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Executives

Michael Cooper - Vice Chairman & Chief Executive Officer

Mario Barrafato - Senior Vice President & Chief Financial Officer

Ana Radic - Chief Operating Officer

Analysts

Sam Damiani - TD Securities

Mark Rothschild – Canaccord Genuity

Mario Saric – Scotiabank

Alex Avery – CIBC

Dundee Real Estate Investment Trust (OTC:DRETF) Q3 2013 Earnings Call November 7, 2013 2:00 PM ET

Operator

Good afternoon ladies and gentlemen. Welcome to the Dundee REIT Third Quarter 2013 Conference Call for Thursday, November 7, 2013.

During this call, management of Dundee REIT may make statements containing forward-looking information within the meaning of applicable securities legislation. Forward-looking information is based on a number of assumptions and is subject to a number of risks and uncertainties, many of which are beyond Dundee REIT’s control that could cause actual results to differ materially from those that are disclosed in or implied by such forward-looking information.

Additional information about these assumptions and risks and uncertainties is contained in Dundee REIT’s filings with the securities regulators, including its latest annual information form and MD&A. These filings are also available on Dundee REIT’s website at www.dundeereit.com. To accompany a portion of today's presentation, management has posted an operational highlights presentation on its website. It can be accessed on either the home page or on the calendar of events page.

Later in the presentation, we will have a question-and-answer session. (Operatior Instructions)

Your host for today will be Mr. Michael Cooper, CEO of Dundee REIT. Mr. Cooper, please go ahead.

Michael Cooper 

Thank you. Good afternoon and welcome to our third quarter conference call. Today I’m here with Mario Barrafato and Ana Radic. Ana will go over our operations and Mario will address our financial statements. But first, I would like to make a few comments.

Last quarter the issue facing us and all REITs was that we were facing the end of the era of low interest rates. With increases in May of about 100 basis points, we think the consensus that interest rates were on their way up. 90 days since our last call, interest rates were down and there does not seem to be any great concern regarding interest rate increasing rapidly at all.

However, we announced facing stakeholders' concerns that Canada is going slowly and there's an increase of live office based in Canada major markets. To start with, what we are seeing most of institutional investors with a tremendous amount of capital that they would like to invest in quality properties. More and more institutions want to own private real assets and are allocating more money in these areas.

With slower global growth, real estate continues to look attractive. Institutions are building new buildings because they are attracted to this asset class. Buying large buildings means very valuable and properties continue to trade at very high values. With slower economic growth than many expected, interest rates have remained low. Demand for everything is lower than the demand than they had expected.

But realty continues to be a very attractive asset class to many investors even beyond the institutions. I was asked by a friend recently if we had a place for him to lease in downtown Toronto because he needed 30,000 square feet. We do not. The most contiguous space we have, out of our 5.4-million-square-foot portfolio in downtown Toronto, is 22,000 square feet in Scotia Plaza that we just got back on Sunday.

We have very little space, vacant space. We have many tenants that have been growing old including in Scotia Plaza. The new buildings, for the most part, are designed to fill with the large tenants. We only have nine tenants in Toronto over 100,000 square feet, seven have lease terms until at least 2020. Of the other two, they have average rent of $16,000 and would not be of much interest to the owners of new buildings.

We are very pleased with the level of leasing activity that we are seeing across the country. Ana and her team had completed many transactions in the quarter and they are working on many more. We are seeing activity in all markets across the country, both downtown and non-downtown locations. And we believe that the current level of activity is sustainable.

In fact, my personal belief is that there are many reasons to believe that we are going to see more growth ahead and more demand for space. My take of what is happening is that in 2009, Canada emerged from the crisis in better shape than most and conducted her businesses based on what happened and the usual recovery. However, growth has been slower in Canada than many expected. In fact, growth has been slower pretty much everywhere than people expected.

End result, we've had a pause in the recovery as actual growth catches up to what we all expected. Just yesterday, there was agreement between the British Columbia and Alberta premiers regarding the pipelines through British Columbia. This is a big deal. And more capacity is available the discount for world prices would disappear and they will be commencing increase in revenue for private businesses and various levels of government throughout the country.

I am confident that one way or another, there will be an increase in revenue from oil and gas from where we are now, and this would be good for the Alberta economy and for obvious demand. Aside from that one specific case, we believe there'll be more growth in the future than people are expecting. I think we are more likely to see upside surprises than downside ones over the next few years.

Given that factor, Ana, can you discuss the operations?

Ana Radic 

Thank you, Michael, and good afternoon. We have prepared a slide presentation to accompany the operations overview. You can find the link to it on our Home page and on the Calendar of Events page. Our portfolio continues to perform well in place and committed occupancy at 94.6%, 370 basis points higher than the national average. Occupancy gains were made in downtown Toronto, Saskatoon, British Columbia and suburban Calgary.

Almost half of the modest 30-basis-point decline in our total portfolio occupancy over the prior quarter was due to the federal government closing a 39,000 square foot facility in Halifax. The growth rate generated from this flex office use is 40% lower than the average rent in our portfolio. That's the mean, the NOI impact of this vacancy.

We continue to see rental rate growth as we roll tenants to higher rent. 530,000 square feet of third quarter renewals were completed and a $1.40 spread over expiring rate or an increase of 9.6%. Including a short-term lease extension with a large tenant in Calgary, the spread increases to 36%.

Fourth quarter renewals completed to date, total 695,000 square feet at a similar 9.5% increase over expiring rents. As reported last quarter, occupancy declines are being mitigated by revenue gains and rental lists as we remain on track to deliver 1% comparative property growth this year.

Moving to our key market, counter to the trend in the overall Toronto market, occupancy in our downtown Toronto office portfolio rose 20 basis points to 97.2% as space was absorbed at Scotia Plaza and 20,000 square feet of new transactions were completed at several of our buildings. The most notable, being a 15,000 square foot lease at 250 Dundas Street West, in space we reported last quarter we would be getting back. The space rates achieved exceeded both the expiring and market rent for this building.

At the end of the quarter, Drake150 opened its doors at Adelaide Place. This new restaurant has received an abundance of positive press and we are thrilled with the additional profit that Drake150 has brought to our complex. We are exploring other opportunities across our portfolio to not only maximize revenue on a per square foot basis, but to dramatically change the use of space.

For example, we had begun engineering reviews to explore removing the slab between the second and third floors in one of our Bay Street buildings to create a dramatic 9,000 square foot one of a kind retail opportunity in the heart of the financial core.

In downtown Toronto, we are heading into 2014 and 2015 having renewed our largest expiring tenant who occupies 60,000 square feet of Adelaide Place at a rental rate 10% in excess of the expiring rent. Rental rates continue to hold and we anticipate realizing further NOI gains as we renew the balance of the 640,000 square feet of expiring tenancies over this two-year period at higher rent.

Occupancy in our suburban Toronto portfolio dropped marginally this quarter as a result of 16,000 square feet of negative absorption scattered across several buildings in the suburban west market. Despite this 40-basis-point increase in vacancy, demand has not waned resulting in the completion subsequent to the quarter end of a 5,000 square foot expansion of Valhalla Executive Centre which will bring this complex's occupancy to near 90% as well as 5,000 square feet of new leasing at Airway Centre and Sussex Centre.

Active negotiations with over 70,000 square feet of new tenants are also ongoing and we are optimistic at securing several new transactions in the west end. Dundee's downtown Calgary portfolio is just under 96% occupied and committed. Over a leasing velocity in the 1,000 to 5,000 square foot size range increased this quarter with 10 transactions being completed at an average rental rate of just over $23.50 per square foot, well above our expiring rent.

We are seeing demand from our existing tenants for additional space in suburban Calgary having completed a 6,000 square foot expansion in the northeast market as well as the 7,600 square foot expansion at Airport Corporate Centre. Both sales were completed subsequent to quarter end and were concluded in line with our rental rate expectations.

The overall downtown Edmonton office market recorded 20,000 square feet of positive absorption with the financial drifters being one of the strongest performing known to Edmonton over the past three years prompting new development activity. This is being led by the Kelly Ramsey Development located immediately south of our Bank of Montreal building.

We will benefit from this new development as it gives us the ability to secure a pedway connection which we are optimistic will be possible. Major capital upgrades will also commence shortly at high sales. Work will include an upgrade to the building entrance, the side, main lobby and elevators. This work will greatly enhance Highfield's street presence and appeal to prospective tenants.

At HSBC Bank Place, we concluded our transaction that a major tenant expanded by 10,000 square feet and we have interest in the last large contiguous block of vacancy in this building. We are forecasting overall occupancy within the downtown Edmonton portfolio to strengthen over the coming quarters. As demand increased and further organic growth from our existing tenants as anticipated.

The overall Kitchener-Waterloo office market saw strong leasing activity in the third quarter as 74,000 square feet of space was absorbed. This reduced the overall vacancy rate by 150 basis points. Occupancy in our Kitchener portfolio remains unchanged but we too are seeing increase tour activity and interest from new tenants that should result in occupancy gains in the coming months.

Negotiations with several major tenants in this market are in their final stages and we are confident that we will conclude renewals with just under 170,000 square feet of expiring tenants. Securing these long-term commitments will provide stability through 2014.

In London, a major tenant is contemplating an expansion of 23,000 square feet. In this note, our occupancy at 88.6% exceeds the market by 330 basis points. With negative absorption year-to-date in this market, capturing the demand from our existing tenant is critical.

Negative absorption in the overall downtown Montreal market resulted in occupancy dropping to 92%. Our largest asset, 700 de la Gauchetière boasts an occupancy rate of 96% which we are forecasting to improve by mid-2014 as a result of two potential transactions. The first being with a 13,000 square foot new tenant for whom we are the favoured alternative; and the second being an expansion requirement from our existing tenant.

If both deals are concluded, our committed occupancy at 700 de la Gauchetière will increase to over 98%, an NOI increase by over $300,000. We are also pursuing new retail users in this building where we have 10,000 square feet of lower level space with exterior access. So at these early days, we've started to see the fruits of these efforts with preliminary planning underway for fitness and grocery uses.

Vacancy in our British Columbia portfolio which includes one asset in each of Victoria and Kamloops decreased 30 basis points to 6.4% this quarter; while overall vacancy in Metro Vancouver rose 20 basis points to 8.5%. We are seeing increased demand in [indiscernible] for large tenants wishing to move from downtown Vancouver, in particular along the transit corridors. We hope to benefit from increased tenant activity in this node.

Vacancy in our Ottawa portfolio remained unchanged at 3% with our downtown portfolio virtually fall at 99% and 29,000 square feet of available space in Kanata. Negotiations continue with the prospect to lease of 20,000 square feet and all indication that this transaction will be concluded in the coming months.

Our Yellowknife portfolio is currently 87.1% leased, down 340 basis points from the previous quarter largely due to a single tenant vacating 8,000 square feet in Northwest Tower. The bulk of our leasing effort were directed at the government sector. During the quarter, we presented a proposal to expand our footprint by 10,000 square feet and renewed our current 50,000 square foot lease which expires next year. This proposal is in line with our market rent estimates.

The Regina and Saskatoon markets continue to have two of the lowest vacancy rates in Canada, last reported at approximately 5.4% and 5.6%, respectively. Committed occupancy in our Saskatoon portfolio ended the quarter at 97.5%, up 150 basis points over the previous quarter.

Going forward, we are aware that some tenants will not be renewing. But despite these no vacancies, we are forecasting NOI to increase in 2014 as we rose basis to significantly higher market rental rate with tight supply as capped at an all-time high.

Occupancy in our Regina portfolio remained unchanged at 99% with our two largest expiries totalling 26,000 square feet in the final stages of negotiations. Occupancy will hold firm and rental revenue was forecasted to increase by over 17%.

I will now turn things over to Mario who will speak to our financial results.

Mario Barrafato 

Thank you, Ana. Good afternoon, everyone. Our business continues to perform well. Over the last two years, we've assembled a diversified portfolio that have the qualities to deliver stable performance under changing market conditions and also provide us with opportunities for growth. Our third quarter results reflect both a stable performance and opportunities to grow.

Overall our third quarter results are in line with our expectations. For the quarter, our FFO for the period was $0.73 per unit, up from $0.72 reported in the prior quarter and $0.72 in the same period last year. Our AFFO was $0.63 per unit, up from $0.61 in the prior quarter and $0.61 in the prior year. The increase in our FFO and AFFO for the quarter were due to acquisitions, comparable property growth and approximately $1 million in one-time lease termination in fee income in the period.

The third quarter was very quiet from a transactional perspective. We closed on two previously announced acquisitions. One being our partner's two-thirds interest in the IBM building in Calgary for $125 million; and the second, a $15.3 million acquisition in suburban Regina. We financed these acquisitions using our credit facility and collectively, these assets were required at a fixed cap, are 98.4% occupied and have an average lease term of approximately 6 years. These acquisitions provide us with quality buildings that have a strong tenant profile and also increase our investment in cities with high economic growth expectations.

We also entered two mortgages totalling $113 million, the largest being $105 million refinancing on the mortgage here at the head office at 30 Adelaide. This mortgage is for a term of 10 years with an all-in rate of 4.56%, reflecting a spread of 200 basis points with a maturing mortgage balance of $52.1 million at a 7.2% rate. This mortgage generates significant interest cost savings for the REIT.

From an operational perspective, our properties continue to perform well. Our in place rent continue to increase and our operating fundamentals continue to be stable. We saw strong leasing activity in our portfolio. We had 962,000 square feet of leasing taking effect in the quarter. Of this, 54% or 633,000 of our expiring space or renewals and 329,000 square feet with the new tenants.

The leasing spread on renewals was approximately $5.60 or 36% of expiring rent, excluding 100,000 square foot one-year renewal of a tenant in Calgary. The remaining 533,000 square feet of renewals were completed with a positive leasing spread of $1.40 or 10% of expiring rent. From this leasing activity, our overall in place rent increased to $17.74 from $17.43 in the prior quarter.

On a compare to property basis, in place rent increased 1.3% to $17.56 due to leases rolling over at higher rent. We estimate our in place rent to still be 10% below market. Our overall in place and committed occupancy was 94.6%, down slightly from 94.9% in the prior quarter, but it's better than the national average. Of this change, 32,000 square feet resulted from an increase in vacancy while 31,000 square feet was due to fewer commitments compared to prior quarter.

On a weighted average basis, occupancy for the quarter remained relatively flat. On a year-over-year basis, our comparable property NOI increased $1 million or 1.4% over prior year. On a year-to-date basis, total comparable property NOI growth is 1.1%.

Turning to our balance sheet, our debt metrics remains stable during the quarter. Leverage grew slightly in the quarter to 47% from 46.4% in the prior quarter due to acquisitions, but is down from the 50.5% of September 2012. Our weighted average interest rate continues to decrease going to 4.28% from 4.35% in Q2 with an average turn of maturity remaining at 4.8 years.

Our interest coverage ratio and debt-to-EBITDA ratio remained strong at 2.9x and 7.8x, respectively. We ended the quarter with $26 million, $145 million of unused credit facility and $340 million of borrowing capacity on unencumbered assets. Subsequent to quarter end, we completed the issue of a three-and-a-quarter year $125 million floating rate unsecured debenture.

The debenture bears a rate of a three-month CDOR plus 170 basis points which, as of today, has an all-in rate of 103%. The proceeds of this offering were used to pay down our credit facility. The opportunity was attractive for many reasons. It allowed us to repay amounts on our facility with longer term debt, the rate to the unsecured debenture is left on the rate on our existing operating line, we leave our unencumbered pool in place, and the 2007 maturity system with our debt profile.

To ensure optimal returns of performance, we're also investing in our properties. This quarter saw an increased spending on our buildings, investing on an initiative that enhanced value and improve the efficiency of operation. In addition, we're dealing with CapEx identified during due diligence for properties acquired over the last few years when a price reduction was obtained but accounting standards do not allow us to create a reserve.

Looking ahead to Q4, increase in NOI from new leases commenced in Q3, contractual rent increases and a full quarter of NOI from our acquisitions will be reflected in our Q4 results. However, much of these gains will be balanced by the upcoming activity Ana referred to. In total, we expect Q4 FFO to be approximately $0.72 per unit.

As we look into 2014, we see a great deal of leasing velocity which will translate into NOI growth as we roll tenants into the higher market rent. While high opening vacancy will slow our comparable property NOI growth due to downtime, we have leasing prospects for this vacancy and hope to have more clarity as deals progressed. Presently, our view for 2014 is in line with consensus estimates.

I'd now like to turn the call back to Michael.

Michael Cooper 

Thank you, Mario. We would be happy to answer your questions now.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question online comes from Sam Damiani from TD Securities. Please go ahead.

Sam Damiani - TD Securities

Hi, good afternoon. I want to thank you for providing the slide deck. That's very helpful, a lot of good information in there, hard to write it down last quarter. Two questions, first of all, you're saying your outlook is consistent with consensus in terms of I suppose FFO and AFFO. But if you were to think about the same property NOI growth for next year, what are you thinking about in terms of growth?

Michael Cooper 

It's hard to hear you, Sam. I think you're saying what percentage AFFO growth are we expecting?

Sam Damiani - TD Securities

Sorry. Same property NOI growth.

Mario Barrafato 

Right now we're looking at, based on what we have right now, just over 1%. And like I said, as we get more clarity on the deals we have in our pipeline, we hope to see that rise.

Sam Damiani - TD Securities

Okay. And certainly I was hearing a fairly optimistic outlook, sharp contrast to what the share price is suggesting. Nice to see some buybacks started in the last couple of months. Is there any reason you wouldn't open it up to a wider, more aggressive buyback program in the next little while?

Michael Cooper

We have been buying. I don't think it's disclosed yet, but we bought recently. I think that we have no interest in changing our capital structure to buy back stock, nor change our risk. But other than that, we're happy to buy back stock while we can.

Sam Damiani - TD Securities

Great. Okay. That's it for me. Thank you.

Michael Cooper 

Thanks a lot.

Operator

Our next question online comes from Mark Rothschild from Canaccord Genuity. Please go ahead.

Mark Rothschild – Canaccord Genuity

Hi, good afternoon. Maybe following up on that last point with Sam, maybe just talk a little bit about how you think about [indiscernible] growth versus shared buyback and maybe asset sales in the contest of your current cost of equity.

Michael Cooper 

We've had a history of finding opportunities. We think that where the property prices are now and the stock price, there's opportunities there. And we're very open-minded. But I don't think we want to tell you what we might do before we do it.

Mark Rothschild – Canaccord Genuity

Okay. I won't ask any more on that point then. Ana made some pretty bullish comments or you made some pretty bullish comments as well on the downtown Toronto office market. You have some vacancy coming up in Scotia building at some point in a couple of years, I don't exactly when. What are the prospects of dealing with that ahead of time?

Ana Radic

Hi, Mark. I think the prospects are excellent. We get the space back actually January of 2017 so it's quite a-ways out. But we've had a considerable amount of tour activity already. The building is virtually full so there's some pent-up demand from our existing tenants. And I think we'll be announcing some deals in the coming quarters that commit some of that space. The activity's been good at the upper bank of the tower, and I'm optimistic about it.

Michael Cooper

Mark, and I guess Sam as well, let me go back. First thing is, we spent about $15 million on buying back stock in the middle of August. I think we'll continue to buy back stock. I just don't think we're likely to make a big – a huge effort or something like that. So we'll continue buying. With regards to where the value of properties are, where our stock price is and our outlook, we think we will find opportunities to get returns. They may not be reflected in the kind of numbers that people are running on us. But I also don't think that at any point speculating about the kind of things that we would do.

Mark Rothschild – Canaccord Genuity

Great. And just lastly about the good, very strong property NOI growth in Calgary, that market's based on a little bit of softness. The subway spaces have increased. What are the prospects that you're going to see internal growth in that market next year? And is that a market that you might be a little concerned about with the potential for quite a bit of supply?

Ana Radic

A lot of the supply hasn't come online yet, so that bodes well for us. Our tenant base is a little bit different. Our average tenant size is 10,000 square feet, so our exposure to the tower is a little bit less but certainly it's something we watch closely and we're watching rental rates. So things seem to be holding fairly, fairly firmly. And we have a healthy spread between our expiring rent and market rent. So we're projecting growth in Calgary.

Mark Rothschild – Canaccord Genuity

Okay. Thanks a lot.

Michael Cooper

Thanks, Mark.

Operator

Our next question online comes from Mr. Mario Saric from Scotiabank. Please go ahead.

Mario Saric – Scotiabank

Hi, good afternoon. Maybe, Ana, just on those tenants are less than 10,000 square feet. There's a lot of press about bigger tenants are contracting in their space requirements. But what are you seeing in that segment in terms of tenant expansion, contraction during the quarter on the leasing side. Can you maybe just talk about what the demand for space is in that kind of bit?

Ana Radic

You know, there's been a healthy amount of tour activity. And we've, as I mentioned in the call, we concluded 10 transactions in 1,000 or 5,000 square foot size range. And many of our buildings have a smaller floor plate and that appeals to those tenants in the Calgary market. So I don't think they're really seeing much change in their world because these towers really aren't built for them. That's one segment of the market that really isn't talked about much when people are speaking about the overall market.

Mario Saric – Scotiabank

And I guess on those 10 transactions, generally speaking, are these tenants going from 10,000 square feet to 9,500 or are they going from 10,000 to 10,500? What's the incremental demand for space?

Ana Radic

It is honestly a little bit of everything. We're seeing growth from our own existing tenants. We just concluded two transactions growing a 15,000 square foot, in the Airport Corporate Centre for example, a 15,000 square foot tenant buys 7,000 square feet and they extended their lease. Similarly, another tenant grew – the ones moving into our building, some are growing and others aren't. In general, I think demand's been fairly even.

Mario Saric – Scotiabank

Okay. And then the resource sector I guess in Canada had an announcement earlier this week. It represents 10% or less than 10% of your portfolio. But what are you generally hearing from your resource tenants?

Ana Radic

There's some uncertainty within the resource sector certainly. And that's really what they're telling us. I think the pipeline announcement is great news and within Kanata specifically. This might actually bode well for Calgary. They are looking at consolidating in two primary locations. And that's in Calgary and Denver. They have space and other markets in Alberta, BC, Halifax. And so we're just kind of in a wait-and-see mode.

Mario Saric – Scotiabank

Okay. And then maybe just a question for Michael. You mentioned rising institutional allocations to realize that presumably given the very depressed environment, that capital, is it predominantly focused on the downtown core or are you seeing that capital venturing out into the suburbs as well?

Michael Cooper

I think that we're looking into it more. Clearly, there's tremendous capital for downtown, and I think there's capital for all kinds of strategies, not as deep when you get into less core strategies but we're trying to learn as much about it as we can.

Mario Saric – Scotiabank

Okay. Thank you.

Operator

Our next question online is from phone number 204 663 4562.

Unidentified Analyst

This is [Bob Steady], private investor. This question is perhaps a repeat on Mark's question about you've told us how you're preserving, protecting and, to a certain extent, increasing shareholder value generically, operationally, and somewhat strategically, and I know you may not want to. I can't talk about it further, but given the current financial climate, what are your key components of your strategic game plan for creating shareholder value over the next 12 months?

Michael Cooper

It's actually what we do for a living. We're doing a lot of work on looking at each half that we have and seeing where there's actually income and we've found a lot of opportunities. Ana referred to a few. And we think we're going to generate a lot more income internally that way. I think there was a mention that we've been buying back stock and we're looking at the delta between where properties are trading or the stock market is. So I think we'll find opportunities. But I mean we're really focused on making our properties better and generating our capital. And that's the primary surplus of what we're doing.

Unidentified Analyst

Thank you.

Operator

Thank you. (Operator Instructions) And we have a question online from Mr. Michael [McAllen]. Please go ahead.

Unidentified Analyst

Hi. I did note in addition to the company buybacks, that there were some share buybacks by the executive team and I appreciate that, show of a support for the stock. I wanted to see if you could comment on some of the valuation trends for some of the smaller buildings, some of the say 50,000 square foot type buildings that might appeal to high net worth buyers or local partnerships? And also if you have any buildings that you're looking at potentially to convert to residential or a hotel or other types of redevelopments? And if this kind of trends vary from city to city.

Michael Cooper

Yes I think that's a trend from city to city. I think you're actually right on point with the kind of strategic things we're looking at. Yesterday I went for a walk with one of our board members after our board meeting and in 45 minutes we walked through around downtown Toronto with 30% of our portfolio. That includes some smaller buildings that are fantastic, some bigger buildings that are fantastic. And I think there's a lot of potential with what we own. And we're looking at how to turn that into higher income and higher value. I'm not sure we're looking at conversions to hotels. But we are looking at what potential high values some of our assets.

Unidentified Analyst

So in that regard, do you think there might some more dispositions coming up in 2014?

Michael Cooper

Yes and I think we've sold about $700 million of assets in the last year in a bit. And our plan does include selling assets that have maxed out or that somebody can pay us a better price and do something else with.

Unidentified Analyst

Okay. Thanks very much.

Michael Cooper

Thank you.

Operator

We have a follow-up question from Sam Damiani. Please go ahead.

Sam Damiani - TD Securities

Thanks. Just on your exposure in Calgary releasing over the next two to four years, there's two or three situations there that may come back. What can you tell us today about the outlook for securing new tenancies for those spaces and the risk I guess related to those spaces right now?

Ana Radic

We may get some space back in Telus Tower, I think that's what you're referring to. That's really the one building where we have exposure to large tenants. Right now we're aware that Telus' new building won't be ready in time for their expiry with us, the Telus Tower so we are in discussions. And I think the likelihood of retaining them in a portion of building is good for an extension period there. Essentially I think our prospects are very good. Telus Tower, it’s an excellent building with a good floor plate size.

It's efficient. It's in a desirable location in Calgary. It's connected to The Bow and we're completing extensive renovations there that will continue to enhance its appeal. We don't have any space yet to market so we're not marketing anything. So I can't say that we have prospects. But it's a good building.

Michael Cooper

Our rent there is about $20 a square foot, and it's a great building. One thing I would say because it's been a real trend as of the comments, there's nothing new about commodities and resources. It's been pretty tough for a while. And in my opening comments, my point is I think that the chances are very good, that over the next couple of weeks there'll be more demand for office space than there has in the last year, year-and-a-half.

Sam Damiani - TD Securities

Okay. And what about the National Energy Board space there, what's the status on that space?

Ana Radic

The tour activity has increased significantly I'd say this quarter. We've had a couple of larger prospects come through, 50,000 to 70,000 square feet. One is doing some space planning, and we'll see how that progresses but there isn't a deal to announce yet.

Sam Damiani - TD Securities

Okay. Thank you.

Operator

Our next question online comes from Alex Avery from CIBC. Please go ahead.

Alex Avery – CIBC

Thank you. You mentioned in the opening commentary I guess one of the buildings on Bay Street where you were looking at a retail opportunity. I would presume that some of the time that you spent walking around downtown yesterday would have involved looking at a lot of the ground floor. Can you give us a little bit more of an idea of what you're thinking about in terms of that opportunity to create more street-front retail within your portfolio?

Michael Cooper

Look, just as an example from Bay and Richmond to Bay and Adelaide, just in that area I think there's about eight buildings or maybe nine. We own every building on the west side so we're looking at what to do with it. But that's a pretty significant expanse of street-front. Ana, do you any specific buildings you can tell us more details on?

Ana Radic

Yes, building on Bay Street that had some sort of lower quality office space and certainly the rents are a little bit lower. We'd seen through our marketing of Drake150 and the deal we did at Scotia Plaza for another 5,000 square foot restaurant, there's a real demand for good quality, interesting restaurant space. So that's an opportunity we identified to really almost triple the rent that we can achieve from this second floor space.

And there's other opportunities in our portfolio to where the retail tenants were put in five or 10 years ago and downtowns really change, so the highest invest use isn't what's presently in place in these buildings.

Alex Avery – CIBC

Have you looked at I guess any quantification by square footage or potential NOI upside in that opportunity?

Michael Cooper

We're dealing on pieces that are available now, and we're doing a lot of work on planning different spaces. So I think we probably have somewhere in the neighbourhood of half-a-million square feet of retail in downtown Toronto.

Alex Avery – CIBC

Okay. That's great, thanks.

Michael Cooper

Thank you.

Operator

(Operator Instructions) Our next question online comes from Mr. Mario Saric from Scotiabank. Please go ahead.

Mario Saric – Scotiabank

Hi sorry just one follow-up question. When we look at some of your bigger buildings like Highfield Place, Scotia, Bay Street, Telus Tower, when we look at the infrastructure in these buildings, generally speaking, like what's the minimum amount of square footage per employee that these buildings can handle?

Michael Cooper

One square foot per person. No, I'm not sure. But the systems are pretty good. What do you think, 150, 160?

Ana Radic

Yes, that's probably – our sort of density here at 30 Adelaide, definitely that's our density within our own space. All these buildings are a little different, but it's somewhere in that, 150 to 190 square foot range.

Mario Saric – Scotiabank

Okay. Great. Thank you.

Operator

Our next question online comes from Dave [indiscernible]. Please go ahead.

Unidentified Analyst

Thank you for the call. And I'd like to ask if there's any changes predicted for the distribution, and if so when?

Michael Cooper

I think, David, there are zero plans of changing it. The distribution's in great shape, but I think in this kind of market there'll be no inclination to raise it either.

Unidentified Analyst

Thank you very much.

Michael Cooper

Thank you.

Operator

And we have a question from – this one does not have a name. Whoever spoke up, please take your question. Your line has been opened.

Unidentified Analyst

Hello.

Michael Cooper

Hello.

Unidentified Analyst

I get back to the creating value. I guess in terms of just objectively looking at the retail over the last year, Dundee had the work performance of any REIT in Canada. It has the second largest discount of book value to share price. It's paying a dividend of 8%. And at some point I guess we have to look at the share price performance as a report card on management.

At some point, it seems appropriate to be articulating a strategy for not just over time increasing the value of the buildings in terms of cash flow, but being somehow creative a little bit or reflecting market reality that the share price performance is absolutely abysmal. And to just make comments like we're not going to go into some massive share buyback, we're not going to get the distribution, we're not going to do this, we're going to do that.

It's probably appropriate at some point after the shareholders have watched the 28% decline in share price in the last six months to actually articulate a strategy which is a little bit more than just saying we're going to try to squeeze more money out of the building and build a more creative in creating shareholder value – whether that be a massive buyback or whether that means hiding off major properties, whether it means a partnerships, whether it means buying back the management contract where money is paid out to one of the major shareholders.

Whatever it is I mean at some point it's appropriate to articulate a strategy rather than continuous erosion talking about macroeconomic conditions and how it's affected the Dundee REIT. Well, that's all good and fine, but it's underperformed now, it's underperformed every single REIT in Canada. So at some point, it's time to articulate a strategy I would think.

Michael Cooper

We didn't say we wouldn't do a massive buyback. We said we wouldn't increase the risk of the company to do a massive buyback.

Unidentified Analyst

What does that mean? You don't quantify it. What does that mean? 2%, 5% change in debt to equity? What does it mean? What is the strategy? And the strategy shouldn't be –

Michael Cooper

I think I have articulated.

Unidentified Analyst

The market continues to apply the heaviest discounted Dundee REIT. If you've articulated a strategy, it's time to articulate either a new one or articulate it better.

Michael Cooper

Well, I think when you compare it to some of the peers in the office sector or let's think of a fact. We have years where we do very well compared to our peers. And obviously years that aren't so. This year's a tough one, that's for sure. We've got ample growth in the company. We've got value. And we're working on increasing the value of the individual assets. We started to buy back. I think I mentioned that there's a lot of institutions that are looking for assets, and we're open-mined about that and learning more about it. But I don't think we've ever been accused of not being creative. But at this point, I think what we're doing is working quite well on the operating level and making a lot of progress. And I think it will come through our numbers.

Unidentified Analyst

The market is not rewarding you for your progress and consistently penalizes your worth than any other REIT in Canada.

Michael Cooper

You're saying over the last nine months? I couldn't hear you, it's breaking up.

Unidentified Analyst

What I was saying was that the market is not recognizing the progress you're making. Dundee has been uniquely penalized as being the worst performing REIT in Canada.

Michael Cooper

You know, we've been doing this for a long time. Some years, we have exceptional performance and some years a little. This has been a very tough year. Office in Canada has been very negative. And I think that that's served us quite a bit. I think the underlying operating metrics in office are much better than people think. And I think we're going to prove out the numbers.

Unidentified Analyst

They are excellent. There's no question because the question is really on how to affect share price that the market recognizes the value that you're properly and effectively creating. There's no problem with how the assets are managed. The problem is getting the market to recognize it and reward the shareholders with higher share price. That's the problem.

Michael Cooper

I think you could be comfortable that as time goes by, we will continue to develop strategies. I'm just saying that the fact that interest rates went up in May. International investors decided to leave Canada. The headwinds in office have been pretty tough on us. So we're working our way through it. But I think that the idea of changing your strategy every time the stock price goes down by more than somebody else isn't the long-term successful approach to business. Where there's opportunity to make money, we'll do it.

Unidentified Analyst

Okay.

Operator

Thank you. Our next question online comes from Chris Summers [ph]. Please go ahead.

Unidentified Analyst

Hi, Michael. I thought it was a pretty good quarter. I just wondered what you thought of the Brookfield office property's internalization by the Brookfield people in terms of what valuation would that lend to your operation.

Michael Cooper

Well, I have no idea. I think that was BPY Trading, BPY stock for the outstanding shares of BPO?

Unidentified Analyst

Yes.

Michael Cooper

Yes. I didn't follow it too close.

Unidentified Analyst

Okay. I mean we analysts should be doing that so. I don't follow the property market as closely as the institutional analysts online.

Michael Cooper

Well, BPO isn't a Canadian company that had some Canadian assets, through BOX, the Canadian REIT. But it has assets all over the world too. So I'm just not good at knowing what – in terms of valuation is.

Unidentified Analyst

That's what I was getting at. The international properties seem to be getting a much higher valuation than the Canadian properties. Is that something that you compare your Canadian real estate and think of maybe perhaps undervalued on a real white basis?

Michael Cooper

I don't think so. We're seeing international money go the other way that David here for a long time and others are starting to see better value elsewhere.

Unidentified Analyst

Okay.

Michael Cooper

I think London and New York than most places.

Unidentified Analyst

So our valuations are higher?

Michael Cooper

I think Canadian valuations are pretty high, yes.

Unidentified Analyst

Okay. Second one, what are the largest new build office towers that seem to be impacting sentiment regarding the units medium term? I remember that hole that I used to look at when I worked at 320 Bay has become a pretty good project for Brookfield.

Michael Cooper

There's two buildings being built at Bay Adelaide and later there's another one at the 100 Adelaide. Those are three buildings that are within the traditional core. There's been a lot of buildings in those –

Ana Radic

Total builds both in the core and in the south core that Michael was referring to is just over 5 million square feet in Downtown Toronto.

Michael Cooper

But I think it's 2.5 million or so right in the core.

Ana Radic

Right in the core. These buildings in the south core are a little further afield from our asset.

Unidentified Analyst

Compared to a total market of…? In the core, how many…?

Michael Cooper

140.

Ana Radic

Yes, the total 80 million downtown.

Michael Cooper

And 140 million –

Ana Radic

In the entire TTA, yes.

Unidentified Analyst

And those – the time table for those completions or pre-selling, have they been pre-leased at all or we're way behind on that?

Ana Radic

They're about 55% pre-leased right now. And they come online through 2016 and 2017.

Unidentified Analyst

So 2.5 million total unleased and coming in 2017, you said?

Ana Radic

Yes. On average, yes.

Unidentified Analyst

So four years from now? Three, three-and-a-half years from now or so.

Ana Radic

Yes.

Unidentified Analyst

Is that why people are so negative on the units, that and perhaps the build out in Calgary as well?

Michael Cooper

I think so. I think there's that. I also think that I was referring to earlier. The expectation was that there'd be more job growth for office space and there haven't been. I think that there's been very diminutive absorption space in the last while. So I think that looking backwards, there has been more building and less demand than we're expecting that's affecting people's view. However, we're seeing that there's still lots of activity and we're getting internal growth on top of the 8% yield. So it looks like a pretty attractive proposition for us as a company and also for us individually if we've been buying.

Unidentified Analyst

Just one last one. I know the Adelaide government had turned Whiterock. Has there been some contraction in the government employment?

Michael Cooper

Well first of all, we have a lot of government tenants throughout our entire portfolio, and a small portion of that was Whiterock.

Unidentified Analyst

Okay. So is our government cutting back? I didn't notice the government cutting back, is that a concern? You mentioned Yellowknife and obviously there's a government tenant that is in negotiation.

Ana Radic

We're not seeing significant cutbacks on the government side. There are instances where there's some downside. But we're seeing growth as well, like I mentioned in the northwest territories, in Alberta. And actually our Ontario portfolio has been very stable. No real changes in Ottawa either. So it's been stable.

Michael Cooper

There has not been an issue in this office if the government is not taking as much space as we thought they would or anything like that.

Unidentified Analyst

Great. Well, we'd be looking at those jobs numbers tomorrow. Thanks for all the answers.

Michael Cooper

Thanks a lot.

Operator

(Operator Instructions). And at this time, I'm showing no further questions.

Michael Cooper 

I'd like to thank everybody for spending time with us this afternoon. And please feel free to follow up with your questions by contacting Ana directly. Thanks a lot. Bye.

Operator

Thank you for joining. That concludes today's webcast. You may now disconnect.

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