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Executives

Michael J. Cooper - Vice Chairman and Chief Executive Officer

Mario Barrafato - Senior Vice President and Chief Financial Officer

Ana Radic - Chief Operating Officer

Analysts

Mario Saric - Scotia Capital

Alex Avery - CIBC

Sam Damiani - TD Newcrest

Matt Kornack - National Bank Financial

Dundee REIT (OTC:DRETF) Q4 2013 Earnings Conference Call February 28, 2014 9:00 AM ET

Operator

Good morning, ladies and gentlemen. Welcome to the Dundee REIT Fourth Quarter 2013 Conference Call for Friday, February 28, 2014. 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. Later in the presentation, we will have a question-and-answer session. (Operator Instructions)

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

Michael J. Cooper

Thank you very much and good morning. Welcome to our year-end 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.

Dundee REIT's stock market return was poor in 2013 after many years of outperformance. Last year was a difficult year with stock market with the flow of funds out of Canadian REITs. However, Dundee REIT's operating performance was quite good. With new supply and slow job growth in Canada, we have seen increasing vacancy nationwide, although Dundee REIT's occupancy decline during the year declined at less than half the rate of the market, which I believe is the testament to the quality of our assets and our operating team.

Dundee REIT had 2.5% AFFO growth while reducing its leverage at 1% compared to property growth. We have lease commitments equal to 50% of our 2014 expiry so far and we expect that we will continue to grow our comparative properties net operating income and our AFFO this year. Over the last 90 days, we've bought back $60 million of stock which increased our AFFO by $0.025 and increased our debt-to-book value by about 60 basis points.

We have met with institutional and retail investors over the last three months to discuss the prospects of Dundee REIT. These institutional investors include groups of the U.S. and Europe. We are pleased that there is more interest in Canadian REITs and Dundee REIT now than during the second half of 2013. We will continue presenting our Company to investors so they understand the value for our business.

Ana, will you speak about our operations please?

Ana Radic

Thank you, Michael, and good morning. We have prepared a slide presentation this quarter as well to accompany the operations overview. You can find the link to it on our home page and on the Calendar Events page. The national office vacancy rate increased to 9.7%, up 60 basis points quarter-over-quarter and 130 basis points year-over-year. Vacancy rate remains lowest in downtown markets. Suburban vacancy in the 10 largest office markets ended the year at 12.1% while the downtown rate was 7.8%.

Turning to our portfolio, leasing activity was strong this quarter with 260,000 square feet of new leasing and 385,000 square feet of renewals completed in the quarter. Committed occupancy declined slightly in Q4 but at 94.3% remains well ahead of the national average of 90.3%. Occupancy gains were made in suburban Toronto, downtown Edmonton, Ottawa and the Greater Vancouver area. These gains mitigated occupancy declines in Calgary and downtown Toronto where we experienced 21,000 square feet and 20,000 square feet of negative absorption respectively.

Subsequent to the quarter, new leasing activity has been brisker in Calgary and Toronto resulting in 42,000 square feet of new leases commencing in 2014. We continue to have upside on our expiring rents. Rental rates for renewals completed this quarter have exceeded expiring rents by 12% in downtown Toronto, 27% to downtown Calgary, 32% in suburban Calgary, 30% in suburban Edmonton and 22% in Saskatoon.

Turning to our key markets, 2013 marked the first full year of negative absorption across the overall GTA market since 2003 with negative absorption of over 320,000 square feet and occupancy ending the year at 90.6%, a 70 basis point decline over the previous quarter. In the financial core of Toronto, however, vacancy remains at a low 6.2%. Despite these market pressures, rents in the financial core have remained strong with five landlords owning or managing approximately 75% of the inventory. This stability of ownership has and should continue to control pricing.

Committed occupancy in our downtown Toronto portfolio ended the year at a very strong 96.6%. We did experience modest negative absorption as a result of two law firms at Scotia Plaza downsizing by approximately 19,000 square feet. Subsequent to quarter end however, we have leased over 16,000 square feet downtown, just under 10,000 square feet, 6,500 own share at Scotia Plaza to a tenant who has expanded into a portion of the space we just got back.

Leasing activity in the quarter was steady with our team completing almost 90,000 square feet of transactions, 30,000 square feet of net new leasing and 54,000 square feet of renewals. In both cases, our achieved rental rates exceeded budget with new deals completed at an average rent of $28, 4% higher than anticipated. Rental rates on renewals exceeded expiring rents by 12%.

Demand for larger blocks of space have also been strong in downtown Toronto, with brokers regularly checking in with us at Scotia Plaza and Adelaide Place looking for space in the 25,000 to 200,000 square-foot size range for commencement dates in 2015 and 2016. We cannot accommodate these tenants as our largest block of contiguous space is only 13,000 square feet at Scotia Plaza and 10,000 square feet at Adelaide Place, and we will not have space back at Scotia until January of 2017. This demand is very encouraging. As we move later into the year, we anticipate seeing more 2017 requirements that we can accommodate at Scotia Plaza.

Year-end committed occupancy in our suburban GTA portfolio increased 30 basis points to 93.4%, as 89,000 square feet of leasing was completed commencing in 2013 and 2014. Approximately 50,000 square feet consists of new leases completed at an average rental rate 1% greater than we had budgeted. Larger new transactions included a 12 year lease at 2075 Kennedy Road in Scarborough with the Toronto Police Association for 17,400 square feet for a 12 year term, a 12,000 square foot 10 year transaction with Pace Law Firm at Valhalla Executive Centre at Etobicoke, and an 8,500 square-foot lease with SNC Lavalin at West Metro also in Etobicoke. The 39,000 square feet of renewals were completed at an average rental rate of $14.90, 12% greater than expiring rent.

In the overall downtown Calgary market, the year-end ended with 342,000 square feet of negative absorption and overall occupancy decreasing to 90.9%. Committed occupancy in our downtown Calgary portfolio continues to outperform the market and has remained healthy, though dropping 50 basis points from 95.8% to 95.3%. Bow Valley College vacated 70,000 square feet at Rocky Mountain Plaza this quarter. The space has been leased to Cenouvus Energy effective June of 2014 and does not impact committed occupancy. However, the six-month downtown period will have a drag on NOI.

Leasing velocity was strong in the quarter with 19 lease transactions completed, totaling approximately 98,000 square feet. We continue to capture the embedded value in our portfolio through renewals. The average rental rate for the renewals completed this quarter was $21.60 per square foot, representing a 27% increase from expiring rent. New transactions were completed at an average weighted rent of $26.60, 16% higher than budgeted. Also this quarter, an agreement was reached with Telus to extend their lease in a 130,000 square feet, 73,000 square feet at owned share, a Telus Tower until August of 2018 at rental rates 45% higher than the expiring rent. Interest and activity on our available space at Braithwaite Centre has been brisk since the beginning of the year. We presently have good interest from over 300,000 square feet of prospective tenants.

In our 800,000 square foot suburban Calgary portfolio, committed occupancy decreased from 87.9% to 86.7%. However, we continue to benefit from the positive spread between our in-place and market rents. 12 transactions totaling approximately 100,000 square feet occurred in the quarter with approximately 60,000 square feet being renewals. The weighted average rent of renewals completed this quarter was just over $14, exceeding budget by 16.4% and representing a 32% increase from the expiring rental rate. The weighted average rental rate for new transactions completed in the quarter was $22, 8.6% higher than budgeted.

This quarter the overall downtime Edmonton office market recorded 168,000 square feet of negative absorption, causing occupancy to decline by 110 basis points. Edmonton suburban office market has performed significantly better, posting 219,000 square feet of positive absorption in the quarter. Occupancy in our downtime Edmonton portfolio improved this quarter, increasing 20 basis points to 89.2%, as just under 8,500 square feet of leasing was completed. New leasing was completed in line with our [SIP] (ph) rents and the average rental rate achieved on renewals at $18.77 exceeded the expiring rent by 16%.

One of our primary focuses remain sourcing prospective tenants for our two largest blocks of vacant space at the BMO Building and in Highfield. At the BMO Building, we have reached an understanding with the adjacent Kelly Ramsey development to accept a future pedway bridge from our building. This coupled with the interior and exterior building modifications we are planning will result in increased leaseability of the asset. At Highfield Place, extensive exterior and interior renovations will be underway shortly.

Committed occupancy in our 1.1 million square foot suburban Edmonton portfolio ended the quarter at 93.8%. Leasing activity has been brisk as we completed seven transactions totaling 27,600 square feet with new deals averaging rental rates of $19 per square foot, 50% higher than those budgeted. Renewals transactions were completed at rental rates 36% higher than our expiring rate. Demand for suburban space continues to be strong as the above rental rates indicate and we anticipate short downtimes as we release our vacant space.

Occupancy in our Greater Vancouver portfolio increased 30 basis points this quarter to 94.3%, with approximately 11,000 square feet of transactions completed. 8,000 square feet of new transactions were completed in Burnaby at an average rental rate of $14.40 which was 4% below budget as we made the decision to trade immediate occupancy for lower rental rates. Subsequent to quarter end, we were successful in renewing a 37,000 square foot tenant at Station Tower for an additional seven years increasing their rent 65%.

In our Southwestern Ontario portfolio, 106,000 square feet of leasing was completed this quarter, consisting of 95,000 square feet of renewals and just under 11,000 square feet of new transactions. Notwithstanding a very successful leasing quarter, occupancy dropped by 11,000 square feet as two tenants downsized. Rental rates achieved on the 95,000 square feet of renewals with tenants such as Rogers Communications and Sun Life Financial exceeded our estimates by 6% while rates on the 10,000 square feet of new transactions were just slightly below our forecast.

The pipeline of prospects is more robust than it has ever been in this market. We are in discussions with a number of prospects in Kitchener and subsequent to the end of the quarter concluded a transaction to expand our lead tenant, TD Bank, at London City Centre by 25,000 square feet.

Our portfolio in Montréal experienced a quiet quarter with no leasing activity. 700 de la Gauchetiere's occupancy continues to be strong and we anticipate leasing one of our two remaining blocks of office space by the end of March to an existing tenant.

Committed occupancy in our Ottawa portfolio increased 30 basis points to 97.2% and continues to outperform the overall market. During the quarter, 30,000 square feet of lease transactions commencing in 2013 and 2014 were completed. New leasing totaling just under 26,000 square feet was done at an average rental rate of $13.60, 2% greater than budgeted. Renewal transactions totaling 4,700 square feet were completed with tenants whose expiring rents were well above market. As a result, the average rental rate achieved was 11% below the expiring rate, however exceeded the [SIP] (ph) market rent by 6%.

Turning to our smaller markets, occupancy in our Regina portfolio at quarter end remained unchanged at 98.9% and is forecasted to remain that way through 2014, due our small level of leasing exposure. During the quarter, a 10,000 square foot renewal was completed at a rental rate approximately 50% higher than in the expiring rate. Committed occupancy in our Saskatoon portfolio remained strong at 97.5% but did decline this quarter as a 10,000 square foot tenant relocated from Princeton Tower. During the quarter, 21,700 square feet of renewals were completed with five tenants at an average rental rate 22.5% greater than the expiring rate.

Our Quebec City and Yellowknife portfolios remained stable this quarter with occupancy at 93.8% and 87.1% respectively. Occupancy and NOI within the Yellowknife portfolio is expected to increase by the second quarter as we are very close to finalizing a 58,000 square foot renewal and expansion at Scotia Centre and completing 8,500 square feet of new leasing at Northwest Tower.

We have also continued to strengthen and realign our management team this year by adding a third Senior Vice President of Portfolio Management, Andrew Reial, to manage our Saskatchewan suburban GTA, Ottawa and Atlantic portfolios. Andrew has been a key member of Dundee's asset management team since 2012 and has 10 years of experience in this area. Together with Kevin Hardy and Paul Skeans, our portfolio management teams are responsible for actively monitoring and managing key performance metrics, and with inputs from leasing property management, senior management, creating and executing building strategies.

Each has NOI targets and is responsible for delivering NOI and AFFO growth by ensuring each property is leased, operated and maintained such that cash flows are maximized. They also lead a team of 18 talented and dedicated leasing professionals across the country who are knowledgeable about regional markets and macro market trends. This exceptional team coupled with our national scale remains a competitive advantage that will enable us to deliver a stable cash flow to our unitholders.

We are happy with the level of activity we have been seeing, especially new tenant activity in the 2,000 to 10,000 square foot size range which represents a large portion of our tenant base. We are heading into 2014 on solid footing, having completed over 1.5 million square feet of leasing commencing this year. Over 1 million square feet of renewals have been committed for 2014 at an average rental rate 17% higher than expiring rents. The 500,000 square foot of committed new lease deals are generally in line with our market rent estimates. We are in negotiations with 500,000 square feet of tenants, we feel we have a very high probability of renewing and have a pipeline of 200,000 square feet of new tenant we are presently working with.

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

Mario Barrafato

Thanks Ana. Good morning everyone. Our fourth quarter results were in line with expectations, with FFO for the period of $0.72 per unit, up $0.04 from the same period last year and down $0.01 from last quarter, and AFFO of $0.62 per unit, up $0.05 from the same period last year and down $0.01 from last quarter. The increase in year-over-year FFO and AFFO was a result of NOI growth, interest savings and deployment of cash held in 2012 from the sale of the Industrial portfolio. This is offset by the impact of operating at a lower leverage during the year. The slight decrease in quarter-over-quarter FFO and AFFO were mainly driven by one-time items reported in Q3.

The fourth quarter was very quiet from a transactional perspective. We close one acquisition, an $8 million property, on Yonge Street in Toronto located adjacent to buildings that are already owned. We closed on the previously announced $125 million floating rate unsecured debenture with a term of 3.25 years and all in rate of just under 3%. $20 million of these proceeds were used to repay two mortgages that carried an average rate of 5.4%. The remainder was used to pay down our credit facility. And we purchased 2.1 million units under our normal course issuer bid at a total cost of $61 million or $28.20 per unit.

From an operational perspective, our fundamentals remain stable and our in-place rents continue to rise. We saw a high level of leasing activity with 965,000 square feet of leasing taking effect in the quarter. Of this, 791,000 square feet or 68% of expiring space were renewals, and 174,000 square feet with new tenants. In aggregate, the leasing spreads on renewals were approximately $1.50 or 9% of our expiring rents, leasing of vacant space was completed at an average rent of $20.

With this leasing activity, our overall in-place rent increased by 0.5% to $17.82 from $17.74 in the prior quarter. We estimate our in-place rents will still be 9% below market with Calgary rents at 16% below market and downtown Toronto at 6%. Our overall in-place and committed occupancy was 94.3%, just down slightly from 94.6% in the prior quarter, and our comparative property NOI for the quarter was flat compared to prior year.

Turning to our balance sheet, our debt metrics remained stable during the quarter. Our IFRS value was substantially unchanged with $7.3 billion with an average cap rate remaining at 6.2%. Leverage went up slightly in the quarter to 47.6% from 47%, primarily as a result of financing our unit repurchases with our credit facility. Our weighted average interest rates remained at 4.2%, while the interest coverage ratio and debt-to-EBITDA remained strong at 2.9 times and 8 times respectively.

In early January of this year, we issued of $150 million of unsecured debentures at a rate of 4.1% and a six-year term. $88 million of these proceeds was used to pay down our credit facilities and $59 million was used to repay five mortgages that had an average rate of 6.1%.

On an annual basis, the underlying business performed well and we made significant improvements throughout the business. We generated growth in AFFO while reducing our overall debt level. We continue to take advantage of low-cost longer-term secured financing and we become an issuer of unsecured debt completing three issuances totaling $450 million. With this new source of capital, we have been able to increase our pool of unencumbered assets and strengthen our overall financial position. We continue to make good progress on enhancing our credit metrics which we believe will ultimately reflect in our lower cost of capital.

To summarize our 2013 annual results, our AFFO for the year was $2.47 per unit, a 2.5% increase over 2012. On a leverage neutral basis, AFFO would have been $2.51 per unit or 4% increase over 2012. Our leverage decreased to 47.6% at year-end from a high of 52% during 2012 and 50.5% at the beginning of Q4 last year. We completed $592 million of acquisitions at a 6.1% cap rate. In addition to being accretive, these acquisitions increased our presence and established urban markets of downtown Toronto and Calgary as outlined, and in growth markets of Saskatoon and Regina. Our year-end occupancy was 94.3%, which is 400 basis points above the national industry average.

We continue to nail the gap between in-place and market rents as the comparative property in-place rents increased 2.1% over prior year. We lowered our interest cost and pushed out debt maturities as we completed $250 million of new secured mortgage debt with an average term of nine years and interest rate of 4.1%, replacing maturing debt that carried a rate of 5.6%. We took advantage of new sources of capital with the issuance of $450 million of unsecured debt in 2013 and early 2014. We strengthened our balance sheet, we added $570 million to our pool of unencumbered assets bringing our total to $800 million. And we remain very liquid with $265 million of borrowing capacity available on our credit facility.

Looking ahead to 2014, our business will continue to generate solid results. As Ana mentioned, we have an active leasing pipeline with almost 2 million square feet of leasing completed or in completion and rent consistent with our estimates. On the debt side, we effectively dealt with our debt maturities for 2014. We had $100 million of mortgage debt maturing at a rate of 5.6% and have either refinanced or have plans to refinance these at an average rate of 4.1% which would result in annual savings of $1.5 million.

Our forecast for 2014 reflects modest growth as higher opening vacancy plus committed tenancies that would take occupancy later in the year will result in a lag in our NOI growth. Presently our forecast for 2014, which has AFFO growth of 2% and FFO growth of 1%, is in line with consensus estimates.

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

Michael J. Cooper

Thank you, Mario. If you have heard any background noise, we've got some e-mails that a few people had trouble hearing the call and they have joined the webcast, which I understand it sounded perfectly fine. Over the last few weeks, a small group of us have visited all of our offices across Canada to meet with all of our colleagues. From that trip my impression is that the economy is picking up so far in 2014. The second half of 2013 was surprisingly slow, generally in Canada, and based on what we are seeing, we expect that office job growth will pick up, which is good for our business, however job growth tends to lag.

Our strategy in this market is to focus on tenant retention, bringing in-place rents to market and [pursuing] (ph) value opportunities in our portfolio. A key to this strategy is investing capital in our buildings that improve the value and attractiveness to tenants as well as reduce costs. Not only is this expense recoverable from tenants but they have a better experience at our buildings. This will lead to improved tenant retention, quicker leasing of available space and higher rental rates.

We are committing about $40 million to improving our properties this year. We have been modernizing elevators, upgrading lobbies and common areas and creating better outdoor spaces for our tenants to enjoy, all of which increases tenant satisfaction and improved service. We continue to invest in energy saving initiatives across the portfolio. Designating capital to building improvements such as lighting and water fixture retrofit, boiler and machinery replacements reduce energy costs and make our buildings more competitive from a cost perspective.

Last year we received environmental certification on 74% of our buildings. Lower operating costs and a better indoor environment has also contributed to attracting and retaining tenants. Although we always focus on tenant retention and growing our occupancy, given the current market we are working closely with brokers and our tenants to make staying in our buildings their most attractive option. We have a team of 18 talented leasing professional across the country who stay in close contact with our tenants and tenants looking for space in our markets to keep our buildings occupied. We believe that we can generate 1% comparative property growth in 2014 but we will expect to increase in 2015 and 2016 as our leasing and capital improvements prove themselves out.

Another strategy to generate income is to increase the amount of retail space and to create unique opportunities for businesses in our buildings. We expect that attractive retail use will generate more income, more traffic and a better quality of life for our office tenants. We believe that we can create and reposition a 120,000 square feet of retail in the near to mid-term, which will add $0.02 of AFFO per share within the next couple of years.

We also plan to improve the overall asset quality of our portfolio by disposing the non-core assets comprising primarily special-purpose assets, peripherally located assets or those in declining locations with lower potential for long-term income growth. We have underwritten and identified these assets that we would like to sell to fund some of our investments and to recycle into assets where we can generate additional income, and we expect to start the selling process shortly.

Taken together, investing recoverable capital into our buildings to help retain or attract tenants will result in our assets being even better than they are now. By working closely with the brokers and aggressively pursuing renewals and new tenants, we will maintain and increase our net operating income, increasing the uses that generate activity in our buildings and creating more retail space to generate higher income and add to the value of our buildings while enhancing the experience of our tenants. The sale of non-core assets and investing in properties that are more strategic and provide higher long-term growth, will make our portfolio better.

We will continue to use the normal course issuer bid to buy back stock from time to time to add value to our business. We have made two available to us and continue to improve the business with cash flow and value. We look forward to answering your questions, and if you have any trouble getting through, please e-mail Ana, Mario or myself with any questions you have. Thank you, operator.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from Mario Saric of Scotia Bank. Please go ahead.

Mario Saric - Scotia Capital

Just real quickly on the sale of non-core assets that you are looking to start shortly, can you give us some color as to the magnitude of that potential program?

Michael J. Cooper

We're starting with identified assets that we want to pursue sale of, over $100 million under $200 million.

Mario Saric - Scotia Capital

Okay. And then on the retail repositioning I guess, you are providing a bit more detail this time around, can you just add a bit of color as to how occasions, the mix in terms of tenant going forward, I think last time you mentioned restaurants were becoming more popular, so any additional color on that front would be great?

Ana Radic

The general location is really along King Street, Bay Street, Richmond, our portfolio there, we have identified spaces on Bay Street where we can increase the ceiling heights and create some interesting restaurant spaces that we think could easily double the rent in those places. We have some lower level space along King Street as well that we can create separate entrances into and take what is essentially storage space and convert it to retail. Again, restaurants seem to be our most desirable that tenants and pay higher rental rates and there seems to be demand especially along streets like King Street and desirable type tenants, they pay higher rental rates and there seems to be demand, especially along streets like King Street and Bay Street.

Mario Saric - Scotia Capital

Okay. And then just maybe shifting gears to the leasing outlook, the federal government is your largest tenant, just north of [indiscernible] square feet, average lease term is about three years, can you just give us some color on the confidence level in terms of renewing those expiring leases and maybe perhaps specifically comment on some of the reports that have come out with respect to the CRA looking to cut 3,100 jobs and the potential impact that may now go into 5001 Yonge Street in Toronto?

Ana Radic

We stay very close to the federal government, public works specifically, in Ottawa for example and I was just in Ottawa a month ago and with the National Director of Real Estate for the capital region and they have renewed in our buildings in Ottawa up until now, when we were working with them on capital improvement programs to make sure that the buildings continue to meet their needs and meet the sustainability and occupancy requirements of the federal government. At 5001 Yonge, we haven't seen any decline in physical tenant occupancy and occupancy decline in the building and don't really have any line of sight into plans to reduce their presence in that building. It's a very well utilized building, it's on the subway line and it's very core to their location.

Mario Saric - Scotia Capital

Okay, great. Thank you.

Operator

Our next question is from Alex Avery of CIBC. Please go ahead.

Alex Avery - CIBC

Just in your outlook section, you mentioned empowering your operating group to be more aggressive in overall portfolio management. I was just hoping you could perhaps elaborate a little bit on what that actually translates into?

Ana Radic

Sure. We are very focused on internal growth and it relates to having our team work very closely leading the leasing initiative and working with property management to make sure our assets are as attractive as they can be to the market. We have an aggressive program of building models, we have an average tenant size of 11,000 square feet across the portfolio, and many tenant spaces leased out into 5,000 square feet type range, and we've had a lot of success in making sure that our spaces show well in building out spaces, they are very move-in ready, it shortens our downtime, we are looking at sustainability initiative, that's part of what this group does, working with property management to lower operating cost, looking at other sources of revenues, signage revenue, our parking revenue and other opportunities to add value.

Michael J. Cooper

In addition to that, we have created three portfolio that make up all of them the REIT and put portfolio managers responsible for everything to do with those buildings and they've had a lot of authority assigned to them to meet the goals. They are working very closely with operations leasing and we are trying to push down the authorities as close to the people who know the most in the whole organization. I think that we're trying to be much faster than our competition in being able to make things happen.

Alex Avery - CIBC

So when you say authority, I guess you are referring to the ability to negotiate rents and sign leases and that type of stuff?

Michael J. Cooper

Yes.

Alex Avery - CIBC

Okay. And in the outlook section you also said that concerns over slowing job growth and increased office supply are reasonable but at the same time your market rents on the portfolio that you own continues to go up in 2013. Is it just that the supply is still too far off for that to be showing up in numbers, is that where the disconnect is?

Michael J. Cooper

I don't know. I think that we've been very pleased with the leasing velocity. What do you think, Ana?

Ana Radic

Yes, again the average tenant size in our portfolio is a little bit smaller and we have well-located buildings and we offer good amenities and built-out spaces, so we have seeing healthy rental rates and especially in downtown Toronto there really hasn't been a softening and in Calgary rents have stayed strong as well.

Alex Avery - CIBC

Okay, so just I guess an abundance of caution in terms of saying that things are reasonable to be concerned, okay. And then just looking at your capital allocation for 2014, you mentioned the accretion that you're expecting from the normal course issuer bid activity and also I guess the fact that you delevered over the course of 2013, if you were to look at it today, how would you prioritize delevering versus normal course issuer bid and other I guess uses and proceeds of capital dispositions, are you going to be in that buyer of property or net buyer of stock or delevering during 2014?

Mario Barrafato

It's Mario. As far as allocating capital, I think our priority right now is investing in our buildings. We have a lot of rollover coming up, the landscape is competitive, so we're going to allocate more resources to our buildings. We will be selling buildings and allocating capital to markets and situations that provide a better growth opportunity. I think less so on the stock side. We'll support our stock but using capital, you don't get it back, and so we'll be slower on that but we'll be ready. And I think on the leverage side, we had a lot of improvements last year and we'll continue that. I don't see us decreasing leverage too much. So I think definitely we're tightening capital, putting it into our buildings and changing the profile of our portfolio.

Alex Avery - CIBC

Okay. And then you identified a number of sites where you have got excess land for development. Is that more of just a highlight of something that you are exploring or is that something we can expect some news on in the relatively near-term?

Ana Radic

It's something more than just exploratory. We've hired a Head of Commercial Development, Victor Settino, who has been with us for several months now and he is working with us to move things through site plan approval in various municipalities. We have sites in Vancouver, in Saskatoon, in Markham as well as in Kitchener and we have responded to an RFP for a 100,000 square foot requirement in Kitchener where we can build a leasehold building and we've been one of the four proponents that are going to move on to the next level of the process. So we hope to be market-ready with a few of the sites, of the other sites, by the second quarter of the year.

Alex Avery - CIBC

I'm so sorry, the Kitchener one, that's on land that you don't own currently?

Ana Radic

No, it's land that we do own actually, it's a parking lot.

Alex Avery - CIBC

Okay, that's great. Thank you.

Operator

Our next question is from Sam Damiani of TD Securities. Please go ahead.

Sam Damiani - TD Newcrest

I hope I'm asking a couple of questions here that have not been addressed, I didn't hear most of the call. In the outlook section, there was some talk about pursuing some strategic partnerships. If you haven't already addressed that on the call, I'd be curious about some detail on that.

Michael J. Cooper

We haven't addressed it, and I'm sorry that you weren't able to hear the call clearly. I don't know what happened and we apologize to anybody who's been inconvenienced by that. From what I understand, the webcast was clear and should be available to everybody. But nonetheless that question was not asked. Within our organization, we are looking to develop relationships where the REITs could benefit from their expertise in managing properties and earn higher returns. It's pretty preliminary but we have had discussions with a variety of parties on who might be interested in investing in Canada.

Sam Damiani - TD Newcrest

So essentially you are bringing in financial partners at the asset level and leveraging the operating platform for the REIT to be able to earn fees?

Michael J. Cooper

Yes.

Sam Damiani - TD Newcrest

Okay, that's great. And do you feel likely some progress on that initiative in the coming year or is it more of a longer-term initiative?

Michael J. Cooper

I think that developing these kinds of relationships take a long time. We've been a little bit surprised that Canada is not on a lot of people's radar screens. I think with the recent drop in the dollar, things are looking more attractive. So I don't – what I would say is, we've been trying to develop relationships, so this would be another way for us to make our business more profitable. We don't know how long anything might take?

Sam Damiani - TD Newcrest

Okay. And I believe it was your comments, Michael, where the phone did go out, you were talking about same property NOI growth of I think 1% for this year and then you sort of made some comments about 2015, 2016 which I didn't catch, I wondered if you could just…?

Michael J. Cooper

What I was saying with that, I think we're looking at 1% comparative property growth the way we are now, but a lot of the initiatives that we are taking on the capital side should drive NOI growth higher in subsequent years, so maybe 25 basis points in the second year, 50 basis points in the third year, that kind of thing.

Sam Damiani - TD Newcrest

Okay, thank you very much.

Operator

Our next question is from Matt Kornack of National Bank Financial. Please go ahead.

Matt Kornack - National Bank Financial

Just quickly on renewal spreads, I also got cut off, but in terms of it sounds like in a few markets there are some pretty sizable renewal spreads for leases. On aggregate, what was sort of the quarter and 2013 for renewal spreads across the portfolio?

Ana Radic

For the quarter, the spread on renewals was 17%, and for the year – we're just getting that number, sorry.

Michael J. Cooper

For the year, we had a $2 spread on $17 rent. So everybody has got calculators. So 12%, Matt.

Matt Kornack - National Bank Financial

Okay. So that's pretty positive and there also seems to be quite a spread going forward in terms of where market rents are, and it sounds like you're realizing maybe above those levels. So I mean is that the anticipation going forward? And also from a leasing perspective, what's your view in terms of if someone's vacating, I mean you're trying to keep them in or get new tenants and are you willing to lower rents or at this point you're just looking for the best possible replacement?

Ana Radic

Our goal is to keep the buildings as full as possible, occupancy is really key. So we are trying to shorten downtimes where we have vacant space by making sure it's improved and getting out well ahead of renewals, speaking to all our tenants, 12 to 18 months prior to expiry and making sure we can accommodate them in their space, or if not somewhere else in the portfolio. We've had a lot of experience doing that as well, moving tenants around our portfolio as well.

Matt Kornack - National Bank Financial

Great. And then just finally on Dundee Industrial, industrial seems to be on a pretty good run and in Canada the fundamentals are fairly strong, so I mean do you anticipate keeping that stake, I know you can't ultimately speak to it, but given that it is pretty solid investment at this point, is there any view on that?

Michael J. Cooper

There is no specific view but what I have said before is, it's not a strategic investment, it's how we became pure players in office group and that will be a source of capital to do other things in Dundee office, if an opportunity comes up, but there is no – it's great that Dundee International is trading well and moving along, so it's a good asset to have. And again we're just looking at all the different sources of capital and all the different uses of capital to drive earnings higher, and I think that's one tool that we have available.

Matt Kornack - National Bank Financial

Okay, great. Thanks guys.

Operator

(Operator Instructions) We have no further questions at this time.

Michael J. Cooper

I'd like to thank everybody for their participation on this call. We look forward to our next call. Cooper out.

Operator

Thank you. And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

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