Dream Office Real Estate Investment Trust

Jane Gavan - CEO Ana Radic - COO Mario Barrafato - SVP & CFO

Sam Damiani - TD Securities Mike Markidis - Desjardins Capital Markets Alex Avery - CIBC Matt Kornack - National Bank Financial

Thank you. Good morning.

Welcome to the fourth quarter conference call for Dream Office REIT. With me are Ana Radic, our Chief Operating Officer and Mario Barrafato, our Chief Financial Officer.

I am going to make a few comments and then turn the call over to Ana and Mario. The REIT finished 2014 strong and 2015 is off to a good start.

During the first week of January, Dream Office REIT announced strong fourth quarter leasing results. While not normally the practice of the REIT to press release operating results other than at quarter end, we felt we wanted to communicate early that the pace we talked about in our third quarter call was in fact continuing.

Excellent tenant retention and new leasing momentum in the latter part of 2014 has resulted in fourth quarter results that are reflective of the appeal of the REIT’s portfolio. Tenant retention was 64%.

New leasing activity remained strong through to the year end with 366,000 square feet of new lease deals commencing in the quarter. As a result, we saw 61,000 square feet of positive absorption quarter over quarter and in-place occupancy increased by 30 basis points to 91.4%.

The January press release for Dream Office provided visibility on not only better than expected leasing and tenant retention during the fourth quarter but a very good headstart on 2015 and 2016 leasing. We continued that momentum in the first six weeks of the year and as of today, 52% of our 2015 expiries are already leased, up from 45% at the date of our press release.

52% is about 15% better than the same time last year and is composed of about 927,000 square feet of renewals and 460,000 square feet of new leasing. For 2016, we have 3.7 million square feet expiring and we have now secured lease commitments equal to 27% of those expiries.

We’ve completed just under 1 million square feet of leasing for 2015. Various leasing initiatives to drive new leasing activity were successful in 2014.

Our Model suite program, touring centers and broker rewards programs all of which will continue in 2015. We also introduced a double commission program for leases entered into and they take occupancy in 2015.

Every week on our national leasing calls, you can hear that the program is having an impact on tour velocity. The cost of the program on a deal equates to roughly one month of rent on a four-year average lease term.

So if we leased space even one month earlier because of this initiative, we’ve broken even on the double commission. Since our conference call in November, oil prices have declined, currencies declined, interest rates have declined and provinces are re-writing their GDP outlook.

Across the country in our national portfolio, we feel the impact of these macro-events to varying degrees. The pace of activity in the office sector in Alberta has slowed somewhat with decision making on hold until the impact of oil can be figured out.

We see that most in CBD, Calgary and Edmonton where tenants are in wait and see mode. Fortunately, the WALT of our Calgary portfolio is four years and the WALT of our Edmonton asset is about 3.6 years.

In Calgary, we’ve already secured lease commitments for more than half of our 2015 expiries and have several renewals in negotiation. In Edmonton, over a third of our expiries have already been committed.

Our average tenant size in each of these markets is small in relation to the tenancies of a majority of other landlords. With our average tenant size in Calgary being less than 10,000 square feet and in Edmonton less than 11,000 square feet.

That means our exposure is diversified and historically these tenancies have tended to be stickier and generally more price sensitive. In addition, these tenancies are not typically the targeted customer for new development.

In contrast to a somewhat slower Alberta, we continued to see robust activity in both downtown and suburban Toronto, in part due to our double commission program but as well we are seeing more activity near the airport as certain of our cross-border tenants expand because of a cheaper dollar. In the GTA portfolio, tour activity in January was up almost 30% over the same time last year.

Net of the Winners [ph] space, we have almost 60% of our 2015 Toronto expiries committed and other 15% of those expiries are almost 200,000 square feet in active negotiation. With several new leases being negotiated, we anticipate reporting positive first quarter absorption overall.

With the strong leasing activity in the GTA and good activity in any other of our markets, the first half of 2015 looks very positive. In the fourth quarter, we undertook a disciplined asset management review of every building in the portfolio and identified the assets which are not core to our business and would be good to sell in the near and medium term.

We've begun our disposition program and have one disposition in negotiation for approximately 30 million and we expect to bring a portfolio in Eastern Canada to market in the next few weeks for about 150 million. We expect to reach our target of 300 million of disposition this year.

Some of the largest pools of global capital are beginning to recognize Canada as an investment destination and there are tremendous amounts of capital looking for high-quality assets to invest in. Michael and I just spent a week in Seoul, Beijing, Shanghai and Hong Kong, meeting with over 15 large insurance companies, sovereign wealth and pension funds, including the largest commercial insurance company in China and the largest bank in the world.

What we heard is that Canada is beginning to attract more interest from global investors for a variety of reasons, including a stable economy, high-quality real estate, good fundamentals and relatively attractive cap rates compared to other gateway cities that attract capital for real estate. Like everyone else, these international investors are finding the Canadian market, particularly in what they consider a gateway city like Toronto, very difficult to access.

Canada is becoming more appealing and this only reinforces our conviction about the underlying value of our business and our platform. We’re going to be looking to use our platform to provide value to other institutions to invest in Canada over the next couple of years.

While we have a challenging office environment, I believe that we’ve made major adjustments, so we’re very competitive in this operating environment. We’ve seen the improvements in our leasing over the last five months and we have a very busy like leasing pipeline.

We’re making more improvements than ever to provide our tenants with quality buildings, great amenities and more efficient energy usage. We believe the underlying value of our business is intact and we are making great progress improving the quality of our buildings and keeping our tenants happy and attracting new tenants.

I will now turn the call over to Ana.

Thank you, Jane and good morning. We saw a high level of leasing activity in the fourth quarter with 893,000 square feet of total leasing taking effect, the highest quarterly volume of 2014.

Included in figure were 528,000 square feet of renewals for tenant retention of 64%. The leasing spread on these renewals was $1.41 or 9% above expiring rents.

For the year, the leasing spread on 1.6 million square feet of renewals was strong at $1.36 or 8% above expiring. We ended the year with an average in-place rent for the entire portfolio of $18.22, a 2% increase over $17.83 in-place at the start of the year, generating approximately 9 million of annual NOI growth from 2014 leasing.

We presently estimate our in-place rents to still be 8% below market. Our two largest markets, downtown Toronto and downtown Calgary presently have in-place rents of 10% and 15% below market respectively, providing both the opportunity for growth or a significant buffer should we see some softening of rental rates.

As Jane noted, we have now secured lease commitments equal to 52% of our 2015 expiries and 27% of our 2016 expiries, having completed an additional 267,000 square feet of leasing since our January 6 press release. In terms of total leasing volume completed in the quarter, 705,000 square feet of lease transactions were concluded.

These are leases not necessarily taking occupancy in Q4 of 2014 but in future years. Of this 705,000 square feet, 467,000 were renewals and 238,000 square feet of new transactions.

Significant new transactions concluded in the quarter include the extension of a major suburban GTA tenant futures trading company into 35,000 square feet of quasi office industrial space at 1020 Birchmount Road in Toronto commencing in late 2015. Also in the suburban GTA, 30,000 square feet of new leasing was completed in our airport strip portfolio this quarter.

The largest transaction being with Air Canada Vacations which expanded by approximately 10,000 square feet effective Q3 of 2015. Tour activity in the GTA West increased in the fourth quarter and this momentum has continued into 2015.

In Calgary, at 444 7 Avenue, we have leased 12,000 square feet of the former National Energy Board space. And we continue to work with Rexall Drugs regarding their interest in the 8000 square foot main floor.

We are also among three options considered by a 50,000 square foot tenant in the market. In Kitchener, we completed a new lease with Igloo Incorporated who will relocate into 14,000 square feet at 55 King Street, resulting in net absorption of just under 5000 square feet for an 8 year term.

Significant lease renewals completed this quarter include five year renewals with Air Canada Vacations and Coal International in 17,000 and 15,000 square feet respectively at Airway Center, resulting in a 6% average increase in net rents which are effective this year. In Saskatoon, Revenue Canada renewed 68,000 square feet in TNT Tower at an average rate of 18% above the expiring rent for a five year term effective in October.

We are keenly focused on engaging tenants in renewal discussions as early as possible and recent successes include an eight year renewals with Hutch Limited in just under 62,000 square feet at 847 Avenue in Calgary, that was expiring in March of 2016. Public Works extended their lease for 61,000 square feet in Airport Corporate Center in Calgary commencing in 2017 for a further five year term at an average rent of 8% above our market rent estimate.

In suburban Toronto, we secured a three year extension with Beaches Trading Company in 55,000 square feet at 1020 Birchmount Road effective in 2016. In Saskatchewan we have concluded a five year renewal with the Federal Government in just under 21,000 square feet of DomeView and have increased rents by 25% over in-place.

Active renewal discussions are taking place with over 1 million square feet of tenants across our portfolio. In Edmonton, we have completed a conditional deal to extend office Opus Winners lease in 68,000 square feet in Broadmoor in Edmonton for a five year term commencing in July of 2016.

Also in Edmonton, we are very close to reaching terms with the provincial government to renew 24,000 square feet in HSBC building and a renewal of a 50,000 square foot tenant at Milner Building. In Vancouver, subsequent to quarter end, we’ve concluded a conditional five year renewal with the Vancouver Coastal Health Authority for 39,000 square feet in 8100 Granville.

In suburban Toronto, we are in the final stages of negotiation to extend the leases of two tenants totaling 83,000 square feet at 2075 Kennedy Road as well as a 51,000 square foot tenant at 625 Cocker Road expiring in 2016, a 100,000 square foot single tenant building lease expiring in August of 2016 and a 200,000 square foot tenancy at 5001 Yonge with a 2017 expiry date. In Montreal, at 700 De la Gauchetière we have begun discussions with existing sub-tenants working to secure lease commitments with the Bell Canada space expiring in 2017 and 2018.

Turning to new leasing, oil prices are having some impact on the Calgary CBD market with some slowing in activity and there is some potential for the amount of sub-lease space to increase in that market. That being said, we do have serious interest in a 150,000 square feet of our available space to Telus Tower and anticipate announcing a transaction next quarter.

We continue to see strong tour activity in both downtown and suburban Toronto that will help mitigate the slower activity in Calgary. We are working with nine new prospective tenants totaling approximately 30,000 square feet across our Bay Street and King Street portfolios.

At Scotia Plaza, we have serious interest from 50,000 square feet of new prospects and are negotiating 10,000 square feet of renewals. At 438 University Avenue, we remain optimistic about our ability to find a replacement tenant given the quality of the building and as the tenant improvement.

The lead gold status, ample signage opportunities and excellent location of this building. We’ve had three users requiring 200,000 square feet toward the premises as well as several 50,000 to 100,000 square foot prospects.

We have received one request for proposal from a 50,000 square foot tenant and are anticipating a request for proposal from a 200,000 square foot tenant in the coming weeks.. In 2014, we introduced many new initiatives to focus on customer service, tenant retention and generating new leases.

Although we lost come larger tenants in the first half of 2014, as the year progressed we have seen significant improvement. In the first nine months of the year, our occupancy decreased.

However in the fourth quarter occupancy has begun to increase, improving by 30 basis points while the overall Canadian market saw occupancy decline by 40 basis points. As a result of a strong fourth quarter and future leasing commitments we expect occupancy to continue to increase and we will likely outperform the market in 2015.

We continue to operate in a challenging environment. We however remain focused on executing our strategy of building strong relationships with our tenants, improving the quality of our assets and the service we provide as well as leveraging the market knowledge, relationships and deal making ability of the exceptional leasing team we have built.

We are seeing improved tenant retention and some exciting new leasing. I believe that the buildings we have appeal to tenants and we have the right team in place that will enable us to outperform the market.

This year we have a chance to demonstrate the strength of our buildings, people and platform. I will now turn things over to Mario to speak to our financial results.

Thank you, Ana. Good morning everyone.

This was a very active quarter with strong leasing activity translating into positive absorption, rental rate increases and year-over-year AFFO and NOI growth. We also continued to strengthen our balance sheet by adding low cost long term financing, investing in building improvements and acquiring units under our normal course issuer bids.

Overall our fourth quarter results were in line with our expectations. Our AFFO for the period was $0.628 per unit, up 1.3% over the same period last year and up 0.3% the prior quarter.

Basic AFFO for the period was $0.715, down $0.012 from the same period last year, but up 0.4% the prior quarter. The year over year decline in AFFO was due to $1 million decrease in straight line rent.

On a fully diluted basis, our AFFO for the quarter was $0.711 per unit and after adjusting for $500,000 of non-recurring items, fully diluted AFFP was $0.706 per unit and in line with the consensus estimates. Excluding the straight line rent adjustments, increases in FFO and AFFO over the prior year were primarily the result of the following.

Comparable property NOI growth of $700,000 or 0.7% compared to the same quarter last year. The increase was driven by higher rental rates on new leasing and contractual steps, especially in our downtown Toronto portfolio where comparable NOI increased 4.8% this quarter.

This growth was offset by lower occupancy in Calgary, primarily from the Q3 vacancy at Merck Center. We also had year over year interest savings on the financing as we completed 380 million of new mortgages in 2014 with an average term of eight years and interest rate of 3.8% and used these proceeds to repay debt at an average rate of 4.8%.

We also had incremental increase in AFFO and FFO from our investment in Dream Industrial REIT due to both earnings growth and increased ownership. And we also benefit from a full year of earnings from accretive acquisitions completed in 2013, partially offset by property dispositions in ’14.

On the capital side, we financed our largest 2015 debt maturity with the closing of a $200 million mortgage on Adelaide Place for a term of 10 years and a rate of 3.59%. Proceeds of this mortgage were used to discharge $151 million of mortgage debt at a rate of 4.29%, generating an annual interest cost savings of $1.1 million.

The remaining proceeds from the new mortgage were used to fund the capital expenditures and unit purchases under our NCIB. Most of our debt metrics remain consistent with the prior quarter.

Leverage did increase slightly to 47.5% from 46.9%, primarily due to funding of CapEx and NCIB with debt as well as $67 million downward adjustment to our book value. Our interest coverage and debt to EBITDA ratios remained strong at 2.9 times and 7.8 times respectively and our pool of encumbered assets remains at approximately $800 million.

Looking ahead we will continue to try and strengthen our balance sheet and capitalize on low interest rates. Since our Adelaid Place deal closed, the 10 year deal fee rate has come in 50 basis points while lender’s spreads have increased approximately 20 to 30 basis points depending on the property.

For a seven year deal, we estimate that the all-in rate will be under 3% and with 380 million of debt coming due in 2015, we could potentially realize annual interest cost saves of approximately $4 million. The debt markets are very liquid as top tier lenders continue to have large allocations for 2015.

While there is a general caution on the economy in West Canada, the lenders we’ve spoken to won’t expect concern on single tenant properties with direct energy sector exposure. We presently don’t have any debt maturing in the first half of this year.

However we will be actively exploring the fund and extend the prepayment opportunities that improve our capital structure and allow us to take further advantage of these low rates. The unsecured debt market is also open.

This month approximately 1 billion of unsecured debentures were issued to real estate companies. While the pricing in the unsecured market is generally more expensive than the secured markets, the overall low coupon and the speed of funding is very attractive.

We like the unsecured markets and we see great benefits in building up our pool of encumbered assets. Our current pricing on a five year bond is approximately 70 basis points lighter than secured debt.

On a $150 million financing, the impact will be one set of dilution to AFFO relative to a secured mortgage. Should that gap narrow, we will be very active in the secured market.

We’ve been active in our NCIB program as well, repurchasing $43 million of REIT units over the last four months. To date purchases have been funded with debt, that will ultimately repay with proceeds from property dispositions.

In addition to improving our balance sheet, 150 million buyback finance property disposition will be $0.02 to $0.03 accretive to AFFO on a steady state basis. The fourth quarter saw a continued investment in our properties.

In Q4, 14.2 million of capital was directed to building improvements, bringing our total 2014 investments to $34 million. Spending the quarter included common area lobby upgrades of Telus Tower in Calgary, elevated modernizations at Berkley Center, Calgary, you get to see bank place in Edmonton, and Air Miles in Toronto and we did exterior upgrades in lighting retrofits and high fuel place in Edmonton.

We view proactive investments in our buildings as a way to improve tenant improvement. Attract new talents, and reduce energy costs.

For 2015, we will be investing in additional 75 million on upgrades and sustainability initiatives. The largest annual investment we’ve made, of which we estimate that 7% to 80% will be recoverable for tenants.

We target the projects where we have pending vacancies, tenant demand sustaining with the opportunity to reposition or revitalize the building. Looking ahead to 2015, our leasing outlook is positive, have completed leases equivalent to 52% of our total expiries including $0.52 Calgary.

We still have the opportunity to realize interest cost savings at rates lower than those realized in 2014. We are actively improving our portfolio, the disposition of non-Core properties and capital investments and improvement in repositioning and intensification of properties.

We are purchasing units that trade well ad assets value. As Jane mentioned, we are off to a good start.

We have more opportunities available to improve our business. And now let’s turn the call back to Jane.

Thanks, Mario. We can open the call to questions.

Very positive call this morning. It’s good to hear.

I think it was, Ana, you mentioned for 2015 you expect to out-perform the market, I think you meant to occupy, I wonder if you could be a little bit more specific in terms of you’re expecting to see for the portfolio this year?

We are expecting – as we said, definitely positive absorption in the first quarters of the year. We just carry the commitments equal to expiries.

We will see a dip in Q3. We do have the Winners space coming and are anticipating occupancy coming back up stabilized to where we today or a little bit higher.

So flat despite up by the end of the quarter. And in Q4, the occupancy did run by about 30 basis points.

Was that a fairly steady increase or some of the awesome gain at the right of the quarter, it’s beginning the fourth.

I’d say it was pretty steady throughout the quarter and that wasn’t driven by one big lease, there’s lots of 5 and 6.

Jane, you’d mentioned the trip over to Asia, obviously on yesterday’s call as well. So are you are envisioning JV strategy with Dream Office what we saw in Global.

I think it’s something – we were down last year, there is no increases. It was interesting this year that Canada for the first time is up point of conversations but I don’t know that, it’s going to happen in a timeframe that it did for global but it’s certainly making us think about the opportunity,

And the NCIB still planning to do 150 basis by the first of the year.

Yes, that’s the plan. Along as well, that’s the plan.

And then finally I will turn it back. You’re putting for a assignment.

But what’s kind of assets we talked about, what are in and what kind f cap rates are you?

So I could talk bit around right now. We have been produce to market and they mostly Quebec and office, we may not sell as the portfolio but we are going to bring it out as a portfolio.

What many assets roughly?

About assets roughly. About one eight or nine.

Just going back to the dispositions, you get a fairly aggressively target of 300 million. I know NCIB will be expected in CapEx and is going to up.

But you’ve high [pretty] trip participation rate. So you look out rough, I guess geographically, would you expect the leverage to trend throughout the year.

And two, our acquisitions at all on the radar screen, should we expect the no-redeployment on the acquisition front?

But I think we will likely be net seller of the real estate in 2015.

On the leverage, we like where our leverage is now. It’s ramped up a little bit because of the NCIB and CapEx but our goal is to be leveraging or maybe slightly reduction.

With the DRIP, we can’t control the DRIP, so I don’t always factor that in, as it comes in but our goal is to kind of de-leverage or slight reduction.

And then you had mentioned the outlook, it looks like occupancy is sort of going to be creeping higher in the first half and then we’ve got some space coming back in the second half. So from a same property NOI growth perspective, what are you guys thinking about in terms of a realistic expectation for the full year?

It’s almost déjà vu last year. So we are looking at same property growth, 1.5% and we will get some momentum in the first two quarters because we have fewer expiries that will get uplift.

On renewals and increase in occupancy, and they will give some back in Q3 and they will pick it up in Q4. So very similar, in fact, we are looking at AFFO consistent to last year.

And then last question from me, just I don’t know if it was mentioned in Ana’s comments, I noted you’ve got Stantech which is moving in one of your buildings in Waterloo and I think that happens in the fall. My understandiing is there is a good amount of term on that lease, maybe you could just provide some additional color there and what activities you’re seeing on that space?

Yes, that lease actually doesn’t expire until 2017. So we’ve got a pretty large runway to secure replacement tenants.

And there have been some groups looking at it that would want us to split it and we’re just sort of in the early stages of marketing, it’s really a good market where we had some success in the last six months, we just did a 12,000 square foot deal with NetSuite and we are really – we just completed a transaction which I mentioned in my comments with another technology company Igloo. So we are really focused on targeting technology tenants because it’s a very strong market from that perspective and we think this provides a really good cost effective option in that market.

So you accomplished a quite bit of leasing in the quarter. I was just hoping you could provide a little bit of additional color around the I guess the term, the average term of leasing and perhaps tenant incentives, they were up not surprisingly given the increased volume of leasing that you achieved but just wondering what you guys expect over the next few quarters in terms of tenant incentive costs and also if there was anything in the quarter in terms of the average lease term or nature of the leases that you signed that we should be aware of?

Yes, I will go first, Alex. Just on 2014, what’s interesting is we did 573 transactions last year and in our disclosures the average TI per square foot is $14.66 which is up over the prior year.

But 23% of those costs is only five deals and those are five deals that range in term from 9 to 17 years, so a real commitment to the building, real improvement to the space, we think value add, when you subtract those five deals, on the other 568, the average cost on the Tis that we had last year was $11.94. So in line with prior year.

So I think there is two stories here, on TIs what we saw in ’14 is, there is big TIs where there is value add but as far as the portfolio that we have with smaller tenants, high renewal, move on just cost effective space but we haven’t seen an increase significantly in TIs ’14.

And then I guess just turning to sources of capital, just I was hoping you could provide some context in terms of how you look at the relative appeal of debt equity and asset sales relative to I guess your net asset value which seemed that asset sales may be the far and away best source of capital at this point but just curious how you will categorize your different sources?

Yes, definitely right now asset sales do a lot, selling on core assets, improves the balance sheet and we think we can capitalize on the delta between the value of the stock and the value of the assets. So I think that’s something which is a great for us.

The equity side, equity is too expensive right now. So we do have the DRIP and philosophically the DRIP is there in place and something our investors want.

So it will be there and we will deal with it through buying back stock and managing leverage. And on the debt side, debt is very very attractive right now.

And we are not going to bring our leverage, what I am trying to do right now for this year is accelerate refinancings and just take advantage of – I never thought we’d be at this point in time where the cost of debt would be even that much more less expensive than the year ago.

So just tying that into the normal course issuer bid, you publicly stated and again on this call that $150 million is a number that you will be willing to commit to the normal course issuer bid. Is it safe to assume that to the extent that the discount to NAV persists you’d be willing to continue to liquidate assets and buying back stock?

Yes.

Good morning. It’s actually [Zachery George] with Front Forward Capital.

Good morning Jane and the rest of the team. Jane, just to touch on a point that was made earlier, in your other day job as the CEO of Dream Global, you’ve had great success with the creation of the Pabo JV, enabling you to recycle cycle at accretive levels and materially improve that REIT’s return on equity profile.

When I look at Dream Office, even if I include some of the announced tenant departures, on a pro forma basis, I still have your units trading at around 7% cap rate, while CBD properties in major Canadian markets routinely trade below 6%. When you consider the significant under-performance of the Dream Office units over the past few years the continued accommodative rate environment and the $0.80 Canadian dollar, isn’t there a great opportunity today to create a similar strategic JV by packaging up some of your central business district assets and working with an institutional capital partner to increase the returns for Dream Office REIT unit orders?

You know what, it’s true, we had some really good success with Global, part of it was that the market was very interested in Germany. Canada hasn’t been at least vis-à-vis the Asian investors, we saw hasn’t really been on their radar, Toronto isn’t what they would consider let’s say gateway city.

But we believe, I said it in my comments that there is a disconnect between the value of the properties and what we are trading at. So we will work on various catalysts, we are going to sell, we use the unit buyback and one of the things we will consider is JV-ing with someone who wants access to Canadian market and an operating platform.

Quickly with regards to some of your government tenancies, there has been a trend towards austerity. Is that aiding you to some extent or is it negative at this point?

There certainly is a trend, where we seem to be faring very well in Saskatchewan. As I mentioned, we’ve renewed Revenue Canada there, we’ve renewed Revenue Canada in Ottawa.

In Calgary, we are working on transactions within Ottawa, its various ministries, the passport office, I forget some, what ministry that is. So we are seeing good demand from the government as long as, as a landlord you are engaging them in conversation, you are maintaining the relationships and maintaining your buildings to a standard that they expect, and that’s something that where we have been ahead of the curve especially in Ottawa where we’ve determined that our buildings can accommodate the new office standard, office 2.0 as the government refers to it.

We can meet their sustainability target and as a result of that, we’ve managed to retain them and believe we will continue to do so across the portfolio. And we have a great relationship with the people on the ground both in Ottawa as well as the various other ministries nationally.

Interesting and you mentioned in terms of asset sales, I think you said 8 to 9 assets in Quebec, isn’t that most of your portfolio there, is the reason for exiting that market at this point?

Yes, we have a small buidding in Quebec city and in some other tertiary markets. So that would be the majority of them.

We do have some assets that we would retain and certainly 700 De la Gauchetière is the core asset for us.

And on that front, the sub-let space there that you are looking to re-negotiate at this point, in terms of rent expectations – are they in line with what you were getting previously or – and how much of the space is sublet at this point?

Well it’s all occupied which is great. So we have no available sublease space.

So it’s all space that Dell has sublet to large tenants in that market, who have invested in the premise, and therefore in all likelihood it’s very good. It’s early days in the negotiation but I think the rental rates will be in line with our expectations.

And just finally in terms of the big chunk of space that you guys are looking to lease over the next few years, how is the progress on that front going in Toronto and Calgary as well?

Toronto, we are seeing good interest, good tour activity and significant tenant requirements in the market. So I feel positive about our ability to find replacement tenants ahead of the expiries for a substantial portion of our Toronto exposure.

And in Alberta, there is certainly an uncertainty in that market right now. There has been a slowdown in activity.

Our exposure there isn’t large relative to our overall portfolio. We are working hard, we are marketing, and as I said we’ve leased 12,000 of the NAV space and we will hopefully be announcing a larger transaction Telus Tower next quarter.

So we are chipping away and there are tenants in the market that are looking, they may not be growing but they are looking to relocate. So there are opportunities.

And I guess just one last question, in terms of the small tenancies, historically, have they fared well in these types of downturns or we’ve seen some increase in bankruptcies on those smaller guys?

We haven’t and in the last cycle in Calgary, we were surprised at just how resilient the tenants were and generally they are fairly diversified. We have a lot of service oriented type tenants across our portfolio that whether it’s physiotherapy clinics, whether it’s other medical, different accounting firms, and so forth.

So we haven’t seen anything yet and we did in the last cycle.

Just on the Telus Tower deal that you are hoping to announce next quarter, could you just tell us what that – how that’s going to impact the building, I mean it’s full now, I believe the building now. Is this for space that would come up in ‘16, ’17 which would basically result in the building staying full through the next five years, how should we think about the impact of this transaction?

Right it is. Yes, we have no availability now.

So it is space that expires in 2016 and 2017. So it would be a continuation of the cash flow.

And so would this deal put to bed all the exposure in those two years?

No, it would not. We still have space that is rolling in 2016 and ’17.

Mario, you mentioned the $75 million of CapEx, 75% of that being recoverable, how should we think about that impacting NOI growth into 2016, would you sort of put a yield on that and then build that into your NOI, is that how we should think about that?

Well, I think it impacts in two ways. We do get a return on that right away, so we probably get about a 5% to 7% return on the spend over time.

And then as well, we are targeting buildings that are going to have large vacancies or high rollover. So it secures either a stabilization of occupancy or higher probability of getting the uplift to market.

End of Q&A

That’s great everybody. Thank you very much.

We look forward to talking to you next quarter.