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Executives

Michael Cooper - Vice Chairman and CEO

Michael Knowlton - President and COO

Mario Barrafato - SVP and CFO

Analysts

Mark Rothschild - Genuity Capital Markets

Alex Avery - CIBC

Jeff Roberts - Desjardins Securities

Mandy Samols - Raymond James

Garreth McRae - BMO Capital Markets

Dundee Real Estate Investment Trust (D.UN) Q1 2010 Earnings Call May 7, 2010 11:00 AM ET

Operator

Good morning ladies and gentlemen. Welcome to the Dundee REIT first quarter 2010 fiscal report conference call for Friday, May 07, 2010.

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 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.

Your host for today will be Michael Cooper. Mr. Cooper, please go ahead.

Michael Cooper

Thank you. Good morning and welcome to our first quarter conference call. Today, I'm here with Michael Knowlton and Mario Barrafato. Michael will go over operations and Mario will deal with our financial statements.

This is the first time, we've had a conference call after our annual meeting and there will be remarkable similarity between our presentation this morning and what we said yesterday.

Over the last 16 months, our business has improved dramatically. At the end of 2008, we had just over 20 million shares outstanding with a unit price of $12.60 for a total market cap of about $250 million and now we have about 34 million units outstanding. Our stock price has varied a lot but we're at about $850 million market cap presently.

The changes in our unit price and market cap are just a summary of the progress we've made. We have diversified our portfolio weight in the more risky Calgary market to more stable markets. We have acquired over $470 million of quality buildings since the summer of 2009 including a Class A building in Edmonton that has Enbridge, Bell, and the Alberta Government, as key tenants.

In addition, we recently closed on a 115,00 square foot industrial building in Ottawa with a 15-year sale and leaseback at about a seven and three-quarter cap for $11 million and a fully leased office building in Regina, 90% of which is leased to the provincial government for $14 million.

We also have a further $113 million of properties signed up currently and they consist exclusively of suburban office buildings in Toronto. The buildings acquired since Adelaide Place in total have a capitalization rate of about 8% which is in line with what we had been forecasting.

Average lease term is longer than our portfolio average and most importantly, the in-place rents are below market rents. This means that as leases expire, we anticipate that net operating income on these acquisitions will be higher than it is today.

In total, the buildings we are acquiring have a current return, which is higher than our existing portfolio, so they are accretive purchases but what is even more impressive is that as time goes on, these buildings will contribute even more than our existing properties to our future growth.

During our third quarter conference call, I said that I expected our property performance would show some growth in 2010. I believe that there was skepticism about this comment. Since then, we've had many discussions with analysts and unit holders about our business and I would like to reiterate our position that we expect our properties to produce higher NOI in 2010 than in 2009.

There are two areas where I'd like to clear up some confusion about how to interpret our future performance. First, we've had great success leasing our properties since the third quarter. Our occupied and committed level at leasing is now 97%. This is the highest we've had in modern times.

Our average in-place occupancy has also increased. The benefit of these leases has not all been realized and some of the tenants have not taken possession yet. In any event, our portfolio has had increasing occupancy over the last few quarters and I think that our occupancy level is much higher than the consensus has been.

The second discussion point concerns the interpretation of information we have provided in our supplementary information package. I've heard REIT calculations reflecting how our in-place rent relates to our market rent. In Calgary, market rents have declined rapidly and there is concern that we will have decreasing net operating income over the next while.

We have a schedule in our SIP that shows expiring rents by year. The numbers we provide for expiring rent and market rent have been used to analyze our future cash flow. Our expiring rents in many cases are above the current market rent. Future expiring rents include rent increases between now and their expiry. As an example, if we have a lease with six years left and the original lease provided for a net rent of $10.00 for the first five years and $15.00 for the second five years, we would show an expiring rent of $15.00 and we would share a market rent of say, $13.00.

If the expiring rent schedule is used an analyst would be led to believe that the expiring rent is $15.00 and market rent is $13.00, so why not our net operating income will go down from where we are now? But that is not true. Market rent is currently $3.00 per square feet more than our in-place rent. So, using that example, I think is more relevant to focus on our in-place rent rather than that expiring rent schedule, to estimate our net operating income.

Every quarter, we disclose our in-place rent and our market rent, although they appear on different schedules. We have now included another schedule in our SIP that shows in-place rents and market rents in total and by region. We've prepared a graph, which is now on the website showing market rents less than in-place rents for every quarter since the beginning of 2009.

In total, it shows that market rents remain higher than in-place rents and has been above in-place rents in every quarter except the third quarter.

If we look at Alberta, we know that the market rent has declined in every quarter and has declined from about the same as in-place rents at the beginning of 2009 to being about 14% below in-place rents currently. One thing I've noticed, the big drop in Alberta rents was in 2008, so we've been dealing with this now for about two and a half years.

Our in-place rent in BC, we're 24% below market at the beginning of 2009 and fell to 16% in the third quarter of 2009 and have now come back a little bit. In fact, in Saskatchewan and Yellowknife they performed the best and we've gone from almost the same in-place and market rents to now a spread of 32%.

In Ontario, the market declined from 14% down to about 7% and now the spread is up to 12% again. Our industrial rent in Alberta has declined and how they're just a little bit above in-place rents.

So, we look at the overall portfolio, we started 2009 with 7% premium in market rents to in-place rents. It declined to minus one and now we're back to a 3% potential increase. This means that our in-place rents are below market. We achieved this in part because we are seeing a recovery in some markets but also because our acquisition program is working.

Between an increase in occupancy and our rental structure, we believe that we are in reasonable shape. I like the current environment because we are able to acquire decent properties at valuations that are attractive to the vendor, so we have a reasonable chance of acquiring a lot of properties.

The cost of debt has been pretty stable. In December, we borrowed five year money at 220 basis points over treasuries, which resulted in a 4.8% interest rate. Today, we're looking at about a 2.7%, 2.8% treasury rate and 175 over, so we're probably looking at between 4.50 and 4.60 as interest rate, so it seems to be virtually the same if not better interest rates and there seems to be a lot of demand from lenders to put out money.

Our investors believe that the underlying operating environment is likely to get better which suggests that future returns will be higher than today. In addition, our unit price up until yesterday was yielding about 8.5%, which was a pretty attractive return so our investors got good value for their money.

So, now when we acquire property at the current prices using low cost debt, we're able to issue equity dealer holds at prices that allow our acquisitions to be accretive. With the embedded growth and improving environment I believe that our company is better with each acquisition in the short-term and over the long-term.

To have all the factors reasonably priced and all participants happy with their returns is an unusual environment. I hope it lasts a long-time but no matter how long it lasts we will do our best to take full advantage of this environment to build a bigger and better business in total and on an accretive basis.

Michael, do you want to do operations?

Michael Knowlton

Thank you Michael and good morning everyone. Our business is continuing to perform very well, meeting or exceeding our expectations. Both our in-place occupancy and our committed occupancy increased in the past quarter. Our tenants are very happy this year as our focus on reducing operating costs during the difficult period of 2009 has resulted in the majority of our tenants receiving refund of their operating costs they were billed.

Our committed occupancy level for both office and industrial properties increased to 97% in the quarter. This is a high water mark for our portfolio. In a portfolio, such as ours with the number of tenants that we have and the number of leases we have turning over each year, we are very close if not at fully occupancy.

To a certain degree, our increased occupancy has been driven by the level of occupancy in the properties we have been acquiring, adding to the improvements in our existing portfolio. Even without this however, our overall occupancy level improved in the quarter.

Since last September, we've added significantly to our portfolio. The properties we have acquired are in our key markets outside of Calgary. Our biggest focus has been in Toronto, where we have added 1.7 million square feet with such quality properties as Adelaide Place.

We have also reentered the Ottawa market and had recently closed Enbridge Place in Edmonton and a property on Scarth Street in Regina. All of the acquired properties are well leased to excellent credit tenants with average lease term longer than our current portfolio. These acquisitions have added $50 million in NOI to our business and made our business better and stronger than it was a year ago.

Now, I'd like to talk about our markets, firstly Calgary. The office market in Calgary is coming back to life. Tenants are growing again and require more space either by pulling off the market the space they had been trying to sublet or leasing new space in the market.

Absorption turned positive in the quarter. It's difficult to determine by how much and I have seen reports from various brokers that have absorption varying between 400,000 square feet and 1.2 million square feet in the quarter, whichever numbers are accurate, it is a positive sign for the market.

Vacancy dropped in the downtown market, as no new product was delivered in the quarter while 700,000 square feet of new space in the suburban markets caused vacancy to rise even with good (inaudible) of absorption.

The supply problem created in the Calgary market will not be quickly resolved, as there remains another 4 million square feet under construction for delivery by 2012. Even with this forecast of well over a million square feet of absorption in 2010, we expect lease rates will likely to continue to remain in the doldrums as landlords compete to attract tenants.

Longer term projections of the market vacancy are becoming more optimistic with current estimates now peaking below 20% from much higher levels only a quarter ago. Our Calgary portfolio was very steady in the quarter with a very slight decline overall. Leasing activity was very good, gains in some areas offsetting losses elsewhere.

Two significant deals we've been working on are the renewal and expansion of a tenant who occupied 22,000 square feet and want to expand to 30,000 square feet. We have a conditional deal done with them to take the top two floors of the building for 10 years at $14.50 a square foot. The deal involves moving a tenant that occupies space that will become part of this tenant's premises, over to another of our buildings in the downtown, absorbing 20,000 square feet of vacancy in that building. Although, this deal is not yet finalized due to all the moving parts, the overall effect of the deal will be positive for our portfolio.

The other significant deal is with a tenant who occupies an entire building with 36,000 square feet. We agreed to a 12 month extension of their current lease for $16.00. This rate is only slightly below their current rent of $17.00 but above our budget of $14.00. They were unwilling to commit to a longer term until they have completed a worldwide analysis of their occupancy requirements to ensure that their operations in Calgary will be retained in the longer term. This property was built to suit their requirements so if they do stay in the market they will likely renew here. Given the increased activity in the Oil Patch we are hoping they will decide to stay.

Looking forward at the next quarter, there will be some movement in the tenancies but overall at this point it looks like the occupied area should remain stable or increase slightly in the second quarter in Calgary. Third quarter should be much the same but the fourth quarter should see decline in occupancy as we lose a previously announced 56,000 square foot tenant at one of our buildings.

Toronto is now the second largest segment of our portfolio. Vacancy levels in Toronto inched up again in the first quarter. The good news is that absorption was positive by almost 100,000 square feet. Construction completion is offsetting the positive leasing activities to create higher vacancy.

Vacancy in the downtown and midtown markets is in the range of 7.3% and are still being considered landlord's markets. In the East and West suburbs, vacancy rates have risen to 12% and are shifting to become tenant markets. There is much more optimism on the future of the Toronto market than there was as little as a year ago. Vacancy rates have not risen as high as expected as many of the banks and professional service firms are hiring are pre-recession levels and absorbing more space than expected.

The Toronto economy is expected to grow by 3.7% in 2010, which should translate into good office space demand. Both our new acquisitions and our comparative properties are performing very well in the Toronto market. At Adelaide Place we've been achieving rental rates in excess of our pro-forma numbers on each deal we are completing.

Our only problem is now one caused by growth and not by recession. We have a number of tenants in Adelaide Place that required expansion space, which we cannot supply in a configuration that works for them. This means we will be losing at least two tenants over the next several months. The good news is that we are working on new deals for both of the spaces being vacated and hope to have them filled quickly.

At 438 University, we have now leased the last piece of vacancy in the building, so we have gone from 90% to 100% occupancy since we bought the property just over two years ago.

Just this week, we completed the process of arbitration to set the lease rate for the renewal of the Attorney General of Ontario at 720 Bay Street. As a result, the NOI from this property will increase by $800,000 annually and result in a one-time adjustment in the second quarter to reflect the catch up since the beginning of the lease in April 2009.

We had been scheduled to purchase a building that was to be BMW's Canadian headquarters. Unfortunately, we were not able to come to final terms with the vendor and the deal did not proceed as we had hoped. We had agreed to buy the building in 2007 so it was at a very low cap rate. We believe we can reinvest the money at a much higher return.

Absorption across the Vancouver market was flat in the first quarter. Vacancy levels rose as a result of three new buildings totaling almost 300,000 square feet being delivered to the Burnaby submarket. The Conference Board is projecting growth of 4.2% in the BC economy in 2010, driven by rising commodity prices and a rebound in housing. This growth is expected to drive occupancy levels higher in the market.

Vacancy rates vary significantly between the submarkets in Vancouver. The downtown vacancy is as low as 5.8% with few blocks of space available and no new construction on the horizon. This should force larger tenants to relocate or expand in the suburban markets.

Occupancy in our Vancouver portfolio is one of the many bright spots for the portfolio in the quarter, occupancy increasing by almost a full percentage point to 96.2%. It's an additional 27,000 square feet expiring through the yearend. Coupled with their current uncommitted vacancy of 20,000 square feet, we have 47,000 square feet exposure in the market this year.

Our discussions on renewals with tenants have not revealed any need or desire for them to depart our portfolio, so we are encouraged we will be able to keep them in place. Given the current competitive nature of the markets, the only issue will be rental rate. Activity levels in the portfolio are currently very good and interest in virtually all of our vacancies.

Over the next quarter, we expect in-place occupancy to increase. We've also leased 6,300 square feet at Station Tower for occupancy in December that should boost our fourth quarter numbers as well. We are working with this same tenant to expand their space and take an additional 13,000 square feet. The deal is contingent on moving two tenants in order to make the space available.

Both the Saskatoon and Regina office markets are very tight and new product is on the drawing boards. It is expected to start by the end of the year. Lease rates at the new proposed buildings will be considerably higher than current rates in the market and will allow us to push rates up aggressively on renewals.

In Regina, we have no exposure through 2010. Recently we were successful in renewing a 23,000 square foot tenant at Sherwood Place for their 2012 expiry at a rate of $23.00, up from the $14.50 they are currently paying. This is a sign of the current market dynamics in Regina. The tenant needed to secure the renewal now, as the only other alternative would have been to commit to a new build that would have taken two years to complete.

In Saskatoon, we have only 2,000 square feet of uncommitted space through all of 2010. The Northwest Territories continue to experience above average GDP growth when compared to the rest of Canada.

With Yellowknife as the hub of the Northwest Territories there remains steady demand for office space in the market. The Yellowknife portfolio remains only 1.3% vacant with 20,000 square feet of rollovers over the balance of the year. We do expect some vacancy in the short-term, as we know that some of the rollover space is no longer required by the tenants in place. There is good activity on this space, as we have seen federal government increase their space requirements in this market.

There is a significant level of leasing activity in the Kanata market in the past quarter with Hewlett Packard agreeing to lease 100,000 square feet in the market. The overall vacancy rate remains high, 12.8%, well above any of the other segments of the Ottawa market.

But the overall vacancy rate is only 5.4%. It is expected that further rightsizing of certain tenants in the market will offset leasing to keep absorption flat over the near-term.

Innovation Drive remains fully leased. Two tenants in the building have expressed interest in expanding their presence in the property if space is to become available. There is currently no rollover until 2011 at which time we expect to either retain a tenant whose lease expires or lease the space to the other two tenants in the building.

We acquired the Gateway property with 10,000 of vacancy and 25,000 square feet of rollovers during 2010. We have had some leasing activity but our exposure remains at 33,000 square feet for the balance of the year. The deals we have done to date have been at or close to our pro-forma and we are working very diligently on several more deals which should lower our exposure over the next few months.

Although, the vacancy rate in the Kanata market is quite high, we expect to be able to retain our tenants in these buildings and successfully lease the vacancies that we have.

Rental rates in the industrial markets in Calgary and Edmonton appear to be at bottom and are poised for growth later this year as part of the positive absorption is filling up the existing supply and there is very little new product in the pipeline to replace it.

Our industrial portfolio is back to 97% occupied and committed. We have not seen this level of occupancy for several years due to the large vacancies at both Barlow Trail in Calgary and 128th Avenue in Edmonton.

With these two properties now fully leased, we should see straight significant NOI growth from our Alberta industrial portfolio over 2010 and into 2011, as the effect of leasing these two properties will increasing comparative performance as all other space becomes fully occupied by September 1st of 2010.

The new tenant at 128th Avenue will vacate 45,000 square feet at another of our buildings when they move, causing vacancy to rise again at that point if we are not successful in re-leasing this space before they depart. We have already had a number of promising tours in this space and remain hopeful we will have a new tenant committed to the space by the time the current tenant moves.

Activity levels have picked up throughout the portfolio and we expect this momentum to result in increasing occupancy over the balance of the year.

One other deal of note was the renewal of a tenant, who occupied 53,000 square feet in one of our Sunridge portfolio buildings. Their lease does not expire until 2011 but they have renewed for seven years at rent in excess of what they are currently paying in escalation through the term.

Now, Mario will go over our financial results.

Mario Barrafato

Thank you Mike. Good morning everyone. Going into 2010 our objective was to strengthen the quality of our cash flows and to minimize the risk associated with operating in Calgary. We have been very active in the quarter trying to meet these objectives and are really pleased that the execution of our strategy can be seen in our Q1 numbers.

Before I review our results I just want to summarize some of the key events in the quarter. On January 7th, we issued a $103.5 million of equity at $18.75 per unit. On January 18th we closed on the acquisition of Adelaide Place for $211.5 million. We were able to put a five year non-recourse mortgage on the building for $120 million at an interest rate of 4.795%.

On February 10th we closed on the acquisition of Aviva Corporate Centre for $45.7 million. As consideration we assumed a $31 million mortgage at a rate of 5.3% with a seven-year remaining term.

On March 1st, we sold a property in Toronto for $11 million and on March 16th, we issued $115 million of equity at $25.25 per unit.

For the first quarter, we saw most of our key performance indicators improve over prior quarter. Our total NOI grew by 22% over prior quarter and 25% over prior year. Our comparative NOI was stable, growing by 0.3% versus prior quarter and 1.2% over prior year.

Our FFO increased 3% to $0.72 per unit compared to $0.70 in Q4 and AFFO of [$0.542] in the quarter, was up from $0.522 in the prior quarter. On the year-over-year basis, we did have decrease in both FFO and AFFO but these are due to dilution on the timing of equity raises.

During the quarter, we also improved on our capital structure. Our debt to gross book value decreased to 54.7% from 59.3% in the fourth quarter and our interest coverage ratio improved to 2.6 times earnings from 2.3 in the prior quarter.

Liquidity, which we define as cash, unused operating line, and the potential borrowing capacity of unencumbered assets, has increased significantly over the last few quarters. We've taken advantage of the equity markets to lower our debt ratio and build up a pool of unencumbered assets. This pool will provide us with stability and flexibility going forward.

Our first quarter AFFO increased by $3.6 million from prior quarter primarily due to the acquisition of Adelaide Place and Aviva Corporate Centre and also a full quarter of NOI from the properties closing in late Q4, overall contributing $5.9 million to AFFO. This accretion was offset by $1.5 million of additional interest expense, again primarily related to the $120 million mortgage on Adelaide Place and $51 million of mortgage as assumed on the Q4 acquisitions of Airport Road and Aviva Corporate Centre.

Our G&A went up by $477,000. $190,000 of that was due to increased asset management fees and the remainder for consulting costs related to IFRS and taxation matters.

We also had other income decrease by $142,000 and that's just due to carrying lower cash balances in the quarter and we also increased our CapEx reserve by $450,000 related to just having a larger portfolio.

Included in our AFFO per unit is $0.022 of dilution from carrying cash during the quarter. Absent that, our AFFO would have been $0.565 for the quarter.

As Mike had mentioned, our comparative properties continue to perform well and our fundamentals are solid. On an NOI basis comparable private performance was stable, increasing by 73,000 over prior quarter with increases in both office and industrial.

On a year over year basis, the change in our NOI reflects the benefits of a diversified portfolio and the impact of acquisition strategy. For the first quarter, on a comparative property basis, Calgary office was down 3% primarily due to a decline in occupancy. However, this was offset by gains in BC of 3%, gains of 5% in Saskatchewan, Northwest Territories, gains of 4% in Ontario, and gains of 13% in Industrial, so overall, resulting in comparable property growth of 1% of the prior year.

Acquisitions added $6.6 million to NOI, now making up 20% of our overall cash allowance in the quarter and reducing our Calgary office exposure 33% in Q1 compared to 55% a year ago. With the properties we acquired in Q2 plus the properties under contract, this will decrease further to approximately 35%.

Overall, our acquisitions are performing well and tracking to budget. I just want to draw your attention to two matters related to our acquired properties. Firstly, the Aviva transaction included an 87,000 square foot warehouse that is currently vacant and offers some development potential. We've talked about this building, as a development asset and it is excluded from our operating statistics.

The space is subject to a head lease from the vendor. For GAAP purposes, the head lease payments are treated as a reduction in purchase price and are not reported NOI. In order for us to properly reflect the cash flow of the property, as we underwrote it and better assess the cash available for distribution, the head lease revenues have been included in our computation of AFFO. The amount for the period was $95,000.

Secondly, included in the Adelaide Place purchase equation is a liability to reflect that in-place rents are below market rents. The amortization of this liability has resulted in an increase to GAAP NOI for the quarter of $800,000.

Looking forward, we expect our cash flows to continue to be strong. In taking into account the acquisitions closing under contract in Q2 plus NOI growth for industrial properties, we feel right now we're operating at a steady state AFFO of $0.57 per unit.

We also continue to maintain a strong balance sheet. We closed the quarter with $133 million of cash on our balance sheet, $31 million of unused operating line, and a pool of six unencumbered assets that potentially give us borrowing capacity of another $70 million.

Subsequent to quarter end we renewed our operating line and had the borrowing base increase from $32 million to $36 million with the same underlying securities.

In the quarter, we lowered our debt to gross book valuation to 54.7% from 59% and excluding convertible debentures that ratio was 47.5%. At 54%, we are in line with others in our interest rate but given that 13% of our debt is in the form of deeply subordinated debentures plus with the liquidity in a debt market we're comfortable operating at a slightly higher debt level if the opportunities arise to secure long-term debt at low rates.

Altogether, we're very pleased with our financial position. We've been able to deploy our cash to high quality assets. We've diversified our business. We've continued to add to our pool of unencumbered assets and most importantly, we've strengthened the quality of our cash flows.

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

Michael Cooper

Thank you Mario. We'll be happy to answer any of your questions at this time.

Question-and-Answer Session

Operator

(Operator Instructions). The first question is from Mark Rothschild from Genuity Capital Markets. Please go ahead.

Mark Rothschild - Genuity Capital Markets

Hi, good morning. Michael, one thing you wrote about, I think it was in the letter, I remember reading it was that you feel there's consensus on asset values now. Maybe you could talk about what you're seeing that you believe is consensus and where values are that you think everyone is agreeing on.

Michael Knowlton

Maybe this is the last question we'll ever receive from Genuity. I'm looking forward to hearing from you from Canaccord on Monday. I think that over the last couple of years it's been very difficult for organizations to feel comfortable. They know the value of their assets. So, my sense of it is that in 2009, it was very difficult for an institution to sell an asset because there wasn't a data point to make it clear that they were getting reasonable value so I think now there have been a lot more trades and I think it's become a lot more predictable, at what price an asset is going to trade and I think that's what I was referring to when I said consensus.

Mark Rothschild - Genuity Capital Markets

So, can you mention what you think values are for the types of properties you're looking to buy, maybe given cap rates?

Michael Knowlton

I think that we've spoken about trying to build the portfolio of new acquisitions around an eight cap and that may vary from 7.2 to 7.3 at the low end and up to maybe 8.6, 8.7 at the high end.

Mark Rothschild - Genuity Capital Markets

And my only other question is you seem to have some confidence in the Calgary office market getting better. There is a lot of supply that's definitely coming online. What gives you confidence that rental rates can remain where they are through what's expected to be an increase in the vacancy rate?

Michael Knowlton

I think that our view is that the actual economy in Calgary is doing better than people anticipated and that there is positive absorption. So, I don't think, we're saying rental rates are definitely going to go up, or certainly not right now but that I think that all the information has been digested and the actual outcome seems to be better than people expected.

Operator

Thank you. The following question is from Alex Avery from CIBC. Please go ahead.

Alex Avery - CIBC

I was just wondering, if you could talk a little bit about what you're seeing in terms of tenant retention in the Calgary office market. Is it obviously certainly a focus but just in terms of what you're achieving and I guess what you see on the new leasing side there?

Michael Cooper

The Calgary office portfolio, our overall tenant retention ratio is about 75%. I'd say our Calgary portfolio is very much in line with that. What was the second part of your question? I missed it.

Alex Avery - CIBC

I guess with a focus on tenant retention, I guess is it easier to retain tenants there or are you seeing activity on the new leasing side?

Michael Cooper

We are seeing, we have done quite a number of new leases in Calgary and we continue to see activity there. We've been very successful. We've had some vacancy in our Sunridge portfolio, some of the flex office space. We've been very successful in leasing that out and even in the downtown we are attracting tenants. We're being as aggressive as we need to be and we're filling up space.

Alex Avery - CIBC

And then, in your MD&A you noted that you have 191,000 square feet of committed space. Can you just give us an idea of what kind of an NOI impact that will be?

Michael Cooper

The biggest part of that is the deal at 128th Avenue in Edmonton, which is at $5.75 a square foot but its 96,000 or 97,000 square feet, so it will have a significant impact on the income being generated by our industrial portfolio starting in September of this year.

Alex Avery - CIBC

Okay. In the comparative portfolio analysis of the industrial assets you noted that some of the same portfolio NOI growth was due to occupancy improvements but you didn't note what the prior year occupancy was and I think that there may have been some changes in the constitution of that comparative portfolio. Have you got the number for what that would be in the prior year? I guess Barlow Trail would be the big swing factor.

Michael Cooper

On the occupied improvement or just in-place occupancy?

Alex Avery - CIBC

On the same portfolio results at I guess the actual occupancy.

Michael Cooper

I don't have that number right here, the in-place occupancy number right here with me.

Michael Knowlton

Alex, we're going to try to find that number on this call and if we find it, we'll answer it, a little bit, in a couple of minutes.

Alex Avery - CIBC

Okay. I'd appreciate that. And then, on the BMW transaction that seems to have been terminated, can you just talk about I guess what happened there and at whose option it was terminated?

Michael Knowlton

I'd rather not. We were joint venture partners with the builder up until August of 2007 and the relationship did not end well and it just sort of fell apart and I think both sides were quite happy to walk from it.

Alex Avery - CIBC

Alright, moving on to the Adelaide Place. You noted that there are two tenants that will be leaving because you can't accommodate them. Can you just talk about I guess what kind of space they were leasing?

Michael Cooper

One of them was a full floor legal firm so they are moving because they needed almost twice as much space but we do have another law firm that we're actually negotiating with and exchanging paper with on that particular piece of space. And the other one was a financial firm that was split between two occupancies in downtown and I think they have about 7,200 square feet of space, which was much less than they had in the other building and so it was cheaper for them to move there than to move that operation over to our building.

Operator

Thank you. The following question is from Jeff Roberts from Desjardins Securities. Please go ahead.

Jeff Roberts - Desjardins Securities

Hi, good morning. You acquiring an industrial building in Ottawa, I think it was the first one you've acquired other than the warehouse that came with Aviva. Is this a one-off or is this going to be a growing pipeline of a different type of asset?

Michael Cooper

That's a great question. I think that we are open to owning industrial. We own 7% of our portfolio now. We've always wanted to own more industrial but the pricing never worked out plus it takes a lot of building to add up to the same value as one office building. So, I think that we like the building. It's a long-term lease. We thought it was a good return and I think we would look at other buildings like that in the future but I don't think it's going to be significant in our portfolio.

Jeff Roberts - Desjardins Securities

Okay. And in terms of Edmonton, you're entering the Edmonton office market currently. Do you see more of a pipeline there?

Michael Cooper

You know what? The Edmonton office market isn't that big, so we've looked at a number of properties over the years and if we found things that we liked there we would buy more but again, I don't think it's likely to be a large part of our portfolio either.

Jeff Roberts - Desjardins Securities

Okay. And then parties that you have under contract in the greater Toronto area, can you give a cap rate for that $113 million?

Michael Cooper

It's a little over eight. It's higher than our average.

Jeff Roberts - Desjardins Securities

Okay. A lot of the competitors say that you can't find too many properties on the market but you're having great success. Are you getting deals off market or are these marketed? Could you comment on that?

Michael Cooper

A bit of everything. I think people have a lot of confidence that we're going to close and that we're going to close in a way that they'll be pleased to deal with us again, so I think that works well for us. But I also think that our strategy is for good quality downtown office buildings and even better quality suburban office buildings for the most part, all across the country and that gives us a lot of choices of what to buy and I think that there are some other REITs that are just like us having quite a success in growing and there are some other REITs that are having a more difficult time because of their focus.

So, I think both statements could be true. One REIT could say it's hard to find something and we could say we're having some success and for each of us it's an accurate statement in their market.

Operator

Thank you. The following question is from Mandy Samols from Raymond James. Please go ahead.

Mandy Samols - Raymond James

Good morning. So Michael, you're running at about 54% debt to gross book value and you mentioned that you wouldn't mind increasing net profit if long term debt was available at attractive rates?

Michael Cooper

Yes.

Mandy Samols - Raymond James

So, what would be the maximum leverage level you'd be comfortable operating at?

Michael Cooper

I think that over the longer term between 55% and 59% I think is good.

Mandy Samols - Raymond James

Okay. And when you say attractive long term rates, what would you consider attractive long-term rates?

Michael Cooper

I think right now the rates are very, very attractive. The difference between the 10-year and the five-year rate isn't as high as it's been in other times. The overall rates have come down quite a bit and spreads have come down so I think we're looking at maybe 5.2% for 10-year money. That to me sounds pretty good.

Mandy Samols - Raymond James

And how does it compare to five-year?

Michael Cooper

Five-year now might be 4.5%, 4.5% to 4.6%.

Mandy Samols - Raymond James

So, would you consider putting debt on the unencumbered assets or would that be more in terms of just when you're always going forward in acquisitions that you would have high leverage --?

Michael Cooper

You're reading my mind. I think that this is a very attractive environment to place some debt and we are working on some now.

Mandy Samols - Raymond James

That's on the unencumbered assets?

Michael Cooper

It's on both, some unencumbered and some new properties, so yes, we do think this is a great time to do it.

Mandy Samols - Raymond James

Okay. And then, a quick question on Calgary. Are you signing leases just with reduced rents or are you having to throw in free rent periods or any kind of non-cash incentive that may result in GAAP adjustments?

Michael Cooper

May result in what? I didn't catch that last thing.

Mandy Samols - Raymond James

GAAP adjustments.

Michael Cooper

GAAP adjustments are a result of your rent not being flat for the entire term of the lease and in longer term leases there's always bumps. We are giving away some free rent up front and inducements are at what I would say, normal levels. It depends on what the tenant's requirements are for the space that they're moving into because they generally like turnkey space and a lot of our space is like that but some that we have to do some work on.

Operator

Thank you. (Operator Instructions)

The following question is from Garreth McRae from BMO Capital Markets. Please go ahead.

Garreth McRae - BMO Capital Markets

Hi, good morning, almost afternoon. Just a couple quick questions here, getting back to the acquisition pipeline and the stuff you have under contract, just curious what would the cap rates have looked like maybe about six months ago and correspondingly, what would the debt spreads been around that time?

Michael Cooper

Okay, I'm going to give you my estimate but a couple things. One was it was unclear what the cap rates were six months ago and the debt is really based on my memory. So, on the cap rates, I think it would probably be 50 to 75 basis points higher, if the vendors would sell. I'm going to say six months to a year ago. And the interest rates, a year ago from now, a year ago at this time it was probably 275 over, maybe 350 and 10-year money wasn't available. So, I think that would net out to probably 100 basis points higher on the interest rate because then there was a lot lower base rate too.

Garreth McRae - BMO Capital Markets

So, basically even with cap rate compression we're seeing better spreads then overall?

Michael Cooper

I think things are working now so one of the points that you mention is the cap rates have come in a bit and debt has come down too, which is true but also there is just so much more confidence that tenants are going to renew. This morning we saw these unbelievable numbers for Canadian employment. A year ago, the concern was, is anything good ever going to happen again? So, this is a much more secure environment to be making decisions in, I mean until yesterday at 2:40.

Garreth McRae - BMO Capital Markets

And again and along those same lines actually, are there any new markets you guys are looking at or any place you feel you're underrepresented or anything like that?

Michael Cooper

There is and it's one of the difficulties about being a Canadian company. We're underrepresented in Atlantic Canada and that's something that we wouldn't mind getting more exposure to. We are not just underweight Quebec, we're no weight Quebec and I think that we might go from no weight to underweight.

And then Vancouver, we've got exposure there but wouldn't mind more. Manitoba seems to be a good economy but I don't think there's that many opportunities to grow there and I think Artis is pretty focused on that market. So, I think pretty much any market that we're not in that's of any significance, we'd like to be in overtime but if we don't go there, it may be a good idea too just because of what opportunities that are, we have to do every acquisition on its own basis as well as how it fits into our strategy.

Garreth McRae - BMO Capital Markets

And finally, actually speaking of Artis, did you guys take a look at the Production Court in Burnaby?

Michael Cooper

Yes, and I have nothing bad to say about the asset. I think that's a good one but I don't really want to compliment them, okay?

Garreth McRae - BMO Capital Markets

Okay. That's perfect. Thanks very much.

Operator

Thank you. Mr. Cooper, there are no further questions registered.

Michael Cooper

We have one response to an earlier question about occupancy of industrial and then we'll sign off. Mike?

Michael Knowlton

Alex, this is for you. Our occupancy on an occupied basis went from about 83% up to 90%, as a result of, between the beginning of this year and the end of the year and will be going up to probably 95% once the building on 128th Avenue is fully leased.

Michael Cooper

Okay. I'd like to thank everybody for spending a Friday morning with us. We appreciate your continued interest and attention to our business, looking forward to presenting our results for the second quarter and having another conference call conversation. Thank you.

Operator

Thank you, gentlemen. This concludes today's conference call so disconnect your lines and thanks for your participation.

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THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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Source: Dundee REIT, Q1 2010 Earnings Call Transcript
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