 7102–7220 Barlow Trail SE, Calgary Total industrial 234,676 10,150 – 5,781,948 $ 680,264 $ 261,665 $ (1) Gross proceeds before transaction costs. (2) Loss on sale recognized is related to transaction costs and write-off of goodwill. Year ended December 31, 2012 Net gain (loss) on sale (314)(2) (849)(2) (11)(2) Date disposed February 2, 2012 August 15, 2012 August 15, 2012 1,770 August 30, 2012 (653)(2) September 14, 2012 2,054 September 19, 2012 67 (43)(2) 25 October 4, 2012 October 4, 2012 October 4, 2012 October 4, 2012 1,147 (516)(2) November 30, 2012 2,677 Subsequent to December 31, 2012, we completed the dispositions detailed below. With these sales there are no properties remaining as held for sale: 625 University Park Drive, Regina 2640, 2510–2550 Quance Street, Regina Total (1) Gross proceeds before transaction costs. Property type retail retail Disposed GLA (sq. ft.) Gross proceeds(1) Mortgages discharged 17,145 $ 5,182 $ 69,554 16,300 86,699 $ 21,482 $ – – – Date disposed January 31, 2013 January 31, 2013 Our fi nancing 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 repayments, interest payments and property acquisitions. We expect to meet all our ongoing obligations with current cash and cash equivalents, cash flows generated from operations, conventional mortgage refinancings and, as growth requires and when appropriate, new equity or debt issues. 6042_Dundee_REIT_AR_2012.indd 17 4/8/13 4:23 PM PAGE 17 DUNDEE REIT 2012 Annual Report Our discussion of financing activities will be based on the debt balances below, which include debt related to investments in joint ventures that are equity accounted at our proportionate ownership as well as debt related to discontinued operations – industrial properties and other assets held for sale. Debt Less debt related to: Investment in joint ventures Assets held for sale Consolidated balance sheets December 31, 2012 December 31, 2011 $ 3,314,594 $ 2,254,756 526,968 9,200 130,223 16 $ 2,778,426 $ 2,124,517 Financing activities Our debt strategy includes managing our maturity schedule to help mitigate interest rate risk and limit exposure in any given year as well as fixing the rates and extending mortgage terms as long as possible when interest rates are favourable. On December 31, 2012, we completed the redemption of $126.5 million aggregate principal amount outstanding on our 6.5% Convertible Unsecured Subordinated Debentures (6.5% Debentures), 2005-1 5.7% Convertible Unsecured Subordinated Debentures (“5.7% Debentures”), 6.0% Convertible Unsecured Subordinated Debentures (“6.0% Debentures”) and 7.0% Series G Convertible Unsecured Subordinated Debentures (“7.0% Debentures”). The redeemed convertible debentures bore interest at a weighted average face rate of 6.0% and a weighted average effective rate of 7.0%. In connection with the sale of the Industrial Portfolio and the sale of other non-core assets, $250.3 million of mortgages were assumed by the purchasers. In Q3 2012, we pursued strategic fi nancing initiatives to take advantage of low interest rates and, where possible, refi nance existing mortgages with longer terms and lower interest rates. We evaluated our existing debt portfolio and identifi ed mortgages on investment properties with low loan to values, high interest rates and shorter terms to maturity to execute this strategy. We placed $389.2 million of new or refi nanced mortgages at a weighted average interest rate of 3.96%, and a term to maturity of 7.1 years. In addition, we repaid/discharged debt totalling $402.3 million at a weighted average interest rate of 4.7%, including a $145.0 million repayment of our revolving credit facility. In Q2 2012, we entered into a $650.0 million mortgage bond with our joint venture partner via a bought deal private placement ($433.3 million at our share in equity accounted investments) to partially fund the acquisition of Scotia Plaza. The bond was entered into simultaneously with the closing of the acquisition on June 15, 2012. The bond bears interest semi-annually at a face rate of 3.21% for a term of seven years. After accounting for deferred fi nancing costs, the effective interest rate on the bond is 3.55%. In April 2012, we repaid the $220.0 million bridge loan facility drawn on March 2, 2012, to acquire Whiterock. The facility was converted into a revolving credit facility with a one-year term and bearing interest at either the bank’s prime rate plus 75 bps or bankers’ acceptances (“BAs”) plus 175 bps. At December 31, 2012, $54.0 million was drawn on the facility. PAGE 18 6042_Dundee_REIT_AR_2012.indd 18 4/8/13 4:23 PM Debt The key performance indicators in the management of our debt are as follows: Financing activities(1) Average effective interest rate(2) Level of debt (debt-to -gross book value)(3) Interest coverage ratio(4) Debt-to -EBITDFV (years)(5) Proportion of total debt due in current year Debt – average term to maturity (years) Variable rate debt as percentage of total debt DUNDEE REIT 2012 Annual Report December 31, 2012 December 31, 2011 4.33% 48.0% 2.7 times 8.37 10.4% 5.1 4.3% 4.96% 49.0% 2.6 times 7.63 7.5% 5.2 1.3% (1) The key performance indicators for December 31, 2012 exclude the results of operations and the debt of discontinued operations – industrial properties. (2) Average effective interest rate is calculated as the weighted average interest rate of all interest bearing debt, including debt related to investment in joint ventures that are equity accounted. (3) Level of debt is determined as total debt, including debt related to investment in joint ventures that are equity accounted, divided by total assets (including total assets of investment in joint ventures that are equity accounted) and adjusted for accumulated amortization on property and equipment. (4) The interest coverage ratio for the year, including results from investment in joint ventures that are equity accounted, is calculated as net rental income plus interest and fee income, less general and administrative expenses, all divided by interest expense on debt. (5) Debt-to-EBITDFV, a non-GAAP measure, is calculated as total debt divided by annualized EBITDFV for the current quarter. EBITDFV is calculated as net income less non-cash items included in revenue and fair value adjustments, plus interest expense, depreciation and acquisition related costs. We currently use cash flow performance and debt level indicators to assess our ability to meet our financing obligations. Our current interest coverage ratio is 2.7 times, demonstrating our ability to more than adequately cover interest expense requirements. We also monitor our debt-to-EBITDFV ratio to gauge our ability to repay existing debt. Our current debt- to-EBITDFV ratio is 8.37 years. Our weighted average face rate of interest at December 31, 2012, is 4.50%, down 48 bps from 4.98% at December 31, 2011, and down 9 bps from 4.59% at September 30, 2012, refl ecting the redeemed convertible debentures which had a weighted average face rate of 6.0%. After accounting for fair value adjustments and financing costs, the weighted average effective interest rate for outstanding debt is 4.33% at December 31, 2012. Variable rate debt as a percentage of total debt increased to 4.3% from 1.3% at December 31, 2011, as a result of $48.9 million in new fi nancings in the form of variable rate mortgages and amounts drawn on demand revolving credit facilities. Mortgages Term debt Demand revolving credit facilities Term loan facility Convertible debentures Debentures Total Percentage Fixed $ 2,902,942 $ 248 – 180,837 52,092 36,029 $ 3,172,148 $ Variable 74,889 67,557 – December 31, 2012 Total(1) $ 2,977,831 248 67,557 180,837 52,092 36,029 $ 3,314,594 – – – Fixed Variable Total(1) December 31, 2011 $ 1,909,828 $ 25,982 $ 1,935,810 504 – 184,654 131,353 – – 2,435 – – – 504 2,435 184,654 131,353 – $ 2,226,339 $ 28,417 $ 2,254,756 142,446 95.7% 4.3% 100.0% 98.7% 1.3% 100.0% (1) Includes debt related to investment in joint ventures that are equity accounted, discontinued operations – industrial properties and other assets held for sale. Mortgages payable include $19.9 million of fair value adjustments on mortgages assumed in connection with acquisitions (December 31, 2011 – $10.5 million). Amounts recorded at December 31, 2012, for the convertible debentures include a net fair value adjustment of $1.0 million, recorded at the time of assumption. The debentures include a $1.0 million fair value adjustment. The fair value adjustments and premiums, net of discounts, are amortized to interest expense over the term to maturity of the related debt using the effective interest rate method. PAGE 19 6042_Dundee_REIT_AR_2012.indd 19 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report Debt financing activities New and assumed mortgage and term loan financings are highlighted in the table below. Three months ended December 31, 2012 Year ended December 31, 2012 Average term to maturity (years) Weighted average interest rate (%) Amount Weighted average effective interest rate (%)(1) Amount Average term to maturity (years) Weighted average interest rate (%) $ 35,093 6.0 3.62 3.74 $ 908,124 6.8 3.59 Weighted average effective interest rate (%)(1) 3.85 66,489 $ 101,582 2.1 3.4 6.15 5.28 4.26 794,882 4.08 $ 1,703,006 3.7 5.3 4.86 4.18 3.73 3.79 New mortgages(2) New mortgages assumed on investment property acquisitions and business combinations Overall (1) After accounting for the impact of financing costs and fair value adjustments on mortgages assumed. (2) Includes mortgage bond. On December 31, 2012, we used $126.5 million of our excess cash to redeem convertible debentures with a weighted average coupon rate of 6.0%. The remaining unamortized deferred fi nancing costs and premium/discounts on initial recognition of the debentures have been written off to debt settlement costs in the amount of $2.7 million. In connection with the sale of industrial properties and the sale of non-core assets, $250.3 million of mortgages were assumed by purchasers upon disposition of the properties. On September 28, 2012, we capitalized on the value of an investment property by refi nancing a mortgage for a ten-year term, increasing the principal outstanding from $111.4 million at the time of discharge to $180.0 million, and reducing the face rate from 5.35% to 4.20%. In connection with the refi nancing, we were subject to a prepayment penalty of $5.6 million, and wrote off the $4.1 million fair value adjustment related to the mark-to-market recorded when the debt was assumed. The net amount of $1.5 million was recorded on the consolidated statement of comprehensive income as a component of debt settlement costs. Total debt settlement costs for the quarter were $0.7 million, refl ecting the write-off of $0.8 million in relation to three other mortgages that we discharged early. In addition to the mortgages discussed above, we discharged $174.9 million of mortgages and a portion of the term loan facility with a combined weighted average interest rate of 5.28%, by way of repayment, refi nancing or selling the related asset in Q3 2012. On June 15, 2012, we placed $433.3 million ($650 million including our partner’s share) of mortgage bond fi nancing, which is included in equity accounted investments, at a face rate of 3.21% and an effective interest rate of 3.55% for a term of seven years. The interest is payable semi-annually based on a 30-day amortization period. The Trust has four demand revolving credit facilities totalling approximately $281.5 million, of which $209.9 million is available as at December 31, 2012, after deducting $67.7 million that was drawn on the available facilities and $3.9 million that was utilized in the form of letters of guarantee. On March 2, 2012, we entered into a $10.0 million equity bridge facility and a $210.0 million secured term facility. The equity bridge facility was in the form of rolling one-month BAs bearing interest at the BA rate plus 2.35%. The secured term facility was in the form of rolling one-month BAs, bearing interest at the BA rate plus 1.75%. The equity bridge facility was fully repaid on April 5, 2012. The secured term facility was converted into a revolving credit facility on April 17, 2012, and matures on March 5, 2013. The revolving credit facility is in the form of rolling one-month BAs bearing interest at the BA rate plus 1.75% or at the bank’s prime rate (3.0% at December 31, 2012) plus 0.75%, and is secured by nine properties as fi rst-ranking mortgages. As at January 31, 2013, the formula-based amount available under this facility was $171.5 million, reduced from previous periods as a result of dispositions during Q4 2012. At December 31, 2012, $54.0 million was drawn on the facility. PAGE 20 6042_Dundee_REIT_AR_2012.indd 20 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report A demand revolving credit facility is available up to a formula-based maximum not to exceed $40.0 million, generally bearing interest at the bank’s prime rate (3.0% as at December 31, 2012) plus 1.5%, or bankers’ acceptance rates plus 3.0%. This facility is secured by a first-ranking collateral mortgage on two properties and a second-ranking collateral mortgage on one property. The facility matures on April 30, 2013. At December 31, 2012, the formula-based amount available under this facility was $26.3 million, less $1.6 million in the form of letters of guarantee. At December 31, 2012, $13.7 million was drawn on the facility. In connection with the acquisition of Realex in Q1 2011, we assumed a demand revolving credit facility authorized to a formula-based maximum of $22.0 million. In Q3 2011, we negotiated an increase in the authorized amount of this facility to $35.0 million. The facility is secured by a second-ranking mortgage on two properties and bears interest based on the bank’s prime rate (3.0% as at December 31, 2012) plus 0.85%. The facility matures on April 30, 2013. At December 31, 2012, $2.0 million is being utilized in the form of letters of guarantee with $33.0 million available. In connection with the acquisition of Whiterock, we assumed a revolving acquisition and operating facility of up to $35.0 million. Interest is incurred at fl oating rates determined, at our option, by reference to the prime rate plus 85 bps or bankers’ acceptance rates plus 185 bps. The facility is secured by a fi rst-ranking collateral mortgage on one property and a second-ranking collateral mortgage on one property and the guarantee of the Trust. The facility expires on August 23, 2013. At December 31, 2012, $0.3 million is being utilized in the form of letters of guarantee and $34.7 million remains available. We also have a $188.0 million term loan facility outstanding, drawn to finance the acquisition of the Blackstone Portfolio in Q3 2011. This facility expires on August 15, 2016, and bears interest monthly at bankers’ acceptance rates plus 1.85%. In order to manage the interest rate fluctuations, we have entered into two interest rate swap agreements (the “swaps”) to effectively fi x the interest rate. We have applied hedge accounting to the swaps. On August 15, 2012, the Trust repaid $4.5 million on the term loan facility as one of the properties securing the facility was sold. As at December 31, 2012, $183.5 million was drawn on the term loan facility. At December 31, 2012, we had $24.0 million in cash (excluding cash held in investment in joint ventures that are equity accounted) and $209.9 million available from our revolving credit facilities after accounting for the discharge of industrial properties secured against the revolving credit facility. In addition, we have four unencumbered properties that may be leveraged to provide additional financing. Changes in debt levels, including debt related to investment in joint ventures that are equity accounted, discontinued operations – industrial properties and assets held for sale, are as follows: Demand revolving Term debt credit facilities Mortgages Term loan facility Convertible debentures Debentures Total Three months ended December 31, 2012 Debt as at September 30, 2012 $ 3,180,793 $ 288 $ – $ 180,448 $ 182,979 $ 36,102 $ 3,580,610 New debt assumed on investment property acquisitions 66,489 – – – 67,677 New debt placed Scheduled repayments Lump sum repayments Mortgages assumed on property dispositions 35,093 (20,492) (46,425) (232,573) Conversion to unitholders’ equity – Foreign exchange Other adjustments(1) Debt as at December 31, 2012 $ 2,977,831 $ (5,651) 597 (40) – – – – – – – – – – – – – – – – – – – – (126,494) – (7,393) – – – – – – – – 66,489 102,770 (20,532) (172,919) (232,573) (7,393) 597 (120) 389 3,000 (73) (2,455) 248 $ 67,557 $ 180,837 $ 52,092 $ 36,029 $ 3,314,594 (1) Other adjustments include fi nancing costs on new debt placed, fair value adjustments and amortization of fi nancing costs and fair value adjustments. PAGE 21 6042_Dundee_REIT_AR_2012.indd 21 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report Mortgages Term debt Demand revolving credit facilities Term loan facility Bridge loan facility Convertible debentures Debentures Total Year ended December 31, 2012 $ 1,935,810 $ 504 $ 2,435 $ 184,654 $ – $ 131,353 $ – $ 2,254,756 Debt as at December 31, 2011 New debt assumed on investment property acquisitions New debt placed Lump sum repayments on property dispositions Mortgages assumed on property dispositions Conversion to unitholders’ equity Foreign exchange Other adjustments(1) Debt as at December 31, 2012 794,882 908,124 – 24 34,300 255,289 Scheduled repayments (69,010) (280) – Lump sum repayments (339,407) – (224,347) – – – – (4,547) – – – – 59,927 45,000 934,109 220,000 – – – – – 1,383,437 (69,290) (220,000) (126,686) (10,000) (920,440) – – – – – – – – (11,333) – (250,332) (17,498) – – – (17,498) 450 4,996 1,029 10,735 (6,786) (250,332) – 450 4,100 – – – – – – – – – (120) 730 $ 2,977,831 $ 248 $ 67,557 $ 180,837 $ – $ 52,092 $ 36,029 $ 3,314,594 (1) Other adjustments include fi nancing costs on new debt placed, fair value adjustments and amortization of fi nancing costs and fair value adjustments. Our current debt profi le is balanced with staggered maturities over the next 16 years. The following is our debt maturity profile as at December 31, 2012: Scheduled principal repayments on non-matured debt Debt maturities Amount(1) $ 270,634 $ 74,770 $ 345,404 97,913 410,523 575,161 329,293 72,838 68,587 58,908 50,001 170,751 479,110 634,069 379,294 1,164,634 133,587 1,298,221 % 10.4 5.2 14.5 19.2 11.5 39.2 $ 2,848,158 $ 458,691 $ 3,306,849 100.0 Weighted average effective Weighted average face rate on balance due at maturity (%) interest rate on balance due at maturity (%) 4.28 5.27 3.96 4.36 4.56 4.31 4.33 5.26 5.83 4.25 4.40 4.97 4.22 4.50 21,912 (14,167) $ 3,314,594 2013 2014 2015 2016 2017 2018 and thereafter Total Fair value adjustments Financing costs Total (1) Includes debt related to investment in joint ventures that are equity accounted and assets held for sale. Convertible debentures The total principal amounts outstanding for all of the convertible debentures are as follows: 5.5% Series H Debentures December 9, 2011 Date issued Outstanding principal December 31, 2012 51,128 $ Maturity date March 31, 2017 $ Outstanding principal January 31, 2013 REIT A Units if converted January 31, 2013 51,128 1,393,569 PAGE 22 6042_Dundee_REIT_AR_2012.indd 22 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report On December 31, 2012, the Trust redeemed all the outstanding 6.5% Debentures, 5.7% Debentures, 6.0% Debentures and 7.0% Debentures. The redemption price was determined in accordance with the provisions of the indentures and supplemental debentures related to the redeemed convertible debentures. The aggregate principal amount redeemed was $126.5 million. Debt settlement costs of $2.7 million were recorded on the statement of comprehensive income relating to the write-off of fi nancing costs and fair value adjustments related to the redeemed convertible debentures. The fair value of the conversion features of the convertible debentures is remeasured each period, with changes in fair value being recorded in comprehensive income. At December 31, 2012, the conversion feature amounted to a $1.4 million fi nancial liability (December 31, 2011 – $6.4 million fi nancial liability). Debentures The total principal amounts outstanding for all debentures are as follows: Series K Series L Total Date issued Maturity date Interest rate Outstanding principal December 31, 2012 April 26, 2011 April 26, 2016 5.95% $ 25,000 August 8, 2011 September 30, 2016 5.95% 10,000 $ 35,000 Commitments and contingencies We are contingently liable with respect to guarantees that are issued in the normal course of business and with respect to litigation and claims that may arise from time to time. In the opinion of management, any liability that may arise from such contingencies would not have a material adverse effect on our condensed consolidated financial statements. Dundee REIT’s future minimum commitments under operating and finance leases, including investment in joint ventures that are equity accounted, are as follows: No longer than 1 year 1–5 years Longer than 5 years Total December 31, 2012 Operating lease payments Finance lease payments $ $ 498 1,165 1,350 3,013 $ $ 237 – – 237 During the year ended December 31, 2012, we paid $1.5 million (December 31, 2011 – $1.2 million) in minimum lease payments, which have been included in comprehensive income for the period. We have entered into fi xed price contracts to purchase electricity and gas as follows: Electricity Calgary Edmonton, Parkland County and Strathcona County Toronto and Ottawa Number of properties 14 9 14 Expiry date 2013 2014 2015 Total Minimum payments due January 31, 2013 $ 170 $ – $ – $ 170 May 31, 2015 September 30, 2013 755 416 755 – 327 1,837 – 416 $ 1,341 $ 755 $ 327 $ 2,423 6042_Dundee_REIT_AR_2012.indd 23 4/8/13 4:23 PM PAGE 23 DUNDEE REIT 2012 Annual Report Our equity Our discussion of equity includes LP Class B Units, Series 1 (“subsidiary redeemable units”), which are economically equivalent to REIT Units. Pursuant to IFRS, the subsidiary redeemable units are classified as a liability in our consolidated financial statements. REIT Units, Series A REIT Units, Series B Accumulated other comprehensive loss Add: LP B Units Total December 31, 2012 Unitholders’ equity December 31, 2011 Number of units Amount Number of units Amount 97,618,625 $ 3,295,983 66,193,060 $ 2,118,116 16,316 – 713 (297) 16,316 – 720 (1,602) 97,634,941 3,296,399 66,209,376 2,117,234 3,528,658 132,078 3,506,107 114,445 101,163,599 $ 3,428,477 69,715,483 $ 2,231,679 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 and Dundee Realty Corporation (“DRC”), related parties to Dundee REIT. Both the REIT Units and Special Trust Units entitle the holder to one vote for each unit at all meetings of the unitholders. The LP B Units are exchangeable on a one-for-one basis for REIT B Units at the option of the holder, which can then be converted into REIT A Units. The LP B Units and corresponding Special Trust Units together have economic and voting rights equivalent in all material respects to REIT A Units. The REIT A Units and REIT B Units have economic and voting rights equivalent in all material respects to each other. At December 31, 2012, Dundee Corporation, directly and indirectly through its subsidiaries, held 2,494,383 REIT A Units and 3,528,658 LP B Units for a total ownership interest of approximately 6.0%. The following table summarizes the changes in our outstanding equity. Units issued and outstanding on January 1, 2012 Units issued pursuant to public offering Units issued pursuant to Whiterock transaction Units issued pursuant to DRIP Units issued pursuant to the Unit Purchase Plan Units issued pursuant to Deferred Unit Incentive Plan (“DUIP”) Conversion of debentures Total units outstanding on December 31, 2012 REIT A Units REIT B Units LP B Units Total 66,193,060 16,947,550 12,580,347 1,200,028 15,296 25,290 657,054 16,316 3,506,107 69,715,483 – – – – – – – – 16,947,550 12,580,347 22,551 1,222,579 – – – 15,296 25,290 657,054 97,618,625 16,316 3,528,658 101,163,599 Percentage of all units Units issued pursuant to DRIP on January 15, 2013 Units issued pursuant to Unit Purchase Plan Units issued pursuant to Deferred Unit Incentive Plan (“DUIP”) Total units outstanding on January 31, 2013 96.49% 80,912 99 3,680 0.02% – – – 3.49% 1,908 – – 100.00% 82,820 99 3,680 97,703,316 16,316 3,530,566 101,250,198 Percentage of all units 96.49% 0.02% 3.49% 100.00% On June 12, 2012, we completed a public offering of 10,392,550 REIT A Units, including the over-allotment option, at a price of $35.90 per unit for gross proceeds of $373.1 million. Costs related to the offering totalled $14.6 million and were charged directly to unitholders’ equity. PAGE 24 6042_Dundee_REIT_AR_2012.indd 24 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report On March 28, 2012, we completed a public offering of 6,555,000 REIT A Units, including an over-allotment option, at a price of $35.35 per unit for gross proceeds of $231.7 million. Costs related to the offering totalled $9.4 million and were charged directly to unitholders’ equity. On March 2, 2012, Dundee REIT took up approximately 40.9% of the outstanding Whiterock units under its offer to acquire any and all Whiterock units in consideration for $16.25 or 0.4729 REIT A Units, as elected by Whiterock unitholders. Approximately 9,832,563, or 27%, of the Whiterock units were tendered to our offer for cash totalling $159.8 million and the remaining Whiterock units were redeemed by Whiterock in consideration for 0.4729 REIT A Units for each Whiterock unit. In total, we issued 12,580,347 REIT A Units in connection with the transaction, which were recorded at $34.56 per unit, representing total equity consideration valued at $434.8 million. Normal course issuer bid The Trust renewed its normal course issuer bid, which commenced on December 2, 2011, and remained in effect until the earlier of December 1, 2012, or the date on which the Trust has purchased the maximum number of Units permitted under the bid. Under the bid, the Trust had the ability to purchase for cancellation up to a maximum of 5,910,181 REIT A Units (representing 10% of the REIT’s public fl oat of 59,101,809 REIT A Units at the time of renewal through the facilities of the Toronto Stock Exchange). On December 1, 2012, the normal course issuer bid expired and was not renewed. No purchases had been made under the bid. Short form base shelf prospectus On November 26, 2012, the Trust issued a short form base shelf prospectus, which is valid for a 25-month period, during which time the Trust may offer and issue, from time to time, units and debt securities convertible into or exchangeable for units of the Trust, or any combination thereof, with an aggregate offering price of up to $2 billion. As at December 31, 2012, no units and no debt securities have been issued under the short form base shelf prospectus. Distribution policy Our Declaration of Trust provides our trustees with the discretion to determine the percentage payout of income that would be in the best interest of the Trust. Amounts retained in excess of the declared distributions are used to fund leasing costs and capital expenditure requirements. Given that working capital tends to fluctuate over time and should not affect our distribution policy, we disregard it when determining distributable income. We also exclude the impact of leasing costs, which fluctuate with lease maturities, renewal terms and the type of asset being leased. We evaluate the impact of leasing activity based on averages for our portfolio over a two- to three-year time frame. We exclude the impact of transaction costs expensed on business combinations as these costs are considered to be non-recurring. Additionally, we exclude the impact of the amortization of financing costs and non-recoverable costs that were incurred prior to the formation of the Trust, but deduct amortization of non–real estate assets such as software and office equipment incurred after the formation of the Trust. We include the impact of vendor head lease income that has not been recognized in net income. 6042_Dundee_REIT_AR_2012.indd 25 4/8/13 4:23 PM PAGE 25 DUNDEE REIT 2012 Annual Report Three months ended December 31, 2012 Year ended December 31, 2012 Declared distributions 4% bonus distributions Total Declared distributions 4% bonus distributions Total 2012 distributions Paid in cash or reinvested in units $ 36,783 $ 351 $ 37,134 $ 185,022 $ 1,624 $ 186,646 Payable at December 31, 2012 Total distributions(1) 2012 reinvestment 18,574 130 18,704 18,574 130 18,704 $ 55,357 $ 481 $ 55,838 $ 203,596 $ 1,754 $ 205,350 Reinvested to December 31, 2012 $ 8,774 $ 351 $ 9,125 $ 40,602 $ 1,624 $ 42,226 Reinvested on January 15, 2013 Total distributions reinvested Distributions paid in cash Reinvestment to distribution ratio Cash payout ratio (1) Includes distributions on LP B Units. $ $ 2,970 119 3,089 2,970 119 3,089 11,744 $ 470 $ 12,214 $ 43,572 $ 1,743 $ 45,315 43,613 21.2% 78.8% $ 160,024 21.4% 78.6% Distributions declared for the three months ended December 31, 2012, were $55.4 million, up $18.8 million over the comparative prior year period. Distributions declared for the year ended December 31, 2012, were $203.6 million, up $72.4 million over the comparative prior year period. The increase reflects a larger number of units outstanding as a result of the equity issues completed in 2011 and 2012 as well as distributions reinvested in additional units and vested deferred trust units exchanged for REIT A Units. Of the distributions declared for the three months ended December 31, 2012, $11.7 million ($43.6 million for the year), or approximately 21.2% (21.4% for the year), were reinvested in additional units resulting in a cash payout ratio of 78.8% (78.6% for the year). As required by National Policy 41-201, “Income Trusts and Other Indirect Offerings”, the following table outlines the differences between cash flow from operating activities and cash distributions as well as the differences between net income and cash distributions, in accordance with the guidelines. Net income Cash flows from operating activities(1) Distributions paid and payable(2) Cash flows from operating activities over (shortfall) distributions paid and payable Three months ended December 31, Years ended December 31, 2012 2011 2012 2011 $ 100,542 $ 222,761 $ 291,073 $ 400,920 45,394 55,838 38,117 36,896 178,295 205,350 119,678 132,073 (10,444) 1,221 (27,055) (12,395) (1) Cash flows from operating activities exclude cash flows from transaction costs on acquired businesses, and include operating cash flows from investment in joint ventures that are equity accounted. (2) Includes distributions on LP B Units. For the three months ended December 31, 2012, distributions paid and payable exceeded cash flow from operating activities by $10.4 million ($27.1 million for the year ended December 31, 2012). When establishing distribution payments, we do not take into consideration fluctuations in working capital and transaction costs on business combinations, but rather use a normalized amount as a proxy for leasing costs. Net income exceeded distributions paid and payable by $44.7 million for the three months ended December 31, 2012, and exceeded distributions paid and payable by $85.7 million for the year ended December 31, 2012. PAGE 26 6042_Dundee_REIT_AR_2012.indd 26 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report Our results of operations Investment properties revenue $ 162,014 $ 29,985 $ Amounts Share of income per fi nancial from investment in joint ventures statements 2012 Total 191,999 Three months ended December 31, Amounts per fi nancial statements Share of income from investment in joint ventures 2011 Total $ 119,234 $ 7,678 $ 126,912 Investment properties operating expenses Net rental income from continuing operations Other income and expenses 71,623 13,941 85,564 52,593 3,303 55,896 90,391 16,044 106,435 66,641 4,375 71,016 General and administrative (5,774) (81) (5,855) (3,856) Share of net income and dilution gain from investment in Dundee Industrial 1,568 – 1,568 – – – (3,856) – – Share of net income from investment in joint ventures Fair value adjustments to investment properties Net loss on sale of investment properties Interest: Debt Subsidiary redeemable units Debt settlement and other costs, net Depreciation and amortization Interest and fee income Fair value adjustments to fi nancial instruments Income before income taxes and discontinued operations Deferred income taxes Income from continuing operations Income from discontinued operations Net income Other comprehensive income (loss) Unrealized gain (loss) on interest rate swap agreements Unrealized foreign currency translation gain 10,488 (10,488) – 24,847 (24,847) 45,595 (487) 45,108 145,856 21,938 167,794 (1,289) – (1,289) – – – (33,239) (5,028) (1,944) (3,066) (613) 1,435 (4,179) 99,373 263 99,110 1,432 100,542 344 320 664 – – – 40 – – – – – – – – – (38,267) (1,944) (3,066) (613) 1,475 (24,326) (1,931) – (157) 863 (4,179) (6,433) 99,373 263 99,110 1,432 100,542 344 320 664 101,206 201,504 – 201,504 21,257 222,761 (868) – (868) $ 221,893 $ (1,499) (25,825) – – – 33 – – – – – – – – – – (1,931) – (157) 896 (6,433) 201,504 – 201,504 21,257 222,761 (868) – (868) $ 221,893 Comprehensive income $ 101,206 $ – $ 6042_Dundee_REIT_AR_2012.indd 27 4/8/13 4:23 PM PAGE 27 DUNDEE REIT 2012 Annual Report Investment properties revenue $ 607,796 $ 78,768 $ Amounts Share of income per fi nancial from investment in joint ventures statements 2012 Total 686,564 Years ended December 31, Amounts per fi nancial statements Share of income from investment in joint ventures 2011 Total $ 375,015 $ 29,759 $ 404,774 Investment properties operating expenses Net rental income from continuing operations Other income and expenses 259,249 36,175 295,424 158,949 12,696 171,645 348,547 42,593 391,140 216,066 17,063 233,129 General and administrative (21,132) (82) (21,214) (13,796) Share of net income and dilution gain from investment in Dundee Industrial 1,568 – 1,568 – – – (13,796) – – Share of net (loss) income from investment in joint ventures Fair value adjustments to investment properties Net gain (loss) on sale of investment properties Acquisition related costs, net Interest: Debt Subsidiary redeemable units Debt settlement and other costs, net Depreciation and amortization Interest and fee income Fair value adjustments to fi nancial instruments Income before income taxes and discontinued operations Deferred income taxes Income from continuing operations Income from discontinued operations Net income Other comprehensive income (loss) Unrealized gain (loss) on interest rate swap agreements Unrealized foreign currency translation gain (254) 254 – 49,728 (49,728) 105,572 (23,964) 81,608 205,560 37,969 243,529 1,530 (17,549) – – 1,530 (17,549) – (5,688) (103) – (103) (5,688) (125,118) (13,779) (7,758) (3,798) (2,042) 5,045 – – (4) 168 (138,897) (7,758) (3,798) (2,046) 5,213 (79,787) (7,704) – (580) 2,376 (16,588) (5,186) (21,774) (11,065) 268,023 1,849 266,174 24,899 291,073 1,227 78 1,305 – – – – – – 268,023 1,849 266,174 24,899 291,073 355,110 – 355,110 45,810 400,920 1,227 (1,602) – – – $ 78 1,305 292,378 – (1,602) $ 399,318 $ (5,323) (85,110) – – – 122 – – – – – – – – – – (7,704) – (580) 2,498 (11,065) 355,110 – 355,110 45,810 400,920 (1,602) – (1,602) $ 399,318 Comprehensive income $ 292,378 $ Basis of accounting Our discussion in income from continuing operations excludes the results of the 77 industrial properties sold to Dundee Industrial REIT on October 4, 2012, as it is included and discussed in income from discontinued operations. Prior year amounts have been restated to conform to current year presentation. PAGE 28 6042_Dundee_REIT_AR_2012.indd 28 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report Investment properties revenue Investment properties revenue includes net rental income from investment properties as well as the recovery of operating costs and property taxes from tenants. Revenues generated by acquisitions completed in 2011 and in 2012 were the primary drivers of the $65.1 million, or 51.3%, increase in investment properties revenue over the prior year comparative quarter, and $281.8 million, or 69.6%, increase in investment properties revenue year-over-year. Revenues from investment properties owned as of January 1, 2011, grew by $0.3 million over the prior year comparative quarter and by $3.7 million year-over-year, mainly driven by occupancy increases in Western Canada and Calgary. Investment properties operating expenses Investment properties operating expenses 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 fl uctuate with changes in occupancy levels, weather, utility costs, realty taxes, and repairs and maintenance. Operating expenses increased by $29.7 million, or 53.1%, over the prior year comparative quarter, and by $123.8 million, or 72.1%, over the prior year driven largely by acquisitions completed in both 2011 and 2012. Operating expenses from investment properties owned as of January 1, 2011, grew by $0.9 million over the prior year comparative quarter and by $2.2 million over the prior year, mainly driven by occupancy increases in Western Canada and Calgary. General and administrative expenses General and administrative expenses primarily comprise expenses related to corporate management, Board of Trustees’ fees and expenses, investor relations and asset management fees. For Q4 2012, general and administrative expenses included a $1.1 million non-cash component relating to the DUIP, an increase of $0.3 million over the prior year comparative quarter, primarily as a result of unit price increases driving higher amortization amounts. On a cash basis, general and administrative expenses increased $1.7 million over the prior year comparative quarter, primarily as a result of asset management fees related to acquisitions completed in 2011 and 2012, along with higher general corporate costs and professional fees resulting from the growth of the portfolio. For the year ended December 31, 2012, general and administrative expenses included a $4.2 million non-cash component relating to the DUIP, an increase of $0.8 million over the prior year, primarily as a result of unit price increases driving higher amortization amounts. On a cash basis, general and administrative expenses increased $6.7 million over the prior year, primarily as a result of asset management fees related to acquisitions completed in 2011 and in 2012, along with higher general corporate costs and professional fees resulting from the growth of the portfolio. Fair value adjustments to investment properties A $45.1 million fair value adjustment was recorded during Q4 2012, primarily refl ecting cap rate compression in our downtown Calgary portfolio where cap rates compressed by 23 bps on average, offset by the impact of acquisition related transaction costs. For the year ended December 31, 2012, a fair value adjustment of $81.6 million was recorded, primarily refl ecting an overall cap rate compression of 29 bps compared to the prior year, offset by the impact of acquisition related transaction costs. For the year ended December 31, 2012, the weighted average cap rate across our portfolio was 6.35% (December 31, 2011 – 6.64%). Gain (loss) on sale of investment properties During Q4 2012, the Trust recorded a $1.3 million net loss on the disposition of four non-core investment properties. For the year ended December 31, 2012, the Trust recorded a net gain of $1.5 million on the disposition of ten non-core investment properties. Acquisition related costs, net For the year ended December 31, 2012, the Trust recorded $17.5 million in costs related to the acquisition of Whiterock in March 2012. In the prior year, the Trust recorded $5.7 million in costs related to the acquisition of Realex Properties in February of 2011. PAGE 29 6042_Dundee_REIT_AR_2012.indd 29 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report Interest expense – debt Interest expense on debt increased by $12.4 million, or 48.2%, over the prior year comparative quarter, and $53.8 million, or 63.2%, year-over-year. The increase in interest expense resulted from new debt assumed on investment properties acquired in 2011 and 2012 as well as new debt entered into during the year. Interest expense – subsidiary redeemable units Interest expense on subsidiary redeemable units for the quarter and for the year ended December 31, 2012, increased marginally over the comparative prior periods, refl ecting a greater number of subsidiary redeemable units outstanding as a result of the Distribution Reinvestment Plan. Debt settlement costs and other costs, net During the fi rst nine months of 2012, the Trust incurred net debt settlement costs and other costs of $0.7 million, of which $5.6 million is related to a prepayment penalty on a mortgage that was discharged and refi nanced, offset by a $4.9 million gain resulting from the write-off of fair value adjustments on mortgages that were refi nanced prior to maturity during Q3 2012. During Q4 2012, the Trust incurred net debt settlement costs and other costs of $3.1 million. Included in this amount is a $2.7 million write-off of the fi nancing costs of convertible debentures, as a result of their redemption, and a $1.3 million write-off of external management contracts as a result of the acquisition of the co-owner’s interest in the Trans America Group properties, offset by a $0.9 million gain resulting from the write-off of fair value adjustments on mortgages that were refi nanced prior to maturity or discharged as a result of asset sales. Depreciation and amortization For the three and 12 months ended December 31, 2012, depreciation and amortization expense increased by $0.5 million, or 290.4%, and $1.5 million, or 252.8%, over the respective prior year comparative periods. The increase in depreciation and amortization expense over the prior year comparative periods is primarily due to the amortization of external management contracts acquired as part of the acquisition of Whiterock in Q1 2012. Interest and fee income Interest and fee income comprises fees earned from third-party property management, including management, construction and leasing fees, and interest earned on bank accounts and related fees. Except for property management fees, the income included in interest and fee income is not necessarily of a recurring nature and the amounts may vary quarter-over- quarter and year-over-year. The $0.6 million, or 64.6%, increase over the prior year comparative quarter is primarily as a result of property management fees earned on properties acquired in the Whiterock acquisition that are co-owned. The increase of $2.7 million, or 108.7%, over the prior year is also driven by increases in third-party management fees earned from new investment property acquisitions where we are either a co-owner or under a joint venture arrangement, most of which were acquired in the Whiterock Portfolio. Fair value adjustments to fi nancial instruments Fair value adjustments to fi nancial instruments include: fair value adjustments on the conversion features of convertible debt, remeasurement of the carrying value of subsidiary redeemable units and remeasurement of deferred trust units. During Q4 2012, the fair value adjustment on the conversion features of convertible debt resulted in a net loss of $4.7 million (for the year ended December 31, 2012 – net gain of $2.7 million) mainly as a result of the write-off of the conversion feature on the convertible debentures redeemed at year-end. Our remeasurement of the carrying value of subsidiary redeemable units resulted in a gain of $0.8 million for Q4 2012 as a result of unit price decrease over the prior quarter and a loss of $16.8 million as a result of unit price increase over the prior year. The remeasurement of the deferred trust units resulted in a loss of $0.2 million for Q4 2012 (for the year ended December 31, 2012 – loss of $2.5 million) due to a larger number of amortized deferred trust units being remeasured. PAGE 30 6042_Dundee_REIT_AR_2012.indd 30 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report Related party transactions From time to time, Dundee REIT and its subsidiaries enter into transactions with related parties that are conducted under normal commercial terms and as disclosed in Note 26 to the consolidated fi nancial statements. During Q4 2012, the Trust received $1.0 million related to the DRC Services Agreement (for the year ended December 31, 2012 – $3.4 million) and also recovered $3.5 million for operating and administrative costs (for the year ended December 31, 2012 – $13.3 million). Pursuant to the Asset Management Agreement, we paid $5.4 million (for the year ended December 31, 2012 – $29.9 million), including $3.9 million (for the year ended December 31, 2012 – $15.0 million) reported in general and administrative expenses for asset management fees, $nil recorded for business acquisition related costs (for the year ended December 31, 2012 – $7.2 million), $1.4 million related to property acquisition costs (for the year ended December 31, 2012 – $7.0 million) and $0.2 million recorded as a fi nancing cost (for the year ended December 31, 2012 – $0.7 million). Pursuant to the terms of the $42 million promissory notes receivable from Dundee Industrial, the Trust recognized interest income of $317 for the year ended December 31, 2012, which is included in interest and fee income. Deferred income taxes During Q4 2012, $0.3 million of deferred income taxes were recognized relating to the two investment properties located in the United States that were part of the Whiterock Portfolio. For the year ended December 31, 2012, $1.8 million of deferred incomes taxes were recognized. Income from discontinued operations Income from discontinued operations relates to the 77 industrial properties that were sold as of October 4, 2012. During Q4 2012 and for the year ended December 31, 2012, income from discontinued operations decreased by $19.8 million, or 93.3%, over the prior year comparative quarter and $20.9 million, or 45.6%, over the prior year. The decrease is mainly attributable to the sale of the Industrial Portfolio with the recognition of three days of operations during Q4 2012 versus a full quarter in the prior year comparative period and less signifi cant cap rate compression causing a smaller fair value adjustment in investment properties in 2012. Offsetting these decreases was income growth from properties acquired in 2011 and in 2012, and the recognition of a gain on sale of investment properties of $1.1 million. Other comprehensive income Included in other comprehensive income for the quarter is a $0.3 million unrealized gain on interest rate swap agreements ($1.2 million for the year ended December 31, 2012) and a $0.3 million unrealized foreign currency translation gain related to the two properties located in the United States ($0.1 million for the year ended December 31, 2012). Net operating income We define NOI as the total of investment property revenue, including the share of net rental income from investment in joint ventures and property management income, less investment property operating expenses, excluding property revenue and operating expenses for properties sold and held for sale. Net operating income is an important measure used by management in evaluating property operating performance; however, it is not defined by IFRS, does not have a standard meaning and may not be comparable with similar measures presented by other income trusts. Net rental income Share of net rental income from investment in joint ventures that are equity accounted Income from discontinued properties NOI including income from discontinued operations, properties sold and assets held for sale Three months ended December 31, Years ended December 31, 2012 2011 2012 2011 $ 90,391 $ 66,641 $ 348,547 $ 216,066 16,044 395 4,375 7,100 42,593 28,111 17,063 28,008 $ 106,830 $ 78,116 $ 419,251 $ 261,137 PAGE 31 6042_Dundee_REIT_AR_2012.indd 31 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report Net operating income, before income from discontinued operations, properties sold and other properties held for sale for the three months ended December 31, 2012, was $105.8 million, a 51% increase over the prior year comparative period. For the year ended December 31, 2012, net operating income, before income from discontinued operations, properties sold and other properties held for sale was $385.8 million, a 68% increase over the prior year. The increase is mainly attributable to income generated by investment properties acquired in 2011 and in 2012 as well as comparative property NOI growth. Western Canada Calgary Toronto Eastern Canada NOI NOI from discontinued operations(1) NOI from properties sold and held for sale(1) NOI including income from discontinued operations and properties sold and held for sale Three months ended December 31, Years ended December 31, Growth 2012 $ 21,677 19,873 49,919 14,384 105,853 2011 Amount $ 16,363 $ 5,314 19,068 805 25,280 24,639 9,354 5,030 70,065 35,788 % 32 4 97 54 51 2012 $ 80,968 78,515 171,698 54,640 385,821 2011 Amount $ 57,453 $ 23,515 67,225 11,290 81,936 89,762 22,825 31,815 229,439 156,382 Growth % 41 17 110 139 68 395 7,100 (6,705) 28,111 28,008 103 582 951 (369) 5,319 3,690 1,629 $ 106,830 $ 78,116 $ 28,714 37 $ 419,251 $ 261,137 $ 158,114 61 (1) Includes straight-line rents and amortization of lease incentives. NOI BY REGION (Three months ended December 31, 2012) Toronto 47% (cid:129) Eastern Canada 14% (cid:129) Western Canada 20% (cid:129) Calgary 19% (cid:129) PAGE 32 6042_Dundee_REIT_AR_2012.indd 32 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report NOI comparative portfolio Net operating income shown below details comparative and non-comparative items to assist in understanding the impact each component has on NOI. The comparative properties disclosed in the following tables are properties acquired prior to January 1, 2011. Income from discontinued operations, properties sold and other properties held for sale contributing to NOI in comparative periods is shown separately. Comparative NOI and NOI attributed to acquisitions exclude lease termination fees, straight-line rents and amortization of lease incentives. Comparative properties NOI increased by $1.4 million, or 4%, over the prior year comparative quarter and by $4.3 million, or 3%, over the prior year. Three months ended December 31, Years ended December 31, Western Canada Calgary Toronto Eastern Canada Comparative properties Lease termination fees and other Properties held for redevelopment Acquisitions Straight-line rent Amortization of lease incentives NOI NOI from discontinued operations(1) NOI from properties sold and properties held for sale(1) NOI including income from discontinued operations, properties sold and assets held for sale 2012 $ 12,096 13,365 14,900 2,116 42,477 97 (94) 62,633 2,019 (1,279) 105,853 2011 Amount $ 11,267 $ 12,502 15,043 2,222 829 863 (143) (106) 41,034 1,443 141 (44) 394 (488) 27,677 34,956 2,054 (1,235) (35) (44) Growth % 7 7 (1) (5) 4 2012 $ 47,327 51,554 59,664 8,448 166,993 922 2011 Amount $ 44,345 $ 2,982 50,503 59,467 8,402 1,051 197 46 162,717 4,276 659 263 Growth % 7 2 – 1 3 281 213,645 8,118 (4,138) 385,821 1,395 (1,114) 62,497 151,148 5,493 (3,322) 2,625 (816) 229,439 156,382 68 70,065 35,788 51 395 7,100 (6,705) 28,111 28,008 103 582 951 (369) 5,319 3,690 1,629 $ 106,830 $ 78,116 $ 28,714 37 $ 419,251 $ 261,137 $ 158,114 61 (1) Includes straight-line rents and amortization of lease incentives. 6042_Dundee_REIT_AR_2012.indd 33 4/8/13 4:23 PM PAGE 33 DUNDEE REIT 2012 Annual Report On a quarterly basis, NOI from comparative properties increased by 4%, or $1.4 million, over the prior year comparative quarter (year ended December 31, 2012 – 3% or $4.3 million). NOI from Western Canada increased by 7% both quarter-over-quarter and year-over-year, largely driven by occupancy increases in our downtown Edmonton properties, which contributed $0.7 million and $1.9 million to the gains in each period, respectively. In addition, NOI from properties in Vancouver and Saskatchewan grew by $0.4 million and $0.5 million, respectively, for the year ended December 31, 2012 as a result of occupancy increases in Vancouver as well as stepped rent increases in Saskatchewan. NOI in Calgary increased 7% for the quarter and 2% for the year, primarily as a result of new leases commencing in the quarter, and, on a year-over-year basis as a result of increased occupancy and higher in-place rents on new leases. On a relative basis, our Toronto and Eastern Canada regions did not move signifi cantly quarter-over-quarter and year-over-year. For the year ended December 31, 2012, we received more in termination fees, which increased NOI by $0.3 million over the comparative period. Additionally, we had NOI declines of $0.5 million (year ended December 31, 2012 – $1.1 million) related to a property that no longer has a lease in-place and which has been classifi ed as redevelopment. 2013 NOI classifi cation Due to the volume of acquisition activity in 2011 and 2012, the following table serves as a benchmark for comparative property NOI to be reported in our MD&A in 2013. Western Canada Calgary Toronto Eastern Canada Comparative properties Lease termination fees and other Properties held for redevelopment Acquisitions Straight-line rent Amortization of lease incentives NOI NOI from discontinued operations(1) NOI from properties sold and held for sale(1) NOI including income from discontinued operations and properties sold and held for sale (1) Includes straight-line rent and amortization of lease incentives. Three months ended December 31, 2012 Year ended December 31, 2012 $ 17,097 $ 66,929 19,723 24,316 8,756 69,892 97 (94) 35,218 2,019 (1,279) 105,853 395 582 77,503 97,914 35,204 277,550 922 281 103,088 8,118 (4,138) 385,821 28,111 5,319 $ 106,830 $ 419,251 Comparative property NOI includes investment properties acquired prior to January 1, 2012. PAGE 34 6042_Dundee_REIT_AR_2012.indd 34 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report NOI prior quarter comparison The comparative properties disclosed in the following table include properties acquired prior to July 1, 2012. Western Canada Calgary Toronto Eastern Canada Comparative properties Lease termination fees and other Properties held for redevelopment Acquisitions Straight-line rent Amortization of lease incentives NOI NOI from discontinued operations(1) NOI from properties sold and held for sale(1) NOI including income from discontinued operations and properties sold and held for sale (1) Includes straight-line rent and amortization of lease incentives. Three months ended Growth % – 3 (1) (2) – Amount 57 668 (525) (339) (139) 26 57 1,235 (340) (353) December 31, September 30, 2012 $ 20,556 $ 19,528 49,777 14,153 104,014 71 (151) – 2,359 (926) 2012 $ 20,613 20,196 49,252 13,814 103,875 97 (94) 1,235 2,019 (1,279) 105,853 395 582 105,367 486 – 9,771 1,429 (9,376) (847) $ 106,830 $ 116,567 $ (9,737) (8) As measured against Q3 2012, comparative NOI was relatively stable with gains in Calgary offsetting small declines in Toronto and Eastern Canada. Western Canada remained fl at against the prior quarter. Calgary NOI increased by an impressive 3%, or $0.7 million, over Q3 2012 driven by higher weighted average in-place occupancy as well as leases renewing at higher rents. NOI from the Toronto portfolio was down $0.5 million, primarily refl ecting lower weighted average in-place occupancy as a result of temporary downtime between lease expiries and subsequent renewals and new leasing. We leased and renewed space in excess of the expiring space, but there was some downtime in the quarter, ultimately causing most of the $0.5 million, or 1%, decline in NOI for the quarter. Eastern Canada declined by $0.3 million, or 2%, over the prior quarter primarily as a result of higher non-recoverable expenses. 6042_Dundee_REIT_AR_2012.indd 35 4/8/13 4:23 PM PAGE 35 DUNDEE REIT 2012 Annual Report Funds from operations and adjusted funds from operations Net income Add (deduct): Share of net income and dilution gain from investment in Dundee Industrial Share of FFO from investment in Dundee Industrial Depreciation of property and equipment Amortization of property management contracts Amortization of lease incentives Loss (gain) on disposal of investment properties Interest expense on subsidiary redeemable units Acquisition related costs, net Leasing incentives expensed on lease terminations Three months ended December 31, Years ended December 31, 2012 2011 2012 2011 $ 100,542 $ 222,761 $ 291,073 $ 400,920 (1,568) 3,458 254 359 1,278 142 1,944 – – – – 156 – 1,351 – 1,931 – – (1,568) 3,458 851 1,321 4,383 (2,677) 7,758 17,551 287 – – 579 – 3,951 – 7,704 5,776 – Fair value adjustments to investment properties (45,595) (162,617) (110,759) (232,987) Fair value adjustments to investment properties held in joint ventures Fair value adjustments to fi nancial instruments Fair value adjustments of DUIP included in general and administrative expenses Debt settlement and other costs, net Hedge-break fee for fi nancial instrument held in joint venture Deferred income taxes Other FFO Funds from operations Add (deduct): Share of FFO from investment in Dundee Industrial Share of AFFO from investment in Dundee Industrial Amortization of fair value adjustments on assumed debt Deferred unit compensation expense Straight-line rent Revenue supplement from vendor on acquisition Other Deduct: Normalized initial direct leasing costs and lease incentives Normalized non-recoverable recurring capital expenditures AFFO 487 4,179 181 3,066 – 263 (85) (21,938) 6,433 23,964 16,588 (37,969) 11,065 135 – – – (2) 745 3,798 5,186 1,849 (320) 598 – – – (240) $ $ 68,905 68,905 $ $ 48,210 $ 263,488 $ 159,397 48,210 $ 263,488 $ 159,397 (3,458) 2,597 (1,426) 904 (2,120) – (41) 65,361 7,226 75 – – (799) 696 (2,459) 598 193 46,439 5,317 75 (3,458) 2,597 (7,976) 3,415 (9,313) 1,495 (56) – – (2,156) 2,805 (6,820) 1,217 322 250,192 154,765 27,932 300 16,790 300 $ 58,060 $ 41,047 $ 221,960 $ 137,675 PAGE 36 6042_Dundee_REIT_AR_2012.indd 36 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report Funds from operations and adjusted funds from operations per unit amounts The basic weighted average number of units outstanding used in the FFO and AFFO calculations includes the weighted average of all REIT Units, LP B Units and vested but unissued deferred trust units and income deferred trust units. The diluted weighted average number of units assumes the conversion of the 6.5%, 5.7%, 6.0%, 7.0% and 5.5% Series H Debentures. Diluted FFO for the quarter includes $3.1 million in interest and general and administrative expense adjustments related to convertible debentures and unvested deferred trust units. Diluted FFO for the year ended December 31, 2012, includes $12.0 million in interest and general and administrative expense adjustments related to convertible debentures and non-vested deferred units. Weighted average units outstanding for basic per unit amounts (in thousands) Weighted average units outstanding for diluted per unit amounts (in thousands) Three months ended December 31, Years ended December 31, 2012 2011 2012 2011 101,184 65,942 92,048 59,182 106,021 69,430 96,805 62,673 Funds from operations Management believes FFO is an important measure of our operating performance. This non-GAAP measurement is a commonly used measure of performance of real estate operations; however, it does not represent cash flow from operating activities, as defined by GAAP, and is not necessarily indicative of cash available to fund Dundee REIT’s needs. In compliance with Canadian Securities Administrators Staff Notice 52-306 (Revised), “Non-GAAP Financial Measures”, FFO has been reconciled to net income in a previous table. FFO FFO per unit – basic FFO per unit – diluted Three months ended December 31, Years ended December 31, 2012 68,905 0.68 0.68 $ $ $ 2011 48,210 0.73 0.73 $ $ $ 2012 263,488 2.86 2.85 $ $ $ 2011 159,397 2.69 2.69 $ $ $ For the three months ended December 31, 2012, FFO per diluted unit was $0.68, down 6.8% over the prior year comparative period, refl ecting the sale of the Industrial Portfolio. FFO per diluted unit was $2.85, up 5.9% over the prior year comparative period, refl ecting the impact of accretive acquisitions in 2011 and 2012. For the three months ended December 31, 2012, total FFO was $68.9 million, up $20.7 million, or 42.9% (year ended December 31, 2012 – $263.5 million, up $104.1 million, or 65.3%), reflecting the impact of accretive acquisitions completed in 2011 and 2012. Adjusted funds from operations Management believes that AFFO is an important measure of our economic performance and is indicative of our ability to pay distributions. This non-GAAP measurement is commonly used 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. 6042_Dundee_REIT_AR_2012.indd 37 4/8/13 4:23 PM PAGE 37 DUNDEE REIT 2012 Annual Report Our calculation of AFFO includes a deduction for an estimated amount of normalized non-recoverable maintenance capital expenditures; initial direct leasing costs and tenant incentives that we expect to incur based on our current portfolio; and expected average leasing activity. Our estimates of initial direct leasing costs and lease incentives are based on the average of our expected leasing activity over the next two to three years and multiplied by the average cost per square foot that we incurred and committed to in 2012, adjusted for properties that have been acquired or sold. Our estimates of normalized non-recoverable capital expenditures are based on our expected average expenditures for our current property portfolio. This estimate will differ from actual experience due to the timing of expenditures and any growth in our business resulting from property acquisitions. AFFO AFFO per unit – basic Three months ended December 31, Years ended December 31, 2012 58,060 0.57 $ $ $ $ 2011 2012 41,047 $ 221,960 0.62 $ 2.41 2011 137,675 2.33 $ $ Accretive acquisitions completed in 2011 and 2012 contributed to AFFO per unit increases of 3.4% year-over-year, or increases in total AFFO of $84.3 million. For the quarter, total AFFO was $58.1 million, up $17.0 million, or 41.4%, and $0.57 on a per unit basis, down 8% over the same quarter in 2011 as a result of the sale of the Industrial Portfolio. AFFO is not defined by IFRS and, therefore, may not be comparable to similar measures presented by other real estate investment trusts. In compliance with Canadian Securities Administrators Staff Notice 52-306 (Revised), “Non-GAAP Financial Measures”, the table below reconciles AFFO to cash generated from operating activities. Cash generated from operating activities $ 32,574 $ 33,901 $ 134,950 $ 89,909 Three months ended December 31, Years ended December 31, 2012 2011 2012 2011 2,597 10,488 8,859 – 11,649 487 189 – 137 – – (7,226) (75) (1,619) – 24,847 7,509 – 1,917 2,597 (254) 23,577 17,551 44,074 – 49,728 23,136 17,528 12,941 (21,938) 23,964 (37,969) (83) – 97 – 598 (5,317) (75) (409) 214 – 406 5,186 1,495 (27,932) (300) (3,568) (155) (193) 385 – 1,217 (16,790) (300) (1,762) $ 58,060 $ 41,047 $ 221,960 $ 137,675 Add (deduct): Share of AFFO from investment in Dundee Industrial Share of net income (loss) from investment in joint ventures Initial direct leasing costs and lease incentives incurred Transaction costs on acquired businesses including those recorded in investment in joint ventures Change in non-cash working capital Adjustments for investment in joint ventures: Fair value adjustments to investment properties Straight-line rent Fair value adjustments on assumed debt Amortization of lease incentives Hedge-break fee for fi nancial instrument Revenue supplement from vendor on acquisition Normalized initial direct leasing costs and lease incentives Normalized non-recoverable recurring capital expenditures Other AFFO PAGE 38 6042_Dundee_REIT_AR_2012.indd 38 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report Selected annual information The following table provides selected fi nancial information for the past three years: Revenues(1) Income from continuing operations Net income Total assets Add share of investment in joint ventures that are equity accounted Debt Amounts payable, accrued liabilities and deposits Debt Add debt related to investment in joint ventures that are equity accounted and liabilities related to assets held for sale Distributions declared Units outstanding REIT Units, Series A REIT Units, Series B LP Class B Units, Series 1 2012 2011 2010(2) $ 691,777 $ 407,272 $ 269,795 266,174 291,073 6,352,988 355,110 400,920 215,995 215,995 4,466,467 2,583,248 526,968 33,788 130,223 3,762 94,843 3,183 $ 6,913,744 $ 4,600,452 $ 2,681,274 $ 2,778,426 $ 2,124,517 $ 1,202,008 536,168 130,239 94,843 $ 3,314,594 $ 2,254,756 $ 1,296,851 $ 203,596 $ 131,168 $ 86,048 97,618,625 16,316 3,528,658 66,193,060 45,896,203 16,316 16,316 3,506,107 3,481,733 (1) Including revenues from investment in joint ventures, interest and fee income and excluding discontinued operations. (2) 2010 amounts have not been restated for discontinued operations. 6042_Dundee_REIT_AR_2012.indd 39 4/8/13 4:23 PM PAGE 39 DUNDEE REIT 2012 Annual Report Quarterly information The following tables show quarterly information since January 1, 2011. Q4 Investment properties revenue $ 162,014 Investment properties operating expenses Net rental income from continuing operations Other income and expenses 90,391 71,623 Q3 Q2 2012 Q1 Q4 Q3 Q2 2011 Q1 $ 157,421 $ 156,684 $ 131,677 $ 119,234 $ 101,540 $ 79,072 $ 75,169 66,459 65,177 55,990 52,593 42,308 32,114 31,934 90,962 91,507 75,687 66,641 59,232 46,958 43,235 General and administrative (5,774) (5,748) (5,267) (4,343) (3,856) (3,513) (3,295) (3,132) 1,568 – – – – – – – 10,488 12,105 (31,354) 8,507 24,847 14,054 6,880 3,947 45,595 17,307 11,213 31,457 145,856 9,267 30,872 19,565 (1,289) – 2,988 (230) – – (169) (17,319) – – – – – 2 – (5,690) (33,239) (1,944) (3,066) (613) 1,435 (32,439) (32,512) (26,928) (24,326) (21,882) (17,754) (15,825) (1,941) (1,938) (1,935) (1,931) (1,928) (1,926) (1,919) (732) (574) – (554) 1,413 1,255 – (301) 942 – (157) 863 – (174) 644 – (133) 437 – (117) 433 (4,179) 4,144 (8,120) (8,433) (6,433) 5,870 2,729 (13,231) 99,373 263 87,255 24,230 57,165 201,504 61,570 64,770 27,266 921 665 – – – – – 99,110 86,334 23,565 57,165 201,504 61,570 64,770 27,266 1,432 100,542 4,634 8,278 10,555 21,257 6,285 13,563 4,705 90,968 31,843 67,720 222,761 67,855 78,333 31,971 344 259 (1,906) 2,530 (868) (734) 320 664 $ 101,206 (1,107) 588 277 – – (848) (1,318) 2,807 (868) (734) $ 90,120 $ 30,525 $ 70,527 $ 221,893 $ 67,121 $ 78,333 $ 31,971 – – – – – – Share of net income and dilution gain from investment in Dundee Industrial Share of net income from investment in joint ventures Fair value adjustments to investment properties Net (loss) gain on sale of investment properties Acquisition related costs, net Interest: Debt Subsidiary redeemable units Debt settlement and other costs, net Depreciation and amortization Interest and fee income Fair value adjustments to fi nancial instruments Income before income taxes and discontinued operations Deferred income taxes Income from continuing operations Income from discontinued operations Net income Other comprehensive income (loss) Unrealized gain (loss) on interest rate swaps Unrealized foreign currency translation gain (loss) Comprehensive income PAGE 40 6042_Dundee_REIT_AR_2012.indd 40 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report Calculation of funds from operations NET INCOME Add (deduct): Share of net income and dilution gain from investment in Dundee Industrial Share of FFO from investment in Dundee Industrial Depreciation of property and equipment Amortization of property management contracts Amortization of lease incentives Gain (loss) on disposal of investment properties Interest expense on subsidiary redeemable units Acquisition related costs, net Leasing incentives expensed on lease terminations Fair value adjustments to investment properties Fair value adjustments to investment properties held in joint ventures Fair value adjustments to fi nancial instruments Fair value of DUIP included in general and administrative expenses Debt settlement and other costs, net Hedge-break fee for fi nancial instrument held in joint venture Deferred income taxes Other FFO Q4 $ 100,542 Q3 Q2 2012 Q1 Q4 Q3 Q2 2011 Q1 $ 90,968 $ 31,843 $ 67,720 $ 222,761 $ 67,855 $ 78,333 $ 31,971 (1,568) 3,458 254 359 1,278 – – – – – – – – – – – – – – 221 193 183 156 173 133 117 413 412 138 – – – 1,068 1,023 1,014 1,351 805 1,009 – 786 142 (2,988) – 169 – – – – 1,944 – 1,941 1,938 1,935 1,931 1,928 1,926 230 2 17,319 – – – – – 1,919 5,776 – – 45 13 229 53 (45,593) (15,294) (13,319) (36,551) (162,617) (10,902) (39,712) (19,756) 487 (1,336) 30,438 (5,625) (21,938) (11,206) (3,598) (1,227) 4,179 (4,144) 8,120 8,433 6,433 (5,870) (2,729) 13,231 181 188 203 173 135 111 271 81 3,066 732 – – 263 (87) $ 68,905 – 5,186 921 (86) 665 (84) – – – – – – – – – – – – – – – (66) (55) (62) (142) (34) $ 72,879 $ 66,633 $ 55,071 $ 48,210 $ 42,832 $ 35,491 $ 32,864 FFO per unit – basic(1) FFO per unit – diluted(1) $ $ 0.68 0.68 $ $ 0.72 $ 0.72 $ 0.74 $ 0.73 $ 0.68 $ 0.64 $ 0.63 0.72 $ 0.72 $ 0.73 $ 0.73 $ 0.68 $ 0.64 $ 0.63 (1) The LP B Units are included in the calculation of basic and diluted FFO per unit. 6042_Dundee_REIT_AR_2012.indd 41 4/8/13 4:23 PM PAGE 41 DUNDEE REIT 2012 Annual Report Q4 FUNDS FROM OPERATIONS $ 68,905 Add (deduct): Q3 Q2 2012 Q1 Q4 Q3 Q2 2011 Q1 $ 72,879 $ 66,633 $ 55,071 $ 48,210 $ 42,832 $ 35,491 $ 32,864 Share of FFO from investment in Dundee Industrial Share of AFFO from investment in Dundee Industrial Amortization of fair value (3,458) 2,597 – – – – – – – – – – – – – – adjustment on assumed debt (1,426) (2,349) (2,528) (1,673) (799) (638) (382) (337) Deferred compensation expense Straight -line rent Revenue supplement from vendor on acquisition Other Deduct: Normalized initial direct leasing costs and lease incentives Normalized non-recoverable recurring capital expenditures 904 (2,120) – (41) 65,361 904 858 749 696 697 753 659 (2,720) (2,342) (2,131) (2,459) (2,083) (1,199) (1,079) 299 (11) 598 (2) 598 (2) 598 193 342 118 131 (3) 146 14 69,002 63,217 52,612 46,439 41,268 34,791 32,267 7,226 7,641 7,181 5,884 5,317 4,613 3,430 3,430 75 75 75 75 75 75 75 75 Adjusted funds from operations AFFO per unit – basic(1) Weighted average units outstanding for FFO and AFFO Basic (in thousands) Diluted (in thousands) $ 58,060 $ 61,286 $ 55,961 $ 46,653 $ 41,047 $ 36,580 $ 31,286 $ 28,762 $ 0.57 $ 0.61 $ 0.61 $ 0.63 $ 0.62 $ 0.58 $ 0.56 $ 0.55 101,184 106,021 100,564 91,948 74,527 65,942 62,638 55,389 52,526 105,536 97,011 78,663 69,430 66,118 58,887 56,012 (1) The LP B Units are included in the calculation of basic AFFO per unit. Section III – Disclosure controls and procedures For the December 31, 2012 financial year-end, the Chief Executive Officer and the Chief Financial Officer (the “Certifying Officers”), together with other members of management, have evaluated the design and operational effectiveness of Dundee REIT’s disclosure controls and procedures, as defined in National Instrument 52-109. The Certifying Officers have concluded that the disclosure controls and procedures for recording, processing and summarizing material information are adequate and effective in order to provide reasonable assurance that material information has been accumulated and communicated to management, to allow timely decisions of required disclosures by Dundee REIT and its consolidated subsidiary entities, within the required time periods. The internal controls over financial reporting are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles (“GAAP”). Using the framework established in “Risk Management and Governance: Guidance on Control (COCO Framework)”, published by The Canadian Institute of Chartered Accountants, the Certifying Officers, together with other members of management, have evaluated and concluded that the design and operation of Dundee REIT’s internal controls over financial reporting are effective for the financial year-end December 31, 2012. PAGE 42 6042_Dundee_REIT_AR_2012.indd 42 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report There were no other changes in the internal controls over financial reporting during the financial year-end December 31, 2012, which have materially affected, or are reasonably likely to materially affect, Dundee REIT’s internal controls over financial reporting. Section IV – Risks and our strategy to manage Dundee REIT is exposed to various risks and uncertainties, many of which are beyond our control. The following is a review of the material risks and uncertainties that could materially affect our operations and future performance. Real estate ownership Real estate ownership is generally subject to numerous factors and risks, including changes in general economic conditions (such as the availability, terms and cost of mortgage financings and other types of credit), local economic conditions (such as an oversupply of office and other commercial properties or a reduction in demand for real estate in the area), the attractiveness of properties to potential tenants or purchasers, competition with other landlords with similar available space, and the ability of the owner to provide adequate maintenance at competitive costs. An investment in real estate is relatively illiquid. Such illiquidity will tend to limit our ability to vary our portfolio promptly in response to changing economic or investment conditions. In recessionary times, it may be difficult to dispose of certain types of real estate. The costs of holding real estate are considerable, and during an economic recession, we may be faced with ongoing expenditures with a declining prospect of incoming receipts. In such circumstances, it may be necessary for us to dispose of properties at lower prices in order to generate sufficient cash from operations and make distributions and interest payments. Certain significant expenditures (e.g., property taxes, maintenance costs, mortgage payments, insurance costs and related charges) must be made throughout the period of ownership of real property, regardless of whether the property is producing sufficient income to pay such expenses. In order to retain desirable rentable space and to generate adequate revenue over the long term, we must maintain or, in some cases, improve each property’s condition to meet market demand. Maintaining a rental property in accordance with market standards can entail significant costs, which we may not be able to pass on to our tenants. Numerous factors, including the age of the relevant building structure, the material and substances used at the time of construction, or currently unknown building code violations, could result in substantial unbudgeted costs for refurbishment or modernization. In the course of acquiring a property, undisclosed defects in design or construction or other risks might not have been recognized or correctly evaluated during the pre-acquisition due diligence process. These circumstances could lead to additional costs and could have an adverse effect on our proceeds from sales and rental income of the relevant properties. Rollover of leases Upon the expiry of any lease, there can be no assurance that the lease will be renewed or the tenant replaced. Furthermore, the terms of any subsequent lease may be less favourable than those of the existing lease. Our cash flows and financial position would be adversely affected if our tenants were to become unable to meet their obligations under their leases or if a significant amount of available space in our properties could not be leased on economically favourable lease terms. In the event of default by a tenant, we may experience delays or limitations in enforcing our rights as lessor and incur substantial costs in protecting our investment. Furthermore, at any time, a tenant may seek the protection of bankruptcy, insolvency or similar laws which could result in the rejection and termination of the lease of the tenant and, thereby, cause a reduction in the cash flows available to us. Concentration of properties and tenants Currently, principally all of our properties are located in Canada and, as a result, are impacted by economic and other factors specifically affecting the real estate markets in Canada. These factors may differ from those affecting the real estate markets in other regions. Due to the concentrated nature of our properties, a number of our properties could PAGE 43 6042_Dundee_REIT_AR_2012.indd 43 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report experience any of the same conditions at the same time. If real estate conditions in Canada decline relative to real estate conditions in other regions, our cash flows and financial condition may be more adversely affected than those of companies that have more geographically diversified portfolios of properties. Financing We require access to capital to maintain our properties as well as to fund our growth strategy and significant capital expenditures. There is no assurance that capital will be available when needed or on favourable terms. Our access to third-party financing will be subject to a number of factors, including general market conditions; the market’s perception of our growth potential; our current and expected future earnings; our cash flow and cash distributions, and cash interest payments; and the market price of our Units. A significant portion of our financing is debt. Accordingly, we are subject to the risks associated with debt financing, including the risk that our cash flows will be insufficient to meet required payments of principal and interest, and that, on maturities of such debt, we may not be able to refinance the outstanding principal under such debt or that the terms of such refinancing will be more onerous than those of the existing debt. If we are unable to refinance debt at maturity on terms acceptable to us or at all, we may be forced to dispose of one or more of our properties on disadvantageous terms, which may result in losses and could alter our debt-to-equity ratio or be dilutive to unitholders. Such losses could have a material adverse effect on our financial position or cash flows. The degree to which we are leveraged could have important consequences to our operations. A high level of debt will reduce the amount of funds available for the payment of distributions to unitholders and interest payments on our debentures; limit our flexibility in planning for and reacting to changes in the economy and in the industry, and increase our vulnerability to general adverse economic and industry conditions; limit our ability to borrow additional funds, dispose of assets, encumber our assets and make potential investments; place us at a competitive disadvantage compared to other owners of similar real estate assets that are less leveraged and, therefore, may be able to take advantage of opportunities that our indebtedness would prevent us from pursuing; make it more likely that a reduction in our borrowing base following a periodic valuation (or redetermination) could require us to repay a portion of then outstanding borrowings; and impair our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general trust or other purposes. Changes in law We are subject to applicable federal, provincial, municipal, local and common laws and regulations governing the ownership and leasing of real property, employment standards, environmental matters, taxes and other matters. It is possible that future changes in such laws or regulations, or changes in their application, enforcement or regulatory interpretation, could result in changes in the legal requirements affecting us (including with retroactive effect). In addition, the political conditions in the jurisdictions in which we operate are also subject to change. Any changes in investment policies or shifts in political attitudes may adversely affect our investments. Any changes in the laws to which we are subject in the jurisdictions in which we operate could materially affect our rights and title in and to the properties and the revenues we are able to generate from our investments. Interest rates When entering into financing agreements or extending such agreements, we depend on our ability to agree on terms for interest payments that will not impair our desired profit, and on amortization schedules that do not restrict our ability to pay distributions on our Units and interest payments on our debentures. In addition to existing variable rate portions of our financing agreements, we may enter into future financing agreements with variable interest rates. An increase in interest rates could result in a significant increase in the amount we pay to service debt, which could limit our ability to pay distributions to unitholders and could impact the market price of the Units and/or the debentures. We have implemented an active hedging program in order to offset the risk of revenue losses and to provide more certainty regarding the payment of distributions to unitholders and cash interest payments under the debentures should current variable interest rates increase. However, to the extent that we fail to adequately manage these risks, including if any such hedging arrangements do not PAGE 44 6042_Dundee_REIT_AR_2012.indd 44 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report effectively or completely hedge increases in variable interest rates, our financial results, our ability to pay distributions to unitholders and cash interest payments under our financing arrangements, and the debentures and future financings may be negatively affected. Hedging transactions involve inherent risks. Increases in interest rates generally cause a decrease in demand for properties. Higher interest rates and more stringent borrowing requirements, whether mandated by law or required by banks, could have a significant negative effect on our ability to sell any of our properties. Environmental risk As an owner of real property, we are subject to various federal, provincial and municipal laws relating to environmental matters. Such laws provide a range of potential liability, including potentially significant penalties, and potential liability for the costs of removal or remediation of certain hazardous substances. The presence of such substances, if any, could adversely affect our ability to sell or redevelop such real estate or to borrow using such real estate as collateral and, potentially, could also result in civil claims against us. In order to obtain financing for the purchase of a new property through traditional channels, we may be requested to arrange for an environmental audit to be conducted. Although such an audit provides us and our lenders with some assurance, we may become subject to liability for undetected pollution or other environmental hazards on our properties against which we cannot insure, or against which we may elect not to insure where premium costs are disproportionate to our perception of relative risk. We have formal policies and procedures to review and monitor environmental exposure. These policies include the requirement to obtain a Phase I Environmental Site Assessment, conducted by an independent and qualified environmental consultant, before acquiring any real property or any interest therein. Joint arrangements We are a participant in jointly controlled entities and co-ownerships, combined (“joint arrangements”) with third parties. A joint arrangement involves certain additional risks, including: (i) (ii) the possibility that such third parties may at any time have economic or business interests or goals that will be inconsistent with ours, or take actions contrary to our instructions or requests or to our policies or objectives with respect to our real estate investments; the risk that such third parties could experience financial difficulties or seek the protection of bankruptcy, insolvency or other laws, which could result in additional financial demands on us to maintain and operate such properties or repay the third parties’ share of property debt guaranteed by us or for which we will be liable, and/or result in our suffering or incurring delays, expenses and other problems associated with obtaining court approval of joint arrangement; (iii) the risk that such third parties may, through their activities on behalf of or in the name of the joint arrangements, expose or subject us to liability; and (iv) the need to obtain third parties’ consents with respect to certain major decisions, including the decision to distribute cash generated from such properties or to refinance or sell a property. In addition, the sale or transfer of interests in certain of the joint arrangements may be subject to rights of first refusal or first offer, and certain of the joint venture and partnership agreements may provide for buy-sell or similar arrangements. Such rights may be triggered at a time when we may not desire to sell but may be forced to do so because we do not have the cash to purchase the other party’s interests. Such rights may also inhibit our ability to sell an interest in a property or a joint arrangement within the time frame or otherwise on the basis we desire. Our investment in properties through joint arrangements is subject to the investment guidelines set out in our Declaration of Trust. Competition The real estate market in Canada is highly competitive and fragmented, and we compete for real property acquisitions with individuals, corporations, institutions and other entities that may seek real property investments similar to those we desire. An increase in the availability of investment funds or an increase in interest in real property investments may increase PAGE 45 6042_Dundee_REIT_AR_2012.indd 45 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report competition for real property investments, thereby increasing purchase prices and reducing the yield on them. If competing properties of a similar type are built in the area where one of our properties is located or if similar properties located in the vicinity of one of our properties are substantially refurbished, the net operating income derived from and the value of such property could be reduced. Numerous other developers, managers and owners of properties will compete with us in seeking tenants. To the extent that our competitors own properties that are in better locations, of better quality or less leveraged than the properties owned by us, they may be in a better position to attract tenants who might otherwise lease space in our properties. To the extent that our competitors are better capitalized or financially stronger, they would be in a better position to withstand an economic downturn. The existence of competition for tenants could have an adverse effect on our ability to lease space in our properties and on the rents charged or concessions granted, and could materially and adversely affect our cash flows, operating results and financial condition. Insurance We carry general liability, umbrella liability and excess liability insurance with limits that are typically obtained for similar real estate portfolios in Canada and otherwise acceptable to our trustees. For the property risks, we carry “All Risks” property insurance including, but not limited to, flood, earthquake and loss of rental income insurance (with at least a 24-month indemnity period). We also carry boiler and machinery insurance covering all boilers, pressure vessels, HVAC systems and equipment breakdown. However, certain types of risks (generally of a catastrophic nature such as from war or nuclear accident) are uninsurable under any insurance policy. Furthermore, there are other risks that are not economically viable to insure at this time. We partially self-insure against terrorism risk for our entire portfolio. We have insurance for earthquake risks, subject to certain policy limits, deductibles and self-insurance arrangements. Should an uninsured or underinsured loss occur, we could lose our investment in, and anticipated profits and cash flows from, one or more of our properties, but we would continue to be obligated to repay any recourse mortgage indebtedness on such properties. We do not carry title insurance on our properties. If a loss occurs resulting from a title defect with respect to a property where there is no title insurance or the loss is in excess of insured limits, we could lose all or part of our investment in, and anticipated profits and cash flows from, such property. Section V – Critical accounting policies Critical accounting judgments, estimates and assumptions in applying accounting policies In preparing the consolidated financial statements management is required to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and the disclosures of contingent liabilities. Management bases its judgments and estimates on historical experience and other factors it believes to be reasonable under the circumstances, but that are inherently uncertain and unpredictable, the result of which forms the basis of the carrying amounts of assets and liabilities. However, uncertainty about these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amounts of the asset or liability affected in the future. Dundee REIT’s critical accounting judgments, estimates and assumptions in applying accounting policies are described in Note 4 in the consolidated financial statements. Changes in accounting estimates and changes in accounting policies Future accounting policy changes Dundee REIT’s future accounting policy changes are described in Note 5 in the consolidated fi nancial statements. Additional information relating to Dundee REIT, including the latest annual information form of Dundee REIT, is available on SEDAR at www.sedar.com. PAGE 46 6042_Dundee_REIT_AR_2012.indd 46 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report Management’s responsibility for fi nancial statements The accompanying consolidated fi nancial statements, the notes thereto and other fi nancial information contained in this Annual Report have been prepared by, and are the responsibility of, the management of Dundee REIT. These fi nancial statements have been prepared in accordance with International Financial Reporting Standards, using management’s best estimates and judgments when appropriate. The Board of Trustees is responsible for ensuring that management fulfi lls its responsibility for fi nancial reporting and internal control. The audit committee, which comprises trustees, meets with management as well as the external auditors to satisfy itself that management is properly discharging its fi nancial responsibilities and to review its consolidated fi nancial statements and the report of the auditors. The audit committee reports its fi ndings to the Board of Trustees, which approves the consolidated fi nancial statements. PricewaterhouseCoopers LLP, the independent auditors, have audited the consolidated fi nancial 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 MARIO BARRAFATO Vice Chairman and Chief Executive Offi cer Senior Vice President and Chief Financial Offi cer Toronto, Ontario, February 20, 2013 6042_Dundee_REIT_AR_2012.indd 47 4/8/13 4:23 PM PAGE 47 DUNDEE REIT 2012 Annual Report Independent auditor’s report To the Unitholders of Dundee Real Estate Investment Trust We have audited the accompanying consolidated fi nancial statements of Dundee Real Estate Investment Trust and its subsidiaries, which comprise the consolidated balance sheets as at December 31, 2012 and December 31, 2011 and the consolidated statements of comprehensive income, changes in equity and cash fl ows for the years then ended, and the related notes, which comprise a summary of signifi cant accounting policies and other explanatory information. Management’s responsibility for the consolidated fi nancial statements Management is responsible for the preparation and fair presentation of these consolidated fi nancial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated fi nancial statements that are free from material misstatement, whether due to fraud or error. Auditor’s responsibility Our responsibility is to express an opinion on these consolidated fi nancial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated fi nancial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated fi nancial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated fi nancial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated fi nancial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated fi nancial statements. We believe that the audit evidence we have obtained in our audits is suffi cient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated fi nancial statements present fairly, in all material respects, the fi nancial position of Dundee Real Estate Investment Trust and its subsidiaries as at December 31, 2012 and December 31, 2011 and their fi nancial performance and their cash fl ows for the years then ended in accordance with International Financial Reporting Standards. Chartered Accountants, Licensed Public Accountants Toronto, Ontario, February 20, 2013 PAGE 48 6042_Dundee_REIT_AR_2012.indd 48 4/8/13 4:23 PM Consolidated balance sheets (in thousands of Canadian dollars) Assets NON-CURRENT ASSETS Investment properties Investment in Dundee Industrial Investment in joint ventures Other non-current assets CURRENT ASSETS Promissory notes receivable Amounts receivable Prepaid expenses Cash and cash equivalents Assets held for sale Total assets Liabilities NON-CURRENT LIABILITIES Debt Subsidiary redeemable units Deposits Deferred Unit Incentive Plan Other fi nancial instruments Deferred tax net liabilities CURRENT LIABILITIES Debt Amounts payable and accrued liabilities Distributions payable Liabilities related to assets held for sale Total liabilities Equity Unitholders’ equity Retained earnings Accumulated other comprehensive loss Total equity Total liabilities and equity See accompanying notes to the consolidated financial statements. On behalf of the Board of Trustees of Dundee Real Estate Investment Trust: NED GOODMAN Trustee MICHAEL J. COOPER Trustee DUNDEE REIT 2012 Annual Report Note December 31, 2012 December 31, 2011 8 9 10 11 12 13 20 14 15 16 14 24 14 17 18 20 28 19 $ 5,477,560 $ 4,154,179 160,976 490,770 95,301 6,224,607 42,000 31,106 10,714 24,014 107,834 20,547 – 144,596 22,507 4,321,282 – 13,618 11,990 111,870 137,478 7,707 $ 6,352,988 $ 4,466,467 $ 2,470,337 $ 1,957,538 132,078 16,847 18,754 1,772 4,492 114,445 13,919 12,971 8,028 – 2,644,280 2,106,901 308,089 76,896 18,056 403,041 9,268 166,979 63,139 12,192 242,310 22 3,056,589 2,349,233 2,829,662 467,034 (297) 3,296,399 1,745,283 373,553 (1,602) 2,117,234 $ 6,352,988 $ 4,466,467 PAGE 49 6042_Dundee_REIT_AR_2012.indd 49 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report Consolidated statements of comprehensive income (in thousands of Canadian dollars) Investment properties revenue Investment properties operating expenses Net rental income from continuing operations Other income and expenses General and administrative Share of net income and dilution gain from investment in Dundee Industrial Share of net income (loss) from investment in joint ventures Fair value adjustments to investment properties Net gain on sale of investment properties Acquisition related costs, net Interest: Debt Subsidiary redeemable units Debt settlement and other costs, net Depreciation and amortization Interest and fee income Fair value adjustments to fi nancial instruments Income before income taxes and discontinued operations Deferred income taxes Income from continuing operations Income from discontinued operations Net income for the year Other comprehensive income (loss) Unrealized gain (loss) on interest rate swap agreements Unrealized foreign currency translation gain Comprehensive income for the year See accompanying notes to the consolidated financial statements. Years ended December 31, Note 2012 2011 $ 607,796 $ 375,015 259,249 348,547 (21,132) 1,568 (254) 105,572 1,530 (17,549) (125,118) (7,758) (3,798) (2,042) 5,045 (16,588) 268,023 1,849 266,174 24,899 291,073 1,227 78 1,305 158,949 216,066 (13,796) – 49,728 205,560 – (5,688) (79,787) (7,704) – (580) 2,376 (11,065) 355,110 – 355,110 45,810 400,920 (1,602) – (1,602) $ 292,378 $ 399,318 9 10 8, 20 20 6 21 21 22 23 20 28 28 PAGE 50 6042_Dundee_REIT_AR_2012.indd 50 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report Consolidated statements of changes in equity (in thousands of Canadian dollars, except number of units) Note Number of units Unitholders’ equity Retained earnings Accumulated other comprehensive income (loss) Total Attributable to unitholders of the Trust Balance at January 1, 2012 Net income for the year Distributions paid Distributions payable 66,209,376 – – – 18, 19 18, 19 Public offering of REIT A Units 19 16,947,550 REIT A Units issued for Whiterock transaction 6, 19 Distribution Reinvestment Plan Unit Purchase Plan 19 19 Deferred units exchanged for REIT A Units 16, 19 Conversion of debentures Conversion feature on debentures Issue costs Other comprehensive income Balance at December 31, 2012 19 14, 19 19 19, 28 12,580,347 1,200,028 15,296 25,290 657,054 – – – 97,634,941 $ 1,745,283 $ 373,553 $ (1,602) $ 2,117,234 – – – 291,073 (179,536) (18,056) 604,812 434,777 44,127 578 876 17,498 5,674 (23,963) – – – – – – – – – – $ 2,829,662 $ 467,034 $ – – – – – – – – – – 291,073 (179,536) (18,056) 604,812 434,777 44,127 578 876 17,498 5,674 – (23,963) 1,305 1,305 (297) $ 3,296,399 Note Number of units Unitholders’ equity Retained earnings Accumulated other comprehensive loss Total Attributable to unitholders of the Trust Balance at January 1, 2011 Net income for the year Distributions paid Distributions payable Public offering of REIT A Units Distribution Reinvestment Plan Unit Purchase Plan 18, 19 18, 19 19 19 19 Deferred units exchanged for REIT A Units 16, 19 Conversion of debentures Conversion feature on debentures Issue costs Other comprehensive loss Balance at December 31, 2011 19 14, 19 19 19, 28 See accompanying notes to the consolidated fi nancial statements. 45,912,519 $ 1,118,058 $ 97,002 $ – – – – – – 400,920 (112,177) (12,192) 19,538,500 688,502 629,434 21,857 11,222 32,376 26,257 – – – 359 1,035 701 302 (26,463) – – – – – – – – – – – – – – – – – – – – (1,602) $ 1,215,060 400,920 (112,177) (12,192) 629,434 21,857 359 1,035 701 302 (26,463) (1,602) 66,209,376 $ 1,745,283 $ 373,553 $ (1,602) $ 2,117,234 6042_Dundee_REIT_AR_2012.indd 51 4/8/13 4:23 PM PAGE 51 DUNDEE REIT 2012 Annual Report Consolidated statements of cash fl ows (in thousands of Canadian dollars) Generated from (utilized in) operating activities Net income for the year Non-cash items: Acquisition related costs, net Share of net income and dilution gain from investment in Dundee Industrial Share of net loss (income) from investment in joint ventures Amortization of lease incentives Amortization of external management contracts Amortization of fi nancing costs Amortization of fair value adjustments on assumed debt Fair value adjustments written off on debt extinguishment Net gain on sale of investment properties Deferred unit compensation expense Straight-line rent adjustment Fair value adjustments to investment properties Fair value adjustments to fi nancial instruments Depreciation on property and equipment Deferred income taxes Reinvestment in subsidiary redeemable units Investment in lease incentives and initial direct leasing costs Transaction costs on acquired business Mortgage break fees Debt settlement costs and other non-cash costs Interest paid on subsidiary redeemable units Change in non-cash working capital Generated from (utilized in) investing activities Investment in building improvements Investment in development projects Acquisition of Whiterock (2011 – Realex Properties Corporation), net of cash acquired Acquisition of investment properties Acquisition deposits on investment properties Vendor adjustment on investment properties Net proceeds from disposal of investment properties Acquisition of joint venture interest Distributions from investment in joint ventures Contributions from investment in joint ventures Change in restricted cash Generated from (utilized in) fi nancing activities Mortgages placed Financing costs on mortgages placed Mortgage principal repayments Mortgage lump sum repayments Mortgage break fees New term debt Term debt principal repayments Draw on bridge loan facility Repayment of bridge loan facility Revolving credit facility – net draws (repayments) Financing costs on revolving credit facility Draw on term loan credit facility Repayment of term loan credit facility Financing costs on term loan credit facility Repayment of convertible debentures Repayment of debentures Distributions paid on Units Interest paid on subsidiary redeemable units Units issued for cash Unit issue costs Increase (decrease) in cash and cash equivalents Foreign exchange loss on cash held in foreign currency Cash transferred on disposition of discontinued operations Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year See accompanying notes to the consolidated financial statements. PAGE 52 Note 2012 2011 Years ended December 31, $ 291,073 $ 400,920 6, 20 9 22 20 16 23 15, 21 6 22 22 21 27 6 7 20 22 18 17,551 (1,568) 254 3,976 1,321 3,280 (7,396) (5,796) (2,677) 4,160 (9,898) (110,759) 16,588 848 1,849 826 (23,577) (17,551) 5,626 3,968 6,926 (44,074) 134,950 (20,199) (1,945) (147,134) (235,019) (1,150) – 212,486 (844,766) 455,573 (11,685) 181 (593,658) 474,789 (4,220) (61,685) (346,757) (5,626) 24 (280) 220,000 (220,000) 30,942 (629) – (4,547) – (126,686) (10,340) (147,601) (6,926) 605,390 (23,963) 371,885 (86,823) (155) (878) 111,870 5,734 – (49,728) 3,566 – 2,177 (1,963) – – 3,403 (6,952) (232,987) 11,065 579 – 771 (23,136) (17,528) – – 6,929 (12,941) 89,909 (8,044) (13,215) (154,380) (1,014,706) (18,053) 1,000 – – (11,118) 42,436 28 (1,176,052) 495,489 (3,664) (38,082) (48,390) – – (224) – – 2,435 – 188,000 – (3,650) – – (98,753) (6,929) 629,434 (26,463) 1,089,203 3,060 – – 108,810 $ 24,014 $ 111,870 6042_Dundee_REIT_AR_2012.indd 52 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report Notes to the consolidated fi nancial statements (All dollar amounts in thousands of Canadian dollars, except unit or per unit amounts) Note 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 consolidated subsidiaries. Dundee REIT’s portfolio comprises office properties located in urban centres across Canada and the United States (“U.S.”). A subsidiary of Dundee REIT performs the property management function. The Trust’s registered office is 30 Adelaide Street East, Suite 1600, Toronto, Ontario, Canada M5C 3H1. The Trust is listed on the Toronto Stock Exchange under the symbol “D.UN”. Dundee REIT’s consolidated financial statements for the year ended December 31, 2012, were authorized for issuance by the Board of Trustees on February 20, 2013, after which date they may only be amended with the Board of Trustees’ approval. Equity is described in Note 19; however, for simplicity, throughout the notes, reference is made to the following: • “REIT A Units”, meaning the REIT Units, Series A • “REIT B Units”, meaning the REIT Units, Series B • “REIT Units”, meaning the REIT Units, Series A, and REIT Units, Series B, collectively • “Units”, meaning REIT Units, Series A; Series B; and Special Trust Units, collectively Subsidiary redeemable units classified as a liability are described in Note 15; however, for simplicity, throughout the notes, reference is made to “subsidiary redeemable units”, meaning the LP Class B Units, Series 1 of Dundee Properties Limited Partnership (“DPLP”). At December 31, 2012, Dundee Corporation, the majority shareholder of Dundee Realty Corporation (“DRC”), directly and indirectly through its subsidiaries, held 2,494,383 REIT A Units and 3,528,658 subsidiary redeemable units (December 31, 2011 – 1,776,158 and 3,506,107, respectively). Note 2 Summary of signifi cant accounting policies The principal accounting policies applied in the preparation of these consolidated fi nancial statements are set out below. These policies have been consistently applied to all years presented, unless otherwise stated. Basis of presentation and statement of compliance The consolidated fi nancial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). Basis of consolidation The consolidated financial statements comprise the financial statements of Dundee REIT and its subsidiaries. Subsidiaries are fully consolidated from the date of acquisition, which is the date on which the Trust obtains control, and continue to be consolidated until the date such control ceases. Control exists when the Trust has the power, directly or indirectly, to govern the financial and operating policies of an entity to obtain benefit from its activities. All intercompany balances, income and expenses, and unrealized gains and losses resulting from intercompany transactions are eliminated in full. 6042_Dundee_REIT_AR_2012.indd 53 4/8/13 4:23 PM PAGE 53 DUNDEE REIT 2012 Annual Report Equity accounted investments Equity accounted investments are investments over which the Trust has signifi cant infl uence, but not control. Generally, the Trust is considered to exert signifi cant infl uence when it holds more than a 20% interest in an entity. However, determining signifi cant infl uence is a matter of judgment and specifi c circumstances and, from time to time, the Trust may hold an interest of more than 20% in an entity without exerting signifi cant infl uence. Conversely, the Trust may hold an interest of less than 20% and exert signifi cant infl uence through representation on the Board of Trustees, direction of management or through contractual agreements. The fi nancial results of the Trust’s equity accounted investments are included in the Trust’s consolidated fi nancial statements using the equity method, whereby the investment is carried on the consolidated balance sheets at cost, adjusted for the Trust’s proportionate share of post-acquisition profits and losses and for post-acquisition changes in excess of the Trust’s carrying amount of its investment over the net assets of the equity accounted investments, less any identified impairment loss. The Trust’s share of profits and losses is recognized in the share of net earnings from equity accounted investments in the consolidated statements of comprehensive income. Dilution gains and losses arising from changes in the Trust’s interest in equity accounted investments are recognized in earnings. If the Trust’s investment is reduced to zero, additional losses are not provided for, and a liability is not recognized, unless the Trust has incurred legal or constructive obligations, or made payments on behalf of the equity accounted investment. At each reporting date, the Trust evaluates whether there is objective evidence that its interest in an equity accounted investment is impaired. The entire carrying amount of the equity accounted investment is compared to the recoverable amount, which is the higher of the value in use or fair value less costs to sell. The recoverable amount of each investment is considered separately. When the Trust’s share of losses of an equity accounted investment equals or exceeds its interest in that investment, the Trust discontinues recognizing its share of further losses. An additional share of losses is provided for and a liability is recognized only to the extent the Trust has incurred legal or constructive obligations to fund the entity or made payments on behalf of that entity. Accounting policies of equity accounted investments have been changed where necessary to ensure consistency with the policies adopted by the Trust. Where the Trust transacts with its equity accounted investments, unrealized profits and losses are eliminated to the extent of the Trust’s interest in the investment. Balances outstanding between the Trust and equity accounted investments in which it has an interest are not eliminated in the consolidated balance sheets. Joint arrangements The Trust enters into joint arrangements via jointly controlled entities and co-ownerships. A joint arrangement is a contractual arrangement pursuant to which the Trust and other parties undertake an economic activity that is subject to joint control whereby the strategic financial and operating policy decisions relating to the activities of the joint arrangement require the unanimous consent of the parties sharing control. Joint arrangements that involve the establishment of a separate entity in which each party has an interest are referred to as joint ventures. In a co-ownership arrangement the Trust owns jointly one or more investment properties with another party and has direct rights to the investment property, and obligations for the liabilities relating to the co-ownership. The Trust reports its interests in joint ventures using the equity method of accounting as described under equity accounted investments above. The Trust reports its interests in co-ownerships using the proportionate consolidation method. Under this method, the Trust’s consolidated fi nancial statements refl ect only the Trust’s proportionate share of the assets, its share of any liabilities incurred jointly with the other venturers as well as any liabilities incurred directly, its share of any revenues earned or expenses incurred by the joint venture and any expenses incurred directly. PAGE 54 6042_Dundee_REIT_AR_2012.indd 54 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report Note 3 Accounting policies selected and applied for signifi cant transactions and events The significant accounting policies used in the preparation of these consolidated statements are described below: Investment properties Investment properties are initially recorded at cost, including related transaction costs in connection with asset acquisitions and include office and industrial properties held to earn rental income and/or for capital appreciation and properties that are being constructed or developed for future use as investment properties. Investment properties and properties under development are measured at fair value, determined based on available market evidence, at the consolidated balance sheet dates. Related fair value gains and losses are recorded in comprehensive income in the period in which they arise. The fair value of each investment property is based on, among other things, rental income from current leases and assumptions about rental income from future leases reflecting market conditions at the consolidated balance sheet dates, less future estimated cash outflows in respect of such properties. To determine fair value, the Trust first considers whether it can use current prices in an active market for a similar property in the same location and condition, which is subject to similar leases and other contracts. The Trust has concluded there is insufficient market evidence on which to base investment property valuation using this approach, and has therefore determined that using the income approach is more appropriate. The income approach is one in which the fair value is estimated by capitalizing the net rental income that the property can reasonably be expected to produce over its remaining economic life. The income approach is derived from two methods: the overall capitalization rate method, whereby the net operating income is capitalized at the requisite overall capitalization rate and/or the discounted cash flow method in which the income and expenses are projected over the anticipated term of the investment plus a terminal value discounted using an appropriate discount rate. Active properties under development are measured using a discounted cash flow model, net of costs to complete, as of the consolidated balance sheet dates. Development sites in the planning phases are measured using comparable market prices for similar assets. Valuations of investment properties are most sensitive to changes in discount rates and capitalization rates. The initial cost of properties under development includes the acquisition cost of the property, direct development costs, realty taxes and borrowing costs directly attributable to properties under development. Borrowing costs associated with direct expenditures on properties under development are capitalized. The amount of capitalized borrowing costs is determined first by reference to project-specifi c borrowings, where relevant, and otherwise by applying a weighted average cost of borrowings to eligible expenditures after adjusting for borrowings associated with other specific developments. Where borrowings are associated with specific developments, the amount capitalized is the gross cost incurred on those borrowings less any investment income arising on their temporary investment. Borrowing costs are capitalized from the commencement of the development until the date of practical completion when the property is substantially ready for its intended use or sale. The capitalization of borrowing costs is suspended if there are prolonged periods when development activity is interrupted. Practical completion is when the property is capable of operating in the manner intended by management. Generally, this occurs on completion of construction and receipt of all necessary occupancy and other material permits. If the Trust has pre-leased space at or prior to the start of the development, and the lease requires tenant improvements that enhance the value of the property, practical completion is considered to occur when such improvements are completed. Initial direct leasing costs incurred in negotiating and arranging tenant leases are added to the carrying amount of investment properties. Lease incentives, which include costs incurred to make leasehold improvements to tenants’ space and cash allowances provided to tenants, are added to the carrying amount of investment properties and are amortized on a straight- line basis over the term of the lease as a reduction of investment properties revenue. 6042_Dundee_REIT_AR_2012.indd 55 4/8/13 4:23 PM PAGE 55 DUNDEE REIT 2012 Annual Report Segment reporting A reportable operating segment is a distinguishable component of the Trust that is engaged either in providing related products or services (business segment) or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other reportable segments. The Trust’s primary format for segment reporting is based on business segments. The business segments, office and industrial properties, are based on the Trust’s management and internal reporting structure. Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker, determined to be the Chief Executive Offi cer. The operating segments derive their revenue primarily from rental income from lessees. All of the Trust’s business activities and operating segments are reported within the office and industrial property segments. Other non-current assets Other non-current assets include property and equipment, deposits, restricted cash and straight-line rent receivables, external management contracts, and goodwill. Property and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. Depreciation of property and equipment is calculated using the straight-line method to allocate their cost, net of their residual values, over their expected useful lives of four to ten years. The residual values and useful lives of all assets are reviewed and adjusted, if appropriate, at least at each financial year-end. Cost includes expenditures that are directly attributable to the acquisition and expenditures for replacing part of the property and equipment when that cost is incurred, if the recognition criteria are met. Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Trust and the cost of the item can be measured reliably. All other repairs and maintenance are charged to comprehensive income during the financial period in which they are incurred. Other non-current assets are derecognized on disposal or when no future economic benefits are expected from their use or disposal. Any gain or loss arising on derecognition of an asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the consolidated statement of comprehensive income in the year the asset is derecognized. Revenue recognition The Trust accounts for tenant leases as operating leases given that it has retained substantially all of the risks and benefits of ownership of its investment properties. Revenues from investment properties include base rents, recoveries of operating expenses including property taxes, percentage participation rents, lease termination fees, parking income and incidental income. Revenue recognition under a lease commences when the tenant has a right to use the leased asset. The total amount of contractual rent to be received from operating leases is recognized on a straight-line basis over the term of the lease; a straight-line rent receivable, which is included in other non- current assets, is recorded for the difference between the rental revenue recognized and the contractual amount received. Recoveries from tenants are recognized as revenues in the period in which the corresponding costs are incurred. Percentage participation rents are recognized on an accrual basis once tenant sales revenues exceed contractual thresholds. Other revenues are recorded as earned. Business combinations The purchase method of accounting is used for acquisitions meeting the definition of a business. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition date fair values of the assets transferred by the acquirer, the liabilities incurred by the acquirer to former owners of the acquiree, and the equity interests issued by the acquirer. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their acquisition date fair values irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Trust’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the Trust’s share of the net assets acquired, the difference is recognized directly in the profit or loss for the year as an acquisition gain. Any transaction costs incurred with respect to the business combination are expensed in the period incurred. PAGE 56 6042_Dundee_REIT_AR_2012.indd 56 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report Goodwill Goodwill arises on the acquisition of businesses and represents the excess of the consideration transferred over and above the Trust’s interest in the net fair value of the net identifi able assets, liabilities and contingent liabilities of the acquiree and the fair value of the non-controlling interest in the acquiree. For the purpose of impairment testing, goodwill acquired in a business combination is allocated to each of the cash- generating units or groups of cash-generating units that are expected to benefi t from the synergies of the combination. Each unit or group of units to which the goodwill is allocated represents the lowest level within the entity at which the goodwill is monitored for internal management purposes. Goodwill is monitored by the Trust at the operating segment level. Goodwill impairment reviews are undertaken annually or more frequently if events or changes in circumstances indicate a potential impairment. The carrying value of goodwill is compared to the recoverable amount, which is the higher of value in use and the fair value less costs to sell. Any impairment is recognized immediately as an expense and is not subsequently reversed. External property management contracts External property management contracts assumed in a business combination are recorded on the consolidated balance sheets and arise when the Trust acquires less than 100% of an investment property, but manages the investment property and earns a property management fee from the co-owner. External property management contracts are in place as long as the property is co-owned by the Trust and are amortized on a straight-line basis into comprehensive income over ten years. Distributions Distributions to unitholders are recognized as a liability in the period in which the distributions are approved by the Board of Trustees and are recorded as a reduction of retained earnings. Income taxes Dundee REIT is taxed as a mutual fund trust for Canadian income tax purposes. The Trust expects to distribute all of its taxable income to its unitholders, which enables it to deduct such distributions for income tax purposes. As the income tax obligations relating to the distributions are those of the individual unitholder, no provision for income taxes is required on such amounts. The Trust expects to continue to distribute its taxable income and to qualify as a real estate investment trust (“REIT”) for the foreseeable future. For U.S. subsidiaries, income taxes are accounted for using the asset and liability method. Under this method, deferred income taxes are recognized for the expected future tax consequences of temporary differences between the carrying value of balance sheet items and their corresponding tax values. Deferred income taxes are computed using substantively enacted income tax rates or laws for the years in which the temporary differences are expected to reverse or settle. Unit-based compensation plan As described in Note 16, the Trust has a Deferred Unit Incentive Plan (“DUIP”) that provides for the granting of deferred trust units and income deferred trust units to trustees, officers, employees and affiliates and their service providers (including the asset manager). Unvested deferred trust units are recorded as a liability, and compensation expense is recognized over the vesting period at amortized cost based on the fair value of the units. Once vested, the liability is remeasured at each reporting date at amortized cost, based on the fair value of the corresponding REIT A Units, with changes in fair value recognized in comprehensive income as a fair value adjustment to fi nancial instruments. Deferred trust units and income deferred units are only settled in REIT A Units. 6042_Dundee_REIT_AR_2012.indd 57 4/8/13 4:23 PM PAGE 57 DUNDEE REIT 2012 Annual Report Cash and cash equivalents Cash and cash equivalents include all short -term investments with an original maturity of three months or less, and exclude cash subject to restrictions that prevent its use for current purposes. Excluded from cash and cash equivalents are amounts held for repayment of tenant security deposits, as required by various lending agreements. Deposits are included in other non-current assets. Financial instruments Designation of financial instruments The following summarizes the Trust’s classification and measurement of financial assets and fi nancial liabilities: Classifi cation Measurement Financial assets Promissory notes receivable Amounts receivable Restricted cash and deposits Cash and cash equivalents Financial liabilities Mortgages Term debt Convertible debentures – host instrument Loans and receivables Loans and receivables Loans and receivables Loans and receivables Other liabilities Other liabilities Other liabilities Convertible debentures – conversion feature Fair value through profi t or loss Debentures Subsidiary redeemable units Deposits Deferred Unit Incentive Plan Interest rate swaps Amounts payable and accrued liabilities Distributions payable Other liabilities Other liabilities Other liabilities Other liabilities Cash fl ow hedge Other liabilities Other liabilities Amortized cost Amortized cost Amortized cost Amortized cost Amortized cost Amortized cost Amortized cost Fair value Amortized cost Amortized cost Amortized cost Amortized cost Fair value Amortized cost Amortized cost Financial assets The Trust classifi es its non-derivative fi nancial assets with fi xed or determinable payments that are not quoted in an active market as loans and receivables. All financial assets are initially measured at fair value, less any related transaction costs, and are subsequently measured at amortized cost. Promissory notes receivable are initially measured at fair value and are subsequently measured at amortized cost less impairment losses. The amount of the loss is measured as the difference between the promissory notes receivable’s carrying amount and the present value of estimated future cash fl ows (excluding future credit losses that have not been incurred) discounted at the fi nancial asset’s original effective interest rate. The carrying amount of the promissory notes receivable is reduced and the amount of the loss is recognized in the consolidated statements of comprehensive income. Amounts receivable are initially measured at fair value and are subsequently measured at amortized cost less provision for impairment. A provision for impairment is established when there is objective evidence that collection will not be possible under the original terms of the contract. Indicators of impairment include payment delinquency and significant financial difficulty of the tenant. The carrying amount of the fi nancial asset is reduced through an allowance account, and the amount of the loss is recognized in the consolidated statements of comprehensive income within investment properties operating expenses. Bad debt write- offs occur when the Trust determines collection is not possible. Any subsequent recoveries of amounts previously written off are credited against investment properties operating expenses in the consolidated statements of comprehensive income. Trade receivables that are less than three months past due are not considered impaired unless there is evidence collection is not possible. If in a subsequent period when the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss PAGE 58 6042_Dundee_REIT_AR_2012.indd 58 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report is reversed to the extent that the carrying amount of the asset does not exceed its amortized cost at the reversal date. Any subsequent reversal of an impairment loss is recognized in profit or loss. Financial assets are derecognized only when the contractual rights to the cash flows from the financial asset expire or the Trust transfers substantially all risks and rewards of ownership. Financial liabilities The Trust classifies its financial liabilities on initial recognition as either fair value through profit or loss or other liabilities measured at amortized cost. Financial liabilities are initially recognized at fair value less related transaction costs. Financial liabilities classified as other liabilities are measured at amortized cost using the effective interest rate method. Under the effective interest rate method, any transaction fees, costs, discounts and premiums directly related to the financial liabilities are recognized in comprehensive income over the expected life of the debt. The Trust’s financial liabilities that are classified as fair value through profit or loss are initially recognized at fair value and are subsequently remeasured at fair value each reporting period, with changes in the fair value recognized in comprehensive income. Mortgages, term debt and debentures are initially recognized at fair value less related transaction costs, or at fair value when assumed in a business or asset acquisition. Subsequent to initial recognition, mortgages and term debt are recognized at amortized cost. Borrowing costs that are directly attributable to investment properties under development are capitalized. On issuance, convertible debentures are separated into two financial liability components: the host instrument and the conversion feature. This presentation is required because the conversion feature permits the holder to convert the debenture into REIT Units that, except for the available exemption under International Accounting Standard (“IAS”) 32, “Financial Instruments: Presentation” (“IAS 32”), would normally be presented as a fi nancial liability because of the redemption feature attached to the REIT A Units. Both components are measured based on their respective estimated fair values at the date of issuance. The fair value of the host instrument is net of any related transaction costs. The fair value of the host instrument is estimated based on the present value of future interest and principal payments due under the terms of the debenture using a discount rate for similar debt instruments without a conversion feature. Subsequent to initial recognition, the host instrument is accounted for at amortized cost. The conversion feature is accounted for at fair value with changes in fair value recognized in comprehensive income each period. When the holder of a convertible debenture converts its interest into REIT A Units, the host instrument and conversion feature are reclassified to unitholders’ equity in proportion to the units converted over the total equivalent units outstanding. Deferred trust units and the subsidiary redeemable units are measured at amortized cost because they are settled in REIT A Units and REIT B Units, which in accordance with IAS 32 are considered liabilities. Consequently, the deferred units and subsidiary redeemable units are remeasured each reporting period based on the fair value of REIT Units, with changes in the liabilities recorded in comprehensive income. Distributions paid on subsidiary redeemable units are recorded as interest expense in comprehensive income. A financial liability is derecognized when the obligation under the liability is discharged, cancelled or expired. Derivative financial instruments and hedging activities Derivative fi nancial instruments are initially recognized at fair value on the date a derivative contract is entered into and subsequently remeasured at fair value. The method of recognizing the resulting gain or loss depends on whether the derivative fi nancial instrument is designated as a hedging instrument and, if so, the nature of the item being hedged. The Trust has designated its interest rate swaps as a hedge of the interest under the term loan facility. At the inception of the transaction, the Trust documents the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedging transactions. The Trust also documents, both at hedge inception and on an ongoing basis, its assessment of whether the derivatives used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in other comprehensive income. The gain or loss relating to the ineffective portion is recognized immediately in the consolidated statements of comprehensive income. PAGE 59 6042_Dundee_REIT_AR_2012.indd 59 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report Amounts accumulated in equity are reclassified to other comprehensive income or loss in the periods when the hedged item affects profit or loss. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gains or losses existing in equity at that time are recognized when the forecast transaction is ultimately recognized in the consolidated statements of comprehensive income. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the consolidated statement of other comprehensive income. Interest on debt Interest on debt includes coupon interest, amortization of premiums allocated to the conversion features of the convertible debentures, and amortization of ancillary costs incurred in connection with the arrangement of borrowings. Finance costs are amortized to interest expense unless they relate to a qualifying asset. Equity The Trust presents REIT Units as equity, notwithstanding the fact that the Trust’s REIT Units meet the defi nition of a fi nancial liability. Under IAS 32, the REIT Units are considered a puttable financial instrument because of the holder’s option to redeem REIT Units, generally at any time, subject to certain restrictions, at a redemption price per unit equal to the lesser of 90% of a 20-day weighted average closing price prior to the redemption date or 100% of the closing market price on the redemption date. The total amount payable by Dundee REIT in any calendar month will not exceed $50 unless waived by Dundee REIT’s Board of Trustees at their sole discretion. The Trust has determined the REIT Units can be presented as equity and not financial liabilities because the REIT Units have all of the following features, as defined in IAS 32 (hereinafter referred to as the “puttable exemption”): • REIT Units entitle the holder to a pro rata share of the Trust’s net assets in the event of its liquidation. Net assets are those assets that remain after deducting all other claims on the assets. • REIT Units are the class of instruments that are subordinate to all other classes of instruments because they have no priority over other claims to the assets of the Trust on liquidation, and do not need to be converted into another instrument before they are in the class of instruments that is subordinate to all other classes of instruments. • All instruments in the class of instruments that is subordinate to all other classes of instruments have identical features. • Apart from the contractual obligation for the Trust to redeem the REIT Units for cash or another financial asset, the REIT Units do not include any contractual obligation to deliver cash or another financial asset to another entity, or to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the Trust, and it is not a contract that will or may be settled in the Trust’s own instruments. • The total expected cash flows attributable to the REIT Units over their lives are based substantially on the profit or loss, the change in the recognized net assets and unrecognized net assets of the Trust over the life of the REIT Units. REIT Units are initially recognized at the fair value of the consideration received by the Trust. Any transaction costs arising on the issuance of REIT Units are recognized directly in unitholders’ equity as a reduction of the proceeds received. PAGE 60 6042_Dundee_REIT_AR_2012.indd 60 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report Provisions Provisions for legal claims are recognized when the Trust has a present legal or constructive obligation as a result of past events; it is probable an outfl ow of resources will be required to settle the obligation; and the amount has been reliably estimated. Provisions are not recognized for future operating losses. Where there are a number of similar obligations, the likelihood an outfl ow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognized even if the likelihood of an outfl ow with respect to any one item included in the same class of obligations may be small. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a rate that refl ects current market assessments of the time value of money and the risks specifi c to the obligation. The increase in the provision due to passage of time is recognized as interest expense. Assets held for sale and discontinued operations Assets and liabilities (or disposal groups) are classifi ed as held for sale when their carrying amount is to be recovered principally through a sale transaction and a sale is considered highly probable. Investment properties continue to be measured at fair value and the remainder of the disposal group is stated at the lower of the carrying amount and fair value less costs to sell. A discontinued operation is a component of the Trust that either has been disposed of or is classifi ed as held for sale, and: • represents a separate major line of business or geographical area of operations; • is part of a single coordinated plan to dispose of a separate major line of business, or geographical area of operations; or • is a subsidiary acquired exclusively with a view to resell. Foreign currencies The consolidated fi nancial statements are presented in Canadian dollars, which is the functional currency of the Trust and the presentation currency for the consolidated fi nancial statements. Assets and liabilities related to properties held in a foreign entity with a functional currency other than the Canadian dollar are translated at the rate of exchange at the consolidated balance sheet dates. Revenues and expenses are translated at average rates for the period, unless exchange rates fl uctuate signifi cantly during the period, in which case, the exchange rates at the dates of the transactions are used. The resulting foreign currency translation adjustments are recognized in other comprehensive income. Note 4 Critical accounting judgments, estimates and assumptions in applying accounting policies Preparing the consolidated financial statements requires management to make judgments, estimates and assumptions that affect the amounts reported. Management bases its judgments and estimates on historical experience and other factors it believes to be reasonable under the circumstances, but which are inherently uncertain and unpredictable, the result of which forms the basis of the carrying amounts of assets and liabilities. However, uncertainty about these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amount of the affected asset or liability in the future. 6042_Dundee_REIT_AR_2012.indd 61 4/8/13 4:23 PM PAGE 61 DUNDEE REIT 2012 Annual Report Critical accounting judgments The following are the critical accounting judgments used in applying the Trust’s accounting policies that have the most significant effect on the amounts in the consolidated financial statements: Investment in Dundee Industrial Real Estate Investment Trust (“Dundee Industrial”) Management has assessed the level of infl uence the Trust has on Dundee Industrial and has determined it has signifi cant infl uence. Management assessed whether or not the Trust has control over Dundee Industrial based on whether the Trust has the practical ability to direct the relevant activities of Dundee Industrial unilaterally. In making its judgment, management considered the Trust’s initial absolute 44.1% interest in Dundee Industrial combined with the 2.1% absolute interest held by the Chief Executive Offi cer (“CEO”) of the Trust, together totalling 46.2% (identifi ed as a de facto agent of the Trust) (December 31, 2012 – 30.9% and 1.4%, respectively, and together totalling 32.3%) as well as the relative dispersion of the remaining interests in Dundee Industrial. Management also reviewed Dundee Industrial’s Amended and Restated Declaration of Trust to determine what decisions with respect to relevant activities are required to be put to a unitholder vote and the level of approvals required by those votes. Management concluded that the Trust, combined with the CEO of the Trust, does not have the ability to control the voting interest to direct the relevant activities of Dundee Industrial, and therefore has concluded the Trust does not control Dundee Industrial. Investment properties Critical judgments are made in respect of the fair values of investment properties and the investment properties held in equity accounted investments. The fair values of these investments are reviewed regularly by management with reference to independent property valuations and market conditions existing at the reporting date, using generally accepted market practices. The independent valuators are experienced, nationally recognized and qualified in the professional valuation of office and industrial buildings in their respective geographic areas. Judgment is also applied in determining the extent and frequency of independent appraisals. At each annual reporting period, a select number of properties, determined on a rotational basis, will be valued by qualified valuation professionals. For properties not subject to independent appraisals, internal appraisals are prepared by management during each reporting period. The Trust makes judgments with respect to whether lease incentives provided in connection with a lease enhance the value of the leased space, which determines whether or not such amounts are treated as tenant improvements and added to investment property. Lease incentives, such as cash, rent-free periods and lessee- or lessor-owned improvements, may be provided to lessees to enter into an operating lease. Lease incentives that do not provide benefits beyond the initial lease term are included in the carrying amount of investment properties and are amortized as a reduction of rental revenue on a straight-line basis over the term of the lease. Judgment is also applied in determining whether certain costs are additions to the carrying amount of the investment property and, for properties under development, identifying the point at which practical completion of the property occurs and identifying the directly attributable borrowing costs to be included in the carrying amount of the development property. Leases Judgments are also made in determining whether certain leases, in particular those with long contractual terms where the lessee is the sole tenant in a property and long-term ground leases where the Trust is lessor, are operating or finance leases. The Trust has determined all of its leases are operating leases. PAGE 62 6042_Dundee_REIT_AR_2012.indd 62 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report Compliance with REIT legislation In order to continue to be taxed as a mutual fund trust, the Trust needs to maintain its REIT status. In 2007, the Trust undertook certain transactions to qualify as a REIT under the specified investment fl ow-through (“SIFT”) rules in the Canadian Income Tax Act. The Trust’s current and continuing qualification as a REIT depends on its ability to meet the various requirements imposed under the SIFT rules, which relate to matters such as its organizational structure and the nature of its assets and revenues. The Trust applies judgment in determining whether it continues to qualify as a REIT under the SIFT rules. Treatment of REIT Units The Trust has considered the criteria in IAS 32 to classify the REIT Units as equity based on the puttable exemption. Treatment of subsidiary redeemable units The Trust has considered the criteria in IAS 32 to classify the subsidiary redeemable units as a liability, on the basis that they do not have identical features to REIT Units and are not the most subordinated instrument. Business combinations Accounting for business combinations under IFRS 3, “Business Combinations” (“IFRS 3”), only applies if it is considered that a business has been acquired. Under IFRS 3, a business is defined as an integrated set of activities and assets conducted and managed for the purpose of providing a return to investors or lower costs or other economic benefits directly and proportionately to the Trust. A business generally consists of inputs, processes applied to those inputs, and resulting outputs that are, or will be, used to generate revenues. In the absence of such criteria, a group of assets is deemed to have been acquired. If goodwill is present in a transferred set of activities and assets, the transferred set is presumed to be a business. Judgment is used by management in determining whether the acquisition of an individual property qualifies as a business combination in accordance with IFRS 3 or as an asset acquisition. When determining whether the acquisition of an investment property or a portfolio of investment properties is a business combination or an asset acquisition, the Trust applies judgment when considering the following: • whether the investment property or properties are capable of producing outputs • whether the market participant could produce outputs if missing elements exist In particular, the Trust considers the following: • whether employees were assumed in the acquisition • whether an operating platform has been acquired Currently, when the Trust acquires properties or a portfolio of properties and not legal entities, does not take on or assume employees, or does not acquire an operating platform, it classifi es the acquisition as an asset acquisition. Classification of joint ventures and associates The Trust makes judgments as to whether the joint ventures, partnerships and co-ownerships provide it with joint control, significant influence or no influence. Impairment The Trust assesses the possibility and amount of any impairment loss or write-down as it relates to the investment in Dundee Industrial REIT promissory notes receivable, amounts receivable, property and equipment, external management contracts, and goodwill. 6042_Dundee_REIT_AR_2012.indd 63 4/8/13 4:23 PM PAGE 63 DUNDEE REIT 2012 Annual Report Estimates and assumptions The Trust makes estimates and assumptions that affect the carrying amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amount of earnings for the period. Actual results could differ from these estimates. The estimates and assumptions that are critical in determining the amounts reported in the consolidated financial statements relate to the following: Valuation of investment properties Critical assumptions relating to the estimates of fair values of investment properties include the receipt of contractual rents, expected future market rents, renewal rates, maintenance requirements, discount rates that reflect current market uncertainties, capitalization rates and current and recent property investment prices. If there is any change in these assumptions or regional, national or international economic conditions, the fair value of investment properties may change materially. Valuation of financial instruments The Trust makes estimates and assumptions relating to the fair value measurement of the subsidiary redeemable units, the deferred trust units, the convertible debenture conversion feature, interest rate swaps and the fair value disclosure of the convertible debentures, mortgages and term debt. The critical assumptions underlying the fair value measurements and disclosures include the market price of REIT Units, market interest rates for mortgages, term debt and unsecured debentures, and assessment of the effectiveness of hedging relationships. For certain financial instruments, including cash and cash equivalents, promissory notes receivable, amounts receivable, amounts payable and accrued liabilities, deposits and distributions payable, the carrying amounts approximate fair values due to their immediate or short-term maturity. The fair values of mortgages, term debt and interest rate swaps are determined based on discounted cash flows using discount rates that reflect current market conditions for instruments with similar terms and risks. The fair value of convertible debentures is determined by reference to quoted market prices from an active market. Note 5 Future accounting policy changes Financial instruments IFRS 9, “Financial Instruments” (“IFRS 9”), was issued by the IASB on November 12, 2009, and upon adoption will replace IAS 39, “Financial Instruments: Recognition and Measurement” (“IAS 39”). IFRS 9 provides guidance on the classification and measurement of financial assets and financial liabilities and the derecognition of fi nancial instruments. IFRS 9 is effective for annual periods beginning on or after January 1, 2015. The Trust is currently evaluating the impact of IFRS 9 on the consolidated financial statements. IFRS 7, “Financial Instruments: Disclosures” (“IFRS 7”), has been amended to require additional disclosures on transition from IAS 39 to IFRS 9. Joint arrangements On May 12, 2011, the IASB issued IFRS 11, “Joint Arrangements” (“IFRS 11”). This new standard replaces IAS 31, “Interests in Joint Ventures”, and eliminates the option to proportionately consolidate interests in certain types of joint ventures. The Trust will start the application of IFRS 11 in the consolidated fi nancial statements effective January 1, 2013. The Trust is currently evaluating the impact of IFRS 11 on its consolidated fi nancial statements. PAGE 64 6042_Dundee_REIT_AR_2012.indd 64 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report Financial instruments: Disclosures (amendment regarding disclosures on transfer of fi nancial assets and presentation) IFRS 7 requires the Trust to provide disclosures related to offsetting fi nancial assets and liabilities. The Trust is currently evaluating the impact of IFRS 7 on its consolidated fi nancial statements and will start the application of this amendment on January 1, 2013. IAS 32, “Financial Instruments: Presentation” (“IAS 32”), has been amended to clarify requirements for offsetting fi nancial assets and fi nancial liabilities. The Trust will start the application of this amendment on January 1, 2014, and is currently evaluating the impact on the consolidated financial statements. Consolidated fi nancial statements IFRS 10, “Consolidated Financial Statements” (“IFRS 10”), replaces the guidance on control and consolidation in the current IAS 27, “Consolidated and Separate Financial Statements”. IFRS 10 changes the defi nition of control under IFRS so that the same criteria are applied to all entities to determine control. The standard identifies the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company. The Trust will start the application of IFRS 10 in the consolidated fi nancial statements effective January 1, 2013, and is currently evaluating the impact on the consolidated financial statements. Disclosure of interests in other entities IFRS 12, “Disclosure of Interests in Other Entities” (“IFRS 12”), requires disclosures relating to an entity’s interests in subsidiaries. The Trust will start the application of IFRS 12 in the consolidated fi nancial statements effective January 1, 2013, and is currently evaluating the impact on the consolidated financial statements. Fair value measurement IFRS 13, “Fair Value Measurement” (“IFRS 13”), defines fair value, provides guidance on its determination and introduces consistent requirements for disclosures on fair value measurement. The Trust will start the application of IFRS 13 in the consolidated fi nancial statements effective January 1, 2013, and is currently evaluating the impact on the consolidated financial statements. Presentation of items of other comprehensive income Amendments to IAS 1, “Presentation of Financial Statements” (“IAS 1”), provide guidance on the presentation of items contained in other comprehensive income, including a requirement to separate items presented in other comprehensive income into two groups based on whether or not they may be recycled to profi t or loss in the future. The Trust will start the application of this amendment in the consolidated financial statements effective January 1, 2013, and is currently evaluating the impact on the consolidated financial statements as a result of adopting this standard. Note 6 Business combinations Business combination in the year ended December 31, 2012 On March 2, 2012, Dundee REIT acquired Whiterock Real Estate Investment Trust (“Whiterock”) for total cash consideration of $159,779 and the issuance of 12,580,347 REIT A Units for $434,777, representing total consideration of $594,556. The Trust considered Whiterock an excellent strategic fi t with the existing portfolio that will increase its market presence as the dominant offi ce REIT in Canada. On closing, the fair value of the net identifi able assets and liabilities acquired equalled $532,498. The total consideration exceeded the net identifi able assets and liabilities by $62,058, which has been recorded as goodwill on acquisition. The Whiterock Portfolio consisted of 7.4 million square feet of offi ce, industrial and retail properties. Dundee REIT took up approximately 40.9% of the outstanding units of Whiterock under its offer to acquire any and all units in consideration for $16.25 per unit, or 0.4729 units of Dundee REIT, as elected by depositing unitholders. Approximately 9,832,563, or 27%, of the Whiterock units were tendered to Dundee REIT’s offer for cash totalling $159,779. No elections were pro-rated under the offer. The remaining outstanding units of Whiterock were redeemed by Whiterock in consideration for 0.4729 units of Dundee REIT, or 12,580,347 REIT A Units. PAGE 65 6042_Dundee_REIT_AR_2012.indd 65 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report The fair value of the 12,580,347 REIT A Units issued as part of the consideration for Whiterock was $34.56 per unit, which was the published share price at 8 a.m. on March 2, 2012, the time Dundee REIT acquired control. The following are the recognized amounts of identifiable assets acquired and liabilities assumed, measured at their respective fair values on the date of acquisition: Note Investment properties, including $106,754 classifi ed as assets held for sale on date of acquisition $ 1,419,889 Other non -current assets Amounts receivable Cash and cash equivalents Prepaid expenses External management contracts Amounts payable and accrued liabilities assumed Deposits Deferred tax net liabilities Financial instruments Assumed debt Total identifiable net assets and liabilities Goodwill(1) Fair value of consideration 2,802 6,243 12,645 2,799 16,512 (29,989) (3,855) (2,633) (3,363) (888,552) 532,498 62,058 $ 594,556 11 (1) Goodwill arises principally from the ability to realize synergies on integration of the Trust’s operating platform with Whiterock’s as well as projected future growth. Acquisition related costs comprise $17,549 in transaction costs. Included in the acquired amounts receivable is trade receivables with a fair value of $433 and other amounts receivable with a fair value of $5,810. The gross contractual amount for trade receivables is $2,833, of which $2,400 is expected to be uncollectible. During the year ended December 31, 2012, the Trust recognized $125,970 of revenue and $59,348 of comprehensive income, before fair value adjustments, related to the acquisition of Whiterock. Had the acquisition occurred on January 1, 2012, the Trust would have recognized an additional $26,481 of revenue and $7,691 of comprehensive income, before fair value adjustments. Business combination in the year ended December 31, 2011 On February 8, 2011, Dundee REIT acquired all of the outstanding shares of Realex Properties Corporation (“Realex”) for a total cash consideration of $154,380. At that date, the fair value of the net assets and liabilities acquired equalled $166,174. The Realex Portfolio consisted of 1.8 million square feet of offi ce and industrial properties. The following are the recognized amounts of identifi able assets acquired and liabilities assumed, measured at their respective fair values on the date of acquisition: Investment properties Investments in joint ventures Other non -current assets Amounts receivable Cash and cash equivalents Amounts payable and accrued liabilities assumed Assumed debt Total identifiable net assets and liabilities Fair value of acquisition Acquisition gain PAGE 66 $ 352,609 6,582 2,326 2,987 211 (9,060) (189,481) 166,174 154,380 $ 11,794 6042_Dundee_REIT_AR_2012.indd 66 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report Acquisition related costs of $5,734 comprise: (i) $8,673 in transaction costs; (ii) $8,855 of acquisition related costs that were triggered by contractual change of control provisions in place; and (iii) net of an $11,794 acquisition gain. The fair value of acquired amounts receivable is $2,987 and includes tenant receivables with a fair value of $1,507. During the year ended December 31, 2011, the Trust recognized $48,713 of revenue, and $21,615 of comprehensive income before fair value adjustments related to the acquisition of Realex. Had the acquisition occurred on January 1, 2011, the Trust would have recognized an additional $6,013 of revenue and $2,364 of comprehensive income. Note 7 Property acquisitions Detailed below are the acquisitions completed during the year ended December 31, 2012. 5001 Yonge Street, Toronto 67 Richmond Street West, Toronto Parking lots, Saskatoon 1 Riverside Drive, Windsor Trans America Group properties, Edmonton(2) 30 Adelaide Street East (State Street Financial Centre), Toronto(3) Total Property type offi ce offi ce offi ce offi ce offi ce/industrial offi ce Interest acquired (%) 100.0 100.0 100.0 100.0 60.0 50.0 Purchase price(1) Fair value of mortgage assumed Date acquired $ 112,984 $ – January 19, 2012 14,464 18,242 36,014 6,104 January 30, 2012 – – March 12, 2012 April 26, 2012 75,787 41,780 October 4, 2012 78,774 27,045 December 28, 2012 $ 336,265 $ 74,929 (1) Includes transaction costs. (2) Prior to October 4, 2012, the Trust held its 40% interests in these nine co-ownerships through a partnership interest acquired with the Whiterock transaction and they were accounted for as co-ownerships. On October 4, 2012, the Trust acquired the remaining 60% interests previously held by co-owners. The cost to acquire the 60% interests not previously owned by the Trust, including transaction costs, was $75,787. (3) Prior to December 28, 2012, the Trust held its 50% interest in 30 Adelaide Street East (State Street Financial Centre) in Toronto through a partnership interest, which was accounted for as a joint venture. On December 28, 2012, the Trust acquired the remaining 50% interest previously held by the partner. The cost to acquire the 50% interest not previously owned by the Trust, including transaction costs, was $78,774. Year ended December 31, 2011 Property type Saskatoon Square, Saskatoon 400 Cumberland, Ottawa 55 King Street West, Kitchener 586 Argus Road, Oakville Morgex Building (11120 178th Street), Edmonton offi ce offi ce offi ce offi ce offi ce Multivesco portfolio, Gatineau offi ce/industrial 700 de la Gauchetière, Montréal 13888 Wireless Way, Richmond 81 Wright Avenue and 170 Joseph Zatzman Drive, Halifax Blackstone Portfolio, Ontario, Alberta Richmond Place (8100 Granville Avenue), Richmond Total (1) Includes transaction costs. offi ce offi ce industrial offi ce Interest acquired (%) 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Purchase price(1) $ 51,349 $ 39,179 13,506 16,986 9,877 15,999 Fair value of mortgage assumed – – – – – – 287,766 32,447 123,003 17,005 Date acquired January 4, 2011 January 17, 2011 March 31, 2011 May 2, 2011 May 19, 2011 June 9, 2011 July 11, 2011 July 12, 2011 7,631 1,217 July 27, 2011 703,365 – August 15, 2011 offi ce 100.0 24,867 – November 22, 2011 $ 1,202,972 $ 141,225 PAGE 67 6042_Dundee_REIT_AR_2012.indd 67 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report On August 15, 2011, the Trust completed its acquisition of a portfolio of properties (the “Blackstone Portfolio”) located in Toronto, Ottawa, Calgary and Edmonton from affiliates of Blackstone Real Estate Advisors LP and Slate Properties Inc. for $844,758. As part of the transaction, the Trust immediately redirected five of the properties (“redirected properties”) to third parties. The funds to purchase the redirected properties, totalling $141,393, were paid directly by the third parties to the seller’s counsel in escrow on the closing date. The Trust paid $703,365 for the 24 properties it acquired. Prior to May 19, 2011, the Trust held its 25% interest in 11120 178th Street in Edmonton through a partnership interest acquired with Realex. The Trust’s 25% interest was accounted for as a joint venture until May 19, 2011, at which time the Trust disposed of its 25% interest in the property held in the partnership, and acquired 100% as a directly held property under DPLP. The cost to acquire the 75% interest not previously owned by the Trust, including transaction costs, was $10,054. The assets acquired and liabilities assumed in these transactions were allocated as follows: Investment properties Offi ce Industrial Transfer of interest from investment in joint ventures to investment properties Total purchase price The consideration paid consists of: Cash: Paid during the year Deposits applied Assumed mortgages at fair value Assumed non-cash working capital Total consideration Note 8 Investment properties Balance at beginning of year Additions: Acquisitions from business combinations Property acquisitions Transfer of interest from investment in joint ventures to investment properties Building improvements Lease incentives and initial direct leasing costs Development projects Amortization of lease incentives Vendor adjustment on investment property Properties reclassifi ed as discontinued operations Properties reclassifi ed as other assets held for sale Foreign currency translation gain Fair value adjustments to investment properties Balance at end of year PAGE 68 Years ended December 31, 2012 2011 $ 413,957 $ 1,195,314 – (77,692) 11,135 (3,477) $ 336,265 $ 1,202,972 $ 253,966 $ 1,014,706 6,150 260,116 74,929 1,220 19,703 1,034,409 141,225 27,338 $ 336,265 $ 1,202,972 Years ended December 31, Note 2012 2011 $ 4,154,179 $ 2,330,005 6 7 7 20 1,419,889 336,265 77,692 20,199 23,577 1,945 (3,976) – (551,710) (111,952) 693 110,759 352,609 1,202,972 3,477 8,044 23,136 13,215 (3,566) (1,000) – (7,700) – 232,987 $ 5,477,560 $ 4,154,179 6042_Dundee_REIT_AR_2012.indd 68 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report Investment properties have been reduced by $21,002 (December 31, 2011 – $15,132) related to straight-line rent receivables, which have been reclassified to other non-current assets. The key valuation metrics for investment properties, including investment in joint ventures, and excluding assets related to discontinued operations and assets held for sale, are set out below: Capitalization rate (“cap rate”) Discount rate Terminal rate December 31, 2012 December 31, 2011 Range (%) 5.25–9.25 6.50–10.50 5.25–9.75 Weighted average (%) 6.35 7.53 6.62 Range (%) 5.50–9.25 7.50–10.50 6.00–9.75 Weighted average (%) 6.64 7.94 7.12 Investment properties, including investment in joint ventures and excluding assets related to discontinued operations and assets held for sale with an aggregate fair value of $787,449 at December 31, 2012 (September 30, 2012 – $321,610; June 30, 2012 – $1,544,237; March 31, 2012 – $299,375; December 31, 2011 – $342,850), were valued by qualified external valuation professionals. If the cap rate were to increase by 25 basis points (“bps”), the value of investment properties (including investments in joint ventures and excluding assets related to discontinued operations and assets held for sale) would decrease by $244,983. If the cap rate were to decrease by 25 bps, the value of investment properties (including investments in joint ventures and excluding assets related to discontinued operations and other assets held for sale) would increase by $264,823. Investment properties, including investment in joint ventures and excluding assets related to discontinued operations and assets held for sale, with a fair value of $5,869,242 (December 31, 2011 – $3,480,221), are pledged as security for mortgages. Investment properties, including investments in joint ventures and excluding assets related to discontinued operations and other assets held for sale, pledged as security for demand revolving credit facilities and term loan facility, are as follows: Facility Demand revolving credit facilities: Number of properties Fair value Ranking December 31, 2012 December 31, 2011 December 31, 2012 December 31, 2011 Formula-based maximum not to exceed $171,535 fi rst ranking Formula-based maximum not to exceed $40,000 fi rst ranking Formula-based maximum not to exceed $35,000 second ranking Formula-based maximum not to exceed $35,000 fi rst ranking second ranking Term loan facility second ranking fi rst ranking 9 2 1 2 1 1 8 – 2 1 3 – – 9 $ $ 248,459 39,846 81,349 181,349 37,486 111,861 269,602 969,952 $ – 40,000 75,000 181,500 – – 278,136 $ 574,636 6042_Dundee_REIT_AR_2012.indd 69 4/8/13 4:23 PM PAGE 69 DUNDEE REIT 2012 Annual Report Note 9 Investment in Dundee Industrial Dundee Industrial is an unincorporated, open-ended real estate investment trust. Dundee Industrial owns a portfolio of 158 primarily light industrial properties comprising approximately 11.4 million square feet of gross leasable area. On October 4, 2012, Dundee REIT completed the sale of 77 industrial properties to Dundee Industrial for a total sale price of approximately $575,469 (including working capital adjustments). The sale price of the 77 industrial properties was satisfi ed by cash consideration of approximately $136,267, the receipt of $160,346 of Class B limited partnership units of Dundee Industrial Limited Partnership (“DILP”) (a subsidiary of Dundee Industrial), which are exchangeable for units of Dundee Industrial, and promissory notes receivable from Dundee Industrial of $42,000, offset by an amount due to Dundee Industrial of $457 and the mortgages assumed on disposition. Dundee REIT’s initial interest in Dundee Industrial was approximately 44.1%. On December 13, 2012, Dundee Industrial issued 13,570,000 units in an underwritten public offering at a price of $10.60 per unit. Dundee REIT did not participate in the offering and, as a result, its share in Dundee Industrial was diluted to 30.9%. Investment in Dundee Industrial, January 1 Initial purchase of limited partnership units of Dundee Industrial Limited Partnership Units purchased through Distribution Reinvestment Plan Distributions Share of net income from investment in Dundee Industrial Dilution gain Investment in Dundee Industrial, December 31 Dundee Industrial initial units held – October 4, 2012 Ownership % – October 4, 2012 Dundee Industrial units held – December 31, 2012 Ownership % – December 31, 2012 Year ended December 31, 2012 $ – 160,346 1,773 (2,711) 1,052 516 $ 160,976 16,034,631 44.1% 16,198,745 30.9% At December 31, 2012, the fair value of the Trust’s interest in Dundee Industrial, which is listed on the Toronto Stock Exchange, was $181,426. PAGE 70 6042_Dundee_REIT_AR_2012.indd 70 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report The following amounts represent the ownership interest in the assets, liabilities, revenues, expenses and cash fl ows in the investment in Dundee Industrial, in which the Trust participates. Non-current assets Investment properties Other non-current assets Amounts receivable Prepaid expenses Cash and cash equivalents Total assets Non-current liabilities Debt Subsidiary redeemable units Deposits Conversion feature on the convertible debentures Deferred Unit Incentive Plan Current liabilities Debt Amounts payable and accrued liabilities Distributions payable Total liabilities Net assets Investment properties revenue Investment properties operating expenses Net rental income Other income and expenses General and administrative Fair value adjustments to investment properties Acquisition related costs Interest on debt Interest on subsidiary redeemable units Interest and fee income Fair value adjustments to fi nancial instruments Net loss before the undernoted adjustments Add-back: Interest on subsidiary redeemable units Fair value adjustments to subsidiary redeemable units Share of net income December 31, 2012 December 31, 2011 $ 354,320 $ 11,421 365,741 166 909 712 1,787 $ 367,528 $ $ 169,518 $ 56,024 1,776 1,923 16 229,257 31,153 5,767 630 37,550 $ 266,807 $ 100,721 $ $ – – – – – – – – – – – – – – – – – – – – Years ended December 31, 2012 2011 $ 6,345 $ 1,717 4,628 (322) 2,278 (3,641) (1,208) (1,021) 5 (7,960) (7,241) 1,021 7,272 $ 1,052 $ – – – – – – – – – – – – – – PAGE 71 6042_Dundee_REIT_AR_2012.indd 71 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report Note 10 Joint arrangements Investment in joint ventures December 31, 2012 December 31, 2011 $ 490,770 $ 144,596 Investment in joint ventures The Trust participates in partnerships (“joint ventures”) with other parties that own investment properties, and accounts for its interests using the equity accounting method. On June 15, 2012, the Trust acquired a two-thirds interest in the Scotia Plaza complex in downtown Toronto for $844,339. Dundee REIT has entered into a joint venture with H&R REIT, the owner of the remaining one-third interest in the complex. The acquisition was fi nanced with seven-year fi rst mortgage bonds contracted by the joint venture, of which the portion attributable to the Trust is $433,333, and proceeds from the June 12, 2012 public equity offering (see Note 19). Acquisition costs attributable to the Trust amounted to $31,170. Name Scotia Plaza Location Toronto, Ontario State Street Financial Centre Toronto, Ontario TELUS Tower IBM Corporate Centre Capital Centre Plaza 124 Riverbend Atrium Stockman Centre Calgary, Alberta Calgary, Alberta Edmonton, Alberta Edmonton, Alberta Calgary, Alberta Calgary, Alberta Principal activity Investment property Investment property Investment property Investment property Investment property Investment property Investment property Investment property Ownership interest (%) December 31, 2012 December 31, 2011 66.7 – 50.0 33.0 25.0 25.0 25.0 25.0 – 50.0 50.0 33.0 25.0 25.0 25.0 25.0 On December 28, 2012, the Trust acquired the remaining 50% interest in 30 Adelaide Street East (State Street Financial Centre) in Toronto. Prior to December 28, 2012, the Trust held a 50% interest in the property through a partnership interest and accounted for it as a joint venture. PAGE 72 6042_Dundee_REIT_AR_2012.indd 72 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report The following amounts represent the ownership interest in the assets, liabilities, revenues, expenses and cash flows in the equity accounted investments in which the Trust participates, excluding the interest in Dundee Industrial disclosed in Note 9. Non-current assets Investment properties Other non-current assets Current assets Amounts receivable Prepaid expenses Cash and cash equivalents Total assets Non-current liabilities Debt Deposits Current liabilities Debt Amounts payable and accrued liabilities Total liabilities Net assets Investment properties revenue Investment properties operating expenses Net rental income Other income and expenses General and administrative Fair value adjustments to investment properties Loss on sale of investment properties Interest on debt Depreciation and amortization Interest and fee income Fair value adjustments to fi nancial instruments Net income (loss) Cash fl ow generated from (utilized in): Operating activities Investing activities Financing activities Increase (decrease) in cash and cash equivalents December 31, 2012 December 31, 2011 $ 1,038,867 $ 264,505 2,940 1,041,807 2,100 440 7,179 9,719 2,386 266,891 65 89 11,536 11,690 $ 1,051,526 $ 278,581 $ 489,976 $ 127,246 354 490,330 36,992 33,434 70,426 160 127,406 2,977 3,602 6,579 $ $ 560,756 490,770 $ $ 133,985 144,596 Years ended December 31, 2012 2011 $ 78,768 $ 29,759 36,175 42,593 (82) (23,964) – (13,779) (4) 168 (5,186) (254) $ 12,696 17,063 – 37,969 (103) (5,323) – 122 – $ 49,728 Years ended December 31, 2012 2011 $ 25,794 $ 12,241 (19,479) (10,672) $ (4,357) $ (644) (8,555) 3,042 PAGE 73 6042_Dundee_REIT_AR_2012.indd 73 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report Co-owned investment properties The Trust’s interests in co-owned investment properties are accounted for on a proportionate consolidated basis. The co-owned investment properties acquired in the year ended December 31, 2012, relate to the acquisition of Whiterock, as described in Note 6. Name 10199 101st Street NW St. Albert Trail Centre Location Principal activity Edmonton, Alberta Investment property Edmonton, Alberta Investment property 2240 Premier Way (GE Turbine Building) Edmonton, Alberta Investment property 2810 Matheson Boulevard East Mississauga, Ontario Investment property 50 and 90 Burnhamthorpe (Sussex Centre) Mississauga, Ontario Investment property 300–304 The East Mall (Valhalla Executive Centre) Mississauga, Ontario Investment property Tillsonburg Gateway Centre 185–195 The West Mall 460 Two Nations Crossing 350–450 Lansdowne Street Tillsonburg, Ontario Investment property Toronto, Ontario Investment property Fredericton, New Brunswick Kamloops, British Columbia Investment property Investment property 275 Dundas Street West (London City Centre) London, Ontario Investment property 80 Whitehall Drive 6501–6523 Mississauga Road 6531–6559 Mississauga Road 2010 Winston Park Drive 219 Laurier Avenue West 55 Norfolk Street South 10 Lower Spadina Avenue 49 Ontario Street Markham, Ontario Investment property Mississauga, Ontario Investment property Mississauga, Ontario Investment property Oakville, Ontario Investment property Ottawa, Ontario Investment property Simcoe, Ontario Investment property Toronto, Ontario Investment property Toronto, Ontario Investment property 401–405 The West Mall (Commerce West) Toronto, Ontario Investment property 2261 Keating Cross Road 117 Kearney Lake Road Centre 70 Victoria, British Columbia Investment property Halifax, Nova Scotia Investment property Calgary, Alberta Investment property Ownership interest (%) December 31, 2012 December 31, 2011 50.0 50.0 – 49.9 49.9 49.9 49.9 49.9 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 35.0 15.0 50.0 50.0 50.0 – – – – – – – – – – – – – – – – – – – 15.0 PAGE 74 6042_Dundee_REIT_AR_2012.indd 74 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report The following amounts represent the ownership interest in the assets, liabilities, revenues and expenses in the co-owned properties in which the Trust participates. Non-current assets Investment properties Other non-current assets Current assets Amounts receivable Prepaid expenses and other assets Cash and cash equivalents Total assets Non-current liabilities Debt Deposits Current liabilities Debt Amounts payable and accrued liabilities Total liabilities Investment properties revenue Investment properties operating expenses Net rental income from continuing operations Other income and expenses General and administrative Fair value adjustments to investment properties Interest on debt Interest and fee income Income from continuing operations Loss from discontinued operations Net income (loss) December 31, 2012 December 31, 2011 $ 454,703 $ 34,642 1,106 455,809 8,251 453 8,310 17,014 77 34,719 202 20 300 522 $ 472,823 $ 35,241 $ 183,678 $ 24,374 1,635 185,313 52,514 8,676 61,190 219 24,593 737 435 1,172 $ 246,503 $ 25,765 Years ended December 31, 2012 $ 48,204 $ 22,721 25,483 (3) (16,515) (8,909) – 56 (4,782) (4,726) $ 2011 3,587 1,496 2,091 (207) 3,406 (1,218) 1 4,073 – $ 4,073 PAGE 75 6042_Dundee_REIT_AR_2012.indd 75 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report Note 11 Other non-current assets Property and equipment, net of accumulated depreciation of $1,946 (December 31, 2011 – $1,308) Deposits Restricted cash Straight-line rent receivable External management contracts, net of accumulated amortization of $1,119 (December 31, 2011 – $nil) Goodwill Total December 31, 2012 December 31, 2011 $ 3,022 4,858 2,165 21,002 11,883 52,371 $ 2,690 3,065 1,620 15,132 – – $ 95,301 $ 22,507 Deposits largely represent amounts provided by the Trust in connection with property acquisitions. Restricted cash primarily represents tenant rent deposits and cash held as security for certain mortgages. The Trust leases various vehicles and machinery under non-cancellable finance lease agreements. The lease terms are between four and ten years. As at January 1, 2012 Amounts recorded on acquisition of Whiterock Amounts allocated to discontinued operations Write-off on termination of contracts Derecognition of goodwill due to properties disposed Reclassifi ed to assets held for sale Amortization of external management contracts – discontinued operations Amortization of external management contracts – continuing operations As at December 31, 2012 Note 6 20 22 External management contracts Goodwill $ – $ – 16,512 (2,053) (1,255) – – (125) (1,196) 62,058 (8,064) – (1,369) (254) – – $ 11,883 $ 52,371 As a result of the disposition of the industrial properties portfolio, goodwill of $8,064 and property management contracts of $2,053 were allocated to the disposal group and included in the determination of the net gain on sale (see Note 20). Goodwill amounting to $1,369 was further derecognized as a result of other properties disposed in the year and $254 was reclassifi ed to assets held for sale. In connection with the acquisition of the co-owner’s interest in the Trans America Group properties, the external management contracts for these properties were terminated, resulting in the write-off of the intangible asset of $1,255 (see Note 22). Note 12 Promissory notes receivable Promissory notes receivable December 31, 2012 December 31, 2011 $ 42,000 $ – On October 4, 2012, the Trust entered into promissory notes receivable from a subsidiary of Dundee Industrial totalling $42,000. The promissory notes receivable bear interest at 3.1% and are due on the later of (i) the date of closing and funding of the last of the outstanding fi nancing currently being assessed by Dundee Industrial and (ii) January 2, 2013. Dundee Industrial has the option to prepay all or a portion of the promissory notes payable prior to the maturity date. On January 10, 2013, the promissory notes receivable and accrued interest were fully repaid by Dundee Industrial. PAGE 76 6042_Dundee_REIT_AR_2012.indd 76 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report Note 13 Amounts receivable Amounts receivable are net of credit adjustments aggregating $7,010 (December 31, 2011 – $4,842). Trade receivables Less: Provision for impairment of trade receivables Trade receivables, net Other amounts receivable December 31, 2012 December 31, 2011 $ 12,772 $ (1,993) 10,779 20,327 8,791 (955) 7,836 5,782 $ 31,106 $ 13,618 The movement in the provision for impairment of trade receivables during the year ended December 31 was as follows: As at January 1 Provision for impairment of trade receivables Receivables written off during the year as uncollectible As at December 31 Years ended December 31, $ 2012 955 1,424 (386) $ 1,993 $ $ 2011 547 657 (249) 955 The carrying value of amounts receivable approximates fair value due to their current nature. As at December 31, 2012, trade receivables of approximately $7,161 (December 31, 2011 – $1,139) were past due but not considered impaired as the Trust has ongoing relationships with these tenants and the aging of these trade receivables is not indicative of expected default. The Trust leases offi ce properties to tenants under operating leases. Minimum rental commitments on non-cancellable tenant operating leases over their remaining terms are as follows: 2013 2014 to 2017 2018 to 2031 Note 14 Debt Mortgages(1) Term debt Demand revolving credit facilities(1) Term loan facility(1) Convertible debentures Debentures Total Less: Current portion Non-current debt (1) Secured by charges on specifi c investment properties (refer to Note 8). December 31, 2012 $ 320,316 905,422 349,437 $ 1,575,175 December 31, 2012 December 31, 2011 $ 2,441,663 $ 1,805,571 248 67,557 180,837 52,092 36,029 2,778,426 308,089 504 2,435 184,654 131,353 – 2,124,517 166,979 $ 2,470,337 $ 1,957,538 PAGE 77 6042_Dundee_REIT_AR_2012.indd 77 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report Convertible debentures 6.5% Debentures 5.7% Debentures 6.0% Debentures 5.5% Series H Debentures December 31, 2012 $ – – – 52,092 Carrying value December 31, 2011 $ 2,802 7,497 121,054 – $ 52,092 $ 131,353 Date issued Maturity date Original principal issued 6.5% Debentures June 21, 2004 June 30, 2014 $ 75,000 5.7% Debentures April 1, 2005 March 31, 2015 6.0% Debentures January 14, 2008 December 31, 2014 100,000 125,000 Outstanding principal amount Interest rate 6.5% 5.7% 6.0% $ December 31, 2012 – – – December 31, 2011 $ 2,916 7,539 124,965 5.5% Series H Debentures December 9, 2011 March 31, 2017 51,650 5.5% $ 351,650 51,128 51,128 $ – $ 135,420 6.5% Debentures Each 6.5% Debenture is convertible at any time by the debenture holder into 40 REIT A Units per one thousand dollars of face value, representing a conversion price of $25.00 per unit. 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. Interest on the 6.5% Debentures is payable semi-annually on June 30 and December 31. On December 31, 2012, the remaining principal was redeemed. 5.7% Debentures Each 5.7% Debenture is convertible at any time by the debenture holder into 33.33333 REIT A Units per one thousand dollars of face value, representing a conversion price of $30.00 per unit. 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. Interest on the 5.7% Debentures is payable semi-annually on March 31 and September 30. On December 31, 2012, the remaining principal was redeemed. 6.0% Debentures Each 6.0% Debenture is convertible at any time by the debenture holder into 24.15459 REIT A Units per one thousand dollars of face value, representing a conversion price of $41.40 per unit. On or after December 31, 2010, and prior to December 31, 2012, the 6.0% 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 weighted average trading price for the Trust’s units for the 20 consecutive trading days, ending on the fifth trading day immediately preceding the date on which notice of redemption is given, is not less than 125% of the conversion price. On or after December 31, 2012, the 6.0% Debentures may be redeemed by the Trust at a price equal to the principal amount plus accrued and unpaid interest. Interest on the 6.0% Debentures is payable semi- annually on June 30 and December 31. On December 31, 2012, the remaining principal was redeemed. In connection with the acquisition of Whiterock, Dundee REIT assumed the principal amount outstanding under each of the Whiterock Series F, G and H Convertible Debentures. PAGE 78 6042_Dundee_REIT_AR_2012.indd 78 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report 6.0% Series F Debentures The Series F Debentures are convertible at the request of the holder after July 15, 2009, subject to certain terms and conditions, into 35.77156 REIT A Units per one thousand dollars of face value, representing a conversion price of $27.96 per unit. The Series F Debentures are redeemable at the option of the Trust at 115% of the principal amount, subject to certain terms and conditions. Interest on the Series F Debentures is payable quarterly on the 15th day of January, April, July and October. On July 15, 2012, the Series F Debentures matured and were repaid. 7.0% Series G Debentures The Series G Debentures are convertible at the request of the holder, subject to certain terms and conditions, into 54.43972 REIT A Units per one thousand dollars of face value, representing a conversion price of $18.37 per unit. The Series G Debentures are redeemable at the Trust’s option at the principal amount, subject to certain terms and conditions, from December 31, 2012 and, prior to December 31, 2013, provided the 20-day weighted average trading price of the units is at least $22.97 and, after December 31, 2013, at their principal amount. Interest on the Series G Debentures is payable semi-annually on June 30 and December 31. On December 31, 2012, the remaining principal was redeemed. 5.5% Series H Debentures The Series H Debentures are convertible at the request of the holder, subject to certain terms and conditions, into 27.25648 REIT A Units per one thousand dollars of face value, representing a conversion price of $36.69 per unit. The Series H Debentures are redeemable at the principal amount at the Trust’s option, subject to certain terms and conditions, from March 31, 2015 and, prior to March 31, 2016, provided the 20-day weighted average trading price of the units is at least $45.87 and, on and after March 31, 2016, at their principal amount. Interest on the Series H Debentures is payable semi-annually on March 31 and September 30. Principal redemptions On December 31, 2012 (the “Redemption Date”), the Trust completed the redemption of its remaining 6.5% Debentures, 5.7% Debentures, 6.0% Debentures and 7.0% Series G Debentures (the “Redeemed Debentures”), in accordance with the provisions of the indentures and supplemental indentures related to the Redeemed Debentures. The redemption price was paid in cash and was equal to the aggregate of (i) $1 for each $1 principal amount of Redeemed Debentures issued and outstanding on the Redemption Date and (ii) all accrued and unpaid interest on the Redeemed Debentures up to but excluding the Redemption Date. Debt settlement costs incurred are described in Note 22. Details of the convertible debentures redeemed on December 31, 2012, are as follows: 6.5% Debentures 5.7% Debentures 6.0% Debentures 7.0% Series G Debentures Interest rate 6.5% 5.7% 6.0% 7.0% 6.0% $ Principal redeemed 452 1,139 124,785 118 $ 126,494 PAGE 79 6042_Dundee_REIT_AR_2012.indd 79 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report Debentures In connection with the acquisition of Whiterock, Dundee REIT assumed the Whiterock Series K and Series L Debentures. The principal amount outstanding and the carrying value for each series are as follows: Date issued Maturity date Original principal issued Interest rate Outstanding principal Carrying value Series K Debentures April 26, 2011 April 26, 2016 $ 35,000 5.95% $ 25,000 $ 25,741 Series L Debentures August 8, 2011 September 30, 2016 10,000 5.95% 10,000 $ 45,000 $ 35,000 $ 10,288 36,029 December 31, 2012 Series K and Series L Debentures The Series K and Series L Debentures are redeemable at the Trust’s option, subject to certain terms and conditions. Interest is payable monthly. Demand revolving credit facilities On March 2, 2012, the Trust entered into a $10,000 equity bridge facility and a $210,000 secured term facility. The equity bridge facility was in the form of rolling one-month bankers’ acceptances (“BAs”) bearing interest at the BA rate plus 2.35%. The secured term facility was in the form of rolling one-month BAs, bearing interest at the BA rate plus 1.75%. The equity bridge facility was fully repaid on April 5, 2012. The secured term facility was converted into a revolving credit facility on April 17, 2012, and matures on March 5, 2013. The revolving credit facility is in the form of rolling one-month BAs bearing interest at the BA rate plus 1.75% or at the bank’s prime rate (3.0% at December 31, 2012) plus 0.75%, and is secured by nine properties as fi rst-ranking mortgages. The facility is available up to a formula-based maximum not to exceed $171,535. As at December 31, 2012, the formula-based amount available under this facility was $117,535. At December 31, 2012, $54,000 was drawn on the facility. A demand revolving credit facility is available up to a formula-based maximum not to exceed $40,000, bearing interest generally at the bank’s prime rate (3.0% as at December 31, 2012) plus 1.5% or at bankers’ acceptance rates plus 3.0%. This facility is secured by a first-ranking collateral mortgage on two properties and a second-ranking collateral mortgage on one property. The facility expires on April 30, 2013. As at December 31, 2012, the formula-based amount available under this facility was $26,323, less $1,626 in the form of letters of guarantee (December 31, 2011 – $36,075 less $3,975 drawn). As at December 31, 2012, $13,677 was drawn on the facility. Through an acquisition in 2011, the Trust assumed a demand revolving credit facility with a formula-based maximum not to exceed $22,000, bearing interest generally at the bank’s prime rate (3.0% as at December 31, 2012) plus 0.85%. In the third quarter of 2011, the Trust negotiated an increase in the facility to a maximum of $35,000. The facility is secured by a second-ranking collateral mortgage on two properties and expires on April 30, 2013. As at December 31, 2012, the formula-based amount available under the facility was $35,000, less $2,031 in the form of letters of guarantee. As at December 31, 2012, nothing was drawn from the facility. PAGE 80 6042_Dundee_REIT_AR_2012.indd 80 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report In addition, pursuant to the acquisition of Whiterock, the Trust assumed a revolving acquisition and operating facility of up to $35,000. The facility can be increased by up to an additional $20,000. Interest is borne generally at the bank’s prime rate (3.0% as at December 31, 2012) plus 0.85% or bankers’ acceptance rates plus 1.85%. The facility is secured by a fi rst-ranking collateral mortgage on one property and a second-ranking collateral mortgage on one property and the guarantee of the Trust. The facility expires on August 23, 2013. As at December 31, 2012, the amount available under the facility was $35,000, less $300 in the form of letters of guarantee. As at December 31, 2012, nothing was drawn from the facility. Term loan facility On August 15, 2011, the Trust entered into a term loan facility for $188,000 in the form of rolling one-month bankers’ acceptances. The term loan facility bears interest at BA rates plus 1.85% payable monthly. The term loan facility is secured by first-ranking collateral mortgages on eight properties. On August 15, 2012, the Trust repaid $4,547 on the term loan facility as one of the properties securing the facility was sold. As at December 31, 2012, $183,453 was outstanding on the term loan facility. The term loan facility expires on August 15, 2016. On August 15, 2011, the Trust entered into interest rate swap agreements to modify the interest rate profile of the current variable rate debt on the $188,000 term loan facility, without an exchange of the underlying principal amounts. On December 31, 2012, the notional amount of interest rate swaps hedged against the term loan facility was $183,453. The Trust has applied hedge accounting to this relationship, whereby the change in fair value of the effective portion of the hedging derivative is recognized in other comprehensive income (loss). Settlement of both the fixed and variable portions of the interest rate swaps occurs on a monthly basis. Debt weighted average effective interest rates and maturity Weighted average effective interest rates(1) December 31, 2012 December 31, 2011 Maturity dates December 31, 2012 Debt amount December 31, 2011 Fixed rate Mortgages Term debt Term loan facility(2) Convertible debentures Debentures Total fi xed rate debt Variable rate Mortgages Demand revolving credit facilities Total variable rate debt Total debt 4.56% 7.83% 3.83% 3.80% 5.02% 4.50% 4.26% 3.90% 4.05% 4.48% 4.95% 2013–2028 7.58% 3.83% 7.03% – 4.98% 2013 2016 2017 2016 – 2013–2015 2013 4.50% 4.50% 4.98% $ 2,392,766 248 180,837 52,092 36,029 2,661,972 $ 1,805,571 504 184,654 131,353 – 2,122,082 48,897 67,557 116,454 $ 2,778,426 – 2,435 2,435 $ 2,124,517 (1) The effective interest rate method includes the impact of fair value adjustments on assumed debt and fi nancing costs. (2) Under a hedging arrangement, the Trust has entered into two interest rate swaps to fix the interest rate of the term loan facility: a five -year interest rate swap on a notional balance of $129,783, fixing interest at a bankers’ acceptance rate of 1.67% plus a spread of 185 bps, and a three- year interest rate swap on a notional balance of $53,670, fixing interest at a bankers’ acceptance rate of 1.18% plus a spread of 185 bps. The effective interest rate on the term loan facility is 3.83% after accounting for financing costs. 6042_Dundee_REIT_AR_2012.indd 81 4/8/13 4:23 PM PAGE 81 DUNDEE REIT 2012 Annual Report The scheduled principal repayments and debt maturities are as follows: 2013 2014 2015 2016 2017 2018 and thereafter Financing costs Fair value adjustments Mortgages Term debt Demand revolving credit facilities Term loan facility Convertible debentures Debentures Total $ 240,164 $ 248 $ 67,677 $ – $ – $ – $ 308,089 153,937 467,352 333,765 318,050 916,742 – – – – – – – – – – – – 183,453 – – – – – 51,128 – – – 35,000 – – 153,937 467,352 552,218 369,178 916,742 2,430,010 248 67,677 183,453 51,128 35,000 2,767,516 (7,905) 19,558 11,653 – – – (120) (2,616) – – (120) (2,616) – 964 964 – (10,641) 1,029 1,029 21,551 10,910 $ 2,441,663 $ 248 $ 67,557 $ 180,837 $ 52,092 $ 36,029 $ 2,778,426 Other financial instruments The Trust has other fi nancial instruments as follows: Fair value of interest rate swaps Conversion feature on the convertible debentures Other fi nancial instruments – liability December 31, 2012 December 31, 2011 $ $ 375 1,397 1,772 $ $ 1,602 6,426 8,028 Interest rate swaps The following table summarizes the details of the interest rate swaps that are outstanding as at December 31, 2012: Transaction date August 15, 2011 August 15, 2011 Non-current debt Term loan facility principal amount (notional) $ 129,783 Fixed interest rate Maturity date Financial instrument classifi cation 3.52% August 15, 2016 Cash fl ow hedge 53,670 3.03% August 15, 2014 Cash fl ow hedge $ 183,453 3.38% Fair value 549 (174) 375 $ $ For those interest rate swaps designated as cash fl ow hedges, the Trust has assessed that there is no ineffectiveness in the hedges of its interest rate exposure. The effectiveness of the hedging relationship is reviewed on a quarterly basis. As an effective hedge, unrealized gains or losses on the interest rate swap agreements are recognized in other comprehensive income (loss). As at December 31, 2012, the aggregate fair value of the interest rate swaps amounted to a $375 financial liability (December 31, 2011 – $1,602 fi nancial liability). The associated unrealized gains or losses that are recognized in other comprehensive income (loss) will be reclassified into net income in the same period or periods during which the interest payments on the hedged item affect net income. PAGE 82 6042_Dundee_REIT_AR_2012.indd 82 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report Conversion feature on the convertible debentures The movement in the conversion feature on the convertible debentures for the year is as follows: As at January 1 Assumed from business combination Reduction of conversion feature on the debentures converted during the year Remeasurement of conversion feature Ending balance as at December 31 Note 15 Subsidiary redeemable units The Trust has the following subsidiary redeemable units outstanding: Note $ 23 Years ended December 31, $ 2012 6,426 3,363 (5,674) (2,718) 2011 6,491 – (302) 237 $ 1,397 $ 6,426 Opening balance, January 1 Distribution Reinvestment Plan Remeasurement of carrying value Ending balance Year ended December 31, 2012 Year ended December 31, 2011 Note 23 Number of units issued and outstanding 3,506,107 $ 22,551 – 3,528,658 $ Amount 114,445 826 16,807 132,078 Number of units issued and outstanding 3,481,733 24,374 – 3,506,107 Amount $ 105,148 771 8,526 $ 114,445 During the year ended December 31, 2012, the Trust incurred $7,758 (December 31, 2011 – $7,704) in distributions on the subsidiary redeemable units, which is included as interest expense in comprehensive income (see Note 21). DPLP, a subsidiary of Dundee REIT, is authorized to issue an unlimited number of LP Class B limited partnership units. These units have been issued in two series: subsidiary redeemable units and LP Class B Units, Series 2. The subsidiary redeemable units, together with the accompanying Special Trust Units, have economic and voting rights equivalent in all material respects to the REIT A Units. Generally, each subsidiary redeemable unit entitles the holder to a distribution equal to distributions declared on REIT Units, Series B, or if no such distribution is declared, on REIT Units, Series A. Subsidiary redeemable units may be surrendered or indirectly exchanged on a one-for-one basis at the option of the holder, generally at any time, subject to certain restrictions, for REIT Units, Series B. Holders of the LP Class B Units, Series 2 are entitled to vote at meetings of the limited partners of DPLP and each Unit entitles the holder to a distribution equal to distributions on the subsidiary redeemable units. As at December 31, 2012, and December 31, 2011, all issued and outstanding LP Class B Units, Series 2 are owned indirectly by Dundee REIT and have been eliminated in the consolidated balance sheets. Special Trust Units are issued in connection with subsidiary redeemable units. The Special Trust Units are not transferable separately from the subsidiary redeemable units to which they relate and will be automatically redeemed for a nominal amount and cancelled on surrender or exchange of such subsidiary redeemable units. Each Special Trust Unit entitles the holder to the number of votes at any meeting of unitholders that is equal to the number of REIT B Units that may be obtained on the surrender or exchange of the subsidiary redeemable units to which they relate. As at December 31, 2012, 3,528,658 Special Trust Units were issued and outstanding (December 31, 2011 – 3,506,107). 6042_Dundee_REIT_AR_2012.indd 83 4/8/13 4:23 PM PAGE 83 DUNDEE REIT 2012 Annual Report Note 16 Deferred Unit Incentive Plan The Deferred Unit Incentive Plan (“DUIP”) provides for the grant of deferred trust units to trustees, offi cers and employees as well as affi liates and their service providers, including the asset manager. Deferred trust units are granted at the discretion of the trustees and earn income deferred trust units based on the payment of distributions. Once issued, each deferred trust unit and the related distribution of income deferred trust units vest evenly over a three- or fi ve-year period on the anniversary date of the grant. Subject to an election option available for certain participants to postpone receipt of REIT A Units, such units will be issued immediately on vesting. As at December 31, 2012, up to a maximum of 1.75 million (December 31, 2011 – 1.00 million) deferred trust units are issuable under the DUIP. The movement in the DUIP balance was as follows: As at January 1, 2011 Compensation during the year REIT A Units issued for vested units Remeasurements of carrying value As at December 31, 2011 Compensation during the year REIT A Units issued for vested units Remeasurements of carrying value As at December 31, 2012 Note $ 23 23 8,301 3,403 (1,035) 2,302 12,971 4,160 (876) 2,499 $ 18,754 During the year ended December 31, 2012, $4,160 of compensation expense was recorded (December 31, 2011 – $3,403) and included in general and administrative expenses. For the same period, $2,499 (December 31, 2011 – $2,302) was recognized in fair value adjustments to financial instruments representing the remeasurement of the DUIP liability during the year. Outstanding at January 1, 2011 Granted during the year REIT A Units issued Fractional units paid in cash Outstanding at December 31, 2011 Granted during the year REIT A Units issued Fractional units paid in cash Outstanding and payable at December 31, 2012 Vested but not issued at December 31, 2012 Deferred trust units 300,447 113,791 (25,383) – 388,855 125,391 (21,204) – 493,042 175,259 Income deferred trust units 74,151 33,670 (6,995) (13) 100,813 30,077 (4,086) (21) 126,783 73,932 Total units 374,598 147,461 (32,378) (13) 489,668 155,468 (25,290) (21) 619,825 249,191 On February 23, 2012, 114,100 deferred trust units were granted to trustees and senior managers. Of the units granted, 29,000 relate to key management personnel. The grant date value of these deferred trust units was $34.54 per unit granted. On June 25, 2012, an additional 11,291 deferred trust units were granted to trustees who elected to receive their 2012 annual retainer in the form of deferred trust units rather than cash. The grant date value of these deferred trust units was $37.64. On March 4, 2011, 100,500 deferred trust units were granted to trustees and senior managers. Of the units granted, 27,000 relate to key management personnel. A further 13,291 deferred trust units were granted to trustees who elected to receive their 2011 annual retainer in the form of deferred trust units rather than cash. The grant date value of these deferred trust units was $31.60. PAGE 84 6042_Dundee_REIT_AR_2012.indd 84 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report December 31, 2012 December 31, 2011 $ 6,571 $ 6,451 51,905 10,858 7,562 46,155 8,157 2,376 $ 76,896 $ 63,139 Note 17 Amounts payable and accrued liabilities Trade payables Accrued liabilities and other payables Accrued interest Rent received in advance Total Note 18 Distributions The following table breaks down distribution payments for the years ended December 31: Paid in cash Paid by way of reinvestment in REIT A Units Less: Payable at December 31, 2011 (December 31, 2010) Plus: Payable at December 31, 2012 (December 31, 2011) Total $ REIT Units, Series A 147,565 $ 44,127 (12,189) 18,053 197,556 REIT Units, Series B 36 – (3) 3 36 $ $ 2012 147,601 44,127 (12,192) 18,056 197,592 $ $ Total 2011 $ 98,753 21,857 (8,433) 12,192 $ 124,369 On December 18, 2012, the Trust announced a cash distribution of $0.183 per REIT A Unit for the month of December 2012, totalling $17,980. The amount payable at December 31, 2012, was satisfi ed on January 15, 2013, by $14,962 in cash and $3,018 in connection with the issuance of 80,912 REIT A Units. On January 21, 2013, the Trust announced a cash distribution of $0.183 per REIT A Unit for the month of January 2013. The January 2013 distribution will be payable on February 15, 2013, to unitholders of record as at January 31, 2013. Dundee REIT’s Declaration of Trust endeavours to maintain monthly distribution payments to unitholders payable on or about the 15th day of the following month. The amount of the annualized distribution to be paid is based on a percentage of distributable income. Distributable income is defined in the Declaration of Trust and the percentage is determined by the trustees, at their sole discretion, based on what they consider appropriate given the circumstances of the Trust. Distributions may be adjusted for amounts paid in prior periods if the actual distributable income for those prior periods is greater or lesser than the estimates used for those prior periods. In addition, the trustees may declare distributions out of the income, net realized capital gains, net recapture income and capital of the Trust, to the extent such amounts have not already been paid, allocated or distributed. Distributable income is not a measure defined by IFRS and therefore may not be comparable to similar measures presented by other real estate investment trusts. The Trust declared distributions of $0.183 per unit per month, or $2.20 per unit per year during 2012 and 2011. Note 19 Equity REIT Units, Series A REIT Units, Series B Accumulated other comprehensive loss Total December 31, 2012 December 31, 2011 Number of units Amount Number of units Amount 97,618,625 $ 3,295,983 66,193,060 $ 2,118,116 16,316 – 713 (297) 16,316 – 720 (1,602) 97,634,941 $ 3,296,399 66,209,376 $ 2,117,234 PAGE 85 6042_Dundee_REIT_AR_2012.indd 85 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report 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. The Special Trust Units may only be issued to holders of subsidiary redeemable units. 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 at all meetings of unitholders. REIT Units, Series A REIT Units, Series B Number of units Amount Number of units Accumulated other comprehensive Amount income (loss) Number of units 66,193,060 $ 2,118,116 16,316 $ 720 $ (1,602) 66,209,376 Equity, January 1, 2012 Net income for the year Distributions paid Distributions payable Public offering of REIT A Units 16,947,550 Units issued for Whiterock transaction Distribution Reinvestment Plan Unit Purchase Plan Deferred units exchanged for REIT A Units Conversion of debentures 12,580,347 1,200,028 15,296 25,290 657,054 Conversion feature on debentures Issue costs Other comprehensive income Equity, December 31, 2012 291,044 (179,503) (18,053) 604,812 434,777 44,127 578 876 17,498(1) 5,674 (23,963) – – – – – – – – – – – – – 29 (33) (3) – – – – – – – – – – – – – – – – – – – – 1,305 – – – 16,947,550 12,580,347 1,200,028 15,296 25,290 657,054 – – – Total Amount $ 2,117,234 291,073 (179,536) (18,056) 604,812 434,777 44,127 578 876 17,498 5,674 (23,963) 1,305 97,618,625 $ 3,295,983 16,316 $ 713 $ (297) 97,634,941 $ 3,296,399 (1) Amount represents carrying value of debentures on conversion. REIT Units, Series A Number of units Amount Number of units 45,896,203 $ 1,214,604 16,316 $ REIT Units, Series B Accumulated other comprehensive loss Amount – – – – – – – – – Number of units Total Amount 45,912,519 $ 1,215,060 – – – 19,538,500 688,502 11,222 32,376 26,257 – – – 400,920 (112,177) (12,192) 629,434 21,857 359 1,035 701 302 (26,463) (1,602) $ 456 300 (33) (3) – – – – – – – – – – – – – – – – – – – (1,602) 400,620 (112,144) (12,189) 629,434 21,857 359 1,035 701 302 (26,463) – – – – – – – – – – – – 688,502 11,222 32,376 26,257 – – – Public offering of REIT A Units 19,538,500 Equity, January 1, 2011 Net income for the year Distributions paid Distributions payable Distribution Reinvestment Plan Unit Purchase Plan Deferred units exchanged for REIT A Units Conversion of debentures Conversion feature on debentures Issue costs Other comprehensive loss Equity, December 31, 2011 PAGE 86 66,193,060 $ 2,118,116 16,316 $ 720 $ (1,602) 66,209,376 $ 2,117,234 6042_Dundee_REIT_AR_2012.indd 86 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report Public offering of REIT A Units On June 12, 2012, the Trust completed a public offering of 10,392,550 REIT A Units, at a price of $35.90 per unit for gross proceeds of $373,093. Costs related to the offering totalled $14,564 and were charged directly to unitholders’ equity. The offering includes 390,000 REIT A Units purchased by Dundee Corporation and 278,600 REIT A Units purchased by Michael Cooper, Vice Chairman and Chief Executive Offi cer of the Trust, in each case at the public offering price. On March 28, 2012, the Trust completed a public offering of 6,555,000 REIT A Units, including an over-allotment option, at a price of $35.35 per unit for gross proceeds of $231,719. Costs related to the offering totalled $9,353 and were charged directly to unitholders’ equity. The offering includes 364,800 REIT A Units purchased by Dundee Corporation at the public offering price. On December 20, 2011, the Trust completed a public offering of 4,393,000 REIT A Units, including an over-allotment option, at a price of $32.75 per unit for gross proceeds of $143,870. Costs related to the offering totalled $6,355 and were charged directly to unitholders’ equity. On August 15, 2011, the Trust completed a public offering of 5,037,000 REIT A Units at a price of $32.40 per unit for gross proceeds of $163,199. Costs related to the offering totalled $6,600 and were charged directly to unitholders’ equity. The offering includes 407,000 REIT A Units purchased by Dundee Corporation pursuant to the exercise of its pre- emptive right under the Trust’s Declaration of Trust. On June 14, 2011, the Trust completed a public offering of 4,660,000 REIT A Units at a price of $33.30 per unit for gross proceeds of $155,178. On June 29, 2011, the Trust issued an additional 699,000 REIT A Units, pursuant to the exercise of the over-allotment option granted to the underwriter, for gross proceeds of approximately $23,277. Costs related to the offering totalled $7,138 and were charged directly to unitholders’ equity. The offering includes 356,000 REIT A Units purchased by Dundee Corporation at the public offering price. On February 4, 2011, the Trust completed a public offering of 4,749,500 REIT A Units at a price of $30.30 per unit for gross proceeds of $143,910. Costs related to the offering totalled $6,258 and were charged directly to unitholders’ equity. Units issued for Whiterock transaction Pursuant to the acquisition of Whiterock on March 2, 2012, the Trust issued 12,580,347 REIT A Units to Whiterock unitholders who elected to redeem their Whiterock units for units of Dundee REIT. Distribution Reinvestment and Unit Purchase Plan The Distribution Reinvestment and Unit Purchase Plan (“DRIP”) allows holders of REIT A Units or subsidiary redeemable units, 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 units equal to 4% of each cash distribution that was reinvested. The price per unit is calculated by reference to a five-day weighted average closing price of the REIT A Units on the Toronto Stock Exchange (“TSX”) preceding the relevant distribution date, which typically is on or about the 15th day of the month following the declaration. For the year ended December 31, 2012, 1,200,028 REIT A Units were issued under the DRIP for $44,127 (December 31, 2011 – 688,502 REIT A Units for $21,857). The Unit Purchase Plan feature of the DRIP facilitates the purchase of additional REIT A Units by existing unitholders. Participation in the Unit Purchase Plan is optional and subject to certain limitations on the maximum number of additional REIT A Units that may be acquired. The price per unit is calculated in the same manner as 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, 2012, 15,296 REIT A Units were issued under the Unit Purchase Plan for $578 (December 31, 2011 – 11,222 REIT A Units for $359). 6042_Dundee_REIT_AR_2012.indd 87 4/8/13 4:23 PM PAGE 87 DUNDEE REIT 2012 Annual Report Debenture conversions For the year ended December 31, 2012, the following REIT A Units were issued on the conversion of principal amounts of the convertible debentures. 2012 Years ended December 31, 2011 6.5% Debentures 5.7% Debentures 6.0% Debentures 6.0% Series F Debentures 7.0% Series G Debentures Total REIT A Units issued 98,520 213,311 4,347 232,332 108,544 657,054 $ Principal amount 2,463 6,400 180 6,495 1,994 17,532 $ REIT A Units issued 17,360 8,897 – – – 26,257 Principal amount $ 434 267 – – – $ 701 Normal course issuer bid The Trust renewed its normal course issuer bid, which commenced on December 2, 2011, and remained in effect until the earlier of December 1, 2012, or the date on which the Trust has purchased the maximum number of Units permitted under the bid. Under the bid, the Trust had the ability to purchase for cancellation up to a maximum of 5,910,181 REIT A Units (representing 10% of the REIT’s public fl oat of 59,101,809 REIT A Units at the time of renewal through the facilities of the Toronto Stock Exchange). No purchases had been made under the bid. On December 1, 2012, the normal course issuer bid expired and was not renewed. Short form base shelf prospectus On November 26, 2012, the Trust issued a short form base shelf prospectus, which is valid for a 25-month period, during which time the Trust may offer and issue, from time to time, units and debt securities convertible into or exchangeable for units of the Trust, or any combination thereof, with an aggregate offering price of up to $2,000,000. As at December 31, 2012, no units and no debt securities have been issued under the short form base shelf prospectus. PAGE 88 6042_Dundee_REIT_AR_2012.indd 88 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report Note 20 Discontinued operations and assets and related liabilities held for sale Discontinued operations – industrial properties On October 4, 2012, the Trust completed the sale of its entire industrial segment (77 industrial properties in total) to Dundee Industrial for a total sale price of approximately $575,469 (including working capital adjustments). The sale price of the 77 industrial properties was satisfi ed by cash consideration of approximately $136,267, the issuance of $160,346 of limited partnership units of Dundee Industrial Limited Partnership (a subsidiary of Dundee Industrial), which are exchangeable for units of Dundee Industrial, promissory notes receivable from Dundee Industrial of $42,000, offset by an amount due to Dundee Industrial of $457 and the assumption of mortgages. The Trust is now discharged from all rights and obligations relating to the 77 industrial properties. As a result of the sale, the Trust recognized a net gain of $1,147 in income from discontinued operations. The revenues and expenses are as follows: Investment properties revenue Investment properties operating expenses Net rental income Other income and expenses General and administrative Fair value adjustments to investment properties Gain on sale of investment properties Acquisition related costs, net Interest on debt Depreciation and amortization Interest and fee income Income Cash fl ow generated from (utilized in): Operating activities Investing activities Financing activities Increase (decrease) in cash and cash equivalents Years ended December 31, 2012 2011 $ 37,628 $ 36,573 9,517 28,111 (970) 5,187 1,147 (2) (8,448) (127) 1 8,565 28,008 (968) 27,427 – (46) (8,611) – – $ 24,899 $ 45,810 Years ended December 31, 2012 2011 $ 9,591 $ (11,419) 78,493 (88,159) (42,930) 54,424 $ (75) $ 75 6042_Dundee_REIT_AR_2012.indd 89 4/8/13 4:23 PM PAGE 89 DUNDEE REIT 2012 Annual Report Assets and related liabilities held for sale As at December 31, 2012, the Trust classifi ed three retail buildings as held for sale. At December 31, 2012, management had committed to a plan of sale, and therefore the properties have been reclassifi ed as non-current assets held for sale. Investment properties Other non-current assets Amounts receivable Prepaid expenses Assets held for sale Debt Deposits Accounts payable and accrued liabilities Liabilities held for sale Net assets Investment properties held for sale Balance at beginning of year Additions: Investment properties reclassifi ed as held for sale Investment properties disposed of during the year Balance at end of year December 31, 2012 December 31, 2011 $ 20,295 $ 7,700 249 – 3 20,547 (9,200) (17) (51) (9,268) – 3 4 7,707 (16) – (6) (22) $ 11,279 $ 7,685 Note 8 Years ended December 31, 2012 7,700 $ $ 111,952 (99,357) 2011 – 7,700 – $ 20,295 $ 7,700 For the year ended December 31, 2012, the following dispositions were completed: Year ended December 31, 2012 ARAM Building, Calgary West Chambers, Edmonton 4250 Albert Street, Regina 885 Don Mills Road, Toronto 12804 137th Avenue, Edmonton Bisma Centre, Calgary 998 Parkland Drive, Halifax 193 Malpeque Road, Charlottetown 655 University Avenue, Charlottetown 7102–7220 Barlow Trail SE, Calgary Total Property type Disposed GLA (sq. ft.) Gross proceeds(1) Mortgages/ term loan discharged offi ce offi ce retail offi ce retail offi ce retail retail retail 36,428 $ 7,700 $ – $ 92,560 41,238 59,449 54,514 27,496 33,857 41,573 26,043 24,200 9,600 8,975 18,900 9,200 7,170 5,100 3,800 6,786 5,126 4,547 12,633 – 4,624 – 2,357 Net gain (loss) on sale (314)(2) (849)(2) (11)(2) Date disposed February 2, 2012 August 15, 2012 August 15, 2012 1,770 August 30, 2012 (653)(2) September 14, 2012 2,054 September 19, 2012 67 (43)(2) 25 October 4, 2012 October 4, 2012 October 4, 2012 industrial 234,676 10,150 – (516)(2) November 30, 2012 647,834 $ 104,795 $ 36,073 $ 1,530 (1) Gross proceeds before transaction costs. (2) Loss on sale recognized is related to transaction costs and write-off of goodwill. There were no dispositions for the year ended December 31, 2011. PAGE 90 6042_Dundee_REIT_AR_2012.indd 90 4/8/13 4:23 PM Note 21 Interest Interest on debt Interest on debt incurred and charged to comprehensive income is recorded as follows: Interest expense incurred, at contractual and hedged rate of debt Amortization of fi nancing costs Amortization of fair value adjustments on acquired debt Interest capitalized to investment properties Interest expense Add/(deduct): Amortization of fi nancing costs Amortization of fair value adjustments on acquired debt Cash interest paid for discontinued operations Change in accrued interest Interest capitalized to investment properties Cash interest paid DUNDEE REIT 2012 Annual Report Years ended December 31, 2012 $ 129,310 $ 3,280 (7,396) (76) 125,118 (3,280) 7,396 8,844 (2,998) 76 2011 80,410 2,000 (1,811) (812) 79,787 (2,000) 1,811 8,587 (2,761) 812 $ 135,156 $ 86,236 Certain debt assumed in connection with acquisitions has been adjusted to fair value using the estimated market interest rate at the time of the acquisition (“fair value adjustment”). This fair value adjustment is amortized to interest expense over the expected life of the debt using the effective interest rate method. Interest capitalized includes interest on specified and general debt attributed to a property considered to be under redevelopment. Non-cash adjustments to interest expense are recorded as a change in non-cash working capital in the consolidated statement of cash fl ows. Interest on subsidiary redeemable units Interest payments charged to comprehensive income are recorded as follows: Paid in cash Paid by way of reinvestment in subsidiary redeemable units Less: Interest payable at December 31, 2011 (December 31, 2010) Plus: Interest payable at December 31, 2012 (December 31, 2011) Total $ Years ended December 31, $ 2012 6,926 828 (644) 648 2011 6,929 771 (640) 644 $ 7,758 $ 7,704 The interest payable at December 31, 2012, was satisfied on January 15, 2013, by $577 in cash, and $71 in connection with the issue of 1,908 subsidiary redeemable units. 6042_Dundee_REIT_AR_2012.indd 91 4/8/13 4:23 PM PAGE 91 DUNDEE REIT 2012 Annual Report Note 22 Debt settlement and other costs, net Debt settlement costs include the difference between the carrying amount of mortgages payable that were settled during the year, including fair value adjustments written off on debt extinguishment of $5,796, and the settlement amount, which included a $5,626 prepayment penalty as well as the difference between the carrying amount of convertible debentures that were redeemed during the year and their principal amount. Other costs consist of the write-off of the external management contracts associated with the Trust’s acquisition of its co-owners’ interest in the Trans America Group properties on October 4, 2012, which resulted in the termination of the external management contract for these properties. Mortgage break fees Debt settlement costs incurred on redemption of convertible debentures Fair value adjustments written off on debt extinguishment Write-off of external management contracts Total Note 23 Fair value adjustments to fi nancial instruments Remeasurement of conversion feature on convertible debentures Remeasurement of carrying value of subsidiary redeemable units Remeasurement of deferred trust units Years ended December 31, 2012 5,626 2,713 (5,796) 1,255 3,798 $ $ 2011 – – – – – Years ended December 31, 2012 2,718 (16,807) (2,499) $ 2011 (237) (8,526) (2,302) $ $ $ Note 14 15 16 $ (16,588) $ (11,065) Note 24 Income taxes The Trust is subject to taxation in the U.S. on the taxable income earned by its investment properties located in the U.S. A deferred tax liability arises from the temporary differences between the carrying value and the tax basis of the net assets of the U.S. properties. The tax effects of temporary differences arise from investment properties. The deferred tax liability as at December 31, 2012 is $4,492 (December 31, 2011 – $nil), which is calculated using the U.S. tax rate of 38.46%, on the temporary differences of approximately $11,681 between the carrying value of net assets for accounting purposes and the amount used for the tax basis of the investment properties. Note 25 Segmented information The Trust’s investment properties have been segmented into office and industrial components. Investment properties classifi ed as held for sale have been included in “Other” for segment disclosure. 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, general and administrative expenses, interest and fee income, and fair value adjustments to financial instruments are not allocated to the segment expenses. These segments include the Trust’s proportionate share of its joint ventures. The column entitled “Reconciliation” adjusts the segmented results to account for these joint ventures using the equity method of accounting as applied in these consolidated financial statements. PAGE 92 6042_Dundee_REIT_AR_2012.indd 92 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report The Trust completed the sale of 77 industrial properties on October 4, 2012. As a result, going forward, the Trust will no longer have an industrial segment. Year ended December 31, 2012 Offi ce Industrial Operations Segment total Other(1) Subtotal Reconciliation(2) Total Investment properties revenue $ 684,808 $ 37,628 $ 722,436 $ 1,756 $ 724,192 $ (116,396) $ 607,796 Investment properties operating expenses Net rental income from continuing operations 294,849 389,959 9,517 304,366 575 304,941 (45,692) 259,249 28,111 418,070 1,181 419,251 (70,704) 348,547 Share of net income from investment in joint ventures – – – Fair value adjustments to investment properties 82,587 5,187 87,774 472,546 33,298 505,844 – (979) 202 – (254) (254) 86,795 18,777 105,572 506,046 (52,181) 453,865 Segment income (loss) Other income and expenses General and administrative Share of net income and dilution gain from investment in Dundee Industrial Net gain on sale of investment properties Acquisition related costs, net Interest: Debt Subsidiary redeemable units Debt settlement and other costs, net Depreciation and amortization Interest and fee income Fair value adjustments to fi nancial instruments – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – (22,184) (22,184) 1,052 (21,132) 1,568 2,677 1,568 2,677 – (1,147) 1,568 1,530 (17,551) (17,551) 2 (17,549) (147,345) (147,345) 22,227 (125,118) (7,758) (3,798) (2,173) 5,214 (7,758) (3,798) (2,173) 5,214 – – 131 (169) (7,758) (3,798) (2,042) 5,045 (21,774) (21,774) 5,186 (16,588) Year ended December 31, 2012 Offi ce Industrial Segment total Other(1) Subtotal Reconciliation(2) Total Income (loss) before income taxes and discontinued operations Deferred income taxes $ 472,546 $ – Income (loss) from continuing operations 472,546 – – – $ 472,546 $ (204,523) $ 268,023 $ – 1,849 1,849 472,546 (206,372) 266,174 Income (loss) from discontinued operations – 33,298 33,298 (8,399) 24,899 Net income (loss) $ 472,546 $ 33,298 $ 505,844 $ (214,771) $ 291,073 $ – – – – – $ 268,023 1,849 266,174 24,899 $ 291,073 Capital expenditures Year ended December 31, 2012 Offi ce Industrial Segment total Investment in building improvements $ (20,203) $ (101) $ (20,304) $ Other(1) – Subtotal Reconciliation(3) Total $ (20,304) $ 105 $ (20,199) Investment in lease incentives and initial direct leasing costs Investment in development projects Acquisition of investment properties Acquisition of Whiterock Total capital expenditures (23,979) (1,945) (235,019) (956) (24,935) (95) (25,030) 1,453 (23,577) – – (1,945) (235,019) – – – (1,945) (235,019) (147,134) – – – (1,945) (235,019) (147,134) (129,408) (17,726) (147,134) $ (410,554) $ (18,783) $ (429,337) $ (95) $ (429,432) $ 1,558 $ (427,874) (1) Includes corporate amounts not specifi cally related to the segments and amounts for assets held for sale. (2) Includes the Trust’s proportionate share of its joint ventures, accounted for using the equity method of accounting and discontinued operations – industrial properties. (3) Includes the Trust’s proportionate share of its joint ventures, accounted for using the equity method of accounting. 6042_Dundee_REIT_AR_2012.indd 93 4/8/13 4:23 PM PAGE 93 DUNDEE REIT 2012 Annual Report Year ended December 31, 2011 Offi ce Industrial Segment total Other(1) Subtotal Reconciliation(2) Total Operations Investment properties revenue $ 403,928 $ 36,573 $ 440,501 $ 846 $ 441,347 $ (66,332) $ 375,015 Investment properties operating expenses Net rental income from continuing operations Share of net income from investment in joint ventures Fair value adjustments to investment properties Segment income (loss) Other income and expenses General and administrative Net loss on sale of investment properties Acquisition related costs, net Interest: Debt Subsidiary redeemable units Depreciation and amortization Interest and fee income Fair value adjustments to fi nancial instruments 171,404 232,524 – 242,442 474,966 8,565 179,969 28,008 260,532 – 27,427 55,435 – 269,869 530,401 241 605 – 1,087 1,692 180,210 (21,261) 158,949 261,137 (45,071) 216,066 – 49,728 49,728 270,956 (65,396) 205,560 532,093 (60,739) 471,354 – – – – – – – – – – – – – – – – – – – – – – – – (14,764) (14,764) (103) (103) (5,734) (5,734) 968 103 46 (13,796) – (5,688) (93,721) (93,721) 13,934 (79,787) (7,704) (7,704) (580) 2,498 (580) 2,498 – – (122) (7,704) (580) 2,376 (11,065) (11,065) – (11,065) Year ended December 31, 2011 Offi ce Industrial Segment total Other(1) Subtotal Reconciliation(2) Total Income (loss) from continuing operations $ 474,966 $ – $ 474,966 $ (119,856) $ 355,110 $ – $ 355,110 Income (loss) from discontinued operations – 55,435 55,435 (9,625) 45,810 – 45,810 Net income (loss) Capital expenditures $ 474,966 $ 55,435 $ 530,401 $ (129,481) $ 400,920 $ – $ 400,920 Year ended December 31, 2011 Offi ce Industrial Segment total Other(1) Subtotal Reconciliation(3) Total Investment in building improvements $ (7,795) $ (489) $ (8,284) $ – $ (8,284) $ 240 $ (8,044) Investment in lease incentives and initial direct leasing costs Investment in development projects (22,274) (13,018) (1,303) (23,577) (194) (13,212) Acquisition of investment properties (1,005,115) (9,591) (1,014,706) (139,923) (14,457) (154,380) Acquisition of Realex Total capital expenditures 13 (3) – – (23,564) (13,215) (1,014,706) (154,380) 428 – – – (23,136) (13,215) (1,014,706) (154,380) $(1,188,125) $ (26,034) $(1,214,159) $ 10 $(1,214,149) $ 668 $(1,213,481) As at December 31, 2012 Offi ce Industrial Segment total Other(1) Subtotal Reconciliation(3) Total Total assets Total liabilities $ 6,893,197 $ – $ 6,893,197 $ 20,547 $ 6,913,744 $ (560,756) $ 6,352,988 $ 3,608,077 $ – $ 3,608,077 $ 9,268 $ 3,617,345 $ (560,756) $ 3,056,589 As at December 31, 2011 Offi ce Industrial Segment total Other(1) Subtotal Reconciliation(3) Total Total assets Total liabilities $ 4,109,812 $ 363,725 $ 4,473,537 $ 126,915 $ 4,600,452 $ (133,985) $ 4,466,467 $ 1,835,004 $ 166,917 $ 2,001,921 $ 481,297 $ 2,483,218 $ (133,985) $ 2,349,233 (1) Includes corporate amounts not specifi cally related to the segments and amounts for assets held for sale. (2) Includes the Trust’s proportionate share of its joint ventures, accounted for using the equity method of accounting and discontinued operations – industrial properties. (3) Includes the Trust’s proportionate share of its joint ventures, accounted for using the equity method of accounting. PAGE 94 6042_Dundee_REIT_AR_2012.indd 94 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report Note 26 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. Dundee REIT, Dundee Management Limited Partnership (a wholly owned subsidiary of DPLP) and DRC are parties to an administrative services agreement (the “Services Agreement”) that is in effect until June 30, 2013. Effective August 24, 2007, Dundee REIT also has an asset management agreement (the “Asset Management Agreement”) with DRC pursuant to which DRC provides certain asset management services to Dundee REIT and its subsidiaries. Asset Management Agreement The Asset Management Agreement provides for a broad range of asset management services for the following fees: • base annual management fee calculated and payable on a monthly basis, equal to 0.25% of the gross asset value of properties, defined as the fair value of the properties at August 23, 2007 (the date of the sale of our portfolio of properties in Eastern Canada) plus the purchase price of properties acquired subsequent to that date, adjusted for any properties sold; • incentive fee equal to 15% of Dundee REIT’s adjusted funds from operations per unit in excess of $2.65 per unit; • capital expenditures fee equal to 5% of all hard construction costs incurred on each capital project with costs in excess of $1,000, excluding work done on behalf of tenants or any maintenance capital expenditures; • acquisition fee, calculated over a fiscal year based on the anniversary date of the Asset Management Agreement, equal to: (i) 1.0% of the purchase price of a property on the first $100,000 of properties acquired; (ii) 0.75% of the purchase price of a property on the next $100,000 of properties acquired; and (iii) 0.50% of the purchase price on properties acquired in excess of $200,000; and • financing fee equal to 0.25% of the debt and equity of all financing transactions completed on behalf of Dundee REIT, to a maximum of actual expenses incurred by DRC in supplying services relating to financing transactions. Related party transactions The portion of fees received from or paid to related parties, including both continuing and discontinued operations, were as follows: Fees received Fees received from DRC – related to cost recoveries under the Services Agreement $ 3,386 $ 2,733 Years ended December 31, 2012 2011 Operating and administration costs of regional offi ces recovered from DRC (included in investment property operating expenses of the Trust) Fees paid Fees paid by Dundee REIT under the Asset Management Agreement included in: General and administrative expenses Acquisition related costs Property acquisitions Financing costs reported in debt Amounts capitalized to properties under development Total fees paid under the Asset Management Agreement Amounts paid to DRC (reported in general and administrative expenses) Amounts paid to DRC (reported in investment property and operating expenses of the Trust) 13,287 6,790 $ 14,946 $ 7,236 6,963 694 69 29,908 300 1,103 $ $ $ $ $ $ 9,144 1,867 5,988 – 612 17,611 – 223 PAGE 95 6042_Dundee_REIT_AR_2012.indd 95 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report Included in amounts receivable at December 31, 2012, is $1,532 (December 31, 2011 – $368) related to the Services Agreement and $3,267 (December 31, 2011 – $841) related to additional services provided by DRC. Amounts payable and accrued liabilities at December 31, 2012, include $4,129 related to the Asset Management Agreement (December 31, 2011 – $868). Also included in amounts payable and accrued liabilities at December 31, 2012 is a net amount due to Dundee Industrial of $41 for acquisition related costs and issuance costs related to the initial public offering, paid by Dundee REIT on behalf of Dundee Industrial offset by working capital and post-closing adjustments as a result of the disposition of the industrial properties. The Trust entered into promissory notes receivable with a subsidiary of Dundee Industrial totalling $42,000 (see Note 12). Furthermore, included in amounts receivable is a distribution receivable from Dundee Industrial of $938 related to the cash distribution of $0.05625 per Dundee Industrial REIT Unit, for the month of December 2012 and interest receivable on the promissory notes receivable in the amount of $317. Compensation of key management personnel for the years ended December 31 is as follows: Unit-based awards(1) Years ended December 31, 2012 998 $ 2011 853 $ (1) Deferred trust units granted vest over a fi ve-year period with one-fi fth of the deferred trust units vesting each year. Amounts are determined based on the grant date fair value of deferred trust units multiplied by the number of deferred trust units granted in the year. Note 27 Supplementary cash fl ow information (Increase) decrease in amounts receivable Decrease (increase) in prepaid expenses Increase in other non-current assets Decrease in amounts payable and accrued liabilities Increase in tenant deposits Change in non-cash working capital The following amounts were paid on account of interest: Interest: Debt Subsidiary redeemable units Years ended December 31, 2012 $ (12,269) $ 2,700 (4,498) (31,509) 1,502 2011 239 (8,661) (505) (10,165) 6,151 $ (44,074) $ (12,941) Years ended December 31, 2012 2011 $ 135,156 $ 86,236 6,926 6,929 PAGE 96 6042_Dundee_REIT_AR_2012.indd 96 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report Note 28 Supplemental other comprehensive income (loss) information 2012 Years ended December 31, 2011 Unrealized gain (loss) on interest rate swap agreements Unrealized foreign currency translation gain Accumulated other comprehensive income (loss) – 78 $ (1,602) $ 1,305 $ Opening Net change during balance January 1 Closing balance the year December 31 $ $ (1,602) $ 1,227 Opening balance January 1 Net change during Closing balance the year December 31 – – – $ (1,602) $ (1,602) – – $ (1,602) $ (1,602) (375) $ 78 (297) $ Note 29 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 consolidated financial statements of Dundee REIT. As at December 31, 2012, Dundee REIT’s future minimum commitments under operating and finance leases are as follows: No longer than 1 year 1–5 years Longer than 5 years Total Operating lease payments Finance lease payments $ $ 498 $ 237 1,165 1,350 3,013 – – $ 237 During the year ended December 31, 2012, the Trust paid $1,472 (December 31, 2011 – $1,203) in minimum lease payments, which has been included in comprehensive income for the year. As at December 31, 2012 and December 31, 2011, the Trust had no capital commitments with respect to its investment in joint ventures. The Trust’s share of contingent liabilities arising from its investments in joint ventures is as follows: Contingent liabilities for the obligation of the other owners of investments in joint ventures December 31, 2012 December 31, 2011 $ 353,468 $ 168,888 Purchase and other obligations The Trust has entered into lease agreements that may require tenant improvement costs of approximately $33,727. The Trust has entered into fi xed price contracts to purchase electricity and gas as follows: Electricity Calgary Edmonton, Parkland County and Strathcona County Toronto and Ottawa Number of properties 14 9 14 Expiry date 2013 2014 2015 Total Minimum payments due January 31, 2013 $ 170 $ – $ – $ 170 May 31, 2015 September 30, 2013 755 416 755 – 327 – 1,837 416 $ 1,341 $ 755 $ 327 $ 2,423 PAGE 97 6042_Dundee_REIT_AR_2012.indd 97 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report Note 30 Capital management The primary objective of the Trust’s capital management is to ensure it remains within its quantitative banking covenants and maintains a strong credit rating. The Trust’s capital consists of debt, including mortgages, convertible debentures, debentures, subsidiary redeemable units and demand revolving credit facilities, and unitholders’ equity. The Trust’s objectives in managing capital are to ensure adequate operating funds are available to maintain consistent and sustainable unitholder distributions, to fund leasing costs and capital expenditure requirements, and to provide for resources needed to acquire new properties. Various debt, equity and earnings distribution ratios are used to ensure capital adequacy and monitor capital requirements. The primary ratios used for assessing capital management are the interest coverage ratio and net debt-to-gross carrying value. Other significant indicators include weighted average interest rate, average term to maturity of debt and variable debt as a portion of total debt. These indicators assist the Trust in assessing that the debt level maintained is sufficient to provide adequate cash flows for unitholder distributions, and capital expenditures and for evaluating the need to raise funds for further expansion. Various mortgages have debt covenant requirements that are monitored by the Trust to ensure there are no defaults. These covenants include loan-to-value ratios, cash flow coverage ratios, interest coverage ratios and debt service coverage ratios. These covenants are measured at the subsidiary limited partnership level, and all have been complied with. The Trust’s equity consists of Units, in which the carrying value is impacted by earnings and unitholder distributions. The Trust endeavours to make annual distributions of $2.20 per unit. Amounts retained in excess of the distributions are used to fund leasing costs, capital expenditures and working capital requirements. Management monitors distributions through various ratios to ensure adequate resources are available. These ratios include the proportion of distributions paid in cash, DRIP participation ratio, total distributions as a percent of distributable income and distributable income per unit. The Trust monitors capital primarily using a debt-to-book value ratio, which is calculated as the amount of outstanding debt divided by total assets. During the year the Trust did not breach any of its loan covenants, nor did it default on any other of its obligations under its loan agreements. The DPLP Partnership Agreement limits the Trust’s interest coverage ratio to no less than 1.4 times. The interest coverage ratio is calculated as net operating income from continuing operations plus interest and fee income less general and administrative expense from continuing operations, including investments in joint ventures divided by interest expense. For the year ended December 31, 2012, the Trust’s interest coverage ratio was 2.7 times, reflecting its ability to cover interest expense requirements. When calculating the interest coverage ratio, the Trust includes the results of investments in joint ventures using proportionate consolidation of its ownership. Investment properties revenue Investment properties operating expenses Net rental income Add: Interest and fee income Less: General and administrative expenses Interest expense – debt Interest coverage ratio (1) Excludes the results of discontinued operations. PAGE 98 Years ended December 31, 2012(1) 2011 $ 686,564 $ 441,347 295,424 391,140 5,213 21,214 $ 375,139 $ 138,897 2.7 times $ $ 180,210 261,137 2,498 15,447 248,188 93,721 2.6 times 6042_Dundee_REIT_AR_2012.indd 98 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report Note 31 Financial instruments Risk management IFRS 7, “Presentation of Financial Statements” (“IFRS 7”), places emphasis on disclosures about the nature and extent of risks arising from financial instruments and how the Trust manages those risks, including market, credit and liquidity risks. Market risk is the risk the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk consists of interest rate risk, currency risk and other market price risk. The Trust has some exposure to interest rate risk primarily as a result of its variable rate debt. In addition, there is interest rate risk associated with the Trust’s fixed rate debt due to the expected requirement to refinance such debts in the year of maturity. The Trust is exposed to the variability in market interest rates on maturing debt to be renewed. Variable rate debt at December 31, 2012, was 4.2% of the Trust’s total debt (December 31, 2011 – 0.1%). Included in fixed rate debt is the term loan facility of $183,453, which has a variable rate of interest at bankers’ acceptances plus 1.85% payable monthly. The Trust has entered into two interest rate swap agreements, one for three years at 3.03% for a notional value of $53,670 and one for five years at 3.52% for a notional value of $129,783, fixing the rate of interest at 3.38%. In order to manage exposure to interest rate risk, the Trust endeavours to maintain an appropriate mix of fixed and variable rate debt, manage maturities of fixed rate debt and match the nature of the debt with the cash flow characteristics of the underlying asset. The following interest rate sensitivity table outlines the potential impact of a 1% change in the interest rate on variable rate fi nancial assets and liabilities for the prospective 12-month period. A 1% change is considered a reasonable level of fluctuation on variable rate fi nancial assets and liabilities. The table below includes the Trust’s proportionate share of investment in joint ventures. Financial assets Cash and cash equivalents(1) Financial liabilities Variable rate debt and fi xed rate debt due to mature in 2013 Amount Income –1% Equity Interest rate risk +1% Equity Income $ 31,193 $ (312) $ (312) $ 312 $ 312 $ 311,049 $ 3,110 $ 3,110 $ (3,110) $ (3,110) (1) Cash and cash equivalents are short-term investments with an original maturity of three months or less, and exclude cash subject to restrictions that prevent their use for current purposes. These balances generally receive interest income at the bank’s prime rate less 1.85%. Cash and cash equivalents are short term in nature and the current balance may not be representative of the balance for the rest of the year. The Trust is not exposed to signifi cant foreign exchange risks. The Trust’s assets consist of office properties. Credit risk arises from the possibility that tenants in investment properties may not fulfill their lease or contractual obligations. The Trust mitigates its credit risks by attracting tenants of sound financial standing and by diversifying its mix of tenants. It also monitors tenant payment patterns and discusses potential tenant issues with property managers on a regular basis. Cash and cash equivalents, deposits and restricted cash carry minimal credit risk as all funds are maintained with highly reputable financial institutions. Liquidity risk is the risk the Trust will encounter difficulty in meeting obligations associated with the maturity of financial obligations. The Trust manages maturities of the fixed rate debts, and monitors the repayment dates to ensure sufficient capital will be available to cover obligations. 6042_Dundee_REIT_AR_2012.indd 99 4/8/13 4:23 PM PAGE 99 DUNDEE REIT 2012 Annual Report Derivatives and hedging activities The Trust uses interest rate swaps to manage its cash flow risk associated with changes in interest rates on variable rate debt. As at December 31, 2012, the Trust had the following interest rate swaps outstanding (December 31, 2011 – $188,000): Hedging item Interest rate swap Notional Rate (%) Maturity Fair value Hedged item $ 53,670 3.03 August 15, 2014 $ 174 Interest rate swap $ 129,783 3.52 August 15, 2016 $ (549) Interest payments on forecasted issuance of bankers’ acceptances Interest payments on forecasted issuance of bankers’ acceptances The maximum term over which interest rate hedging gains and losses reflected in other comprehensive income will be recognized is five years as the hedged interest payments occur. Fair value of financial instruments Promissory notes receivable, amounts receivable, restricted cash and deposits, cash and cash equivalents, term debt, subsidiary redeemable units, security deposits, amounts payable and accrued liabilities, and distributions payable are carried at amortized cost which approximates fair value. The convertible debentures conversion feature and interest rate swaps are measured at fair value. Mortgages Convertible debentures Debentures Term loan credit facilities December 31, 2012 Total Fair value $ 2,520,972 56,113 35,975 183,453 Carrying value $ 2,441,663 52,092 36,029 180,837 December 31, 2011 Total Fair value $ 1,901,706 141,653 Carrying value $ 1,805,571 131,353 – – 184,654 188,000 The Trust values financial instruments carried at fair value using quoted market prices, where available. Quoted market prices represent a Level 1 valuation. When quoted market prices are not available, the Trust maximizes the use of observable inputs within valuation models. When all significant inputs are observable, the valuation is classified as Level 2. Valuations that require the significant use of unobservable inputs are considered Level 3. The Trust has determined that the conversion feature on convertible debentures is valued using Level 3 inputs for all years presented, and the interest rate swaps are valued using Level 2 inputs for the year presented. Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 December 31, 2012 December 31, 2011 Financial liabilities Conversion feature of the convertible debentures Fair value of interest rate swaps $ $ – – – $ 375 $ 1,397 – $ – – – $ 6,426 1,602 – Note 32 Subsequent events Subsequent to December 31, 2012, Dundee REIT completed the following dispositions: 625 University Park Drive, Regina 2640, 2510–2550 Quance Street, Regina Total (1) Gross proceeds before transaction costs. PAGE 100 Property type Disposed GLA (sq. ft.) Gross proceeds(1) Mortgages discharged retail retail 17,145 $ 5,182 $ 69,554 16,300 86,699 $ 21,482 $ – – – Date disposed January 31, 2013 January 31, 2013 6042_Dundee_REIT_AR_2012.indd 100 4/8/13 4:23 PM DUNDEE REIT 2012 Annual Report Offi cers NED GOODMAN Chairman MICHAEL J. COOPER Vice Chairman and Chief Executive Offi cer MARIO BARRAFATO Senior Vice President and Chief Financial Offi cer ANA RADIC Chief Operating Offi cer JANE GAVAN Corporate Secretary 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 Trustees and offi cers Trustees DETLEF BIERBAUM1, 2, 4 Köln, Germany Corporate Director DONALD K. CHARTER Toronto, Ontario President and Chief Executive Offi cer Corsa Coal Corp. MICHAEL J. COOPER2 Toronto, Ontario Vice Chairman and Chief Executive Offi cer Dundee REIT PETER A. CROSSGROVE1, 3, 4 Toronto, Ontario Executive Chairman Excellon Resources Inc. JOANNE FERSTMAN Toronto, Ontario Corporate Director ROBERT G. GOODALL1, 3 Mississauga, Ontario President Canadian Mortgage Capital Corporation DAVID J. GOODMAN Toronto, Ontario Corporate Director NED GOODMAN2, 5 Innisfi l, Ontario President and Chief Executive Offi cer Dundee Corporation DUNCAN JACKMAN1, 4 Toronto, Ontario Chairman, President and CEO E-L Financial Corporation Limited ROBERT TWEEDY4 Toronto, Ontario Corporate Director 6042_Dundee_REIT_AR_2012.indd 101 4/8/13 4:23 PM PAGE 101 DUNDEE REIT 2012 Annual Report Notes PAGE 102 6042_Dundee_REIT_AR_2012.indd 102 4/8/13 4:23 PM Corporate information Head offi ce DUNDEE REAL ESTATE INVESTMENT TRUST State Street Financial Centre Investor relations Phone: (416) 365-3536 Toll free: 1 877 365-3535 E-mail: info@dundeereit.com Distribution Reinvestment and Unit Purchase Plan The purpose of our Distribution Reinvestment and Unit Purchase Plan 30 Adelaide Street East, Suite 1600 Web site: www.dundeereit.com (“DRIP”) is to provide unitholders with a Toronto, Ontario M5C 3H1 Phone: (416) 365-3535 Fax: (416) 365-6565 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 1 800 564-6253 Fax: (416) 263-9394 or 1 888 453-0330 Taxation of distributions Distributions paid to unitholders in respect of the tax year ending December 31, 2012, are taxed as follows: Other income: 31.3% Capital gains: 24.8% Return of capital: 43.9% Management estimates that 55% of the distributions to be made by the REIT in 2013 will be tax deferred. Stock exchange listing E-mail: service@computershare.com THE TORONTO STOCK EXCHANGE 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. If you register in the DRIP you will also receive a “bonus” distribution of units equal to 4% of the amount of your cash distribution reinvested pursuant to the Plan. In other words, for every $1.00 of cash distributions reinvested by you under the Plan, $1.04 worth of units will be purchased. Listing symbols: REIT Units, Series A: D.UN 5.5% Series H Convertible Debentures: D.DB.H Cash purchase: Unitholders may 5.95% Senior Unsecured Debentures, invest in additional units by making Series K: D.DB.K Annual meeting of unitholders Wednesday, May 8, 2013, at 4:00 pm (EST) Toronto Board of Trade, East Ballroom 1 First Canadian Place, Street Level Toronto, Ontario, Canada (entrance via 100 King Street West or 77 Adelaide Street West) cash purchases. To enrol, contact: COMPUTERSHARE TRUST COMPANY OF CANADA 100 University Avenue, 9th Floor Toronto, Ontario 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. Auditors PRICEWATERHOUSECOOPERS LLP PwC Tower, 18 York Street, Suite 2600 Toronto, Ontario M5J 0B2 Corporate counsel OSLER, HOSKIN & HARCOURT LLP Box 50, 1 First Canadian Place Suite 6100 Toronto, Ontario M5X 1B8 i . m o c . n g s e d s k r o w w w w S N O I T A C N U M M O C N G S E D S K R O W E H T I I i : n g s e D d n a t p e c n o C 6042_Dundee_REIT_AR_2012.indd IBCA 4/8/13 4:23 PM aT sign-on anD beyonD, We folloW Through in MeeTing our TenanTs’ neeDs. High quality, well located, competitively priced. d u n d e e r e i t 2 0 1 2 a n n u a l r e p o r t To view our portfolio of properties, visit: www.dundeereit.com ToronTo MarkhaM Mississauga kiTchener-WaTerloo lonDon WinDsor oTTaWa MonTréal Québec ciTy halifax yelloWknife regina saskaToon VicToria VancouVer calgary eDMonTon