Dundee REIT
Annual Report 2018

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

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