2016 Annual Report
Dream Office REIT owns well-located,
high-quality central business district
and suburban office properties in major
urban centres across Canada. Its portfolio
is well diversified by geographic location
and tenant mix.
Letter to
Unitholders
In February 2016, Dream Office REIT
announced a multi-year Strategic Plan
which would result in a smaller more
valuable business with a high quality office
portfolio, an industry leading balance sheet
and ample liquidity for value enhancing
initiatives. This strategy has changed the
way we view and run our business.
P. Jane Gavan
Chief Executive Officer
In the Strategic Plan, we reduced Dream Office REIT’s
distribution and eliminated the distribution reinvestment
plan to be able to carry on operations without reducing
the value of the business. We obtained an $800 million
credit facility from a syndicate of lenders to support our
liquidity while we execute our strategies.
We completed over $870 million of asset dispositions in
2016, including the sale of a one-sixth interest in Scotia
Plaza. Subsequent to year-end, a further $600 million
in assets either have been sold or are in advanced
negotiations. We have also been able to sell assets
in Alberta that were not contemplated in our original
disposition target at the beginning of 2016. In so doing,
we have further de-risked our portfolio and helped
underscore the value of the remaining real estate.
Since the date of that announcement in February, Dream
Office REIT’s unit price has appreciated 25% compared
to the REIT index at 15% and added approximately $450
million to Dream Office REIT’s market valuation. We
have been pleased with how our strategies have been
executed to date and hope that the improvements in our
unit price this year reflects improving confidence in our
business. We believe that the market has understood and
appreciated the strategy and its execution.
We intend to continue course on our disposition program
in 2017. We will continue to sell those assets that are not
core to our strategy but which will achieve liquidity at
reasonable prices in the market. The proceeds from these
dispositions will be targeted to making the balance sheet
stronger, investing in our buildings and opportunistically
repurchasing our units, until such time as we see more
attractive investment opportunities in the marketplace to
redeploy the capital.
It will take some time, but we want to distill our portfolio to
a smaller core group of assets - those valuable assets in
core markets that are appealing to tenants over the long
term. They are also the buildings for which investment
of capital produces a return; the ones which will provide
stability and predictability in terms of their long term
cash flows.
Heading into 2017, our overall strategy remains consistent
with what we announced last February, to become
smaller with a core portfolio of assets that are far simpler
to understand and manage. We are a business under
construction, but the path is clear, with an outcome that
we believe is achievable and valuable to unitholders.
As always, I would like to thank you for your continued
support as we reshape Dream Office REIT and look
forward to reporting back on our progress.
Sincerely,
P. Jane Gavan
Chief Executive Officer
February 23, 2017
Portfolio
at-a-Glance
DECEMBER 31, 2016
3%
NORTHWEST
TERRITORIES
18%
ALBERTA
3%
BRITISH
COLUMBIA
8%
SASKATCHEWAN
6%
QUÉBEC
58%
ONTARIO
1%
ATLANTIC
CANADA
Dream Office REIT owns and operates high-quality,
well-located and competitively priced business premises.
The portfolio comprises approximately 17 million square
feet of central business district and suburban office
properties located in Canada’s key office markets.
3%
UNITED STATES
Geographic Diversification
(% of net operating income,
excluding properties held for sale)
High-Quality Tenants
TENANT
Government of Canada
Bank of Nova Scotia
Government of Ontario
Bell Canada
State Street Trust Company
Aviva Canada Inc.
Newalta Corporation
Government of Saskatchewan
Loyalty Management
Government of British Columbia
Total
GROSS RENTAL
REVENUE
(%)
OWNED AREA
(THOUSANDS OF
SQ. FT.)
OWNED AREA
(%)
8.2
8.0
2.9
2.6
1.9
1.5
1.5
1.5
1.4
1.2
30.7
1,148
757
438
372
245
319
187
282
194
191
4,133
6.7
4.4
2.5
2.2
1.4
1.9
1.1
1.6
1.1
1.1
24.0
WEIGHTED
AVERAGE
REMAINING
LEASE TERM
(YEARS)
3.8
7.5
3.7
1.0
5.3
0.7
6.9
2.9
0.7
3.7
4.4
CREDIT RATING (1)
AAA/A-1+
A+/A-/A-1
A+/A-1+
BBB+
A-1+/AA-/A
A+
N/R
AA+/A-1+
N/R
AAA/A-1+
(1) Credit ratings are obtained from Standard & Poor’s and may reflect the parent’s or a guarantor’s credit rating.
N/R – not rated
Net Operating Income Breakdown
(excluding properties hold for sale)
Diversified Tenant Base
14%
VALUE ADD ASSETS
25%
PRIVATE MARKET
ASSETS
61%
CORE ASSETS
4.5%
ADMINISTRATIVE & SUPPORT,
WASTE MANAGEMENT &
REMEDIATION SERVICES
5.7%
INFORMATION AND
CULTURAL INDUSTRIES
15.8%
PROFESSIONAL, SCIENTIFIC
AND TECHNICAL SERVICES
28.5%
DIVERSIFIED
26.2%
FINANCE AND
INSURANCE
19.3%
PUBLIC
ADMINISTRATION
* As at December 31, 2016
$5.5 billion
TOTAL ASSETS
700 de la Gauchetière,
Montréal, QC
17 million
TOTAL GROSS LEASABLE AREA (SQUARE FEET)
COMPLETED THE
(EXCLUDING PROPERTIES HELD FOR SALE)
DEVELOPMENT AND
SALE OF OVER
19,000
$600 million
SINGLE FAMILY LOTS
OVER
LIQUIDITY
Scotia Plaza,
Toronto, ON
3.0×
INTEREST COVERAGE RATIO
90%
OCCUPANCY
(INCLUDING COMMITTED)
Station Tower
Vancouver, BC
Table of Contents
Management’s Discussion and Analysis
Management’s Responsibility for the
Consolidated Financial Statements
Independent Auditor’s Report
Consolidated Financial Statements
Notes to the Consolidated Financial
Statements
Trustees
Corporate Information
1
74
75
76
80
IBC
IBC
Management’s discussion and analysis
(All dollar amounts in our tables are presented in thousands of Canadian dollars, except for rental rates, unit and per unit amounts, unless otherwise stated)
SECTION I – FINANCIAL HIGHLIGHTS AND OBJECTIVES
UPDATE ON IMPLEMENTATION OF STRATEGIC PLAN
2016 proved to be a transformative year for Dream Office Real Estate Investment Trust (“Dream Office REIT” or the “Trust”)
where the Trust introduced a plan on February 18, 2016 to execute a mandate similar to that of a real estate private equity
fund, to attempt to reduce the current discount to total equity(1) or net asset value (“NAV”)(1), the Strategic Plan. Over the past
year, we have executed on the following initiatives based on the quality of the Trust’s assets, the current state of economic
uncertainty in Alberta and the private demand for many of the Trust’s properties:
• The Trust completed the sale of $531.6 million of investment properties included in the Private Market Assets (as later
defined). In addition, the Trust completed the sale of $117.3 million of investment properties included in the Value-Add
Assets (as later defined) and $221.2 million included in the Core Assets (as later defined) for total dispositions of
approximately $870 million for the year ended December 31, 2016. Subsequent to year-end, the Trust completed the sale
of another $56.7 million in the Private Market Assets and $171.7 million of the Value-Add Assets. In addition, the Trust
has approximately $378 million of Private Market Assets currently under contract or in various stages of discussion. Upon
completion, these transactions would amount to approximately $966 million of Private Market Asset dispositions, which
represents approximately 81% of the original target of $1.2 billion;
• The Trust used the net proceeds from the dispositions to first pay down debt to reduce leverage, invest in our assets and
subsequently, to repurchase REIT A Units for cancellation under the Trust’s normal course issuer bid (“NCIB”). For the year
ended December 31, 2016, the Trust repaid $646.9 million of debt, invested $128.8 million in building improvements and
leasing costs and repurchased 4.3 million REIT A Units totalling $80.2 million;
• We secured an $800 million demand revolving credit facility (the “$800 million Facility”) to provide the Trust with
operating flexibility through the execution of the Strategic Plan and significantly bolster our liquidity to manage the Trust’s
business in the current environment; and
• Effective with the February 2016 distribution, we revised our annual distribution from $2.24 per unit to $1.50 per unit,
which reflects a more conservative payout ratio. Concurrently, the Trust suspended the Distribution Reinvestment Plan
(“DRIP”) to eliminate dilution.
FINANCIAL OVERVIEW
• Disposition of assets in conjunction with the Strategic Plan: During the quarter, the Trust completed the sale of eight
properties in our Private Market and Value-Add Assets located in the Kitchener and Vancouver areas totalling
approximately 1.1 million square feet, for gross proceeds (net of adjustments) totalling approximately $171.3 million.
For the year, the Trust completed the sale of properties mainly in our Private Market Assets and a portion of our interest
in Scotia Plaza and 100 Yonge Street, included in our Core Assets, totalling approximately 3.6 million square feet, for gross
proceeds (net of adjustments) totalling approximately $870.2 million.
Subsequent to year-end, the Trust completed the sale of properties in our Private Market Assets and Value-Add Assets
located in Calgary and Toronto totalling approximately 1.6 million square feet, for gross proceeds (net of adjustments)
totalling approximately $228.3 million. With the dispositions in Calgary, we have significantly reduced our exposure in the
Alberta region from approximately 5.9 million square feet, or 30% of total gross leasable area (“GLA”) in our portfolio as at
December 31, 2016, to approximately 4.3 million square feet, or 24% of total GLA as at February 23, 2017.
• Capital allocation: The Trust has redeployed the net proceeds from dispositions to repay debt, invest in our assets,
repurchase REIT A units for cancellation and purchased Dream Industrial Real Estate Investment Trust (“Dream Industrial
REIT”) Units.
For the three months and year ended December 31, 2016, the Trust purchased for cancellation 3.9 million REIT A Units
and 4.3 million REIT A Units, respectively, under the NCIB at a cost of approximately $73.7 million and approximately
$80.2 million, respectively.
Dream Office REIT 2016 Annual Report | 1
During the quarter, the Trust discharged maturing mortgages and mortgages associated with disposed properties totalling
approximately $99.6 million with a weighted average face interest rate(2) of 3.93% per annum. In addition, the Trust
renewed or refinanced mortgages totalling $74.0 million at a weighted average face interest rate(2) of 3.09% per annum
with an average term of ten years. For the year ended December 31, 2016, the Trust discharged maturing mortgages and
mortgages associated with disposed properties totalling approximately $646.9 million with an average face interest rate(2)
of 4.28% per annum. In addition, the Trust renewed or refinanced mortgages during the year ended December 31, 2016
totalling $231.4 million at a weighted average face interest rate(2)of 2.99% per annum with an average term of 7.2 years.
Subsequent to year-end, the Trust repaid the Series B Debentures with an aggregate principal amount of $125.0 million
on January 9, 2017.
During the fourth quarter of 2016, the Trust purchased 747,190 Dream Industrial REIT Units for a total cost of $5.9 million.
The purchased units were enrolled in Dream Industrial REIT’s distribution reinvestment plan effective for the December
2016 distribution. In addition, the Trust enrolled its 18,551,855 Dream Industrial LP Class B limited partnership units into
Dream Industrial REIT’s distribution reinvestment plan effective for the November 2016 distribution and elected to
reinvest the distributions received in Dream Industrial REIT Units. For the year ended December 31, 2016, the Trust
purchased Dream Industrial REIT Units through Dream Industrial REIT’s distribution reinvestment plan totalling 135,283
Dream Industrial REIT Units for a total cost of $1.1 million. As at December 31, 2016 the Trust’s ownership increased to
24.9%, from 24.0% at December 31, 2015.
• NAV per unit(1): Our NAV per unit is comprised of the Core, Private Market and Value-Add net assets totalling $25.70,
offset by corporate net liabilities totalling $3.22 resulting in overall NAV per unit of $22.48 as at December 31, 2016.
When compared to Q3 2016, NAV per unit was down $0.98 from $23.46 as at September 30, 2016 and down $9.11 from
$31.59 as at December 31, 2015. The decrease during the quarter and for the year ended December 31, 2016 was mainly
driven by fair value adjustments to our investment properties totalling $136.1 million and $1.1 billion, respectively.
• Conservative capital structure with significant liquidity: We ended the year with net total debt-to-gross book value
ratio(1) of 52.3%, net debt-to-adjusted EBITDFV(1) of 7.7 years, and interest coverage ratio(1) of 3.0 times. The increase
quarter-over-quarter on the aforementioned leverage metrics was mainly due to the vendor takeback mortgage (“VTB
Mortgage”) received as partial consideration for the Kitchener portfolio sale on December 29, 2016 and fair value
adjustments on investment properties in the quarter, along with REIT A Units purchased for cancellation under the NCIB.
Our available liquidity is $622.7 million as at December 31, 2016, consisting of undrawn demand revolving credit facilities
totalling $613.5 million and $9.2 million of cash and cash equivalents on hand.
• Net loss: For the three months and year ended December 31, 2016, the Trust incurred a net loss of $100.7 million and
$879.7 million, respectively, mainly driven by fair value adjustments to investment properties. For the three months and
year ended December 31, 2016, the Trust recorded a fair value loss (including assets classified as held for sale and sold
properties) of $136.1 million and $1.1 billion, respectively, mainly as a result of dispositions for the year and bids received
on certain properties, changes in market rental rates and leasing cost assumptions, and an increase in cap rates on select
properties in certain regions. In particular, the Alberta region (including assets classified as held for sale) had a significant
decline in the current year with fair value losses of $51.0 million and $845.7 million for the three months and year ended
December 31, 2016, respectively, mainly as a result of bids received on certain properties and the changes made to the
critical and key assumptions used in the discounted cash flow model in Q2 2016.
• Diluted funds from operations (“FFO”) per unit(1) for the quarter and year: Diluted FFO on a per unit basis for the three
months ended December 31, 2016 was $0.59, compared to $0.62 in Q3 2016. The decrease in diluted FFO per unit on a
quarter-over-quarter basis was primarily as a result of property dispositions, decrease in comparative properties NOI(1),
incremental change in straight-line rent adjustment and charge on cost reduction program as discussed below. Offsetting
this decline were interest savings on discharged debt associated with disposed properties, interest rate savings upon
refinancing of maturing debt and incremental change in lease termination and other.
Diluted FFO on a per unit basis for the three months and year ended December 31, 2016 was $0.59 and $2.54,
respectively, compared to $0.70 and $2.82 for the three months and year ended December 31, 2015, respectively. The
decrease in diluted FFO per unit on a quarter-over-quarter and year-over-year basis was due to the same reasons
noted above.
Dream Office REIT 2016 Annual Report | 2
•
In-place occupancy: As at December 31, 2016, our comparative portfolio in-place occupancy improved to 87.9%,
compared to 87.4% in the prior quarter. On a quarter-over-quarter basis, we saw modest increases in in-place occupancy
in all regions except for B.C./Saskatchewan/N.W.T. When compared to Q4 2015, our comparative portfolio in-place
occupancy decreased by 2.1% from 90.0% to 87.9%. The decrease year-over-year was experienced in all regions except for
Toronto suburban where it increased 1.3%.
Our overall comparative portfolio in-place and committed occupancy was 89.7% as at December 31, 2016, relatively flat
when compared to Q3 2016 and down from 91.6% in Q4 2015.
• Leasing activity: For the three months ended December 31, 2016, approximately 0.6 million square feet of leases
commenced, of which approximately 0.3 million square feet were renewals, resulting in a tenant retention ratio of
approximately 55%. For the year ended December 31, 2016, approximately 3.3 million square feet of leases commenced,
of which approximately 2.3 million square feet were renewals, resulting in a tenant retention ratio of approximately 62%.
As at December 31, 2016, we continue to make good progress on securing lease commitments, with approximately
1.7 million square feet taking occupancy in 2017, representing approximately 51% of 2017 lease maturities. To date, we
have secured in total 1.9 million square feet bringing the percentage to 57% of 2017 lease maturities. Factoring in a
committed lease at 438 University Ave. in downtown Toronto that does not take occupancy until the end of 2018, the
percentage improves to 63%.
• Comparative properties NOI(1): For the three months ended December 31, 2016, NOI from comparative properties(1) on a
quarter-over-quarter basis decreased by $0.8 million, or 1.0%, from $82.1 million to $81.4 million, mainly driven by lower
weighted average occupancy in the B.C./Saskatchewan/N.W.T. and Alberta regions, partially offset by higher weighted
average occupancy in the Toronto suburban region.
For the three months ended December 31, 2016, NOI from comparative properties(1) on a year-over-year basis decreased
by $3.2 million, or 3.8%, from $84.6 million to $81.4 million. We saw strength in the Toronto downtown and Toronto
suburban regions, with comparative properties NOI(1) increasing $0.2 million or 0.6% and $0.4 million or 3.3%,
respectively, while the rest of our portfolio experienced a decline, mainly driven by the Alberta region, with comparative
properties NOI(1) decreasing $2.9 million, or 17.4%. The overall decline was primarily due to lower occupancy. For the year
ended December 31, 2016, NOI from comparative properties on a year-over-year basis decreased by $6.9 million, or 2.0%,
from $338.1 million to $331.3 million. Toronto downtown saw similar trends with comparative properties NOI increasing
2.9 million, or 2.3%, while the rest of our portfolio experienced a decline due to lower occupancy.
•
Implementation of cost reduction program: Since the announcement of our Strategic Plan in February 2016, we have
made significant progress in executing our disposition program. During the quarter, to ensure that the costs of the
operating platform continue to be efficient for the reduced size of the portfolio, the Trust and Dream Asset Management
Corporation (“DAM”), a subsidiary of Dream Unlimited Corp., jointly implemented a cost reduction program to simplify
the Trust’s operating and shared service platform. As a result of implementing this program, the Trust incurred a charge
on the cost reduction program of $3.9 million ($0.03 per diluted unit) in the fourth quarter. The Trust expects there to be
annual savings coming from recoverable operating expenses that will directly benefit existing tenants. Further, the Trust
expects to achieve annual savings to FFO of up to $4.0 million commencing in 2017 as a result of this program.
(1) Total equity, net asset value (“NAV”) per unit, diluted FFO per unit, net total debt-to-gross book value, net debt-to-adjusted EBITDFV, interest
coverage ratio, and comparative properties NOI are non-GAAP measures used by Management in evaluating operating and financial performance.
Please refer to the “Non-GAAP measures and other disclosures” section of the MD&A for a full description of these non-GAAP measures.
(2) Weighted average face interest rate is calculated as the weighted average face rate of all interest bearing debt on balance, including investment in
joint ventures that are equity accounted.
Dream Office REIT 2016 Annual Report | 3
KEY PERFORMANCE INDICATORS
Performance is measured by these and other key indicators:
Total portfolio(1)
Number of properties
Gross leasable area (“GLA”)(2)
Occupancy rate – including committed (period-end)
Occupancy rate – in-place (period-end)
Average in-place and committed net rent per square foot (period-end)
Market rent/average in-place and committed net rent (%)
Comparative portfolio(3)
Occupancy rate – including committed (period-end)
Occupancy rate – in-place (period-end)
Average in-place and committed net rent per square foot (period-end)
Market rent/average in-place and committed net rent (%)
December 31,
2016
September 30,
2016
As at
December 31,
2015
121
17,233
89.7 %
87.9 %
19.21 $
(2.8 %)
89.7 %
87.9 %
19.21 $
(2.8 %)
148
20,787
88.9 %
87.0 %
18.95 $
(6.1 %)
89.6 %
87.4 %
19.32 $
(3.4 %)
166
23,030
91.3 %
89.8 %
18.94
2.7 %
91.6 %
90.0 %
19.12
4.6 %
$
$
— %
Operating results
Net loss
NOI(4)
Comparative properties NOI(4)
FFO(5)
Distributions
Total distributions
Per unit amounts(6)
Distribution rate
FFO (basic)(5)
FFO (diluted)(5)
NAV(7)
Financing
Weighted average effective interest rate on debt (period-end)(8)
Weighted average face rate of interest on debt (period-end)(9)
Interest coverage ratio (times)(10)
Net average debt-to-EBITDFV (years)(10)
Net debt-to-adjusted EBITDFV (years)(10)
Level of debt (net total debt-to-gross book value)(10)
Level of debt (net secured debt-to-gross book value)(10)
Debt – average term to maturity (years)
Unsecured convertible and non-convertible debentures
Unencumbered assets(11)
Three months ended December 31,
2015
2016
Year ended December 31,
2015
2016
$
$
$
(100,671 ) $
77,255
81,355
67,155
(54,137 ) $
81,147
84,581
79,672
(879,705 ) $
316,761
331,273
290,887
(55,039 )
327,332
338,136
318,511
42,235 $
64,265 $
177,633 $
254,303
0.38 $
0.59
0.59
22.48
0.56 $
0.70
0.70
31.59
1.56 $
2.55
2.54
22.48
2.24
2.83
2.82
31.59
December 31,
2016
September 30,
2016
As at
December 31,
2015
3.82 %
3.84 %
3.0
7.3
7.7
52.3 %
44.2 %
3.8
448,828 $
244,000 $
3.84 %
3.89 %
3.0
7.4
7.3
50.4 %
42.6 %
3.8
448,623 $
285,000 $
4.11 %
4.05 %
2.9
7.7
7.7
48.3 %
41.0 %
3.8
534,097
825,000
$
$
(1) Total portfolio includes investment in joint ventures and excludes properties held for sale and a redevelopment property at the end of each period.
(2) In thousands of square feet.
(3) Comparative portfolio includes investment in joint ventures and excludes properties sold, properties held for sale and a redevelopment property at the
end of Q4 2016.
(4) NOI and comparative properties NOI (non-GAAP measures) – NOI is defined as total of net rental income, including the share of net rental income from
investment in joint ventures and property management income, excluding net rental income from properties sold and assets held for sale. Comparative
properties NOI includes the properties acquired prior to January 1, 2015 and excludes lease termination fees, one-time property adjustments, bad debt
expenses, NOI of properties sold, properties held for sale and a redevelopment property, straight-line rent and amortization of lease incentives. The
reconciliations of NOI and comparative properties NOI to net rental income can be found in the section “Non-GAAP measures and other disclosures”
under the headings “NOI” and “Comparative properties NOI”.
Dream Office REIT 2016 Annual Report | 4
(5) FFO (non-GAAP measure) – The reconciliation of FFO to net income can be found in the section “Our Results of Operations” under the heading “Funds
from operations”. FFO (non-GAAP measure) for the comparative period excludes the one-time cost on Reorganization of $128,132 recorded in Q2 2015.
(6) A description of the determination of basic and diluted amounts per unit can be found in the section “Non-GAAP measures and other disclosures” under
the heading “Weighted average number of units”.
(7) NAV per unit (non-GAAP measure) is defined in the section “Non-GAAP measures and other disclosures” under the heading “Net Asset Value (“NAV”) per
unit”.
(8) Weighted average effective interest rate is calculated as the weighted average face rate of interest on balance, net of amortization of fair value
adjustments and financing costs of all interest bearing debt, including debt related to investment in joint ventures, which are equity accounted.
(9) Weighted average face interest rate is calculated as the weighted average face rate of all interest bearing debt on balance, including investment in joint
ventures that are equity accounted.
(10) The calculation of the following non-GAAP measures – interest coverage ratio, net average debt-to-EBITDFV, net debt-to-adjusted EBITDFV and levels of
debt – are included in the section “Non-GAAP measures and other disclosures”.
(11) Unencumbered assets (non-GAAP measure) includes unencumbered investment properties related to wholly owned and co-owned properties and
investment in joint ventures that are equity accounted. Management believes this non-GAAP measurement is an important measure of our
unencumbered pool of assets available for liquidity purposes.
BASIS OF PRESENTATION
Our discussion and analysis of the financial position and results of operations of Dream Office Real Estate Investment Trust
(“Dream Office REIT” or the “Trust”) should be read in conjunction with the audited consolidated financial statements of
Dream Office REIT for the year ended December 31, 2016. Unless otherwise indicated, our discussion of assets, liabilities,
revenue and expenses includes our investment in joint ventures, which are equity accounted at our proportionate share of
assets, liabilities, revenue and expenses.
This management’s discussion and analysis (“MD&A”) is dated as at February 23, 2017.
For simplicity, throughout this discussion, we may make reference to the following:
• “REIT A Units”, meaning the REIT Units, Series A of the Trust;
• “REIT B Units”, meaning the REIT Units, Series B of the Trust;
• “REIT Units”, meaning the REIT Units, Series A, and REIT Units, Series B, of the Trust; and
• “LP B Units” and “subsidiary redeemable units”, meaning the LP Class B Units, Series 1 of Dream Office LP (a wholly
owned subsidiary of the Trust).
When we use terms such as “we”, “us” and “our”, we are referring to Dream Office REIT and its subsidiaries.
The ongoing execution of the Strategic Plan is premised on the classification of our portfolio into three segments, namely Core
Assets, Private Market Assets and Value-Add Assets. When evaluating the operating and financial performance of our
investment properties, it remains premised on the classification of our portfolio into geographic segments. Prior to 2016, the
Trust’s reportable operating segments of its investment properties and results of operations were segmented geographically,
namely Western Canada, Calgary downtown, Calgary suburban, Toronto downtown, Toronto suburban and Eastern Canada.
Effective January 1, 2016, the Trust made several changes to its reportable operating segments as follows: (i) separated its
investment properties and results of operations in Edmonton from Western Canada and combined Calgary downtown and
Calgary suburban into a new Alberta segment; and (ii) for the remaining properties in Western Canada that are located in the
provinces of British Columbia, Saskatchewan and Northwest Territories, the Trust renamed the Western Canada region to
“B.C./Saskatchewan/N.W.T.”. These changes will enable management and unitholders to evaluate the performance of our
investment properties located in the Province of Alberta.
Market rents disclosed throughout the MD&A are management’s estimates and are based on current period leasing
fundamentals. The current estimated market rents are at a point in time and are subject to change based on future market
conditions.
In addition, certain disclosure incorporated by reference into this report includes information regarding our largest tenants
that has been obtained from publicly available information. We have not independently verified any such information.
Dream Office REIT 2016 Annual Report | 5
Certain information herein contains or incorporates comments that constitute forward-looking information within the
meaning of applicable securities legislation, including but not limited to statements relating to the Trust’s objectives, strategies
to achieve those objectives, the Trust’s beliefs, plans, estimates, projections and intentions, and similar statements concerning
anticipated future events, future growth, results of operations, performance, business prospects and opportunities,
acquisitions or divestitures, tenant base, future maintenance and development plans and costs, capital investments, financing,
the availability of financing sources, income taxes, vacancy and leasing assumptions, litigation and the real estate industry in
general (including statements regarding our Strategic Plan, our disposition targets, the timing of proposed dispositions, the
use of proceeds from dispositions, proposed debt repayments and unit repurchases), in each case that are not historical facts.
Forward-looking statements generally can be identified by words such as “outlook”, “objective”, “may”, “will”, “would”,
“expect”, “intend”, “estimate”, “anticipate”, “believe”, “should”, “could”, “likely”, “plan”, “project”, “budget” or “continue” or
similar expressions suggesting future outcomes or events. Forward-looking information is based on a number of assumptions
and is subject to a number of risks and uncertainties, many of which are beyond Dream Office REIT’s control, which could
cause actual results to differ materially from those disclosed in or implied by such forward-looking information. These risks
and uncertainties include, but are not limited to, general and local economic and business conditions; the financial condition
of tenants; our ability to execute our Strategic Plan and achieve its expected benefits; our ability to refinance maturing debt;
our ability to sell investment properties at a price which reflects fair value; leasing risks, including those associated with the
ability to lease vacant space; our ability to source and complete accretive acquisitions; and interest rates.
Although the forward-looking statements contained in this MD&A are based on what we believe are reasonable assumptions,
there can be no assurance that actual results will be consistent with these forward-looking statements. Forward-looking
information is disclosed in this MD&A as part of the sections “Our Objectives” and “Outlook on valuations of investment
properties in Alberta”. Factors that could cause actual results to differ materially from those set forth in the forward-looking
statements and information include, but are not limited to, general economic conditions; local real estate conditions, including
the development of properties in close proximity to the Trust’s properties; timely leasing of vacant space and re-leasing of
occupied space upon expiration; dependence on tenants’ financial condition; the uncertainties of acquisition activity; the
ability to effectively integrate acquisitions; interest rates; availability of equity and debt financing; our continued compliance
with the real estate investment trust (“REIT”) exception under the specified investment flow-through trust (“SIFT”) legislation;
and other risks and factors described from time to time in the documents filed by the Trust with securities regulators.
All forward-looking information is as of February 23, 2017. Dream Office REIT does not undertake to update any such forward-
looking information whether as a result of new information, future events or otherwise, except as required by applicable law.
Additional information about these assumptions, risks and uncertainties is contained in our filings with securities regulators,
including our latest Annual Report and Annual Information Form available on System for Electronic Document Analysis and
Retrieval (“SEDAR”) at www.sedar.com. Certain filings are also available on our website at www.dreamofficereit.ca.
Dream Office REIT 2016 Annual Report | 6
OUR OBJECTIVES
We have been and remain committed to:
• Managing our business to provide stable cash flows and sustainable returns, by adapting our strategy and tactics to
changes in the real estate industry and the economy;
• Building and maintaining a stronger, more flexible and resilient balance sheet, by adopting our Strategic Plan;
•
Improving the overall quality of our portfolio by investing in key assets and selectively disposing of non-core assets with
lower potential for long-term income growth; and
• Maintaining a REIT status that satisfies the REIT exception under the SIFT legislation in order to provide certainty to
unitholders with respect to taxation of distributions.
Strategic Plan
Management of the Trust has determined that the best course of action for the Trust is for the Trust to execute a mandate
similar to that of a real estate private equity fund, to attempt to reduce the discount to NAV through the execution of our
Strategic Plan, announced on February 18, 2016.
The Trust intends to advance the Strategic Plan until the Core Assets represent substantially all of the Trust’s portfolio, with
the goal of stabilizing the business by 2019. The proceeds from dispositions will be targeted to making the balance sheet
stronger, investing in our buildings and opportunistically repurchasing our units, until such time as we see more attractive
investment opportunities in the marketplace to redeploy the capital.
We believe the Trust will have sufficient liquidity and balance sheet flexibility to execute on the Strategic Plan.
At the time of the Strategic Plan announcement in February 2016, our portfolio of assets was classified into three segments:
Core Assets, Private Market Assets and Value-Add Assets. Over the course of 2016, as the Trust executed on its Strategic Plan,
we found there was increasing liquidity for properties in Alberta, which comprised the majority of the Value-Add Assets. With
the recent disposition of properties in Alberta, the Trust has revisited the assets within its segments, with the composition and
strategy for each segment as follows:
Core Assets(1)
The Trust identified its core holdings (the “Core Assets”), which currently represent 66% of the total portfolio carrying value
(excluding assets held for sale), as at December 31, 2016. The Core Assets include our long-term holdings situated in
downtown Toronto, downtown Calgary, 700 De la Gauchetière St. W. in downtown Montréal, Station Tower in suburban
Vancouver, 5001 Yonge St. in North York, 50 & 90 Burnhamthorpe Rd. W. (Sussex Centre) in Mississauga, and 150 Metcalfe St.
in Ottawa. As at December 31, 2016, these assets were 94% leased with a Weighted Average Lease Term (“WALT”) of
approximately 5.5 years and have an aggregate investment property value (excluding assets held for sale) of approximately
$3.3 billion with associated mortgages outstanding of approximately $1.3 billion. The NAV of our Core Assets was
approximately $2.0 billion or $17.68 per unit.
The Trust continues to drive value from our Core Assets by making prudent asset management decisions in order to meet
tenant and unitholders’ objectives over the long term. Included in the Core Assets are six properties in downtown Calgary
totalling approximately $290 million of carrying value and approximately $211 million of NAV. We believe these downtown
Calgary assets are of higher quality and more resilient to the prolonged weakness in the Alberta economy relative to the
remainder of the Alberta assets included in our Private Market and Value-Add Asset strategies.
(1) The ongoing execution of the Strategic Plan is premised on the classification of our portfolio into three segments, namely Core Assets, Private Market
Assets and Value-Add Assets. The related investment properties and associated mortgages are non-GAAP measures used by Management in evaluating
the intrinsic value of the assets as it relates to the execution of the Strategic Plan. Please refer to the section “Non-GAAP measures and other disclosures“
under the heading “Strategic Plan classification“ of the MD&A for a full description of these non-GAAP measures.
Dream Office REIT 2016 Annual Report | 7
Private Market Assets(1)
The Trust identified good quality assets, primarily in Saskatchewan, Greater Toronto Area, Eastern Canada and Alberta as
assets that the Trust believes are fairly liquid, but not strategic to the longer-term objectives of the Trust (the “Private Market
Assets”). As at December 31, 2016, the Private Market Assets represented approximately $1.1 billion of the total portfolio
carrying value (excluding assets held for sale), with approximately $0.4 billion of associated mortgages. As at December 31,
2016, the NAV of our Private Market Assets was $0.7 billion or $6.48 per unit. As at February 23, 2017, the Trust has sold
approximately $588 million of Private Market Assets with an additional $378 million under contract or in various stages of
negotiation. Subsequent to year-end, the Trust completed the sale of five properties in our Private Market Assets located in
Calgary and Toronto totalling approximately 318,000 square feet, for gross proceeds (net of adjustments) totalling
approximately $57 million. With the dispositions in Calgary, we have significantly reduced our exposure in the Alberta region
from approximately 5.9 million square feet, or 30% of total GLA in our portfolio as at December 31, 2016, to approximately
4.3 million square feet, or 24% of total GLA as at February 23, 2017.
The Trust continues to sell and crystallize the value of the Private Market Assets in 2017 and beyond.
Value-Add Assets(1)
The Trust identified the balance of the assets (the “Value-Add Assets”), primarily in Alberta and Yellowknife, as requiring active
asset management or the passage of time prior to improving their demand profile and/or liquidity in the Private Market. As at
December 31, 2016, the Value-Add Assets represented approximately $0.5 billion of the total portfolio carrying value
(excluding assets held for sale), with approximately $0.3 billion of associated mortgages. As at December 31, 2016, the NAV of
our Value-Add Assets was approximately $0.2 billion or $1.54 per unit.
The hold period for these assets is difficult to determine at this juncture, although the Trust remains opportunistic in
improving the value or achieving liquidity when and where possible.
(1) The ongoing execution of the Strategic Plan is premised on the classification of our portfolio into three segments, namely Core Assets, Private Market
Assets and Value-Add Assets. The related investment properties and associated mortgages are non-GAAP measures used by Management in evaluating
the intrinsic value of the assets as it relates to the execution of the Strategic Plan. Please refer to the section “Non-GAAP measures and other disclosures“
under the heading “Strategic Plan classification“ of the MD&A for a full description of these non-GAAP measures.
Dream Office REIT 2016 Annual Report | 8
OUR PROPERTIES
Dream Office REIT provides high-quality, well-located and reasonably 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, Ottawa and Vancouver.
At December 31, 2016, our ownership interests included 143 properties, which comprise office properties, a redevelopment
property and properties held for sale. The Trust owns approximately 19.9 million square feet of GLA, including 17.2 million
square feet of office properties, 2.6 million square feet of properties held for sale and 0.1 million square feet related to a
redevelopment property. The committed occupancy rate across our office portfolio remains high at 89.7% at December 31,
2016. Our occupancy rates include lease commitments for space that is currently being readied for occupancy but for which
rent is not yet being recognized.
OWNED GLA BY REGION
(in thousands of square feet)
The following chart includes GLA by region, including investment in joint ventures, properties held for sale and a
redevelopment property as at December 31, 2016.
The following chart includes GLA by region, including investment in joint ventures, properties held for sale and a
redevelopment property as at February 23, 2017. Subsequent to year-end, the Trust completed the sale of properties
primarily in our Private Market Assets and a few properties in our Value-Add Assets, located in Calgary and Toronto totalling
approximately 1.6 million square feet. With the dispositions in Calgary, we have significantly reduced our exposure in the
Alberta region from approximately 5.9 million square feet, or 30% of total GLA in our portfolio as at December 31, 2016, to
approximately 4.3 million square feet, or 24% of total GLA as at February 23, 2017.
Dream Office REIT 2016 Annual Report | 9
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
Total portfolio(1)
Occupancy rate – including committed (period-end)
Occupancy rate – in-place (period-end)
Average in-place and committed net rental rates (per sq. ft.) (period-end)
Tenant maturity profile – average term to maturity (years)
Comparative portfolio(2)
Occupancy rate – including committed (period-end)
Occupancy rate – in-place (period-end)
Average in-place and committed net rental rates (per sq. ft.) (period-end)
Tenant maturity profile – average term to maturity (years)
December 31,
2016
September 30,
2016
December 31,
2015
$
$
89.7 %
87.9 %
19.21 $
4.9
89.7 %
87.9 %
19.21 $
4.9
88.9 %
87.0 %
18.95 $
4.7
89.6 %
87.4 %
19.32 $
5.0
91.3 %
89.8 %
18.94
4.6
91.6 %
90.0 %
19.12
4.8
(1) Total portfolio includes investment in joint ventures and excludes properties held for sale and a redevelopment property at the end of each period.
(2) Comparative portfolio includes investment in joint ventures and excludes properties sold, properties held for sale and a redevelopment property at the
end of Q4 2016.
As at December 31, 2016, our comparative portfolio in-place and committed occupancy was 89.7%, stable when compared to
Q3 2016. Over the prior quarter, Toronto downtown and Toronto suburban experienced a slight increase of 20 basis points
(“bps”) and 30 bps, respectively. B.C./Saskatchewan/N.W.T. experienced a slight decrease of 40 bps over the prior quarter, and
Alberta continues to experience a challenging leasing environment, where comparative in-place and committed occupancy
decreased by 20 bps when compared to Q3 2016. Excluding the Alberta region, the remainder of our comparative portfolio in-
place and committed occupancy as at December 31, 2016 was 92.0% compared to 91.9% in Q3 2016.
When compared to Q4 2015, our comparative portfolio in-place and committed occupancy decreased by 1.9% from 91.6% at
Q4 2015 to 89.7% as at December 31, 2016. The decline was attributed to decreases in comparative portfolio in-place and
committed occupancy for all regions, except for an increase of 1.6% in Toronto suburban when compared to the prior year.
Our largest region, Toronto downtown, remained relatively stable with comparative portfolio in-place and committed
occupancy at 97.8% compared to 97.9% in Q4 2015. Excluding the Alberta region, the remainder of our comparative portfolio
in-place and committed occupancy as at December 31, 2016 was 92.0% compared to 92.7% in Q4 2015.
As at December 31, 2016, our comparative portfolio in-place occupancy increased by 50 bps to 87.9% when compared to the
prior quarter. The increase was attributed to higher in-place occupancy across all regions except for B.C./Saskatchewan/N.W.T.,
which experienced a 30 bps decrease over Q3 2016. Excluding the Alberta region, the remainder of our comparative portfolio
in-place occupancy as at December 31, 2016 was 90.3% compared to 89.9% in Q3 2016.
As at December 31, 2016, our comparative portfolio in-place occupancy decreased by 2.1% to 87.9% when compared to the
prior year. The decrease was attributed to lower in-place occupancy across all regions except for Toronto suburban, which
experienced a 1.3% increase over Q4 2015. Excluding the Alberta region, the remainder of our comparative portfolio in-place
occupancy as at December 31, 2016 was 90.3% compared to 91.4% in Q4 2015.
(percentage)
Occupancy rate – including committed
B.C./Saskatchewan/N.W.T.
Alberta
Toronto – downtown
Toronto – suburban
Eastern Canada
Total
December 31,
2016
September 30,
2016
Total portfolio(1)
December 31,
2015
December 31,
2016
Comparative portfolio(2)
December 31,
2015
September 30,
2016
88.8
80.2
97.8
83.9
94.5
89.7
89.2
82.1
97.6
83.6
92.7
88.9
91.5
87.8
98.0
84.5
94.1
91.3
88.8
80.2
97.8
83.9
94.5
89.7
89.2
80.4
97.6
83.6
94.5
89.6
92.0
87.4
97.9
82.3
96.8
91.6
(1) Total portfolio includes investment in joint ventures and excludes properties held for sale and a redevelopment property at the end of each period.
(2) Comparative portfolio includes investment in joint ventures and excludes properties sold, properties held for sale and a redevelopment property at the
end of Q4 2016.
Dream Office REIT 2016 Annual Report | 10
Occupancy rate by quarter
The graph below details the percentage of in-place and committed occupancy and in-place occupancy across our total
portfolio for the last eight quarters:
(1) Includes investment in joint ventures and excludes properties held for sale and a redevelopment property at the end of each period.
Occupancy schedule
The following table details the change in occupancy (including committed) for the three months and year ended December 31,
2016:
Weighted
average rate
per sq. ft.
Three months ended
December 31, 2016
in thousands of sq. ft.(1)
As a
% of total
GLA(1)
Weighted
average rate
per sq. ft.
Year ended
As a
December 31, 2016 % of total
GLA(1)
in thousands of sq. ft.(1)
Occupancy (including vacancy committed
for future leases) at beginning of period
Vacancy committed for future leases
Occupancy in-place at beginning of period
Occupancy related to sold properties and
properties held for sale
Remeasurements/reclassifications
Occupancy at beginning of period –
adjusted
$
Expiries
Early terminations and bankruptcies
New leases
Renewals
Occupancy in-place – December 31, 2016
Vacancy committed for future leases
Occupancy (including vacancy committed
for future leases) – December 31, 2016
(23.31)
(20.72)
18.00
20.74
18,488
(407 )
18,081
88.9 %
(1.9 %)
87.0 %
(3,019 )
(1 )
15,061
87.4 %
(488 )
(5 )
304
268
15,140
310
(2.8 %) $
(0.1 %)
1.8 %
1.6 %
87.9 %
1.8 %
(17.41)
(19.37)
17.61
16.71
21,037
(361 )
20,676
91.3 %
(1.5 %)
89.8 %
(5,117 )
5
15,564
(3,633 )
(104 )
1,047
2,266
15,140
310
90.3 %
(21.1 %)
(0.6 %)
6.1 %
13.2 %
87.9 %
1.8 %
15,450
89.7 %
15,450
89.7 %
(1) Includes investment in joint ventures and excludes properties held for sale and a redevelopment property at period-end.
During the quarter, overall comparative portfolio in-place occupancy increased by 0.5% to 87.9%. Tenants taking occupancy
during the quarter included approximately 268,000 square feet of renewals and approximately 304,000 square feet of new
leases, offset by approximately 488,000 square feet of lease expiries across the portfolio and approximately 5,000 square feet
of early terminations and bankruptcies.
Dream Office REIT 2016 Annual Report | 11
At December 31, 2016, vacant space committed for future occupancy decreased from the beginning of the quarter by
approximately 97,000 square feet to approximately 310,000 square feet, due to tenants taking occupancy during the quarter.
Of the total vacant space committed for future occupancy, approximately 230,000 square feet will take occupancy during
2017.
Tenant retention ratio
Renewal rate (per sq. ft.)
Expiring rents on renewed space (per sq. ft.)
Renewal to expiring rent spread (per sq. ft.)
Renewal to expiring rent spread (%)
Three months ended
December 31, 2016
$
54.9 %
20.74 $
20.12
0.62
3.1 %
Year ended
December 31, 2016
62.4 %
16.71
15.70
1.01
6.4 %
For the three months ended December 31, 2016, our tenant retention ratio was 54.9%, with renewals completed at $20.74
per square foot, compared to expiring rents at $20.12 per square foot, for an increase of $0.62 per square foot, or 3.1%. For
the year ended December 31, 2016, our tenant retention ratio was 62.4%, with renewals completed at $16.71 per square foot,
for an increase of $1.01 per square foot, or 6.4%.
In-place net rental rates
Average in-place and committed net rents across our comparative portfolio at December 31, 2016 was $19.21 per square foot,
down from $19.32 per square foot at September 30, 2016, reflecting decreases in average in-place and committed net rents
mainly in the Alberta region, offset by increases in the Eastern Canada region, with the rest of the regions remaining relatively
flat. As compared to last year, average in-place and committed net rents across our portfolio increased from $19.12 per square
foot at December 31, 2015 to $19.21 at December 31, 2016, reflecting rent uplifts in all regions except for the Alberta region.
Market rents represent base rents only and do not include the impact of lease incentives. Market rents reflect management’s
best estimates with reference to recent leasing activity and external market data, which do not take into account allowance
for increases in the future years. Market rents are subject to change depending on the market conditions at a particular point
in time. In particular, the market rents in Alberta as presented in the table below are based on the best available information
as at the respective periods and may vary significantly from period-to-period given the changing economic conditions in that
particular region.
We believe estimated market rents for our in-place and committed space are approximately 2.8% lower than our comparative
portfolio average. Excluding the Alberta region, estimated market rents for our comparative portfolio in-place and committed
space are approximately 3.0% higher than our remaining comparative portfolio average.
December 31, 2016(1)
Market rent/
September 30, 2016(2)
Market rent/
Average
in-place and
committed
net rent
(per sq. ft.)
Market
rent(3)
(per sq. ft.)
21.25 $
19.88
24.47
14.12
13.57
19.21 $
22.12
14.24
25.39
14.04
14.05
18.67
average
in-place and
committed
net rent
(%)
4.1 $
(28.4 )
3.8
(0.6 )
3.5
(2.8 ) $
Average
in-place and
committed
net rent
(per sq. ft.)
Market
rent(3)
(per sq. ft.)
21.22 $
20.71
24.42
14.14
13.45
19.32 $
22.09
14.24
25.40
14.03
14.06
18.67
in-place and
committed
net rent
(%)
4.1 $
(31.2 )
4.0
(0.8 )
4.5
(3.4 ) $
average
Average
in-place and
committed
net rent
(per sq. ft.)
21.13 $
20.35
23.97
14.07
13.51
19.12 $
(per sq. ft.)
Market
rent(3)
December 31, 2015(2)
Market rent/
average
in-place and
committed
net rent
(%)
8.9
(4.0 )
8.3
1.6
5.5
4.6
23.02
19.54
25.97
14.29
14.25
20.00
Comparative portfolio
B.C./Saskatchewan/N.W.T. $
Alberta
Toronto – downtown
Toronto – suburban
Eastern Canada
Total
$
(1) Includes investment in joint ventures and excludes properties held for sale and a redevelopment property at period-end.
(2) Comparative periods includes investment in joint ventures and excludes properties sold, properties held for sale and a redevelopment property at the end
of Q4 2016.
(3) Market rents include office and retail space.
Dream Office REIT 2016 Annual Report | 12
Market rent estimates for occupied and committed space across our comparative portfolio at December 31, 2016 remained
stable at $18.67 per square foot when compared to the prior quarter. When compared to the prior year comparative period,
market rent estimates for occupied and committed space decreased from $20.00 per square foot at December 31, 2015 to
$18.67 per square foot at December 31, 2016, due to declines in market rents across all regions, the most significant of which
related to the decrease in the Alberta region where market rents decreased by over $5.00 per square foot given the current
market and economic conditions in that region.
For the balance of our comparative portfolio, the spread between estimated market rents and average in-place and
committed net rents has tightened over the past year as we bring rents to market upon lease renewals.
Leasing and tenant profile
The average remaining lease term and other comparative portfolio information are detailed in the following table. The
comparative portfolio average remaining lease term at December 31, 2016 is 4.9 years, which remained stable when
compared to September 30, 2016 and December 31, 2015, largely reflecting the impact of renewals and new leases, offset by
expiring leases during the period.
Comparative portfolio
B.C./Saskatchewan/N.W.T.
Alberta
Toronto – downtown
Toronto – suburban
Eastern Canada
Total
December 31, 2016(1)
Average
tenant
size
(sq. ft.)
10,601
9,874
10,295
10,556
22,838
11,430
Average
remaining
lease term
(years)
3.6
4.0
5.8
3.9
6.2
4.9
September 30, 2016(2)
Average
tenant
size
(sq. ft.)
10,735
9,830
10,189
10,485
23,020
11,385
Average
remaining
lease term
(years)
3.7
4.1
5.7
3.9
6.4
5.0
December 31, 2015(2)
Average
tenant
size
(sq. ft.)
10,876
10,643
10,270
10,926
23,164
11,732
Average
remaining
lease term
(years)
3.7
3.5
5.5
4.0
6.5
4.8
(1) Includes investment in joint ventures and excludes properties held for sale and a redevelopment property at period-end.
(2) Comparative periods includes investment in joint ventures and excludes properties sold, properties held for sale and a redevelopment property at the end
of Q4 2016.
The following table details our lease maturity profile, net of committed occupancy, by geographic segment at December 31,
2016.
Lease maturity profile
(in thousands of square feet)
B.C./Saskatchewan/N.W.T.
Alberta
Toronto – downtown
Toronto – suburban
Eastern Canada
Total portfolio(1)
Total portfolio(1)(%)
Current
monthly/
short-term
tenancies
Vacancy
243
682
112
580
166
1,783
10.3 %
1
—
—
1
—
2
0.0 %
2017
151
481
418
501
94
1,645
9.6 %
2018
548
371
417
529
492
2,357
13.7 %
2019
221
461
400
244
57
1,383
8.0 %
2020
235
161
319
379
567
1,661
9.7 %
2021
319
424
773
402
51
1,969
11.4 %
2022+
457
871
2,546
973
1,586
6,433
37.3 %
Total
2,175
3,451
4,985
3,609
3,013
17,233
100.0 %
(1) Includes investment in joint ventures and excludes properties held for sale and a redevelopment property at the end of Q4 2016.
Our lease maturity profile, net of committed occupancy, remains staggered. Lease expiries, net of committed occupancy, as a
percentage of total GLA, between 2017 and 2021 range from approximately 8% to 14%.
Dream Office REIT 2016 Annual Report | 13
Expiring net rents
The following table details the expiring net rents, including committed, by geographic segment and by year, as at
December 31, 2016.
(per square foot)
B.C./Saskatchewan/N.W.T.
Alberta
Toronto – downtown
Toronto – suburban
Eastern Canada
Total portfolio(1)
2017
23.22 $
19.78
26.69
10.48
20.00
19.03 $
2018
18.37 $
22.27
24.39
18.56
17.53
19.91 $
2019
24.03 $
21.77
23.50
10.53
17.94
20.49 $
2020
21.00 $
18.21
24.57
15.79
14.69
18.07 $
2021
18.18 $
17.19
23.19
13.88
17.50
19.04 $
2022+
27.30
21.78
28.78
16.51
11.75
21.68
$
$
(1) Includes investment in joint ventures and excludes properties held for sale and a redevelopment property at the end of Q4 2016.
2017 full-year commitments as a percent of lease expiries
The following graph details our 2017 lease maturities that have been committed in each of the geographic segments,
excluding current monthly and short-term tenancies.
2017 TOTAL COMMITMENTS AS A PERCENT OF EXPIRIES BY REGION (GLA in thousands of square feet)
(As at December 31, 2016)
As at December 31, 2016, the Trust had lease commitments totalling approximately 1.7 million square feet or 51.0% of 2017
maturities.
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.
For the three months and year ended December 31, 2016, approximately $19.9 million and $57.4 million, respectively, of
initial direct leasing costs and lease incentives were attributable to leases that commenced during the periods, representing
an average cost of $5.73 per square foot per year leased and $4.26 per square foot per year leased, respectively. Average
initial direct leasing costs and lease incentives for Q4 2016 increased to $5.73 per square foot per year leased from $4.52 per
square foot per year leased for Q3 2016, mainly due to certain higher-quality tenants that took occupancy in one of our
Calgary properties totalling 83,500 square feet during the quarter with a weighted average lease term of over ten years.
Dream Office REIT 2016 Annual Report | 14
We expect leasing costs and lease incentives to remain elevated in light of the current competitive office leasing environment.
Performance indicators
Operating activities (comparative portfolio)(1)
Portfolio size (in thousands of sq. ft.)
Occupancy rate – including committed (period-end)
Number of lease deals committed during the period
Leases that commenced during the period (in thousands of sq. ft.)
Average lease term for leases that commenced during the period (years)
Initial direct leasing costs and lease incentives attributable to leases that commenced during
the period:
In thousands of dollars
Per square foot
Per square foot per year
Three months ended
December 31, 2016
Year ended
December 31, 2016
17,233
89.7 %
116
564
6.2
$
$
$
19,895
35.27
5.73
$
$
$
17,233
89.7 %
434
2,731
4.9
57,367
21.00
4.26
(1) Comparative portfolio Includes investment in joint ventures and excludes properties sold, properties held for sale and a redevelopment property at the
end of each period.
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 major banks and Canada’s prominent law firms, and small to medium-sized
businesses across Canada. With just over 1,850 tenants, our risk of exposure to any single large lease or tenant is mitigated.
The average size of our office tenants is approximately 11,000 square feet.
The stability and quality of our cash flow is further enhanced by the fact that rental revenue from our ten largest tenants,
which include both federal and provincial governments as well as other nationally and internationally recognizable high-
quality corporations and businesses, comprises approximately 30.7% of our total gross rental revenue.
The following table outlines the contributions of our ten largest tenants to our total gross rental revenue.
Tenant
Government of Canada
Bank of Nova Scotia
Government of Ontario
Bell Canada
State Street Trust Company
Aviva Canada Inc.
Newalta Corporation
Government of Saskatchewan
Loyalty Management
1
2
3
4
5
6
7
8
9
10 Government of British Columbia
Total
Gross rental Owned area
(thousands
of sq. ft.)
1,148
757
438
372
245
319
187
282
194
191
4,133
revenue
(%)
8.2
8.0
2.9
2.6
1.9
1.5
1.5
1.5
1.4
1.2
30.7
Owned area
(%)
6.7
4.4
2.5
2.2
1.4
1.9
1.1
1.6
1.1
1.1
24.0
Weighted average
remaining lease
Credit
term (years)
rating(1)
3.8
AAA/A-1+
7.5
A+/A-/A-1
3.7
A+/A-1+
1.0
BBB+
5.3 A-1+/AA-/A
0.7
A+
6.9
N/R
2.9
AA+/A-1+
0.7
N/R
3.7
AAA/A-1+
4.4
(1) Credit ratings are obtained from Standard & Poor’s and may reflect the parent’s or a guarantor’s credit rating.
N/R – not rated
Dream Office REIT 2016 Annual Report | 15
The following pie chart illustrates our tenant base by the North American Industry Classification System codes:
Dream Office REIT 2016 Annual Report | 16
OUR RESOURCES AND FINANCIAL CONDITION
Investment properties
As at December 31, 2016, the fair value of our comparative portfolio investment properties, which includes investment in joint
ventures and excludes redevelopment properties, properties sold and assets held for sale, was $4.9 billion (December 31,
2015 – $5.5 billion).
The fair value of our investment properties, including investment in joint ventures, is set out below:
B.C./Saskatchewan/N.W.T.
Alberta
Toronto – downtown
Toronto – suburban
Eastern Canada
Total comparative portfolio
Add:
Redevelopment property
Assets classified as held for sale/sold properties
Total portfolio
Less:
Investment in joint ventures
Wholly owned/co-owned properties classified as assets held for sale
Total per consolidated financial statements
December 31,
2016
644,552 $
562,206
2,289,463
768,559
630,575
4,895,355
September 30,
2016(1)
660,955 $
573,546
2,277,536
788,885
638,305
4,939,227
1,000
321,232
5,217,587 $
10,000
543,017
5,492,244 $
60,000
321,232
4,836,355 $
72,373
55,885
5,363,986 $
$
$
$
Total portfolio
December 31,
2015(1)
702,294
1,018,032
2,294,136
790,442
660,574
5,465,478
10,000
1,571,968
7,047,446
1,103,603
44,712
5,899,131
(1) Comparative periods have been reclassified to exclude assets held for sale and properties sold in the current period.
The fair value of our total portfolio decreased by approximately $274.7 million during the quarter, mainly due to
$170.1 million relating to dispositions and $136.1 million relating to fair value losses, offset by $34.3 million of building
improvements and initial direct leasing costs and lease incentive additions.
Valuations of externally appraised properties
For the year ended December 31, 2016, the Trust valued 46 investment properties by qualified external valuation
professionals, including investment in joint ventures, with an aggregate fair value of $2.0 billion (for the year ended
December 31, 2015 – 59 investment properties with an aggregate fair value of $3.0 billion).
Assumptions in the valuation of investment properties (excluding Alberta)
As at December 31, 2016, the Trust’s total portfolio, excluding investment properties in Alberta, was valued using the cap rate
method. The critical valuation metrics as at December 31, 2016, September 30, 2016 and December 31, 2015 are set out in
the table below by region as follows:
December 31, 2016
Weighted
average (%)(2)
6.55
5.25
6.40
6.10
Range (%)(2)
5.25–8.25
4.90–6.00
5.75–7.50
5.50–8.00
September 30, 2016(1)
Weighted
average (%)(2)
6.57
5.24
6.41
6.12
Range (%)(2)
5.25–8.25
4.90–6.00
5.75–7.50
5.50–8.00
Capitalization rates
Total portfolio
December 31, 2015(1)
Weighted
average (%)
6.52
5.14
6.45
6.10
Range (%)
5.75–8.25
4.65–6.00
5.75–7.50
5.50–7.75
4.90–8.25
5.74
4.90–8.25
5.76
4.65–8.25
5.73
B.C./Saskatchewan/N.W.T.
Toronto – downtown
Toronto – suburban
Eastern Canada
Total comparative portfolio
(excluding Alberta)
(1) Comparative periods have been reclassified to exclude assets held for sale and sold properties during the period.
(2) Excludes certain properties where bids were received by the Trust.
Dream Office REIT 2016 Annual Report | 17
For the three months ended December 31, 2016, the Trust recorded a fair value loss in our total portfolio, excluding
investment properties in Alberta, of $85.1 million. For the year ended December 31, 2016, the Trust recorded a fair value loss
in our total portfolio, excluding investment properties in Alberta, of $226.1 million. The fair value losses were for the most part
due to changes in market rental rates and leasing cost assumptions and an increase in cap rates on select properties in
certain regions.
Assumptions in the valuation of investment properties in Alberta
Since July of 2014, the oil and gas industry has been beset by significant financial deterioration. Throughout 2016, economic
conditions have remained the same or deteriorated. The combination of vacancy rates increasing to over 20%, reduced
number of office workers and increased supply of new office buildings indicates that the recovery of demand for office space
and increase in occupancy rates and rental rates may be delayed. As at December 31, 2016, the Trust continues to note a
prolonged deterioration in leasing volume as well as key operating metrics such as market rents, leasing costs and vacancy
rates relative to the Trust’s expectations over the past year. These observations are consistent with external market data
points as at December 31, 2016. Based on the ongoing challenges in the Alberta office sector, the Trust continued to
revisit all assumptions used in the discounted cash flow model in valuing the Alberta investment properties to reflect the
continued slump. The critical valuation metrics as at December 31, 2016, September 30, 2016 and December 31, 2015 are set
out below:
Discount rates (%)
Terminal cap rates (%)
Market rents(3)
December 31, 2016(1)
Weighted
average(2)
Range(2)
7.50–8.75
6.63–8.25
$ 11.00–16.50 $
7.99
7.34
14.53
Range(2)
7.50–8.75
September 30, 2016(1)
Weighted
average(2)
8.13
7.51
13.86
6.63–8.50
$ 11.00–16.50 $
December 31, 2015(1)
Weighted
average
Range
7.00–8.25
6.25–7.75
$ 14.00–24.00 $
7.56
6.93
18.38
(1) Includes investment in joint ventures and excludes properties held for sale at the end of each period.
(2) Excludes certain properties where bids were received by the Trust.
(3) Market rents represent year one rates in the discounted cash flow model. Market rents include office space only and exclude retail space.
In addition to the assumptions noted above, the Trust has also updated its assumptions for leasing costs and vacancy rates
throughout the year. In particular, the leasing cost assumptions for new and renewed leasing were within the range of $25 and
$60 per square foot, with vacancy rate assumptions in years one to four remaining unchanged relative to the prior quarter at a
range of 15% and 20%, and returning to normalized vacancy rates of 5% beyond year four.
For the three months ended December 31, 2016, the Trust recorded a fair value loss in our Alberta investment properties,
including investment properties in joint ventures, of $51.0 million mainly as a result of bids received on certain properties.
These bids may not reflect the final price the Trust may obtain in connection with a potential sale of any of such properties.
Accordingly, these adjustments were applied to the properties impacted while the rest of the Alberta portfolio values
remained relatively flat when compared to the prior quarter as there were no significant changes to the underlying critical and
key assumptions used in the discounted cash flow model. For the year ended December 31, 2016, the Trust recorded a fair
value loss in the Alberta investment properties, including investment properties in joint ventures, of $845.7 million, mainly as
a result of the changes made to the critical and key assumptions used in the discounted cash flow model in Q2 2016.
Outlook on valuations of investment properties in Alberta
Given the prominence of the oil and gas industry in Alberta, the office market in that province continues to be significantly
impacted by the price of oil. A continuation of these market and economic conditions, including any substantial decline or
prolonged weakness in the price of oil, could adversely affect the Trust’s occupancy, its operating results and its investment
property values as they relate to the properties in our Alberta portfolio.
The Trust expects that the fair value of our Alberta investment properties will remain challenging to value for the foreseeable
future and there can be no assurance that the fair value will not decrease further. Until there is positive visibility on oil prices
and related economic fundamentals, the Trust anticipates continued challenges for its assets located in Alberta and will
continuously evaluate the economic health of the markets in which we operate to ensure that we have identified and, where
possible, mitigated, risks to the Trust, including the potential impacts of changes in the price of oil.
Dream Office REIT 2016 Annual Report | 18
The fair value of the Trust’s investment properties as at December 31, 2016, as reflected in the Trust’s consolidated financial
statements represents the Trust’s best estimate based on the available information both internally and externally as at the end
of the reporting period and is subject to many factors outside of the Trust’s control. If there are any changes in the
assumptions used in valuing the investment properties, or regional, national or international economic conditions, the fair
value of investment properties may change materially. The fair value of such properties as reflected in the Trust’s consolidated
financial statements, particularly with respect to properties in the Trust’s Alberta portfolio, may not reflect the actual price
that may be obtained by the Trust in connection with a sale of any such properties.
Below are some internal and external market factors that may cause the fair value of investment properties in Alberta to
change materially:
• Changes in economic indicators in Alberta and/or Canada, including but not limited to gross domestic product,
employment and unemployment rates, construction volumes, leasing volumes, market rents, leasing costs, vacancy rates,
interest rates, foreign exchange rates, performance and/or sentiments of the stock market and commercial real estate;
• New market information or forecast from brokerage firms, financial and/or government institutions;
• Changes in operating costs, leasing costs and capital maintenance requirements;
• Changes in the operational performance and leasing in our investment properties or comparable assets in Alberta;
• Ability to obtain financing for commercial office properties in Alberta;
• New transactions in Calgary or Edmonton which include office properties that are comparable to our portfolio in 2017
would provide new data points and benchmarks on the fair value of our investment properties and on various metrics
such as price per square foot and cap rates; and
• Unsolicited or solicited offers for any of our investment properties in Alberta.
For the three months and year ended December 31, 2016, approximately 17% and 18%, respectively, of our comparative
properties NOI was generated from Alberta with a period-end in-place and committed occupancy rate of 80.2%. We had
45 properties in Alberta as at December 31, 2016 with 540 tenants and an average tenant size of approximately 9,445 square
feet. As at February 23, 2017, we have 32 properties in Alberta with 357 tenants and an average tenant size of approximately
10,870 square feet.
Dream Office REIT 2016 Annual Report | 19
Changes in the value of our investment properties by region for the three months ended December 31, 2016 are summarized
in the table below as follows:
Three months ended
Building
improvement,
initial direct
leasing costs
and lease
incentives
1,101 $
7,029
8,533
8,023
4,744
29,430
Amortization of
lease incentives,
foreign exchange
and other
adjustments
(504 ) $
(769 )
994
(1,049 )
2,126
798
Fair value
adjustments
(17,000 ) $
(17,600 )
2,400
(27,300 )
(14,600 )
(74,100 )
December 31,
2016
644,552
562,206
2,289,463
768,559
630,575
4,895,355
—
(9,000 )
—
1,000
$
September 30,
2016(1)
660,955 $
573,546
2,277,536
788,885
638,305
4,939,227
10,000
Assets held
for sale/sold
properties
— $
—
—
—
—
—
—
543,017
$ 5,492,244 $
(170,052 )
(170,052 ) $
4,821
34,251 $
(53,000 )
(136,100 ) $
(3,554 )
(2,756 ) $
321,232
5,217,587
72,373
—
350
(12,900 )
55,885
265,600
70
300
177
(623 )
60,000
321,232
B.C./Saskatchewan/N.W.T.
Alberta
Toronto – downtown
Toronto – suburban
Eastern Canada
Total comparative portfolio
Add:
Redevelopment property
Assets classified as held for
sale/sold properties
Total portfolio
Less:
Investment in joint ventures
Wholly owned/co-owned properties
classified as assets held for sale
Total amounts included in
consolidated financial statements
$ 5,363,986
$
(435,652 ) $
33,831
$
(123,500 ) $
(2,310 ) $
4,836,355
(1) Opening balances have been reclassified to exclude assets held for sale and sold properties during the period.
Dream Office REIT 2016 Annual Report | 20
Changes in the value of our investment properties by region for the year ended December 31, 2016 are summarized in the
table below as follows:
Building
improvement,
initial direct
leasing costs
and lease
incentives
Assets held
for sale/sold
properties
— $
—
—
—
—
—
7,037 $
25,225
36,943
17,860
13,816
100,881
Amortization of
lease incentives,
foreign exchange
and other
adjustments
(1,779 ) $
(3,451 )
2,684
(2,343 )
(5,015 )
(9,904 )
Fair value
adjustments
(63,000 ) $
(477,600 )
(44,300 )
(37,400 )
(38,800 )
(661,100 )
Year ended
December 31,
2016
644,552
562,206
2,289,463
768,559
630,575
4,895,355
January 1,
2016(1)
702,294 $
$
1,018,032
2,294,136
790,442
660,574
5,465,478
10,000
—
—
(9,000 )
—
1,000
1,571,968
$ 7,047,446 $
(867,241 )
(867,241 ) $
27,876
128,757 $ (1,071,800 ) $
(401,700 )
(9,671 )
(19,575 ) $
321,232
5,217,587
B.C./Saskatchewan/N.W.T.
Alberta
Toronto – downtown
Toronto – suburban
Eastern Canada
Total comparative portfolio
Add:
Redevelopment property
Assets classified as held for
sale/sold properties
Total portfolio
Less:
Investment in joint ventures
Wholly owned properties classified as
assets held for sale
Total amounts included in
1,103,603
(221,235 )
15,606
(172,700 )
(665,274 )(2)
60,000
44,712
276,798
799
(300 )
(777 )
321,232
consolidated financial statements
$ 5,899,131
$
(922,804 ) $
112,352
$
(898,800 ) $
646,476
$
4,836,355
(1) Opening balances have been reclassified to exclude assets held for sale and sold properties during the period.
(2) On June 30, 2016, the Trust derecognized its investment in the joint ventures of Scotia Plaza and 100 Yonge Street and recognized the Trust’s remaining
50% interest in the investment properties totalling $663,705 as a joint operation.
Building improvements
Building improvements represent investments made to our investment properties to ensure optimal building performance, to
improve the experience and attractiveness to our tenants, as well as to reduce operating costs. In order to retain desirable
rentable space and to generate adequate revenue over the long term, we must maintain or, in some cases, improve each
property’s condition to meet market demand.
As part of our broader strategy to invest capital in our buildings to improve the experience and attractiveness to tenants as
well as to reduce operating costs, we expect overall building improvements to remain elevated. By doing so, our tenants will
have a better experience at our buildings, leading to improved tenant retention, quicker leasing of available space and
realization of higher rental rates.
Dream Office REIT 2016 Annual Report | 21
The table below summarizes the building improvements incurred for the three months and years ended December 31, 2016
and December 31, 2015.
Building improvements
Recoverable
Non-recoverable
Scotia Plaza
Total comparative portfolio(1)
Assets classified as held for sale /sold properties
Total portfolio
Less:
Investment in joint ventures
Wholly owned/co-owned properties classified as assets
held for sale
Total amounts included in consolidated financial statements
$
(1) Excludes assets held for sale and sold properties during the period.
Three months ended December 31,
2015
2016
Year ended December 31,
2016
2015
$
$
8,720 $
503
2,877
12,100
1,124
13,224 $
17,987 $
2,025
8,499
28,511
1,659
30,170 $
24,738 $
3,703
13,714
42,155
5,967
48,122 $
47,209
4,077
18,045
69,331
4,965
74,296
—
5,429
9,901
22,359
—
13,224 $
—
24,741 $
128
38,093 $
—
51,937
For the three months and year ended December 31, 2016, we incurred $13.2 million and $48.1 million in expenditures,
respectively, related to building improvements, the majority of which are recoverable from tenants under current terms of the
leases.
Recoverable building improvements for the three months and year ended December 31, 2016 were $8.7 million and
$24.7 million, respectively, and included safety enhancements, roof, heating, ventilation, air conditioning replacements,
parking upgrades, elevator modernization, recoverable lobby and common area upgrades, and exterior enhancements.
For the three months and year ended December 31, 2016, non-recoverable building improvements were $0.5 million and
$3.7 million, respectively, which include costs for parkade and curtain wall restoration.
The Trust is investing a significant amount of capital in Scotia Plaza, the Trust’s largest and most iconic asset in our Toronto
downtown portfolio. The capital will be allocated across three major property enhancements: elevator modernization,
common area revitalization and Leadership in Energy and Environmental Design (“LEED”) recertification. All of these
investments are targeted towards a superior tenant experience. For the three months and year ended December 31, 2016,
approximately $2.9 million and $13.7 million, respectively, of our building improvement expenditures pertained to Scotia Plaza
and accounted for approximately 21.8% and 28.5%, respectively, of the total building improvements incurred over those
respective periods. Of the $2.9 million and $13.7 million total building improvements incurred during the periods related to
Scotia Plaza, approximately $2.0 million and $5.9 million, respectively, are recoverable from tenants under current terms of
the leases.
Dream Office REIT 2016 Annual Report | 22
Dispositions
As part of our Strategic Plan, we initially identified approximately $2.6 billion of high-quality Private Market Assets primarily
located in the Greater Toronto Area, Ottawa and Vancouver, which we believed were liquid, but not irreplaceable to the Trust.
We set a three-year disposition target of $1.2 billion from the assets identified as Private Market Assets. We completed the
following dispositions mainly from our Private Market Assets for the year ended December 31, 2016:
Asset Ownership
(%)
bucket
Disposed
share of GLA
(000s sq. ft.)
Sales
price(1)
2450 Girouard Street West & 455 Saint Joseph Avenue
(Intact Tower), Saint-Hyacinthe
8550 Newman Boulevard, Montréal
1305 Chemin Sainte-Foy, Québec City
1 Riverside Drive, Windsor
Total dispositions to March 31, 2016
2010 Winston Park Drive, Oakville
4259–4299 Canada Way, Burnaby
960 Quayside Drive, New Westminster
625 Cochrane Drive and Valleywood Corporate Centre,
Markham
30 Eglinton Ave. West, Mississauga
887 Great Northern Way, Vancouver
Scotia Plaza and 100 Yonge Street, Toronto
Total dispositions to June 30, 2016
100 Gough Road, Markham
Suburban Ottawa & Gatineau Portfolio(2)
Seven Capella Court, Ottawa
4370 & 4400 Dominion Street, Burnaby
Total dispositions to September 30, 2016
2665 Renfrew Street, Vancouver
Kitchener Portfolio(3)
Total dispositions to December 31, 2016
Total dispositions for the year ended December 31, 2016
Braithwaite Boyle Centre, Calgary
10 Lower Spadina Avenue, Toronto
49 Ontario Street, Toronto
Calgary Portfolio(4)
Total dispositions to February 23, 2017
Total dispositions from January 1, 2016 to February 23, 2017
Private Market
Private Market
Private Market
Private Market
Private Market
Private Market
Private Market
Private Market
Private Market
Private Market
Core
Private Market
Private Market
Private Market
Private Market
Private Market
Value-Add/
Private Market
Value-Add
Private Market
Private Market
Value-Add/
Private Market
100%
100%
100%
100%
40%
100%
100%
100%
100%
100%
17%
100%
100%
100%
100%
100%
100%
100%
40%
40%
100%
232
66
37
236
571 $
32
120
62
318
165
164
371
1,232 $
112
392
32
157
693 $
82
985
1,067 $
3,563 $
55
24
35
81,501
471,030
146,350
171,273
870,154
1,505
1,619 $
228,330
5,182 $ 1,098,484
Date disposed
February 26, 2016
March 1, 2016
March 1, 2016
March 10, 2016
April 1, 2016
April 27, 2016
April 29, 2016
May 2, 2016
May 18, 2016
June 10, 2016
June 30, 2016
July 25, 2016
July 29, 2016
August 2, 2016
September 16, 2016
November 16, 2016
December 29, 2016
January 9, 2017
January 11, 2017
January 11, 2017
January 31, 2017
(1) Sales price reflects gross proceeds net of adjustments and before transaction costs.
(2) Includes four properties in suburban Ottawa and Gatineau: 2625 Queensview Drive, Gateway Business Park, 1125 Innovation Drive and 22 Varennes
Street.
(3) Includes seven properties in Kitchener: Market Square, 101 Frederick Street (Galleria), 50 Queen Street North, 55 King Street West, 235 King Street East,
22 Frederick Street and 70 King Street East.
(4) Includes 12 properties in Calgary: Atrium I, Atrium II, Roslyn Building, 435-4th Avenue SW, Mount Royal Place, 1035-7th Avenue SW, 840-7th Avenue,
McFarlane Tower, Dominion Centre, 510-5th Street SW, Northland Building and 441-5th Avenue.
Dream Office REIT 2016 Annual Report | 23
On June 30, 2016, four limited partnerships jointly controlled by the Trust and H&R Real Estate Investment Trust (“H&R REIT”)
completed the sale of a 50% undivided interest in each of Scotia Plaza and 100 Yonge Street to KingSett Canadian Real Estate
Income Fund LP (“KingSett”) and Alberta Investment Management Corporation (“AIMCo”) for gross proceeds net of
adjustments of $663.7 million. The Trust’s share of the sale represented one-third of the 50%, or 16.7%, for gross proceeds net
of adjustments of $221.2 million. On June 30, 2016, a portion of the net proceeds totalling approximately $49.5 million was
used to pay down drawings on our credit facilities with the balance of the proceeds totalling $64.0 million used to further pay
down debt immediately after Q2 2016. The Trust’s share of the transaction costs related to the sale, including debt settlement
costs, totalled $4.4 million and were included within the share of net loss from investment in joint ventures in the
consolidated statements of comprehensive income (loss) during Q2 2016.
Concurrently on June 30, 2016, the Trust terminated the joint venture agreement with H&R REIT and entered into a co-
ownership agreement with KingSett and AIMCo. As a result of this change, the Trust derecognized its investment in joint
ventures of Scotia Plaza and 100 Yonge Street at its combined carrying amount of $329.1 million and recognized the Trust’s
remaining 50% interest in the assets and liabilities amounting to $664.1 million and $345.3 million, respectively, of Scotia Plaza
and 100 Yonge Street on a combined basis, in the consolidated balance sheet. This resulted in the Trust recognizing a loss of
$10.3 million in the consolidated statement of net income related to the initial recognition at fair value of the Trust’s
remaining 50% share of the debt compared to the carrying values of the joint ventures. The newly formed co-ownership
entered into a property management agreement with a wholly owned subsidiary of the Trust to provide property
management services to Scotia Plaza and 100 Yonge Street.
We completed the following dispositions for the year ended December 31, 2015:
Capital Centre, Edmonton(2)
8100 Granville Avenue, Vancouver
2200–2204 Walkley Road, Ottawa
Québec City Portfolio(3)
Total dispositions to December 31, 2015
Ownership
(%)
25 %
100 %
100 %
100 %
Disposed
share of GLA
(000s sq. ft.)
16
95
159
634
904 $
Sales
price(1)
154,131
Date disposed
March 12, 2015
July 15, 2015
August 27, 2015
October 30, 2015
(1) Sales price reflects gross proceeds net of adjustments and before transaction costs.
(2) The Trust held a 25% interest in the property through a partnership interest and accounted for this as an investment in joint venture.
(3) Includes four properties in Québec City: 900 Place D'Youville, 580 Rue Grand Allée, 200 Chemin Sainte-Foy and 141 Saint-Jean Street.
On April 30, 2015, a parcel of land at 60 Columbia Way, Markham, was expropriated by the City of Markham to build a
highway off-ramp for total gross proceeds of $2.7 million. The gross proceeds represented fair market value. In addition to the
gross proceeds, the Trust recorded a one-time compensation income of $0.6 million for the expropriation of the parcel of land.
Investment in Dream Industrial REIT
Dream Industrial REIT is an unincorporated, open-ended real estate investment trust listed on the Toronto Stock Exchange
under the symbol “DIR.UN”. Dream Industrial REIT owns a portfolio of 213 primarily light industrial properties comprising
approximately 16.2 million square feet of gross leasable area.
During the fourth quarter of 2016, the Trust purchased 747,190 Dream Industrial REIT Units for a total cost of $5.9 million.
These units purchased were enrolled in Dream Industrial REIT’s distribution reinvestment plan effective for the December
2016 distribution. In addition, the Trust enrolled its 18,551,855 Dream Industrial LP Class B limited partnership units into
Dream Industrial REIT’s distribution reinvestment plan effective for the November 2016 distribution and elected to reinvest
the distributions received in Dream Industrial REIT Units. For the year ended December 31, 2016, the Trust purchased Dream
Industrial REIT Units through its distribution reinvestment plan totalling 135,283 Dream Industrial REIT Units for a total cost of
$1.1 million (December 31, 2015 – $nil).
Dream Office REIT 2016 Annual Report | 24
As at December 31, 2016 and December 31, 2015, the Trust’s ownership of Dream Industrial REIT Units was 24.9% and 24.0%,
respectively. The net change in the Trust’s ownership was as a result of the Trust’s purchase of Dream Industrial REIT Units
during 2016 and as part of Dream Industrial REIT’s issuance of additional units through Dream Industrial REIT’s distribution
reinvestment plan, deferred unit incentive plan, and unit purchase plan during the years ended December 31, 2016 and
December 31, 2015.
Balance as at beginning of year
Dream Industrial REIT units purchased during the year
Dream Industrial REIT units purchased through distribution reinvestment plan
Distributions received on LP Class B limited partnership units
Distributions received on Dream Industrial REIT Units
Share of net income from investment in Dream Industrial REIT
Accretion loss
Balance as at end of year
Dream Industrial REIT Units held, end of year
Dream Industrial LP Class B limited partnership units held, end of year
Total Dream Industrial REIT Units and Dream Dream Industrial LP Class B limited partnership
units held, end of year
Ownership %, end of year
$
$
Year ended
December 31,
2016
184,817 $
5,851
1,115
(13,050 )
(65 )
8,467
(381 )
186,754 $
882,473
18,551,855
Year ended
December 31,
2015
191,691
—
—
(12,986 )
—
6,112
—
184,817
—
18,551,855
19,434,328
24.9 %
18,551,855
24.0 %
The carrying value of the Trust’s interest in Dream Industrial REIT as at December 31, 2016 was $186.8 million (December 31,
2015 – $184.8 million). The fair value of the Trust’s interest in Dream Industrial REIT of $165.8 million (December 31, 2015 –
$133.2 million) was determined using the Dream Industrial REIT closing unit price of $8.53 per unit at year-end multiplied by
the number of units held by the Trust as at December 31, 2016.
Pursuant to the reorganization of the Trust’s management structure on April 2, 2015, the Trust has granted DAM, a subsidiary
of Dream Unlimited Corp., a right of first offer to purchase up to 18,551,855 Dream Industrial LP Class B limited partnership
units, in the event the Trust sells its interest in Dream Industrial REIT.
Dream Office REIT 2016 Annual Report | 25
OUR FINANCING
Our discussion of financing activities is based on the debt balance, which includes debt related to investments in joint
ventures that are equity accounted, at our proportionate ownership, and debt associated with assets held for sale. Where
applicable, a reconciliation to our consolidated financial statements has been included in the tables in this section.
Liquidity and capital resources
Dream Office REIT’s primary sources of capital are cash generated from operating activities, credit facilities, mortgage
financing and refinancing, and equity and debt issuances. 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 and interest payments. We expect to meet all of our ongoing obligations with current cash and cash equivalents,
cash flows generated from operations, credit facilities, conventional mortgage refinancing and, as growth requires and when
appropriate, new equity or debt issuances.
In our consolidated financial statements for the year ended December 31, 2016, our current liabilities exceeded our current
assets by $218.7 million. Typically, real estate entities seek to address liquidity needs by having a balanced debt maturity
schedule, undrawn credit facilities and a pool of unencumbered assets. We are able to use our credit facilities on short notice,
which eliminates the need to hold significant amounts of cash and cash equivalents on hand. Working capital balances can
fluctuate significantly from period-to-period depending on the timing of receipts and payments. Debt obligations that are due
within one year include debt maturities of $328.3 million (excluding debt related to investment in joint ventures, which are
equity accounted), which we typically refinance with our undrawn demand credit facilities and mortgages of terms between
five and ten years. Amounts payable and accrued liabilities balances outstanding at the end of any reporting period depend
primarily on the timing of leasing costs, capital expenditures incurred, as well as the impact of transaction costs incurred on
dispositions completed during the reporting period. Our available liquidity is $622.7 million as at December 31, 2016,
consisting of undrawn demand revolving credit facilities totalling $613.5 million and $9.2 million of cash and cash equivalents
on hand.
We endeavour to maintain high levels of liquidity to ensure that we can meet distribution requirements and react quickly to
potential investment opportunities.
Debt
Less debt related to:
Investment in joint ventures(1)
Assets held for sale
Debt (amounts included in consolidated financial statements)
December 31,
2016
September 30,
2016
$
2,898,901 $
2,898,800 $
December 31,
2015
3,520,486
39,883
209,228
2,649,790 $
39,854
2,281
2,856,665 $
485,493
24,245
3,010,748
$
(1) On June 30, 2016, the Trust derecognized its investment in the joint ventures of Scotia Plaza and 100 Yonge Street and recognized the Trust’s remaining
50% interest in the debt of these investment properties in its joint operations.
Dream Office REIT 2016 Annual Report | 26
A summary of debt
The key performance indicators in the management of our debt are as follows:
Financing and liquidity metrics
Weighted average effective interest rate (period-end)(1)
Weighted average face rate of interest (period-end)(2)
Interest coverage ratio (times)(3)
Net average debt-to-EBITDFV (years)(3)
Net debt-to-adjusted EBITDFV (years)(3)
Level of debt (net total debt-to-gross book value)(3)
Level of debt (net secured debt-to-gross book value)(3)
Secured debt to total investment properties(4)
Debt – average term to maturity (years)
Variable rate debt as percentage of total debt
Unsecured convertible and non-convertible debentures
Unencumbered assets(5)
Cash and cash equivalents on hand(6)
Undrawn demand revolving credit facilities
December 31,
2016
September 30,
2016
December 31,
2015
3.82 %
3.84 %
3.0
7.3
7.7
52.3 %
44.2 %
47.0 %
3.8
13.0 %
448,828 $
244,000 $
9,211 $
613,514 $
3.84 %
3.89 %
3.0
7.4
7.3
50.4 %
42.6 %
44.6 %
3.8
11.6 %
448,623 $
285,000 $
19,780 $
677,701 $
4.11 %
4.05 %
2.9
7.7
7.7
48.3 %
41.0 %
42.6 %
3.8
7.6 %
534,097
825,000
12,433
186,495
$
$
$
$
(1) Weighted average effective interest rate is calculated as the weighted average face rate of interest on balance, net of amortization of fair value
adjustments and financing costs of all interest bearing debt, including debt related to investment in joint ventures, which are equity accounted.
(2) Weighted average face interest rate is calculated as the weighted average face rate of all interest bearing debt on balance, including debt related to
investment in joint ventures that are equity accounted.
(3) The calculation of the following non-GAAP measures – interest coverage ratio, net average debt-to-EBITDFV, net debt-to-adjusted EBITDFV and levels of
debt – are included in the “Non-GAAP measures and other disclosures” section of the MD&A.
(4) Secured debt to total investment properties (non-GAAP measure) is calculated as total debt secured by investment properties related to wholly owned
and co-owned properties and investment in joint ventures that are equity accounted, divided by total investment properties. Management believes this
non-GAAP measurement is an important measure of our secured debt levels.
(5) Unencumbered assets (non-GAAP measure) includes unencumbered investment properties related to wholly owned and co-owned properties and
investment in joint ventures that are equity accounted. Management believes this non-GAAP measurement is an important measure of our
unencumbered pool of assets available for liquidity purposes.
(6) Cash and cash equivalents on hand (non-GAAP measure) includes cash and cash equivalents related to investment in joint ventures that are equity
accounted.
We ended the year with a net debt-to-gross book value ratio of 52.3%, net debt-to-adjusted EBITDFV of 7.7 years, and interest
coverage ratio of 3.0 times. The increase quarter-over-quarter on the aforementioned leverage metrics was mainly due to the
VTB Mortgage received as partial consideration for the Kitchener Portfolio sale on December 29, 2016 and fair value
adjustments on investment properties in the quarter, along with REIT A Units purchased for cancellation under the NCIB.
Financing activities during the quarter
The following table details the total mortgages renewed, refinanced and discharged during the three months and year ended
December 31, 2016:
Three months ended December 31, 2016
Year ended December 31, 2016
Financing activities
Amount
New term (years)
Weighted average face interest rate(1)
$
Mortgages renewed
or refinanced Mortgages discharged
74,000 $
10.0
3.09 %
(99,589 ) $
n/a
3.93 %
Mortgages renewed
231,434 $
or refinanced Mortgages discharged
(646,859 )
n/a
4.28 %
7.2
2.99 %
(1) Weighted average face interest rate is calculated as the weighted average face rate of all interest bearing debt on balance, including debt related to
investment in joint ventures that are equity accounted.
Dream Office REIT 2016 Annual Report | 27
During the quarter, the Trust discharged maturing mortgages and mortgages associated with disposed properties totalling
approximately $99.6 million with an average face rate of 3.93% per annum. In addition, the Trust renewed or refinanced
mortgages totalling $74.0 million at an average face rate of 3.09% per annum with an average term of 10.0 years. Over the
year ended December 31, 2016, the Trust discharged maturing mortgages and mortgages associated with disposed properties
totalling approximately $646.9 million with an average face rate of 4.28% per annum. In addition, the Trust renewed or
refinanced mortgages during the year ended December 31, 2016 totalling $231.4 million at an average face rate of 2.99% per
annum with an average term of 7.2 years.
Composition of debt
As at December 31, 2016, variable rate debt as a percentage of total debt increased to 13.0% from 7.6% as at December 31,
2015, mainly due to discharge of fixed rate debt associated with disposed properties and repayment of the term loan facility,
Series H Debentures, Series K Debentures and Series L Debentures with our $800 million Facility. When compared to the prior
quarter, variable rate debt as a percentage of total debt increased from 11.6% to 13.0%, primarily due to higher drawings on
demand revolving facilities during the period.
Mortgages
Demand revolving credit facilities
Debentures
Term loan facility
Convertible debentures
Total
Less debt related to:
Investment in joint ventures
Assets held for sale
Debt (amounts included in
Fixed
2,198,450 $
—
323,829
—
—
2,522,279 $
$
$
December 31, 2016
Total(1)
2,276,283 $
173,790
448,828
Variable
77,833 $
173,790
124,999
—
—
376,622 $
—
—
2,898,901 $
Fixed
2,714,921 $
—
358,396
129,459
50,923
3,253,699 $
Variable
38,978 $
49,500
124,778
53,531
December 31, 2015
Total(1)
2,753,899
49,500
483,174
182,990
50,923
3,520,486
—
266,787 $
—
39,883
209,228
—
39,883
209,228
485,493
24,245
—
—
485,493
24,245
consolidated financial statements) $
2,313,051
$
336,739
$
2,649,790
$
2,743,961
$
266,787
$
Percentage of total debt(2)
In-place face rate (year-end)(2)
Average term to maturity (years)(2)
87.0 %
4.03 %
4.2
13.0 %
2.63 %
1.3
100.0 %
3.84 %
3.8
92.4 %
4.17 %
4.0
7.6 %
2.62 %
1.3
3,010,748
100.0 %
4.05 %
3.8
(1) Net of financing costs and fair value adjustments.
(2) Includes investment in joint ventures that are equity accounted and properties held for sale.
Demand revolving credit facilities
On March 1, 2016, the Trust entered into an $800 million Facility. The $800 million Facility bears interest at the bankers’
acceptances (“BA”) rate plus 1.70% and/or at the bank’s prime rate (2.70% as at December 31, 2016) plus 0.70%. As at
December 31, 2016, the $800 million Facility is secured by first-ranking mortgages on 22 properties and matures on March 1,
2019. The formula-based amount available under the $800 million Facility was $763.3 million less $178.0 million drawn and
less $16.5 million in the form of letters of credit as at December 31, 2016.
The amounts available and drawn under the demand revolving credit facilities as at December 31, 2016 and December 31,
2015 are as follows:
Formula-based maximum
not to exceed $800,000
Formula-based maximum
not to exceed $45,000
Maturity date
March 1, 2019
April 30, 2018
Interest rates on
drawings
BA + 1.70% or
Prime + 0.70%
BA + 2.00% or
Prime + 0.85%
Secured
investment
properties
Face
interest
rate
Borrowing
capacity
Drawings
Letters of
credit
Amount
available
December 31, 2016
22
2.61 % $ 763,333
$
(178,000 ) $
(16,461 ) $ 568,872
4
26
3.55 %
45,000
$ 808,333 $
—
(178,000 ) $
(358 )
44,642
(16,819 ) $ 613,514
Dream Office REIT 2016 Annual Report | 28
Formula-based maximum
not to exceed $171,500
Formula-based maximum
not to exceed $27,690
Formula-based maximum
not to exceed $15,000
Formula-based maximum
not to exceed $55,000
Maturity date
March 5, 2016
April 30, 2016
November 1, 2016
November 1, 2016
Interest rates on
drawings
BA + 1.75% or
Prime + 0.75%
BA + 1.85% or
Prime + 0.85%
BA + 1.70% or
Prime + 0.70%
BA + 1.70% or
Prime + 0.70%
Secured
investment
properties
Face
interest
rate
Borrowing
capacity
Drawings
Letters of
credit
Amount
available
December 31, 2015
8
2
2
2.62 % $ 171,500
$
(15,000 ) $
—
$ 156,500
3.55 %
27,690
—
(443 )
27,247
3.40 %
15,000
(14,500 )
(150 )
350
2
14
2.54 %
55,000
$ 269,190 $
(20,000 )
(49,500 ) $
(32,602 )
2,398
(33,195 ) $ 186,495
On March 1, 2016, the Trust’s $171,500 formula-based demand revolving credit facility was repaid in full and terminated.
On April 30, 2016, the Trust’s $27,690 formula-based demand revolving credit facility matured and was subsequently renewed
to April 30, 2018 with an increased formula-based credit limit of $45,000. The renewed facility bears interest at the BA rate
plus 2.00% and/or at the bank’s prime rate (2.70% as at December 31, 2016) plus 0.85%.
On September 30, 2016 and November 1, 2016, respectively, the Trust’s $55,000 and $15,000 formula-based demand
revolving credit facilities were repaid in full and terminated.
Continuity of debt
Changes in debt levels, including debt related to investment in joint ventures that are equity accounted and assets held for
sale for the three months and year ended December 31, 2016, are as follows:
Three months ended December 31, 2016
Demand
revolving
credit
Debt as at September 30, 2016
Borrowings
Principal repayments
Lump sum repayments
Financing costs additions
Lump sum repayment on property dispositions
Foreign exchange adjustments
Other adjustments(1)
Debt as at December 31, 2016
Less:
Debt related to investment in joint ventures
Debt related to assets held for sale
Debt (per consolidated financial statements)
Mortgages
facilities Debentures
Total
$ 2,318,092 $ 132,085 $ 448,623 $ 2,898,800
305,086
(16,874 )
(233,248 )
(480 )
(55,426 )
1,524
(481 )
$ 2,276,283 $ 173,790 $ 448,828 $ 2,898,901
231,086
—
(189,086 )
—
—
—
(295 )
74,000
(16,874 )
(44,162 )
(480 )
(55,426 )
1,524
(391 )
—
—
—
—
—
—
205
39,883
209,228
39,883
—
209,228
—
$ 2,027,172 $ 173,790 $ 448,828 $ 2,649,790
—
—
(1) Other adjustments includes amortization of financing costs and amortization of fair value adjustments.
Dream Office REIT 2016 Annual Report | 29
Mortgages
$ 2,753,899 $
231,434
(67,649 )
(317,809 )
(1,545 )
(133,916 )
(195,133 )
(2,064 )
9,066
Debt as at January 1, 2016
Borrowings
Principal repayments
Lump sum repayments
Financing costs additions
Lump sum repayment on property dispositions
Debt assumed by purchaser on disposal of
investment properties
Foreign exchange adjustments
Other adjustments(1)(2)
Debt as at December 31, 2016
Less:
Debt related to investment in joint ventures
Debt related to assets held for sale
Debt (per consolidated financial statements)
Year ended December 31, 2016
Debentures
Demand
revolving
credit
facilities
49,500 $ 483,174 $
930,309
—
(801,809 )
(5,710 )
—
—
—
(35,000 )
—
—
Convertible
debentures
Term loan
facility
Total
50,923 $ 182,990 $ 3,520,486
1,161,743
(67,649 )
(1,388,699 )
(7,255 )
(133,916 )
—
—
(183,453 )
—
—
—
—
(50,628 )
—
—
—
—
1,500
—
—
654
—
—
(295 )
(195,133 )
—
—
(2,064 )
11,388
463
— $ 2,898,901
$ 2,276,283 $ 173,790 $ 448,828 $
— $
39,883
209,228
—
—
—
—
$ 2,027,172 $ 173,790 $ 448,828 $
—
—
— $
39,883
—
209,228
—
— $ 2,649,790
(1) Other adjustments include amortization of financing costs and amortization of fair value adjustments.
(2) As a result of the recognition of debt related to joint operations, the Trust recognized $9,145 of fair value adjustments on June 30, 2016.
Our current debt profile is balanced with staggered maturities over the next 12 years. The following tables summarize our
debt maturity profile as at December 31, 2016:
Debt maturities
2017
2018
2019
2020
2021
2022–2028
Subtotal before undernoted items
Demand revolving credit facilities
(2019)
Scheduled principal repayments on
non-matured debt
Subtotal before undernoted items
Fair value adjustments
Financing costs
Subtotal before undernoted items
Less:
Debt related to investment in joint
ventures
Debt related to assets held for sale
Debt (per consolidated financial
statements)
Mortgages
Weighted
average
face
interest
rate
5.09 % $
3.96 %
3.33 %
3.60 %
4.72 %
3.89 %
4.03 % $
$
Outstanding
balance
due at
maturity
220,803
234,717
343,098
246,448
304,539
629,862
$ 1,979,467
Demand revolving
credit facilities
Weighted
average
face
interest
rate
— $
—
—
—
—
—
— $
Outstanding
balance
due at
maturity
—
—
—
—
—
—
—
Debentures
Weighted
average
face
interest
rate
2.60 % $
3.42 %
—
4.07 %
—
—
Outstanding
balance
due at
maturity
345,803
409,717
343,098
396,448
304,539
629,862
3.41 % $ 2,429,467
Total
Weighted
average
face
interest
rate
4.19 %
3.73 %
3.33 %
3.78 %
4.72 %
3.89 %
3.91 %
Outstanding
balance
due at
maturity
125,000
175,000
—
150,000
—
—
450,000
—
—
178,000
2.61 %
—
—
178,000
2.61 %
293,139
$ 2,272,606
11,087
(7,410 )
$ 2,276,283
—
4.02 % $
—
178,000
—
2.61 % $
—
450,000
—
293,139
3.41 % $ 2,900,606
—
3.84 %
—
(4,210 )
—
(1,172 )
11,087
(12,792 )
3.91 % $
173,790
3.02 % $
448,828
3.70 % $ 2,898,901
3.82 %
39,883
209,228
—
—
—
—
39,883
209,228
$ 2,027,172
$
173,790
$
448,828
$ 2,649,790
Dream Office REIT 2016 Annual Report | 30
Term loan facility
The total principal amount outstanding for the term loan facility is as follows:
Term loan facility
August 15, 2011 August 15, 2016 $
188,000
Date issued
Maturity date
principal issued
Original
Weighted
average face
Outstanding principal amount
interest rate December 31, 2016 December 31, 2015
183,453
3.28 $
— $
On March 1, 2016, the Trust repaid in full the outstanding principal amount of $183.5 million under its term loan facility prior
to the maturity date of August 15, 2016. As a result of the early repayment, the Trust wrote off $0.3 million of associated
unamortized financing costs into net income during the period.
On March 1, 2016, the associated five-year interest rate swap on the notional balance of $129.8 million under the term loan
facility was terminated prior to its maturity date of August 15, 2016. As a result, the Trust reclassified the unrealized loss of
$0.6 million included in accumulated other comprehensive income into net income during the period.
Convertible debentures
The principal amount and carrying value for the convertible debentures is as follows:
Date
issued
December 9,
Maturity
date
March 31,
Original
principal
issued
Face
Outstanding principal amount
Carrying value
interest December 31, December 31, December 31, December 31,
2015
2015
2016
2016
rate
2011
2017 $
51,650
5.50 % $
—
$
50,628
$
—
$
50,923
5.50% Series H
Debentures
On March 31, 2016 (the “Redemption Date”), the Trust completed the redemption of its remaining 5.50% Series H
Debentures, in accordance with the provisions of the indenture and supplemental indenture related to the redeemed 5.50%
Series H Debentures. The redemption price was paid in cash and was equal to the aggregate of (i) $1,000 for each $1,000
principal amount of 5.50% Series H Debentures issued and outstanding on the Redemption Date, and (ii) all accrued and
unpaid interest on the 5.50% Series H Debentures up to but excluding the Redemption Date. The aggregate principal amount
redeemed on the Redemption Date for 5.50% Series H Debentures was $50.6 million. As a result of the redemption, the Trust
(i) wrote off the conversion feature on the convertible debentures of $0.04 million, and (ii) wrote off the fair value
adjustments of $0.2 million, all into net loss during Q1 2016.
Debentures
The principal amount outstanding and the carrying value for each series of debentures are as follows:
Debentures
Series A
Date issued
Maturity date
Original
principal
Face Outstanding
principal
interest rate
December 31, 2016
Carrying Outstanding
principal
value
December 31, 2015
Carrying
value
Debentures
June 13, 2013
June 13, 2018 $ 175,000
3.42 % $ 175,000
$ 174,536
$ 175,000
$ 174,218
Series B
Debentures October 9, 2013
January 9, 2017
125,000
2.60 % (1)
125,000 (2)
124,999
125,000
124,778
Series C
Debentures January 21, 2014
January 21, 2020
150,000
4.07 %
150,000
149,293
150,000
149,047
Series K
Debentures
April 26, 2011
April 26, 2016
35,000
5.95 %
—
—
25,000
25,097
Series L
Debentures
August 8, 2011 September 30, 2016
10,000
$ 495,000
5.95 %
—
$ 450,000
—
10,034
$ 448,828 $ 485,000 $ 483,174
10,000
(1) Variable interest rate at three-month CDOR plus 1.7%.
(2) On January 9, 2017, the Trust repaid the Series B Debentures with an aggregate principal amount of $125,000.
On April 26, 2016, the Trust repaid Series K Debentures with an aggregate principal amount of $25.0 million at maturity.
On September 30, 2016, the Trust repaid Series L Debentures with an aggregate principal amount of $10.0 million at maturity.
On January 9, 2017, the Trust repaid Series B Debentures with an aggregate principal amount of $125.0 million at maturity.
Dream Office REIT 2016 Annual Report | 31
Short form base shelf prospectus
On April 27, 2015, the Trust filed 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, debt securities, with an aggregate offering price of up to $2.0 billion. For the
three months and year ended December 31, 2016, no debt securities were issued under the short form base shelf prospectus.
Commitments and contingencies
We are contingently liable with respect to guarantees that are issued in the normal course of business, on certain debt
assumed by purchasers, 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
consolidated financial statements.
In 2015, a subsidiary of the Trust received notices of reassessment from both the Canada Revenue Agency and the Alberta
Minister of Finance with respect to its 2007, 2008 and 2010 taxation years. These reassessments relate to the deductibility of
certain tax losses claimed by the subsidiary prior to its acquisition by the Trust. These federal and provincial reassessments if
upheld could increase total current taxes payable, including interest and penalties by $11.2 million. No cash payment is
expected to be made unless it is ultimately established that the Trust has an obligation to make one. Management is of the
view that there is a strong case to support the position as filed and has contested both the federal and provincial
reassessments. Since management believes that it is more likely than not that its position will be sustained, no amounts
related to these reassessments have been recorded in the consolidated financial statements as of December 31, 2016.
In an effort to manage the volatility of electricity prices, the Trust entered into fixed price contracts to purchase electricity for
certain properties. Furthermore, in an effort to manage the volatility of heating prices mainly in the Toronto downtown region,
the Trust entered into fixed price contracts to purchase steam for nine properties.
Dream Office REIT’s finance leases, fixed price contracts to purchase electricity and steam, and future minimum commitments
under operating leases are as follows:
Operating lease payments
Finance lease payments
Fixed price contracts – steam
Total
< 1 year
3,243 $
68
315
3,626 $
$
$
1–5 years
Minimum payments due
> 5 years
Total
7,503 $ 100,738 $ 111,484
68
—
—
1,576
5,987
4,096
9,079 $ 104,834 $ 117,539
Operating leases include ground leases on certain properties totalling $108.5 million, payable over the next 73 years.
The Trust has entered into lease agreements whereby tenants currently in place may require the Trust to reimburse such
tenants for tenant improvement costs totalling approximately $42.6 million (December 31, 2015 – $37.8 million).
As at December 31, 2016, the Trust’s share of contingent liabilities for the obligation of the other owners of co-owned
properties was $5.3 million (December 31, 2015 – $6.4 million).
The Trust is contingently liable under guarantees that are issued on certain debt assumed by purchasers totalling $74.4 million
(December 31, 2015 – $nil).
Dream Office REIT 2016 Annual Report | 32
OUR EQUITY
Our discussion of equity includes LP B Units (or subsidiary redeemable units), which are economically equivalent to REIT Units.
Pursuant to IFRS, the LP B Units are classified as a liability in our consolidated financial statements.
REIT Units, Series A
Retained earnings (deficit)
Accumulated other comprehensive income
Equity (per consolidated financial statements)
Add: LP B Units
Total equity (including LP B Units)(1)
NAV per unit(2)
Number of Units
December 31, 2016
Amount
3,108,424
(747,840 )
11,181
2,371,765
102,321
2,474,086
22.48
104,806,724 $
—
—
104,806,724
5,233,823
110,040,547 $
$
Unitholders’ equity
December 31, 2015
Number of Units
107,860,638 $
—
—
107,860,638
5,233,823
113,094,461 $
$
Amount
3,168,915
301,324
11,575
3,481,814
90,912
3,572,726
31.59
(1) Total equity (non-GAAP measure) is defined in the section “Non-GAAP measures and other disclosures” under the heading “Total equity (including LP B
Units)”.
(2) NAV per unit (non-GAAP measure) is defined in the section “Non-GAAP measures and other disclosures” under the heading “Net Asset Value (“NAV”) per
unit”.
The amended and restated Declaration of Trust of Dream Office REIT dated May 8, 2014, as amended or amended and
restated from time to time (the “Declaration of Trust”), authorizes the issuance of an unlimited number of the following
classes of units: REIT Units, issuable in one or more series, Transition Fund Units and Special Trust Units. The Special Trust
Units may only be issued to holders of LP B Units, are not transferable separately from these Units, and are used to provide
voting rights with respect to Dream Office REIT to persons holding LP B Units. The LP B Units are held by DAM, a related party
to Dream Office REIT, and DAM holds an equivalent number of Special Trust Units. Both the REIT Units and Special Trust Units
entitle the holder to one vote for each Unit at all meetings of the unitholders. The LP B Units are exchangeable on a one-for-
one basis for REIT B Units at the option of the holder, which can then be converted into REIT A Units. The LP B Units and
corresponding Special Trust Units together have economic and voting rights equivalent in all material respects to REIT A Units.
The REIT A Units and REIT B Units have economic and voting rights equivalent in all material respects to each other.
At December 31, 2016, DAM held 3,858,153 REIT A Units and 5,233,823 LP B Units for a total ownership interest of
approximately 8.3%.
Outstanding equity
The following table summarizes the changes in our outstanding equity:
Total Units issued and outstanding at January 1, 2016
Units issued pursuant to DRIP
Units issued pursuant to the Unit Purchase Plan
Units issued pursuant to Deferred Unit Incentive Plan (“DUIP”)
Cancellation of REIT A Units
Total Units issued and outstanding at December 31, 2016
Percentage of all Units
Units issued pursuant to DUIP
Cancellation of REIT A Units
Total Units issued and outstanding at February 23, 2017
Percentage of all Units
REIT A Units
107,860,638
1,122,411
362
154,507
(4,331,194 )
104,806,724
95.2 %
42,999
(90,500 )
104,759,223
95.2 %
LP B Units
5,233,823
—
—
—
—
5,233,823
4.8 %
—
—
5,233,823
4.8 %
Total
113,094,461
1,122,411
362
154,507
(4,331,194 )
110,040,547
100.0 %
42,999
(90,500 )
109,993,046
100.0 %
As at December 31, 2016, there were 913,141 deferred trust units and income deferred trust units outstanding (December 31,
2015 – 847,071) under the Trust’s DUIP.
Dream Office REIT 2016 Annual Report | 33
Normal course issuer bid
On June 22, 2016, the Trust renewed its NCIB which expired on June 21, 2016. The NCIB will remain in effect until the earlier
of June 21, 2017 or the date on which the Trust has purchased the maximum number of REIT A Units permitted under the Bid.
Under the Bid, the Trust has the ability to purchase for cancellation up to a maximum of 10,732,867 REIT A Units (representing
10% of the Trust’s public float of 107,328,675 REIT A Units at the time of entering the Bid through the facilities of the TSX).
Daily purchases are limited to 81,907 REIT A Units, other than purchases pursuant to applicable block purchase exceptions.
For the three months ended December 31, 2016, 3.9 million REIT A Units were purchased and subsequently cancelled under
the NCIB for a total cost of $73.7 million.
For the year ended December 31, 2016, 4,331,194 REIT A Units were purchased and subsequently cancelled under the NCIB
for a total cost of $80.2 million (December 31, 2015 – 4,486,473 REIT A Units cancelled for $105.1 million).
Subsequent to year-end, the Trust purchased an additional 90,500 REIT A Units under the NCIB for cancellation for a cost of
$1.7 million.
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, which allows for any unforeseen expenditures.
The Trust is committed to preserving a strong balance sheet and bolstering its liquidity position. In consideration of these objectives,
the Trust announced on February 18, 2016 a reduction to its monthly cash distribution from $0.18666 per unit to $0.125 per unit, or
$1.50 per unit on an annualized basis, effective for the month of February 2016 distribution. In addition, the Trust also announced on
February 18, 2016 the suspension of its DRIP until further notice, effective for the February 2016 distribution.
Annualized distribution rate
Monthly distribution rate
Period-end closing unit price
Annualized distribution yield on period-end
closing unit price (%)(2)
Q4
Q3
Q2
$
$
$
1.50 $
1.50 $
1.50 $
0.125 $
0.125 $
0.125 $
19.55 $
16.92 $
18.58 $
2016
Q1
1.50
0.125
20.75
$
(1) $
$
Q4
Q3
Q2
2015
Q1
2.24 $
2.24 $
2.24 $
2.24
0.187 $
0.187 $
0.187 $
0.187
17.37 $
21.20 $
24.54 $
26.35
7.7 %
8.9 %
8.1 %
7.2 %
12.9 %
10.6 %
9.1 %
8.5 %
(1) The Trust announced on February 18, 2016 a reduction to its monthly cash distribution from $0.18666 per unit to $0.125 per unit, or $1.50 per unit on an
annualized basis, effective for the month of February 2016 distribution.
(2) Annualized distribution yield is calculated as the annualized distribution rate divided by period-end closing price.
The table below summarizes the distributions for the three months and year ended December 31, 2016:
2016 distributions
Paid in cash or reinvested in units
Payable at December 31, 2016
Total distributions
2016 reinvestment
Reinvested to December 31, 2016
Total distributions reinvested
Distributions paid in cash
Reinvestment to distribution ratio
Cash payout ratio
Three months ended December 31, 2016
$
$
$
Total(1)
Declared
distributions(1)
28,480 $
13,755
42,235
—
— $
42,235 $
—
100.0 %
163,558 $
13,755
177,313
8,005
8,005 $
169,308
4.5 %
95.5 %
Year ended December 31, 2016
4% bonus
distributions(2)
Total
320
—
320
320
320
$
$
163,878
13,755
177,633
8,325
8,325
(1) Includes distributions to LP B Units.
(2) Unitholders who participated in the DRIP prior to the suspension in February 2016 received an additional distribution of units equal to 4% of each cash
distribution that was reinvested.
Dream Office REIT 2016 Annual Report | 34
Distributions declared for the three months ended December 31, 2016 were $42.2 million, a decrease of $21.1 million over
the prior year comparative quarter. Distributions declared for the year ended December 31, 2016 were $177.3 million, a
decrease of $73.3 million over the prior year. The decrease mainly reflects the reduction in the monthly cash distribution from
$0.18666 per unit to $0.125 per unit, or $1.50 per unit on an annualized basis, effective for the month of February 2016
distribution.
Of the distributions declared for the year ended December 31, 2016, $8.0 million or approximately 4.5% was reinvested in
additional REIT A Units, resulting in cash payout ratios for the three months and year ended December 31, 2016 of 100.0% and
95.5%, respectively.
Dream Office REIT 2016 Annual Report | 35
OUR RESULTS OF OPERATIONS
Basis of accounting
The Trust’s proportionate share of the results of operations of its investment in joint ventures, which are accounted for using
the equity method in the consolidated financial statements, are presented and discussed throughout the MD&A using the
proportionate consolidation method and are, therefore, non-GAAP measures. A reconciliation of the results of operations to
the consolidated statements of comprehensive income (loss) is included in the following tables.
“GAAP” or “IFRS” means International Financial Reporting Standards as issued by the International Accounting Standards
Board and as adopted by the Canadian Professional Accountants of Canada in Part I of The Canadian Professional Accountants
of Canada Handbook – Accounting, as amended from time to time.
Statement of comprehensive loss reconciliation to consolidated financial statements
2016
Three months ended December 31,
2015
Investment properties revenue
Investment properties operating expenses
Net rental income
Other income (loss)
Share of net income (loss) and accretion loss
from investment in Dream Industrial REIT
Share of net income (loss) from investment in
joint ventures
Interest and fee income
Other expenses
General and administrative
Interest:
Debt
Subsidiary redeemable units
Amortization of external management contracts
and depreciation on property and equipment
Fair value adjustments, net losses on
transactions and other activities
Fair value adjustments to investment properties
Fair value adjustments to financial instruments
Net losses on transactions and other activities
Loss before income taxes
Deferred income tax expense
Net loss for the period
Other comprehensive income
Items that will be reclassified subsequently to
net loss:
Unrealized gain on interest rate swaps, net
of taxes
Unrealized foreign currency translation
gain, net of taxes
Comprehensive loss for the period
$
Amounts included
in consolidated
financial statements
$
Share of
income from
investment in
joint ventures
Amounts included
in consolidated
financial statements
Total
Share of
income from
investment in
joint ventures
166,919 $
(75,204 )
91,715
2,196 $ 169,115 $
(76,451 )
(1,247 )
92,664
949
168,349 $
(73,662 )
94,687
Total
27,829 $ 196,178
(12,907 )
(86,569 )
109,609
14,922
1,156
—
1,156
(5,923 )
—
(5,923 )
(12,201 )
1,055
(9,990 )
12,201
9
12,210
—
1,064
2,220
10,186
914
5,177
(10,186 )
15
(10,171 )
—
929
(4,994 )
(2,811 )
—
(2,811 )
(1,899 )
(47 )
(1,946 )
(28,248 )
(1,963 )
(872 )
(33,894 )
(123,200 )
(15,246 )
(9,332 )
(147,778 )
(99,947 )
(724 )
(100,671 )
(259 )
—
(28,507 )
(1,963 )
(32,302 )
(2,931 )
(4,286 )
—
(36,588 )
(2,931 )
—
(259 )
(872 )
(34,153 )
(779 )
(37,911 )
(3 )
(4,336 )
(782 )
(42,247 )
(12,900 )
—
—
(12,900 )
—
—
—
(136,100 )
(15,246 )
(9,332 )
(160,678 )
(99,947 )
(724 )
(100,671 )
(79,100 )
20,695
(57,169 )
(115,574 )
(53,621 )
(516 )
(54,137 )
(300 )
—
(115 )
(415 )
—
—
—
(79,400 )
20,695
(57,284 )
(115,989 )
(53,621 )
(516 )
(54,137 )
11
—
11
377
—
377
950
961
(99,710 ) $
—
—
— $
950
961
(99,710 ) $
1,406
1,783
(52,354 ) $
—
—
— $
1,406
1,783
(52,354 )
Dream Office REIT 2016 Annual Report | 36
Amounts per
consolidated
financial statements
Share of
income from
investment in
joint ventures
59,002 $
(28,381 )
30,621
664,291 $
(295,713 )
368,578
2016
Year ended December 31,
2015
Amounts per
consolidated
financial statements
Share of
income from
investment in
joint ventures
Total
723,293 $
(324,094 )
399,199
690,962 $
(303,449 )
387,513
Total
111,484 $ 802,446
(51,693 )
(355,142 )
447,304
59,791
8,086
—
8,086
6,112
—
6,112
(154,300 )
3,258
(142,956 )
154,300
42
154,342
—
3,300
11,386
53,136
3,005
62,253
(53,136 )
68
(53,068 )
—
3,073
9,185
(11,906 )
—
(11,906 )
(12,196 )
(47 )
(12,243 )
(119,520 )
(8,174 )
(8,864 )
—
(128,384 )
(8,174 )
(131,818 )
(9,171 )
(17,266 )
—
(149,084 )
(9,171 )
(3,573 )
(143,173 )
(27 )
(8,891 )
(3,600 )
(152,064 )
(2,949 )
(156,134 )
(24 )
(17,337 )
(2,973 )
(173,471 )
(899,100 )
(13,555 )
(47,546 )
(960,201 )
(877,752 )
(1,953 )
(879,705 )
(172,700 )
—
(3,372 )
(176,072 )
—
—
—
(1,071,800 )
(13,555 )
(50,918 )
(1,136,273 )
(877,752 )
(1,953 )
(879,705 )
(201,030 )
48,890
(194,836 )
(346,976 )
(53,344 )
(1,695 )
(55,039 )
11,030
—
(416 )
10,614
—
—
—
(190,000 )
48,890
(195,252 )
(336,362 )
(53,344 )
(1,695 )
(55,039 )
561
—
561
—
—
—
252
—
252
(139 )
—
(139 )
(1,207 )
(394 )
(880,099 ) $
—
—
— $
(1,207 )
(394 )
(880,099 ) $
7,486
7,347
(47,692 ) $
—
—
— $
7,486
7,347
(47,692 )
$
Investment properties revenue
Investment properties operating expenses
Net rental income
Other income (loss)
Share of net income and accretion loss from
investment in Dream Industrial REIT
Share of net income (loss) from investment in
joint ventures
Interest and fee income
Other expenses
General and administrative
Interest:
Debt
Subsidiary redeemable units
Amortization of external management contracts
and depreciation on property and equipment
Fair value adjustments, net losses on
transactions and other activities
Fair value adjustments to investment properties
Fair value adjustments to financial instruments
Net losses on transactions and other activities
Loss before income taxes
Deferred income taxes
Net loss for the year
Other comprehensive income (loss)
Items reclassified to net loss:
Reclassified interest rate swaps, net of taxes
Items that will be reclassified subsequently to
net income (loss):
Unrealized gain (loss) on interest rate
swaps, net of taxes
Unrealized foreign currency translation gain
(loss), net of taxes
Comprehensive loss for the year
$
Net loss
For the three months and year ended December 31, 2016, the Trust incurred a net loss of $100.7 million and $879.7 million,
respectively, mainly driven by fair value adjustments to investment properties (including joint ventures) of $136.1 million and
$1.1 billion recorded during the respective periods.
For the three months and year ended December 31, 2015, the Trust incurred a net loss of $54.1 million and $55.0 million,
respectively, mainly driven by fair value adjustments to investment properties (including joint ventures) of $79.4 million and
$190.0 million recorded during the respective periods, an impairment of goodwill charge of $51.2 million in Q4 2015 and cost
of Reorganization of $128.1 million in Q2 2015.
Dream Office REIT 2016 Annual Report | 37
Investment properties revenue
Investment properties revenue includes base rent from investment properties, recovery of operating costs and property taxes
from tenants, as well as lease termination fees and other adjustments. Lease termination fees and other adjustments are not
necessarily of a recurring nature and the amounts may vary year-over-year.
Investment properties revenue for the quarter (per consolidated financial statements) was $166.9 million, a decrease of
$1.4 million, or 0.8%, over the prior year comparative quarter (for the year ended December 31, 2016 – $664.3 million, a
decrease of $26.7 million, or 3.9%, over the prior year), primarily driven by dispositions during the current and prior year,
lower weighted average in-place occupancy, lower straight-line rent and an increase in amortization of lease incentives.
Offsetting this decline in investment properties revenue (per consolidated financial statements) for the three months and year
ended December 31, 2016 was the recognition of the Trust’s remaining 50% interest in Scotia Plaza and 100 Yonge Street’s
investment property revenues(1) in the consolidated financial statements effective June 30, 2016 and an increase in lease
termination fees and other adjustments.
Investment properties revenue (including joint ventures) for the quarter was $169.1 million, a decrease of $27.1 million, or
13.8%, over the prior year comparative quarter (for the year ended December 31, 2016 – $723.3 million, a decrease of
$79.2 million, or 9.9%, over the prior year), primarily driven by dispositions during the current and prior year, lower weighted
average in-place occupancy, lower straight-line rent and an increase in amortization of lease incentives. Offsetting this decline
in investment properties revenue (including joint ventures) for the three months and year ended December 31, 2016 was an
increase in lease termination fees and other adjustments.
Investment properties operating expenses
Investment properties operating expenses comprise operating costs and property taxes as well as certain expenses that are
not recoverable from tenants. Operating expenses fluctuate with changes in occupancy levels, expenses that are seasonal in
nature, and the level of repairs and maintenance incurred during the period.
Investment properties operating expenses (per consolidated financial statements) for the quarter were $75.2 million, an
increase of $1.5 million, or 2.1%, over the prior year comparative quarter, mainly due to the recognition of the Trust’s
remaining 50% interest in Scotia Plaza and 100 Yonge Street’s investment property operating expenses(1) in the consolidated
financial statements effective June 30, 2016. For the year ended December 31, 2016, investment properties operating
expenses (per consolidated financial statements) was $295.7 million, a decrease of $7.7 million, or 2.5%, over the prior year,
primarily driven by lower operating expenses as a result of dispositions during the current and prior year, and lower weighted
average in-place occupancy offset by the recognition of the Trust’s remaining 50% interest in Scotia Plaza and 100 Yonge
Street’s investment property.
Investment properties operating expenses (including joint ventures) for the quarter were $76.5 million, a decrease of
$10.1 million, or 11.7%, over the prior year comparative quarter (for the year ended December 31, 2016 – $324.1 million, a
decrease of $31.0 million, or 8.7%, over the prior year), primarily driven by lower operating expenses as a result of
dispositions during the current and prior year, and lower weighted average in-place occupancy.
Share of net income and accretion loss from investment in Dream Industrial REIT
Share of net income and accretion loss from investment in Dream Industrial REIT for the quarter was $1.2 million, an increase
of $7.1 million, or 119.5%, over the prior year comparative quarter (for the year ended December 31, 2016 – $8.1 million, an
increase of $2.0 million, or 32.3%, over the prior year). The increase in the share of net income and accretion loss from our
investment in Dream Industrial REIT over the prior quarter and over the prior year was mainly driven by fair value adjustments
to investment properties and non-recurring charges on other activities, net of accretion loss recognized during the quarter as
a result of our purchase of Dream Industrial REIT Units and our participation in Dream Industrial REIT’s distribution
reinvestment plan.
(1) On June 30, 2016, the Trust derecognized its investment in the joint ventures of Scotia Plaza and 100 Yonge Street and recognized the Trust’s remaining
50% interest in the revenues and expenses of these investment properties in the consolidated financial statements.
Dream Office REIT 2016 Annual Report | 38
Interest and fee income
Interest and fee income comprises fees earned from third-party property management, including management and
construction fees, our share of net income (loss) from investment in Dream Technology Ventures LP (“DTV LP”), and interest
earned on bank accounts. Except for the third-party property management fees, the income included in interest and fee
income is not necessarily of a recurring nature and the amounts may vary year-over-year.
Interest and fee income (per consolidated financial statements) for the quarter was $1.1 million, an increase of $0.1 million, or
15.5%, over the prior year comparative quarter (for the year ended December 31, 2016 – $3.3 million, an increase of
$0.3 million, or 8.5%, over the prior year), mainly due to third-party property management fees. Interest and fee income from
joint ventures was relatively flat for the three months and year ended December 31, 2016 when compared to the prior year
same periods.
General and administrative expenses
The following table summarizes the nature of expenses included in general and administrative expenses:
Management Services Agreement with DAM
Asset Management Agreement with DAM
Salaries and benefits
Deferred compensation expense
Other(1)
General and administrative expenses
$
Three months ended December 31,
2015
(133 ) $
—
(152 )
(494 )
(1,167 )
(1,946 ) $
2016
(110 ) $
—
(438 )
(694 )
(1,569 )
(2,811 ) $
$
Year ended December 31,
2016
2015
(661 ) $
(435 )
—
(4,338 )
(1,902 )
(346 )
(2,551 )
(2,638 )
(6,792 )
(4,486 )
(11,906 ) $
(12,243 )
(1) “Other” comprises public reporting, professional service fees, corporate sponsorships, donations and overhead-related costs.
General and administrative (“G&A”) expenses (per consolidated financial statements) for the quarter was $2.8 million, an
increase of $0.9 million, or 48.0%, over the prior year comparative quarter mainly attributable to the realignment of certain
employees based on change in roles and responsibilities since the beginning of the year, deferred compensation expense and
overhead-related costs. The increase in the aforementioned costs is a result of the elimination of the Trust’s obligation to pay
asset management fees to DAM effective April 2, 2015. For the year ended December 31, 2016, G&A expenses
(per consolidated financial statements) was $11.9 million, a decrease of $0.3 million, or 2.4%, over the prior year, mainly
attributable to the elimination of the Trust’s obligation to pay asset management fees to DAM, offset by the same reasons
noted earlier, and higher corporate sponsorships and donations incurred during the current year. G&A expense from joint
ventures was relatively flat for the three months and year ended December 31, 2016 when compared to the prior year
same periods.
Interest expense – debt
Interest expense on debt (per consolidated financial statements) for the quarter was $28.2 million, a decrease of $4.1 million,
or 12.6%, over the prior year comparative quarter (for the year ended December 31, 2016 – $119.5 million, a decrease of
$12.3 million or 9.3% over the prior year) mainly due to the discharge of debt related to the sold properties during the current
and prior year, and the refinancing of maturing debt at lower interest rates. Offsetting this decline in interest expense on debt
(per consolidated financial statements) for the three months and year ended December 31, 2016 was the recognition of the
Trust’s remaining 50% interest in Scotia Plaza and 100 Yonge Street’s interest expense(1) on debt in the consolidated financial
statements effective June 30, 2016.
Interest expense on debt (including joint ventures) for the quarter was $28.5 million, a decrease of $8.1 million, or 22.1%, over
the prior year comparative quarter (for the year ended December 31, 2016 – $128.4 million, a decrease of $20.7 million or
13.9% over the prior year) mainly due to the discharge of debt related to the sold properties during the current and prior year,
and the refinancing of maturing debt at lower interest rates.
(1) On June 30, 2016, the Trust derecognized its investment in the joint ventures of Scotia Plaza and 100 Yonge Street and recognized the Trust’s remaining
50% interest in the revenues and expenses of these investment properties in the consolidated financial statements.
Dream Office REIT 2016 Annual Report | 39
Interest expense – subsidiary redeemable units
Interest expense on subsidiary redeemable units for the quarter was $2.0 million, a decrease of $1.0 million, or 33.0%, over
the prior year comparative quarter (year ended December 31, 2016 – $8.2 million, a decrease of $1.0 million, or 10.9%, over
the prior year), mainly due to the reduction in monthly cash distribution from $0.18666 per unit to $0.125 per unit, or
$1.50 per unit on an annualized basis, effective for the month of February 2016 distribution.
Amortization of external management contracts and depreciation on property and equipment
Amortization of external management contracts and depreciation on property and equipment expense (per consolidated
financial statements) for the quarter was $0.9 million, an increase of $0.1 million, or 11.9%, when compared to the prior year
comparative quarter (for the year ended December 31, 2016 – $3.6 million, an increase of $0.6 million, or 21.2%, over the
prior year), primarily driven by additions to property and equipment during the current and prior year. Depreciation on
property and equipment from joint ventures was relatively flat for the three months and year ended December 31, 2016 when
compared to the prior year same periods.
Fair value adjustments to investment properties
For the three months ended December 31, 2016, the Trust recorded a fair value loss in our total portfolio, excluding
investment properties in Alberta, of $85.1 million. For the year ended December 31, 2016, the Trust recorded a fair value loss
in our total portfolio, excluding investment properties in Alberta, of $226.1 million. The fair value losses were for the most part
due to changes in market rental rates and leasing cost assumptions and an increase in cap rates on select properties in certain
regions.
For the three months ended December 31, 2016, the Trust recorded a fair value loss in the Alberta investment properties of
$38.2 million (as included in the consolidated financial statements) as a result of bids received on certain properties. These
bids may not reflect the final price the Trust may obtain in connection with a potential sale of any of such properties.
Accordingly, these adjustments were applied to the properties impacted while the rest of the Alberta Portfolio values
remained relatively flat when compared to the prior quarter as there were no significant changes to the underlying critical and
key assumptions used in the discounted cash flow model. For the year ended December 31, 2016, the Trust recorded a fair
value loss in the Alberta investment properties of $768.9 million (as included in the consolidated financial statements), mainly
as a result of the changes made to the critical and key assumptions used in the discounted cash flow model in Q2 2016.
For the three months ended December 31, 2016, the Trust recorded a fair value loss in the investment properties in joint
ventures of $12.9 million, mainly due to changes in cash flow assumptions. For the year ended December 31, 2016, the Trust
recorded a fair value loss in the investment properties in joint ventures of $172.7 million mainly due to contracted sales prices
for the sale of our 16.7% interest in Scotia Plaza and 100 Yonge Street and changes made to the critical and key assumptions
used in the discounted cash flow model in Q2 2016 for the remaining property.
Fair value adjustments to financial instruments
Fair value adjustments to financial instruments include remeasurement on the conversion feature of the convertible
debenture, remeasurement of the carrying value of subsidiary redeemable units and remeasurement of deferred trust units.
Our remeasurement of the conversion feature of the convertible debentures was $nil during the quarter and for the year,
given that the convertible debentures were redeemed on March 31, 2016 and as a result eliminated the associated conversion
feature of the convertible debentures.
Our remeasurement of the carrying value of subsidiary redeemable units resulted in a loss of $13.8 million during the quarter
(loss of $11.4 million for the year ended December 31, 2016), mainly as a result of an increase in our unit price during the
respective periods.
The remeasurement of the deferred trust units resulted in a loss of $1.5 million during the quarter mainly as a result of an
increase in our unit price during the period. The remeasurement of the deferred trust units resulted in a loss of $2.1 million
for the year ended December 31, 2016, due to an increase in our unit price for the year relative to the beginning of the year.
Dream Office REIT 2016 Annual Report | 40
Net losses on transactions and other activities
The following table summarizes the nature of expenses included:
Debt settlement costs, net
Costs on sale of investment properties
Internal leasing costs
Business transformation costs
Loss on recognition of net assets related to joint operations
Charge on cost reduction program
Cost on Reorganization
Impairment of goodwill
Other
Total
$
$
2016
Three months ended December 31,
2015
(1,136 ) $
(2,121 )
(2,442 )
(373 )
—
—
—
(51,212 )
—
(57,284 ) $
— $
(3,137 )
(2,150 )
(122 )
—
(3,923 )
—
—
—
(9,332 ) $
Year ended December 31,
2016
2015
(13,320 ) $
(1,999 )
(12,074 )
(3,773 )
(8,822 )
(9,246 )
(1,219 )
(1,490 )
—
(10,263 )
—
(3,923 )
—
(128,132 )
—
(51,212 )
600
(1,297 )
(50,918 ) $
(195,252 )
Net losses on transactions and other activities for the quarter (per consolidated financial statements) were $9.3 million, a
decrease of $47.8 million, or 83.7%, over the prior year comparative quarter mainly due to the goodwill impairment charge of
$51.2 million recognized in Q4 2015, offset by higher costs related to property dispositions and a charge of $3.9 million
recognized as a result of the cost reduction program implemented this quarter (see “Related party transactions” section below
for details).
Net losses on transactions and other activities for the year (per consolidated financial statements) was $47.5 million, a
decrease of $147.3 million, or 75.6%, over the prior year comparative quarter mainly due to the reasons noted above,
$128.1 million of one-time cost on Reorganization incurred in Q2 2015 (see “Related party transactions” section below for
details), offset by higher debt settlement and costs related to property dispositions and $10.3 million one-time loss on
recognition of net assets related to Scotia Plaza and 100 Yonge Street in Q2 2016.
Net losses on transactions and other activities from joint ventures were relatively flat for the three months ended
December 31, 2016 when compared to the prior year comparative quarter while net losses on transactions and other
activities from joint ventures for the year ended December 31, 2016, was $3.0 million higher than the prior year mainly due to
$3.4 million of financing costs written off as a result of the recognition of the Trust’s remaining 50% interest in Scotia Plaza and
100 Yonge Street’s debt at fair value in the consolidated financial statements effective June 30, 2016.
Related party transactions
From time to time, Dream Office REIT and its subsidiaries enter into transactions with related parties that are conducted
under normal commercial terms.
Agreements with DAM
On August 24, 2007, Dream Office REIT had an asset management agreement (the “Asset Management Agreement”) with
DAM pursuant to which DAM provided certain asset management services to Dream Office REIT and its subsidiaries. On
April 2, 2015, the Trust acquired a subsidiary of DAM which was a party to the Asset Management Agreement with the Trust,
resulting in the elimination of the Trust’s obligation to pay asset management, acquisition and capital expenditure fees to
DAM. In consideration for the Reorganization, the Trust issued 4,850,000 subsidiary redeemable units to DAM, representing
total consideration of $127.3 million using the closing price of REIT A Units at the date of the transaction. The total
consideration of $127.3 million and costs related to the Reorganization totalling $0.8 million were charged to net income in
the consolidated statement of comprehensive income.
On April 2, 2015, the Trust and DAM also entered into a Management Services Agreement pursuant to which DAM will provide
strategic oversight of the Trust and the services of a Chief Executive Officer as requested on a cost recovery basis. In
accordance with the termination provisions of the Management Services Agreement, the Trust is subject to an incentive fee
payable which is based on 15% of the Trust’s Aggregate Adjusted Funds from Operations (as defined in the Management
Services Agreement), including the net gain on sale of any properties during the term of the agreement, and the deemed sale
of the remaining portfolio upon termination, in excess of $2.65 per REIT A Unit. As the termination of the Management
Services Agreement for the first three years is solely at the discretion of the Trust and the Trust currently has no intention to
terminate the Management Services Agreement, the Trust has determined that it is not probable that the incentive fee is
payable and, accordingly, no amounts related to the incentive fee have been recorded in the consolidated financial statements
as at December 31, 2016.
Dream Office REIT 2016 Annual Report | 41
On December 1, 2013, Dream Office REIT and DAM entered into a Shared Services and Cost Sharing Agreement. Pursuant to
the Reorganization, the Trust and DAM amended the existing Shared Services and Cost Sharing Agreement as of April 2, 2015.
According to the terms of the amended arrangement, DAM will continue to provide administrative and support services on an
as-needed basis and will receive an annual fee to reimburse it for all expenses incurred. The Trust will continue to reimburse
DAM for any shared costs allocated in each calendar year. This amended agreement provides for the automatic reappointment
of DAM for additional one-year terms commencing on January 1 unless and until terminated in accordance with its terms or
by mutual agreement of the parties.
Dream Office REIT, Dream Office Management LP (a wholly owned subsidiary of Dream Office LP) and DAM were parties to an
administrative services agreement (the “Services Agreement with DAM”). Effective April 2, 2015, as part of the Reorganization,
the existing Services Agreement with DAM was terminated and Dream Office Management Corp. (“DOMC”), a wholly owned
subsidiary of Dream Office Management LP, and DAM entered into an amended Administrative Services Agreement pursuant
to which DOMC will continue to provide certain administrative and support services to DAM. The terms of the agreement
provide for DOMC to be reimbursed by DAM for the actual costs incurred by it in carrying out these activities on behalf of
DAM. This agreement is for one-year terms unless and until terminated in accordance with its terms or by mutual agreement
of the parties.
On October 25, 2016, the Trust and DAM jointly implemented a cost reduction program to simplify and to establish more
dedicated services on a cost-efficient basis of the Trust’s operating and shared service platform. On a go forward basis, the
portion of the cost reduction program that relates to the shared service platform will impact the costs being allocated to
related parties in accordance with the Shared Services and Cost Sharing Agreements and Administrative Services Agreement
currently in place. As a result of implementing this program, the Trust incurred a charge of $3.9 million for the three months
ended December 31, 2016 which is included in net losses on transactions and other activities.
Management Services Agreement with DAM
The following is a summary of fees incurred for the three months and years ended December 31, 2016 and December 31,
2015 pursuant to the Management Services Agreement:
Senior management compensation (included in G&A expenses)
Expense reimbursements related to financing arrangements (included
in debt)
Expense reimbursements related to disposition arrangements (included
in costs on sale of investment properties)
Total incurred under the Management Services Agreement
$
Three months ended December 31,
2015
(133 ) $
2016
(110 ) $
$
Year ended December 31,
2016
2015
(661 ) $
(435 )
(190 )
(122 )
(753 )
(359 )
(271 )
(571 ) $
(119 )
(374 ) $
(876 )
(2,290 ) $
(300 )
(1,094 )
Asset Management Agreement with DAM
The Asset Management Agreement provided 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 Dream Office REIT’s adjusted funds from operations per unit (as defined in the Asset
Management Agreement) 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 million, 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 million of properties acquired; (ii) 0.75% of the purchase price
of a property on the next $100 million of properties acquired; and (iii) 0.50% of the purchase price of a property acquired
in excess of $200 million of properties acquired; and
•
financing fee equal to the lesser of actual expenses incurred by DAM in supplying services relating to financing
transactions and 0.25% of the debt and equity of all financing transactions completed on behalf of Dream Office REIT.
Dream Office REIT 2016 Annual Report | 42
The following is a summary of fees incurred pursuant to the Asset Management Agreement for the three months and years
ended December 31, 2016 and December 31, 2015 prior to its elimination as part of the Reorganization on April 2, 2015:
Base annual management fee (included in G&A expenses)
Total incurred under the Asset Management Agreement
$
$
Three months ended December 31,
2015
2016
— $
— $
— $
— $
Year ended December 31,
2016
2015
— $
(4,338 )
— $
(4,338 )
Shared Services and Cost Sharing Agreement with DAM
Effective January 1, 2016, the Shared Services and Cost Sharing Agreement was amended such that future funding costs in
respect of technology personnel and technology related platforms ceased subsequent to December 31, 2015. There were no
other material changes to the agreement.
Effective January 1, 2016, DTV LP, a limited partnership, was established by a wholly owned subsidiary of DAM acting as
general partner and Dream Office LP (a wholly owned subsidiary of the Trust), DAM, Dream Industrial LP, Dream Global REIT,
and Dream Alternatives Master LP as the limited partners. Each of the limited partners, including the Trust, will contribute
capital to DTV LP to fund costs incurred relating to technology personnel and technology related platforms. In addition, the
Trust will be party to a licensing agreement in respect of the use of the developed technology. The Trust accounts for its
investment in DTV LP using the equity method and has included the equity accounted investment in other non-current assets,
and the associated results have been included in interest and other fee income within the consolidated financial statements
for the three months and year ended December 31, 2016. A one-time charge relating to the DTV LP cost reduction program
has been recorded in net losses on transaction and other activities for the three months and year ended December 31, 2016.
As a result of the cost reduction program implemented on October 25, 2016, the Trust accelerated payment of the remaining
outstanding commitments under the Shared Services and Cost Sharing Agreement to DAM totalling $1.2 million and has been
included in the charge on cost reduction program within net losses on transaction and other activities for the three months
ended December 31, 2016.
The following is a summary of fees billed by DAM for the three months and years ended December 31, 2016 and
December 31, 2015. Amounts billed by DAM prior to April 2, 2015 are included pursuant to the original Shared Services and
Cost Sharing Agreement:
Business transformation costs(1)
Strategic services and other (included in G&A expenses)
Total costs incurred under the Shared Services and Cost Sharing
Three months ended December 31,
2015
(373 ) $
(352 )
2016
(122 ) $
(180 )
$
Year ended December 31,
2016
2015
(1,219 ) $
(1,490 )
(871 )
(889 )
Agreement
$
(302 ) $
(725 ) $
(2,090 ) $
(2,379 )
(1) Business transformation costs are included in net losses on transactions and other activities and relate to process and technology improvement. This
initiative will transform our operating platform to allow us to improve data integrity, realize operating efficiencies, establish business analytic tools and
ultimately generate better business outcomes. This initiative will also form the foundation of our continuous improvement culture. The Trust has no
remaining commitment under the Shared Services and Cost Sharing Agreement.
Dream Office REIT 2016 Annual Report | 43
Administrative Services Agreement with DAM
The following is a summary of cost reimbursements received from or paid to DAM and costs incurred by DAM or the Trust on
behalf of the other party for the three months and years ended December 31, 2016 and December 31, 2015 pursuant to the
amended Administrative Services Agreement with DAM. Amounts incurred prior to April 2, 2015 are included pursuant to the
original agreement:
Shared services and costs processed on behalf of DAM
Operating and administration costs of regional offices processed on
behalf of DAM
Total costs processed on behalf of DAM under the Administrative
Services Agreement
Total costs processed by DAM on behalf of the Trust under the
Administrative Services Agreement
$
$
Three months ended December 31,
2015
1,495 $
2016
1,569 $
$
Year ended December 31,
2016
2015
5,560
7,220 $
85
810
615
2,979
1,654
$
2,305
$
7,835
$
8,539
(148 ) $
(476 ) $
(568 ) $
(610 )
Services Agreement with Dream Industrial REIT
Effective October 4, 2012, DOMC and Dream Industrial REIT entered into a Services Agreement, pursuant to which DOMC
provides certain services to Dream Industrial REIT on a cost recovery basis.
The following is a summary of the cost recoveries from Dream Industrial REIT for the three months and years ended
December 31, 2016 and December 31, 2015:
Total cost recoveries from Dream Industrial REIT
Three months ended December 31,
2015
806 $
2016
973 $
$
Year ended December 31,
2016
2015
3,471
3,682 $
Deferred income taxes
Deferred income taxes (per consolidated financial statements) for the three months and year ended December 31, 2016 were
$0.7 million and $2.0 million, respectively, which related to the two investment properties located in the United States
(“U.S.”).
Other comprehensive income (loss)
Other comprehensive income (loss) comprises unrealized gain (loss) on interest rate swaps and unrealized foreign currency
translation gain (loss) related to the two investment properties located in the U.S. Other comprehensive income (per
consolidated financial statements) for the three months ended December 31, 2016 was $1.0 million (for the year ended
December 31, 2016 – other comprehensive loss was $0.4 million). The changes in overall comprehensive income (loss) for the
respective periods were mainly driven by foreign exchange adjustments related to our U.S. properties.
Dream Office REIT 2016 Annual Report | 44
Net operating income (“NOI”)
NOI is defined as the total of net rental income, including the share of net rental income from investment in joint ventures and
property management income, excluding net rental income from properties sold and assets held for sale.
The following pie chart illustrates comparative properties NOI by region as a percentage of comparative properties NOI,
excluding properties sold and properties held for sale, for the three months ended December 31, 2016.
COMPARATIVE PROPERTIES NOI BY REGION
(Three months ended December 31, 2016)
Comparative portfolio NOI
NOI shown below details comparative and non-comparative items to assist in understanding the impact each component has
on NOI. The comparative properties NOI on a year-over-year basis disclosed in the following table excludes NOI from
properties held for redevelopment, sold and held for sale. Income from properties held for redevelopment, sold and held for
sale contributing to NOI in comparative periods are shown separately. Comparative properties NOI excludes lease termination
fees, bad debt expense, one-time property adjustments, straight-line rents and amortization of lease incentives.
For the three months ended December 31, 2016, NOI from comparative properties decreased by 3.8%, or $3.2 million, over
the prior year comparative quarter, with decreases mainly in Alberta, B.C./Saskatchewan/N.W.T., and Eastern Canada, partially
offset by increases in Toronto downtown and suburban regions. For the year ended December 31, 2016, NOI from
comparative properties decreased by 2.0%, or $6.9 million, over the prior year, with decreases in all regions except for Toronto
downtown where it increased 2.3%, or $2.9 million, over the prior year. The overall decrease in comparative properties NOI
was mainly due to lower occupancy.
B.C./Saskatchewan/N.W.T.
Alberta
Toronto – downtown
Toronto – suburban
Eastern Canada
Comparative properties NOI(1)
Lease termination fees and other
Property held for redevelopment
Straight-line rent
Amortization of lease incentives
NOI excluding NOI from properties
sold and properties held for sale
NOI from properties sold and
properties held for sale
NOI(1)
Three months ended December 31,
Change
%
(3.9 ) $
(17.4 )
0.6
3.3
(3.9 )
(3.8 )
$
2016
11,513 $
13,795
32,784
12,203
11,060
81,355
213
(119 )
461
(4,655 )
2015
11,975 $
16,708
32,573
11,816
11,509
84,581
35
(121 )
484
(3,832 )
Amount
(462 )
(2,913 )
211
387
(449 )
(3,226 )
178
2
(23 )
(823 )
2015
2016
47,912 $
47,112 $
61,110
67,662
131,345 128,433
46,959
48,772
45,357
44,747
331,273 338,136
16
(432 )
2,852
(13,240 )
1,703
(375 )
1,843
(17,683 )
Year ended December 31,
Change
%
(1.7 )
(9.7 )
2.3
(3.7 )
(1.3 )
(2.0 )
Amount
(800 )
(6,552 )
2,912
(1,813 )
(610 )
(6,863 )
1,687
57
(1,009 )
(4,443 )
77,255
81,147
(3,892 )
(4.8 )
316,761 327,332
(10,571 )
(3.2 )
15,409
28,462
92,664 $ 109,609 $
(13,053 )
(16,945 )
82,438 119,972
(15.5 ) $ 399,199 $ 447,304 $
(37,534 )
(48,105 )
$
(10.8 )
(1) Comparative properties NOI and NOI (non-GAAP measures) – The reconciliations of comparative properties NOI and NOI to net rental income can be
found in the section “Non-GAAP measures and other disclosures” under the headings “Comparative properties NOI” and “NOI”.
Dream Office REIT 2016 Annual Report | 45
Comparative properties NOI from B.C./Saskatchewan/N.W.T. decreased by 3.9%, or $0.5 million, over the prior year comparative
quarter (for the year ended December 31, 2016 – a decrease of 1.7%, or $0.8 million, over the prior year), primarily due to a
decline in weighted average in-place occupancy of approximately 85,000 square feet, partially offset by higher in-place net rents.
Comparative properties NOI from Alberta decreased by 17.4%, or $2.9 million, over the prior year comparative quarter (for
the year ended December 31, 2016 – a decrease of 9.7%, or $6.6 million, over the prior year), mainly attributable to declines
in weighted average in-place occupancy in Alberta of approximately 243,000 square feet and lower in-place net rents. Of that
decline, approximately 170,500 square feet related to a previously identified tenant that departed one of our Calgary
properties during Q2 2016.
Comparative properties NOI from Toronto downtown increased by 0.6%, or $0.2 million, over the prior year comparative
quarter (for the year ended December 31, 2016 – an increase of 2.3%, or $2.9 million, over the prior year), mainly due to
higher in-place rents on renewals and contractual step-up in rental rates for certain tenants, partially offset by lower weighted
average in-place occupancy.
Comparative properties NOI from Toronto suburban increased by 3.3%, or $0.4 million, over the prior year comparative
quarter, mainly attributable to increase in weighted average in-place occupancy in Toronto suburban of approximately 50,000
square feet and one-time favourable year-end recovery adjustments of approximately $0.2 million on certain properties. For
the year ended December 31, 2016, NOI from Toronto suburban decreased by 3.7%, or $1.8 million, over the prior year,
primarily due to a previously identified tenant departure that occupied 196,200 square feet in one of our Mississauga
properties at the beginning of Q3 2015 with a full-year impact in 2016.
Comparative properties NOI from Eastern Canada decreased by 3.9%, or $0.4 million, over the prior year comparative quarter
(for the year ended December 31, 2016 – a decrease of 1.3%, or $0.6 million, over the prior year), primarily due to a decline in
weighted average in-place occupancy of approximately 121,000 square feet, partially offset by favourable foreign exchange
adjustments in our U.S. properties for the year.
Lease termination fees and other adjustments are not necessarily of a recurring nature and the amounts may vary year-over-
year. For the three months and year ended December 31, 2016, lease termination fees and other adjustments amounted to
income of $0.2 million and $1.7 million, respectively (three months and year ended December 31, 2015 – income of
$0.04 million and $0.02 million, respectively).
NOI prior quarter comparison
The comparative properties NOI on a quarter-over-quarter basis disclosed in the following table exclude properties held for
redevelopment, sold and held for sale. Income from properties held for redevelopment, sold and held for sale contributing to
NOI in comparative periods are shown separately. Comparative properties NOI excludes lease termination fees, bad debt
expense, one-time property adjustments, straight-line rents and amortization of lease incentives.
For the three months ended December 31, 2016, NOI from comparative properties on a quarter-over-quarter basis decreased
by 1.0%, or $0.8 million, over the prior quarter, with decreases mainly in Alberta, B.C./Saskatchewan/N.W.T. and the Toronto
downtown regions, offset by an increase in Toronto suburban, with Eastern Canada remaining relatively stable. The overall
decrease was mainly driven by lower occupancy.
B.C./Saskatchewan/N.W.T.
Alberta
Toronto – downtown
Toronto – suburban
Eastern Canada
Comparative properties NOI(1)
Lease termination fees and other
Property held for redevelopment
Straightline rent
Amortization of lease incentives
NOI excluding NOI from properties sold and properties held for sale
NOI from properties sold and properties held for sale
NOI(1)
$
December 31, September 30,
2016
11,841 $
14,877
32,886
11,514
11,019
82,137
(67 )
(67 )
404
(4,399 )
78,008
16,621
94,629 $
2016
11,513 $
13,795
32,784
12,203
11,060
81,355
213
(119 )
461
(4,655 )
77,255
15,409
92,664 $
$
Three months ended
Change
%
(2.8 )
(7.3 )
(0.3 )
6.0
0.4
(1.0 )
Amount
(328 )
(1,082 )
(102 )
689
41
(782 )
280
(52 )
57
(256 )
(753 )
(1,212 )
(1,965 )
(1.0 )
(2.1 )
(1) Comparative properties NOI and NOI (non-GAAP measures) – The reconciliations of comparative properties NOI and NOI to net rental income can be
found in the section “Non-GAAP measures and other disclosures” under the headings “Comparative properties NOI” and “NOI”.
Dream Office REIT 2016 Annual Report | 46
Comparative properties NOI from B.C./Saskatchewan/N.W.T. decreased by 2.8%, or $0.3 million, over the prior quarter,
mainly attributable to declines in weighted average in-place occupancy in B.C./Saskatchewan/N.W.T. of approximately
22,000 square feet.
Comparative properties NOI from Alberta decreased by 7.3%, or $1.1 million, over the prior quarter, mainly attributable to
declines in weighted average in-place occupancy in Alberta of approximately 35,000 square feet and lower in-place net rents.
Comparative properties NOI from Toronto downtown decreased by 0.3%, or $0.1 million, over the prior quarter, mainly due to
lower weighted average in-place occupancy, partially offset by higher in-place rents on renewals and contractual step-up in
rental rates for certain tenants.
Comparative properties NOI from Toronto suburban increased by 6.0%, or $0.7 million, over the prior quarter, mainly
attributable to one-time favourable year-end recovery adjustments of approximately $0.2 million on certain properties and an
increase in the weighted average in-place occupancy in Toronto suburban of approximately 33,000 square feet.
Comparative properties NOI from Eastern Canada was relatively flat quarter-over-quarter.
Lease termination fees and other adjustments are not necessarily of a recurring nature and the amounts may vary from
quarter to quarter. For the three months ended December 31, 2016, lease termination fees and other adjustments amounted
to a gain of $0.2 million (three months ended September 30, 2016 – loss of $0.1 million).
Funds from operations (“FFO”)
Net loss for the period
Add (deduct):
Share of net income (loss) and accretion loss from investment in
Dream Industrial REIT
Share of FFO from investment in Dream Industrial REIT
Depreciation and amortization
Costs on sale of investment properties(1)
Interest expense on subsidiary redeemable units
Fair value adjustments to investment properties
Fair value adjustments to financial instruments and DUIP included
in G&A expenses
Debt settlement costs, net
Internal leasing costs
Deferred income taxes
Loss on recognition of net assets related to joint operations
Impairment of goodwill
Interest rate swap reclassified to net income, net of taxes
Other
FFO before undernoted item
Add: Cost on Reorganization
FFO(2)
FFO per unit – basic(3)
FFO per unit – diluted(3)
Three months ended December 31,
2015
(54,137 ) $
2016
(100,671 ) $
$
Year ended December 31,
2016
2015
(879,705 ) $
(55,039 )
(1,156 )
4,068
5,526
3,137
1,963
136,100
15,257
—
2,150
724
—
—
—
57
67,155 $
—
67,155 $
0.59 $
0.59 $
5,923
4,519
4,614
2,121
2,931
79,400
(21,046 )
1,136
2,442
516
—
51,212
—
41
79,672 $
—
79,672 $
0.70 $
0.70 $
(8,086 )
17,104
21,283
12,074
8,174
1,071,800
13,108
13,320
8,822
1,953
10,263
—
561
216
290,887 $
—
290,887 $
2.55 $
2.54 $
(6,112 )
18,056
16,213
3,773
9,171
190,000
(49,851 )
1,999
9,246
1,695
—
51,212
—
16
190,379
128,132
318,511
2.83
2.82
$
$
$
$
(1) For the three months and year ended December 31, 2016, costs on sale of investment properties included severance charges directly attributable to the
investment properties sold of $161 and $210, respectively.
(2) FFO (non-GAAP measure) – Refer to the section “Non-GAAP measures and other disclosures” under the heading “Funds from operations (“FFO”)” for
further details. FFO (non-GAAP measure) for the comparative period excludes the one-time cost on Reorganization of $128,132 recorded in Q2 2015.
(3) The LP B Units are included in the calculation of basic and diluted FFO per unit.
FFO for the three months and year ended December 31, 2016 was $67.2 million and $290.9 million, respectively, a decrease of
$12.5 million, or 15.7%, over the prior year comparative quarter and a decrease of $27.6 million, or 8.7%, over the prior year.
Dream Office REIT 2016 Annual Report | 47
Diluted FFO on a per unit basis for the three months and year ended December 31, 2016 was $0.59 and $2.54, respectively,
compared to $0.70 and $2.82 for the three months and year ended December 31, 2015. The decline when compared to the
prior year comparative quarter and period was mainly due to the following reasons:
• Disposition of properties;
• Decrease in comparative NOI;
• Incremental change in straight-line rent adjustment; and
• Charge on cost reduction program relating to the simplification of the Trust’s operating and shared service platform.
The decline when compared to the prior year comparative quarter and period was partially offset by:
• Interest savings on debt discharged associated with disposed properties;
• Interest rate savings upon refinancing of maturing debt; and
• Incremental change in lease termination and other.
Adjusted funds from operations (“AFFO”)
Consistent with the Strategic Plan as described in the “Our Objectives” section of this MD&A, the Trust is focused on the net
asset value of its portfolio. To do this, the Trust has originally targeted the disposition of $1.2 billion of Private Market Assets
over the next three years to crystallize value and reduce the unit price discount to the Trust’s underlying net asset value per
unit. The timing and amount of these dispositions is not certain, nor is the composition of the remaining portfolio. Further,
continuing economic uncertainty in the Alberta office market will result in higher leasing costs, relative to historical
normalized rates. There can also be a large degree of variability in the actual amounts incurred in any given period due to the
timing and extent of leasing activity and building improvement projects. Management does not believe current costs in
respect of leasing and building improvements are indicative of a normalized longer-term trend.
Given these dynamics, it is difficult for management to provide a meaningful normalized reserve for leasing costs and building
improvements, based on a percentage of NOI, in the calculation of AFFO consistent with our practice in prior periods.
Accordingly, the Trust has discontinued presenting AFFO in its MD&A and public disclosures and is of the view that net asset
value is a more relevant metric.
In prior periods, the Trust had included AFFO, a non-GAAP measure, as part of the MD&A as management previously was of
the view that it provided an important additional measure of the Trust’s operating performance. For unitholders that continue
to use AFFO to evaluate the performance of the Trust, we continue to disclose in our MD&A relevant information, including
leasing and building improvement costs incurred during the period, for unitholders to make their own estimates of AFFO.
SELECTED ANNUAL INFORMATION
The following table provides selected financial information for the past three years:
Investment properties revenue
Net income (loss)
Total assets
Non-current debt
Total debt
Total distributions
Distribution rate (per unit)
Units outstanding:
REIT Units, Series A
LP Class B Units, Series 1
$
2016
664,291 $
(879,705 )
5,486,516
2,321,530
2,649,790
177,313
1.56 (1)
2015
690,962 $
(55,039 )
6,762,874
2,401,104
3,010,748
254,303
2.24
2014
705,279
159,290
7,029,751
2,730,973
3,096,828
244,698
2.24
104,806,724
5,233,823
107,860,638
5,233,823
107,936,575
602,434
(1) The Trust announced on February 18, 2016 a reduction to its monthly cash distribution from $0.18666 per unit to $0.125 per unit, or $1.50 per unit on an
annualized basis, effective for the month of February 2016 distribution.
Dream Office REIT 2016 Annual Report | 48
QUARTERLY INFORMATION
The following tables show quarterly information since January 1, 2015.
Key leasing, financing, portfolio and results of operations quarterly information
Leasing – total portfolio(1)
Occupancy rate – including committed (period-end)
Occupancy rate – in-place (period-end)
Tenant retention ratio
Average in-place and committed net rent per square
Q4
Q3
Q2
2016
Q1
Q4
Q3
Q2
2015
Q1
89.7 % 88.9 % 90.1 %
87.9 % 87.0 % 87.7 %
54.9 % 66.1 % 60.0 %
91.4 %
89.4 %
65.3 %
91.3 %
89.8 %
74.7 %
91.6 %
89.8 %
53.4 %
92.8 %
91.0 %
61.8 %
92.8 %
91.4 %
51.5 %
foot (period-end)
$ 19.21
$ 18.95
(2.8 %)
(6.1 %)
$ 18.75
(5.9 %)
$ 19.02
0.9 %
$ 18.94
2.7 %
$ 18.73
5.0 %
$ 18.28
6.4 %
$ 18.24
7.5 %
Market rent/in-place and committed net rent (%)
Financing
Weighted average face rate of interest on debt
(period-end)(2)
Interest coverage ratio (times)(3)
Net debt-to-adjusted EBITDFV (years)(3)
Level of debt (net total debt-to-gross book value)(3)
Portfolio(1)
Number of properties
GLA (millions of sq. ft.)
3.84 % 3.89 % 3.97 %
2.9
3.0
7.4
7.3
52.3 % 50.4 % 51.3 %
3.0
7.7
3.96 %
2.9
7.8
48.6 %
4.05 %
2.9
7.7
48.3 %
4.11 %
2.9
7.8
48.0 %
4.13 %
2.9
7.7
47.9 %
4.16 %
2.9
7.9
47.6 %
121
17.2
148
20.8
157
21.5
160
22.3
166
23.0
169
23.3
174
24.1
174
24.1
(1) Excludes properties held for sale and a redevelopment property at period-end.
(2) Weighted average face interest rate is calculated as the weighted average face rate of all interest bearing debt on balance, including debt related to
investment in joint ventures that are equity accounted.
(3) The calculation of the following non-GAAP measures – interest coverage ratio, net debt-to-adjusted EBITDFV and levels of debt – are included in the
“Non-GAAP measures and other disclosures” section of the MD&A.
Results of operations
(in thousands of Canadian dollars)
Investment properties revenue
Investment properties operating
expenses
Net rental income
Other income (loss)
Other expenses
Fair value adjustments, net losses on
transactions and other activities
Income (loss) before income taxes
Deferred income taxes expense
Net income (loss) for the period
Other comprehensive income (loss)
Comprehensive income (loss) for
2016
2015
Q1
Q1
$ 166,919 $ 170,699 $ 159,124 $ 167,549 $ 168,349 $ 174,370 $ 174,402 $ 173,841
Q3
Q4
Q2
Q4
Q2
Q3
(75,204 )
91,715
(9,990 )
(33,894 )
(77,032 )
93,667
1,616
(34,766 )
(70,513 )
88,611
(63,682 )
(36,013 )
(72,964 )
94,585
(70,900 )
(38,500 )
(73,662 )
94,687
5,177
(37,911 )
(78,734 )
95,636
19,099
(38,741 )
(75,275 )
99,127
15,894
(39,185 )
(75,778 )
98,063
22,083
(40,297 )
(147,778 )
(99,947 )
(724 )
(100,671 )
961
(31,573 )
28,944
(364 )
28,580
523
(695,587 )
(706,671 )
(403 )
(707,074 )
(40 )
(85,263 )
(100,078 )
(462 )
(100,540 )
(1,859 )
(115,574 )
(53,621 )
(516 )
(54,137 )
1,783
(49,259 )
26,735
(522 )
26,213
3,315
(164,345 )
(88,509 )
(328 )
(88,837 )
(59 )
(17,798 )
62,051
(329 )
61,722
2,308
the period
$
(99,710 ) $
29,103
$ (707,114 ) $ (102,399 ) $
(52,354 ) $ 29,528
$
(88,896 ) $ 64,030
Dream Office REIT 2016 Annual Report | 49
Calculation of funds from operations
(in thousands of Canadian dollars except for unit and per unit amounts)
Net income (loss) for the period
Add (deduct):
Share of net loss (income) and
dilution/accretion loss from
investment in Dream Industrial
REIT
Share of FFO from investment in
Dream Industrial REIT
Depreciation and amortization
Costs on sale of investment
properties
Interest expense on subsidiary
redeemable units
Fair value adjustments to
investment properties
Fair value adjustments to financial
instruments and DUIP included
in G&A expenses
Debt settlement costs, net
Reclassified interest rate swap, net
of taxes
Internal leasing costs
Deferred income taxes expense
Impairment of goodwill
Loss on recognition of net assets
related to joint operations
Other
FFO before undernoted item
Add: Cost on Reorganization
FFO(1)
FFO per unit – basic(2)
FFO per unit – diluted(2)
Weighted average units
outstanding(3)
Basic (in thousands)
Diluted (in thousands)
2016
2015
Q1
Q1
$ (100,671 ) $ 28,580 $ (707,074 ) $ (100,540 ) $ (54,137 ) $ 26,213 $ (88,837 ) $ 61,722
Q3
Q4
Q2
Q2
Q3
Q4
(1,156 )
(255 )
(4,400 )
(2,275)
5,923
(3,303)
(4,305)
(4,427)
4,068
5,526
4,307
5,291
4,348
5,460
4,381
5,006
4,519
4,614
4,506
4,125
4,517
3,915
4,514
3,561
3,137
2,213
5,217
1,507
2,121
1,531
—
1,963
1,963
1,963
2,285
2,931
2,931
2,972
121
337
136,100
33,700
759,400
142,600
79,400
58,200
44,100
8,300
15,257
—
(9,677 )
2,844
(12,748 )
8,862
20,276
1,614
(21,046 )
1,136
(19,091)
863
(10,647)
—
—
2,150
724
—
—
2,051
364
—
—
2,299
403
—
561
2,322
462
—
—
2,442
516
51,212
—
2,411
522
—
—
2,342
328
—
933
—
—
2,051
329
—
10,263
157
—
57
—
24
—
(22 )
—
(2)
67,155 $ 71,359 $ 74,150 $ 78,223 $ 79,672 $ 78,917 $ (45,659 ) $ 77,439
—
67,155 $ 71,359 $ 74,150 $ 78,223 $ 79,672 $ 78,917 $ 82,473 $ 77,439
$ 0.73 $ 0.71
$ 0.72 $ 0.71
0.59 $ 0.62 $ 0.65 $ 0.69 $ 0.70 $ 0.70
0.59 $ 0.62 $ 0.65 $ 0.68 $ 0.70 $ 0.69
— 128,132
—
(44)
—
41
—
9
—
—
—
—
—
$
$
$
$
113,920 114,448 114,396 113,971 113,483 113,532 113,664 108,718
114,018 114,558 114,516 115,488 115,019 115,075 115,256 110,352
(1) FFO (non-GAAP measure) – Refer to the section “Non-GAAP measures and other disclosures” under the heading “Funds from operations (“FFO”) for
further details. FFO (non-GAAP measure) for the comparative period excludes the one-time cost on Reorganization of $128,132 recorded in Q2 2015.
(2) The LP B Units are included in the calculation of basic and diluted FFO per unit.
(3) A description of the determination of basic and diluted amounts per unit can be found in the section Non-GAAP measures and other disclosures under
the heading “Weighted average number of units”.
Dream Office REIT 2016 Annual Report | 50
NON-GAAP MEASURES AND OTHER DISCLOSURES
The following non-GAAP measures are important measures used by management in evaluating the Trust’s underlying
operating performance and debt management. These non-GAAP measures are not defined by IFRS, do not have a
standardized meaning and may not be comparable with similar measures presented by other income trusts.
Strategic Plan classification
The ongoing execution of the Strategic Plan is premised on the classification of our portfolio into three segments, namely Core
Assets, Private Market Assets and Value-Add Assets. The related investment properties and associated mortgages are non-
GAAP measures used by Management in evaluating the intrinsic value of the assets as it relates to the execution of the
Strategic Plan. However, these non-GAAP measures are not defined by IFRS, do not have a standardized meaning and may not
be comparable with similar measures presented by other income trusts.
In compliance with Canadian Securities Administrators Staff Notice 52-306 (Revised), “Non-GAAP Financial Measures”, the
Strategic Plan classification of the related investment properties and associated mortgages has been reconciled in the table
below to investment properties and mortgages as included in the consolidated financial statements.
Strategic Plan classification
Core Assets
Private Market Assets
Value-Add Assets
Total comparative portfolio before assets classified as held for sale/sold properties
Add:
Assets classified as held for sale/sold properties
Total portfolio
Less:
Investment in joint ventures
Wholly owned/co-owned properties classified as assets held for sale
Total amounts included in consolidated financial statements
December 31, 2016
Investment
properties
Mortgages
3,252,640 $ 1,306,771
446,236
1,160,588
314,048
483,127
2,067,055
4,896,355
321,232
209,228
5,217,587 $ 2,276,283
60,000
321,232
39,883
209,228
4,836,355 $ 2,027,172
$
$
$
Total equity (including LP B Units)
One of the components used to determine the Trust’s net asset value per unit is total equity (including LP B Units). Total equity
(including LP B Units) is calculated as the sum of the equity amount per consolidated financial statements and the subsidiary
redeemable units amount. Management believes it is important to include the subsidiary redeemable units amount for the
purpose of determining the Trust’s capital management. Management does not consider the subsidiary redeemable units to
be debt or borrowings of the Trust, but rather a component of the Trust’s equity. However, total equity (including LP B Units) is
not defined by IFRS, does not have a standardized meaning and may not be comparable with similar measures presented by
other income trusts.
In compliance with Canadian Securities Administrators Staff Notice 52-306 (Revised), “Non-GAAP Financial Measures”, the
table within the section “Our Equity” reconciles total equity (including LP B Units) to equity (as per consolidated financial
statements).
Net asset value (“NAV”) per unit
NAV per unit is calculated as the total equity (including LP B Units) divided by the total number of REIT A Units and LP B Units.
This non-GAAP measurement is an important measure used by the Trust, as it reflects management’s view of the intrinsic
value of the Trust. However, it is not defined by IFRS, does not have a standardized meaning and may not be comparable with
similar measures presented by other income trusts.
Dream Office REIT 2016 Annual Report | 51
Funds from operations (“FFO”)
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 net income nor cash
generated from operating activities, as defined by IFRS, and is not necessarily indicative of cash available to fund Dream Office
REIT’s needs.
In compliance with Canadian Securities Administrators Staff Notice 52-306 (Revised), “Non-GAAP Financial Measures”, FFO has
been reconciled to net income in the section “Our Results of Operations” under the heading “Funds from operations”.
NOI
NOI is defined by the Trust as the total investment property revenue less investment property operating expenses, including
the share of net rental income from investment in joint ventures and property management income. This non-GAAP
measurement is an important measure used by the Trust in evaluating property operating performance; however, it is not
defined by IFRS, does not have a standard meaning and may not be comparable with similar measures presented by other
income trusts. In compliance with Canadian Securities Administrators Staff Notice 52-306 (Revised), “Non-GAAP Financial
Measures”, NOI has been reconciled to net rental income in the table below:
Net rental income (included in consolidated financial statements)
Add: Share of net rental income from investments in joint ventures
NOI
Less: NOI from properties sold and properties held for sale
NOI (excluding NOI from properties sold and properties
held for sale)
$
Three months ended December 31,
2015
94,687 $
14,922
109,609
28,462
2016
91,715 $
949
92,664
15,409
Year ended December 31,
2016
2015
387,513
368,578 $
59,791
30,621
447,304
399,199
119,972
82,438
$
77,255
$
81,147
$
316,761
$
327,332
Comparative properties NOI
Comparative properties NOI includes NOI of the same properties owned by the Trust in (i) the current and prior year
comparative period and (ii) the current and prior quarter, and excludes: lease termination fees; one-time property
adjustments; bad debt expenses; NOI of properties sold, properties held for sale, and properties held for redevelopment;
straight-line rent; and amortization of lease incentives. Comparative properties NOI is an important non-GAAP measure used
by management to evaluate the performance of the same properties owned by the Trust in the current period, comparative
period and prior quarter as presented. This non-GAAP measure is not defined by IFRS, does not have a standard meaning and
may not be comparable with similar measures presented by other income trusts. In compliance with Canadian Securities
Administrators Staff Notice 52-306 (Revised), “Non-GAAP Financial Measures”, comparative properties NOI for the respective
periods have been reconciled to net rental income in the tables below:
Net rental income (included in consolidated financial statements)
Add: Share of net rental income from investments in joint ventures
Less: Lease termination fees and other
Less: Properties held for redevelopment
Less: Straight-line rent
Less: Amortization of lease incentives
Less: NOI from properties sold and properties held for sale
Comparative properties NOI
Three months ended December 31,
2015
94,687 $
14,922
35
(121 )
484
(3,832 )
28,462
84,581 $
2016
91,715 $
949
213
(119 )
461
(4,655 )
15,409
81,355 $
$
$
Year ended December 31,
2016
2015
387,513
368,578 $
59,791
30,621
16
1,703
(375 )
(432 )
2,852
1,843
(17,683 )
(13,240 )
119,972
82,438
338,136
331,273 $
Dream Office REIT 2016 Annual Report | 52
Net rental income (included in consolidated financial statements)
Add: Share of net rental income from investments in joint ventures
Less: Lease termination fees and other
Less: Properties held for redevelopment
Less: Straight-line rent
Less: Amortization of lease incentives
Less: NOI from properties sold and properties held for sale
Comparative properties NOI
December 31,
2016
91,715 $
949
213
(119 )
461
(4,655 )
15,409
81,355 $
Three months ended
September 30,
2016
93,667
962
(67 )
(67 )
404
(4,399 )
16,621
82,137
$
$
Stabilized NOI
Stabilized NOI for an individual property is defined by the Trust as investment property revenues less property operating
expenses, including the share of net rental income from investment in joint ventures and property management income,
adjusted for items such as average lease up costs, long-term vacancy rates, non-recoverable capital expenditures,
management fees, straight-line rents and other non-recurring items. This non-GAAP measurement is an important measure
used by the Trust in determining the fair value of certain investment properties that are valued using the direct capitalization
method; 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.
Weighted average number of units
The basic weighted average number of units outstanding used in the FFO per unit calculations includes the weighted average
number of all REIT Units, LP B Units, and vested but unissued deferred trust units and income deferred trust units. The diluted
weighted average number of units for the year ended December 31, 2016 reflects the conversion of the 5.5% Series H
Debentures, as they are dilutive prior to its redemption on March 31, 2016. Diluted FFO per unit for the year ended
December 31, 2016 excludes $0.7 million in interest related to convertible debentures (for the three months and year ended
December 31, 2015 – $0.7 million and $2.8 million, respectively).
Weighted average number of units (in thousands)
Basic
Diluted
Three months ended December 31,
2015
113,483
115,019
2016
113,920
114,018
Year ended December 31,
2015
112,370
113,927
2016
114,203
114,651
Adjusted cash flows from operating activities
When the Trust determines its cash available for distribution, it uses adjusted cash flows from operating activities which
includes cash flows from operating activities of our investments in joint ventures that are equity accounted and excludes
working capital and investment in lease incentives and initial direct leasing costs. Working capital and investment in lease
incentives and initial direct leasing costs have been excluded from adjusted cash flows from operating activities to eliminate
the seasonal fluctuations in non-cash working capital and the impact of leasing costs, which fluctuate with lease maturities,
renewal terms, the type of asset being leased and when tenants fulfill the terms of their respective lease agreements. The
Trust funds its working capital needs and investments in lease incentives and initial direct leasing costs with cash and cash
equivalents on hand and, if necessary, with our credit facilities. Accordingly, management believes adjusted cash flows from
operating activities is an important measure that reflects our ability to pay cash distributions. This non-GAAP measurement
does not represent cash generated from (utilized in) operating activities (as per consolidated financial statements), as defined
by GAAP.
In compliance with Canadian Securities Administrators Staff Notice 52-306 (Revised), “Non-GAAP Financial Measures”, the
table within this section under the heading “Cash flows from operating activities and distributions declared” reconciles
adjusted cash flows from operating activities to cash generated from (utilized in) operating activities (as per consolidated
financial statements).
Dream Office REIT 2016 Annual Report | 53
Cash flows from operating activities (including investments in joint ventures)
When the Trust determines its cash available for distribution, it uses adjusted cash flows from operating activities. One of the
components of adjusted cash flows from operating activities is cash flows from operating activities of our investments in joint
ventures that are equity accounted. Management believes it is important to include cash flows from operating activities of our
investments in joint ventures that are equity accounted as it forms part of the Trust’s determination of its cash available for
distribution. This non-GAAP measurement does not represent cash generated from (utilized in) operating activities (as per
consolidated financial statements), as defined by IFRS.
In compliance with Canadian Securities Administrators Staff Notice 52-306 (Revised), “Non-GAAP Financial Measures”, the
table within this section under the heading “Cash flows from operating activities and distributions declared” reconciles cash
flows from operating activities (including investments in joint ventures) to cash generated from (utilized in) operating activities
(as per consolidated financial statements).
Investment in joint ventures and debt associated with assets held for sale
The Trust’s proportionate share of the financial position and results of operations of its investment in joint ventures, which are
accounted for using the equity method in the consolidated financial statements and as presented and discussed throughout
this MD&A using the proportionate consolidation method, are non-GAAP measures. The reconciliation of debt tables is
included in the “Our financing” section of this MD&A. The reconciliation of the consolidated statements of comprehensive
income is included in the “Our results of operations” section of this MD&A under the heading “Statement of comprehensive
income (loss) reconciliation to consolidated financial statements”. A reconciliation of the financial position to the consolidated
balance sheets is included in the following table:
Dream Office REIT 2016 Annual Report | 54
Balance sheet reconciliation to consolidated financial statements
December 31, 2016
December 31, 2015
Amounts per
consolidated
financial
statements
Share from
investment
in joint
ventures
Amounts per
consolidated
financial
statements
Share from
investment
in joint
ventures
Total
Total
Assets
NON-CURRENT ASSETS
Investment properties
Investment in Dream Industrial REIT
Investment in joint ventures
Other non-current assets
CURRENT ASSETS
Amounts receivable
Prepaid expenses and other receivables
Cash and cash equivalents
Assets held for sale
Total assets
Liabilities
NON-CURRENT LIABILITIES
Debt
Subsidiary redeemable units
Deferred Unit Incentive Plan
Deferred tax liabilities, net
Other non-current liabilities
CURRENT LIABILITIES
Debt
Amounts payable and accrued liabilities
Liabilities related to assets held for sale
Total liabilities
Equity
Unitholders’ equity
Retained earnings (deficit)
Accumulated other comprehensive
income
Total equity
Total liabilities and equity
60,000 $ 4,896,355 $ 5,899,131 $ 1,103,603 $ 7,002,734
184,817
184,817
595,203
—
17,704
17,448
7,205,255
6,696,599
186,754
—
16,563
5,099,672
—
(595,203 )
256
508,656
—
(15,189 )
7
44,818
$ 4,836,355 $
186,754
15,189
16,556
5,054,854
17,786
84,854
7,667
110,307
321,355
249
140
1,544
1,933
—
18,035
84,994
9,211
112,240
321,355
10,258
9,052
2,051
21,361
44,914
$ 5,486,516 $
46,751 $ 5,533,267 $ 6,762,874 $
$ 2,321,530 $
39,883 $ 2,361,413 $ 2,401,104 $
102,321
14,796
10,735
15,058
2,504,323
328,260
111,863
440,123
217,056
3,161,502
90,912
12,596
9,038
20,284
2,533,934
609,644
112,980
722,624
24,502
3,281,060
102,321
14,796
10,735
15,056
2,464,438
328,260
104,997
433,257
217,056
3,114,751
3,108,424
(747,840 )
11,181
2,371,765
$ 5,486,516 $
—
—
—
2
39,885
—
6,866
6,866
—
46,751
—
—
—
—
3,108,424
(747,840 )
3,168,915
301,324
—
—
3,168,915
301,324
11,181
2,371,765
11,575
3,481,814
46,751 $ 5,533,267 $ 6,762,874 $
—
—
11,575
3,481,814
523,163 $ 7,286,037
3,785
340
10,382
14,507
—
14,043
9,392
12,433
35,868
44,914
523,163 $ 7,286,037
410,832 $ 2,811,936
90,912
12,596
9,038
20,775
2,945,257
—
—
—
491
411,323
74,661
37,179
111,840
—
523,163
684,305
150,159
834,464
24,502
3,804,223
Dream Office REIT 2016 Annual Report | 55
Cash flows from operating activities and distributions declared
In any given period, actual cash generated from (utilized in) operating activities may differ from distributions declared,
primarily due to seasonal fluctuations in non-cash working capital and the impact of leasing costs, which fluctuate with lease
maturities, renewal terms, the type of asset being leased, and when tenants fulfill the terms of their respective lease
agreements. These seasonal fluctuations or the unpredictability of when leasing costs are incurred are funded with our cash
and cash equivalents on hand and, if necessary, with our existing credit facilities. The Trust determines the distribution rate by,
among other considerations, its assessment of cash flow as determined using adjusted cash flows from operating activities (a
non-GAAP measure), which includes cash flows from operating activities of our investments in joint ventures that are equity
accounted and excludes non-cash working capital, and investment in lease incentives and initial direct leasing costs. As such,
the Trust believes the cash distributions are not an economic return of capital, but a distribution of sustainable adjusted cash
flow from operating activities. The Trust continues to monitor our distribution policy in light of the ongoing execution of our
Strategic Plan.
In any given period, the Trust anticipates that net income (loss) will, in the foreseeable future, continue to vary from total
distributions as net income (loss) includes non-cash items such as fair value adjustments to investment properties and
financial instruments. Accordingly, the Trust does not use net income (loss) as a proxy for distributions.
As required by National Policy 41-201, “Income Trusts and Other Indirect Offerings”, the following tables outline the
differences between cash generated from (utilized in) operating activities (per consolidated financial statements) and total
distributions, as well as the differences between net income (loss) and total distributions, in accordance with the guidelines.
The following table summarizes net income (loss) and total distributions for the three months and years ended December 31,
2016 and December 31, 2015:
Net loss for the period
Total distributions(1)
Three months ended December 31,
2015
(54,137 ) $
64,265 $
2016
(100,671 ) $
42,235 $
$
$
Year ended December 31,
2016
2015
(879,705 ) $
(55,039 )
254,303
177,633 $
(1) Includes distributions declared on LP B Units and 4% bonus on distributions reinvested.
As the Trust uses adjusted cash flows from operating activities (a non-GAAP measure) in determining its cash available for
distribution, the following table reconciles cash generated from operating activities (per consolidated financial statements) to
adjusted cash flows from operating activities.
Cash generated from operating activities (per consolidated
financial statements)
Add:
Investment in joint venturesʼ cash flows from operating activities
Cash flows from operating activities (including investment in joint
ventures)
Add (deduct):
Three months ended December 31,
2015(1)
2016
Year ended December 31,
2016
2015(1)
$
35,911
$
53,778
$
147,368
$
192,509
278
7,270
18,123
46,419
36,189
61,048
165,491
238,928
Investment in lease incentives and initial direct leasing costs
Change in non-cash working capital
Adjusted cash flows from operating activities
Total distributions(2)
21,710
3,810
61,709 $
42,235 $
24,653
(12,591 )
73,110 $
64,265 $
82,287
15,586
263,364 $
177,633 $
67,145
(15,454 )
290,619
254,303
$
$
(1) Comparative figures have been reclassified to conform to the current period presentation.
(2) Includes distributions declared on LP B Units and 4% bonus on distributions reinvested.
Dream Office REIT 2016 Annual Report | 56
The following table compares adjusted cash flows from operating activities to total distributions, net loss and cash generated
from operating activities (per consolidated financial statements) to total distributions:
Three months ended December 31,
2015(1)
2016
Year ended December 31,
2016
2015(1)
Excess of adjusted cash flows from operating activities over total
distributions(2)
Total distributions(2) over net loss
Shortfall of cash generated from operating activities (per consolidated
financial statements) over total distributions(2)
$
$
19,474
(142,906 )
$
8,845
(118,402 )
85,731
(1,057,338 )
$
36,316
(309,342 )
$
(6,324 ) $
(10,487 ) $
(30,265 ) $
(61,794 )
(1) Comparative figures have been reclassified to conform to the current period presentation.
(2) Includes distributions declared on LP B Units and 4% bonus on distributions reinvested.
For the three months and year ended December 31, 2016, adjusted cash flows from operating activities exceeded total
distributions by $19.5 million and $85.7 million, respectively (for the three months and year ended December 31, 2015 –
$8.8 million and $36.3 million, respectively).
For the three months and year ended December 31, 2016, total distributions exceeded cash generated from operating
activities (per consolidated financial statements) by $6.3 million and $30.3 million, respectively. The shortfall of cash
generated from operating activities over total distributions is mainly due to the seasonal fluctuations in non-cash working
capital and the impact of leasing costs, which fluctuate with lease maturities, renewal terms and the type of asset being
leased. In addition, the shortfall for the year ended December 31, 2016 was due to the fact that cash flows from operating
activities of our investments in joint ventures that are equity accounted were excluded from this calculation despite the fact
that they form part of the Trust’s determination of its cash available for distribution. For the three months and year ended
December 31, 2015, total distributions exceeded cash generated from operating activities (per consolidated financial
statements) by $10.5 million and $61.8 million, respectively, for the same reasons noted in the current year.
For the three months and year ended December 31, 2016, total distributions exceeded cash flows from operating activities
(including investment in joint ventures) by $6.0 million and $12.1 million, respectively. The shortfall was mainly driven by the
impact of leasing costs, which fluctuate with lease maturities, renewal terms, the type of asset being leased, and when
tenants fulfill the terms of their respective lease agreements. These investments were funded by cash and cash equivalents
and, if necessary, by our existing credit facilities. For the three months and year ended December 31, 2015, total distributions
exceeded cash flows from operating activities (including investment in joint ventures) by $3.2 million and $15.4 million,
respectively, for the same reasons noted in the current year.
Of the total distributions for the year ended December 31, 2016, $8.3 million was reinvested in units pursuant to the DRIP.
Over time, reinvestments pursuant to the DRIP will increase the number of units outstanding, thereby increasing the total
cash distributions. 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, which allows for any unforeseen expenditures and the variability in cash
distributions as a result of additional units issued pursuant to the Trust’s DRIP. Accordingly, the Trust believes this does not
constitute an economic return of capital. The Trust’s DRIP was suspended in February 2016.
For the three months and year ended December 31, 2016, total distributions exceeded net loss by $142.9 million and
$1.1 billion, respectively, primarily due to non-cash components of net loss, which include the fair value loss to investment
properties of $136.1 million and $1.1 billion, respectively, and fair value adjustments to financial instruments of $15.2 million
and $13.6 million, respectively. For the three months and year ended December 31, 2015, total distributions exceeded net loss
by $118.4 million and $309.3 million, respectively, mainly due to the same reasons noted in the current year.
Dream Office REIT 2016 Annual Report | 57
Level of debt (net total debt-to-gross book value and net secured debt-to-gross book value)
Management believes these non-GAAP measurements are important measures in the management of our debt levels. Net
total debt-to-gross book value as shown below is determined as total debt (net of cash on hand), which includes debt related
to investment in joint ventures that are equity accounted and debt related to assets held for sale, divided by total assets. Net
secured debt-to-gross book value as shown below is determined as secured debt (net of unsecured debt and cash on hand),
which includes debt related to investment in joint ventures that are equity accounted and debt related to assets held for sale,
divided by total assets. Total assets include assets of investment in joint ventures that are equity accounted and the reversal of
accumulated depreciation of property and equipment and cash on hand.
In compliance with Canadian Securities Administrators Staff Notice 52-306 (Revised), “Non-GAAP Financial Measures”, the
following tables calculate the level of debt (net total debt-to-gross book value and net secured debt-to-gross book value) as at
December 31, 2016 and December 31, 2015:
As at December 31, 2016
Amounts per
consolidated
financial statements
Share of amounts
from investment
in joint ventures
$
Non-current debt
Current debt
Debt before undernoted items
Add: Debt related to assets held for sale
Add: Overdraft(1)
Net total debt
Less: Unsecured debt
Net total secured debt
Total assets
Add: Accumulated depreciation of property and equipment
Add: Overdraft(1)
Total assets (excluding accumulated depreciation of property and
2,321,530 $
328,260
2,649,790
209,228
1,274
2,860,292
(448,828 )
2,411,464
5,486,516
(2)
8,753
1,274
39,883 $
—
39,883
—
—
39,883
—
39,883
46,751
—
—
equipment and cash on hand)
Net total debt-to-gross book value
Net secured debt-to-gross book value
$
5,496,543
$
46,751
$
Total
2,361,413
328,260
2,689,673
209,228
1,274
2,900,175
(448,828 )
2,451,347
5,533,267
8,753
1,274
(3)
5,543,294
52.3 %
44.2 %
(1) Overdraft represents overdraft at year-end, excluding cash held in joint ventures and co-owned properties.
(2) Includes investment in joint ventures that are equity accounted.
(3) Total assets are determined as total assets, including assets related to investment in joint ventures that are equity accounted and assets held for sale at
year-end.
Dream Office REIT 2016 Annual Report | 58
As at December 31, 2015
$
Non-current debt
Current debt
Debt before undernoted items
Add: Debt related to assets held for sale
Add: Overdraft(1)
Net total debt
Less: Unsecured debt
Net total secured debt
Total assets
Add: Accumulated depreciation of property and equipment
Add: Overdraft(1)
Total assets (excluding accumulated depreciation of property and
Amounts per
consolidated
financial statements
Share of amounts
from investment
in joint ventures
2,401,104 $
609,644
3,010,748
24,245
2,485
3,037,478
(534,097)
2,503,381
6,762,874
6,471
2,485
(2)
410,832 $
74,661
485,493
—
—
485,493
—
485,493
523,163
—
—
equipment and cash on hand)
Net total debt-to-gross book value
Net secured debt-to-gross book value
$
6,771,830
$
523,163
$
Total
2,811,936
684,305
3,496,241
24,245
2,485
3,522,971
(534,097)
2,988,874
7,286,037
6,471
2,485
(3)
7,294,993
48.3 %
41.0 %
(1) Overdraft represents overdraft at year-end, excluding cash held in joint ventures and co-owned properties.
(2) Includes investment in joint ventures that are equity accounted.
(3) Total assets are determined as total assets, including assets related to investment in joint ventures that are equity accounted and assets held for sale at
year-end.
Dream Office REIT 2016 Annual Report | 59
Interest coverage ratio
Management believes this non-GAAP measurement is an important measure in determining our ability to cover interest
expense based on our operating performance. Interest coverage ratio for the year ended December 31, 2016 and for the year
ended December 31, 2015 includes the results from investment in joint ventures that are equity accounted. Interest coverage
ratio as shown below is calculated as net rental income plus interest and fee income, less general and administrative expenses,
all divided by interest expense on total debt.
In compliance with Canadian Securities Administrators Staff Notice 52-306 (Revised), “Non-GAAP Financial Measures”, the
following tables calculate the interest coverage ratio for the years ended December 31, 2016 and December 31, 2015:
Net rental income
Add: Interest and fee income
Less: General and administrative expenses
Total
Interest expense – debt
Interest coverage ratio (times)
Net rental income
Add: Interest and fee income
Less: General and administrative expenses
Total
Interest expense – debt
Interest coverage ratio (times)
For the year ended December 31, 2016
Amounts per
consolidated
financial statements
Share of amounts
from investment
in joint ventures
368,578 $
3,258
(11,906 )
359,930
119,520 $
30,621 $
42
—
30,663
8,864 $
Total
399,199
3,300
(11,906 )
390,593
128,384
3.0
For the year ended December 31, 2015
Amounts per
consolidated
financial statements
Share of amounts
from investment
in joint ventures
387,513 $
3,005
(12,196 )
378,322
131,818 $
59,791 $
68
(47 )
59,812
17,266 $
Total
447,304
3,073
(12,243 )
438,134
149,084
2.9
$
$
$
$
Net average debt-to-EBITDFV
Management believes this non-GAAP measurement is an important measure in determining the time it takes the Trust, based
on its historical operating performance, to repay our average debt.
Net average debt-to-EBITDFV as shown below is calculated as total average debt (net of cash on hand), which includes debt
related to investment in joint ventures that are equity accounted and debt related to assets held for sale, divided by
annualized EBITDFV for the current quarter. EBITDFV – annualized is calculated as net income for the period adjusted for: lease
termination fees and other, non-cash items included in investment properties revenue, fair value adjustments to investment
properties and financial instruments, share of net income and accretion loss from Dream Industrial REIT, distributions received
from Dream Industrial REIT, interest expense, amortization of external management contracts and depreciation on property
and equipment, net loss on transactions and other activities, and deferred income taxes.
Dream Office REIT 2016 Annual Report | 60
Net debt-to-adjusted EBITDFV
Management believes this non-GAAP measurement is an important measure in determining the time it takes the Trust, on a
go forward basis, based on its normalized operating performance, to repay our debt.
Net debt-to-adjusted EBITDFV as shown below is calculated as total debt (net of cash on hand), which includes debt related to
investment in joint ventures that are equity accounted and debt related to assets held for sale, divided by adjusted EBITDFV –
annualized. Adjusted EBITDFV – annualized is calculated as EBITDFV – annualized less NOI of disposed properties for the
quarter.
In compliance with Canadian Securities Administrators Staff Notice 52-306 (Revised), “Non-GAAP Financial Measures”, the
following tables calculate the annualized net average debt-to-EBITDFV and annualized net debt-to-adjusted EBITDFV for the
three months ended December 31, 2016 and December 31, 2015:
December 31, 2016
Amounts per
consolidated
financial statements
2,321,530 $
328,260
2,649,790
209,228
(19,700 )
1,274
2,840,592 $
19,700
2,860,292 $
(88,470 )
(213 )
4,163
123,200
15,246
(1,156 )
3,293
28,248
1,963
872
9,332
724
97,202 $
(3,634 )
93,568 $
$
$
$
$
$
Non-current debt
Current debt
Debt before undernoted items
Add: Debt related to assets held for sale
Less: Weighted average debt adjustment(1)
Add: Overdraft(2)
Net average debt
Add: Weighted average debt adjustment(1)
Net debt
Net loss for the period
Add (deduct):
Lease termination fees and other
Non-cash items included in investment properties revenue(3)
Fair value adjustments to investment properties
Fair value adjustments to financial instruments
Share of net income and accretion loss from Dream Industrial REIT
Distributions received from Dream Industrial REIT
Interest – debt
Interest – subsidiary redeemable units
Amortization of external management contracts and depreciation
on property and equipment
Net loss on transactions and other activities
Deferred income taxes
EBITDFV – quarterly
Less: NOI of disposed properties for the quarter
Adjusted EBITDFV – quarterly
EBITDFV – annualized
Adjusted EBITDFV – annualized
Net average debt-to-EBITDFV (years)
Net debt-to-adjusted EBITDFV (years)
$
Share of amounts
from investment
in joint ventures
39,883
—
39,883
—
—
—
39,883
—
39,883
$
(12,201 )
$
—
31
12,900
—
—
—
259
—
—
—
—
989
—
989
$
$
$
$
(1) Weighted average debt adjustment reflects outstanding debt at year-end, pro-rated for the number of days outstanding during the period.
(2) Overdraft represents overdraft at year-end, excluding cash held in joint ventures and co-owned properties.
(3) Includes adjustments for straight-line rent and amortization of lease incentives.
Dream Office REIT 2016 Annual Report | 61
Total
2,361,413
328,260
2,689,673
209,228
(19,700 )
1,274
2,880,475
19,700
2,900,175
(100,671 )
(213 )
4,194
136,100
15,246
(1,156 )
3,293
28,507
1,963
872
9,332
724
98,191
(3,634 )
94,557
392,764
378,228
7.3
7.7
Amounts included in
consolidated
financial statements
Share of amounts
from investment
in joint ventures
Non-current debt
Current debt
Debt before undernoted items
Add: Debt related to assets held for sale
Add: Weighted average debt adjustment(1)
Add: Overdraft(2)
Net average debt
Less: Weighted average debt adjustment(1)
Net debt
Net income (loss) for the period
Add (deduct):
Lease termination fees and other
Non-cash items included in investment properties revenue(3)
Fair value adjustments to investment properties
Fair value adjustments to financial instruments
Share of net loss from Dream Industrial REIT
Distributions received from Dream Industrial REIT
Interest – debt
Interest – subsidiary redeemable units
Amortization of external management contracts and depreciation
on property and equipment
Net loss on transactions and other activities
Deferred income taxes
EBITDFV – quarterly
Less: NOI of disposed properties for the quarter
Adjusted EBITDFV – quarterly
EBITDFV – annualized
Adjusted EBITDFV – annualized
Net average debt-to-EBITDFV (years)
Net debt-to-adjusted EBITDFV (years)
$
$
$
$
$
2,401,104 $
609,644
3,010,748
24,245
8,430
2,485
3,045,908 $
(8,430 )
3,037,478 $
(64,323 )
(35 )
3,408
79,100
(20,695 )
5,923
3,247
32,302
2,931
779
57,169
516
100,322 $
(494 )
99,828 $
410,832 $
74,661
485,493
—
—
—
485,493 $
—
485,493 $
10,186
—
(60 )
300
—
—
—
4,286
—
3
115
—
14,830 $
—
14,830 $
$
$
December 31, 2015
Total
2,811,936
684,305
3,496,241
24,245
8,430
2,485
3,531,401
(8,430 )
3,522,971
(54,137 )
(35 )
3,348
79,400
(20,695 )
5,923
3,247
36,588
2,931
782
57,284
516
115,152
(494 )
114,658
460,608
458,632
7.7
7.7
(1) Weighted average debt adjustment reflects outstanding debt at year-end, pro-rated for the number of days outstanding during the period.
(2) Overdraft represents overdraft at year-end, excluding cash held in joint ventures and co-owned properties.
(3) Includes adjustments for straight-line rent and amortization of lease incentives.
Dream Office REIT 2016 Annual Report | 62
SECTION III – DISCLOSURE CONTROLS AND PROCEDURES
At December 31, 2016, financial year-end, the Chief Executive Officer and the Chief Financial Officer (the “Certifying Officers”),
together with other members of management, have evaluated the design and operational effectiveness of Dream Office REIT’s
disclosure controls and procedures, as defined in National Instrument 52-109 – Certification of Disclosure in Issuers’ Annual
and Interim Filings (“NI 52-109”). The Certifying Officers have concluded that the disclosure controls and procedures are
adequate and effective in order to provide reasonable assurance that material information has been accumulated and
communicated to management, to allow timely decisions of required disclosures by Dream Office REIT and its consolidated
subsidiary entities, within the required time periods.
Dream Office REIT’s internal control over financial reporting (as defined in NI 52-109) is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external
purposes in accordance with IFRS. During the year ended December 31, 2016, Dream Office REIT implemented the framework
established in “2013 Committee of Sponsoring Organizations (COSO) Internal Control Framework”, published by the
Committee of Sponsoring Organizations of the Treadway Commission. The Certifying Officers, together with other members of
management, have evaluated the design and operation of Dream Office REIT’s internal control over financial reporting. Based
on that evaluation, the Certifying Officers have concluded that Dream Office REIT’s internal control over financial reporting
was effective as at December 31, 2016.
There were no changes in Dream Office REIT’s internal control over financial reporting during the financial year ended
December 31, 2016 that have materially affected, or are reasonably likely to materially affect, Dream Office REIT’s internal
control over financial reporting.
SECTION IV – RISKS AND OUR STRATEGY TO MANAGE
In addition to the specific risks discussed in this MD&A, we are exposed to various risks and uncertainties, many of which are
beyond our control and could have an impact on our business, financial condition, operating results and prospects.
Unitholders should consider these risks and uncertainties when assessing our outlook in terms of investment potential. For a
further discussion of the risks and uncertainties identified by Dream Office REIT, please refer to our latest Annual Report and
Annual Information Form filed on SEDAR (www.sedar.com).
REAL ESTATE OWNERSHIP
Real estate ownership is generally subject to numerous factors and risks, including changes in general economic conditions
(such as the availability, terms and cost of mortgage financings and other types of credit), local economic conditions (such as
an oversupply of office and other commercial properties or a reduction in demand for real estate in the area), the
attractiveness of properties to potential tenants or purchasers, competition with other landlords with similar available space,
and the ability of the owner to provide adequate maintenance at competitive costs.
An investment in real estate is relatively illiquid. Such illiquidity will tend to limit our ability to vary our portfolio promptly in
response to changing economic or investment conditions. In recessionary times, it may be difficult to dispose of certain types
of real estate. The costs of holding real estate are considerable, and during an economic recession, we may be faced with
ongoing expenditures with a declining prospect of incoming receipts. In such circumstances, it may be necessary for us to
dispose of properties at lower prices in order to generate sufficient cash 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.
Dream Office REIT 2016 Annual Report | 63
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 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.
Given the prominence of the oil and gas industry in Alberta, the office market in that province continues to be significantly
impacted by the price of oil. A continuation of these market and economic conditions, including any substantial decline or
prolonged weakness in the price of oil, could adversely affect the Trust’s occupancy, its operating results and its investment
property values as they relate to the properties in our Alberta portfolio. The Trust expects that occupancy, operating results
and its Alberta investment properties values will remain challenging for the foreseeable future and there can be no assurance
that the occupancy, operating results and fair value will not decrease further. Until there is positive visibility on oil prices and
related economic fundamentals, the Trust anticipates continued challenges for its assets located in Alberta and will
continuously evaluate the economic health of the markets in which we operate to ensure that we have identified and, where
possible, mitigated risks to the Trust, including the potential impacts of changes in the price of oil.
FINANCING
We require access to capital to maintain our properties as well as to fund our growth strategy and significant capital
expenditures. There is no assurance that capital will be available when needed or on favourable terms. Our access to third-
party financing will be subject to a number of factors, including general market conditions; the market’s perception of our
growth potential; our current and expected future earnings; our cash flow and cash distributions and cash interest payments;
and the market price of our REIT A Units.
A significant portion of our financing is debt. Accordingly, we are subject to the risks associated with debt financing, including
the risk that our cash flows will be insufficient to meet required payments of principal and interest, and that, on maturities of
such debt, we may not be able to refinance the outstanding principal under such debt or that the terms of such refinancing
will be more onerous than those of the existing debt. If we are unable to refinance debt at maturity on terms acceptable to us
or at all, we may be forced to dispose of one or more of our properties on disadvantageous terms, which may result in losses
and could alter our debt-to-equity ratio or be dilutive to unitholders. Such losses could have a material adverse effect on our
financial position or cash flows.
The degree to which we are leveraged could have important consequences to our operations. A high level of debt will reduce
the amount of funds available for the payment of distributions to unitholders and interest payments on our debentures; limit
our flexibility in planning for and reacting to changes in the economy and in the industry, and increase our vulnerability to
general adverse economic and industry conditions; limit our ability to borrow additional funds, dispose of assets, encumber
our assets and make potential investments; place us at a competitive disadvantage compared to other owners of similar real
estate assets that are less leveraged and, therefore, may be able to take advantage of opportunities that our indebtedness
would prevent us from pursuing; make it more likely that a reduction in our borrowing base following a periodic valuation (or
redetermination) could require us to repay a portion of then outstanding borrowings; and impair our ability to obtain
additional financing in the future for working capital, capital expenditures, acquisitions, general trust or other purposes.
Dream Office REIT 2016 Annual Report | 64
CHANGES IN LAW
We are subject to applicable federal, provincial, municipal, local and common laws and regulations governing the ownership
and leasing of real property, employment standards, environmental matters, taxes and other matters. It is possible that future
changes in such laws or regulations, or changes in their application, enforcement or regulatory interpretation, could result in
changes in the legal requirements affecting us (including with retroactive effect). In addition, the political conditions in the
jurisdictions in which we operate are also subject to change. Any changes in investment policies or shifts in political attitudes
may adversely affect our investments. Any changes in the laws to which we are subject in the jurisdictions in which we operate
could materially affect our rights and title in and to the properties and the revenues we are able to generate from
our investments.
INTEREST RATES
When entering into financing agreements or extending such agreements, we depend on our ability to agree on terms for
interest payments that will not impair our desired profit, and on amortization schedules that do not restrict our ability to pay
distributions on our REIT A Units and interest payments on our debentures. In addition to existing variable rate portions of our
financing agreements, we may enter into future financing agreements with variable interest rates. An increase in interest rates
could result in a significant increase in the amount we pay to service debt, which could limit our ability to pay distributions to
unitholders and could impact the market price of the REIT A Units and/or the debentures. We have implemented an active
hedging program in order to offset the risk of revenue losses and to provide more certainty regarding the payment of
distributions to unitholders and cash interest payments under the debentures should current variable interest rates increase.
However, to the extent that we fail to adequately manage these risks, including if any such hedging arrangements do not
effectively or completely hedge increases in variable interest rates, our financial results, our ability to pay distributions to
unitholders and cash interest payments under our financing arrangements, and the debentures and future financings may be
negatively affected. Hedging transactions involve inherent risks. Increases in interest rates generally cause a decrease in
demand for properties. Higher interest rates and more stringent borrowing requirements, whether mandated by law or
required by banks, could have a significant negative effect on our ability to sell any of our properties.
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 the 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
Dream Office REIT 2016 Annual Report | 65
(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
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.
RELIANCE ON DAM FOR CERTAIN MANAGEMENT SERVICES
We rely on DAM for certain management services, including the services of a Chief Executive Officer, as requested. DAM has
the right, upon 180 days’ notice, to terminate our Management Services Agreement for any reason: (i) at any time on or after
April 2, 2018; and (ii) at any time on or after April 2, 2017 if the Shared Services and Cost Sharing Agreement has been
terminated by Dream Office LP. Our Management Services Agreement may also be terminated in other circumstances, such as
in the event of default or insolvency of DAM within the meaning of such agreement. Accordingly, there can be no assurance
that DAM will continue to provide management services. If DAM should cease for whatever reason to provide such services,
this may adversely impact our ability to meet our objectives and execute our strategy.
The Management Services Agreement does not obligate DAM to provide the services of any particular person to Dream Office
REIT, including the services of our current senior management team. However, we have no reason to believe the services of
our current senior management team will not continue to be provided by DAM.
Dream Office REIT 2016 Annual Report | 66
IMPLEMENTING THE TRUST’S STRATEGIC PLAN
The Trust’s Strategic Plan is intended to surface value for unitholders by reducing the current discount to NAV and creating a
stronger and more flexible balance sheet. However, there can be no assurance that the Trust will be successful in executing
the Strategic Plan and achieving its expected benefits. If we are unable to successfully execute the Strategic Plan, whether
because we are unable to complete dispositions of our investment properties contemplated by the Strategic Plan on
favourable terms or at prices which reflect fair value, because one or more of the assumptions underlying the Strategic Plan
proves to be incorrect, or as a result of events outside the Trust’s control that were not anticipated or expected when the
Strategic Plan was implemented or for other reasons, or if the benefits of the Strategic Plan are not fully achieved or take
longer to realize than anticipated, it could have a material adverse effect on the Trust’s financial condition and results
of operations.
SECTION V – CRITICAL ACCOUNTING POLICIES
CRITICAL ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS IN APPLYING ACCOUNTING POLICIES
Preparing the consolidated financial statements requires management to make judgments, estimates and assumptions that
affect the amounts reported. Management bases its judgments and estimates on historical experience and other factors it
believes to be reasonable under the circumstances, but which are inherently uncertain and unpredictable, the result of which
forms the basis of the carrying amounts of assets and liabilities. However, uncertainty about these assumptions and estimates
could result in outcomes that could require a material adjustment to the carrying amount of the affected asset or liability in
the future.
Critical accounting judgments
The following are the critical accounting judgments used in applying the Trust’s accounting policies that have the most
significant effect on the amounts in the consolidated financial statements:
Investment properties
Critical judgments are made in respect of the fair values of investment properties and the investment properties held in equity
accounted investments. The fair values of these investments are reviewed at least quarterly by management with reference to
independent property appraisals and market conditions existing at the reporting date, using generally accepted market
practices. The independent appraisers are experienced, nationally recognized and qualified in the professional valuation of
office buildings in their respective geographic areas. Judgment is also applied in determining the extent and frequency of
independent appraisals. At each reporting period, a select number of properties, determined on a rotational basis, are valued
by appraisals. For properties not subject to independent appraisals, valuations are prepared internally during each reporting
period.
Critical assumptions relating to the estimates of fair values of investment properties include cap rates, discount rates that
reflect current market uncertainties, terminal cap rates and market rents. Other key assumptions relating to the estimates of
fair values of investment properties include components of stabilized NOI, leasing costs and vacancy rates. The Trust examines
the critical and key assumptions at the end of each reporting period and updates these assumptions based on recent leasing
activity and external market data available at that time. If there is any change in these assumptions or regional, national or
international economic conditions, the fair value of investment properties may change materially.
The Trust makes judgments with respect to whether lease incentives provided in connection with a lease enhance the value of
the leased space, which determines whether or not such amounts are treated as tenant improvements and added to
investment properties. Lease incentives, such as cash, rent-free periods and lessee- or lessor-owned improvements, may be
provided to lessees to enter into an operating lease. Lease incentives that do not provide benefits beyond the initial lease
term are included in the carrying amount of investment properties and are amortized as a reduction of rental revenue on a
straight-line basis over the term of the lease.
Judgment is also applied in determining whether certain costs are additions to the carrying amount of the investment
property.
Dream Office REIT 2016 Annual Report | 67
Impairment
The Trust assesses the possibility and amount of any impairment loss or write-down as it relates to the investment in
Dream Industrial REIT, amounts receivable, property and equipment, external management contracts and goodwill.
IAS 39, “Financial Instruments: Recognition and Measurement”, requires management to use judgment in determining if the
Trust’s financial assets are impaired. In making this judgment, the Trust evaluates, among other factors, the duration and
extent to which the fair value of the investment is less than its carrying amount; and the financial health of and short-term
business outlook for the investee, including factors such as industry and sector performance, changes in technology, and
operational and financing cash flows.
IAS 36, “Impairment of Assets” (“IAS 36”), requires management to use judgment in determining the recoverable amount of
assets and equity accounted investments that are tested for impairment, including goodwill, the investment in Dream
Industrial REIT and the investment in joint ventures. Judgment is involved in estimating the fair value less cost to sell or value-
in-use of the cash-generating units (“CGUs”) to which goodwill has been allocated, including estimates of growth rates,
discount rates and terminal rates. Judgment is also involved in estimating the value-in-use of the investment in Dream
Industrial REIT, including estimates of future cash flows, discount rates and terminal rates. The values assigned to these key
assumptions reflect past experience and are consistent with external sources of information.
The Trust’s goodwill balance is allocated to the office properties group of CGUs by geographical segment (herein referred to as
the goodwill CGU). The recoverable amount of the Trust’s goodwill CGU is determined based on the value-in-use approach.
For the purpose of this impairment test, the Trust uses cash flow projections forecasted out for a ten-year period, consistent
with the internal financial budgets approved by management on a property-by-property basis. The key assumptions used
in determining the value-in-use of the goodwill CGU are the estimated growth rate, discount rate and terminal rate. In
arriving at the growth rate, the Trust considers past experience and inflation, as well as industry trends. The Trust utilizes
weighted average cost of capital (“WACC”) to determine the discount rate and terminal rate. The WACC reflects specific risks
that would be attributable to the Trust. As the Trust is not subject to taxation, no adjustment is required to adjust the WACC
on a pre-tax basis.
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 reporting 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 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
mortgages, term loan facility, convertible debentures and debentures. The critical assumptions underlying the fair value
measurements and disclosures include the market price of REIT A Units, market interest rates for mortgages, term loan facility
and unsecured debentures, and assessment of the effectiveness of hedging relationships.
For certain financial instruments, including cash and cash equivalents, amounts receivable, other receivables, 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 loan facility 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.
FUTURE ACCOUNTING POLICY CHANGES
Statement of cash flows
IAS 7, “Cash Flow Statements” – (“IAS 7”), has been amended by the IASB to introduce additional disclosure that will allow
users to understand changes in liabilities arising from financing activities. This amendment to IAS 7 is effective for annual
periods beginning or after January 1, 2017. The Trust does not anticipate this amendment to have a material impact to the
consolidated financial statements.
Dream Office REIT 2016 Annual Report | 68
Revenue recognition
IFRS 15, “Revenue from Contracts with Customers” (“IFRS 15”), provides a comprehensive five-step revenue recognition model
for all contracts with customers. The IFRS 15 revenue recognition model requires management to exercise significant
judgment and make estimates that affect revenue recognition. IFRS 15 is effective for annual periods beginning on or after
January 1, 2018, with earlier application permitted. The Trust is currently evaluating the impact of adopting this standard on
the consolidated financial statements.
Financial instruments
The final version of IFRS 9, “Financial Instruments” (“IFRS 9”), was issued by the IASB in July 2014 and will replace IAS 39,
“Financial Instruments: Recognition and Measurement” (“IAS 39”). IFRS 9 introduces a model for classification and
measurement, a single, forward-looking “expected loss” impairment model and a substantially reformed approach to hedge
accounting. The new single, principle-based approach for determining the classification of financial assets is driven by cash
flow characteristics and the business model in which an asset is held. The new model also results in a single impairment model
being applied to all financial instruments, which will require more timely recognition of expected credit losses. It also includes
changes in respect of an entity’s own credit risk in measuring liabilities elected to be measured at fair value, so that gains
caused by the deterioration of an entity’s own credit risk on such liabilities are no longer recognized in profit or loss. The
entity’s own credit changes can be early adopted in isolation without otherwise changing the accounting for financial
instruments.
Lastly, a third measurement category for financial assets – “fair value through other comprehensive income” will exist. IFRS 9
is effective for annual periods beginning on or after January 1, 2018; however, it is available for early adoption. The Trust is
currently evaluating the impact of adopting this standard on the consolidated financial statements.
Financial instruments – disclosures
IFRS 7, “Financial Instruments: Disclosures” (“IFRS 7”), has been amended by the IASB to require additional disclosures on
transition from IAS 39 to IFRS 9. The amendment to IFRS 7 is effective for annual periods beginning on or after January 1,
2018. The Trust is currently evaluating the impact of adopting this standard on the consolidated financial statements.
Leases
IFRS 16, “Leases” (“IFRS 16”), sets out the principles for the recognition, measurement and disclosure of leases. IFRS 16
provides revised guidance on identifying a lease and for separating lease and non-lease components of a contract. IFRS 16
introduces a single accounting model for all lessees and requires a lessee to recognize right-of-use assets and lease liabilities
for leases with terms of more than 12 months, unless the underlying asset is of low value. Under IFRS 16, lessor accounting for
operating and finance leases will remain substantially unchanged. IFRS 16 is effective for annual periods beginning on or after
January 1, 2019, with earlier application permitted for entities that apply IFRS 15. The Trust is currently evaluating the impact
of adopting this standard on the consolidated financial statements.
ADDITIONAL INFORMATION
Additional information relating to Dream Office REIT, including the latest Annual Information Form of Dream Office REIT, is
available on SEDAR at www.sedar.com.
Dream Office REIT 2016 Annual Report | 69
SECTION V – SUPPLEMENTARY INFORMATION
The following table within this section include supplementary information on our portfolio as at December 31, 2016.
Asset listing
Property
Ownership
Saskatoon Square, Saskatoon
Station Tower, Surrey
1900 Sherwood Place, Regina
Victoria Tower, Regina
Princeton Tower, Saskatoon
340-450 3rd Avenue N., Saskatoon
13888 Wireless Way, Richmond
Scotia Centre, Yellowknife
Precambrian Building, Yellowknife
Northwest Tower, Yellowknife
625 Agnes Street, New Westminster
1914 Hamilton Street, Regina
350–450 Lansdowne Street,
Kamloops(2)
2261 Keating Cross Road, Victoria(2)
Financial Building, Regina
Preston Centre, Saskatoon
2220 College Avenue, Regina
Bellanca Building, Yellowknife(3)
Gallery Building, Yellowknife
Harbour Landing, Phase 2, Regina
2400 College Avenue, Regina
Royal Centre, Saskatoon
2208 Scarth Street, Regina
Royal Centre-Retail, Saskatoon
2445 – 13th Avenue, Regina
234 – 1st Avenue South, Saskatoon
B.C./Saskatchewan/N.W.T.
IBM Corporate Park, Calgary
F1RST Tower, Calgary(4)
HSBC Bank Place, Edmonton
840 – 7th Avenue SW, Calgary
Enbridge Place, Edmonton
444 – 7th Building, Calgary
McFarlane Tower, Calgary
Life Plaza, Calgary
Rocky Mountain Plaza, Calgary
Milner Building, Edmonton
2257 & 2301 Premier Way,
Sherwood Park
2121 & 2181 Premier Way,
Sherwood Park
Airport Corporate Centre, Calgary
Franklin Atrium, Calgary
Northland Building, Calgary
Baker Centre, Edmonton
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
40.0 %
40.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
50.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
Total GLA
(in thousands
of square feet)
228
220
185
144
135
131
117
108
93
88
86
82
Owned share of
total GLA
(in thousands of
square feet)
228
220
185
144
135
131
117
108
93
88
86
82
190
182
66
62
60
52
48
39
36
32
25
16
16
10
2,451
358
710
301
273
262
261
242
237
205
178
156
151
150
150
147
143
76
73
66
62
60
52
48
39
36
32
25
16
16
10
2,228
358
354
301
273
262
261
242
237
205
178
156
151
150
150
147
143
Year
built/
renovated
1980
1994
1992/2003
1976
1988
1980/1993
2008
1991
1976
1991
1981
1973
1970/2008
1999
1958/1992
1988/2003
1976
1973
2012
2013
1977
1952
1974
1952
1975
1971
2002
1983
1981
1979/2001
1981
1963/1998
1979/2003
1980/1992
1972
1957
2003
2005, 2006
2000
1981
1982
1958
Dream Office REIT 2016 Annual Report | 70
Average tenant
size (in
thousands of
square feet)
15
11
26
72
7
17
58
7
11
6
5
12
No. of
tenants
14
19
7
2
16
5
2
15
7
14
15
7
29
5
1
12
1
—
2
2
4
2
3
6
5
4
199
10
8
18
21
5
11
30
28
11
4
16
16
9
8
18
23
6
26
5
5
60
—
24
19
8
16
7
2
2
2
11
34
46
15
8
52
23
7
5
17
43
9
9
16
12
6
5
Average
lease term
remaining
(in years) Occupancy(1)
2.8
3.8
2.8
1.8
3.9
4.1
2.5
6.4
4.3
4.1
3.7
3.4
4.8
2.8
1.0
4.5
4.6
—
5.2
6.6
3.9
2.2
3.5
2.4
3.2
5.5
3.6
4.9
3.4
2.6
4.9
2.0
8.2
3.2
3.2
5.2
2.1
2.3
3.6
4.9
3.1
3.9
2.8
92.9 %
93.8 %
100.0 %
100.0 %
86.3 %
65.5 %
100.0 %
96.8 %
85.6 %
93.3 %
82.5 %
100.0 %
86.1 %
72.3 %
6.8 %
97.4 %
100.0 %
— %
100.0 %
100.0 %
89.4 %
100.0 %
87.3 %
90.6 %
50.4 %
83.4 %
86.7 %
94.5 %
51.3 %
88.2 %
59.2 %
100.0 %
98.3 %
91.4 %
56.8 %
93.7 %
97.7 %
91.2 %
95.3 %
93.8 %
65.3 %
73.5 %
86.9 %
Property
Ownership
Total GLA
(in thousands
of square feet)
Owned share of
total GLA
(in thousands of
square feet)
Year
built/
renovated
No. of
tenants
Average tenant
size (in
thousands of
square feet)
Average
lease term
remaining
(in years) Occupancy(1)
606 4th Building & Barclay Parkade,
Calgary
Roslyn Building, Calgary
HSBC Building, Edmonton
Atrium I, Calgary
Atrium II, Calgary
510 – 5th Street SW, Calgary
Joffre Place, Calgary
Highfield Place, Edmonton
Dominion Centre, Calgary
435 – 4th Avenue SW, Calgary
2891 Sunridge Way, Calgary
2055 Premier Way, Strathcona
County
2899 Broadmoor Blvd., Strathcona
County
2693 Broadmoor Blvd., Strathcona
County
Kensington House, Calgary
1035 – 7th Ave SW, Calgary
2833 Broadmoor Blvd., Strathcona
County
3115 – 12th Street NE, Calgary
14505 Bannister Road, SE, Calgary
2755 Broadmoor Blvd.
441 – 5th Avenue SW, Calgary
10199 – 101st Street NW,
Edmonton(2)
Mount Royal Place, Calgary
Braithwaite Boyle Centre, Calgary
Morgex Building, Edmonton
Franklin Building, Calgary
13183 – 146th Street NW, Edmonton
2816 – 11th Street NE, Calgary
Centre 70, Calgary(2)
Alberta
Scotia Plaza (40 King Street West),
Toronto(2)
Adelaide Place, Toronto
State Street Financial Centre,
Toronto
438 University Avenue, Toronto
655 Bay Street, Toronto
74 Victoria Street/137 Yonge Street,
Toronto
720 Bay Street, Toronto
18 King Street East, Toronto
36 Toronto Street, Toronto
Scotia Plaza (44 King Street West),
Toronto(2)
330 Bay Street, Toronto
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
50.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
15.0 %
50.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
50.0 %
100.0 %
133
131
119
110
110
109
107
105
99
89
87
87
82
82
78
75
75
73
61
61
61
120
59
55
53
51
39
33
132
6,400
1,580
657
414
323
299
266
248
233
214
401
164
133
131
119
110
110
109
107
105
99
89
87
87
82
1969/1998
1966/2003
1974
1978
1979
1981
1980
1978
1979
1978
2001
2007
1999
2007
1982/2002,
2003
82
78
75
1979/2002
2000
1981
2000
2005
1973
1985
1979/2004
1982
1982/1995
1978/2001
2005
1981
1977
75
73
61
61
61
60
59
55
53
51
39
33
19
5,871
790
657
1989/2011
1982/2001
414
323
299
266
248
233
214
1958/2001
1992
1990
1958/1968,
2011
1989
1967/2008,
2009
1875/2008,
2009
200
164
1951/2011
1926
13
13
19
6
12
21
12
5
6
15
4
9
5
8
15
2
15
16
4
13
12
1
18
9
1
2
5
6
37
540
71
72
8
19
25
5
1
30
37
1
42
8
8
6
14
7
4
7
6
16
5
22
9
15
5
4
27
4
4
15
4
3
66
3
5
53
24
7
5
3
9
22
9
52
17
12
53
248
8
6
402
4
2.0
4.1
3.0
7.0
3.7
2.7
3.0
3.2
3.4
2.2
1.9
5.5
0.1
2.6
5.4
1.6
4.0
3.3
4.2
2.9
1.9
0.8
3.2
4.2
2.7
1.0
4.6
2.5
2.7
3.6
6.7
5.5
7.6
8.3
4.7
6.9
4.0
3.0
4.1
10.5
3.6
80.2 %
80.1 %
90.6 %
77.4 %
73.2 %
79.9 %
81.1 %
30.9 %
100.0 %
91.0 %
100.0 %
97.0 %
90.0 %
48.6 %
70.5 %
71.8 %
80.1 %
88.4 %
100.0 %
89.9 %
68.8 %
54.0 %
87.6 %
80.0 %
100.0 %
95.2 %
92.0 %
81.4 %
76.9 %
81.7 %
97.9 %
94.8 %
100.0 %
99.7 %
99.8 %
100.0 %
100.0 %
100.0 %
95.8 %
100.0 %
97.7 %
Dream Office REIT 2016 Annual Report | 71
Property
Ownership
Total GLA
(in thousands
of square feet)
20 Toronto Street /33 Victoria Street,
Toronto
8 King Street East, Toronto
100 Yonge Street, Toronto(2)
250 Dundas Street West, Toronto
Victory Building, Toronto
425 Bloor Street East, Toronto
212 King Street West, Toronto
357 Bay Street, Toronto
360 Bay Street, Toronto
10 King Street East, Toronto
67 Richmond Street West, Toronto
350 Bay Street, Toronto
366 Bay Street, Toronto
49 Ontario Street, Toronto(2)
56 Temperance Street, Toronto
10 Lower Spadina Avenue, Toronto(2)
83 Yonge Street, Toronto
Toronto Downtown
5915–5935 Airport Road, Mississauga
Aviva Corporate Centre, Toronto
6655–6725 Airport Road, Mississauga
5001 Yonge Street, Toronto
2075 Kennedy Road, Toronto
5945–5955 Airport Road, Mississauga
50 Burnhamthorpe Road West,
Mississauga (Sussex Centre)(2)
401 & 405 The West Mall, Toronto
(Commerce West)(2)
300, 302 & 304 The East Mall,
Toronto (Valhalla Executive Centre)(2)
90 Burnhamthorpe Road West,
Mississauga (Sussex Centre)(2)
185 The West Mall, Toronto(2)
2645 Skymark Ave., Mississauga
6299 Airport Road, Mississauga
1020 Birchmount Road, Toronto
6303 Airport Road, Mississauga
195 The West Mall, Toronto(2)
191 The West Mall, Toronto(2)
586 Argus Road, Oakville
2810 Matheson Boulevard East,
Mississauga(2)
6509 Airport Road, Mississauga
2550 Argentia Road, Mississauga
6501–6523 Mississauga Road,
Mississauga(2)
6531–6559 Mississauga Road,
Mississauga(2)
100.0 %
100.0 %
50.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
40.0 %
100.0 %
40.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
49.9 %
40.0 %
49.9 %
49.9 %
49.9 %
100.0 %
100.0 %
100.0 %
100.0 %
49.9 %
49.9 %
100.0 %
49.9 %
100.0 %
100.0 %
40.0 %
40.0 %
158
151
245
122
101
84
73
64
58
57
54
53
36
87
32
60
12
6,246
498
352
331
309
211
185
351
412
326
303
297
141
91
89
80
161
158
75
139
60
52
85
71
Owned share of
total GLA
(in thousands of
square feet)
Year
built/
renovated
1965/2009,
2011
1914/2006,
2008
1989
1983
1925/2007,
2008
1986
1908/1980
1921/2008
1955/2007,
2009
1965/2010
1940
1928/1987
1959/2006,
2009
158
151
122
122
101
84
73
64
58
57
54
53
36
35
32
24
12
5,044
498
352
331
309
211
185
175
1972
1984/2008
1988
1857/2006
1983
1987
1983
1992
1991
1981
1987
166
1985/2007
163
151
148
141
91
89
80
80
79
75
69
60
52
34
29
1973
1989
1989/2006
1984
1975/2007
1952
1979/2007
1984
1985
1992/2011
1989
1981/2010
1987
1982
1978
Average tenant
size (in
thousands of
square feet)
Average
lease term
remaining
(in years) Occupancy(1)
No. of
tenants
24
51
14
19
44
8
8
22
15
21
5
12
12
2
10
9
4
591
55
7
5
20
13
42
34
20
20
22
20
6
18
1
9
1
9
5
8
1
17
26
23
7
3
18
6
2
10
8
2
4
3
10
4
3
44
3
7
3
10
8
50
25
15
13
4
8
18
9
12
13
23
3
89
9
161
16
15
13
60
3
3
2
5.5
3.2
6.8
6.9
3.0
7.0
3.4
2.3
3.9
2.8
3.3
3.4
2.9
7.3
4.2
3.6
3.4
5.8
5.5
0.8
1.3
2.5
4.0
4.5
4.5
4.4
3.6
4.3
5.9
5.5
4.2
2.1
4.8
5.3
6.8
5.3
5.6
4.0
4.5
3.3
4.6
99.1 %
92.2 %
100.0 %
100.0 %
96.7 %
100.0 %
89.0 %
82.8 %
96.8 %
100.0 %
93.3 %
92.2 %
96.2 %
100.0 %
100.0 %
100.0 %
100.0 %
97.7 %
86.0 %
98.7 %
38.0 %
99.9 %
78.7 %
88.9 %
80.7 %
85.3 %
56.2 %
90.2 %
87.5 %
96.1 %
68.6 %
100.0 %
98.0 %
100.0 %
93.3 %
100.0 %
76.2 %
100.0 %
88.4 %
96.9 %
72.7 %
Dream Office REIT 2016 Annual Report | 72
Property
80 Whitehall Drive, Markham(2)
3035 Orlando Drive, Mississauga
Ownership
40.0 %
100.0 %
Toronto Suburban
700 De la Gauchetière Street West,
Montréal
445 Opus Industrial Boulevard,
Mount Juliet, Nashville, U.S.
275 Dundas Street West, London
(London City Centre)(2)
12800 Foster Street, Overland Park,
U.S.
400 Cumberland Road, Ottawa
130 Slater Street, Ottawa
150 Metcalfe Street, Ottawa
360 Laurier Avenue West, Ottawa
Accelerator Building, Waterloo
250 King Street, Fredericton
277 Pleasant Street, Dartmouth
219 Laurier Avenue West, Ottawa(2)
236 Brownlow Avenue, Dartmouth
180 Keil Drive South, Chatham
700 De la Gauchetière Street West-
Retail, Montréal
111 Ilsley Avenue, Dartmouth
680 Broadway Street, Tillsonburg
(Tillsonburg Gateway Centre)(2)
460 Two Nations Crossing,
Fredericton(2)
117 Kearney Lake Road, Halifax(2)
55 Norfolk Street South, Simcoe(2)
Eastern Canada(3)
Total
100.0 %
100.0 %
40.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
40.0 %
100.0 %
100.0 %
79.2 %
100.0 %
49.9 %
40.0 %
35.0 %
40.0 %
Total GLA
(in thousands
of square feet)
61
17
4,855
Owned share of
total GLA
(in thousands of
square feet)
24
17
3,609
Year
built/
renovated
1990
1991
Average tenant
size (in
thousands of
square feet)
30
17
11
No. of
tenants
2
1
385
954
717
541
185
174
123
109
107
93
80
77
188
61
37
40
27
47
51
36
13
3,660
23,612
1983/2003,
2010
954
717
217
2010
1974
185
174
123
109
107
93
80
77
75
61
37
2006
1972/2000
1968
1991
1966/2010
2006
1999
1971
1965
1987
2005
1983/2003,
2010
1983
32
27
2003
2008
1994
1987/2000
23
20
13
5
3,129
19,881
14
1
22
1
3
21
19
7
4
3
3
3
1
1
27
4
4
1
12
1
152
1,867
67
717
23
185
58
5
5
15
23
27
21
43
21
37
1
4
12
51
2
13
23
11
Average
lease term
remaining
(in years) Occupancy(1)
3.0
5.4
3.9
6.3
9.3
6.4
3.9
1.0
3.5
2.9
2.3
8.0
3.2
3.0
15.5
1.0
10.0
6.0
4.4
6.3
11.6
3.8
5.2
6.3
4.7
100.0 %
100.0 %
83.9 %
98.2 %
100.0 %
92.2 %
100.0 %
100.0 %
78.7 %
83.6 %
100.0 %
100.0 %
100.0 %
81.3 %
69.2 %
35.3 %
100.0 %
100.0 %
63.1 %
100.0 %
100.0 %
80.2 %
100.0 %
94.7 %
88.8 %
(1) Occupancy includes in-place and committed.
(2) Co-owned property.
(3) Redevelopment property.
(4) Investment in joint venture.
(5) Includes properties in southwestern Ontario and U.S.
Dream Office REIT 2016 Annual Report | 73
Management’s responsibility for the consolidated financial statements
The accompanying consolidated financial statements, the notes thereto and other financial information contained in this
Annual Report have been prepared by, and are the responsibility of, the management of Dream Office Real Estate Investment
Trust. These consolidated financial statements have been prepared in accordance with International Financial Reporting
Standards, using management’s best estimates and judgments when appropriate.
The Board of Trustees is responsible for ensuring that management fulfills its responsibility for financial reporting and internal
controls. The Audit Committee, which comprises trustees, meets with management as well as the external auditor to satisfy
itself that management is properly discharging its financial responsibilities and to review its consolidated financial statements
and the report of the auditor. The Audit Committee reports its findings to the Board of Trustees, which approves the
consolidated financial statements.
PricewaterhouseCoopers LLP, the independent auditor, has audited the consolidated financial statements in accordance with
Canadian generally accepted auditing standards. The auditor has full and unrestricted access to the Audit Committee, with or
without management present.
P. Jane Gavan
Chief Executive Officer
Rajeev Viswanathan
Chief Financial Officer
Toronto, Ontario, February 23, 2017
Dream Office REIT 2016 Annual Report | 74
Independent auditor’s report
To the Unitholders of Dream Office Real Estate Investment Trust
We have audited the accompanying consolidated financial statements of Dream Office Real Estate Investment Trust and its
subsidiaries (together, Dream Office REIT), which comprise the consolidated balance sheets as at December 31, 2016 and
December 31, 2015 and the consolidated statements of comprehensive loss, changes in equity and cash flows for the years
then ended, and the related notes, which comprise a summary of significant accounting policies and other explanatory
information.
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance
with International Financial Reporting Standards, and for such internal control as management determines is necessary to
enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud
or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our
audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with
ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial
statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated
financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of
material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the
consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as
evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit
opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Dream
Office REIT as at December 31, 2016 and December 31, 2015 and its financial performance and its cash flows for the years
then ended in accordance with International Financial Reporting Standards.
Chartered Professional Accountants, Licensed Public Accountants
Toronto, Ontario, February 23, 2017
Dream Office REIT 2016 Annual Report | 75
Note
December 31,
2016
December 31,
2015
7
8
9
10
11
19
19
12
13
14
22
15
12
16
19
18
18
18, 27
$
$
$
$
4,836,355
186,754
15,189
16,556
5,054,854
17,786
84,854
7,667
110,307
321,355
5,486,516
2,321,530
102,321
14,796
10,735
15,056
2,464,438
328,260
104,997
433,257
217,056
3,114,751
3,108,424
(747,840 )
11,181
2,371,765
5,486,516
$
$
$
$
5,899,131
184,817
595,203
17,448
6,696,599
10,258
9,052
2,051
21,361
44,914
6,762,874
2,401,104
90,912
12,596
9,038
20,284
2,533,934
609,644
112,980
722,624
24,502
3,281,060
3,168,915
301,324
11,575
3,481,814
6,762,874
Consolidated balance sheets
(in thousands of Canadian dollars)
Assets
NON-CURRENT ASSETS
Investment properties
Investment in Dream Industrial REIT
Investment in joint ventures
Other non-current assets
CURRENT ASSETS
Amounts receivable
Prepaid expenses and other receivables
Cash and cash equivalents
Assets held for sale
Total assets
Liabilities
NON-CURRENT LIABILITIES
Debt
Subsidiary redeemable units
Deferred Unit Incentive Plan
Deferred tax liabilities, net
Other non-current liabilities
CURRENT LIABILITIES
Debt
Amounts payable and accrued liabilities
Liabilities related to assets held for sale
Total liabilities
Equity
Unitholders’ equity
Retained earnings (deficit)
Accumulated other comprehensive income
Total equity
Total liabilities and equity
See accompanying notes to the consolidated financial statements.
On behalf of the Board of Trustees of Dream Office Real Estate Investment Trust:
JOANNE FERSTMAN
Trustee
MICHAEL J. COOPER
Trustee
Dream Office REIT 2016 Annual Report | 76
Consolidated statements of comprehensive loss
(in thousands of Canadian dollars)
Investment properties revenue
Investment properties operating expenses
Net rental income
Other income (loss)
Share of net income and accretion loss from investment in Dream Industrial REIT
Share of net income (loss) from investment in joint ventures
Interest and fee income
Other expenses
General and administrative
Interest:
Debt
Subsidiary redeemable units
Amortization of external management contracts and depreciation on property and equipment
Fair value adjustments, net losses on transactions and other activities
Fair value adjustments to investment properties
Fair value adjustments to financial instruments
Net losses on transactions and other activities
Loss before income taxes
Deferred income taxes
Net loss for the year
Other comprehensive income (loss)
Items reclassified to net loss:
Reclassified interest rate swaps, net of taxes
Items that will be reclassified subsequently to net income (loss):
Unrealized gain (loss) on interest rate swaps, net of taxes
Unrealized foreign currency translation gain (loss), net of taxes
Comprehensive loss for the year
See accompanying notes to the consolidated financial statements.
Note
$
Year ended December 31,
2016
2015
690,962
664,291 $
(295,713 )
(303,449 )
387,513
368,578
8
9
8,086
(154,300 )
3,258
(142,956 )
6,112
53,136
3,005
62,253
24
(11,906 )
(12,196 )
20
20
7, 19
21
32
22
(119,520 )
(8,174 )
(3,573 )
(143,173 )
(899,100 )
(13,555 )
(47,546 )
(960,201 )
(877,752 )
(1,953 )
(879,705 )
(131,818 )
(9,171 )
(2,949 )
(156,134 )
(201,030 )
48,890
(194,836 )
(346,976 )
(53,344 )
(1,695 )
(55,039 )
27
27
27
$
561
—
252
(1,207 )
(394 )
(880,099 ) $
(139 )
7,486
7,347
(47,692 )
Dream Office REIT 2016 Annual Report | 77
Consolidated statements of changes in equity
(in thousands of Canadian dollars, except for number of units)
Year ended December 31, 2016
Balance at January 1, 2016
Net loss for the year
Distributions paid and payable
Distribution Reinvestment Plan
Unit Purchase Plan
Deferred trust units exchanged for REIT A
Units
Cancellation of REIT A Units
Issue costs
Other comprehensive loss
Balance at December 31, 2016
Year ended December 31, 2015
Balance at January 1, 2015
Net loss for the year
Distributions paid and payable
Distribution Reinvestment Plan
Unit Purchase Plan
Deferred trust units exchanged for REIT A
Units
REIT B Units exchanged for REIT A Units
Cancellation of REIT A Units
Issue costs
Other comprehensive income
Balance at December 31, 2015
Note
17
18
18
14
18
27
Note
17
18
18
14
18
18
27
Number of
REIT A Units
107,860,638 $
—
—
1,122,411
362
154,507
(4,331,194 )
—
—
104,806,724 $
Unitholdersʼ
equity
3,168,915 $
—
—
17,034
6
2,696
(80,174 )
(53 )
—
3,108,424 $
Number of
REIT A Units
107,936,575 $
—
—
4,040,965
13,727
137,233
218,611
(4,486,473 )
—
—
107,860,638 $
Unitholdersʼ
equity
3,171,794 $
—
—
93,122
343
3,269
5,795
(105,114 )
(294 )
—
3,168,915 $
See accompanying notes to the consolidated financial statements.
Attributable to unitholders of the Trust
Retained
earnings
(deficit)
301,324 $
(879,705 )
(169,459 )
—
—
—
—
—
—
(747,840 ) $
Accumulated
other
comprehensive
income (loss)
11,575 $
—
—
—
—
—
—
—
(394 )
11,181 $
Total equity
3,481,814
(879,705 )
(169,459 )
17,034
6
2,696
(80,174 )
(53 )
(394 )
2,371,765
Attributable to unitholders of the Trust
Accumulated
other
comprehensive
income
4,228 $
—
—
—
—
—
—
—
—
7,347
11,575 $
Retained
earnings
601,495 $
(55,039 )
(245,132 )
—
—
—
—
—
—
—
301,324 $
Total equity
3,777,517
(55,039 )
(245,132 )
93,122
343
3,269
5,795
(105,114 )
(294 )
7,347
3,481,814
Dream Office REIT 2016 Annual Report | 78
Year ended December 31,
2015
2016
$
(879,705 ) $
(55,039 )
Note
8
9
26
7, 19
21
26
20
26
(8,086 )
154,300
21,006
899,100
13,555
35,646
(78,201 )
8,174
(18,421 )
147,368
(47,689 )
(2,623 )
470,293
11,918
(5,851 )
130,698
(35,909 )
101
520,938
12
12, 19
12
12, 19
12
17
20, 26
18
18
$
1,121,743
(61,814 )
(1,325,173 )
(133,917 )
(7,080 )
(159,782 )
(8,497 )
(80,174 )
6
(7,918 )
(662,606 )
5,700
(84 )
2,051
7,667 $
(6,112 )
(53,136 )
14,981
201,030
(48,890 )
186,196
(63,895 )
9,171
8,203
192,509
(44,755 )
(1,450 )
130,582
12,986
—
33,577
(19,535 )
2,101
113,506
572,628
(63,792 )
(512,633 )
(44,674 )
(1,987 )
(151,945 )
(8,306 )
(105,114 )
343
(1,408 )
(316,888 )
(10,873 )
2,004
10,920
2,051
Consolidated statements of cash flows
(in thousands of Canadian dollars)
Generated from (utilized in) operating activities
Net loss for the year
Non-cash items:
Share of net income and accretion loss from investment in Dream Industrial REIT
Share of net loss (income) from investment in joint ventures
Amortization and depreciation
Fair value adjustments to investment properties
Fair value adjustments to financial instruments
Other adjustments
Investment in lease incentives and initial direct leasing costs
Interest expense on subsidiary redeemable units
Change in non-cash working capital
Generated from (utilized in) investing activities
Investment in building improvements
Investment in property and equipment
Net proceeds from disposal of investment properties and expropriation of land
Distributions from investment in Dream Industrial REIT
Purchase of Dream Industrial REIT Units
Distributions from investment in joint ventures
Contributions to investment in joint ventures
Change in restricted cash
Generated from (utilized in) financing activities
Borrowings
Principal repayments
Lump sum repayments
Lump sum repayments on property dispositions
Financing costs additions
Distributions paid on REIT A Units
Interest paid on subsidiary redeemable units
Cancellation of REIT A Units
REIT A Units issued for cash
Debt settlement and REIT A Unit issue costs
Increase (decrease) in cash and cash equivalents
Foreign exchange gain (loss) on cash held in foreign currency
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
See accompanying notes to the consolidated financial statements.
Dream Office REIT 2016 Annual Report | 79
Notes to the consolidated financial statements
(All dollar amounts in thousands of Canadian dollars, except for unit, per unit or per square foot amounts)
Note 1
ORGANIZATION
Dream Office Real Estate Investment Trust (“Dream Office REIT” or the “Trust”) is an open-ended investment trust created
pursuant to a Declaration of Trust, as amended and restated, under the laws of the Province of Ontario. The consolidated
financial statements of Dream Office REIT include the accounts of Dream Office REIT and its subsidiaries. Dream Office REIT’s
portfolio comprises office properties located in urban centres across Canada and the United States (“U.S.”). A subsidiary of
Dream Office REIT performs the property management function.
The principal office and centre of administration of the Trust is 30 Adelaide Street East, Suite 301, State Street Financial
Centre, Toronto, ON M5C 3H1. The Trust is listed on the Toronto Stock Exchange (“TSX“) under the symbol “D.UN”. Dream
Office REIT’s consolidated financial statements for year ended December 31, 2016 were authorized for issuance by the Board
of Trustees on February 23, 2017, after which they may only be amended with the Board of Trustees’ approval.
For simplicity, throughout the Notes, reference is made to the units of the Trust as follows:
• “REIT A Units”, meaning the REIT Units, Series A;
• “REIT B Units”, meaning the REIT Units, Series B;
• “REIT Units”, meaning the REIT Units, Series A, and REIT Units, Series B, collectively;
• “Units”, meaning REIT Units, Series A, REIT Units, Series B, and Special Trust Units, collectively; and
• “subsidiary redeemable units”, meaning the LP Class B Units, Series 1, limited partnership units of Dream Office LP, a
subsidiary of Dream Office REIT.
Note 2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies applied in the preparation of these consolidated financial 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 financial 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 Dream Office REIT and its subsidiaries. Subsidiaries
are fully consolidated from the date of acquisition, the date on which the Trust obtains control, and continue to be
consolidated until the date such control ceases. Control exists when the Trust is exposed to, or has rights to, variable returns
from its involvement with the entity and has the ability to affect those returns through its power over the entity. All
intercompany balances, income and expenses, and unrealized gains and losses resulting from intercompany transactions are
eliminated in full.
Equity accounted investments
Equity accounted investments are investments over which the Trust has significant influence, but not control. Generally, the
Trust is considered to exert significant influence when it holds more than a 20% interest in an entity or partnership. However,
determining significant influence is a matter of judgment and specific circumstances and, from time to time, the Trust may
hold an interest of more than 20% in an entity or partnership without exerting significant influence. Conversely, the Trust may
hold an interest of less than 20% and exert significant influence through representation on the Board of Trustees, direction of
management or through contractual agreements.
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The financial results of the Trust’s equity accounted investments are included in the Trust’s consolidated financial statements
using the equity method, whereby the investment is carried on the consolidated balance sheets at cost, adjusted for the
Trust’s proportionate share of post-acquisition profits and losses and for post-acquisition changes in excess of the Trust’s
carrying amount of its investment over the net assets of the equity accounted investments, less any identified impairment
loss. The Trust’s share of profits and losses is recognized in the share of net earnings from equity accounted investments in the
consolidated statements of comprehensive income (loss). Dilution gains and losses arising from changes in the Trust’s interest
in equity accounted investments are recognized in earnings. If the Trust’s investment is reduced to zero, additional losses are
not provided for, and a liability is not recognized, unless the Trust has incurred legal or constructive obligations, or made
payments on behalf of the equity accounted investment.
At each reporting date, the Trust evaluates whether there is objective evidence that its interest in an equity accounted
investment is impaired. The entire carrying amount of the equity accounted investment is compared to the recoverable
amount, which is the higher of the value-in-use or fair value less costs to sell. The recoverable amount of each investment is
considered separately.
Where the Trust transacts with its equity accounted investments, unrealized profits and losses are eliminated to the extent of
the Trust’s interest in the investment. Balances outstanding between the Trust and equity accounted investments in which it
has an interest are not eliminated in the consolidated balance sheets.
Joint arrangements
The Trust enters into joint arrangements via joint operations and joint ventures. A joint arrangement is a contractual
arrangement pursuant to which the Trust and other parties undertake an economic activity that is subject to joint control,
whereby the strategic financial and operating policy decisions relating to the activities of the joint arrangement require the
unanimous consent of the parties sharing control, and that is referred to as joint operations. Joint arrangements that involve
the establishment of a separate entity or partnership in which each party to the venture has rights to the net assets of the
arrangements are referred to as joint ventures. In a co-ownership arrangement, the Trust owns jointly one or more investment
properties with another party and has direct rights to the investment property, and obligations for the liabilities relating to the
co-ownership.
The Trust reports its interests in joint ventures using the equity method of accounting as previously described under “Equity
accounted investments”. The Trust reports its interests in co-ownerships as joint operations by accounting for its share of the
assets, liabilities, revenues and expenses. Under this method, the Trust’s consolidated financial statements reflect only the
Trust’s proportionate share of the assets, its share of any liabilities incurred jointly with the other ventures as well as any
liabilities incurred directly, its share of any revenues earned or expenses incurred by the joint operation and any expenses
incurred directly.
Note 3
ACCOUNTING POLICIES SELECTED AND APPLIED FOR SIGNIFICANT TRANSACTIONS AND EVENTS
The significant accounting policies used in the preparation of these consolidated financial statements are described below:
Investment properties
Investment properties are initially recorded at cost, including related transaction costs in connection with asset acquisitions
and include office properties held to earn rental income and/or for capital appreciation. Subsequent to initial recognition,
investment properties are accounted for at fair value. At the end of each reporting period, the Trust determines the fair value
of investment properties by:
1) considering current contracted sales prices for properties that are available for sale;
2) obtaining appraisals from qualified external professionals applying the income approach on a rotational basis for select
properties; and
3) using internally prepared valuations applying the income approach.
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The income approach is derived from two methods: capitalization rate (“cap rate”) method and discounted cash flow method.
In applying the cap rate method, the stabilized net operating income (“stabilized NOI”) of each property is divided by an
appropriate cap rate with adjustments for items such as average lease up costs, long-term vacancy rates, non-recoverable
capital expenditures, management fees, straight-line rents and other non-recurring items. On a quarterly basis, the Trust
generally uses the cap rate method to value investment properties that are more stable and uses the discounted cash flow
method on an annual basis to validate the cap rate value on such properties. On a quarterly basis, for investment properties
that are subject to significant volatility, uncertainty and risk, the Trust generally uses the discounted cash flow method to value
such properties.
Initial direct leasing costs incurred in negotiating and arranging tenant leases are added to the carrying amount of investment
properties. Lease incentives, which include costs incurred to make leasehold improvements to tenants’ space and cash
allowances provided to tenants, are added to the carrying amount of investment properties and are amortized on a straight-
line basis over the term of the lease as a reduction to investment properties revenue. Internal leasing costs are expensed in
the period that they are incurred.
Investment properties are derecognized on disposal or when no future economic benefits are expected from their use or
disposal. Any transaction costs arising on derecognition of an investment property is included in the consolidated statements
of comprehensive income (loss) in the period the asset is derecognized.
Straight-line rent receivables are added to the carrying amount of investment properties.
Segment reporting
A reportable operating segment is a distinguishable component of the Trust that is engaged either in providing related
products or services (geographic segment) or in providing products or services within a particular economic environment
(geographic segment), which is subject to risks and rewards that are different from those of other reportable segments. The
Trust’s primary format for segment reporting is based on geographic segments. The business segments, office 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 Officer
(“CEO”) of the Trust. The operating segments derive their revenue primarily from rental income from lessees. All of the Trust’s
business activities and operating segments are reported within the geographic segments.
Prior to 2016, the Trust’s reportable operating segments of its investment properties and results of operations were
segmented geographically, namely Western Canada, Calgary downtown, Calgary suburban, Toronto downtown, Toronto
suburban and Eastern Canada. Effective January 1, 2016, the Trust made several changes to its reportable operating segments
as follows: (i) separated its investment properties and results of operations in Edmonton from Western Canada and combined
Calgary downtown and Calgary suburban into a new Alberta segment; and (ii) for the remaining properties in Western Canada,
which are located in British Columbia, Saskatchewan and Northwest Territories, the Trust renamed the Western Canada region
to B.C./Saskatchewan/N.W.T. These changes enable the chief operating decision-maker, determined to be the Chief Executive
Officer of the Trust, to evaluate the performance of our investment properties located in the province of Alberta, which is
subject to risks and rewards that are different from those of other reportable operating segments.
Other non-current assets
Other non-current assets include property and equipment, deposits, restricted cash, 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 two to seven years. The residual values and useful lives of all property and
equipment are reviewed and adjusted, if appropriate, at least once a year. Cost includes expenditures that are directly
attributable to the 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 consolidated statements
of comprehensive income (loss) during the reporting period in which they are incurred.
Other non-current assets are derecognized on disposal or when no future economic benefits are expected from their use or
disposal. Any gain or loss arising on derecognition of an asset (calculated as the difference between the net disposal proceeds
and the carrying amount of the asset) is included in the consolidated statements of comprehensive income (loss) in the year
the asset is derecognized.
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Revenue recognition
The Trust accounts for tenant leases as operating leases given that it has retained substantially all of the risks and rewards of
ownership of its investment properties. 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 investment properties, is recorded for the difference between the rental
revenue recognized and the contractual amount received. Recoveries from tenants are recognized as revenues in the period in
which the corresponding costs are incurred and collectibility reasonably assured. Percentage participation rents are
recognized on an accrual basis once tenant sales revenues exceed contractual thresholds. Other revenues are recorded as
earned.
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 fair value of the net identifiable 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 (“CGUs”) or groups of cash-generating units that are expected to benefit 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 geographic 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 consolidated statements of comprehensive income
(loss) over the life of the contract. As co-owned investment properties are derecognized on disposal, a portion of the
unamortized external property management contracts is written off and included in the consolidated statements of
comprehensive income (loss).
Distributions
Distributions to unitholders are recognized in the period in which the distributions are declared and are recorded as a
reduction of retained earnings.
Income taxes
Dream Office REIT is taxed as a mutual fund trust for Canadian income tax purposes. The Trust expects to distribute all of its
taxable income to its unitholders, which enables it to deduct such distributions for income tax purposes. As the income tax
obligations relating to the distributions are those of the individual unitholder, no provision for income taxes is required on
such amounts. The Trust expects to continue to distribute its taxable income and to qualify as a real estate investment trust
(“REIT”) for the foreseeable future.
For U.S. subsidiaries, income taxes are accounted for using the asset and liability method. Under this method, deferred income
taxes are recognized for the expected future tax consequences of temporary differences between the carrying value of
balance sheet items and their corresponding tax values. Deferred income taxes are computed using substantively enacted
income tax rates or laws for the years in which the temporary differences are expected to reverse or settle. Deferred tax assets
are recognized only to the extent that they are realizable.
Unit-based compensation plan
As described in Note 14, the Trust has a Deferred Unit Incentive Plan (“DUIP”) that provides for the granting of deferred trust
units and income deferred trust units to trustees, officers, employees and employees of affiliates.
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Over the vesting period, deferred units are recorded as a liability, and compensation expense is recognized at amortized cost
based on the fair value of the units. Once vested, the liability is remeasured at each reporting date at amortized cost, based on
the fair value of the corresponding REIT A Units, with changes in fair value recognized in the consolidated statements of
comprehensive income (loss) as a fair value adjustment to financial instruments. Deferred trust units and income deferred
units are only settled in REIT A Units.
Cash and cash equivalents
Cash and cash equivalents include all short-term investments with an original maturity of three months or less, and exclude
cash subject to restrictions that prevent its use for current purposes. Excluded from cash and cash equivalents are amounts
held for repayment of tenant security deposits, as required by various lending agreements. Restricted cash and deposits are
included in other non-current assets (see Note 10).
Financial instruments
Designation of financial instruments
The following summarizes the Trust’s classification and measurement of financial assets and financial liabilities:
Classification
Measurement
Financial assets
Amounts receivable
Other receivables
Restricted cash and deposits
Cash and cash equivalents
Financial liabilities
Amounts payable and accrued liabilities
Distributions payable
Tenant security deposits
Deferred Unit Incentive Plan
Subsidiary redeemable units
Mortgages
Term loan and demand revolving credit facilities
Debentures
Convertible debentures – host instrument
Convertible debentures – conversion feature
Interest rate swaps
Loans and receivables
Loans and receivables
Loans and receivables
Loans and receivables
Other liabilities
Other liabilities
Other liabilities
Other liabilities
Other liabilities
Other liabilities
Other liabilities
Other liabilities
Other liabilities
Fair value through profit or loss
Cash flow hedge
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Fair value
Fair value
Financial assets
The Trust classifies its non-derivative financial assets with fixed 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.
Amounts receivable and other receivables are initially measured at fair value and are subsequently measured at amortized
cost less provision for impairment. A provision for impairment is established for amounts receivable when there is objective
evidence that collection of all principal and interest is unlikely 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 financial
asset is reduced through an allowance account, and the amount of the loss is recognized in the consolidated statements of
comprehensive income (loss) 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 (loss). 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 is reversed to the extent that
the carrying amount of the amounts receivable does not exceed its amortized cost at the reversal date. Any subsequent
reversal of an impairment loss is recognized in the consolidated statements of comprehensive income (loss).
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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 the consolidated statements of comprehensive income (loss) 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 the consolidated
statements of comprehensive income (loss).
Mortgages, term loan facility, demand revolving credit facilities 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, term loan facility, demand revolving credit facilities and debentures are recognized at amortized cost.
On issuance, convertible debentures are separated into two financial liability components: the host instrument and the
conversion feature. This presentation is required because the conversion feature permits the holder to convert the debenture
into REIT A Units, except for the available exemption under International Accounting Standard (“IAS”) 32, “Financial
Instruments: Presentation” (“IAS 32”), would normally be presented as a financial 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 the consolidated statements of comprehensive income (loss) in each reporting 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 as they are settled in REIT A Units
and REIT B Units, respectively, which in accordance with IAS 32 are considered liabilities. Consequently, the deferred trust
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 the consolidated statements of comprehensive income (loss). Distributions paid and
payable on subsidiary redeemable units are recorded as interest expense in the consolidated statements of comprehensive
income (loss).
Financial liabilities are derecognized when the obligation under the liabilities are discharged, cancelled or expired and their
associated unamortized financing costs and unamortized fair value adjustments on assumed debt are written off and included
in consolidated statements of comprehensive income (loss).
Derivative financial instruments and hedging activities
Derivative financial 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 financial 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 (loss). The gain or loss relating to the ineffective portion is recognized immediately
in the consolidated statements of comprehensive income (loss).
Amounts accumulated in equity are reclassified to other comprehensive income (loss) in the periods when the hedged item
affects profit or loss.
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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 in the consolidated statements of comprehensive
income (loss) immediately.
Interest on debt
Interest on debt includes coupon interest, amortization of premiums allocated to the conversion features of the convertible
debentures, amortization of ancillary costs incurred in connection with the arrangement of borrowings and amortization of
fair value adjustments on assumed debt. Finance costs are amortized to interest expense.
Equity
The Trust presents REIT Units as equity, notwithstanding the fact that the Trust’s REIT Units meet the definition of a financial
liability. Under IAS 32, the REIT Units are considered a puttable financial instrument because of the holder’s option to redeem
REIT Units, generally at any time, subject to certain restrictions, at a redemption price per unit equal to the lesser of 90% of a
20-day weighted average closing price prior to the redemption date or 100% of the closing market price on the redemption
date. The total amount payable by Dream Office REIT in any calendar month will not exceed $50 unless waived by Dream
Office REIT’s Board of Trustees at their sole discretion. The Trust has determined the REIT Units can be presented as equity and
not financial liabilities because the REIT Units have all of the following features, as defined in IAS 32 (hereinafter referred to as
the “puttable exemption”):
• REIT Units entitle the holder to a pro rata share of the Trust’s net assets in the event of its liquidation. Net assets are
those assets that remain after deducting all other claims on the assets.
• REIT Units are the class of instruments that are subordinate to all other classes of instruments as they have no priority
over other claims to the assets of the Trust on liquidation, and do not need to be converted into another instrument
before they are in the class of instruments that is subordinate to all other classes of instruments.
• All instruments in the class of instruments that is subordinate to all other classes of instruments have identical features.
• Apart from the contractual obligation for the Trust to redeem the REIT Units for cash or another financial asset, the REIT
Units do not include any contractual obligation to deliver cash or another financial asset to another entity, or to exchange
financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the Trust,
and it is not a contract that will or may be settled in the Trust’s own instruments.
• The total expected cash flows attributable to the REIT Units over their lives are based substantially on the profit or loss,
and the change in the recognized net assets and unrecognized net assets of the Trust over the life of the REIT Units.
• 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.
Provisions
Provisions for legal claims are recognized when the Trust has a present legal or constructive obligation as a result of past
events; it is probable an outflow of resources will be required to settle the obligation; and the amount has been reliably
estimated. Provisions are not recognized for future operating losses.
Where there are a number of similar obligations, the likelihood an outflow will be required in settlement is determined by
considering the class of obligations as a whole. A provision is recognized even if the likelihood of an outflow with respect to
any one item included in the same class of obligations may be small.
Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a rate
that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in
the provision due to passage of time is recognized as interest expense.
Assets held for sale
Assets and liabilities (or disposal groups) are classified as held for sale when their carrying amount is to be recovered
principally through a sale transaction and a sale is considered highly probable. Investment properties continue to be measured
at fair value and the remainder of the disposal group is stated at the lower of the carrying amount and fair value less costs to
sell.
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Foreign currencies
The consolidated financial statements are presented in Canadian dollars, which is the functional currency of the Trust and the
presentation currency for the consolidated financial statements.
Assets and liabilities related to properties held in a foreign entity with a functional currency other than the Canadian dollar are
translated at the rate of exchange at the consolidated balance sheet dates. Revenues and expenses are translated at average
rates for the period, unless exchange rates fluctuate significantly during the period, in which case the exchange rates at the
dates of the transactions are used. The resulting foreign currency translation adjustments are recognized in other
comprehensive income (loss).
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.
Critical accounting judgments
The following are the critical accounting judgments used in applying the Trust’s accounting policies that have the most
significant effect on the amounts in the consolidated financial statements:
Investment properties
Critical judgments are made in respect of the fair values of investment properties and the investment properties held in equity
accounted investments. The fair values of these investments are reviewed at least quarterly by management with reference to
independent property appraisals and market conditions existing at the reporting date, using generally accepted market
practices. The independent appraisers are experienced, nationally recognized and qualified in the professional valuation of
office buildings in their respective geographic areas. Judgment is also applied in determining the extent and frequency of
independent appraisals. At each reporting period, a select number of properties, determined on a rotational basis, are valued
by appraisals. For properties not subject to independent appraisals, valuations are prepared internally during each reporting
period.
Critical assumptions used in estimating the fair values of investment properties include cap rates, discount rates that reflect
current market uncertainties, terminal cap rates and market rents. Other key assumptions relating to the estimates of fair
values of investment properties include components of stabilized NOI, leasing costs and vacancy rates. The Trust examines the
critical and key assumptions at the end of each reporting period and updates these assumptions based on recent leasing
activity and external market data available at that time. If there is any change in these assumptions or regional, national or
international economic conditions, the fair value of investment properties may change materially.
The Trust makes judgments with respect to whether lease incentives provided in connection with a lease enhance the value of
the leased space, which determines whether or not such amounts are treated as tenant improvements and added to
investment properties. Lease incentives, such as cash, rent-free periods and lessee- or lessor-owned improvements, may be
provided to lessees to enter into an operating lease. Lease incentives that do not provide benefits beyond the initial lease
term are included in the carrying amount of investment properties and are amortized as a reduction of rental revenue on a
straight-line basis over the term of the lease.
Judgment is also applied in determining whether certain costs are additions to the carrying amount of the investment
property.
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Impairment
The Trust assesses the possibility and amount of any impairment loss or write-down as it relates to the investment in
Dream Industrial REIT, amounts receivable, property and equipment, external management contracts and goodwill.
IAS 39, “Financial Instruments: Recognition and Measurement”, requires management to use judgment in determining if the
Trust’s financial assets are impaired. In making this judgment, the Trust evaluates, among other factors, the duration and
extent to which the fair value of the investment is less than its carrying amount; and the financial health of and short-term
business outlook for the investee, including factors such as industry and sector performance, changes in technology, and
operational and financing cash flows.
IAS 36, “Impairment of Assets” (“IAS 36”), requires management to use judgment in determining the recoverable amount of
assets and equity accounted investments that are tested for impairment, including goodwill, the investment in Dream
Industrial REIT and the investment in joint ventures. Judgment is involved in estimating the fair value less cost to sell or value-
in-use of the cash-generating units to which goodwill has been allocated, including estimates of growth rates, discount rates
and terminal rates. Judgment is also involved in estimating the value-in-use of the investment in Dream Industrial REIT,
including estimates of future cash flows, discount rates and terminal rates. The values assigned to these key assumptions
reflect past experience and are consistent with external sources of information.
The Trust’s goodwill balance is allocated to the office properties group of CGUs by geographic segment (herein referred to as
the goodwill CGU). The recoverable amount of the Trust’s goodwill CGU is determined based on the value-in-use approach.
For the purpose of this impairment test, the Trust uses cash flow projections forecasted out for a ten-year period, consistent
with the internal financial budgets approved by management on a property-by-property basis. The key assumptions used
in determining the value-in-use of the goodwill CGU are the estimated growth rate, discount rate and terminal rate. In
arriving at the growth rate, the Trust considers past experience and inflation, as well as industry trends. The Trust utilizes
weighted average cost of capital (“WACC”) to determine the discount rate and terminal rate. The WACC reflects specific risks
that would be attributable to the Trust. As the Trust is not subject to taxation, no adjustment is required to adjust the WACC
on a pre-tax basis.
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 reporting 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 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
mortgages, term loan facility, convertible debentures, and debentures. The critical assumptions underlying the fair value
measurements and disclosures include the market price of REIT A Units, market interest rates for mortgages, term loan facility
and unsecured debentures, and assessment of the effectiveness of hedging relationships.
For certain financial instruments, including cash and cash equivalents, amounts receivable, other receivables, 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, loan facility 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.
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Note 5
CHANGES IN ACCOUNTING POLICIES AND DISCLOSURES
The Trust has adopted the following new and revised standards, along with any consequential amendments, effective
January 1, 2016. These changes were made in accordance with the applicable transitional provisions.
Presentation of financial statements
IAS 1, “Presentation of Financial Statements” (“IAS 1”), was amended by the IASB to clarify guidance on materiality and
aggregation, the presentation of subtotals, the structure of financial statements and disclosure of accounting policies. The
amendment gives guidance that information within the consolidated balance sheets and statements of comprehensive
income should not be aggregated or disaggregated in a manner that obscures useful information, and that disaggregation may
be required in the statement of comprehensive income in the form of additional subtotals as they are relevant to
understanding the entity’s financial position or performance. This amendment did not result in a material impact to the
consolidated financial statements.
Acquisitions of interests in joint operations
IFRS 11, “Joint Arrangements” (“IFRS 11”), has been amended to require the application of IFRS 3, “Business Combinations”, to
transactions where an investor obtains an interest in a joint operation that constitutes a business. This amendment did not
result in a material impact to the consolidated financial statements.
Note 6
FUTURE ACCOUNTING POLICY CHANGES
Statement of cash flows
IAS 7, “Cash Flow Statements“ – (“IAS 7”), has been amended by the IASB to introduce additional disclosure that will allow
users to understand changes in liabilities arising from financing activities. This amendment to IAS 7 is effective for annual
periods beginning or after January 1, 2017. The Trust does not anticipate this amendment to have a material impact to the
consolidated financial statements.
Revenue recognition
IFRS 15, “Revenue from Contracts with Customers” (“IFRS 15”), provides a comprehensive five-step revenue recognition model
for all contracts with customers. The IFRS 15 revenue recognition model requires management to exercise significant
judgment and make estimates that affect revenue recognition. IFRS 15 is effective for annual periods beginning on or after
January 1, 2018, with earlier application permitted. The Trust is currently evaluating the impact of adopting this standard on
the consolidated financial statements.
Financial instruments
The final version of IFRS 9, “Financial Instruments” (“IFRS 9”), was issued by the IASB in July 2014 and will replace IAS 39,
“Financial Instruments: Recognition and Measurement” (“IAS 39”). IFRS 9 introduces a model for classification and
measurement, a single, forward-looking “expected loss” impairment model and a substantially reformed approach to hedge
accounting. The new single, principle-based approach for determining the classification of financial assets is driven by cash
flow characteristics and the business model in which an asset is held. The new model also results in a single impairment model
being applied to all financial instruments, which will require more timely recognition of expected credit losses. It also includes
changes in respect of an entity’s own credit risk in measuring liabilities elected to be measured at fair value, so that gains
caused by the deterioration of an entity’s own credit risk on such liabilities are no longer recognized in profit or loss. The
entity’s own credit changes can be early adopted in isolation without otherwise changing the accounting for financial
instruments. Lastly, a third measurement category for financial assets, “fair value through other comprehensive income”, will
exist. IFRS 9 is effective for annual periods beginning on or after January 1, 2018; however, it is available for early adoption.
The Trust is currently evaluating the impact of adopting this standard on the consolidated financial statements.
Financial instruments – disclosures
IFRS 7, “Financial Instruments: Disclosures” (“IFRS 7”), has been amended by the IASB to require additional disclosures on
transition from IAS 39 to IFRS 9. The amendment to IFRS 7 is effective for annual periods beginning on or after January 1,
2018. The Trust is currently evaluating the impact of adopting this standard on the consolidated financial statements.
Dream Office REIT 2016 Annual Report | 89
Leases
IFRS 16, “Leases” (“IFRS 16”), sets out the principles for the recognition, measurement and disclosure of leases. IFRS 16
provides revised guidance on identifying a lease and for separating lease and non-lease components of a contract. IFRS 16
introduces a single accounting model for all lessees and requires a lessee to recognize right-of-use assets and lease liabilities
for leases with terms of more than 12 months, unless the underlying asset is of low value. Under IFRS 16, lessor accounting for
operating and finance leases will remain substantially unchanged. IFRS 16 is effective for annual periods beginning on or after
January 1, 2019, with earlier application permitted for entities that apply IFRS 15. The Trust is currently evaluating the impact
of adopting this standard on the consolidated financial statements.
Share-based payments
IFRS 2, “Share-Based Payments“ (“IFRS 2”), clarifies how to account for certain types of share-based payment transactions. It
was amended to address (i) certain issues related to the accounting for cash settled awards, and (ii) the accounting for equity
settled awards that include a “net settlement” feature in respect of employee withholding taxes. The amendments to IFRS 2
are effective for years beginning on or after January 1, 2018. The Trust is currently assessing the impact of IFRS 2 on the
consolidated financial statements.
Note 7
INVESTMENT PROPERTIES
Balance, beginning of year
Additions:
Building improvements
Lease incentives and initial direct leasing costs
Recognition of investment properties related to joint operations
Other
Total additions to investment properties
Dispositions and assets held for sale:
Investment properties and land disposed of during the year
Investment properties classified as held for sale during the year
Total investment properties and land disposed of and classified as held for sale
Losses included in net loss:
Fair value adjustments to investment properties
Amortization of lease incentives
Change in straight-line rent
Total losses included in net loss
Gains (losses) included in other comprehensive income (loss):
Foreign currency translation gain (loss) and other
Total gains (losses) included in other comprehensive income (loss)
Balance, end of year
Change in unrealized losses included in net loss for the year
Change in fair value of investment properties
Year ended
December 31,
2016
5,899,131 $
Year ended
December 31,
2015
6,172,452
Note
$
9
19
38,093
74,259
663,705
4,070
780,127
(386,679 )
(536,125 )
(922,804 )
(898,800 )
(16,092 )
(1,764 )
(916,656 )
51,937
66,416
—
—
118,353
(30,034 )
(159,547 )
(189,581 )
(207,000 )
(13,032 )
(772 )
(220,804 )
(3,443 )
(3,443 )
4,836,355 $
18,711
18,711
5,899,131
(898,747 ) $
(195,866 )
$
$
Investment properties includes $30,772 (December 31, 2015 – $32,536) related to straight-line rent receivables.
Investment properties with a fair value of $3,778,650 as at December 31, 2016 (December 31, 2015 – $4,406,289) are pledged
as security for the mortgages.
Investment properties with a fair value of $826,563 as at December 31, 2016 (December 31, 2015 – $912,227) are pledged as
security for the demand revolving credit facilities and the term loan facility.
Dream Office REIT 2016 Annual Report | 90
Valuations of externally appraised properties
For the year ended December 31, 2016, the Trust valued 46 investment properties by qualified external valuation
professionals with an aggregate fair value of $2,014,068 representing 42% of the total investment property values (for the
year ended December 31, 2015 – 59 investment properties including investment in joint ventures with an aggregate fair value
of $2,992,179, representing 42% of the total investment property values including investment in joint ventures).
Assumptions used in the valuation of investment properties (excluding Alberta)
As at December 31, 2016, the Trust’s investment properties, excluding investment properties in Alberta, investment in joint
ventures and assets held for sale were valued using the cap rate method. The critical valuation metrics as at December 31,
2016 and December 31, 2015 are set out below:
Cap rates(2)
December 31, 2016
Weighted
average (%)(1)
5.74
Range (%)
4.90–8.25
December 31, 2015
Range (%)
5.00–8.25
Weighted
average (%)
6.04
(1) Excludes certain properties where bids were received by the Trust.
(2) Excludes investment properties in Alberta, investment in joint ventures and assets held for sale.
For the year ended December 31, 2016, the Trust recorded a fair value loss in investment properties, excluding investment
properties in Alberta, investment in joint ventures and assets held for sale of $129,900 (year ended December 31, 2015 – fair
value gain of $15,500).
Sensitivities on assumptions
Generally, an increase in stabilized net operating income (“NOI”) will result in an increase to the fair value of an investment
property. An increase in the cap rate will result in a decrease to the fair value of an investment property. The cap rate
magnifies the effect of a change in stabilized NOI, with a lower rate resulting in a greater impact to the fair value of an
investment property than a higher rate.
If the weighted average cap rate were to increase by 25 basis points (“bps”), the value of investment properties (excluding
investment properties in Alberta, investment in joint ventures, assets held for sale and certain properties where bids were
received by the Trust) would decrease by $151,037. If the cap rate were to decrease by 25 bps, the value of investment
properties (excluding investment properties in Alberta, investment in joint ventures and assets held for sale) would increase
by $238,515.
Assumptions used in the valuation of investment properties in Alberta
Given the prominence of the oil and gas industry in Alberta, the office market of this province has been significantly impacted
by the price of oil. Throughout 2016, economic conditions have remained the same or deteriorated. The combination of
vacancy rates increasing significantly, reduced number of office workers and increased supply of new office buildings indicates
that the recovery of demand for office space and increase in occupancy rates and rental rates are further delayed in Alberta.
As at December 31, 2016, the Trust continues to note a prolonged deterioration in leasing volume as well as key operating
metrics such as market rents, leasing costs and vacancy rates relative to the Trust’s expectations over the past year. These
observations are consistent with external market data points as at December 31, 2016. Based on the continued challenges in
the Alberta office sector, the Trust continued to revisit all assumptions used in valuing the Alberta investment properties to
reflect the continued slump.
The critical valuation metrics as at December 31, 2016 and December 31, 2015 are set out below and exclude investment in
joint ventures and assets held for sale:
December 31, 2016
Weighted
December 31, 2015
Weighted
average (%)
7.56
6.93
18.38
Discount rates(2)
Terminal cap rates(2)
Market rents(2)(3)
(1)
Range (%)
7.50–8.75
6.63–8.25
$ 11.00–16.50
average (%)
(1)
7.98
7.31
14.22
$
Range (%)
7.00–8.25
6.25–7.75
$ 14.00–24.00
$
(1) Excludes certain properties where bids were received by the Trust.
(2) Excludes investment in joint ventures and assets held for sale.
(3) Market rents represent year one rates in the discounted cash flow model. Market rents include office space only and exclude retail space.
Dream Office REIT 2016 Annual Report | 91
In addition to the critical assumptions noted above, the Trust has also updated its key assumptions for leasing costs and
vacancy rates throughout the year. In particular, the leasing cost assumptions for new and renewed leases were within the
range of $25 to $60 per square foot, with vacancy rate assumptions in years one to four at a range of 15% and 20%, and
returning to normalized vacancy rates of 5% beyond year four.
For the year ended December 31, 2016, the Trust recorded a fair value loss in the Alberta investment properties, excluding
investment in joint ventures and assets held for sale, of $768,900 (year ended December 31, 2015 – fair value loss of
$222,500) as a result of the changes made to the critical and key assumptions used in the discounted cash flow model.
The fair value of the investment properties as at December 31, 2016 represents the Trust’s best estimate based on the
internally and externally available information as at the end of the reporting period. If there are any changes in the critical and
key assumptions used in valuing the investment properties, or regional, national or international economic conditions, the fair
value of investment properties may change materially.
Sensitivities on assumptions
The following sensitivity table outlines the potential impact on the value of investment properties in Alberta, excluding
investment in joint ventures and assets held for sale, assuming a change in the weighted average discount rates and terminal
rates by a respective 25 bps.
Increase (decrease) in value
+25 bps
(8,242 )
$
$
Impact of change to weighted average
discount rates
–25 bps
8,445
Impact of change to weighted average
terminal rates
+25 bps
(9,209 )
$
–25 bps
9,880
$
The following sensitivity table outlines the potential impact on the value of investment properties in Alberta, excluding
investment in joint ventures and assets held for sale, assuming the market rental rates were to change by $1 per square foot
and if the leasing costs per square foot were to change by $5 per square foot.
Increase (decrease) in value
Impact of change to market rental rates
–$1.00
(22,197 )
+$1.00
25,089
$
$
Impact of change to leasing costs per
square foot
+$5.00
(11,560 )
$
–$5.00
11,561
$
Generally, a decrease in vacancy rate assumptions will result in an increase to the value of investment properties in Alberta,
excluding investment in joint ventures and assets held for sale, while an increase in vacancy rate assumptions will result in a
decrease to the value of investment properties in Alberta, excluding investment in joint ventures and assets held for sale.
Note 8
INVESTMENT IN DREAM INDUSTRIAL REIT
Dream Industrial REIT is an unincorporated, open-ended real estate investment trust listed on the Toronto Stock Exchange
under the symbol “DIR.UN”. Dream Industrial REIT owns a portfolio of 213 primarily light industrial properties comprising
approximately 16.2 million square feet of gross leasable area.
During the fourth quarter of 2016, the Trust purchased 747,190 Dream Industrial REIT Units for a total cost of $5,851. These
units purchased were enrolled in Dream Industrial REIT’s distribution reinvestment plan effective for the December 2016
distribution. In addition, the Trust enrolled its 18,551,855 Dream Industrial LP Class B limited partnership units into Dream
Industrial REIT’s distribution reinvestment plan effective for the November 2016 distribution and elected to reinvest the
distributions received in Dream Industrial REIT Units. For the year ended December 31, 2016, the Trust purchased Dream
Industrial REIT Units through its distribution reinvestment plan totalling 135,283 Dream Industrial REIT Units for a total cost of
$1,115 (December 31, 2015 – $nil).
As at December 31, 2016 and December 31, 2015, the Trust’s ownership was 24.9% and 24.0%, respectively. The net change in
the Trust’s ownership was as a result of the Trust’s purchase of Dream Industrial REIT Units during 2016 and as part of Dream
Industrial REIT’s issuance of additional units through Dream Industrial REIT’s distribution reinvestment plan, deferred unit
incentive plan, and unit purchase plan during the years ended December 31, 2016 and December 31, 2015.
Dream Office REIT 2016 Annual Report | 92
Balance as at beginning of year
Dream Industrial REIT units purchased during the year
Dream Industrial REIT units purchased through distribution reinvestment plan
Distributions received on LP Class B limited partnership units
Distributions received on Dream Industrial REIT Units
Share of net income from investment in Dream Industrial REIT
Accretion loss
Balance as at end of year
Dream Industrial REIT Units held, end of year
Dream Industrial LP Class B limited partnership units held, end of year
Total Dream Industrial REIT Units and Dream Industrial LP Class B limited partnership units held,
$
$
end of year
Ownership %, end of year
Year ended
December 31,
2016
184,817 $
5,851
1,115
(13,050 )
(65 )
8,467
(381 )
186,754 $
882,473
18,551,855
19,434,328
24.9 %
Year ended
December 31,
2015
191,691
—
—
(12,986 )
—
6,112
—
184,817
—
18,551,855
18,551,855
24.0 %
The fair value of the Trust’s interest in Dream Industrial REIT of $165,775 (December 31, 2015 – $133,202) was determined
using the Dream Industrial REIT closing unit price of $8.53 per unit at year-end multiplied by the number of units held by the
Trust as at December 31, 2016.
Pursuant to the reorganization of the Trust’s management structure (see Note 25), the Trust has granted Dream Asset
Management Corporation (“DAM“), a subsidiary of Dream Unlimited Corp., a right of first offer to purchase up to 18,551,855
Dream Industrial LP Class B limited partnership units, in the event the Trust sells its interest in Dream Industrial REIT.
External market conditions have caused a decline in the unit price of Dream Industrial REIT since the second quarter of 2013,
resulting in the carrying value to be above the market value. Under IAS 39, a significant or prolonged decline in the fair value
of an investment in an equity instrument above its cost is an indicator of impairment. As a result, the Trust performed an
impairment test as at December 31, 2016, by comparing the recoverable amount of its investment in Dream Industrial REIT
using the value-in-use approach to its carrying value. Based on the impairment test performed, the Trust concluded that no
impairment existed as at December 31, 2016.
The following amounts represent 100% of the Trust’s ownership interest in the assets, liabilities, revenues, expenses and cash
flows of Dream Industrial REIT:
At 100%
At % ownership interest
December 31, December 31, December 31,
2015
413,110
4,762
417,872
319,475
46,782
366,257
51,615
2015
1,701,307 $
19,613
1,720,920 $
900,326
193,711
1,094,037 $
626,883 $
2016
408,225 $
4,996
413,221 $
357,157
27,557
384,714 $
28,507 $
158,247
186,754 $
133,202
184,817
$
Non-current assets
Current assets
Total assets
Non-current liabilities
Current liabilities
Total liabilities
Net assets
Add-back:
Subsidiary redeemable units
Investment in Dream Industrial REIT
December 31,
2016
1,638,031 $
20,045
1,658,076 $
956,389
110,577
1,066,966 $
591,110 $
$
$
$
$
Dream Office REIT 2016 Annual Report | 93
Net rental income
Other income and expenses, fair value adjustments, other items, and
income taxes
Net income (loss) before the undernoted adjustments
Add-back:
Interest on subsidiary redeemable units
Fair value adjustments to subsidiary redeemable units
Share of net income from investment in Dream Industrial REIT
Add (deduct):
Accretion loss
Share of net income and accretion loss from investment in Dream
Industrial REIT
At 100%
At % ownership interest
Year ended December 31,
2016
117,387 $
2015
119,446 $
Year ended December 31,
2016
28,073 $
2015
29,004
(120,077 )
(2,690 ) $
(84,257 )
35,189 $
(57,701 )
(29,628 ) $
(12,874 )
16,130
$
$
13,050
25,045
8,467 $
12,986
(23,004 )
6,112
$
(381 )
—
$
8,086
$
6,112
Note 9
JOINT ARRANGEMENTS
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 method.
On June 30, 2016, four limited partnerships jointly controlled by the Trust and H&R REIT completed the sale of a 50%
undivided interest in each of Scotia Plaza and 100 Yonge Street to KingSett Canadian Real Estate Income Fund LP (“KingSett”)
and Alberta Investment Management Corporation (“AIMCo”) for gross proceeds, net of adjustments, totalling $663,705. The
Trust’s share of the sale represented one-third of the 50% or 16.7%, for gross proceeds, net of adjustments, totalling
$221,235. The Trust’s share of the gross proceeds, net of adjustments were satisfied by cash consideration of $113,518, debt
assumed by KingSett and AIMCo with a carrying value of $104,474 and other adjustments of $3,243. The Trust’s share of the
costs related to the sale, including debt settlement costs, totalled $4,370 and was included within share of net loss from
investment in joint ventures in the consolidated statements of comprehensive loss during the year.
Concurrently on June 30, 2016, the Trust terminated the joint venture agreement with H&R REIT and entered into a co-
ownership agreement with KingSett and AIMCo. As a result of this change, the Trust derecognized its investment in joint
ventures of Scotia Plaza and 100 Yonge Street at its combined carrying amount of $329,104 and recognized the Trust’s
remaining 50% interest in the assets and liabilities amounting to $664,144 and $345,303, respectively, of Scotia Plaza and 100
Yonge Street on a combined basis in the consolidated balance sheet. This resulted in the Trust recognizing a loss of $10,263 in
the consolidated statements of comprehensive loss related to the initial recognition at fair value of the Trust’s remaining 50%
share of the assets and liabilities compared to the carrying values of the joint ventures (see Note 32). The newly formed co-
ownership entered into a property management agreement with a wholly owned subsidiary of the Trust to provide property
management services to Scotia Plaza and 100 Yonge Street.
Property
Scotia Plaza(1)
Other joint ventures:
100 Yonge Street(1)
F1RST Tower
Location
Toronto
Toronto
Calgary
Ownership interest (%)
December 31,
2016
—
—
50.0
December 31,
2015
66.7
66.7
50.0
(1) On June 30, 2016 the Trust derecognized its investment in the joint ventures of Scotia Plaza and 100 Yonge Street and recognized the Trust’s remaining
50% interest in the assets, liabilities, revenues and expenses of these investment properties in the consolidated financial statements.
Dream Office REIT 2016 Annual Report | 94
Property
Scotia Plaza(1)
Other joint ventures(1)
Total net assets
Net assets at % ownership interest
December 31,
December 31,
2016
— $
15,189
15,189 $
2015
491,603
103,600
595,203
$
$
(1) On June 30, 2016 the Trust derecognized its investment in the joint ventures of Scotia Plaza and 100 Yonge Street and recognized the Trust’s remaining
50% interest in the assets and liabilities of these investment properties in the consolidated financial statements.
Property
Scotia Plaza(1)
Other joint ventures(1)
Share of net income (loss) from investment in joint ventures
Share of net income (loss) at
% ownership interest
for the year ended December 31,
2016
(79,104 ) $
(75,196 )
(154,300 ) $
$
$
2015
46,465
6,671
53,136
(1) On June 30, 2016 the Trust derecognized its investment in the joint ventures of Scotia Plaza and 100 Yonge Street and recognized the Trust’s remaining
50% interest in the revenues and expenses of these investment properties in the consolidated financial statements.
The following amounts represent 100% of the Trust’s 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 Dream Industrial REIT,
which is disclosed separately in Note 8.
Scotia Plaza(1)
At 100%
Scotia Plaza(1)
At 66.7%
Non-current assets
Current assets
Total assets
Non-current liabilities
Current liabilities
Total liabilities
Net assets
$
$
December 31, December 31, December 31,
2016
— $
—
— $
—
—
— $
— $
2015
1,367,333 $
17,661
1,384,994 $
585,380
62,210
647,590 $
737,404 $
2016
— $
—
— $
—
—
— $
— $
$
$
December 31,
2015
911,555
11,774
923,329
390,253
41,473
431,726
491,603
(1) On June 30, 2016, the Trust derecognized its investment in the joint venture of Scotia Plaza and recognized the Trust’s remaining 50% interest in the
assets and liabilities of this investment property in the consolidated financial statements.
Net rental income
Other income and expenses, fair value adjustments, net
losses on transactions and other activities
Net income (loss) for the year
$
$
Scotia Plaza(1)
At 100%
Scotia Plaza(1)
At 66.7%
Year ended December 31,
2015
2016
70,813 $
35,211 $
Year ended December 31,
2016
23,474 $
2015
47,209
(153,867 )
(118,656 ) $
(1,116 )
69,697 $
(102,578 )
(79,104 ) $
(744 )
46,465
(1) On June 30, 2016, the Trust derecognized its investment in the joint venture of Scotia Plaza and recognized the Trust’s remaining 50% interest in the
revenues and expenses of this investment property in the consolidated financial statements.
Dream Office REIT 2016 Annual Report | 95
Cash flows generated from (utilized in):
Operating activities
Investing activities
Financing activities
Decrease in cash and cash equivalents
Scotia Plaza(1)
At 100%
Scotia Plaza(1)
At 66.7%
Year ended December 31,
2015
2016
Year ended December 31,
2016
2015
$
$
20,433 $
301,837
(323,696 )
(1,426 ) $
51,426 $
(32,900 )
(20,298 )
(1,772 ) $
13,622 $
95,749
(110,321 )
(950 ) $
34,284
(21,933 )
(13,532 )
(1,181 )
(1) On June 30, 2016, the Trust derecognized its investment in the joint venture of Scotia Plaza and recognized the Trust’s remaining 50% interest in the cash
flows from operating, investing and financing activities of this investment property in the consolidated financial statements.
Other joint ventures(1)
At 100%
Other joint ventures(1)
At proportionate share
Non-current assets
Current assets
Total assets
Non-current liabilities
Current liabilities
Total liabilities
Net assets
$
December 31,
2016
120,014 $
3,866
123,880 $
79,770
13,732
93,502 $
30,378 $
$
$
$
December 31, December 31, December 31,
2015
192,304
2,733
195,037
21,070
70,367
91,437
103,600
2015
356,618 $
5,009
361,627 $
31,605
139,871
171,476 $
190,151 $
2016
60,007 $
1,933
61,940 $
39,885
6,866
46,751 $
15,189 $
(1) On June 30, 2016, the Trust derecognized its investment in the joint venture of 100 Yonge Street and recognized the Trust’s remaining 50% interest in the
assets and liabilities of this investment property in the consolidated financial statements.
Net rental income
Other income and expenses, fair value adjustments, net
losses on transactions and other activities
Net income (loss) for the year
$
$
Other joint ventures(1)
At 100%
Year ended December 31,
2015
2016
23,727 $
13,533 $
Other joint ventures(1)
At proportionate share
Year ended December 31,
2016
7,147 $
2015
12,582
(162,887 )
(149,354 ) $
(13,882 )
9,845 $
(82,343 )
(75,196 ) $
(5,911 )
6,671
(1) On June 30, 2016, the Trust derecognized its investment in the joint venture of 100 Yonge Street and recognized the Trust’s remaining 50% interest in the
revenues and expenses of this investment property in the consolidated financial statements.
Cash flows generated from (utilized in):
Operating activities
Investing activities
Financing activities
Increase (decrease) in cash and cash equivalents
Other joint ventures(1)
At 100%
Other joint ventures(1)
At proportionate share
Year ended December 31,
2015
2016
Year ended December 31,
2016
2015
$
$
8,675 $
23,731
(36,594 )
(4,188 ) $
23,330 $
8,730
(30,422 )
1,638 $
4,501 $
7,779
(14,416 )
(2,136 ) $
12,135
1,916
(12,847 )
1,204
(1) On June 30, 2016, the Trust derecognized its investment in the joint venture of 100 Yonge Street and recognized the Trust’s remaining 50% interest in the
cash flows from operating, investing and financing activities of this investment property in the consolidated financial statements.
Dream Office REIT 2016 Annual Report | 96
Co-owned investment properties
The Trust’s interests in co-owned investment properties are accounted for based on the Trust’s share of interest in the assets,
liabilities, revenues and expenses of the investment properties.
Property
Scotia Plaza(1)
100 Yonge Street(1)
10199 - 101st Street North West
680 Broadway Street (Tillsonburg Gateway Centre)
2810 Matheson Boulevard East
50 & 90 Burnhamthorpe Road West (Sussex Centre)
300, 302 & 304 The East Mall (Valhalla Executive Centre)
185, 191, 195 The West Mall
2261 Keating Cross Road
350–450 Lansdowne Street
55 Norfolk Street South
275 Dundas Street West (London City Centre)
6501–6523 Mississauga Road
6531–6559 Mississauga Road
10 Lower Spadina Avenue(2)
49 Ontario Street(2)
401 & 405 The West Mall (Commerce West)
80 Whitehall Drive
219 Laurier Avenue West
460 Two Nations Crossing
117 Kearney Lake Road
Centre 70
2010 Winston Park Drive(3)
Location
Toronto, Ontario
Toronto, Ontario
Edmonton, Alberta
Tillsonburg, Ontario
Mississauga, Ontario
Mississauga, Ontario
Mississauga, Ontario
Toronto, Ontario
Victoria, British Columbia
Kamloops, British Columbia
Simcoe, Ontario
London, Ontario
Mississauga, Ontario
Mississauga, Ontario
Toronto, Ontario
Toronto, Ontario
Toronto, Ontario
Markham, Ontario
Ottawa, Ontario
Fredericton, New Brunswick
Halifax, Nova Scotia
Calgary, Alberta
Oakville, Ontario
Ownership interest (%)
December 31,
December 31,
2016
50.0
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
35.0
15.0
—
2015
—
—
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
35.0
15.0
40.0
(1) On June 30, 2016, the Trust derecognized its investment in the joint ventures of Scotia Plaza and 100 Yonge Street and recognized the Trust’s remaining
50% interest in the assets, liabilities, revenues and expenses of these investment properties in the consolidated financial statements.
(2) On January 10, 2017, the Trust completed the sale of its 40% interest in 10 Lower Spadina Avenue and 49 Ontario Street in Toronto, Ontario to the co-owner.
(3) On April 1, 2016, the Trust completed the sale of its 40% interest in 2010 Winston Park Drive in Oakville (see Note 19).
Dream Office REIT 2016 Annual Report | 97
The following amounts represent the Trust’s ownership interest in the assets, liabilities, revenues and expenses of the co-
owned properties in which the Trust participates.
Non-current assets
Current assets
Assets held for sale
Total assets
Non-current liabilities
Current liabilities
Liabilities related to assets held for sale
Total liabilities
Net assets
$
Net assets at % ownership interest
December 31,
December 31,
2016(1)
1,058,636 $
12,716
22,784
1,094,136 $
423,902
96,121
9,090
529,113 $
565,023 $
2015
446,827
4,804
—
451,631
191,617
29,828
—
221,445
230,186
$
$
$
(1) On June 30, 2016, the Trust derecognized its investment in the joint ventures of Scotia Plaza and 100 Yonge Street and recognized the Trust’s remaining
50% interest in the assets and liabilities of these investment properties in the consolidated financial statements.
Net rental income
Other income and expenses, fair value adjustments, net losses on transactions and other activities
Share of net income (loss) from co-owned properties
Share of net income (loss) at
% ownership interest
for the year ended December 31,
2016(1)
40,017 $
(52,681 )
(12,664 ) $
2015
24,433
(15,629 )
8,804
$
$
(1) On June 30, 2016, the Trust derecognized its investment in the joint ventures of Scotia Plaza and 100 Yonge Street and recognized the Trust’s remaining
50% interest in the revenues and expenses of these investment properties in the consolidated financial statements.
Note 10
OTHER NON-CURRENT ASSETS
Property and equipment, net of accumulated depreciation of $8,753 (December 31, 2015 – $6,471)
Restricted cash
External management contracts, net of accumulated amortization of $6,331
(December 31, 2015 – $5,040)
Deposits and other
Goodwill
Total
December 31,
2016
6,783 $
1,357
$
6,671
1,745
—
16,556 $
$
December 31,
2015
6,190
1,458
7,962
1,838
—
17,448
The Trust leases various vehicles and machinery under non-cancellable finance lease agreements. The remaining term of these
leases is one year. These finance lease arrangements are included in property and equipment.
Deposits largely represent amounts provided by the Trust in connection with utility deposits. Restricted cash primarily
represents tenant rent deposits and cash held as security for certain mortgages.
As a result of the Trust’s disposition of assets during the year ended December 31, 2015 (see Note 19), goodwill associated
with the cash-generating unit of $874 was derecognized and included in the determination of the net loss on sale of
investment properties.
Dream Office REIT 2016 Annual Report | 98
External management contracts and goodwill
Balance as at January 1, 2015
Amortization of external management contracts
Derecognition of goodwill due to investment properties disposed of during the year
Impairment of goodwill
Balance as at December 31, 2015
Amortization of external management contracts
Balance as at December 31, 2016
External
management
contracts
9,253
(1,291 )
—
—
7,962
(1,291 )
6,671
$
$
$
$
Goodwill
52,086
—
(874 )
(51,212 )
—
—
—
The Trust performed its annual goodwill impairment test as at December 31, 2015 in accordance with the methodology set
out in IAS 36, by comparing the recoverable amount of the goodwill CGU using the value-in-use approach to its carrying
amount. The carrying amount of goodwill associated with each geographic segment was:
Western Canada
Calgary downtown
Calgary suburban
Toronto downtown
Toronto suburban
Eastern Canada
Total goodwill
$
$
10,225
8,517
1,301
16,735
6,848
7,586
51,212
For the purpose of this impairment test, management used projected financial forecasts for a period of ten years. The key
assumptions used included weighted average cost of capital, estimated growth, discount and terminal rates. The weighted
average cost of capital, discount and terminal rates used in this impairment test ranged from 7.06% to 8.96% depending on
the geographic segment.
Based on the impairment test performed on each of the geographic segments, the Trust concluded that goodwill for each of
the geographic segments was impaired as at December 31, 2015. As a result, the Trust has recognized a goodwill impairment
loss of $51,212 in the consolidated statements of comprehensive loss for the year ended December 31, 2015. The goodwill
impairment was mainly attributable to the significant increase in the weighted average cost of capital of the Trust during the
fourth quarter of 2015, resulting from the unfavourable external market conditions.
Note 11
AMOUNTS RECEIVABLE
Amounts receivable are net of credit adjustments aggregating $10,081 (December 31, 2015 – $6,674).
Trade receivables
Less: Provision for impairment of trade receivables
Trade receivables, net
Other amounts receivable
Total
Note
25
December 31,
2016
3,442 $
(1,803 )
1,639
16,147
17,786 $
$
$
December 31,
2015
4,932
(1,615 )
3,317
6,941
10,258
Dream Office REIT 2016 Annual Report | 99
The movement in the provision for impairment of trade receivables during the year ended December 31 was as follows:
Balance at beginning of year
Provision for impairment of trade receivables
Reversal of provision for previously impaired trade receivables
Receivables written off during the year as uncollectible
Provision for impairment of trade receivables re-classified as held for sale during the year
Balance at end of year
Year ended December 31,
2015
2,419
1,785
(869 )
(1,720 )
—
1,615
2016
1,615 $
2,301
(408 )
(1,272 )
(433 )
1,803 $
$
$
The carrying value of amounts receivable approximates fair value due to their current nature. As at December 31, 2016, trade
receivables of approximately $1,634 (December 31, 2015 – $2,785) 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 office properties to tenants under operating leases. Minimum rental commitments, including joint operations, on
non-cancellable tenant operating leases over their remaining terms are as follows:
$
December 31, 2016
270,429
772,505
443,988
1,486,922
$
December 31,
2016
2,027,172 $
173,790
448,828
—
—
2,649,790
328,260
2,321,530 $
December 31,
2015
2,244,161
49,500
483,174
182,990
50,923
3,010,748
609,644
2,401,104
$
$
No more than 1 year
1–5 years
5+ years
Note 12
DEBT
Mortgages(1)(2)
Demand revolving credit facilities(2)(3)
Debentures(4)
Term loan facility(2)
Convertible debentures
Total
Less: Current portion
Non-current debt
(1) Net of financing costs of $6,925 (December 31, 2015 – $8,248).
(2) Secured by charges on specific investment properties (see Note 7).
(3) Net of financing costs of $4,210 (December 31, 2015 – $nil).
(4) Net of financing costs of $1,172 (December 31, 2015 – $1,957).
Dream Office REIT 2016 Annual Report | 100
Continuity of debt
The following tables provide a continuity of debt for the year ended December 31, 2016 and year ended December 31, 2015:
Year ended December 31, 2016
Balance as at January 1, 2016
Borrowings
Principal repayments
Lump sum repayments
Financing costs additions
Lump sum repayments on property dispositions
Debt assumed by purchaser on disposal of
investment properties
Debt classified as liabilities related to assets
held for sale
Recognition of debt related to joint operations
Foreign exchange adjustments
Other adjustments(1)(2)
Balance as at December 31, 2016
Demand
revolving
credit
Term
loan
facility
Convertible
debentures
Note Mortgages
$ 2,244,161 $
191,434
(61,336 )
(254,283 )
(1,370 )
(83,141 )
facilities Debentures
49,500 $ 483,174 $ 182,990 $
—
930,309
—
—
(35,000 )
(801,809 )
—
(5,710 )
—
—
—
—
(183,453 )
—
—
Total
50,923 $ 3,010,748
1,121,743
(61,336 )
(1,325,173 )
(7,080 )
(83,141 )
—
—
(50,628 )
—
—
(52,788 )
—
19
9
(274,761 )
313,422
(2,064 )
7,898
—
—
—
1,500
—
—
—
—
654
—
—
—
—
463
$ 2,027,172 $ 173,790 $ 448,828 $
— $
—
(52,788 )
—
—
—
(295 )
(274,761 )
313,422
(2,064 )
10,220
— $ 2,649,790
(1) Other adjustments includes amortization of financing costs and amortization of fair value adjustments.
(2) As a result of the recognition of debt related to joint operations, the Trust recognized $9,145 of fair value adjustments on June 30, 2016.
Year ended December 31, 2015
Note Mortgages
Balance as at January 1, 2015
Borrowings
Principal repayments
Lump sum repayments
Financing costs additions
Lump sum repayments on property dispositions
Debt classified as liabilities related to assets
$ 2,380,708 $
282,708
(63,687 )
(272,213 )
(1,987 )
(15,280 )
Demand
revolving
credit
facilities
Debentures
Term
loan Convertible
facility debentures
— $ 482,700 $ 182,260 $
—
—
—
—
—
—
—
—
—
—
289,920
—
(240,420 )
—
—
Total
51,160 $ 3,096,828
572,628
(63,687 )
(512,633 )
(1,987 )
(15,280 )
—
—
—
—
—
held for sale
Foreign exchange adjustments
Other adjustments(1)
Balance as at December 31, 2015
19
(75,703 )
12,069
(2,454 )
—
—
730
$ 2,244,161 $ 49,500 $ 483,174 $ 182,990 $
—
—
474
—
—
—
—
—
(237 )
(75,703 )
12,069
(1,487 )
50,923 $ 3,010,748
(1) Other adjustments include amortization of financing costs and amortization of fair value adjustments.
Demand revolving credit facilities
On March 1, 2016, the Trust entered into an $800,000 formula-based demand revolving credit facility. The demand revolving
credit facility bears interest at the bankers’ acceptance (“BA”) rate plus 1.70% and/or at the bank’s prime rate (2.70% as at
December 31, 2016) plus 0.70%. The demand revolving credit facility is secured by first-ranking mortgages on 22 properties
and matures on March 1, 2019. The formula-based amount available under this facility was $763,333 less $178,000 drawn and
less $16,461 in the form of letters of credit as at December 31, 2016.
Dream Office REIT 2016 Annual Report | 101
The amounts available and drawn under the demand revolving credit facilities as at December 31, 2016 and December 31,
2015 are as follows:
Formula-based maximum
not to exceed $800,000
Formula-based maximum
not to exceed $45,000
Maturity date
March 1, 2019
April 30, 2018
Interest rates on
drawings
BA + 1.70% or
Prime + 0.70%
BA + 2.00% or
Prime + 0.85%
Formula-based maximum
not to exceed $171,500
Formula-based maximum
not to exceed $27,690
Formula-based maximum
not to exceed $15,000
Formula-based maximum
not to exceed $55,000
Maturity date
March 5, 2016
April 30, 2016
November 1, 2016
November 1, 2016
Interest rates on
drawings
BA + 1.75% or
Prime + 0.75%
BA + 1.85% or
Prime + 0.85%
BA + 1.70% or
Prime + 0.70%
BA + 1.70% or
Prime + 0.70%
Secured
investment
properties
Face
interest
rate
Borrowing
capacity
Drawings
Letters of
credit
Amount
available
December 31, 2016
22
2.61 % $ 763,333
$ (178,000 ) $
(16,461 ) $ 568,872
4
26
3.55 %
45,000
—
$ 808,333 $ (178,000 ) $
(358 )
44,642
(16,819 ) $ 613,514
Secured
investment
properties
Face
interest
rate
Borrowing
capacity
Drawings
Letters of
credit
Amount
available
December 31, 2015
8
2
2
2.62 % $ 171,500
$
(15,000 ) $
—
$ 156,500
3.55 %
27,690
—
(443 )
27,247
3.40 %
15,000
(14,500 )
(150 )
350
2
14
2.54 %
55,000
$ 269,190 $
(20,000 )
(49,500 ) $
(32,602 )
2,398
(33,195 ) $ 186,495
On March 1, 2016, the Trust’s $171,500 formula-based demand revolving credit facility was repaid in full and terminated.
On April 30, 2016, the Trust’s $27,690 formula-based demand revolving credit facility matured and was subsequently renewed
to April 30, 2018 with an increased formula-based credit limit to $45,000. The renewed facility bears interest at the BA rate
plus 2.00% and/or at the bank’s prime rate (2.70% as at December 31, 2016) plus 0.85%.
On September 30, 2016 and November 1, 2016, respectively, the Trust’s $55,000 and $15,000 formula-based demand
revolving credit facilities were repaid in full and terminated.
Debentures
Series A Debentures
On June 13, 2013, the Trust completed the issuance of $175,000 aggregate principal amount of Series A senior unsecured
debentures (“Series A Debentures”). The Series A Debentures bear interest at a coupon rate of 3.424% per annum with a
maturity date of June 13, 2018. Interest on the Series A Debentures is payable semi-annually on June 13 and December 13,
with the first payment commencing on December 13, 2013. Costs related to the issuance of the Series A Debentures totalled
$1,590.
The Trust has the option to redeem the Series A Debentures at a redemption price equal to the greater of the Canada Yield
Price and par plus any accrued and unpaid interest. The Canada Yield Price is defined as the amount that would return a yield
on investment for the remaining term to maturity equal to the Canada bond rate with equal term to maturity plus a spread of
0.475%.
Series B Debentures
On October 9, 2013, the Trust completed the issuance of $125,000 aggregate principal amount of Series B floating senior
unsecured debentures (“Series B Debentures”). The Series B Debentures bear interest at a three-month Canadian Dealer
Offered Rate (“CDOR”) rate plus 1.7% per annum with a maturity date of January 9, 2017. Interest on the Series B Debentures
is payable quarterly in arrears on January 9, April 9, July 9 and October 9, with the first payment commencing on January 9,
2014. Costs related to the issuance of the Series B Debentures totalled $720.
On January 9, 2017, subsequent to year-end, the Trust repaid Series B Debentures with an aggregate principal amount of
$125,000.
Dream Office REIT 2016 Annual Report | 102
Series C Debentures
On January 21, 2014, the Trust completed the issuance of $150,000 aggregate principal amount of Series C senior unsecured
debentures (“Series C Debentures”). The Series C Debentures bear interest at a rate of 4.074% with a maturity date of
January 21, 2020. Interest on the Series C Debentures is payable semi-annually on January 21 and July 21, with the first
payment commencing on July 21, 2014. Costs related to the issuance of the Series C Debentures totalled $1,400.
The Trust has the option to redeem the Series C Debentures at a redemption price equal to the greater of the Canada Yield
Price and par plus any accrued and unpaid interest. The Canada Yield Price is defined as the amount that would return a yield
on investment for the remaining term to maturity equal to the Canada bond rate with equal term to maturity plus a spread of
0.525%.
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.
On April 26, 2016, the Trust repaid Series K Debentures with an aggregate principal amount of $25,000 at maturity.
On September 30, 2016, the Trust repaid Series L Debentures with an aggregate principal amount of $10,000 at maturity.
Debentures
The principal amount outstanding and the carrying value for each series of debentures are as follows:
Debentures
Date issued
Maturity date
Series A
Original
principal
Face Outstanding
principal
interest rate
December 31, 2016
Carrying Outstanding
principal
value
December 31, 2015
Carrying
value
Debentures
June 13, 2013
June 13, 2018 $ 175,000
3.42 % $ 175,000
$ 174,536
$ 175,000
$ 174,218
Series B
Debentures October 9, 2013
January 9, 2017
125,000
2.60 % (1)
125,000 (2)
124,999
125,000
124,778
Series C
Debentures January 21, 2014
January 21, 2020
150,000
4.07 %
150,000
149,293
150,000
149,047
Series K
Debentures
April 26, 2011
April 26, 2016
35,000
5.95 %
—
—
25,000
25,097
Series L
Debentures
August 8, 2011 September 30, 2016
10,000
$ 495,000
5.95 %
—
$ 450,000
—
10,034
$ 448,828 $ 485,000 $ 483,174
10,000
(1) Variable interest rate at three-month CDOR plus 1.7%.
(2) On January 9, 2017, the Trust repaid the Series B Debentures with an aggregate principal amount of $125,000.
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 BA rates. The
term loan facility bears interest at BA rates plus 1.85% payable monthly. The term loan facility was originally secured by first-
ranking collateral mortgages on nine 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. At December 31, 2015, $183,453 was outstanding on the term loan facility,
secured by first-ranking collateral mortgages on eight properties.
On August 15, 2011, the Trust entered into two 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. The first
interest rate swap agreement is for a five-year term on a notional balance of $133,000, fixing interest at a BA rate of 1.67%
plus a spread of 185 bps and the second interest rate swap agreement is for a three-year term on a notional balance of
$55,000, fixing interest at a BA rate of 1.28% plus a spread of 185 bps. On August 15, 2014, the three-year interest rate swap
expired and was not subsequently renewed. On December 31, 2015, the notional amount of interest rate swap agreement
hedged against the term loan facility was $129,783. 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.
Settlement of both the fixed and variable portions of the interest rate swaps occurs on a monthly basis.
Dream Office REIT 2016 Annual Report | 103
The principal amount and carrying value for the term loan facility is as follows:
Date
issued
Maturity
date
Original
principal
issued
Weighted
average
face
interest
rate
Outstanding principal amount
December 31, December 31,
2015
2016
Carrying value
December 31, December 31,
2015
2016
Term loan facility
August 15,
2011
August 15,
2016 $
188,000
3.28 % $
—
$
183,453
$
—
$
182,990
On March 1, 2016, the Trust repaid in full the outstanding principal amount of $183,453 prior to the maturity date of
August 15, 2016. As a result of the early repayment, the Trust wrote off $280 of associated unamortized financing cost into net
loss during the first quarter of 2016.
On March 1, 2016, the associated five-year interest rate swap agreement on the notional balance of $129,783 was terminated
prior to its maturity date of August 15, 2016. As a result, the Trust reclassified the unrealized loss of $561 included in
accumulated other comprehensive income into net loss during the first quarter of 2016.
Convertible debentures
5.5% Series H Debentures
The 5.5% Series H Debentures are convertible at the request of the holder, subject to certain terms and conditions, into
27.25648 REIT A Units per $1,000 of face value, representing a conversion price of $36.69 per unit. The 5.5% 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 5.5% Series H Debentures is payable semi-
annually on March 31 and September 30.
For the years ended December 31, 2016 and December 31, 2015, no debentures were converted.
The principal amount and carrying value for the convertible debentures is as follows:
Date
issued
Maturity
date
December 9,
March 31,
Original
principal
issued
Face
interest
rate
Outstanding principal amount
Carrying value
December 31, December 31, December 31, December 31,
2015
2015
2016
2016
2011
2017 $
51,650
5.50 % $
—
$
50,628
$
—
$
50,923
5.50% Series H
Debentures
Principal redemptions
On March 31, 2016 (the “Redemption Date”), the Trust completed the redemption of its remaining 5.50% Series H
Debentures, in accordance with the provisions of the indenture and supplemental indenture related to the redeemed 5.50%
Series H Debentures. The redemption price was paid in cash and was equal to the aggregate of (i) $1 for each $1 principal
amount of 5.50% Series H Debentures issued and outstanding on the Redemption Date and (ii) all accrued and unpaid interest
on the 5.50% Series H Debentures up to but excluding the Redemption Date. The aggregate principal amount redeemed on
the Redemption Date for 5.50% Series H Debentures was $50,628. As a result of the redemption, the Trust (i) wrote off the
conversion feature on the convertible debentures of $38, and (ii) wrote off the fair value adjustments of $233, all into net loss
during the first quarter of 2016.
Dream Office REIT 2016 Annual Report | 104
Debt weighted average effective interest rates and maturities
Fixed rate
Mortgages
Debentures
Term loan facility(2)
Convertible debentures
Total fixed rate debt
Variable rate
Mortgages
Demand revolving credit facilities
Series B Debentures
Term loan facility(3)
Total variable rate debt
Total debt
Weighted average
effective interest rates(1)
December 31, December 31,
2015
2016
3.86 %
3.93 %
—
—
3.87 %
3.05 %
3.02 %
3.09 %
—
3.05 %
3.76 %
4.38 %
4.04 %
3.83 %
3.80 %
4.30 %
2.98 %
2.82 %
3.09 %
3.83 %
3.21 %
4.20 %
Maturity
dates
December 31,
2016
Debt amount
December 31,
2015
2017–2028 $
2018–2020
—
—
2018
2019
2017
—
$
1,989,222 $
323,829
—
—
2,313,051
37,950
173,790
124,999
—
336,739
2,649,790 $
2,205,183
358,396
129,459
50,923
2,743,961
38,978
49,500
124,778
53,531
266,787
3,010,748
(1) The effective interest rate method includes the impact of fair value adjustments on assumed debt and financing costs.
(2) Prior to repayment, the Trust entered into an interest rate swap agreement to fix the interest rate of a portion of the term loan facility: a five-year interest
rate swap on a notional balance of $129,783, fixing interest at a BA rate of 1.67% plus a spread of 185 bps.
(3) Prior to repayment, the notional balance of $53,670 bore interest at the one-month BA rate plus 185 bps.
The following table summarizes the aggregate of the scheduled principal repayments and debt maturities:
2017
2018
2019
2020
2021
2022–2028
Financing costs
Fair value adjustments
Demand
revolving
Mortgages credit facilities
203,137 $
207,248
381,478
262,012
313,771
655,377
2,023,023
(6,925 )
11,074
2,027,172 $
— $
—
178,000
—
—
—
178,000
(4,210 )
—
173,790 $
$
$
Debentures
125,000 $
175,000
—
150,000
—
—
450,000
(1,172 )
—
448,828 $
Term loan
facility
— $
—
—
—
—
—
—
—
—
— $
Convertible
debentures
— $
—
—
—
—
—
—
—
—
— $
Total
328,137
382,248
559,478
412,012
313,771
655,377
2,651,023
(12,307 )
11,074
2,649,790
Interest rate swap
The following table summarizes the details of the interest rate swap that is outstanding at December 31, 2016:
Transaction date
August 15, 2011
$
Term loan facility
principal amount
(notional)
129,783
Fixed
interest rate
3.52 %
Maturity date
August 15, 2016
Financial
instrument
classification
Cash flow hedge
Fair value
—
$
For the interest rate swap designated as cash flow hedge, the Trust has assessed that there is no ineffectiveness in the hedge
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. The
associated unrealized gains or losses that are recognized in other comprehensive income will be reclassified into net income in
the same period or periods during which the interest payments on the hedged item affect net income.
On August 15, 2014, the three-year interest rate swap on the notional balance of $53,670 expired and was not subsequently
renewed. As a result, the associated unrealized loss of $8 included in accumulated other comprehensive income was
reclassified into net income during 2014.
Dream Office REIT 2016 Annual Report | 105
On March 1, 2016, the associated five-year interest rate swap agreement on the notional balance of $129,783 was terminated
prior to its maturity date of August 15, 2016. As a result, the Trust reclassified the unrealized loss of $561 included in
accumulated other comprehensive income into net loss during the first quarter of 2016.
At December 31, 2016, the fair value of the remaining interest rate swap amounted to a $nil financial liability (December 31,
2015 – $770 financial liability).
Short form base shelf prospectus
On April 27, 2015, the Trust filed 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, debt securities, with an aggregate offering price of up to $2.0 billion. For the years
ended December 31, 2016 and December 31, 2015, no debt securities have been issued under the short form base shelf prospectus.
Note 13
SUBSIDIARY REDEEMABLE UNITS
The Trust has the following subsidiary redeemable units outstanding:
Balance at beginning of year
Units issued pursuant to the Reorganization
Subsidiary redeemable units surrendered
Remeasurement of carrying value of
subsidiary redeemable units
Balance at end of year
Year ended December 31, 2016
Year ended December 31, 2015
Note
25
21
Number of units
issued and outstanding
5,233,823 $
—
—
—
5,233,823 $
Amount
90,912
—
—
11,409
102,321
Number of units
issued and outstanding
602,434 $
4,850,000
(218,611 )
—
5,233,823 $
Amount
15,151
127,313
(5,795 )
(45,757 )
90,912
During the year ended December 31, 2016, the Trust incurred $8,174 (December 31, 2015 – $9,171) in distributions on the
subsidiary redeemable units, which is included as interest expense in the consolidated statements of comprehensive loss (see
Note 20).
Dream Office LP, a subsidiary of Dream Office REIT, is authorized to issue an unlimited number of LP Class B limited
partnership units. These units have been issued in two series: subsidiary redeemable units and LP Class B Units, Series 2. The
subsidiary redeemable units, together with the accompanying Special Trust Units, have economic and voting rights equivalent
in all material respects to REIT A Units. Generally, each subsidiary redeemable unit entitles the holder to a distribution equal
to distributions declared on REIT Units, Series B, or if no such distribution is declared, on REIT Units, Series A. Subsidiary
redeemable units may be surrendered or indirectly exchanged on a one-for-one basis at the option of the holder, generally at
any time subject to certain restrictions, for REIT Units, Series B.
Holders of the LP Class B Units, Series 2 are entitled to vote at meetings of the limited partners of Dream Office LP and each
Unit entitles the holder to a distribution equal to distributions on the subsidiary redeemable units. As at December 31, 2016
and December 31, 2015, all issued and outstanding LP Class B Units, Series 2 are owned indirectly by the Trust and have been
eliminated in the consolidated balance sheets.
On May 25, 2015, one of the holders surrendered 218,611 subsidiary redeemable units and received 218,611 REIT B Units. On
the same day, such REIT B Units were converted by the holder into 218,611 REIT A Units. The exchanges were valued based on
the carrying amount of the subsidiary redeemable units on the day prior to the surrender.
On April 2, 2015, the Trust acquired a subsidiary of DAM which was a party to the Asset Management Agreement with the
Trust, resulting in the elimination of the Trust’s obligation to pay asset management, acquisition and capital expenditure fees
to DAM (the “Reorganization”). In consideration for the Reorganization, the Trust issued 4,850,000 subsidiary redeemable
units at $26.25 per unit to DAM, representing total consideration of $127,313.
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, 2016 and December 31, 2015, 5,233,823 Special Trust Units were issued and outstanding.
Dream Office REIT 2016 Annual Report | 106
Note 14
DEFERRED UNIT INCENTIVE PLAN
The Deferred Unit Incentive Plan (“DUIP”) provides for the grant of deferred trust units to trustees, officers and employees as
well as employees of affiliates. Deferred trust units are granted at the discretion of the trustees and earn income deferred
trust units based on the payment of distributions. Once granted, each deferred trust unit and the related distribution of
income deferred trust units vest evenly over a three- or five-year period on the anniversary date of the grant. Subject to an
election option available for certain participants to postpone receipt of REIT A Units, such units will be issued immediately on
vesting. As at December 31, 2016, up to a maximum of 2.55 million (December 31, 2015 – 1.75 million) deferred trust units
are issuable under the DUIP.
The movement in the DUIP balance was as follows:
Balance at beginning of year
Compensation expense
REIT A Units issued for vested deferred trust units
Remeasurements of carrying value of deferred trust units
Balance at end of year
Note
21
Year ended
December 31, 2016
12,596
2,750
(2,696 )
2,146
14,796
$
$
Year ended
December 31, 2015
17,082
2,638
(3,269 )
(3,855 )
12,596
$
$
Of the $2,750 of deferred compensation expense incurred during the year ended December 31, 2016, $2,551 was recorded
and included in general and administrative (“G&A”) expenses (December 31, 2015 – $2,638). For the same period, a fair value
loss of $2,146 (December 31, 2015 – fair value gain of $3,855) was recognized, representing the remeasurement of the DUIP
liability during the year.
Outstanding and payable at beginning of year
Granted
Income deferred trust units
REIT A Units issued
Fractional Units paid in cash
Cancelled
Outstanding and payable at end of year
Vested but not issued at end of year
Year ended
December 31, 2016
847,071
144,636
82,233
(154,507)
—
(6,292)
913,141
471,455
Year ended
December 31, 2015
791,299
131,833
79,652
(137,233)
(6)
(18,474)
847,071
421,649
For the year ended December 31, 2016, 144,636 deferred trust units were granted to trustees, officers and employees as well
as employees of affiliates with the grant price ranging from $16.27 to $20.31 per unit. Of the units granted, 72,636 units relate
to key management personnel. For the year ended December 31, 2015, 131,833 deferred trust units were granted to trustees,
officers and employees as well as employees of affiliates with the grant price ranging from $17.59 to $27.34 per unit. Of the
units granted, 79,433 units relate to key management personnel.
For the year ended December 31, 2016, 6,292 deferred trust units were cancelled (December 31, 2015 – 18,474).
Note 15
OTHER NON-CURRENT LIABILITIES
Tenant security deposits
Finance leases
Other financial instruments – net liabilities
Total
December 31,
2016
14,988 $
68
—
15,056 $
December 31,
2015
19,319
233
732
20,284
$
$
Dream Office REIT 2016 Annual Report | 107
Note 16
AMOUNTS PAYABLE AND ACCRUED LIABILITIES
Trade payables
Accrued liabilities and other payables
Accrued interest
Rent received in advance
Distributions payable
Total
Note
25
17
December 31,
2016
1,313 $
63,414
10,775
16,394
13,101
104,997 $
$
$
December 31,
2015
3,460
59,662
13,603
15,797
20,458
112,980
Note 17
DISTRIBUTIONS
Dream Office 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 Trust determines the distribution rate by, among other considerations, its
assessment of cash flow as determined using adjusted cash flows from operating activities, which includes cash flows from
operating activities of our investments in joint ventures that are equity accounted and excludes the fluctuations in non-cash
working capital, transaction costs on business combinations and investment in lease incentives and initial direct leasing costs.
Adjusted cash flows from operating activities is not a measure defined by IFRS and therefore may not be comparable to similar
measures presented by other real estate investment trusts. The distribution rate 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 adjusted cash flows from operating activities for those prior periods is greater or
less 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.
On February 18, 2016, the Trust announced a reduction to its monthly cash distribution from $0.18666 per REIT A Unit to
$0.125 per REIT A Unit, or $1.50 per REIT A Unit on an annualized basis, effective for the month of February 2016 distribution.
The following table summarizes distribution payments for the years ended December 31, 2016 and December 31, 2015:
Paid in cash
Paid by way of reinvestment in REIT A Units
Less: Payable at December 31, 2015 (December 31, 2014)
Plus: Payable at December 31, 2016 (December 31, 2015)
Total
Year ended December 31,
2016
159,782 $
17,034
(20,458 )
13,101
169,459 $
2015
151,945
93,122
(20,393 )
20,458
245,132
$
$
On December 19, 2016, the Trust announced a cash distribution of $0.125 per REIT A Unit for the month of December 2016.
The December 2016 distribution was paid in cash on January 15, 2017, totalling $13,101.
On January 20, 2017, the Trust announced a cash distribution of $0.125 per REIT A Unit for the month of January 2017. The
January 2017 distribution was paid in cash on February 15, 2017, totalling $13,095.
On February 16, 2017, the Trust announced a cash distribution of $0.125 per REIT A Unit for the month of February 2017. The
February 2017 distribution will be payable on March 15, 2017 to unitholders of record at February 28, 2017.
The Trust declared monthly distributions of $0.18666 per unit for January 2016 and $0.125 per unit for the remainder of the
year, or $1.56 per unit for the year ended December 31, 2016. During 2015, the Trust declared monthly distributions of
$0.18666 per unit, or $2.24 per unit for the year ended December 31, 2015.
Dream Office REIT 2016 Annual Report | 108
Note 18
EQUITY
REIT A Units
Retained earnings (deficit)
Accumulated other comprehensive income
Total
Note
27
December 31, 2016
December 31, 2015
Number of
REIT A Units
104,806,724 $
—
—
104,806,724 $
Amount
3,108,424
(747,840 )
11,181
2,371,765
Number of
REIT A Units
107,860,638 $
—
—
107,860,638 $
Amount
3,168,915
301,324
11,575
3,481,814
Dream Office REIT Units
Dream Office REIT is authorized to issue an unlimited number of REIT Units and an unlimited number of Special Trust Units.
The REIT Units are divided into and issuable in two series: REIT 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 Dream Office REIT and in
distributions made by Dream Office 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.
Distribution Reinvestment and Unit Purchase Plan
The Distribution Reinvestment Plan (“DRIP”) allows holders of REIT A Units or subsidiary redeemable units, other than
unitholders who are resident of or present in the U.S., to elect to have all cash distributions from Dream Office 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 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, 2016, 1,122,411 REIT A Units were issued under the DRIP for $17,034 (December 31, 2015 –
4,040,965 REIT A Units for $93,122).
On February 18, 2016, the Trust announced the suspension of its DRIP until further notice effective for the February 2016
distribution.
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, 2016, 362 REIT A Units were issued under the Unit Purchase Plan for $6 (December 31,
2015 – 13,727 REIT A Units for $343).
Debenture conversions
For the years ended December 31, 2016 and December 31, 2015, no debentures were converted. There are no convertible
debentures remaining as at December 31, 2016.
Exchange of REIT B Units for REIT A Units
On May 25, 2015, 218,611 REIT B Units were exchanged for 218,611 REIT A Units totalling $5,795. The exchange was valued
based on the carrying amount of the subsidiary redeemable units on the day prior to the exchange for REIT B Units.
Normal course issuer bid
On June 22, 2016, the Trust renewed its normal course issuer bid (the “Bid”) which expired on June 21, 2016. The Bid will
remain in effect until the earlier of June 21, 2017 or the date on which the Trust has purchased the maximum number of
REIT A Units permitted under the Bid. Under the Bid, the Trust has the ability to purchase for cancellation up to a maximum of
10,732,867 REIT A Units (representing 10% of the Trust’s public float of 107,328,675 REIT A Units at the time of entering the
bid through the facilities of the TSX). Daily purchases are limited to 81,907 REIT A Units, other than purchases pursuant to
applicable block purchase exceptions.
For the year ended December 31, 2016, 4,331,194 REIT A Units had been purchased and subsequently cancelled under the Bid
for a total cost of $80,174 (for the year ended December 31, 2015 – 4,486,473 REIT A Units cancelled for $105,114).
Subsequent to year-end, the Trust purchased an additional 90,500 REIT A Units under the normal course issuer bid for
cancellation for a cost of $1,741.
Dream Office REIT 2016 Annual Report | 109
Note 19
ASSETS HELD FOR SALE AND DISPOSITIONS
Assets held for sale
As at December 31, 2016 and December 31, 2015, the Trust classified certain properties as assets held for sale totalling
$321,355 and $44,914, respectively, and its associated liabilities totalling $217,056 and $24,502, respectively. As at
December 31, 2016 and December 31, 2015, management had committed to a plan of sale of the underlying properties and
the sales were considered to be highly probable. As a result, these properties were classified as assets held for sale as at
December 31, 2016 and December 31, 2015 and certain properties were subsequently sold during 2016 and in Q1 2017 (see
Note 34).
Non-current assets
Current assets
Total assets
Non-current liabilities
Current liabilities
Total liabilities
Net assets
Investment properties held for sale
Balance at beginning of year
Add (deduct):
Building improvements
Lease incentives and initial direct leasing costs
Investment properties disposed of during the year
Investment properties classified as held for sale during the year
Fair value adjustment to investment properties
Amortization of lease incentives and other
December 31, 2016 December 31, 2015
44,732
182
44,914
24,268
234
24,502
20,412
321,232 $
123
321,355 $
212,278
4,778
217,056 $
104,299 $
$
$
$
$
Year ended
December 31, 2016
44,712 $
Year ended
December 31, 2015
—
$
128
671
(259,327 )
536,125
(300 )
(777 )
321,232 $
—
—
(120,805 )
159,547
5,970
—
44,712
Balance at end of year
$
Debt related to investment properties held for sale
Balance at beginning of year
Add (deduct):
Principal repayments
Lump sum repayment on property dispositions
Debt assumed by purchaser on disposal of investment properties
Debt classified as liabilities related to assets held for sale
Other adjustments(1)
Balance at end of year
(1) Other adjustments include amortization of financing costs and amortization of fair value adjustments.
Year ended
December 31, 2016
24,245 $
Year ended
December 31, 2015
—
$
(478 )
(50,776 )
(37,899 )
274,761
(625 )
209,228 $
(125 )
(29,395 )
(21,959 )
75,703
21
24,245
$
Dream Office REIT 2016 Annual Report | 110
Dispositions
For the year ended December 31, 2016, the Trust disposed of the following properties:
2450 Girouard Street West & 455 Saint Joseph Avenue (Intact Tower), Saint-Hyacinthe
8550 Newman Boulevard, Montréal
1305 Chemin Sainte-Foy, Québec City
1 Riverside Drive, Windsor
2010 Winston Park Drive, Oakville
4259–4299 Canada Way, Burnaby
960 Quayside Drive, New Westminster
625 Cochrane Drive and Valleywood Corporate Centre, Markham
30 Eglinton Ave. West, Mississauga
887 Great Northern Way, Vancouver
100 Gough Road, Markham
Suburban Ottawa & Gatineau Portfolio(2)
Seven Capella Court, Ottawa
4370 & 4400 Dominion Street, Burnaby
2665 Renfrew Street, Vancouver
Kitchener Portfolio(3)
Total dispositions for the year ended December 31, 2016
Ownership
(%)
100%
100%
100%
100%
40%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
$
Sales
price(1)
648,919
Date disposed
February 26, 2016
March 1, 2016
March 1, 2016
March 10, 2016
April 1, 2016
April 27, 2016
April 29, 2016
May 2, 2016
May 18, 2016
June 10, 2016
July 25, 2016
July 29, 2016
August 2, 2016
September 16, 2016
November 16, 2016
December 29, 2016
(1) Sales price reflects gross proceeds net of adjustments and before transaction costs.
(2) Includes four properties in suburban Ottawa and Gatineau: 2625 Queensview Drive, Gateway Business Park, 1125 Innovation Drive and 22 Varennes
Street.
(3) Includes seven properties in Kitchener: Market Square, 101 Frederick Street (Galleria), 50 Queen Street North, 55 King Street West, 235 King Street East,
22 Frederick Street, and 70 King Street East.
On December 29, 2016, the Trust completed the sale of the Kitchener Portfolio consisting of seven properties for gross
proceeds, net of adjustments, totalling $119,273 and was satisfied by cash consideration of $40,000, vendor takeback
mortgage (“VTB Mortgage”) of $78,775 and other adjustments of $498. The VTB Mortgage bears interest at the bank’s prime
rate (2.70% as at December 31, 2016) plus 0.2277% per annum and interest is payable monthly. The VTB Mortgage is secured
by the seven properties and matures on March 28, 2017. The VTB Mortgage has been included in prepaid expenses and other
receivables in the consolidated balance sheets.
For the year ended December 31, 2015, the Trust disposed of the following properties:
8100 Granville Avenue, Vancouver
2200–2204 Walkley Road, Ottawa
Québec City Portfolio(2)
Total dispositions for the year ended December 31, 2015
Ownership
(%)
100 %
100 %
100 %
$
Sales
price(1)
151,791
Date disposed
July 15, 2015
August 27, 2015
October 30, 2015
(1) Sales price reflects gross proceeds net of adjustments and before transaction costs.
(2) Includes four properties in Québec City: 900 Place D’Youville, 580 Rue Grand Allée, 200 Chemin Sainte-Foy and 141 Saint-Jean Street.
On April 30, 2015, a parcel of land at 60 Columbia Way, Markham, was expropriated by the City of Markham to build a
highway off-ramp, for total gross proceeds of $2,674. The gross proceeds represented fair market value. In addition to the
gross proceeds, the Trust recorded a one-time compensation income of $600 for the expropriation of the parcel of land.
On March 12, 2015, the Trust disposed of its 25% interest in an investment property of Capital Centre, Edmonton (an
investment in joint venture) for total gross proceeds of $2,340. As a result of the sale, the Trust recognized a net loss of $121,
which was included in share of net income from investment in joint ventures.
Dream Office REIT 2016 Annual Report | 111
Note 20
INTEREST
Interest on debt
Interest on debt incurred and charged to the consolidated statements of comprehensive loss is recorded as follows:
Interest expense incurred, at contractual and hedged rate of debt
Amortization of financing costs
Amortization of fair value adjustments on assumed debt
Interest expense on debt
Add (deduct):
Amortization of financing costs
Amortization of fair value adjustments on assumed debt
Change in accrued interest
Cash interest paid
Year ended December 31,
2016
2015
132,818
119,151 $
3,060
3,867
(3,498 )
(4,060 )
131,818
119,520
(3,867 )
3,498
(1,389 )
117,762 $
(3,060 )
4,060
545
133,363
$
$
Certain debts assumed in connection with acquisitions have been adjusted to fair value using the estimated market interest
rate at the time of the acquisition (“fair value adjustments”). Fair value adjustments are amortized to interest expense over
the expected life of the debt using the effective interest rate method. Non-cash adjustments to interest expense are recorded
as a change in non-cash working capital in the consolidated statements of cash flows.
Interest on subsidiary redeemable units
Interest payments charged to comprehensive income are recorded as follows:
Year ended December 31,
2016
2015
8,306
8,497 $
(977 )
(112 )
977
654
9,171
8,174 $
$
$
Note
$
13
14
$
2016
— $
Year ended December 31,
2015
(722 )
45,757
3,855
48,890
(11,409 )
(2,146 )
(13,555 ) $
Paid in cash
Less: Interest payable at December 31, 2015 (December 31, 2014)
Plus: Interest payable at December 31, 2016 (December 31, 2015)
Interest expense on subsidiary redeemable units
Note 21
FAIR VALUE ADJUSTMENTS TO FINANCIAL INSTRUMENTS
Remeasurement of conversion feature on convertible debentures
Remeasurement of carrying value of subsidiary redeemable units
Remeasurement of carrying value of deferred trust units
Dream Office REIT 2016 Annual Report | 112
Note 22
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. at a
rate of approximately 39.49% (December 31, 2015 – 38.46%). A deferred tax asset arises from the loss carry-forwards of the
U.S. subsidiaries, and is recognized only to the extent that it is realizable. A deferred tax liability arises from the temporary
differences between the carrying value and the tax basis of the net assets of the U.S. subsidiaries.
The tax effects of temporary differences arise from investment properties. As at December 31, 2016, the Trust had a
deductible temporary difference of $4,823 (December 31, 2015 – $4,434) that was not recognized as a deferred tax asset as it
did not meet the probable recognition criteria under IAS 12, “Income Taxes”. However, the deductible temporary difference
can be carried forward indefinitely.
The loss carry-forwards and the tax effects of temporary differences that give rise to the recognition of deferred tax assets and
liabilities are presented below:
Deferred tax assets
Deferred financing costs
Financial instruments
Loss carry-forwards
Deferred tax liabilities
Investment properties
Deferred tax liabilities, net
December 31,
2016
December 31,
2015
$
269 $
1,121
1,097
2,487
331
1,375
1,292
2,998
(13,222 )
(10,735 ) $
$
(12,036 )
(9,038 )
A reconciliation between the expected income taxes based upon the 2016 and 2015 statutory rates and the income tax
expense recognized during the years ended December 31, 2016 and December 31, 2015 is as follows:
Income taxes computed at the statutory rate of nil that is applicable to the Trust
Deferred income tax expense on U.S. properties
December 31,
2016
$
$
— $
1,953
1,953 $
December 31,
2015
—
1,695
1,695
As part of the deferred tax balance, $256 is a result of foreign exchange differences for the U.S. properties (for the year ended
December 31, 2015 – $1,160). This amount is included as part of other comprehensive income under unrealized foreign
currency translation gain (loss).
Dream Office REIT 2016 Annual Report | 113
Note 23
SEGMENTED INFORMATION
For the years ended December 31, 2016 and December 31, 2015, the Trust’s reportable operating segments of its investment
properties and results of operations were segmented geographically, namely B.C./Saskatchewan/N.W.T., Alberta, Toronto
downtown, Toronto suburban and Eastern Canada. Corporate amounts, lease termination fees, bad debt expense, straight-line
rent and amortization of lease incentives, and revenue and expenses related to properties held for redevelopment, sold
properties and assets held for sale at period-end, were included in “Other” for segment disclosure. The Trust did not allocate
interest expense to these segments since leverage is viewed as a corporate function. The decision as to where to incur the
debt is largely based on minimizing the cost of debt and is not specifically related to the segments. Similarly, other income,
other expenses, fair value adjustments to financial instruments, net losses on transactions and other activities, and deferred
income taxes were not allocated to the segments.
For the years ended December 31, 2016 and December 31, 2015, the 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.
Year ended December 31, 2016
Operations
Investment properties revenues
Investment properties operating
expenses
Net rental income (segment income)
Other income (loss)
Other expenses
Fair value adjustments, net losses on
transactions and other activities
Income (loss) before income taxes
Deferred income taxes
Net income (loss) for the year
$
B.C./
Saskatchewan/
N.W.T.
Alberta
Toronto
downtown
Toronto
suburban
Eastern
Canada
Segment
total(1)
Other(2)
Reconciliation(1)
Total
$
75,272 $
104,719 $
236,941 $
91,711 $
78,799 $
587,442 $
135,851 $
(59,002 ) $
664,291
(28,160 )
47,112
—
—
(43,609 )
61,110
—
—
(105,596 )
131,345
—
—
(63,000 )
(15,888 )
—
(15,888 ) $
(477,600 )
(416,490 )
—
(416,490 ) $
(44,300 )
87,045
—
87,045 $
(44,752 )
46,959
—
—
(37,400 )
9,559
—
9,559 $
(34,052 )
44,747
—
—
(256,169 )
331,273
—
—
(67,925 )
67,926
11,386
(152,064 )
(38,800 )
5,947
—
5,947 $
(661,100 )
(329,827 )
—
(329,827 ) $
(475,173 )
(547,925 )
(1,953 )
(549,878 ) $
28,381
(30,621 )
(154,342 )
8,891
(295,713 )
368,578
(142,956 )
(143,173 )
176,072
—
—
— $
(960,201 )
(877,752 )
(1,953 )
(879,705 )
Year ended December 31, 2016
Capital expenditures(5)
Investment properties
B.C./
Saskatchewan/
N.W.T.
7,037 $
644,552 $
$
$
Toronto
downtown
Alberta
25,225 $
36,943 $
562,206 $ 2,289,463 $
Toronto
suburban
17,860 $
768,559 $
Segment
Eastern
total(1)
Canada
13,816 $
100,881 $
630,575 $ 4,895,355 $
Other(3)
27,876 $
322,232 $
Reconciliation(1)(4)
Total
112,352
(16,405 ) $
(381,232 ) $ 4,836,355
(1) Includes the Trust’s proportionate share of its joint ventures, accounted for using the equity method of accounting.
(2) Includes fair value adjustments on sold properties and assets classified as held for sale at period-end, and corporate amounts, lease termination fees, bad debt expense, straight-line
rent and amortization of lease incentives and revenue and expenses related to properties held for redevelopment, sold properties and assets held for sale at year-end.
(3) Includes properties held for redevelopment, sold properties and assets held for sale at year-end.
(4) Includes assets held for sale at year-end.
(5) Includes building improvements and initial direct leasing costs and lease incentives.
Dream Office REIT 2016 Annual Report | 114
Year ended December 31, 2015
Operations
Investment properties revenue
Investment properties operating
expenses
Net rental income (segment income)
Other income
Other expenses
Fair value adjustments, net losses on
transactions and other activities
Income (loss) before income taxes
Deferred income taxes
Net income (loss) for the year
$
B.C./
Saskatchewan/
N.W.T.
Alberta
Toronto
downtown
Toronto
suburban
Eastern
Canada
Segment
total(1)
Other(3)
Reconciliation(1)
Total
$
75,371 $
114,803 $
234,393 $
92,782 $
79,941 $
597,290 $
205,156 $
(111,484 ) $
690,962
(27,459 )
47,912
—
—
(47,141 )
67,662
—
—
(105,960 )
128,433
—
—
(44,010 )
48,772
—
—
(34,584 )
45,357
—
—
(259,154 )
338,136
—
—
(95,988 )
109,168
9,185
(173,471 )
10,800
58,712
—
58,712 $
(227,100 )
(159,438 )
—
(159,438 ) $
83,200
211,633
—
211,633 $
(28,500 )
20,272
—
20,272 $
(16,000 )
29,357
—
29,357 $
(177,600 )
160,536
—
160,536 $
(158,762 )
(213,880 )
(1,695 )
(215,575 ) $
51,693
(59,791 )
53,068
17,337
(10,614 )
—
—
— $
(303,449 )
387,513
62,253
(156,134 )
(346,976 )
(53,344 )
(1,695 )
(55,039 )
Year ended December 31, 2015
Capital expenditures(5)
Investment properties
B.C./
Saskatchewan/
N.W.T.
8,322 $
$
$
Alberta
52,645 $
39,734 $
893,007 $ 1,665,106 $ 2,554,098 $
Toronto
downtown
Toronto
suburban
21,610 $
955,327 $
Segment
Eastern
total(1)
Canada
19,773 $
142,084 $
922,882 $ 6,990,420 $
Other(6)
1,786 $
56,474 $
Reconciliation(1)(4)
(25,517 ) $
Total
118,353
(1,147,763 ) $ 5,899,131
(1) Includes the Trust’s proportionate share of its joint ventures, accounted for using the equity method of accounting.
(2) Includes fair value adjustments on sold properties and assets classified as held for sale at period-end, and corporate amounts, lease termination fees, bad debt expense,
straight-line rent and amortization of lease incentives and revenue and expenses related to properties held for redevelopment, sold properties and assets held for sale at year-
end.
(3) Includes properties held for redevelopment, sold properties and assets held for sale at December 31, 2015.
(4) Includes assets held for sale at year-end.
(5) Includes building improvements and initial direct leasing costs and lease incentives.
(6) Includes properties held for redevelopment, sold properties and assets held for sale at December 31, 2015.
Note 24
GENERAL AND ADMINSTRATIVE EXPENSES
Management Services Agreement
Asset management fees
Salaries
Deferred compensation expense
Other(1)
General and administrative expenses
Note
25
25
14
$
$
$
Year ended December 31,
2015
(435 )
(4,338 )
(346 )
(2,638 )
(4,439 )
(12,196 )
2016
(661 )
—
(1,902 )
(2,551 )
(6,792 )
(11,906 )
$
(1) Other comprises public reporting, professional service fees, corporate sponsorships, donations and overhead related costs.
Note 25
RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
From time to time, Dream Office REIT and its subsidiaries enter into transactions with related parties that are conducted
under normal commercial terms.
At December 31, 2016, DAM held 3,858,153 REIT A Units and 5,233,823 subsidiary redeemable units (December 31, 2015 –
773,939 REIT A Units and 5,233,823 subsidiary redeemable units).
Agreements with DAM
On August 24, 2007, Dream Office REIT had an asset management agreement (the “Asset Management Agreement”) with
DAM pursuant to which DAM provided certain asset management services to Dream Office REIT and its subsidiaries. On
April 2, 2015, the Trust acquired a subsidiary of DAM which was a party to the Asset Management Agreement with the Trust,
resulting in the elimination of the Trust’s obligation to pay asset management, acquisition and capital expenditure fees to
DAM. In consideration for the Reorganization, the Trust issued 4,850,000 subsidiary redeemable units to DAM, representing
total consideration of $127,313 using the closing price of REIT A Units at the date of the transaction. The total consideration of
$127,313 and costs related to the Reorganization totalling $819 were charged to net income in the consolidated statement of
comprehensive income.
Dream Office REIT 2016 Annual Report | 115
On April 2, 2015, the Trust and DAM also entered into a Management Services Agreement pursuant to which DAM will provide
strategic oversight of the Trust and the services of a Chief Executive Officer as requested on a cost recovery basis. In
accordance with the termination provisions of the Management Services Agreement, the Trust is subject to an incentive fee
payable which is based on 15% of the Trust’s Aggregate Adjusted Funds from Operations (as defined in the Management
Services Agreement), including the net gain on sale of any properties during the term of the agreement, and the deemed sale
of the remaining portfolio upon termination, in excess of $2.65 per REIT A Unit. As the termination of the Management
Services Agreement for the first three years is solely at the discretion of the Trust and the Trust currently has no intention to
terminate the Management Services Agreement, the Trust has determined that it is not probable that the incentive fee is
payable and accordingly, no amounts related to the incentive fee have been recorded in the consolidated financial statements
as at December 31, 2016.
On December 1, 2013, Dream Office REIT and DAM entered into a Shared Services and Cost Sharing Agreement. Pursuant to
the Reorganization, the Trust and DAM amended the existing Shared Services and Cost Sharing Agreement as of April 2, 2015.
According to the terms of the amended arrangement, DAM will continue to provide administrative and support services on an
as-needed basis and will receive an annual fee to reimburse it for all expenses incurred. The Trust will continue to reimburse
DAM for any shared costs allocated in each calendar year. This amended agreement provides for the automatic reappointment
of DAM for additional one-year terms commencing on January 1 unless and until terminated in accordance with its terms or
by mutual agreement of the parties.
Dream Office REIT, Dream Office Management LP (a wholly owned subsidiary of Dream Office LP) and DAM were parties to an
administrative services agreement (the “Services Agreement with DAM”). Effective April 2, 2015, as part of the Reorganization,
the existing Services Agreement with DAM was terminated and Dream Office Management Corp. (“DOMC”), a wholly owned
subsidiary of Dream Office Management LP, and DAM entered into an amended Administrative Services Agreement pursuant
to which DOMC will continue to provide certain administrative and support services to DAM. The terms of the agreement
provide for DOMC to be reimbursed by DAM for the actual costs incurred by it in carrying out these activities on behalf of
DAM. This agreement is for one-year terms unless and until terminated in accordance with its terms or by mutual agreement
of the parties.
On October 25, 2016, the Trust and DAM jointly implemented a cost reduction program to simplify and to establish more
dedicated services on a cost-efficient basis of the Trust’s operating and shared service platform. On a go forward basis, the
portion of the cost reduction program that relates to the shared service platform will impact the costs being allocated to
related parties in accordance with the Shared Services, Cost Sharing, Administrative Services and Services Agreements
currently in place. As a result of implementing this program, the Trust incurred a charge of $3,923 for the year ended
December 31, 2016, which is included in net losses on transactions and other activities (see Note 32).
Management Services Agreement with DAM
The following is a summary of fees incurred for the years ended December 31, 2016 and December 31, 2015:
Senior management compensation (included in G&A expenses)
Expense reimbursements related to financing arrangements (included in debt)
Expense reimbursements related to disposition arrangements
(included in cost on sale of investment properties)
Total incurred under the Management Services Agreement
$
$
Year ended December 31,
2016
2015
(661 )
(753 )
(435 )
(359 )
$
(876 )
(2,290 )
$
(300 )
(1,094 )
Asset Management Agreement with DAM
The Asset Management Agreement provided 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 Dream Office REIT’s adjusted funds from operations per unit (as defined in the Asset
Management Agreement) 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;
Dream Office REIT 2016 Annual Report | 116
• 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 of a property acquired in
excess of $200,000 of properties acquired; and
•
financing fee equal to the lesser of actual expenses incurred by DAM in supplying services relating to financing
transactions and 0.25% of the debt and equity of all financing transactions completed on behalf of Dream Office REIT.
The following is a summary of fees incurred for the years ended December 31, 2016 and December 31, 2015 prior to the
elimination of the Asset Management Agreement with DAM as part of the Reorganization on April 2, 2015:
Base annual management fee (included in G&A expenses)
Expense reimbursements related to financing arrangements (included in debt)
Total incurred under the Asset Management Agreement
$
$
Year ended December 31,
2016
2015
—
(4,338 )
—
—
—
(4,338 )
$
$
Shared Services and Cost Sharing Agreement with DAM
Effective January 1, 2016, the Shared Services and Cost Sharing Agreement with DAM was amended such that future funding
costs in respect of technology personnel and technology related platforms ceased. There were no other material changes to
the agreement.
Effective January 1, 2016, Dream Technology Ventures LP (“DTV LP”), a limited partnership, was established by a wholly owned
subsidiary of DAM acting as general partner and Dream Office LP (a wholly owned subsidiary of the Trust), DAM, Dream
Industrial LP, Dream Global REIT, and Dream Alternatives Master LP as the limited partners. Each of the limited partners,
including the Trust, will contribute capital to DTV LP to fund costs incurred relating to technology personnel and technology
related platforms. In addition, the Trust will be party to a licensing agreement in respect of the use of the developed
technology. The Trust accounts for its investment in DTV LP using the equity method and has included the equity accounted
investment in other non-current assets, and the associated results have been included in interest and other income within the
consolidated statements of comprehensive loss for the year ended December 31, 2016.
As a result of the cost reduction program implemented on October 25, 2016, the Trust accelerated payment of the remaining
outstanding commitments under the Shared Services and Cost Sharing Agreement to DAM totalling $1,169 which has been
included in the charge on cost reduction program within net losses on transaction and other activities for the year ended
December 31, 2016 (see Note 32).
The following is a summary of fees billed by DAM for the years ended December 31, 2016 and December 31, 2015. Amounts
billed by DAM prior to April 2, 2015 are included pursuant to the original agreement:
Business transformation costs
Strategic services and other
Total costs incurred under the Shared Services and Cost Sharing Agreement
Year ended December 31,
2016
2015
(1,219 ) $
(1,490 )
(871 )
(889 )
(2,090 ) $
(2,379 )
$
$
Administrative Services Agreement with DAM
The following is a summary of fees received from or paid to DAM and costs incurred by DAM or the Trust on behalf of the
other party for the years ended December 31, 2016 and December 31, 2015. Amounts incurred prior to April 2, 2015 are
included pursuant to the original agreement:
Shared services and costs processed on behalf of DAM
Operating and administration costs of regional offices processed on behalf of DAM
Total costs processed on behalf of DAM under the Administrative Services Agreement
Total costs processed by DAM on behalf of the Trust under the Administrative Services
Agreement
Year ended December 31,
2016
2015
5,560
7,220 $
2,979
615
8,539
7,835 $
(610 )
(568 ) $
$
$
$
Dream Office REIT 2016 Annual Report | 117
Services Agreement with Dream Industrial REIT
Effective October 4, 2012, DOMC and Dream Industrial REIT entered into a Services Agreement, pursuant to which DOMC
provides certain services to Dream Industrial REIT on a cost recovery basis.
The following is a summary of the cost recoveries from Dream Industrial REIT for the years ended December 31, 2016 and
December 31, 2015:
Total cost recoveries from Dream Industrial REIT
Amounts due from (to) related parties
Amounts due from DAM
Administrative Services Agreement with DAM
Parking revenue received on behalf of the Trust
Total amounts due from DAM
Amounts due to DAM
Various agreements with DAM(1)
Distributions payable to DAM(2)
Subsidiary redeemable interest payable to DAM(3)
Total amounts due to DAM
Year ended December 31,
2016
2015
3,471
3,682 $
$
December 31,
2016
December 31,
2015
1,077 $
—
1,077 $
552
260
812
December 31, December 31,
2015
2016
(825 ) $
(482 )
(654 )
(1,961 ) $
(2,536 )
(144 )
(977 )
(3,657 )
$
$
$
$
(1) Includes Management Services Agreement, Asset Management Agreement, Shared Services and Cost Sharing Agreement, and Administrative Services
Agreement.
(2) Distributions payable is in relation to the 3,858,153 REIT A Units held by DAM.
(3) Subsidiary redeemable interest payable is in relation to the 5,233,823 subsidiary redeemable units held by DAM.
Amounts due from (to) Dream Industrial REIT
Service Agreement with Dream Industrial REIT
Distributions from Dream Industrial REIT
Total amounts due from Dream Industrial REIT
Total amounts due to Dream Industrial REIT related to Dream Industrial REIT properties
December 31, December 31,
2015
2016
$
$
$
429 $
1,168
1,597 $
— $
256
1,082
1,338
(135 )
Compensation of key management personnel and trustees
Compensation of key management personnel and trustees for the years ended December 31, 2016 and December 31, 2015 is
as follows:
Compensation and benefits
Unit-based awards(1)
Total
Year ended December 31,
2016
1,189 $
1,298
2,487 $
2015
666
1,793
2,459
$
$
(1) Deferred trust units granted to officers and trustees vest over a five-year period with one-fifth 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.
Dream Office REIT 2016 Annual Report | 118
Note
$
20
20
$
Note
32 $
32
14
22
9, 32
25, 32
10
$
$
$
Year ended December 31,
2016
2015
13,032
17,064 $
1,291
1,291
3,060
3,867
(3,498 )
(4,060 )
1,658
2,282
14,981
21,006 $
Year ended December 31,
2016
2015
1,999
9,899 $
3,652
12,250
2,638
2,750
(1,512 )
(2,313 )
1,695
1,953
10,263
—
127,313
43
51,212
—
186,196
35,646 $
Year ended December 31,
2016
2015
6,155
(3,965 ) $
2,078
(481 )
188
287
2,026
(12,160 )
216
(4,562 )
8,203
(18,421 ) $
Note
Year ended December 31,
2016
2015
20 $
20
117,762 $
8,497
133,363
8,306
Note 26
SUPPLEMENTARY CASH FLOW INFORMATION
The components of amortization and depreciation under operating activities include:
Amortization of lease incentives
Amortization of external management contracts
Amortization of financing costs
Amortization of fair value adjustments on assumed debt
Depreciation on property and equipment
Total amortization and depreciation
The components of changes in other adjustments under operating activities include:
Debt settlement costs, net
Costs on sale of investment properties
Deferred unit compensation expense
Straight-line rent adjustment
Deferred income taxes
Loss on recognition of net assets of joint operations
Cost on Reorganization and other
Impairment of goodwill
Total other adjustments
The components of the changes in non-cash working capital under operating activities include:
Decrease (increase) in amounts receivable
Decrease (increase) in prepaid expenses and other receivables
Decrease in other non-current assets
Increase (decrease) in amounts payable and accrued liabilities
Increase (decrease) in non-current liabilities
Change in non-cash working capital
The following amounts were paid on account of interest:
Interest:
Debt
Subsidiary redeemable units
Dream Office REIT 2016 Annual Report | 119
Note 27
ACCUMULATED OTHER COMPREHENSIVE INCOME
Opening
balance
January 1
Net change
during the
year
2016
Closing
balance
December 31
Opening
balance
January 1
Year ended December 31,
2015
Closing
balance
December 31
Net change
during the
year
Realized and unrealized gain (loss) on interest
rate swaps, net of taxes
Unrealized foreign currency translation gain (loss),
net of taxes
Accumulated other comprehensive income
$
(1,141 ) $
813 $
(328 ) $
(1,002 ) $
(139 ) $
(1,141)
12,716
11,575 $
$
(1,207 )
(394 ) $
11,509
11,181 $
5,230
4,228 $
7,486
7,347 $
12,716
11,575
Note 28
COMMITMENTS AND CONTINGENCIES
Dream Office REIT and its operating subsidiaries are contingently liable under guarantees that are issued in the normal course
of business, on certain debt assumed by purchasers of investment properties, and with respect to litigation and claims that
arise from time to time. In the opinion of management, any liability that may arise from such contingencies would not have a
material adverse effect on the consolidated financial statements of Dream Office REIT.
In 2015, a subsidiary of the Trust received notices of reassessment from both the Canada Revenue Agency and the Alberta
Minister of Finance with respect to its 2007, 2008 and 2010 taxation years. These reassessments relate to the deductibility of
certain tax losses claimed by the subsidiary prior to its acquisition by the Trust. These federal and provincial reassessments if
upheld could increase total current taxes payable, including interest and penalties by $11,208. No cash payment is expected to
be made unless it is ultimately established that the Trust has an obligation to make one. Management is of the view that there
is a strong case to support the position as filed and has contested both the federal and provincial reassessments. Since
management believes that it is more likely than not that its position will be sustained, no amounts related to these
reassessments have been recorded in the consolidated financial statements as of December 31, 2016 and December 31, 2015.
At December 31, 2016, Dream Office REIT’s future minimum commitments under operating leases, finance leases, and fixed
price contracts to purchase electricity and steam are as follows:
Operating lease payments
Finance lease payments
Fixed price contracts – steam
Total
< 1 year
3,243 $
68
315
3,626 $
$
$
1–5 years
Minimum payments due
> 5 years
Total
7,503 $ 100,738 $ 111,484
68
—
—
1,576
5,987
4,096
9,079 $ 104,834 $ 117,539
Operating leases include ground leases on certain properties totalling $108,541, payable over the next 73 years.
During the year ended December 31, 2016, the Trust paid $3,208 (December 31, 2015 – $817) in minimum lease payments,
which has been included in the consolidated statements of comprehensive loss for the year.
The Trust has entered into lease agreements that may require tenant improvement costs of approximately $42,575
(December 31, 2015 – $37,825).
As at December 31, 2016, the Trust’s share of contingent liabilities for the obligation of the other owners of co-owned
properties was $5,330 (December 31, 2015 – $6,354).
The Trust is contingently liable under guarantees that are issued on certain debt assumed by purchasers of investment
properties totalling $74,380 (December 31, 2015 – $nil).
Dream Office REIT 2016 Annual Report | 120
Note 29
CAPITAL MANAGEMENT
The primary objectives of the Trust’s capital management are to ensure it remains within its quantitative banking covenants
and to improve its credit rating. The Trust has a credit rating of BBB (low) with a stable trend as part of the Series A, Series B
and Series C Debentures offerings.
The Trust’s capital consists of debt, including mortgages, demand revolving credit facilities, debentures, term loan facility,
convertible debentures, subsidiary redeemable units and unitholders’ equity. The Trust’s objectives in managing capital are to
ensure adequate operating funds are available to maintain consistent and sustainable unitholder distributions, to fund leasing
costs and capital expenditure requirements, and to provide for resources needed to acquire new properties. The Trust’s
maximum credit exposure is equal to the trade receivables at December 31, 2016.
Various debt, equity and earnings distribution ratios are used to ensure capital adequacy and to monitor capital requirements.
The primary ratios used for assessing capital management are the interest coverage ratio and net debt-to-gross carrying value.
Other significant indicators include weighted average interest rate, average term to maturity of debt and variable debt as a
portion of total debt. These indicators assist the Trust in assessing whether the debt level maintained is sufficient to provide
adequate cash flows for unitholder distributions, leasing costs, and capital expenditures, and for evaluating the need to raise
funds for further expansion. Various mortgages have debt covenant requirements that are monitored by the Trust to ensure
there are no defaults. These covenants include loan-to-value ratios, cash flow coverage ratios, interest coverage ratios and
debt service coverage ratios. These covenants are measured at the subsidiary limited partnership level, and all have been
complied with in all material respects.
The Trust’s equity consists of REIT Units, in which the carrying value is impacted by earnings and unitholder distributions.
Amounts retained in excess of the distributions are used to fund leasing costs, capital expenditures and working capital
requirements. Management monitors distributions to ensure adequate resources are available by comparing total
distributions to adjusted cash flows from operating activities, a non-IFRS measure.
During the year, there were no events of default on any of the Trust’s obligations under its credit facilities or mortgage loans.
Note 30
FINANCIAL INSTRUMENTS
Risk management
IFRS 7, “Financial Instruments: Disclosures” (“IFRS 7”), places emphasis on disclosures about the nature and extent of risks
arising from financial instruments and how the Trust manages those risks, including market, credit and liquidity risks.
Market risk is the risk the fair value or future cash flows of a financial instrument will fluctuate because of changes in market
prices. Market risk consists of interest rate risk, currency risk and other market price risk. The Trust has exposure to interest
rate risk primarily as a result of its variable rate debt. In addition, there is interest rate risk associated with the Trust’s fixed
rate debt due to the expected requirement to refinance such debts in the year of maturity. The Trust is exposed to the
variability in market interest rates and credit spreads on maturing debt to be renewed. Variable rate debt at December 31,
2016 was 12.7% of the Trust’s total debt (December 31, 2015 – 8.9%). 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.
Dream Office REIT 2016 Annual Report | 121
The following interest rate sensitivity table outlines the potential impact of a 1% change in the interest rate on variable rate
financial assets and liabilities for the prospective 12-month period. A 1% change is considered a reasonable level of fluctuation
on variable rate financial assets and liabilities.
Financial assets
Cash and cash equivalents(1)
Financial liabilities
Fixed rate debt due to mature in 2017
and total variable debt
$
$
Amount
Income
-1 %
Equity
Income
Interest rate risk
+1%
Equity
7,667
$
(77 )
$
(77 )
$
77
$
77
490,776
$
4,908
$
4,908
$
(4,908 )
$
(4,908 )
(1) Cash and cash equivalents are short-term investments with an original maturity of three months or less, and exclude cash subject to restrictions that
prevent the Trustʼs use for current purposes. These balances generally receive interest income at the bankʼs prime rate less 1.85%. 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 significant foreign exchange risks.
The Trust’s assets mainly consist of investment properties. Credit risk arises from the possibility that tenants in investment
properties may not fulfill their lease or contractual obligations. The Trust mitigates its credit risks by attracting tenants of
sound financial standing and by diversifying its mix of tenants. 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 as they become due.
Derivatives and hedging activities
There were no interest rate swaps or conversion feature on the convertible debentures remaining as at December 31, 2016.
Note 31
FAIR VALUE MEASUREMENT
Fair value of financial instruments
Quoted market prices represent a Level 1 valuation. When quoted market prices are not available, the Trust maximizes the use
of observable inputs. When all significant inputs are observable, the valuation is classified as Level 2. Valuations that require
the significant use of unobservable inputs are considered Level 3. The Trust’s policy is to recognize transfers in and transfers
out of fair value hierarchy levels as of the date of the event or change in circumstances that caused the transfer. There were no
transfers between Levels 1, 2 and 3 during the year.
Dream Office REIT 2016 Annual Report | 122
The following tables summarize fair value measurements recognized in the consolidated financial statements by class of asset
or liability and categorized by level according to the significance of the inputs used in making the measurements.
Note
Carrying value as at
December 31, 2016
Level 1
Fair value as at December 31, 2016
Level 3
Level 2
Recurring measurements
Non-financial assets
Investment properties
Investment properties classified as held for sale
7 $
19 $
4,836,355 $
321,232 $
— $
— $
— $ 4,836,355
321,232
— $
Note
Carrying value as at
December 31, 2015
Level 1
Fair value as at December 31, 2015
Level 3
Level 2
Recurring measurements
Non-financial assets
Investment properties
Financial liabilities (assets)
Interest rate swaps
Conversion feature on the convertible debentures
7
$
5,899,131 $
— $
— $ 5,899,131
$
$
770 $
(38 ) $
— $
— $
770 $
(38 )
$
—
—
Financial instruments carried at amortized cost where the carrying value does not approximate fair value are noted below:
Fair values disclosed
Mortgages
Mortgages related to properties held for sale
Debentures
Investment in Dream Industrial REIT
Fair values disclosed
Mortgages
Debentures
Term loan facility
Convertible debentures
Investment in Dream Industrial REIT
Note
Carrying value as at
December 31, 2016
Fair value as at December 31, 2016
Level 1
Level 2
Level 3
12 $
12
12
8
2,027,172 $
209,228
448,828
186,754
— $
—
450,000
—
— $ 2,047,635
211,845
—
—
—
—
165,775
Note
Carrying value as at
December 31, 2015
Fair value as at December 31, 2015
Level 1
Level 2
Level 3
12 $
12
12
12
8
2,244,161 $
483,174
182,990
50,923
184,817
— $
485,000
—
50,628
—
— $ 2,325,458
—
—
185,009
—
—
—
—
133,202
Amounts receivable, cash and cash equivalents, tenant security deposits, amounts payable and accrued liabilities, and
distributions payable are carried at amortized cost which approximates fair value due to their short-term nature. Subsidiary
redeemable units and the Deferred Unit Incentive Plan are carried at amortized cost, which approximates fair value as they are
readily redeemable financial instruments.
Investment properties
The Trust’s accounting policy as indicated in Note 3 is applied to fair value investment properties using the income approach,
which is derived from two methods: overall capitalization rate method and discounted cash flow method, which result in these
measurements being classified as Level 3 in the fair value hierarchy. Valuations of investment properties are most sensitive to
changes in discount rates and capitalization rates. In applying the overall cap rate method the stabilized NOI of each property
is divided by any appropriate cap rate.
Dream Office REIT 2016 Annual Report | 123
The critical and key assumptions in the valuation of investment properties are as follows:
Cap rate method
• Cap rates – based on actual location, size and quality of the properties and taking into account any available market data
at the valuation date.
• Stabilized NOI – normalized property operating revenues less property operating expenses.
Discounted cash flow method
• Discount and terminal rates – reflecting current market assessments of the return expectations.
• Market rents – reflecting management’s best estimates with reference to recent leasing activity and external market data.
• Leasing costs – reflecting recent leasing activity and external market data.
• Vacancy rates – reflecting recent leasing activity and external market data.
In accordance with IFRS 5, “Non-Current Assets Held for Sale and Discontinued Operations”, as at December 31, 2016, the
Trust classified certain investment properties as assets held for sale totalling $321,232 and its associated liabilities totalling
$209,228. The fair value of the assets held for sale approximates the carrying value of the assets.
Investment properties are valued on a highest-and-best-use basis. For all of the Trust’s investment properties the current use
is considered the highest and best use.
Investment properties valuation process
The Trust is responsible for determining the fair value measurements included in the consolidated financial statements. At the
end of each reporting period, the Trust determines the fair value of investment properties by:
1) considering current contracted sales prices for properties that are available for sale;
2) obtaining appraisals from qualified external professionals applying the income approach on a rotational basis for select
properties; and
3) using internally prepared valuations applying the income approach.
The fair values of these investments are reviewed at least quarterly by management with reference to independent property
appraisals and market conditions existing at the reporting date, using generally accepted market practices. The independent
appraisers are experienced, nationally recognized and qualified in the professional valuation of office buildings in their
respective geographic areas. Judgment is also applied in determining the extent and frequency of independent appraisals. At
each reporting period, a select number of properties, determined on a rotational basis, are valued by appraisals. For
properties not subject to independent appraisals, valuations are prepared internally during each reporting period.
Convertible debentures and interest rate swaps
Up until March 31, 2016 and for all of 2015, the Trust held the 5.50% Series H Convertible Debentures. There were no interest
rate swaps or convertible features on the convertible debentures remaining as at December 31, 2016.
The 5.50% Series H Convertible Debentures have two components of value – a conventional bond and a call on the equity of
the Trust through conversion. Based on its terms (see Note 12), the conversion feature is an embedded derivative and has
been separated from the host contract and classified as a financial liability or asset through profit and loss.
The fair value of the conversion feature, categorized in Level 2, is calculated based on a market-based methodology. In this
model, a convertible bond consists of two components, an equity component and a debt component, and these components
have different default risks. The equity component is discounted at the risk-free rate. The equity component has no default
risk since the Trust can always issue its own units. The debt component is discounted at the risk-free rate plus a credit spread.
The fair value of the conversion feature on the convertible debentures was determined using a number of inputs. The critical
inputs are the unit price, the units’ distribution yield, the underlying unit volatility, the risk-free rate and the assumed credit
spread, all of which are observable.
A qualified independent consultant calculates the fair value measurement for the financial liability classified as Level 2. The
valuation processes and results are determined and reviewed by senior management. The inputs and processes used in the
valuation and the results thereof are reviewed by senior management and discussed with the qualified independent
consultant to ensure conformity with IFRS.
Dream Office REIT 2016 Annual Report | 124
The significant observable inputs used in the fair value measurement of the conversion feature as at December 31, 2015 were
as follows:
• Volatility: Historical volatility as at December 31, 2015 was derived from the historical prices of the Trust with maturity
equal to the term to maturity of the convertible debentures.
• Credit spread: The credit spread of the convertible debentures was imputed from the trade price of the convertible
debentures as at December 31, 2015.
5.5% Series H Debentures
Credit spread
Volatility
December 31,
2015
4.55 %
15.64 %
2016
—
—
A higher volatility will increase the value of the conversion option. A lower credit spread will decrease the value of the
conversion option.
The following table shows the changes in fair value of the conversion option from a 5% increase or decrease in volatility and a
100 basis points (“bps“) increase or decrease in credit spread, holding all other inputs constant as at December 31, 2015.
Increase (decrease) in fair value as at December 31, 2015
$
Impact of change to volatility
-5%
—
+5%
—
$
Impact of change to credit spread
+100 bps
38
$
-100 bps
(460 )
$
The Trust also uses the following techniques in determining the fair value disclosed for the following financial liabilities
classified as Level 1, 2 and 3:
Mortgages and term loan facility
The fair value of mortgages and term loan facility as at December 31, 2016 is determined by discounting the expected cash
flows of each mortgage and term loan facility using market discount rate. The discount rates are determined using the
Government of Canada benchmark bond yield for instruments of similar maturity adjusted for the Trust’s specific credit risk. In
determining the adjustment for credit risk, the Trust considers market conditions, the value of the investment properties that
the mortgages and term loan facility are secured by and other indicators of the Trust’s creditworthiness.
Convertible debentures
The fair value of convertible debentures as at December 31, 2015 was based on the convertible debentures’ trading price on
or about December 31, 2015.
Debentures
The fair value of debentures that are traded as at December 31, 2016 and December 31, 2015 are based on the debentures’
trading price on or about December 31, 2016 and December 31, 2015, respectively. The fair values of debentures that are
non-trading as at December 31, 2016 and December 31, 2015 are based on the debentures’ par value.
Demand revolving credit facilities
The fair value of the demand revolving credit facilities as at December 31, 2016 and December 31, 2015 approximates their
carrying value due to their short-term nature.
Dream Office REIT 2016 Annual Report | 125
Note 32
NET LOSSES ON TRANSACTIONS AND OTHER ACTIVITIES
Debt settlement costs, net
Costs on sale of investment properties
Internal leasing costs
Business transformation costs
Loss on recognition of net assets related to joint operations
Charge on cost reduction program
Cost on Reorganization
Impairment of goodwill
Other
Total
Note
$
25
9
25
25
10
$
Year ended December 31,
2016
2015
(9,899 ) $
(1,999 )
(12,250 )
(3,652 )
(8,695 )
(8,951 )
(1,219 )
(1,490 )
—
(10,263 )
—
(3,923 )
—
(128,132 )
—
(51,212 )
600
(1,297 )
(47,546 ) $
(194,836)
Net debt settlement costs comprise fees related to the discharge of mortgages prior to the original maturity dates during the
year, offset by the write-off of associated fair value adjustments and financing costs.
On October 25, 2016, the Trust and DAM jointly implemented a cost reduction program to simplify and to establish more
dedicated services on a cost-efficient basis of the Trust’s operating and shared service platform. On a go forward basis, the
portion of the cost reduction program that relates to the shared service platform will impact the costs being allocated to
related parties in accordance with the Shared Services, Cost Sharing, Administrative Services and Services Agreements
currently in place. As a result of implementing this program, the Trust incurred a charge of $3,923 for the year ended
December 31, 2016.
On June 30, 2016, the Trust terminated the joint venture agreement with H&R REIT and entered into a co-ownership
agreement with KingSett and AIMCo. As a result of this change, the Trust recognized a loss of $10,263 in the consolidated
statements of comprehensive income (loss) related to the initial recognition at fair value of the Trust’s remaining 50% share of
the assets and liabilities compared to the carrying values of the joint ventures (see Note 9).
In consideration for the Reorganization, the Trust issued 4,850,000 subsidiary redeemable units to DAM, representing total
consideration of $127,313. The total consideration of $127,313 and costs related to the Reorganization totalling $819 were
charged to net losses on transactions and other activities in the consolidated statements of comprehensive loss (see Note 25).
Note 33
COMPARATIVE FIGURES
Certain comparative figures included in the consolidated financial statements have been reclassified to conform to the current
year presentation.
Note 34
SUBSEQUENT EVENTS
On January 9, 2017, the Trust repaid Series B Debentures with an aggregate principal amount of $125,000 at maturity.
Subsequent to year-end, the Trust completed the sale of 15 properties located in Calgary and Toronto totalling approximately
1.6 million square feet, for gross proceeds (net of adjustments) totalling approximately $228,330.
Dream Office REIT 2016 Annual Report | 126
Trustees
Detlef BierbaumInd.,1,2
Köln, Germany
Corporate Director
Donald K. Charter Ind.,3,4
Toronto, Ontario
Corporate Director
Michael J. Cooper2,5
Toronto, Ontario
President and Chief Responsible Officer
Dream Unlimited Corp.
Joanne FerstmanInd.,1,2
Toronto, Ontario
Corporate Director
Robert GoodallInd.,4
Toronto, Ontario
President
Canadian Mortgage Capital Corporation
Duncan JackmanInd.,3
Toronto, Ontario
Chairman, President and CEO
E-L Financial Corporation Limited
The Hon. Dr. Kellie LeitchInd.,3
Creemore, Ontario
Member of Parliament for Simcoe–Grey
Karine MacIndoeInd.,1,4
Toronto, Ontario
Corporate Director
Ind. Independent
1 Member of the Audit Committee
2 Member of the Investment Committee
3 Member of the Governance and
Nominating Committee
4 Member of the Compensation, Health
and Environmental Committee
5 Chair of the Board of Trustees
Corporate Information
HEAD OFFICE
Dream Office
Real Estate Investment Trust
State Street Financial Centre
30 Adelaide Street East, Suite 301
Toronto, Ontario M5C 3H1
Phone: (416) 365-3535
Fax: (416) 365-6565
TRANSFER AGENT
(for change of address, registration or
other unitholder enquiries)
Computershare Trust
Company of Canada
100 University Avenue, 8th Floor
Toronto, Ontario M5J 2Y1
Phone: (514) 982-7555 or 1 800 564-6253
Fax: (416) 263-9394 or 1 888 453-0330
Web: www.computershare.com
E-mail: service@computershare.com
AUDITORS
PricewaterhouseCoopers LLP
PwC Tower, 18 York Street, Suite 2600
Toronto, Ontario M5J 0B2
STOCK EXCHANGE LISTING
The Toronto Stock Exchange
Listing Symbol:
REIT Units, Series A: D.UN
CORPORATE COUNSEL
Osler, Hoskin & Harcourt LLP
Box 50, 1 First Canadian Place, Suite 6200
Toronto, Ontario M5X 1B8
INVESTOR RELATIONS
Phone: (416) 365-3535
Toll free: 1 877 365-3535
E-mail: officeinfo@dream.ca
Website: www.dreamofficereit.ca
Corporate Office
State Street Financial Centre
30 Adelaide Street East, Suite 301
Toronto, Ontario M5C 3H1
Phone: 416.365.3535
Fax: 416.365.6565
dreamofficereit.ca