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Annual Report 2016

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Consolidating Canada’s Automotive Dealership Properties 2 0 1 6 A n n u A l R e p o R t D R IV I N G U N I TH O L D E R V A L U E At IPO (July 2015) Year ended Dec. 31, 2016 Percentage Increase Number of properties Number of acres 26 88 32 108 Gross Leasable Area (square feet) 0.96 million1 1.27 million1 Number of automotive brands Number of markets % of GLA leased to third party automotive dealership tenants 26 4 0% 29 6 8.9% Net Operating Income (NOI) $25.9 million2 $29.5 million Adjusted Funds From Operations (AFFO) $15.5 million2 $17.6 million Market capitalization $180.5 million3 $233.8 million3 Total Assets $357.7 million $464.3 million (1) Includes ancillary retail (2) Annualized 12-month run rate at IPO (3) Includes Class B Units 23.1% 22.7% 32.3% 11.5% 50% – 13.9% 13.5% 29.5% 29.8% TM To Our Unitholders: We are pleased to present Automotive Properties REIT’s (APR) 2016 Annual Report, covering our first full calendar year as a publicly traded REIT. We have made strong progress in advancing our strategic objectives, elevating our profile and building unitholder value in the relatively short period of time since our July 2015 initial public offering (IPO). A big part of our success has been the favourable reception APR has received from both the investment community and the automotive dealership community. The investment community has recognized the stable and predictable growth of our cash flow, which is supported by long-term, triple-net leases, contractual annual rent increases and the accretive impact of our steady acquisition program. We are attracting the support of institutional investors and we have succeeded over the last year in gaining research coverage from five investment dealers. Clearly, sophisticated investors recognize our property portfolio as an institutional-quality asset class. This has enabled us to complete two follow-on, over-subscribed bought deal equity offerings since our IPO. The net proceeds from these offerings are funding the advancement of our accretive acquisition program. From the time of our IPO to 2016 year end, we completed six accretive acquisitions of automotive dealership properties for an aggregate purchase price of approximately $93 million. Through these acquisitions, APR has expanded its presence in the Greater Toronto Area and established a presence in new major Canadian markets, including Edmonton and Montreal. Further, APR has augmented its automotive brand diversification by adding Jaguar, Land Rover and Mercedes-Benz dealership properties to its portfolio. APR’s automotive dealership property tenants now represent 29 global brands, ranging from the mass market segment to ultra-luxury. The acquisitions completed to date effectively demonstrate our ability to execute on the three key elements of our acquisition strategy. First, we have completed acquisitions with major automotive dealer groups, whereby they acquire the dealership business and we concurrently acquire the dealership property. Second, our acquisitions of Go Auto’s Porsche Centre and Jaguar Land Rover and Go Mazda dealership properties in Edmonton, and the Pfaff Audi dealership property in Vaughan, Ontario, part of the Greater Toronto Area, are consistent with our objective to diversify our tenant base by partnering with large automotive dealership groups. Finally, our acquisitions of the Audi Barrie and Barrie Volkswagen properties, and pending acquisition of Heritage Honda in Calgary, demonstrate the execution of the third pillar of our acquisition strategy, which is the opportunity to capitalize on our right of first offer to acquire REIT- suitable properties from Dilawri’s development and acquisition pipeline. Acquisitions have contributed significant growth for the REIT. As showcased on the inside front cover of this report, for the 12 months ended December 31, 2016, Net Operating Income (NOI) and Adjusted Funds From Operations (AFFO) were up 13.9% and 13.5%, respectively, compared to the NOI and AFFO forecasted for the 12-month period ended June 30, 2016 at the time of our IPO. The REIT’s total assets were $464.3 million as at December 31, 2016, compared to $357.7 million at the time of our IPO. These figures do not include the impact of our year-to-date 2017 property acquisitions, including Go Mazda, Barrie Volkswagen and Heritage Honda. TM Our strategy to own and invest in automotive dealership properties is supported by compelling industry fundamentals. The Canadian automotive retail industry is large and has a history of long-term growth. The industry generated record sales of approximately $134 billion in 2016, representing the largest component of retail products and merchandise sales in Canada. Over the last 20 years, automotive retail sales grew at a compound annual rate of 4.5%. This long-term industry growth is one of the key factors that makes high-quality automotive dealership businesses an attractive tenant profile. The Canadian automotive retail industry is also highly fragmented and consolidation is gaining momentum. We estimate that the top 10 automotive dealership groups in Canada comprise in aggregate less than 10% of the overall automotive dealership market and that there are more than 3,100 automotive dealerships outside of this group of large multi-location operators. Industry consolidation is being driven by the increasing sophistication of the automotive dealership business and growing capital requirements. Larger, multi-location operators achieve clear benefits of scale compared to individual dealership owners. We believe that industry consolidation will provide ample opportunities for us to partner with automotive dealership groups by acquiring the real estate associated with their businesses. We continue to raise awareness in the automotive dealership community of our monetization solution, providing owners of dealership businesses with the opportunity to generate liquidity from their real estate for succession planning, directly investing in upgrading their dealerships or facilitating acquisitions. We’re Canada’s only publicly traded entity pursuing this strategy and it’s proven to be a compelling offering. Our dealer proposition is being well received among dealership operators and our network of opportunities is continuing to expand. Looking ahead, we are uniquely positioned to generate further asset expansion. Coming out of our February 2017 offering, APR has a strong balance sheet with the capacity to accretively add attractive new dealership properties to our portfolio. We’re targeting prime automotive dealership properties with cash flow stability in strategic markets across Canada that will enhance the REIT’s brand, tenant and geographic diversification. We expect to steadily add attractive new properties to our portfolio, while growing AFFO per unit and maintaining conservative debt ratios. On behalf of the Board of Trustees and management of APR, thank you for your confidence and support. We look forward to reporting to you on the continued advancement of our value-enhancing growth strategy. Sincerely, Kapil Dilawri Chair of the Board Milton Lamb President and Chief Executive Officer Automotive Properties Real Estate Investment Trust Management’s Discussion and Analysis December 31, 2016 2016 MD&A Table of Contents SECTION 1 – GENERAL INFORMATION AND CAUTIONARY STATEMENTS ........................................ 4 Basis of Presentation ..................................................................................................................... 4 The REIT ....................................................................................................................................... 4 Forward-Looking Statements ......................................................................................................... 6 Non-IFRS Measures ...................................................................................................................... 7 SECTION 2 – OVERVIEW, STRATEGY AND OBJECTIVES ..................................................................... 9 Overview ........................................................................................................................................ 9 Growth Strategies ........................................................................................................................ 10 SECTION 3 – FINANCIAL OVERVIEW AND KEY PERFORMANCE INDICATORS ................................ 11 Key Performance Indicators ......................................................................................................... 12 Portfolio ........................................................................................................................................ 12 Operating Results ........................................................................................................................ 12 Balance Sheet Metrics ................................................................................................................. 13 SECTION 4 - PROPERTY PORTFOLIO ................................................................................................... 13 Property Portfolio Summary ......................................................................................................... 13 Portfolio Overview ........................................................................................................................ 13 Profile of the Dilawri Leases ......................................................................................................... 14 Property Use and Brand Diversification ........................................................................................ 15 Description of the REIT’s Key Tenant .......................................................................................... 17 Dilawri Additional and Non-ASPE Measures ................................................................................ 17 SECTION 5 – RESULTS OF OPERATIONS ............................................................................................ 18 Results of Operations - For the three and twelve months ended December 31, 2016 .................. 18 Net Income (Loss) and Comprehensive Income (Loss) ................................................................ 18 Property Revenue and Property Costs ......................................................................................... 19 General and Administrative Expenses ......................................................................................... 19 Interest Expense and Other Financing Charges ........................................................................... 20 Changes in Fair Values of Investment Properties ........................................................................ 20 Changes in Fair Values of Class B LP Units and Interest Rate Swaps ........................................ 21 FFO and AFFO ............................................................................................................................ 21 Reconciliation of NOI, Cash NOI, FFO and AFFO ....................................................................... 21 Cash Flow from Operating Activities Compared to AFFO ............................................................ 23 SECTION 6 – LIQUIDITY AND CAPITAL RESOURCES .......................................................................... 23 Capital Structure .......................................................................................................................... 23 Debt Financing ............................................................................................................................. 25 Unitholders’ Equity (including Class B LP Units) .......................................................................... 26 Financing Metrics and Debt Covenants ........................................................................................ 28 SECTION 7 – QUARTERLY RESULTS OF OPERATIONS ...................................................................... 30 SECTION 8 – RELATED PARTY TRANSACTIONS ................................................................................. 31 SECTION 9 − OUTLOOK ......................................................................................................................... 32 2 2016 MD&A SECTION 10 – OTHER DISCLOSURES .................................................................................................. 33 Commitments and Contingencies ................................................................................................ 33 Disclosure Controls and Internal Controls over Financial Reporting ............................................. 33 SECTION 11 – RISKS & UNCERTAINTIES, CRITICAL JUDGEMENTS & ESTIMATES ......................... 34 APPENDIX ............................................................................................................................................... 48 Property List as at December 31, 2016 ........................................................................................ 48 3 2016 MD&A SECTION 1 – GENERAL INFORMATION AND CAUTIONARY STATEMENTS Basis of Presentation The following Management’s Discussion and Analysis (“MD&A”) of the financial position and results of operations of Automotive Properties Real Estate Investment Trust (the “REIT”) is intended to provide readers with an assessment of the performance of the REIT for the year ended December 31, 2016 and for the period ended December 31, 2015. The REIT was formed on June 1, 2015 and had no operating activity until July 22, 2015, the date of completion of its initial public offering (“IPO”). Prior thereto, the REIT generated no revenue and incurred no expenses. As a result, the comparative information contained herein reflect the REIT’s operating results from July 22, 2015 to December 31, 2015 and therefore the year end results for 2016 and 2015 are not comparable. Consequently, the comparative analysis of the results of operations will primarily focus on the three month periods ended December 31, 2016 (“Q4 2016”) and 2015 (“Q4 2015”). This MD&A also outlines the REIT’s capital structure, operating strategies and business outlook. All dollar amounts in this MD&A are presented in thousands of Canadian dollars, except unit and per unit amounts, unless otherwise noted. This MD&A should be read in conjunction with the audited consolidated financial statements of the REIT and accompanying notes for the year ended December 31, 2016 and for the period ended December 31, 2015. Further information about the REIT can be found in the REIT’s annual information form dated March 20, 2017 (the “AIF”). The AIF, along with other continuous disclosure documents required by the Canadian securities regulators, can be found on the SEDAR website at www.sedar.com and on the REIT’s website at www.automotivepropertiesreit.ca. The REIT The REIT was formed primarily to own income producing automotive dealership properties located in Canada. In connection with the completion of the REIT’s IPO, the REIT indirectly acquired a portfolio of 26 commercial properties from certain members of the Dilawri Group (as defined below) (the “Initial Properties”). The REIT currently owns a portfolio of 32 commercial properties, including the Initial Properties, located in Ontario, Saskatchewan, Alberta, British Columbia and Québec, totaling approximately 1.3 million square feet of gross leasable area (“GLA”). 893353 Alberta Inc. (“Dilawri”) is a privately held corporation, which, together with certain of its affiliates, held an approximate 45% effective interest in the REIT as at December 31, 2016 (38% as of the date hereof), through the ownership, direction or control of all of the Class B limited partnership units (“Class B LP Units”) of Automotive Properties Limited Partnership, the REIT’s operating subsidiary (the “Partnership”). The Class B LP Units are economically equivalent to REIT Units (as defined below), and exchangeable generally on a one-for-one basis. Dilawri and its affiliates, other than its shareholders and controlling persons, are referred to herein as the “Dilawri Group”. Upon closing of the 2016 Equity Offering (as defined below), Dilawri’s effective interest in the REIT was reduced from approximately 55% to approximately 45% and was further reduced to approximately 38% upon closing of the 2017 Equity Offering (as defined below). As at December 31, 2016, the total number of the REIT Units and Class B LP Units was 11,961,000 and 9,933,253, respectively for a total of 21,894,253 Units (16,216,000, 9,933,253 and for a total of 26,149,253, respectively, as of the date hereof). Out of the 32 properties, 28 are exclusively occupied by the Dilawri Group for use as automotive dealerships or, in one case, an automotive repair facility, while two of the other four properties are jointly occupied by the Dilawri Group (for use as automotive dealerships) and one or more third parties (for use as automotive dealerships or complementary uses, including restaurants), and two are exclusively occupied by third party tenants for use as automotive dealerships. At the time of the acquisition of each applicable property, the REIT entered into a lease with the applicable member of the Dilawri Group (collectively, the “Dilawri Tenants”) in respect of each of the 30 investment properties occupied by the Dilawri Group, and either entered into a new lease or assumed the existing lease in respect of the two properties occupied exclusively by third parties. The first acquisition of a dealership property undertaken by the REIT with the Dilawri Group pursuant to the Strategic Alliance Agreement was completed on December 23, 2015. The REIT acquired the real estate underlying Toyota Woodland (“Toyota Woodland Property”), a 49,737 square foot automotive dealership property located at 1000 – 1009 Woodland Avenue in Montréal, Québec, from a third party for approximately $7,200. On closing of the transaction, a Dilawri Tenant entered into a 16-year triple-net lease with the REIT. 4 2016 MD&A The REIT’s first acquisition of a dealership property with a third-party dealer as a tenant was completed on December 30, 2015. The REIT acquired the real estate underlying the Porsche Centre Edmonton and Jaguar Land Rover Edmonton (“Porsche JLR Edmonton Property”), a 44,779 square foot automotive dealership property occupied by two third-party dealerships and located at 17007 111th Avenue N.W. in Edmonton, Alberta, for approximately $23,000. On closing of the transaction, the third-party tenants entered into a 17-year triple-net lease with the REIT. On January 14, 2016, the REIT acquired the real estate underlying Audi Barrie (“Audi Barrie Property”) from the Dilawri Group, a newly constructed 24,982 square foot automotive dealership property located at 2484 Doral Drive in Innisfil, near Barrie, Ontario, for approximately $11,130. Audi Barrie Property was one of three development properties owned by the Dilawri Group at the time of the IPO and was acquired pursuant to the REIT’s right of first offer to acquire any REIT-suitable properties from the Dilawri Group pursuant to the Strategic Alliance Agreement. On closing of the transaction, the applicable Dilawri Tenant entered into a 19-year triple-net lease with the REIT. On September 19, 2016, the REIT issued an aggregate of 3,841,000 trust units (“REIT Units”) at a price of $10.50 per REIT Unit in connection with a public offering of REIT Units for gross proceeds of $40,330, which included the exercise in full of the over-allotment option granted to the underwriters, whereby an additional 501,000 REIT Units were issued at a price of $10.50 per REIT Unit (the “2016 Equity Offering”). Issuance costs of $2,124 were netted against the gross proceeds. On September 20, 2016, the REIT acquired the real estate underlying Pfaff Audi (“Pfaff Audi Property”) from a third- party vendor for $17,150. Pfaff Audi Property is a 68,874 square foot automotive dealership property located at 9088 Jane Street, in Vaughan, Ontario. The REIT assumed the current triple-net lease on the property, which had a remaining term of approximately 4.4 years as at December 31, 2016, following which there are two five-year renewal options available to the tenant. On December 8, 2016, the REIT acquired the automotive dealership property located at 1905 and 1917 Boulevard Sir Wilfrid Laurier in St. Bruno, Quebec (“St. Bruno Audi & VW Property”) for approximately $14,280. The St. Bruno Audi & VW Property includes a Volkswagen and an Audi dealership and has a combined total gross leasable area of 62,705 square feet. The St. Bruno Audi & VW Property was acquired from an unrelated third-party pursuant to the Strategic Alliance Agreement concurrently with the acquisition by a member of the Dilawri Group of the automotive dealership operated at the St. Bruno Audi & VW Property. The applicable Dilawri Tenant entered into a 18-year triple-net lease with the REIT on closing of the transaction. On December 22, 2016, the REIT acquired the real estate underlying the automotive dealership property located at 4525 Boulevard Saint-Jean in suburban Montreal, Quebec (“MB West Island Property”) for approximately $20,250. The MB West Island Property has a total gross leasable area of 60,850 square feet. Pursuant to the Strategic Alliance Agreement, the MB West Island Property was offered for purchase to the REIT by the Dilawri Group and on closing of the transaction, the applicable Dilawri Tenant entered into a 17-year triple-net lease with the REIT. As at December 31, 2016, the Dilawri Group is the REIT’s most significant tenant and is expected to continue to be for the foreseeable future, with members of the Dilawri Group occupying 91.1% of the REIT’s GLA (including subleases to third parties). The remaining 8.9% of the REIT’s GLA is occupied by the Porsche JLR Edmonton Property and the Pfaff Audi Property. The remaining terms of the leases with the Dilawri Tenants (the “Dilawri Leases”) range from 9.5 to 18.0 years. Overall, the REIT’s portfolio has a weighted average lease term of approximately 13.6 years, including the aforementioned acquisitions closed subsequent to the IPO in 2015 and 2016. On February 7, 2017, the REIT issued an aggregate of 4,255,000 REIT Units at a price of $10.85 per REIT Unit in connection with a public offering of REIT Units for gross proceeds of $46,167, which included the exercise in full of the over-allotment option granted to the underwriters, whereby an additional 555,000 REIT Units were issued at a price of $10.85 per REIT Unit (the “2017 Equity Offering”). Issuance costs of $2,248 were netted against the gross proceeds. On March 17, 2017, the REIT announced that it has entered into an agreement to purchase the real estate underlying the Go Mazda dealership (the “Go Mazda Property”) from the same third party vendor from which the REIT acquired the Porsche JLR Edmonton Property in December 2015. The Go Mazda Property is a 17,150 square foot, full-service automotive dealership property located on 2.27 acres in Edmonton, Alberta. The purchase price for the acquisition will be approximately $8,000 and will be funded using cash on hand. On closing of the acquisition, the third party tenant will enter into a 17-year triple-net lease with the REIT which is expected to include an annual contractual rent 5 2016 MD&A increase of 1% following the initial year of the lease. The acquisition is subject to customary closing conditions and is expected to be completed by the end of March 2017. The REIT announced monthly cash distributions of $0.067 per REIT Unit, resulting in total distributions declared and paid of $4,401 for Q4 2016 (Q4 2015 - $3,629). For the year ended December 31, 2016, the REIT declared distributions of $15,544 and paid distributions of $15,287. The REIT is externally administered by Dilawri pursuant to the Administration Agreement. The Strategic Alliance Agreement with Dilawri allows the REIT to benefit from a preferential relationship with Dilawri as Dilawri develops and acquires automotive dealerships in the future. These agreements are described under “Related Party Transactions” in this MD&A. This MD&A is dated March 20, 2017. Forward-Looking Statements Certain statements contained in this MD&A constitute forward-looking information within the meaning of securities laws. Forward-looking information may relate to the REIT’s future outlook and anticipated events or results and may include statements regarding the financial position, business strategy, budgets, litigation, projected costs, capital expenditures, financial results, taxes, plans and objectives of or involving the REIT. Particularly, statements regarding future results, performance, achievements, prospects or opportunities for the REIT or the real estate or automotive dealership industry are forward-looking statements. In some cases, forward-looking information can be identified by terms such as “may”, “might”, “will”, “could”, “should”, “would”, “occur”, “expect”, “plan”, “anticipate”, “believe”, “intend”, “estimate”, “predict”, “potential”, “continue”, “likely”, “schedule”, “objectives”, or the negative thereof or other similar expressions concerning matters that are not historical facts. Some of the specific forward-looking statements in this MD&A include, but are not limited to, statements with respect to the following:             the REIT’s relationship with the Dilawri Group, Dilawri’s shareholders and certain other related persons and entities (collectively, the “Dilawri Organization”), including in respect of (i) the Dilawri Organization’s retained interest in the REIT and its current intention with respect thereto, (ii) the services to be provided to the REIT (whether directly or indirectly) by Dilawri pursuant to the Administration Agreement, (iii) expected transactions to be entered into between Dilawri and the REIT (including the REIT’s acquisition of certain interests in properties held by the Dilawri Group), (iv) substantial completion of the Development Properties (as defined below) and occupancy and leasing arrangements relating thereto, and (v) the Strategic Alliance Agreement; the REIT’s intention with respect to, and ability to execute, its external and internal growth strategies; the REIT representing a unique alternative for automotive dealership operators considering a sale or recapitalization of their business; the REIT’s acquisition of the Go Mazda Property, including the expected accretion to the REIT’s AFFO (as defined below), timing of the completion; the REIT’s capital expenditure requirements and capital expenditures to be made by the REIT and the Dilawri Group; the REIT’s distribution policy and the distributions to be paid to Unitholders (as defined below); the REIT’s debt strategy; the REIT’s access to available sources of debt and/or equity financing; the expected tax treatment of the REIT and its distributions to Unitholders; the REIT’s ability to meet its stated objectives; the REIT’s ability to expand its asset base and make accretive acquisitions; and the ability of the REIT to qualify as a “Mutual Fund Trust” as defined in the Income Tax Act (Canada), and as a “Real Estate Investment Trust”, as defined in the SIFT Rules (as defined below). 6 2016 MD&A The REIT has based these forward-looking statements on factors and assumptions about future events and financial trends that it believes may affect its financial condition, results of operations, business strategy and financial needs, including that the Canadian economy will remain stable over the next 12 months, that inflation will remain relatively low, that interest rates will remain stable, that tax laws remain unchanged, that conditions within the automotive dealership real estate industry and the automotive dealership industry generally, including competition for acquisitions, will be consistent with the current climate, that the Canadian capital markets will provide the REIT with access to equity and/or debt at reasonable rates when required and that the Dilawri Organization will continue its involvement with the REIT. Although the forward-looking statements contained in this MD&A are based upon assumptions that management believes are reasonable based on information currently available to management, there can be no assurance that actual results will be consistent with these forward-looking statements. Forward-looking statements necessarily involve known and unknown risks and uncertainties, many of which are beyond the REIT’s control, that may cause the REIT’s or the industry’s actual results, performance, achievements, prospects and opportunities in future periods to differ materially from those expressed or implied by such forward-looking statements. These risks and uncertainties include, among other things, the factors contained in the REIT’s filings with securities regulators, including the factors discussed under “Risks & Uncertainties, Critical Judgements & Estimates” in this MD&A. When relying on forward-looking statements to make decisions, the REIT cautions readers not to place undue reliance on these statements, as forward-looking statements involve significant risks and uncertainties and should not be read as guarantees of future performance or results and will not necessarily be accurate indications of whether or not the times at or by which such performance or results will be achieved. The forward-looking statements made in this MD&A relate only to events or information as of the date of this MD&A. Except as required by law, the REIT undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. All information regarding Dilawri contained in this MD&A (the “Dilawri Information”) has been provided by, and is solely the responsibility of, Dilawri and not of the REIT, the REIT’s management nor the trustees of the REIT (the “Trustees”). Although the REIT has no reason to believe that the Dilawri Information contains a misrepresentation, Dilawri is a private company that is independent of, and operates entirely independently from, the REIT and, consequently, neither the REIT, its management nor its Trustees (in their capacities as such) have been involved in the preparation of the Dilawri Information, nor has the REIT approved such information. Readers are cautioned, therefore, not to place undue reliance on the Dilawri Information. Non-IFRS Measures The REIT prepares its financial statements according to International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). This MD&A contains certain financial measures which are not defined under IFRS and may not be comparable to similar measures presented by other real estate investment trusts or enterprises. Funds from operations (“FFO”), adjusted funds from operations (“AFFO”), FFO payout ratio, AFFO payout ratio, net operating income (“NOI”), cash net operating income (“Cash NOI”), and earnings before income tax, depreciation, and amortization (“EBITDA”) are key measures of performance used by real estate businesses. Gross book value (“GBV”), indebtedness (“Indebtedness”), interest coverage ratio (“Interest Coverage Ratio”) and tangible net worth are measures of financial position defined by agreements to which the REIT is a party. These measures, as well as any associated “per Unit” amounts are not defined by IFRS and do not have standardized meanings prescribed by IFRS, and therefore should not be construed as alternatives to net income or cash flow from operating activities calculated in accordance with IFRS. The REIT believes that AFFO is an important measure of economic performance and is indicative of the REIT’s ability to pay distributions, while FFO, NOI, Cash NOI, and EBITDA are important measures of operating performance of real estate businesses and properties. The IFRS measurement most directly comparable to FFO, AFFO, NOI, Cash NOI, and EBITDA is net income. “FFO” is defined consistently with the definition presented in the White Paper on funds from operations prepared by the Real Property Association of Canada. FFO is calculated as net income in accordance with IFRS, adjusted by removing the impact of: (i) fair value adjustments on investment properties; (ii) other fair value adjustments including fair value adjustments on redeemable or exchangeable units; (iii) gains and losses on the sale of investment 7 2016 MD&A properties; (iv) amortization of tenant incentives; and (v) distributions on redeemable or exchangeable units treated as interest expense. “FFO payout ratio” is calculated as distributions per unit divided by the FFO per unit diluted. “AFFO” is defined as FFO subject to certain adjustments, to (a) remove the impact of: (i) amortization of fair value mark-to-market adjustments on debt and amortization of financing costs and indemnity payable in respect of the third party tenant portfolio sublease structure; (ii) adjusting for any differences resulting from recognizing property rental revenues or expenses (including ground lease rental payments) on a straight-line basis; (iii) depreciation; and (iv) non-cash compensation incentive plans; and (b) deduct a reserve for normalized maintenance capital expenditures, tenant inducements and leasing commissions. Other adjustments may be made to AFFO as determined by the Trustees in their sole discretion. “AFFO payout ratio” is calculated as distributions per unit divided by the AFFO per unit diluted. “NOI” is defined as rental revenue from properties less property operating expenses as presented in the statement of income prepared in accordance with IFRS. Accordingly, NOI excludes certain expenses included in the determination of net income such as general and administrative expenses, fair value adjustments and amortization. “Cash NOI” is defined as NOI prior to the effects of straight-line adjustments. FFO, AFFO, FFO payout ratio, AFFO payout ratio, NOI and Cash NOI should not be construed as alternatives to net income or cash flow from operating activities determined in accordance with IFRS as indicators of the REIT’s performance. The REIT’s method of calculating FFO, AFFO, FFO payout ratio, AFFO payout ratio, NOI and Cash NOI may differ from other issuers’ methods and, accordingly, may not be comparable to measures used by other issuers. See “Results of Operations” in this MD&A for a reconciliation of these measures to net income. “EBITDA” is defined as earnings before, income tax, depreciation, and amortization. “GBV” means, at any time, the greater of: (A) the book value of the assets of the REIT and its consolidated subsidiaries, as shown on its then most recent consolidated balance sheet, less the amount of any receivable reflecting interest rate subsidies on any debt assumed by the REIT; and (B) the historical cost of the investment properties, plus (i) the carrying value of cash and cash equivalents, (ii) the carrying value of mortgages receivable; and (iii) the historical cost of other assets and investments used in operations. “Debt to GBV” means the ratio of Indebtedness to GBV at a particular time. “Indebtedness” of the REIT means (without duplication) (i) any obligation for borrowed money (including, for greater certainty, the full principal amount of convertible debt, notwithstanding its presentation under IFRS), (ii) any obligation incurred in connection with the acquisition of property, assets or businesses, (iii) any obligation issued or assumed as the deferred purchase price of property, (iv) any capital lease obligation (as defined in the Declaration of Trust), and (v) any obligations of the type referred to in clauses (i) through (iv) of another entity, the payment of which the REIT has guaranteed or for which the REIT is responsible or liable; provided that, (A) for the purpose of clauses (i) through (v) an obligation will constitute Indebtedness of the REIT only to the extent that it would appear as a liability on the consolidated balance sheet of the REIT in accordance with IFRS, (B) obligations referred to in clauses (i) through (iii) exclude trade accounts payable, distributions payable to Unitholders or holders of other securities excluded from the definition of Indebtedness pursuant to clause (C) below, accrued liabilities arising in the ordinary course of business which are not overdue or which are being contested in good faith, deferred revenues, intangible liabilities, deferred income taxes, deferred financing costs, tenant deposits and indebtedness with respect to the unpaid balance of installment receipts where such indebtedness has a term not in excess of 12 months, and (D) REIT Units and Class B LP Units, exchangeable securities and other equity securities that constitute debt under IFRS do not constitute Indebtedness. “Net Asset Value” means total assets less Indebtedness, accounts payable, accrued liabilities, credit facilities and interest rate swaps. The net balance is then divided by the total of Unitholders’ equity plus the market value of Class B LP Units at a particular time. 8 2016 MD&A “Debt to GBV” means the ratio of Indebtedness to GBV at a particular time. “Interest Coverage Ratio” means the ratio of Cash NOI less general and administrative expenses divided by the total of the interest expense and other financing charges SECTION 2 – OVERVIEW, STRATEGY AND OBJECTIVES Overview The REIT is an unincorporated, open-ended real estate investment trust, offering exposure to a unique real estate asset class. At December 31, 2016, the REIT’s portfolio consisted of 32 income producing automotive dealership properties located in Ontario, Saskatchewan, Alberta, British Columbia and Québec. The properties encompass approximately 1.3 million square feet of GLA, and are primarily occupied by retail automotive dealerships, which also include service centres and, in certain instances, ancillary businesses. The REIT’s automotive dealership business tenants represent the largest, most recognizable global automotive brands ranging from mass market vehicle brands through to the ultra-luxury segment, with a focus on European and Asian brands. The REIT Units are listed on the Toronto Stock Exchange under the symbol “APR.UN”. Canada’s automotive retail industry is characterized by strong industry fundamentals. According to Statistics Canada, the automotive retail industry represented the largest component of total retail sales and merchandise in Canada, equating to approximately 6.7% of gross domestic product in 2016. Industry sales totaled a record $134 billion in 2016 (up 4.6% from 2015), representing approximately 25% of Canada’s overall retail sales of products and merchandise. Over the last 20 years, retail automotive sales grew at a compound annual rate of 4.5%. The table below contains new automobile sales by units in Canada for the 2016 and 2015 calendar years: Alberta British Columbia and the Territories Manitoba New Brunswick Newfoundland and Labrador Nova Scotia Ontario Prince Edward Island Québec Saskatchewan Total Canada 2016 223,651 221,772 57,428 44,984 33,687 54,451 821,762 8,768 465,143 52,099 1,983,745 12 Months Ended December 31 YoY unit increase/ (decrease) YoY % increase/ (decrease) (18,325) 10,513 (558) 249 (1,332) (606) 43,046 792 13,481 (3,032) 44,228 -7.6% 5.0% -1.0% 0.6% -3.8% -1.1% 5.5% 9.9% 3.0% -5.5% 2.3% 2015 241,976 211,259 57,986 44,735 35,019 55,057 778,716 7,976 451,662 55,131 1,939,517 (Source: Statistics Canada, last modified at February 14, 2017) The REIT’s most significant tenant is the Dilawri Group, one of the largest automotive dealership groups in Canada. Building on a strong track record of development and active management, revenues of the Dilawri Group were approximately $2.4 billion over the 12 month period ended December 31, 2016, compared to approximately $2.0 billion in 2015. The Dilawri Leases are structured as triple-net leases under which the tenant is responsible for all costs relating to repair and maintenance, realty taxes, property insurance, utilities and all non-structural capital improvements. Dilawri indemnifies its individual dealerships’ rental obligations. 9 2016 MD&A The Dilawri Leases include a fixed rent escalator of 1.5% per annum. The Porsche JLR Edmonton Property lease includes an annual rent escalator of 1.0% after the end of the fifth year of the 17-year term. On September 20, 2016, the REIT acquired the Pfaff Audi Property and assumed the current triple-net lease, which had a remaining term of approximately 4.4 years as at December 31, 2016, following which there are two five-year renewal options available to the tenant. The REIT’s overall portfolio has a weighted average lease term of approximately 13.6 years. The REIT’s portfolio of best-in-class dealership properties, strong industry fundamentals and an attractive leasing profile support the stability of Unitholder distributions. The REIT is currently paying monthly cash distributions to holders of REIT Units and Class B LP Units (collectively, “Unitholders”) of $0.067 per Unit, representing $0.804 per Unit on an annualized basis. The primary strategy of the REIT is to create long-term value for Unitholders by generating sustainable tax-efficient cash flow and capital appreciation, while maintaining a strong balance sheet and practicing prudent financial management. The objectives of the REIT are to:  provide Unitholders with stable, predictable and growing monthly cash distributions on a tax-efficient basis;  enhance the value of the REIT’s assets in order to maximize long-term Unitholder value; and  expand the REIT’s asset base while also increasing the REIT’s AFFO per Unit, including through accretive acquisitions. Management intends to grow the value of the REIT’s real estate portfolio while also increasing AFFO per Unit through accretive acquisitions and steady growth in rental rates. The REIT expects to be well-positioned to capitalize on acquisition opportunities presented by third parties due to the fragmented nature of the automotive dealership market. The REIT also expects to leverage its strategic arrangement with the Dilawri Group to acquire properties from the Dilawri Group that meet the REIT’s investment criteria. Management intends to focus on obtaining new properties which have the potential to contribute to the REIT’s ability to generate stable, predictable and growing monthly cash distributions to Unitholders. Growth Strategies The REIT has a well-defined, long-term growth strategy which includes both external and internal elements. External Growth Accretive Acquisitions of Third Party Properties Management believes that the REIT is well-positioned to capitalize on opportunities for accretive acquisitions from third party vendors due to certain features of the Canadian automotive dealership industry:  Fragmented ownership – Management estimates that the top 10 automotive dealership groups in Canada own less than 10% of the approximately 3,500 automotive dealerships in Canada;  Increasing momentum of consolidation – The proportion of automotive dealerships in Canada that are owned by operators with fewer than five locations has declined from 71% in 2009 to 65% in 2013 (Source: DesRosiers Automotive Consultants). The REIT is uniquely positioned to work with the large dealership groups in unlocking the value of the underlying real estate as they accumulate dealerships.  Capital redeployment needs – According to PricewaterhouseCoopers LLP’s 2012 Automotive Trendsetter Report, 91% of dealers surveyed said that they own the properties underlying their dealerships. Monetizing the underlying real estate would allow dealers to retain control of their dealership while redeploying capital into other areas of their business; and  Succession planning issues – Management believes that for the majority of independent dealers, the dealership and its underlying real estate together represent the single largest proportion of their wealth. Selling the underlying real estate to the REIT can help such dealers address succession planning issues, particularly if the transaction can be effected on a tax efficient basis. This is especially important given the aging demographics of the Canadian dealership owners. 10 2016 MD&A Management believes that the REIT represents a unique alternative for automotive dealership operators considering a sale or recapitalization of their business, as the REIT is at present the only publicly listed vehicle in Canada exclusively focused on owing and acquiring automotive dealership properties. The REIT seeks to acquire properties that meet its specific investment criteria. Acquisition opportunities are evaluated based on a number of factors, including valuation, expected financial performance, stability of cash flows, physical features, existing leases, functionality of design, geographic market, location, automotive brand representation and opportunity for future value enhancement. As described above under “The REIT”, in line with this strategy, the REIT acquired the Porsche JLR Edmonton Property on December 30, 2015 and Pfaff Audi Property on September 20, 2016 from third party vendors. Right of First Offer to Acquire REIT-Suitable Properties from the Dilawri Group Management believes that its relationship with the Dilawri Group provides the REIT with additional opportunities to add quality automotive dealership properties to its portfolio in an accretive manner. Pursuant to the Strategic Alliance Agreement, which is further described under ”Related Party Transactions”, the REIT has the right of first offer on properties that are suitable for use as an automotive dealership that are acquired, developed, redeveloped, refurbished, repositioned or held for sale by the Dilawri Group. As described above under “The REIT”, in line with this strategy, subsequent to the IPO, the REIT acquired the Toyota Woodland Property, the Audi Barrie Property, the St. Bruno Audi & VW Property and the MB West Island Property under the Strategic Alliance Agreement. As previously disclosed by the REIT, the Dilawri Group has two properties under development which represent an aggregate of approximately 75,000 square feet of GLA, consisting of a Volkswagen dealership property located in Barrie, Ontario and a Honda dealership property located in Calgary, Alberta (the “Development Properties”). Construction in respect of the Development Properties was completed in January 2017. The REIT has begun discussions with the Dilawri Group to acquire the Development Properties. If acquired by the REIT, these properties are expected to be 100% leased to the Dilawri Group. Internal Growth Management believes that the REIT is well-positioned to achieve organic increases in cash flow and, as a result, increase the values of its properties over time. These increases are expected to come from the following sources:  Each of the Dilawri Leases contains annual contractual basic rent escalators in the amount of 1.5% per annum. These leases are structured as triple-net leases under which the tenant is responsible for all costs relating to repair and maintenance, realty taxes, property insurance, utilities and non-structural capital improvements so that rent escalators are expected to flow directly to NOI; and  Contractual rent escalators that are expected, wherever possible, to be negotiated into new leases entered into by the REIT. For example, the lease in respect of the Porsche JLR Edmonton Property has an annual rent accelerator of 1.0% after the end of the fifth year of the term. SECTION 3 – FINANCIAL OVERVIEW AND KEY PERFORMANCE INDICATORS The financial results described herein relate to the year ended December 31, 2016. The REIT was formed on June 1, 2015 and had no operating activity until July 22, 2015, the date of completion of the IPO. Prior thereto, the REIT generated no revenue and incurred no expenses. As a result, the comparative information contained herein reflects the REIT’s operating results from July 22, 2015 to December 31, 2015 and therefore the results for 2016 and 2015 are not comparable. Consequently, the comparative analysis of the results of operations will primarily focus on Q4 2016 and Q4 2015. The financial results in respect of Q4 2016 were higher than Q4 2015 due to the acquisition of six properties subsequent to the IPO. 11 2016 MD&A AFFO was $4,608 in Q4 2016 (Q4 2015 - $3,787), or $0.210 per Unit (Q4 2015 - $0.210); and Cash NOI was $7,043 on $9,127 of revenue (compared to Cash NOI of $5,865 on revenue of $7,498 for Q4 2015). During 2016, the REIT’s properties generated AFFO of $17,605, or $0.920 per Unit and Cash NOI was $26,772 on $34,274 of revenue. The REIT declared distributions of $4,401, or $0.201 per Unit, to Unitholders, which resulted in an AFFO payout ratio of 95.7% in Q4 2016, which was consistent with Q4 2015. The Q4 2016 payout ratio remained high as a result of the 2016 Equity Offering. In 2016, the REIT declared distributions of $15,544, or $0.804 per Unit, to Unitholders, representing an AFFO payout ratio of 87.4% compared to 93.7% in 2015. The lower AFFO payout ratio year over year is a result of an increase in the Cash NOI attributable to the six properties acquired by the REIT subsequent to the IPO. The REIT’s Credit Facilities (as defined below), as well as the components of the REIT’s equity, are more fully described under “Liquidity and Capital Resources” in this MD&A. The REIT’s total assets were $464,338 as at December 31, 2016, representing a Debt to GBV ratio of 51.5%. As at December 31, 2016, the REIT’s weighted average in-place interest rate on its debt is 3.15%. The remaining outstanding expected term of the Credit Facilities is 3.5 years, and the remaining expected term to maturity of the related interest rate swaps is 5.0 years. Key Performance Indicators Performance is measured by management by these and other key indicators: Portfolio Number of properties GLA (sq. ft.) Average in-place base rent per sq. ft. Weighted average remaining lease term (years) As at December 31, 2016 As at December 31, 2015 32 1,270,202 $24.33 13.6 28 1,052,828 $24.72 14.7 For the three months ended December 31 For the twelve months ended December 31 Operating Results 2016 2015 2016 2015(1) Revenue from investment properties $ 9,127 $ 7,498 $ 34,274 $ 13,300 Cash NOI FFO AFFO 7,043 5,021 4,608 5,865 4,454 3,787 Fair value adjustment to investment properties 99 (1,249) Distributions per Unit FFO per Unit - basic (2) FFO per Unit - diluted (3) AFFO per Unit - basic (2) AFFO per Unit - diluted (3) Payout ratio (%) FFO AFFO $ $ 0.201 $ 0.229 0.229 0.210 0.210 87.8% 95.7% 0.201 0.247 0.247 0.210 0.210 81.4% 95.7% 26,772 19,900 17,605 5,316 0.804 1.040 1.040 0.920 0.920 77.3% 87.4% $ 10,410 8,054 6,875 (94) 0.357 0.446 0.446 0.381 0.381 80.0% 93.7% 12 Balance Sheet Metrics Total assets Units outstanding (includes Class B LP Units) Q4 2016 weighted average Units - basic (includes Class B LP Units) Q4 2016 weighted average Units - diluted (includes Class B LP Units) Year Ended 2016 weighted average Units - basic (includes Class B LP Units) Year Ended 2016 weighted average Units - diluted (includes Class B LP Units) Market capitalization (includes Class B LP Units) Weighted average effective interest rate on debt Proportion of total debt at fixed interest rates through swaps Weighted average interest rate swap term remaining (years) Interest coverage ratio Debt Service Coverage Debt to GBV 2016 MD&A As at December 31, 2016 $464,338 21,894,253 21,894,253 21,897,998 19,134,190 19,135,140 $233,831 3.15% 77% 5.0 3.4X 1.8X 51.5% (1) Based on operations beginning July 22, 2015.  (2) FFO per Unit and AFFO per Unit – basic is calculated by dividing the total FFO and AFFO by the amount of the total weighted average number of outstanding REIT Units and Class B LP Units. For 2015, the total number of REIT Units outstanding (including Class B LP Units) was 18,053,253. (3) FFO per Unit and AFFO per Unit – diluted is calculated by dividing the total FFO and AFFO by the amount of the total weighted average number of outstanding REIT Units, Class B LP Units and DUs (as defined below) granted to certain Trustees. For 2015, the total number of REIT Units outstanding (including Class B LP Units) was 18,053,253. SECTION 4 - PROPERTY PORTFOLIO Property Portfolio Summary City or Region Greater Vancouver Area (GVA) Calgary Regina Greater Montréal Area (GMA)(3) Edmonton Greater Toronto Area (GTA) Total Portfolio Number of Properties GLA (sq. ft.) Average rental rate (per sq. ft.)(1) Weighted Average Lease Term (yrs)(2) 6 4 8 3 1 10 32 153,950 177,787 183,941 173,292 44,779 536,453 $36.39 21.62 19.84 16.60 34.00 24.87 1,270,202 $24.33 15.9 13.7 12.4 16.6 16.0 12.0 13.6 (1) Based on 12 month rolling average. (2) As at December 31, 2016. (3) Includes MB West Island Property and St. Bruno Audi & VW Property. Appendix “A” in this MD&A contains a list and description of the REIT’s properties as of December 31, 2016. Portfolio Overview At December 31, 2016, the REIT’s portfolio consisted of 32 properties, including the 26 Initial Properties and the Toyota Woodland property (acquired on December 23, 2015), the Porsche JLR Edmonton Property (acquired on December 30, 2015), the Audi Barrie Property (acquired on January 14, 2016), the Pfaff Audi Property (acquired on September 20, 2016), the St. Bruno Audi & VW Property (acquired on December 8, 2016) and the MB West Island Property (acquired on December 22, 2016). Out of the 32 properties, 28 are exclusively occupied by the Dilawri Group for use as automotive dealerships or, in one case, an automotive repair facility, while two of the other four properties are jointly occupied by the Dilawri Group (for use as automotive dealerships) and one or more third parties (for use as automotive dealerships or complementary uses, including restaurants), and two are exclusively occupied by third party tenants for use as automotive dealerships. Consequently, the Dilawri Group is the REIT’s most 13   2016 MD&A significant tenant and provides approximately 93.1% of the REIT’s Cash NOI, including subleases to third parties (100% as at December 31, 2015). As the REIT grows, management intends to continue to diversify the REIT’s tenant base, but management expects that the Dilawri Group will provide a significant proportion of the REIT’s rental revenue for the foreseeable future. Collectively, the REIT’s properties contain 46 automotive dealership locations (including one automotive repair location) occupying 45 individual buildings as well as four ancillary retail buildings. The Dilawri Group is the sole occupant of 38 of the 46 automotive dealership locations (including the one automotive repair location), with third party automotive dealers occupying the Porsche JLR Edmonton Property located in Edmonton Alberta, the Pfaff Audi Property located in Vaughan, Ontario, Hyundai and Kia dealerships at Dixie Auto Mall, located in Mississauga, Ontario and the Ford dealership located in Markham, Ontario. While the Honda and Toyota dealerships in the Dixie Auto Mall have relocated to another location, the third party tenants remain under lease and are expected to use the existing sites for ancillary dealership purposes, and Dilawri will continue to be the lead tenant for the Dixie Auto Mall until July 2030. The four retail buildings are located on contiguous lots within the Dixie Auto Mall and are occupied by several national retail tenants including Cara Operations Limited (operating as Montana’s Cookhouse and Kelsey’s Restaurant), A&W restaurant and Enterprise Rent-a-Car. Dixie Auto Mall includes an industrial property with approximately 53,000 square feet of GLA which is not included as part of the portfolio as it is not an asset over which the REIT has control. This property was acquired by the REIT for nominal consideration on July 22, 2015 from a member of the Dilawri Group. This property has been leased to the applicable Dilawri Tenant for nominal consideration pending severance approvals at which time the property will be transferred to that member of the Dilawri Group for the same nominal consideration that the REIT paid for its acquisition. All severance approvals have been completed and the transfer is to be completed by June 30, 2017. The former Dilawri Acura property in Regina at 1921 1st Avenue, is being used for ancillary dealership purposes by both the Dilawri BMW and the Triple 7 Chrysler dealerships. It continues to be leased by a Dilawri Group tenant under the same lease as Dilawri BMW. Profile of the Dilawri Leases The remaining terms of the Dilawri Leases range from 9.5 years to 18.0 years, with a weighted average lease term of approximately 14.0 years. As of December 31, 2016, the weighted average annual basic rent payable under the Dilawri Leases, including the Toyota Woodland Property, the Audi Barrie Property, the St. Bruno Audi & VW Property and the MB West Island Property, is approximately $24.38 per square foot. The basic annual rental rates of these leases increase by 1.5% annually. Material terms of the Dilawri Leases include the following:  Requirements to obtain the REIT’s consent for certain changes in use that might affect or impair the value of the properties;  Options on the part of Dilawri to extend the leases for successive five-year periods as long as Dilawri meets certain conditions;  The leases are triple-net to the REIT, with the tenant responsible for costs relating to the properties, including property taxes and non-structural repairs and maintenance;  Rights on the part of Dilawri to cease operations under certain circumstances, provided it continues to comply with the other terms of the leases; and  Other terms with respect to alterations, environmental covenants, assignment and subletting, damage and destruction and tenant expansion. A full description of the material terms of the Dilawri Leases is contained in the REIT’s AIF, which is available on SEDAR at www.sedar.com. Profile of Third Party Leases  The Porsche JLR Edmonton Property, was the REIT’s first acquisition of a dealership property with third party dealerships as the REIT’s tenants. On closing of the transaction, the tenants entered into a 17-year triple-net lease with the REIT, with annual 1.0% rent escalations beginning at the end of the fifth year of the 14 lease term. The tenant is controlled by the parent company operating as Go Auto, which indemnifies the dealerships’ rental obligations.  The Pfaff Audi Property, was the REIT’s second acquisition of a dealership property with a third party dealership as the REIT’s tenant. On closing the transaction, the REIT assumed the current triple-net lease on the property, which had a remaining lease term of approximately 4.4 years as at December 31, 2016, following which there are two five-year renewal options available to the tenant. The tenant is controlled by the parent company operating as Pfaff, which indemnifies the dealership’s rental obligations. 2016 MD&A Profile of Overall Rent Overall, at December 31, 2016, the REIT’s properties have a weighted average base rental rate of $24.33 per square foot. Profile of Overall Lease Maturity With the exception of the Pfaff Audi Property, the lease portfolio matures between 2026 and 2035 as set out in the chart below: Lease Maturity Profile 5.0 I 4.0 O N 3.0 h s a 2.0 C f o 1.0 % ‐ 4% 7% 6% 5% 16% 15% 16% 10% 9% 8% 25% 20% 15% 10% 3% 5% ‐ '16 '17 '18 '19 '20 '21 '22 '23 '24 '25 '26 '27 '28 '29 '30 '31 '32 '33 '34 '35 (*) Based on a 12 month rolling average as at December 31, 2016. Property Use and Brand Diversification Sales for an individual automotive dealership are heavily influenced by the popularity of the automotive brands being marketed, and these, in turn, are often cyclical for each brand as new models are introduced and existing models are updated and refreshed. In addition, prospects for both mass market and luxury brands can vary with economic cycles. Management believes that the portfolio’s broad automotive brand diversification contributes to the quality and stability of the REIT’s cash flows. The table below sets out the breakdown of automotive brands that are marketed, retailed and serviced at the REIT’s properties as of December 31, 2016: 15         Manufacturer / Brand REIT Auto Dealership GLA (Sq. Feet) % of REIT Auto Dealership GLA % of REIT Auto Dealership Rent No. of REIT Locations 2016 MD&A Honda (1) Porsche (2) Acura (1) Nissan BMW (3) Audi Toyota Mazda Hyundai Infiniti Volkswagen General Motors Ford Chrysler (4) Mitsubishi Kia Mercedes Benz Other (5) Total 193,211 15.5% 84,569 93,829 71,521 100,180 160,215 72,478 47,501 49,734 31,077 64,855 35,504 39,286 40,957 14,750 13,890 60,850 75,570 6.8% 7.5% 5.7% 8.0% 12.8% 5.8% 3.8% 4.0% 2.5% 5.2% 2.8% 3.1% 3.3% 1.2% 1.1% 4.9% 6.0% 16.7% 11.1% 10.7% 6.9% 7.1% 8.1% 4.0% 4.6% 4.4% 4.7% 3.8% 3.3% 3.3% 2.1% 1.4% 1.3% 0.2% 6.3% 6 2 4 3 2 4 2 2 3 4 2 1 1 1 2 1 1 5 1,249,977 100.0% 100.0% 46 Notes: (1) (2) (3) (4) (5) Includes Honda Used Car and Regina Collision Centre. Regina Honda/Acura split 75% & 25% of 30,863 sq. ft.   Includes Porsche JLR Edmonton.   Includes MINI.  Includes Dodge, FIAT, Jeep and RAM.   Represents the Dilawri Distinctive Collection property in Calgary, which currently has franchise agreements with Aston Martin and Bentley. In  addition,  the  Dilawri  Distinctive  Collection  sells  a  variety  of  used  vehicles,  including  Audi,  BMW,  Lamborghini,  Maserati,  McLaren  and  Mercedes‐Benz. The former Dilawri Acura property in Regina at 1921 1st Avenue, is being used for ancillary dealership purposes by both the  Dilawri BMW and the Triple 7 Chrysler dealerships. It continues to be leased by a Dilawri Group tenant under the same lease as Dilawri BMW.  The former Honda and Toyota dealerships located in the Dixie Auto Mall have vacated their premises, however, the third party tenants are  expected to use the existing sites for ancillary dealership purposes, and Dilawri will continue to be the lead tenant for the Dixie Auto Mall until  July 2030.   16           Description of the REIT’s Key Tenant The following chart summarizes certain relevant financial information of the Dilawri Group as at and for the twelve months ended December 31, 2016 as provided to the REIT by Dilawri (all figures are approximations): 2016 MD&A Dilawri Group’s Financial Information (approximations) Year ended December 31, 2016 Year ended December 31, 2015 Combined Revenues (not audited or reviewed) 2.4 billion(1) $ 2.0 billion EBITDA (not audited or reviewed) $ 72.8 million(1) $ 76.6 million Pro Forma Adjusted Rent Coverage Ratio (not audited or reviewed) 3.2 (2) 3.4 Term Debt (not audited or reviewed) $ 150.5 million(2) $ 139.6 million Term Debt to EBITDA Ratio (not audited or reviewed) 2.1(2) 1.8 Notes: (1) (2) For the Last Twelve Months (“LTM”) ended December 31, 2016. As at December 31, 2016. Although the REIT has no reason to believe that the above financial information of the Dilawri Group contains a misrepresentation, Dilawri is a private company that is independent of, and operates entirely independently from, the REIT and, consequently, neither the REIT, its management nor its Trustees in their capacities as such have been involved in the preparation of this financial information. Readers are cautioned, therefore, not to place undue reliance on that financial information. Dilawri Additional and Non-ASPE Measures Dilawri uses “EBITDA” in its financial statements which is an additional ASPE (as defined below) measure. “EBITDA” is defined as the earnings of the Dilawri Group before interest, taxes, depreciation and amortization, all as reflected in the non-consolidated combined financial statements of the Dilawri Group prepared in accordance with the recognition, measurement and disclosure principles of ASPE. Dilawri believes that EBITDA is an important measure of operating performance as it shows Dilawri’s earnings before interest, taxes, depreciation and amortization. Dilawri’s method of calculating EBITDA may differ from other issuers’ calculations and, accordingly, may not be comparable to measures used by other issuers. References to “Pro Forma Adjusted Rent Coverage Ratio”, “Term Debt” and “Term Debt to EBITDA Ratio”, which are key measures of performance used by automotive dealership businesses, refer to the Pro Forma Adjusted Rent Coverage Ratio, Term Debt and Term Debt to EBITDA Ratio of the Dilawri Group on a non-consolidated combined basis. Pro Forma Adjusted Rent Coverage Ratio, Term Debt and Term Debt to EBITDA Ratio are not defined by Canadian accounting standards for private enterprises (“ASPE”) or IFRS and do not have standardized meanings prescribed by ASPE or IFRS. “Pro Forma Adjusted Rent Coverage Ratio” is calculated by Dilawri as EBITDA for the LTM plus rent paid by the Dilawri Group for the LTM to third parties and the REIT, less rent received from third parties. The resultant figure is divided by rent paid by the Dilawri Group for the LTM to third parties and the REIT, less rent received from third parties. “Term Debt” is calculated by Dilawri as the Dilawri Group’s total debt reflected in its non-consolidated combined financial statements as at December 31, 2016 prepared in accordance with the recognition, measurement and disclosure principles of ASPE. “Term Debt to EBITDA Ratio” is defined as the ratio of Term Debt to EBITDA. 17 2016 MD&A SECTION 5 – RESULTS OF OPERATIONS Results of Operations - For the three and twelve months ended December 31, 2016 Net Income (Loss) and Comprehensive Income (Loss) The REIT was formed on June 1, 2015 and had no operating activity until July 22, 2015, the date of completion of the IPO. Prior thereto, the REIT generated no revenue and incurred no expenses. As a result, the comparative information contained herein reflects the REIT’s operating results from July 22, 2015 to December 31, 2015 and therefore the results for 2016 and 2015 are not comparable. Consequently, the comparative analysis of the results of operations will primarily focus on Q4 2016 and Q4 2015. Three months ended December 31 Twelve months ended December 31 2016 2015 Variance 2016 2015(1) Variance $ 9,127 $ 7,498 $ 1,629 $ 34,274 $ 13,300 $ 20,974 (1,444) 7,683 (980) 6,518 (464) (4,788) (1,734) (3,054) 1,165 29,486 11,566 17,920 (891) (481) (410) (2,409) (780) (1,629) (1,771) (1,583) (188) (7,177) (2,732) (4,445) 4,110 (355) 4,465 1,522 (4,172) 5,694 (1,997) (1,997) - (7,986) (3,546) (4,440) (1,590) 14,800 (16,390) (24,139) 17,383 (41,522) 99 (1,249) 1,348 5,316 (94) 5,410 $ 5,643 $ 15,653 $ (10,010) $ (5,387) $ 17,625 $ (23,012) 21,894,253 18,053,253 3,841,000 21,894,253 18,053,253 3,841,000 Net Property Income Rental revenue from investment properties Property costs NOI Other Income (Expenses) General and administrative expenses Interest expense and other financing charges Fair value adjustment on interest rate swaps Distribution expense on Class B LP Units Fair value adjustment on Class B LP Units, Deferred Units and Income Deferred Units Fair value adjustment on investment properties Net Income (Loss) and Comprehensive Income (Loss) Units Outstanding including Class B LP Units weighted average Units - basic 21,894,253 18,053,253 3,841,000 19,134,190 18,053,253 1,080,937 weighted average Units - diluted 21,897,998 18,053,253 3,844,745 19,135,140 18,053,253 1,081,887 Per Unit (2) $ 0.258 $ 0.867 $ (0.604) $ (0.282) $ 0.976 $ (1.258) (1) Based on operations commencing July 22, 2015. (2) Calculation based on the weighted average number of REIT Units diluted. 18 2016 MD&A Property Revenue and Property Costs Rental revenue is based on rents from leases entered into with tenants on closing of the applicable acquisitions, all of which are triple-net leases and, as such, include recoverable realty taxes. The Dilawri Leases have remaining lease terms ranging from approximately 9.5 to 18.0 years, with an average remaining lease term of approximately 14.0 years and an annual basic rent escalator of 1.5% in each year during the initial term. The Porsche JLR Edmonton Property has an initial 17-year lease term and an annual base rent escalator of 1.0% after the fifth year of the term. The Pfaff Audi Property has a triple-net lease with a remaining term of approximately 4.4 years as at December 31, 2016, following which there are two five-year renewal options available to the tenant. Two of the Initial Properties are subject to land leases. Land lease expense includes straight line rent on the land leases over the expected lease term and recoverable realty taxes that have been paid by the REIT. For Q4 2016, rental revenue of $9,127 was $1,629 higher than Q4 2015, primarily due to the four properties acquired in 2016 (the Audi Barrie Property, the Pfaff Audi Property, the St. Bruno Audi & VW Property and the MB West Island Property) and the two properties acquired at the end of 2015 (the Toyota Woodland Property and the Porsche JLR Edmonton Property), and contractual annual rent increases from the Dilawri Leases. Rental revenue for the year ended December 31, 2016 was $34,274 (2015 - $13,300). Property costs for Q4 2016 were $464 higher than Q4 2015. The increase is attributable to the six properties acquired subsequent to the IPO. The property costs for YTD 2016 were $4,788 (YTD 2015 - $1,734). Q4 2016 property costs as a percentage of revenue increased from approximately 13% in Q4 2015 to approximately 16% in Q4 2016, reflecting the pre-payment by the Dilawri Group of some realty taxes earlier in the year in 2015 prior to the IPO. General and Administrative Expenses The REIT has two broad categories of general and administrative expenses consisting of: i) public entity costs, and ii) outsourced costs. The public entity costs reflect the expenses related to ongoing operations of the REIT (including professional fees for legal and audit services and fees payable to members of the REIT’s Board of Trustees (the “Board”) and will fluctuate depending on when such expenses are incurred. The outsourced costs are largely related to the services provided by Dilawri pursuant to the Administration Agreement. The Administration Agreement provided for services to the REIT to be on a cost-recovery basis with a fixed fee during the period from July 1, 2015 to June 30, 2016 (the “Forecast Period”). Following the Forecast Period, the REIT will reimburse Dilawri for costs incurred in connection with the provision of such services so long as such costs are identified in the then current annual budget of the REIT or are otherwise approved by the REIT. The REIT paid to Dilawri $771 in respect of services provided in 2016. General and administrative expenses in Q4 2016 of $891 were $410 higher than Q4 2015, primarily attributable to management compensation expenses, public entity costs, Deferred Unit (“DU”) and Income Deferred Unit (“IDU”) expenses and an increase in fees payable to Dilawri under the Administration Agreement following the Forecast Period. On June 8, 2016, the Unitholders approved the adoption of an Equity Incentive Plan (the “Plan”) whereby DUs may be granted to Trustees, officers and employees of the REIT on a discretionary basis by the Governance, Compensation and Nominating Committee, subject to approval by the Board. Each DU shall receive a distribution of additional IDUs equal to the amount of distributions paid per REIT Unit by the REIT on its REIT Units. Under the Plan, the fair value of the DUs and IDUs is recognized as compensation expense over the vesting period. The deferred unit liability is adjusted to reflect the change in their fair value at each reporting period with the changes in fair value recognized as compensation expense. Under the Plan, the Chief Executive Officer and the Chief Financial Officer will be eligible to receive a short-term incentive with a target of 50% and 40% of base salary up to a maximum of 75% and 60%, respectively, which will be payable in fully-vested DUs. In addition, the Chief Executive Officer and the Chief Financial Officer will be eligible to receive a long-term incentive grant of DUs of up to 50% and 40%, respectively, of base salary. For the twelve month period ended December 31, 2016, the REIT accrued short-term incentive awards of $360 which will be settled by the granting of DUs. Certain independent Trustees elected to receive board and committee fees in the form of DUs. The fair value of each DU granted is measured based on the volume-weighted average trading price of the REIT Units for the five trading days immediately preceding the grant date. As of December 31, 2016, the REIT incurred an expense of $79 reflecting the grant of 7,428 DUs and IDUs granted in 2016. 19 2016 MD&A The table below illustrates the breakdown of general and administrative expenses incurred in Q4 2016 as compared to Q4 2015: Administration Agreement DUs and IDUs expense Management compensation expense Public entity costs and other General and administrative expenses Q4 2016 $ (211) (39) (175) (466) $ (891) Q4 2015 $ (175) - - Variance $ (36) (39) (175) (306) (160) $ (481) $ (410) The $36 increase in Administration Agreement cost is attributable to an increase in outsourced costs as a result of the REIT being required to pay Dilawri for the provided services on a cost recovery basis rather than at a fixed fee following the end of the Forecast Period (July 1, 2016). DU and IDU expense reflects the costs attributed to DUs and IDUs granted to Participants under the Plan. Management compensation expense reflects the costs attributed to DUs which are expected to be granted to management according to the Plan. Public entity costs and other were higher due to the regulatory requirements for annual audited combined operating carve-out financial statements of the Dilawri Tenants for the Initial Properties. Interest Expense and Other Financing Charges Interest expenses include amounts payable to lenders under the REIT’s Credit Facilities as well as amortization of upfront costs and costs to hedge the Credit Facilities at fixed rates. For Q4 2016, the interest expense and other financing charges were $1,771, $188 higher than those incurred during Q4 2015 primarily due to the financing of the four acquisitions completed in 2016. The weighted average fixed rate of interest on the REIT’s debt is 3.15% as of December 31, 2016 (2015 – 3.15%). Changes in Fair Values of Investment Properties As at Balance, beginning of period Acquisition of Initial Properties Acquisitions during the period Fair value adjustment on investment properties Straight-line rent Balance, end of period December 31, 2016 December 31, 2015 $389,650 - 64,129 5,316 2,714 $- 357,742 30,846 (94) 1,156 $461,809 $389,650 The REIT valued the investment properties using a discounted cash flow approach whereby a current discount rate was applied to the projected net operating income which a property can reasonably be expected to produce in the future. The REIT’s valuation inputs are supported by quarterly market reports from an independent appraiser which indicate a decrease in capitalization rates in the Vancouver and Toronto markets which were offset by a capitalization rate increase in the Regina market. The overall implied capitalization rate applicable to the entire portfolio remained at 6.5%, which is equivalent to the REIT’s overall assessment as at December 31, 2015. In accordance with the REIT’s valuation policy, an independent appraiser is engaged to prepare appraisals on a portion of the portfolio annually, such that the entire portfolio is appraised at least once every three years. In addition, any investment property which represents greater than 15% of the overall portfolio value is appraised annually. A 25 basis point decrease or increase in capitalization rates would result in an increase or decrease in the fair value of investment properties of approximately $18,500 or ($17,100), respectively. 20 2016 MD&A Changes in Fair Values of Class B LP Units and Interest Rate Swaps The Class B LP Units and the interest rate hedges (see “Liquidity and Capital Resources” in this MD&A) are required to be presented under relevant accounting standards at fair value on the balance sheet. The resulting changes in these items are recorded in net income and comprehensive income. The REIT entered into interest rate swaps on August 7, 2015 and December 30, 2015 to limit its exposure to fluctuations in the interest rates on variable rate financings for Facility 1 and Facility 2 (see “Liquidity and Capital Resources” in this MD&A). Gains or losses arising from the change in the fair value of the interest rate derivative contracts are recognized in the consolidated statements of income (loss) and comprehensive income (loss). Under IFRS, the Class B LP Units are classified as financial liabilities and measured at fair value through profit and loss (FVTPL). The fair value of the Class B LP Units will be measured every period by reference to the traded value of the REIT Units, with changes in measurement recorded in interest expense and other financing charges. Distributions on the Class B LP Units will be recorded in interest expense and other financing charges in the period in which they become payable. The contribution to net income for Q4 2016 is primarily attributable to the fair value adjustments for interest rate swaps of $4,110. The net loss for the year ended December 31, 2016 is primarily attributable to the fair value adjustments for both Class B LP Units and Deferred Units of $24,139. FFO and AFFO Q4 2016 FFO increased 12.7% to $5,021, or $0.229 per Unit, from $4,454, or $0.247 per Unit, in Q4 2015. The per Unit decline was attributable to a $215 non-cash accrual for the Equity Incentive Plan and the timing difference between the 2016 Equity Offering and the deployment of the funds in late Q4 2016. Q4 2016 AFFO increased 21.7% to $4,608, or $0.21 per Unit, from $3,787, or $0.21 per Unit, in Q4 2015, with the timing difference also impacting the Q4 2016 per Unit figures. Reconciliation of NOI, Cash NOI, FFO and AFFO The REIT uses the following non-IFRS key performance indicators: NOI, Cash NOI, FFO, AFFO, FFO Payout Ratio and AFFO Payout Ratio. The REIT believes these non-IFRS measures and ratios provide useful supplemental information to both management and investors in measuring the financial performance and financial condition of the REIT. These measures and ratios do not have a standardized meaning prescribed by IFRS and therefore may not be comparable to similarly titled measures and ratios presented by other publicly traded real estate investment trusts, and should not be construed as an alternative to other financial measures determined in accordance with IFRS (see “Non-IFRS Measures” in this MD&A). The calculations of these measures and the reconciliation to net income and comprehensive income are set out in the following table: ($000s, except per Unit amounts) Calculation of NOI Property revenue Property costs NOI (including straight-line adjustments) Three months ended December 31 Twelve months ended December 31 2016 2015 Variance 2016 2015(1) Variance $9,127 (1,444) $7,498 (980) $1,629 (464) $34,274 (4,788) $13,300 (1,734) $20,974 (3,054) 7,683 6,518 1,165 29,486 11,566 17,920 21 2016 MD&A Reconciliation of net income to FFO and AFFO Net income (loss) and comprehensive income (loss) Adjustments: Change in fair value – Interest rate swaps Distributions on Class B LP Units Change in fair value – Class B LP Units and Deferred Units Change in fair value – investment properties FFO Adjustments: Amortization of deferred financing costs and indemnity fee(2) Straight-line adjustment (rent and land lease) (3) Equity Incentive Plan(4) Structural reserve(5) AFFO NOI (including straight-line adjustments) Adjustments: Straight-line adjustment (rent and land lease) Cash NOI Number of Units outstanding (including Class B LP Units) Weighted average Units Outstanding – basic Weighted average Units Outstanding – diluted FFO per Unit - basic(6) FFO per Unit - diluted(7) AFFO per Unit - basic (6) AFFO per Unit - diluted (7) Distributions per Unit FFO payout ratio AFFO payout ratio 5,643 15,653 (10,010) (5,387) 17,625 (23,012) (4,110) 1,997 355 1,997 (4,465) - (1,522) 7,986 4,172 3,546 (5,694) 4,440 1,590 (14,800) 16,390 24,139 (17,383) 41,522 (99) 5,021 88 (640) 215 (76) 4,608 7,683 1,249 4,454 (1,348) 567 (5,316) 19,900 94 8,054 (5,410) 11,846 50 (653) - (64) 3,787 38 13 215 (12) 821 274 90 184 (2,714) 439 (294) 17,605 (1,156) - (113) 6,875 (1,558) 439 (181) 10,730 6,518 1,165 29,486 11,566 17,920 (640) $7,043 (653) $5,865 13 (2,714) (1,156) (1,558) $1,178 $26,772 $10,410 $16,362 21,894,253 18,053,253 3,841,000 21,894,253 18,053,253 3,841,000 21,894,253 18,053,253 3,841,000 19,134,190 18,053,253 1,080,937 21,897,998 18,053,253 3,844,745 19,135,140 18,053,253 1,081,887 $0.229 $0.229 $0.210 $0.210 $0.201 87.8% 95.7% $0.247 $0.247 $0.210 $0.210 $0.201 81.4% 95.7% ($0.018) ($0.018) - - - 6.4% - $1.040 $1.040 $0.920 $0.920 $0.804 77.3% 87.4% $0.446 $0.446 $0.381 $0.381 $0.357 80.0% 93.7% $0.594 $0.594 $0.539 $0.539 $0.447 -2.7% -6.3% (1) Based on operations commencing July 22, 2015. (2) Amortization of deferred financing costs and indemnity fee of $88 for Q4 2016 and $274 for the year ended December 31, 2016. The increase of $38 from Q4 2015 is attributable to the addition of financing facilities used to acquire four properties in 2016. (3) Straight-line adjustment (rent and land lease) of $640 and $2,714 for Q4 2016 and for the year ended December 31, 2016, respectively. The decrease from Q4 2015 is attributable to the six properties acquired subsequent to the IPO and annual rent escalators. (4) During Q4 2016, the REIT incurred an expense of $39 relating to 3,754 DUs and IDUs granted in Q4 2016 and $176 for management compensation expense as part of the Plan. In respect of the year ended December 31, 2016, the REIT incurred an expense of $79 relating to 7,428 DUs and IDUs granted and a total of $360 for management compensation expense as part of the Plan. (5) Structural reserve of $76 in Q4 2016 was $13 higher than Q4 2015 attributable to the six properties acquired subsequent to the IPO. (6) The FFO and AFFO per Unit – basic is calculated by dividing the total FFO and AFFO by the amount of the total weighted-average number of outstanding REIT Units and Class B LP Units.  22 (7) The FFO and AFFO per Unit – diluted is calculated by dividing the total FFO and AFFO by the amount of the total weighted-average number of outstanding REIT Units, Class B LP Units and DUs granted as at December 31, 2016 to certain independent Trustees. 2016 MD&A Cash Flow from Operating Activities Compared to AFFO AFFO is not defined by IFRS and, therefore, may not be comparable to similar measures presented by other real estate investment trusts. In compliance with Canadian Securities Administrators Staff Notice 52-306 (Revised), “Non-GAAP Financial Measures”, the table below reconciles AFFO to cash generated from (utilized in) operating activities. Cash generated from operating activities Add (deduct): Structural reserve Changes in non-cash operating accounts AFFO Twelve months ended December 31, 2016 17,128 (294) 771 17,605 SECTION 6 – LIQUIDITY AND CAPITAL RESOURCES Capital Structure Debt(5) Term (yrs) Hedged Term (yrs) Interest Rate Payments & Interest/ Amortization Effective Interest Rate As at December 31, 2016 Key Terms Facility 1 (1) 1.6 to 8.6 BA + 150 bps, Prime +25 bps (1) 3.1% $ 141,485 Facility 2 Facility 3 Facility 4 Facility 5 (2) 1.6 to 8.6 BA + 150 bps, Prime +25 bps (2) 3.1% 2.1 n/a Fixed 3.5 % P&I, 20 yrs 3.5% 4.0 2.8 n/a n/a Fixed 3.22 % P&I, 20 yrs 3.2% BA + 150 bps, Prime +25 bps n/a n/a Financing fees Average /Total 5.0 Class B LP Units & REIT Units Class B LP Units REIT Units Number of Units Outstanding 9,933,253 11,961,000 21,984,253 64,436 13,415 6,913 12,950 239,199 (658) 238,541 $ $ As at December 31, 2016 $ $ 106,087 111,000 217,087 23 Cash Balance Key Financing Metrics and Debt Covenants(3),(6) Interest coverage Debt to GBV Unitholders’ Equity (including Class B LP Units) Debt Service Coverage AFFO payout ratio 2016 MD&A $257 Debt Covenant Declaration of Trust(4) - - <65% (5) <65%(5) >$120,000 >1.35 <100% - - - As at December 31, 2016 3.4 51.5% $218,868 1.8 87.4% (1) $113,535 of this facility matures July 2020, $14,400 of this facility matures December, 2020 and the $13,550 revolving facility matures July 2018. (2) $56,936 of this facility matures July 2020 and the $7,500 revolving facility matures July 2020. (3) The calculations of these ratios, which are non-IFRS measures, are set out under “Financing Metrics and Debt Covenants” below. (4) The Declaration of Trust contains other operating covenants that do not relate to leverage or debt service/coverage. The Declaration of Trust is available on www.sedar.com and is described in the AIF. Management believes that the REIT is in compliance with these operating covenants. Including convertible debentures. Excluding convertible debentures, the maximum ratio is 60%. (5) (6) The debt agreements for Facility 1 and Facility 2, which are available on www.sedar.com, have other covenants that do not directly relate to the REIT’s consolidated financial position. Management believes that the REIT is in compliance with all such covenants and with the debt agreement covenants for Facility 3, Facility 4 and Facility 5. In order to maintain or adjust its capital structure, the REIT may increase or decrease the amount of distributions paid to Unitholders, issue new REIT Units and debt, or repay debt. Factors affecting such decisions include:   complying with the guidelines set out in the REIT’s Declaration of Trust; complying with debt covenants;  ensuring sufficient liquidity is available to support the REIT’s financial obligations and to execute its operating and strategic plans;  maintaining financial capacity and flexibility through access to capital to support future development; and  minimizing the REIT’s cost of capital while taking into consideration current and future industry, market and economic risks and conditions. Principal mortgage repayments are as follows: 2017 ............................................................................................................................... 2018 ............................................................................................................................... 2019 ............................................................................................................................... 8,577 22,330 33,622 2020 ............................................................................................................................... 168,903 Thereafter ....................................................................................................................... 5,767 Total ............................................................................................................................... $239,199 See details below regarding the Credit Facilities and remaining expected terms to maturity of the interest rate swaps. Management believes that the REIT’s liquidity position as at December 31, 2016, which includes approximately $3,100 of undrawn credit facilities and cash on hand of $257, is sufficient to carry out its obligations, discharge liabilities as they come due and fund distributions to Unitholders. Capital requirements in the next two years are low, given that there are no debt maturities during that time and capital expenditure requirements are expected to be insignificant. Capital required for investing activities will be addressed through additional borrowings or issuances of equity as acquisition and development opportunities arise. 24 2016 MD&A Debt Financing The REIT’s overall borrowing policy is to obtain secured credit facilities, principally on a fixed rate or effectively fixed rate basis, which will allow the REIT to (i) achieve and maintain staggered maturities to lessen exposure to re-financing risk in any particular period; (ii) achieve and maintain fixed rate maturities to lessen exposure to interest rate fluctuations; and (iii) extend loan commitment periods and fixed rate periods as long as possible when borrowing conditions are favourable. Subject to market conditions and the growth of the REIT, management currently intends to target Indebtedness of approximately 55%-60% of GBV. As at December 31, 2016, the REIT’s Debt to GBV ratio was 51.5% (2015 – 55.0%). The reduction is attributable to the pay down of revolving debt from the net proceeds from 2016 Equity Offering. Management expects that the ratio of Debt to GBV may increase, at least temporarily, following an acquisition by the REIT of one or more additional properties. Interest rates and loan maturities will be reviewed on a regular basis by management and the Trustees to ensure appropriate debt management strategies are implemented. Pursuant to the Declaration of Trust, the REIT may not incur or assume any Indebtedness, if after giving effect to the incurring or assumption of such Indebtedness, the total Indebtedness of the REIT would be more than 65% of GBV, including convertible debentures. The REIT intends to finance its ongoing operations with a combination of primarily fixed rate non-revolving secured debt with staggered maturities and floating rate secured short-term revolving debt. Secured Credit Facilities The Credit Facilities with Canadian Schedule 1 banks described below (the “Credit Facilities”) are secured by the REIT’s investment properties, excluding the MB West Island Property and the St. Bruno Property. Facility 1 A non-revolving loan in the amount $113,535 (December 31, 2015 - $118,315) bearing interest at the bankers’ acceptance (“BA”) rate plus 150 basis points (bps) or Canadian prime rate (“Prime”) plus 25 bps, maturing in July 2020, repayable in equal quarterly principal payments which commenced on December 31, 2015, based on a 25 year amortization. The REIT entered into floating-to-fixed interest rate swaps on August 7, 2015 for terms of 3 to 10 years which resulted in a weighted average effective interest rate of 3.1%. An additional non-revolving loan in the amount of $14,400 (December 31, 2015 - $15,000) bearing interest at the BA rate plus 150 bps or Prime plus 25 bps, maturing in December 30, 2020, repayable in equal quarterly principal payments which commenced on March 31, 2016, based on a 25 year amortization. The REIT entered into a floating-to-fixed interest rate swap on December 30, 2015 for a term of 7 years which resulted in a weighted average effective interest rate of 3.17%. A $15,000 revolving Credit Facility bearing interest at Prime plus 25 bps or CDOR plus 1.0%, maturing in July 2018, of which $13,550 was drawn at December 31, 2016 (December 31, 2015 - $10,200). Facility 2  A non-revolving loan in the amount of $56,936 (December 31, 2015 - $59,074) bearing interest at the BA rate plus 150 bps or Prime plus 25 bps, maturing in July 2020, repayable in monthly blended payments based on a 20 year amortization. The REIT entered into floating-to-fixed interest rate swaps on August 7, 2015 for terms of 3 to 10 years which resulted in a weighted average effective interest rate of 3.1%. A $7,500 revolving credit facility bearing interest at Prime plus 25 bps maturing in July 2020, of which $7,500 was drawn at December 31, 2016 (December 31, 2015 – $nil). Facility 3 A non-revolving loan in the amount of $13,415 (December 31, 2015 - $13,874) bearing interest at 3.5% maturing in February 2019, repayable in monthly blended payments based on a 20 year amortization. Facility 4 A non-revolving loan in the amount of $6,913 bearing interest at 3.22% maturing in January 2021, repayable in monthly blended payments based on a 20 year amortization (December 31, 2015 – $nil).  25 2016 MD&A Facility 5 A $14,600 revolving credit facility bearing interest at the BA rate plus 150 bps or Prime plus 50 bps maturing in October 2019, of which $12,950 was drawn as at December 31, 2016 (December 31, 2015 – $nil). Financing Fees The REIT incurred financing fees of $273 (December 31, 2015 –$641). The amounts are accounted for using the effective interest method, $658 remains unamortized at December 31, 2016 (December 31, 2015 - $585). Hedging Arrangements The REIT entered into interest rate derivative contracts on August 7, 2015 and December 30, 2015 to limit its exposure to fluctuations in the interest rates payable on variable rate financings for Facility 1 and Facility 2. Gains or losses arising from changes in the fair value of the interest rate derivative contracts are recognized in the consolidated statements of income (loss) and comprehensive income (loss). The following table sets out the combined borrowings under Facility 1 and Facility 2, and the remaining expected term to maturity of the related interest rate swaps. Remaining Term (yrs) 1.6 3.6 5.6 6.0 8.6 5.0 Amount ($000s) 43,187 40,910 14,400 43,187 43,187 184,871 Total Swapped Fixed Rate Debt (%) 23.4 22.1 23.4 7.7 23.4 100.0 As at December 31, 2016, the notional principal amount of the interest rate swaps was $184,871 (2015 - $192,389) and the fair value adjustment of the interest rate swaps was $1,522 (2015 - $4,172), which resulted in a liability balance of $2,650 (2015 - $4,172). Unitholders’ Equity (including Class B LP Units) Unitholders’ equity consists of two classes of Units described below: REIT Units The REIT is authorized to issue an unlimited number of REIT Units. Each REIT Unit is transferable and represents an equal, undivided beneficial interest in the REIT and any distributions from the REIT, whether of net income, net realized capital gains (other than such gains allocated and distributed to redeeming holders of REIT Units) or other amounts and, in the event of the termination or winding-up of the REIT, in the net assets of the REIT remaining after satisfaction of all liabilities. All REIT Units rank equally among themselves without discrimination, preference or priority and entitle the holder thereof to receive notice of, to attend and to one vote at all meetings of holders of REIT Units and holders of Special Voting Units (as defined below) or in respect of any written resolution thereof. Holders of REIT Units are entitled to receive distributions from the REIT (whether of net income, net realized capital gains or other amounts) if, as and when declared by the Board. Upon the termination or winding-up of the REIT, holders of REIT Units will participate equally with respect to the distribution of the remaining assets of the REIT after payment of all liabilities. Such distribution may be made in cash, as a distribution in kind, or both, all as the Board in its sole discretion may determine. REIT Units have no associated conversion or retraction rights. No person is entitled, as a matter of right, to any pre-emptive right to subscribe for or acquire any REIT Units, except for Dilawri 26 2016 MD&A as set out in the Exchange Agreement entered into on closing of the IPO between the REIT and certain members of the Dilawri Group, pursuant to which such members of the Dilawri Group have been granted, among other things, certain rights to participate in future offerings of the REIT. On September 19, 2016, the REIT issued an aggregate of 3,841,000 Units at a price of $10.50 per REIT Unit in connection with a public offering of REIT Units for gross proceeds of $40,330, which included the exercise in full of the over-allotment option granted to the underwriters, whereby an additional 501,000 REIT Units were issued at a price of $10.50 per REIT Unit. Direct costs of $2,124 were netted against the gross proceeds. The Dilawri Group waved its pre-emptive right to acquire REIT Units in connection with the offering. On February 7, 2017, the REIT issued an aggregate of 4,255,000 REIT Units at a price of $10.85 per REIT Unit in connection with a public offering of REIT Units for gross proceeds of $46,167, which included the exercise in full of the over-allotment option granted to the underwriters, whereby an additional 555,000 REIT Units were issued at a price of $10.85 per REIT Unit. Issuance costs of $2,248 were netted against the gross proceeds. The Dilawri Group waved its pre-emptive right to acquire REIT Units in connection with the offering. As at December 31, 2016, the total number of the REIT Units outstanding was 11,961,000 (16,216,000 as of the date of this MD&A). Class B LP Units In conjunction with the IPO, and as partial consideration for the Initial Properties, the REIT, through the Partnership, issued Class B LP Units to certain members of the Dilawri Group. The Class B LP Units are economically equivalent to REIT Units, and are exchangeable at the option of the holder for REIT Units (subject to certain anti-dilution adjustments), are accompanied by a special voting unit (a “Special Voting Unit”) (which provides the holder with that number of votes at any meeting of holders of REIT Units to which a holder of the number of REIT Units that may be obtained upon the exchange of the Class B LP Unit to which such Special Voting Unit is attached would be entitled), and will receive distributions of cash from the Partnership equal to the distributions to which a holder of the number of REIT Units that may be obtained upon the exchange of the Class B LP Unit would be entitled. Under IFRS, the Class B LP Units are classified as financial liabilities and measured at fair value through profit and loss (FVTPL). The fair value of the Class B LP Units will be measured every period by reference to the traded value of the REIT Units, with changes in measurement recorded in interest expense and other financing charges. Distributions on the Class B LP Units will be recorded in interest expense and other financing charges in the period in which they become payable. As at December 31, 2016, the total number of the Class B LP Units outstanding was 9,933,253 (9,933,253 as of the date of this MD&A). Distributions Holders of REIT Units are entitled to receive distributions from the REIT (whether of net income, net realized capital gains or other amounts) if, as and when declared by the Board. Upon the termination or winding-up of the REIT, holders of REIT Units will participate equally with respect to the distribution of the remaining assets of the REIT after payment of all liabilities. Such distribution may be made in cash, as a distribution in kind, or both, all as the Board in its sole discretion may determine. REIT Units have no associated conversion or retraction rights. No person is entitled, as a matter of right, to any pre-emptive right to subscribe for or acquire any REIT Units, except for Dilawri as set out in the Exchange Agreement, or as otherwise agreed to by the REIT pursuant to a binding written agreement. In determining the amount of the monthly cash distributions paid to holders of REIT Units, the Board applies discretionary judgment to forward-looking cash flow information, which includes forecasts and budgets and many other factors including provisions in the Declaration of Trust, the macro-economic and industry-specific environment, debt maturities and covenants and taxable income. The Board regularly reviews the REIT’s rate of distributions to ensure an appropriate level of cash distributions. Net income prepared in accordance with IFRS recognizes certain revenues and expenses at time intervals that do not match the receipt or payment of cash. Therefore, in applying judgment, consideration is given to AFFO (which is the product of the cash generated from, and required for, operating activities) and other factors when establishing cash distributions to holders of REIT Units. 27 2016 MD&A Deferred Units On June 8, 2016, Unitholders approved the adoption of the Plan whereby DUs may be granted to Trustees, officers and employees of the REIT on a discretionary basis by the Governance, Compensation and Nominating Committee and approved by the Board. The maximum number of REIT Units available for issuance under the Plan is 500,000. Each DU is economically equivalent to one REIT Unit, however, under no circumstances shall DUs be considered REIT Units nor entitle a participant to any rights as a Unitholder, including, without limitation, voting rights or rights on liquidation. Each DU shall receive a distribution of additional IDUs equal to the amount of distributions paid per REIT Unit by the REIT on its REIT Units. Upon vesting of the DUs and IDUs, a participant may elect, prior to the expiry of such DU or IDU, to exchange such vested DUs and IDUs (subject to satisfaction of any applicable withholding taxes) whereby the REIT will issue to the participant an equal number of REIT Units in exchange for the DUs and IDUs. The holder of such DUs and IDUs cannot settle such DUs and IDUs for cash. A summary of DU and IDU grants under the Plan is outlined below: Outstanding DUs and IDUs, beginning of period DUs Granted IDUs Granted Outstanding DUs and IDUs, end of period As at December 31, 2016 Units Amount - 7,359 69 7,428 $ - 79 - $79 Financing Metrics and Debt Covenants The calculations of financial metrics and debt covenants are set out in the table below: Calculations of financial metrics and debt covenants Year ended December 31, 2016 Year ended December 31, 2015 Net Asset Value Investment properties, IFRS value Cash, prepaid and other assets Accounts payable and accrued liabilities $ 461,809 $ 389,650 2,529 (4,200) 4,189 (4,319) Credit Facilities, interest rate swaps and DUs & IDUs (241,270) (220,050) Total Net Asset Value $ 218,868 $ 169,470 REIT Units and Class B LP Units outstanding (thousands) 21,894 18,053 Interest coverage Cash NOI General and administrative expenses $ 26,772 (2,409) $ 10,410 (780) 28 2016 MD&A Income before interest expense and fair value adjustments Interest expense and other financing charges (A) (B) 24,363 7,177 9,630 2,732 Interest coverage ratio (A/B) 3.4X 3.5X Debt to GBV Indebtedness outstanding : Credit Facilities (excludes deferred financing costs) (C) $ 239,199 $ 216,463 Gross Book Value Total assets (D) 464,338 393,839 Debt to GBV (C/D) X 100 51.5% 55.0% Unitholders’ Equity & Class B LP Units Unitholders’ Equity Value of Class B LP Units Total Unitholders’ Equity & Class B LP Units $ 112,781 106,087 218,868 $ 87,520 81,950 169,470 Calculations of financial metrics and debt covenants (1) Q4 2016 Q4 2015 Year ended December 31, 2016 Debt Service Coverage Consolidated net income $5,643 $15,653 $(5,387) Interest expense and other financing charges Distribution expense on Class B LP units Amortization of deferred financing costs and indemnity fee 1,771 1,997 88 1,583 1,997 50 Fair value adjustments, net (2,619) (13,196) EBITDA E 6,880 6,087 Principal payments on debt Interest payments on debt Debt Service 2,122 1,692 3,814 F 1,890 1,553 3,443 Debt Service Ratio E/F 1.8 X 1.8 X AFFO payout ratio AFFO Distributions on REIT Units 4,608 2,404 3,787 1,632 7,177 7,986 274 17,301 27,351 8,214 6,936 15,150 1.8 X 17,605 7,301 29 Distributions on Class B LP Units 1,997 4,401 1,997 3,629 AFFO payout ratio (2) 95.7% 95.7% 2016 MD&A 7,986 15,287 87.4% (1) The REIT was formed on June 1, 2015 and had no operating activity until July 22, 2015, the date of completion of the IPO. Prior thereto, the REIT generated no revenue and incurred no expenses. As a result, the comparative information contained herein reflect the REIT’s operating results from July 22, 2015 to December 31, 2015 and therefore the results for 2016 and 2015 are not comparable. Consequently, the comparative analysis of operations in respect of Q4 2016 and Q4 2015 are provided only. (2) AFFO payout ratio is calculated as distributions per REIT Unit divided by the AFFO per Unit - diluted. SECTION 7 – QUARTERLY RESULTS OF OPERATIONS The following is a summary of selected consolidated financial information for each of the five most recently completed quarters. Selected Quarterly Information ($ thousands except where otherwise  indicated)  Fourth Quarter 2016 Third Second First Fourth Quarter 2016 Quarter 2016 Quarter 2016 Quarter 2015 Number of Properties 32 30 29 29 28 GLA (sq. ft.) Rental revenue Net Operating Income Net Income (loss) FFO per unit – basic(i) FFO per unit – diluted(ii) AFFO per unit – basic(i) AFFO per unit – diluted(ii) AFFO payout ratio Distribution declared per unit Units outstanding (including Class B LP Units) Total assets Debt to total assets Debt service coverage 1,270,202 1,146,684 1,077,810 1,077,810 1,052,828 9,127 7,683 5,643 0.229 0.229 0.210 0.210 95.7% 8,538 7,302 1,171 0.269 0.269 0.236 0.236 85.2% 8,302 8,308 7,498 7,266 7,235 6,518 (2,530) (9,673) 15,653 0.269 0.279 0.247 - - - 0.239 0.238 0.210 - 84.1% - 84.5% - 95.7% 0.201 0.201 0.201 0.201 0.201 21,894,253 21,894,253 18,053,253 18,053,253 18,053,253 464,338 51.5% 1.8x 430,294 407,366 407,201 393,839 48.2% 1.7x 55.6% 1.8x 55.9% 1.8x 55.0% 1.8x (i) (ii) The FFO and AFFO per Unit-basic is calculated by using the weighted-average number of outstanding REIT Units and Class B LP Units. The FFO and AFFO per Unit-diluted is calculated by using the weighted-average number of outstanding REIT Units, Class B LP Units, DUs and IDUs granted as at December 31, 2016 The increase in rental revenue and NOI is primarily attributable to the six acquisitions completed since the REIT’s IPO. The net income (loss) is impacted by the fluctuations in fair value of Class B LP Units, investment properties and interest rate swaps. 30                                                      2016 MD&A SECTION 8 – RELATED PARTY TRANSACTIONS The REIT’s largest Unitholder and lead tenant is the Dilawri Group, which as at December 31, 2016, held an approximate 45% effective interest in the REIT on a fully diluted basis, through its ownership of all of the issued and outstanding Class B LP Units. The Dilawri Group’s effective interest in the REIT was reduced from approximately 55% to approximately 45% as a result of the 2016 Equity Offering and was further reduced to approximately 38%, as a result of the 2017 Equity Offering. In the normal course of its operations, the REIT enters into various transactions with related parties and the REIT’s policy is to conduct all transactions and settle all balances with related parties on market terms and conditions and in accordance with the Related Party Transaction Policy adopted by the Board and the Declaration of Trust. In consideration of the applicable Dilawri Tenants leasing the entirety of two of the Initial Properties with third party tenants (and thereby bearing occupancy, rental and other risks associated with the portions of those properties to be subleased to third party tenants for the initial lease terms of 12 and 15 years for those properties), the REIT paid to such Dilawri Tenants an indemnity fee in the aggregate amount of $1,000 at the time of closing of the IPO (amortizable over the term of the leases). In addition, the REIT paid Dilawri $1,800 as part of the purchase price of the Initial Properties with respect to the recoverable land transfer taxes associated with the acquisitions that may become payable by Dilawri over the 3 years following the IPO. Subsequently, this amount was adjusted to $896 and the remaining balance of $904 was paid back to the REIT from Dilawri. Administration Agreement Pursuant to the Administration Agreement, Dilawri has agreed to provide, or cause to be provided, if and as requested by the REIT and, in each case, subject to the overriding supervision and direction of the Trustees, the REIT with: i. ii. the REIT’s President and Chief Executive Officer, Chief Financial Officer and Corporate Secretary, as approved by the REIT; certain administrative and other support services, including assisting the President and Chief Executive Officer and the Chief Financial Officer and Corporate Secretary with the standard functions of a public company, including financial reporting, investor relations, quarterly conference calls, ongoing disclosure obligations, Unitholder correspondence, annual and special meetings of the Unitholders, compliance with the Declaration of Trust and providing office space for the REIT; and iii. such other services as may from time to time be agreed in writing by the REIT and Dilawri for which Dilawri will be compensated on terms to be agreed prior to the provision of such services. Effective July 1, 2016, subject to the provisions above, Dilawri provided these services to the REIT on a cost-recovery basis in the amount of $421 from July 1, 2016 to December 31, 2016, reflecting Dilawri’s actual costs in providing such services. Dilawri agreed to provide the above-noted services for a fixed fee equal to $700 during the Forecast Period. The independent Trustees approved a $71 budget increase which was effective July 1, 2016 for the balance of 2016. Following the Forecast Period, the REIT will reimburse Dilawri for costs incurred in connection with the provision of the above services so long as such costs are identified in the then current annual budget of the REIT or are otherwise approved by the REIT. The term of the Administration Agreement is for five years commencing on closing of the IPO and will be automatically renewed for further one-year terms, provided that the Administration Agreement or any of the services thereunder may be terminated by the REIT at any time during the term upon 90 days’ prior written notice to Dilawri, or in the event of a material breach or material default of Dilawri’s obligations under the Administration Agreement or insolvency of Dilawri, in all cases without payment of any termination fees. Dilawri has the right to terminate the Administration Agreement upon not less than 180 days’ prior written notice to the REIT once the REIT’s fully-diluted market capitalization based on the volume weighted average price of the REIT Units on the principal exchange or market on which the REIT Units are listed or quoted for trading over a 20 business day period exceeds $500,000 or in the event of a material breach or material default of the REIT’s obligations under the Administration Agreement or insolvency of the REIT, in all cases without payment of any termination fees. For clarity, the REIT’s independent Trustees may terminate the Administration Agreement in part in respect of one or more particular services, in each 31 2016 MD&A case, upon 90 days’ prior written notice, without payment of any termination fees. As part of any termination of the Administration Agreement, the REIT will be permitted to solicit employees of the Dilawri Group who provide services to the REIT under the Administration Agreement. Management expects the scope of the services to be provided pursuant to the Administration Agreement to decrease over time as the REIT develops the capacity and financial wherewithal to undertake more of the services internally and transitions to directly employing its President and Chief Executive Officer, Chief Financial Officer and Corporate Secretary and other senior management. General and administrative expenses include $211 for Q4 2016 (Q4 2015 - $175) and $771 for the year ended December 31, 2016 (2015 - $311) paid by the REIT to Dilawri pursuant to the Administration Agreement. Strategic Alliance Agreement In connection with the IPO, the REIT and the Dilawri Group entered into the Strategic Alliance Agreement which establishes a preferential and mutually beneficial business and operating relationship between the REIT and the Dilawri Group. The Strategic Alliance agreement will be in effect so long as the Dilawri Organization and the applicable transferors of the Initial Properties own, control or direct, in the aggregate, an effective interest of at least 10% (on a fully-diluted basis) in the REIT. The Strategic Alliance Agreement provides, among other things, that (i) subject to certain exceptions, the REIT has the right to purchase any property in Canada or the United States acquired by a member of the Dilawri Group that Dilawri determines, acting reasonably, to be a REIT-Suitable Property (as defined in the Strategic Alliance Agreement), and any property owned by a member of the Dilawri Group that a member of the Dilawri Group develops, redevelops, refurbishes, or repositions into a property that Dilawri determines, acting reasonably, is a REIT-Suitable Property, each on terms (including the terms of the lease pursuant to which the applicable member of the Dilawri Group will lease the relevant property from the REIT) and at prices to be agreed between the REIT and Dilawri, (ii) subject to certain exceptions, Dilawri has a right of first offer to purchase any property owned by the REIT in which a member of the Dilawri Group is a tenant or which the REIT acquired from a member of the Dilawri Group or pursuant to the Strategic Alliance Agreement that the REIT seeks to sell or otherwise dispose of on terms and at prices to be agreed between the REIT and Dilawri, (iii) without the prior written approval of a majority of the REIT’s independent Trustees, subject to certain exceptions, Dilawri and its directors and executive officers will not be permitted during the term of the Strategic Alliance Agreement, directly or indirectly, to create another real estate investment trust or publicly-traded real estate business with investment criteria similar to that of the REIT or materially engage (contractually or otherwise) with another real estate investment trust or publicly-traded real estate business with investment criteria similar to that of the REIT, except in the normal course of business to lease or acquire property for use by Dilawri or its directors or executive officers, as applicable, and (iii) during the term of the Strategic Alliance Agreement, neither the REIT nor Dilawri will intentionally solicit any specific tenant of a property that is owned by the other to vacate that property in favour of a property in which it has an ownership or operating interest and that the Dilawri Group will not intentionally solicit any employee of the REIT. Pursuant to the Strategic Alliance Agreement, the REIT acquired the following investment properties:  On December 23, 2015, the REIT acquired the Toyota Woodland Property from a third party and leased it to a Dilawri Tenant.  On January 14, 2016, the REIT acquired the Audi Barrie Property from a member of the Dilawri Group and leased it to a Dilawri Tenant.  On December 8, 2016, the REIT acquired the St. Bruno Audi & VW Property from a third party and leased it to a Dilawri Tenant.  On December 22, 2016, the REIT acquired the MB West Island Property from a member of the Dilawri Group and leased it to a Dilawri Tenant.  Refer to the AIF for additional information on related party agreements and arrangements with Dilawri. SECTION 9 − OUTLOOK The Canadian automotive retail industry is a large and stable business with a track record of long-term growth. At approximately 6.7% of Gross Domestic Product (“GDP”) in 2016, the automotive retail industry is the largest component of retail sales and merchandise in Canada. Over the last 20 years, Canadian automobile retail sales grew at a compound annual rate of 4.5%. For calendar year 2016, this steady growth has continued, with sales of 32 2016 MD&A new automobiles up 2.3% to 1,983,745 units, compared to 1,939,954 units for 2015, which was itself a record year for automobile sales in Canada (Source: Statistics Canada). Management expects continued steady sales levels for 2017. Management believes that the stable and growing sales levels within the Canadian automotive retail sector support the ability of the automobile dealership tenants within the REIT’s portfolio to meet their current lease obligations and the contractual annual rent escalations in place. Further, given the large size of the industry, there are ample opportunities for the REIT to acquire additional properties on an accretive basis in support of stable and growing cash available for Unitholder distributions. The Canadian automotive dealership industry is highly fragmented. The top 10 dealership groups in aggregate comprise less than 10% of the overall market. There are more than 3,100 automobile dealerships that fall outside this group of larger multi-location operators. Industry consolidation is now gaining momentum. According to Desrosiers Automotive Consultants, from 2009 to 2013, the number of groups with five or more automobile dealerships increased by 24%. This consolidation trend is being driven by the increasing sophistication of the auto dealership business, growing capital requirements and economies of scale. To this end, the REIT has been actively expanding its automotive dealer and industry relationships to build its acquisition pipeline. As the only publicly traded Canadian real estate entity focused on owning automotive dealership properties, the REIT provides a unique opportunity for automotive dealership owners to monetize the real estate underlying their dealerships while retaining ownership and control of their core automotive dealership businesses. This provides them with liquidity to advance their individual strategic objectives, whether it be succession planning, directly investing in upgrading their dealerships, or facilitating acquisitions in this period of industry consolidation. Finally, the REIT has an attractive pipeline of opportunities from Dilawri with a right of first offer to acquire any REIT-suitable properties that Dilawri acquires or develops. As previously disclosed by the REIT, the Dilawri Group has two properties under development which represent an aggregate of approximately 75,000 square feet of GLA, consisting of a Volkswagen dealership property located in Barrie, Ontario and a Honda dealership property located in Calgary, Alberta (the “Development Properties”). Construction in respect of the Development Properties was completed in January 2017. The REIT has begun discussions with the Dilawri Group to acquire the Development Properties. If acquired by the REIT, these properties are expected to be 100% leased to the Dilawri Group. SECTION 10 – OTHER DISCLOSURES Commitments and Contingencies In conjunction with the IPO, the REIT and Dilawri entered into the Administration Agreement which covers various operational and administrative services to be provided to the REIT by Dilawri on a cost-recovery basis. The Administration Agreement has a term of 5 years from the closing of the IPO and will be automatically renewed for one year terms. The REIT, as lessee, is committed under long-term land leases that are classified as operating leases with expiry dates to 2033 with minimum annual rentals as follows: Within 1 year ............................................................................................................................................ $576 After 1 year, but not more than 5 years .................................................................................................... 3,115 More than 5 years ..................................................................................................................................... 8,356 Total ......................................................................................................................................................... $12,047 Disclosure Controls and Internal Controls over Financial Reporting The REIT’s certifying officers have designed a system of disclosure controls and procedures (“DC&P”) to provide reasonable assurance that (i) material information relating to the REIT, including its consolidated subsidiaries, is made known to them by others; and (ii) information required to be disclosed by the REIT in its annual filings, interim filings and other reports filed or submitted by the REIT under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation. Also, the REIT’s certifying officers 33 2016 MD&A have designed a system of internal controls over financial reporting (“ICFR”) to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with IFRS. The REIT has used the Internal Control – Integrated Framework (2013) from The Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in order to assess the effectiveness of the REIT’s internal control over financial reporting. There are no material weaknesses relating to the design of either DC&P or ICFR as at December 31, 2016. There have been no changes to the REIT’s ICFR during Q4 2016 and the year ended December 31, 2016, that have materially affected, or are reasonably likely to materially affect, the REIT’s ICFR. Management does recognize that any controls and procedures no matter how well designed and operated, can only provide reasonable assurance and not absolute assurance of achieving the desired control objectives. In the unforeseen event that lapses in the disclosure or internal controls and procedures occur and/or mistakes happen, the REIT intends to take whatever steps are necessary to minimize the consequences thereof. Consistent with National Instrument 52-109 – Certification of Disclosure in Issuers’ Annual and Interim Filings (“NI 52‐109”), the REIT has filed certificates on Form 52-109F1. SECTION 11 – RISKS & UNCERTAINTIES, CRITICAL JUDGEMENTS & ESTIMATES The following risks are a subset of the key risks that affect the REIT’s business and operations. They should be read in conjunction with the full set of risks inherent in the REIT’s business, as included in the REIT’s Annual Information Form for the year ended December 31, 2016. Risk Factors Related to the REIT’s Relationship with Dilawri Significant Ownership by the Dilawri Organization As at December 31, 2016, Dilawri had an approximate 45% effective interest in the REIT on a fully-diluted basis through ownership, direction or control of all of the Class B LP Units. Each Class B LP Unit has attached to it, a Special Voting Unit of the REIT, providing for voting rights in the REIT (approximately 38% as of the date of this MD&A). In addition, the Declaration of Trust grants Dilawri the right to nominate certain Trustees of the REIT based on the Dilawri Organization’s direct and indirect interest in the REIT. For so long as the Dilawri Organization maintains a significant effective interest in the REIT, the Dilawri Organization will have the ability to exercise certain influence with respect to the affairs of the REIT and significantly affect the outcome of the votes of Unitholders, and may have the ability to prevent certain fundamental transactions. As a result, the Dilawri Organization has the ability to influence many matters affecting the REIT. Accordingly, the REIT Units may be less liquid and trade at a relative discount compared to such REIT Units in circumstances where the Dilawri Organization did not have the ability to influence or determine matters affecting the REIT. Additionally, the Dilawri Organization’s significant effective interest in the REIT may discourage transactions involving a change of control of the REIT, including transactions in which an investor, as a holder of the REIT Units (a “REIT Unitholder”), might otherwise receive a premium for its REIT Units over the then-current market price. Further, the Dilawri Organization’s significant effective interest in the REIT may discourage competing bids if Dilawri or another member of the Dilawri Organization bids for the REIT. Pursuant to the Exchange Agreement, each Class B LP Unit is exchangeable at the option of the holder for one REIT Unit (subject to customary anti-dilution adjustments). If the Dilawri Organization exchanges some or all of its Class B LP Units for REIT Units and subsequently sells such REIT Units in the public market, the market price of the REIT Units may decrease. Moreover, despite the fact that Dilawri has advised the REIT that the Dilawri Organization’s current intention is to retain a significant interest in the REIT for the foreseeable future, the perception in the public market that these sales will occur could also produce such an effect. The Dilawri Group as Key Tenant As of December 31, 2016, the REIT derives approximately 93.2% of its annual base minimum rent from the Dilawri Group. Consequently, revenues will be dependent on the ability of the Dilawri Group to meet its rent obligations and the REIT’s ability to collect rent from the Dilawri Group. If the Dilawri Group were to terminate its tenancies, default 34 2016 MD&A on or cease to satisfy its payment obligations, it would have a material adverse effect on the REIT’s financial condition and results of operations and its ability to make cash distributions to REIT Unitholders. The REIT has entered into leases with the applicable members of the Dilawri Group in respect of each of the Initial Properties, including the Third Party Tenant Portfolio, as well as the Toyota Woodland Property, the Audi Barrie Property, the St. Bruno Audi & VW Property and the MB West Island Property (collectively, the “Dilawri Properties”). Under such leases, Dilawri provided an indemnity for the lease obligations of each other member of the Dilawri Group. Consequently, the Dilawri Group will be the REIT’s most significant tenant for the foreseeable future, with members of the Dilawri Group occupying 91.1% of the REIT’s GLA including third parties occupying the subleases and remaining 8.9% occupied by Porsche JLR Edmonton Property and Pfaff Audi Property, at December 31, 2016. As of the date of this MD&A, the initial terms of the Dilawri Leases range from approximately 9.5 to 18.0 years, with a weighted average lease term as at December 31, 2016 of approximately 14.0 years. Therefore, the REIT’s net income could also be materially adversely affected in the event of a downturn in the business, or the bankruptcy or insolvency, of Dilawri or the Dilawri Group, as the REIT’s largest tenant. Acquisition of Future Properties from the Dilawri Group The REIT’s ability to expand its asset base and increase AFFO per Unit through acquisitions will be significantly affected by the REIT’s ability to leverage its relationship with the Dilawri Group to access opportunities to acquire additional properties that satisfy the REIT’s investment criteria, including pursuant to the Strategic Alliance Agreement. As previously disclosed by the REIT, the Dilawri Group has two properties under development which represent an aggregate of approximately 75,000 square feet of GLA, consisting of a Volkswagen dealership property located in Barrie, Ontario and a Honda dealership property located in Calgary, Alberta (the “Development Properties”). Construction in respect of the Development Properties was completed in January 2017. The REIT has begun discussions with the Dilawri Group to acquire the Development Properties. If acquired by the REIT, these properties are expected to be 100% leased to the Dilawri Group. As the REIT’s acceptance of such offer will be conditional on market conditions and the REIT’s due diligence, there can be no assurance that the REIT will approve such opportunities and acquire either or both of the Development Properties or do so on terms favourable to the REIT. In addition, there can be no assurance that the right of first offer granted to the REIT by Dilawri to acquire the Dilawri Group’s interests in other properties will be exercised or that the Dilawri Group will dispose of interests in its properties. The inability of the REIT to expand its asset base by virtue of its relationship with the Dilawri Group or pursuant to the rights of first offer may have a material adverse effect on the REIT’s business, cash flows, financial condition and results of operations and its ability to make cash distributions to REIT Unitholders. Sale Provisions under the Strategic Alliance Agreement Pursuant to the Strategic Alliance Agreement, the REIT has granted a right of first offer in favour of Dilawri in the event that the REIT intends to sell or otherwise to dispose of any of its properties in which a member of the Dilawri Group is a tenant or, where a member of the Dilawri Group is not a tenant, which the REIT acquired from a member of the Dilawri Group or pursuant to the Strategic Alliance Agreement. In the event that the REIT desires to sell or otherwise dispose of a property, the existence of this right of first offer in favour of Dilawri could limit the number of purchasers of such property, make it more difficult to sell such property and/or decrease the potential purchase price that could be obtained for such property, which, in turn, could have a material adverse effect on the REIT. This right survives termination of the Strategic Alliance Agreement. Potential Conflicts of Interest with Dilawri Other than pursuant to the Strategic Alliance Agreement, Dilawri is not limited or restricted in any way from owning, acquiring, constructing, developing or redeveloping properties, and may itself compete with the REIT in seeking tenants and for the purchase, development and operation of desirable properties to be used as automotive dealerships. Dilawri’s continuing business may lead to conflicts of interest between Dilawri and the REIT. In addition, the ongoing employment relationships between the applicable subsidiary of Dilawri and each of Milton Lamb (President and Chief Executive Officer of the REIT) and Andrew Kalra (Chief Financial Officer and Corporate Secretary of the REIT), and the development and other services to be performed by Mr. Lamb, and the services provided by Mr. Kalra, respectively, for Dilawri may lead to conflicts of interest between such persons and the REIT. The REIT may not be able to resolve any such conflicts and, even if it does, the resolution may be less favourable to the REIT than if it were dealing with a party that was not a holder of a significant interest in the REIT. The agreements that the REIT has entered into with the Dilawri Group to date may be amended upon agreement between the parties, subject to applicable law and approval of the Trustees who are “independent” pursuant to National Instrument 58-101 — Disclosure of Corporate Governance Practices. Because of the Dilawri Organization’s significant holdings in the REIT, the REIT may not have the leverage to negotiate any required amendments to these agreements on terms as favourable to the REIT as those the REIT could secure with a party that was not a significant effective REIT Unitholder. There can be no assurance that actual or potential conflicts of interest will be resolved in favour of the REIT. 35 2016 MD&A Risk Factors Related to the Real Estate Industry and the Business of the REIT Real Property Ownership and Tenant Risks Real estate ownership is generally subject to numerous factors and risks, including changes in general economic conditions (such as the availability, terms and cost of mortgage financing and other types of credit), local economic conditions (such as an oversupply of properties or a reduction in demand for real estate in the area), the attractiveness of properties to potential tenants or purchasers, competition with other landlords with similar available space, and the ability of the owner to provide adequate maintenance at competitive costs. There is no assurance that the operations of the REIT will be profitable or that cash from operations will be available to make distributions to REIT Unitholders. Real estate, like many other types of long-term investments, experiences significant fluctuation in value and, as a result, specific market conditions may result in occasional or permanent reductions in the value of the REIT’s portfolio. The marketability and value of the REIT’s portfolio will depend on many factors, including, without limitation: (i) changes in general economic conditions (such as the availability, terms and cost of mortgage financing and other types of credit); (ii) local economic conditions (such as business layoffs, industry slowdowns, changing demographics and other factors); (iii) local real estate conditions (such as an oversupply of properties or a reduction in demand for real estate in the area); (iv) changes in occupancy rates; (v) the attractiveness of properties to potential tenants or purchasers; (vi) competition with other landlords with similar available space; (vii) the ability of the REIT to provide adequate maintenance at competitive costs; (viii) changes in exchange rates; (ix) the promulgation and enforcement of governmental regulations relating to land-use and zoning restrictions, environmental protection and occupational safety; (x) the financial condition of borrowers and of tenants, buyers and sellers of real estate assets; (xi) changes in real estate tax rates and other operating expenses; (xii) the imposition of rent controls; (xiii) energy and supply shortages; (xiv) various uninsured or uninsurable risks; and (xv) natural disasters. There can be no assurance of profitable operations because the costs of operating the portfolio, including debt service, may exceed gross rental income therefrom, particularly since certain expenses related to real estate, such as property taxes, utility costs, maintenance costs and insurance, tend to increase even if there is a decrease in the REIT’s income from such investments. The Properties generate income through rent payments made by the Dilawri Group and third parties. The REIT depends on tenants who lease its properties to pay rent, maintain its properties and meet their other lease obligations. All of the REIT’s properties rely on the Dilawri Group and third parties under a triple-net lease, which subjects the REIT to additional risk related to the financial strength of the Dilawri Group and such third parties relative to multi-tenant properties. Furthermore, as the Dilawri Group will head lease all of the premises currently leased to third party tenants (with the exception of the Porsche JLR Edmonton Property and the Pfaff Audi Property which are leased by the REIT to third party tenants), the Dilawri Group, not the REIT, will have control over the re-leasing of such premises. Upon the expiry of any lease, there can be no assurance that the lease will be renewed or the tenant replaced for a number of reasons. Furthermore, the terms of any subsequent lease may be less favourable than the existing lease. In addition, historical occupancy rates and rents are not necessarily an accurate prediction of future occupancy rates for the REIT’s properties. The REIT’s cash flows and financial position would be materially adversely affected if its tenants (and especially the Dilawri Group) were to become unable to meet their obligations under their leases or if a significant amount of available space in the REIT’s properties was not able to be leased on economically favourable lease terms. The REIT also depends on the tenant to keep the property adequately insured. If the tenant does not have enough insurance and there is a loss, the REIT could incur all or some of the cost to repair or replace the property. In addition, if the tenant fails to pay real estate taxes when due, the REIT may be required to pay these taxes. If a tenant fails to pay rent or perform any other obligation under the lease, the tenant could be in default under the lease. In the event of default by a tenant, the REIT may experience delays or limitations in enforcing its rights as lessor and incur substantial costs in protecting its investment. Any such process may be costly, time consuming and could divert the attention of management from the day-to-day-business of the REIT. Further, the REIT may be unsuccessful collecting the money that is owed by a defaulting tenant. In addition, the Dilawri Leases may narrow the field of potential tenants at a property and could contribute to difficulties in leasing space to new tenants. Furthermore, at any time, a tenant may seek the protection of bankruptcy, insolvency or similar laws which could result in the rejection and termination of the lease of the tenant and thereby cause a reduction in the REIT’s cash flows, financial condition or results of operations and its ability to make cash distributions to REIT Unitholders. The above list of ways in which the REIT depends on its tenants is not exhaustive. Other actions by the REIT’s tenants could have an adverse effect on its cash flows, financial condition or results of operations and its ability to make cash distributions to REIT Unitholders. Asset Class and Manufacturer Diversification The REIT’s investments are not widely diversified by asset class. Substantially all of the REIT’s investments are in automotive dealership properties. A lack of asset class diversification increases risk because automotive dealership properties are subject to their own set of risks, such as the risks associated with automotive manufacturers. 36 2016 MD&A Furthermore, Honda and Acura dealerships collectively represent over 27% of the gross automotive dealership rent paid to the REIT in 2016 and approximately 23% of the REIT’s GLA as at December 31, 2016. Because Acura is a division of Honda, any material adverse changes to the business of this one manufacturer may adversely affect the ability of the Dilawri Group to meet its rent obligations, which in turn may have a material adverse effect on the REIT. Geographic Concentration The REIT’s properties are all located in Canada, in the provinces of Ontario, Saskatchewan, Alberta, British Columbia and Québec. As a result, the market value of the REIT’s properties, the income generated by the REIT and the REIT’s performance are particularly sensitive to changes in the economic condition and regulatory environments of Ontario, Saskatchewan, Alberta, British Columbia and Québec. Adverse changes in the economic condition or regulatory environment of Ontario, Saskatchewan, Alberta, British Columbia or Québec may have a material adverse effect on the REIT’s business, cash flows, financial condition and results of operations and its ability to make cash distributions to REIT Unitholders. Competition The REIT competes with other investors, managers and owners of properties in seeking tenants and for the purchase and development of desirable real estate properties. Some of the properties of the REIT’s competitors may be newer or better located than the REIT’s properties. Certain of these competitors may have greater financial and other resources and greater operating flexibility than the REIT. An increase in the availability of funds for investment or an increase in interest in real estate property investments may increase the competition for real estate property investments, thereby increasing purchase prices and reducing the yield on them. The existence of competing managers and owners could have a material adverse effect on the REIT’s ability to lease space and on the rents the REIT is able to charge, and could materially adversely affect revenues and the REIT’s ability to meet its obligations and its ability to make cash distributions to REIT Unitholders. Capital Expenditures and Fixed Costs Certain significant expenditures, including property taxes, maintenance costs, debt service payments, insurance costs and related charges, must be made throughout the period of ownership of real property, regardless of whether the property is producing sufficient income to pay such expenses. In order to retain desirable rentable space and to generate adequate revenue over the long-term, the REIT must maintain or, in some cases, improve each property’s condition to meet market demand. Maintaining a rental property in accordance with market standards can entail significant costs, which the REIT may not be able to recover from its tenants. In addition, property tax reassessments based on updated appraised values may occur, which the REIT may not be able to fully recover from its tenants. As a result, the REIT will bear the economic cost of such structural defects and/or taxes not recoverable from tenants which may adversely impact the REIT’s financial condition and results from operations and decrease the amount of cash available for distribution to REIT Unitholders. Numerous factors, including the age of the relevant building, the materials used at the time of construction or currently unknown building code violations could result in substantial unbudgeted costs for refurbishment or modernization. In addition, the timing and amount of capital expenditures may indirectly affect the amount of cash available for distribution to REIT Unitholders. Distributions may be reduced, or even eliminated, at times when the REIT deems it necessary to make significant capital or other expenditures. If the actual costs of maintaining or upgrading a property exceed the REIT’s estimates, or if hidden defects are discovered during maintenance or upgrading which are not covered by insurance or contractual warranties, or if the REIT is not permitted to increase rents due to legal or other constraints, the REIT will incur additional and unexpected costs. If competing properties of a similar type are built in the area where one of the REIT’s properties is located or similar properties located in the vicinity of one of the REIT’s properties are substantially refurbished, the net operating income derived from, and the value of, the REIT’s property could be reduced. Any failure by the REIT to undertake appropriate maintenance and refurbishment work in response to the factors described above could materially adversely affect the rental income that the REIT earns from such properties. Any such event could have a material adverse effect on the REIT’s cash flows, financial condition or results of operations and its ability to make cash distributions to REIT Unitholders. Liquidity An investment in real estate is relatively illiquid. Such illiquidity will tend to limit the REIT’s ability to vary its portfolio promptly in response to changing economic or investment conditions. In recessionary times it may be difficult to dispose of certain types of real estate. The costs of holding real estate are considerable and during an economic recession the REIT may be faced with ongoing expenditures with a declining prospect of incoming receipts. In such circumstances, it may be necessary for the REIT to dispose of properties at lower prices in order to generate sufficient cash for operations and for making distributions to REIT Unitholders. Environmental Matters Environmental legislation and regulations have become increasingly important in recent years. As an owner of real property in Canada, the REIT is subject to various Canadian federal, provincial, territorial and municipal laws relating 37 2016 MD&A to environmental matters. In the event that the REIT acquires properties in the United States, it will also be subject to various U.S. federal, state and other environmental laws. Such laws provide that the REIT could be, or become, liable for environmental harm, damage or costs, including with respect to the release of hazardous, toxic or other regulated substances into the environment, and the removal or other remediation of hazardous, toxic or other regulated substances that may be present at or under its properties. Further, liability may be incurred by the REIT with respect to the release of such substances from or to the REIT’s properties. These laws often impose liability regardless of whether the property owner knew of, or was responsible for, the presence of such substances. Additional liability may be incurred by the REIT with respect to the release of such substances from the REIT’s properties to properties owned by third parties, including properties adjacent to the REIT’s properties or with respect to the exposure of persons to such substances. These laws also govern the maintenance and removal of materials containing asbestos in the event of damage, demolition or renovation of a property and also govern emissions of, and exposure to, asbestos fibres in the air. Certain of the REIT’s properties contain or might contain materials containing asbestos. The costs of investigation, removal and remediation of such substances, materials and/or contamination from the REIT’s properties may be substantial and could materially adversely affect the REIT’s financial condition and results of operations. The presence of such substances, materials and/or contamination or the failure to remediate them may also materially adversely affect the REIT’s ability to sell such property, realize the full value of such property or borrow using such property as collateral security, and could potentially result in significant claims against the REIT by public or private parties. The REIT is also exposed to the risk that recourse against the polluter or the previous owners of the properties might not be possible. Moreover, the existence or even the mere suspicion of the existence of hazardous materials or contamination can materially adversely affect the value of a property and the REIT’s ability to lease or sell such property. All of the REIT’s properties have, or have had, tenants that would or currently use, hazardous, toxic or other regulated substances. For example, automotive repair and/or service operations are currently located at each of the REIT’s properties. The REIT’s operating policy is to obtain, or be able to rely on, a phase I environmental site assessment, conducted by an independent and experienced environmental consultant, prior to acquiring a property and to have phase II environmental site assessment work completed where recommended in a phase I environmental site assessment. Although such environmental site assessments would provide the REIT with some level of assurance about the condition of such properties, the REIT may become subject to liability for undetected contamination or other environmental conditions at its properties, which could materially adversely affect the REIT’s financial condition and results of operations and decrease or eliminate the amount of cash available for distribution to REIT Unitholders. The REIT intends to make, or require the tenants to make, the necessary capital and operating expenditures to comply with environmental laws and address any material environmental issues and such costs relating to environmental matters that may have a material adverse effect on the REIT’s business, financial condition or results of operation and decrease or eliminate the amount of cash available for distribution to REIT Unitholders. In addition, environmental laws can change and the REIT may become subject to even more stringent environmental laws in the future, with increased enforcement of laws by the government. Compliance with more stringent environmental laws, which may be more rigorously enforced, the identification of currently unknown environmental issues or an increase in the costs required to address a currently known condition may have a material adverse effect on the REIT’s financial condition and results of operation and may decrease or eliminate the amount of cash available for distribution to REIT Unitholders. Financing Risks The REIT has outstanding Indebtedness of approximately $239.2 million as of December 31, 2016. Although a portion of the cash flow generated by the REIT’s properties will be devoted to servicing such debt, there can be no assurance that the REIT will continue to generate sufficient cash flow from operations to meet required interest payments and principal repayments upon an applicable maturity date. If the REIT is unable to meet interest or principal payments, it could be required to seek renegotiation of such payments or obtain additional equity, debt or other financing. The failure of the REIT to make or renegotiate interest or principal payments or obtain additional equity, debt or other financing could materially adversely affect the REIT’s financial condition and results of operations and decrease or eliminate the amount of cash available for distribution to REIT Unitholders. The REIT is subject to the risks associated with debt financing, including the risk that any outstanding indebtedness will not be able to be refinanced or that the terms of such refinancing will not be as favourable as the terms of existing indebtedness, which may reduce AFFO. To the extent that the REIT incurs variable rate indebtedness (such as under the revolving credit facilities), this will result in fluctuations in the REIT’s cost of borrowing as interest rates change. To the extent that interest rates rise, the REIT’s operating results and financial condition could be materially adversely affected and decrease the amount of cash available for distribution to REIT Unitholders. The Credit Facilities also contain covenants that require the REIT to maintain certain financial ratios on a consolidated basis. If the REIT does not maintain such ratios, the REIT’s ability to make distributions to REIT Unitholders may be limited 38 2016 MD&A or suspended. In particular, Facility 1, Facility 2 and Facility 5 limits distributions by the REIT to an amount not to exceed 100% of its consolidated adjusted funds from operations. Such maximum payout ratios could limit the amount of distributions payable by the REIT from time to time. In addition, the Credit Facilities contain restrictions concerning the change of control of the REIT and the Partnership (and/or requiring the REIT to remain publicly-traded) which may discourage transactions involving a change of control of the REIT, including transactions in which an investor, as a holder of the REIT Units, might otherwise receive a premium for its REIT Units over the then-current market price. Facility 1 also contains a limit on the amount the REIT can spend in any year on capital improvements to its properties. Although the REIT does not anticipate spending significant sums on capital improvements given that the Dilawri Leases are “triple net” leases, such a limit could impact the REIT’s ability to expand or otherwise make substantial structural improvements to its properties. Degree of Leverage The REIT’s ratio of Indebtedness to GBV was approximately 51.5% as of December 31, 2016. The REIT’s degree of leverage could have important consequences to REIT Unitholders, including: (i) the REIT’s ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, development or other general trust purposes, making the REIT more vulnerable to a downturn in business or the economy in general and (ii) a portion of the REIT’s cash flow is dedicated to the payment of the principal of and interest on, its Indebtedness, thereby reducing the amount of funds available for distributions to REIT Unitholders. Under the Declaration of Trust, the maximum amount of Indebtedness cannot exceed 60% of GBV (or 65% including convertible Indebtedness). Interest Rate Risk The REIT required extensive financial resources to complete the IPO, the acquisition of the Initial Properties in conjunction to the IPO and acquisition of properties completed subsequent to the IPO, and will require extensive financial resources to implement its future growth strategy. When concluding financing agreements or extending such agreements, the REIT will depend on its ability to agree on terms, including in respect of interest payments and, if applicable, amortization that will not impair the REIT’s desired AFFO and that do not restrict its ability to make distributions to REIT Unitholders. In addition to the revolving credit facilities, the REIT may enter into future financing agreements with variable interest rates if the current historical low level of interest rates continue. Given the historically low interest rates, there is a risk that interest rates will increase. An increase in interest rates could result in a significant increase in the amount paid by the REIT to service debt, resulting in a decrease in or the elimination of distributions to REIT Unitholders, which could materially adversely affect the trading price of the REIT Units. In addition, increasing interest rates may put competitive pressure on the levels of distributable income made by the REIT to REIT Unitholders, increasing the level of competition for capital faced by the REIT, which could have a material adverse effect on the trading price of the REIT Units. The REIT has implemented hedging programs in respect of Facility 1 and Facility 2 in order to offset the risk of revenue losses and to provide more certainty regarding the payment of distributions to REIT Unitholders. However, to the extent that the REIT fails to adequately manage its variable interest rate risks, its financial results, and its ability to pay distributions to REIT Unitholders and interest payments under the Credit Facilities and any other variable rate financings, may be materially adversely affected. Increases in interest rates generally cause a decrease in demand for real property. Higher interest rates and more stringent borrowing requirements, whether mandated by law or required by lenders, could have a material adverse effect on the REIT’s ability to sell any of its properties at fair market value. Appraisals The REIT retained an independent professional appraiser to provide independent estimates of the fair market value range in respect of the Initial Properties and each property acquired by the REIT subsequent to the IPO. Caution should be exercised in the evaluation and use of appraisal results, which are estimates of market value at a specific point in time. In general, appraisals represent only the analysis and opinion of qualified experts as of the effective date of such appraisals and are not guarantees of present or future value. There is no assurance that the assumptions employed in determining the appraised values of the REIT’s properties are correct as of the date of this MD&A or that such valuations actually reflect an amount that would be realized upon a current or future sale of any of the REIT’s properties or that any projections included in the appraisals will be attainable. As prices in the real estate market fluctuate over time in response to numerous factors, the values of the REIT’s properties reflected in the appraisals may be an unreliable indication of their current market values. A publicly-traded real estate investment trust will not necessarily trade at values determined solely by reference to the underlying value of its real estate assets. Accordingly, the REIT Units may trade at a premium or a discount to values implied by the above-mentioned appraisals. General Insured and Uninsured Risks The Dilawri Leases require Dilawri (or the applicable member of the Dilawri Group) to carry general liability, umbrella liability and/or excess liability insurance with limits that are typically obtained for similar real estate properties and 39 2016 MD&A that are otherwise acceptable to the Board that names the REIT as an additional insured. For property risks, the Dilawri Leases require Dilawri (or the applicable member of the Dilawri Group) to carry “All Risks” property insurance, including but not limited to, flood, earthquake and loss of rental income insurance (with at least a 12 month indemnity period) that names the REIT as an additional insured. The REIT also carries customary insurance covering its Trustees and officers as well as prospectus liability insurance. There are, however, certain types of risks (generally of a catastrophic nature, such as from war or nuclear accident) which are uninsurable under any insurance policy. Furthermore, there are other risks that are not economically viable to insure at this time. The REIT does not carry title insurance on the REIT’s properties. If a loss occurs resulting from a title defect with respect to a property where there is no title insurance, the REIT could lose all or part of its investment in, and anticipated profits and cash flows from, such property. While the REIT, as an additional insured on Dilawri’s policies, will have insurance to cover a substantial portion of the cost of natural disasters, such insurance includes customary deductible amounts and certain items may not be covered by insurance. Future natural disasters may materially adversely affect the REIT’s operations and properties and, more specifically, may cause the REIT to experience reduced rental revenue (including from increased vacancy), incur clean-up costs or otherwise incur costs in connection with such events. Any of these events may have a material adverse effect on the REIT’s business, cash flows, financial condition and results of operations and its ability to make distributions to REIT Unitholders. Risk Related to Insurance Renewals Certain events could make it more difficult and expensive to obtain property and casualty insurance, including coverage for catastrophic risks. When Dilawri’s current insurance policies expire, it may encounter difficulty in obtaining or renewing property or casualty insurance at the same levels of coverage and under similar terms. Such insurance may be more limited and, for catastrophic risks (e.g., earthquake, hurricane, flood and terrorism), may not be generally available to fully cover potential losses. If Dilawri or the REIT is unable to obtain adequate insurance for certain risks, it could result in an event of default under the Dilawri Leases and/or could cause the REIT to be in default under specific covenants on certain of its indebtedness or other contractual commitments that it has which require the REIT to maintain adequate insurance on its properties to protect against the risk of loss. If this were to occur, or if Dilawri or the REIT were unable to obtain adequate insurance, and its properties experienced damages that would otherwise have been covered by insurance, it could have a material adverse effect on the REIT’s business, cash flows, financial condition and results of operations and ability to make cash distributions to REIT Unitholders. Current Economic Environment Continued concerns about the uncertainty over whether the economy will be adversely affected by inflation, deflation or stagflation, and the systemic impact of unemployment, volatile energy costs, geopolitical issues and the availability and cost of credit have contributed to increased market volatility and weakened business and consumer confidence. This difficult operating environment could materially adversely affect the REIT’s ability to generate revenues, thereby reducing its operating income and earnings. It could also have a material adverse effect on the ability of the REIT’s operators to maintain occupancy rates in the REIT’s properties, which could harm the REIT’s financial condition. If these economic conditions continue, the REIT’s tenants may be unable to meet their rental payments and other obligations due to the REIT, which could have a material adverse effect on the REIT. Reliance on Key Personnel The management and governance of the REIT depends on the services of certain key personnel, including certain executive officers and the Trustees. The inability to attract and retain qualified and experienced personnel or the loss of the services of any key personnel could have a material adverse effect on the REIT and materially adversely affect the REIT’s financial condition and results of operations and decrease or eliminate the amount of cash available for distribution to REIT Unitholders. The REIT does not have key person insurance on any of its executive officers. Further, pursuant to the Administration Agreement, the roles and responsibilities of the REIT’s President and Chief Executive Officer and Chief Financial Officer and Corporate Secretary are currently performed by employees of a subsidiary of Dilawri. Therefore, Dilawri’s inability to attract and retain qualified and experienced personnel or the loss of the services of any such key personnel could have a material adverse effect on the REIT, its financial condition and results of operations and decrease or eliminate the amount of cash available for distribution to REIT Unitholders. Derivative Risks The REIT has swap facilities in place as part of Facility 1 and Facility 2. See “Section 6 – Liquidity and Capital Resources”. The REIT may also use other derivative instruments, including futures, forwards, options and additional swaps to manage the interest rate risks inherent in its operations and Credit Facilities. There can be no assurance that any hedging activities of the REIT will be effective. Further, these activities, although intended to mitigate price volatility, would expose the REIT to other risks. For example, the REIT would be subject to the credit risk that its counterparty (whether a clearing corporation in the case of exchange traded instruments or another third party in the 40 2016 MD&A case of over-the-counter instruments) may be unable to meet its obligations. In addition, there would be a risk of loss by the REIT of margin deposits in the event of the bankruptcy of the dealer with whom the REIT has an open position in an option or futures or forward contract. In the absence of actively quoted market prices and pricing information from external sources, the valuation of these contracts involves judgment and use of estimates. As a result, changes in the underlying assumptions or use of alternative valuation methods could affect the reported fair value of these contracts. The ability of the REIT to close out its positions may also be affected by exchange-imposed daily trading limits on options and futures contracts. If the REIT is unable to close out a position, it will be unable to realize its profit or limit its losses until such time as the option becomes exercisable or expires or the futures or forward contract terminates, as the case may be. The inability to close out options, futures and forward positions could also have a material adverse effect on the REIT’s ability to use derivative instruments to effectively hedge the interest rate risks inherent in its operations. Joint Venture Arrangements The REIT does not currently have but may, directly or indirectly, invest in a joint venture arrangement, thereby acquiring a non-controlling interest in certain investments. Although the REIT may not have control over these investments and therefore may have a limited ability to protect its position therein, such joint venture arrangements are expected to contain terms and conditions which are commercially reasonable. Nevertheless, such investments may involve risks not present in investments where a third party is not involved, including the possibility that a co- venturer may have financial difficulties resulting in a negative impact on such investment, may have economic or business interests or goals which are inconsistent with those of the REIT (including relating to the sale of properties held in the joint venture or the timing of the termination and liquidation of such joint venture) or may be in a position to take action contrary to the REIT’s investment objectives. The REIT also may, in certain circumstances, be liable for the actions of its third party co-venturers. Land Leases Two of the REIT’s properties are subject to land leases. To the extent that the properties in which the REIT has or will have an interest are located on leased land, including these properties, the land leases may be subject to periodic rate resets which may fluctuate and may result in significant rental rate adjustments which could adversely impact the REIT’s financial condition and operating results and decrease the amount of cash available for distribution. Litigation Risks In the normal course of the REIT’s operations, whether directly or indirectly, it may become involved in, named as a party to or the subject of, various legal proceedings, including regulatory proceedings, tax proceedings and legal actions relating to personal injuries, property damage, property taxes, land rights, the environment and contract disputes. The outcome with respect to outstanding, pending or future proceedings cannot be predicted with certainty and may be determined in a manner adverse to the REIT and, as a result, could have a material adverse effect on the REIT’s assets, liabilities, business, financial condition and results of operations. Even if the REIT prevails in any such legal proceeding, the proceedings could be costly and time-consuming and may divert the attention of management and key personnel from the REIT’s business operations, which could have a material adverse effect on the REIT’s cash flows, financial condition or results of operations and its ability to make cash distributions to REIT Unitholders. Investments in Debt Instruments Under the Declaration of Trust, the REIT may hold direct or indirect investments in mortgages and mortgage bonds (including participating or convertible mortgages). Adverse changes to the financial condition of a mortgagor with respect to a mortgage held directly or indirectly by the REIT could have an adverse impact on the REIT’s ability to collect principal and interest payments from such mortgagor and therefore, cause a reduction in the REIT’s ability to make distributions to REIT Unitholders and in the value of that investment. Based upon applicable laws governing the REIT’s investments in debt instruments and the loans underlying the REIT’s debt securities, the REIT’s investments in debt may also be adversely affected by: (i) the operation of applicable laws regarding the ability to foreclose mortgage loans or to exercise other creditors’ rights provided in the underlying loan documents; (ii) lender liability with respect to the negotiation, administration, collection or foreclosure of mortgage loans; (iii) penalties for violations of applicable usury limitations; and (iv) the impact of bankruptcy or insolvency laws. Further, the REIT will not know whether the values of the properties securing the mortgage loans will remain at the levels existing on the dates of origination of those mortgage loans. If the values of the underlying properties fall, the risk to the REIT will increase because of the lower value of the security associated with such loans. 41 2016 MD&A Risk Factors Related to the Automotive Dealership Industry Automotive Dealership Tenant Risks All of the REIT’s annual base minimum rent as of the date of this MD&A will be received from the Dilawri Group and third party operators of automotive dealerships. Further, the REIT’s external growth strategy is intended to primarily target acquisitions of automotive dealership properties. Therefore, the REIT will be affected and may be harmed by changes in the automotive dealership industry and the automotive production market. An automotive dealership tenant’s ability to pay rent and perform its other obligations under a lease will be dependent to a significant extent on its relationship with the automotive manufacturer. The automotive dealership tenants or their related dealership groups generally operate dealerships that sell the products of more than one manufacturer. The sales mix of makes and models of motor vehicles tends to change periodically; therefore, current sales of the makes or models of one manufacturer may not reflect the level of future sales of that manufacturer’s products. A reduction in supply, particularly of certain models, could lower motor vehicle sales, which in turn could negatively impact service and parts sales. Other factors which can affect sales include the manufacturer’s financial condition, marketing and incentive programs and expenditures; ability and desire to finance the sale of vehicles or provide warranties to consumers on vehicles sold; vehicle design; production capabilities and management of the manufacturer; strikes and other labour actions by unions; negative publicity; product recalls; or litigation. The automotive dealership tenant may be unable to pay rent or meet other lease obligations if a dealership’s motor vehicle supply is reduced. Further, the REIT depends on its tenants to maintain good relationships with automotive manufacturers and to comply with their franchise agreements. Manufacturers exercise a certain degree of control over dealerships, and the franchise agreements between the dealership groups and the manufacturers provide for termination or non-renewal for a variety of causes. The REIT has no rights under the franchise agreements. If a manufacturer terminates or declines to renew one or more franchise agreements or negotiates terms for renewal that are better for the manufacturer, the tenant may be unable to pay rent and perform its other obligations under its lease with the REIT. These factors, as well as other events involving the automotive dealership tenant/manufacturer relationship, could adversely affect the REIT’s cash flows, financial condition or results of operations and its ability to make cash distributions to REIT Unitholders. Furthermore, the business of the REIT’s automotive dealership tenants is heavily dependent on consumer demand and preferences. Such tenants’ revenues will be materially and adversely affected if there is a severe or sustained downturn in overall levels of consumer spending. Retail vehicle sales are cyclical and historically have experienced periodic downturns characterized by oversupply and weak demand. These cycles are often dependent on general economic conditions and consumer confidence, as well as the level of discretionary personal income and credit availability. A sustained downturn in the sale of vehicles could have a material adverse effect on the REIT’s automotive dealership tenants which, in turn, could materially adversely affect the financial performance of the REIT and its ability to make cash distributions to REIT Unitholders. Competitive Environment The automotive dealership industry in Canada is highly competitive. If Dilawri or another automotive dealership tenant is ineffective in responding to consumer trends or in executing its strategic plans, its financial performance could be negatively affected. The REIT’s automotive dealership tenants are subject to competitive pressures from new entrants into the marketplace, from the expansion or renovation of existing competitors and from new sales channels such as the Internet. The inability of these tenants to effectively predict market activity or compete effectively with their current or future competitors or new sales channels could result in, among other things, reduced market share and lower pricing in response to competitors’ pricing activities. Failure by any automotive dealership tenant, particularly the Dilawri Group, to sustain its competitive position could negatively affect its financial performance which, consequently, could materially adversely affect the financial performance of the REIT and its ability to make cash distributions to REIT Unitholders. Economic Environment Economic factors that impact motor vehicle consumer spending patterns could deteriorate or remain unpredictable due to global, national or regional economic volatility. These factors include high levels of unemployment and household debt, increased interest rates, inflation, foreign exchange rates and commodity prices (including gasoline) and access to consumer credit. Any of these factors could negatively affect the automotive dealership tenants’ revenue and margins. Inflationary trends are unpredictable and changes in the rate of inflation or deflation will affect consumer prices, which in turn could negatively affect the financial performance of the automotive dealership tenants, including the Dilawri Group, which, consequently, could materially adversely affect the financial performance of the REIT and its ability to make cash distributions to REIT Unitholders. 42 2016 MD&A Risk Factors Related to the Structure of the REIT Reliance on the Partnership The REIT is dependent on the business of the Partnership for NOI. The cash distributions made to REIT Unitholders are dependent on the ability of the Partnership to make distributions in respect of the limited partnership units of the Partnership. The ability of the Partnership to make distributions or make other payments or advances to the REIT will depend on the Partnership’s results of operations and may be restricted by, among other things, applicable tax and other laws and regulations and may be subject to contractual restrictions contained in any instruments governing the indebtedness of the Partnership, and any other agreements governing the Partnership. If the Partnership is unable to make distributions or other payments or advances to the REIT, such failure could have a material adverse effect on the REIT’s financial condition or results of operations and its ability to make cash distributions to REIT Unitholders. Return on Investment and Cash Distributions are Not Guaranteed There can be no assurance regarding the amount of income to be generated by the REIT’s properties. The ability of the REIT to make cash distributions, and the actual amount distributed, is entirely dependent on the operations and assets of the REIT, and is subject to various factors, including financial performance, obligations under the Credit Facilities, fluctuations in working capital, the sustainability of income derived from the tenants of the REIT’s properties and any capital expenditure requirements. The REIT Units are equity securities of the REIT and are not traditional fixed income securities. Unlike fixed-income securities, there is no obligation of the REIT to distribute to REIT Unitholders any fixed amount and there is no promise to return the initial purchase price of a REIT Unit on a certain date in the future, and reductions in, or suspensions of, cash distributions may occur at any time that would reduce the yield of a REIT Unit. The market value of the REIT Units will deteriorate if the REIT is unable to meet its distribution and AFFO targets in the future, and that deterioration may be significant. In addition, the composition of cash distributions for tax purposes may change over time and may affect the after-tax return for investors. Therefore, the rate of return over a defined period for a REIT Unitholder may not be comparable to the rate of return on a fixed income security that provides a “return on capital” over the same period. Tax-Related Risk Factors Mutual Fund Trust Status — The REIT intends to comply with the requirements under the Income Tax Act (Canada) (the “ITA”) at all relevant times such that it maintains its status as a “unit trust” and a “mutual fund trust” for purposes of the ITA. There can be no assurance that Canadian federal income tax laws and the administrative policies and assessing practices of the Canada Revenue Agency respecting mutual fund trusts will not be changed in a manner that adversely affects REIT Unitholders. Should the REIT cease to qualify as a mutual fund trust under the ITA, the consequences may be material and adverse. Non-Resident Ownership — Under current law, a trust may lose its status under the ITA as a mutual fund trust if it can reasonably be considered that the trust was established or is maintained primarily for the benefit of non-resident persons, except in limited circumstances. Accordingly, the Declaration of Trust provides that (i) non-residents of Canada, (ii) partnerships that are not Canadian partnerships, or (iii) a combination of non-residents and such partnerships (all within the meaning of the ITA) (“Non-Residents”) may not be the beneficial owners of more than 49% of the REIT Units (determined on a basic or a fully-diluted basis). The Trustees also have various powers that can be used for the purpose of monitoring and controlling the extent of Non-Resident ownership of the REIT Units. The restriction on the issuance of REIT Units by the REIT to Non-Residents may adversely affect the REIT’s ability to raise financing for future acquisitions or operations. In addition, the Non-Resident ownership restriction may adversely impact the liquidity of the REIT Units and the market price at which REIT Units can be sold. REIT Exception — Unless the exclusion from the definition of “SIFT trust” in the ITA for a trust qualifying as a “real estate investment trust” under the ITA applies to the REIT (the “REIT “Exception”), the rules applicable to SIFT trusts and SIFT partnerships in the ITA (the “SIFT Rules”) may have an adverse impact on the taxation of the REIT and on the taxation of distributions to REIT Unitholders. Although, as of the date hereof, management believes that the REIT will be able to meet the requirements of the REIT Exception throughout the current taxation year and each subsequent taxation year, there can be no assurance that the REIT will be able to qualify for the REIT Exception such that the REIT and the REIT Unitholders will not be subject to the SIFT Rules in the current taxation year or in any subsequent taxation year. In the event that the SIFT Rules apply to the REIT, the tax consequences to REIT Unitholders will depend on the status of the holder and, in part, on the amount of income distributed which would not be deductible by the REIT in computing its income in a particular year and what portions of the REIT’s distributions constitute “non-portfolio earnings”, other income and returns of capital. If the SIFT Rules apply to the REIT, they may adversely affect the marketability of the REIT Units, the amount of cash available for distribution and the after-tax return to investors. Tax Basis of the Initial Properties — The Initial Properties were acquired by the Partnership on a tax deferred basis, such that the tax cost of these properties is less than their then fair market value. If one or more of such properties 43 2016 MD&A are disposed of, the gain realized by the Partnership for tax purposes (including any income inclusions arising from the recapture of previously claimed capital cost allowance on depreciable property) will be in excess of that which it would have realized if it had acquired the properties at their respective tax costs equal to their then fair market values. For the purpose of claiming capital cost allowance, the undepreciated capital cost of such properties acquired by the Partnership was equal to the amounts jointly elected by the Partnership and the applicable transferor of such Initial Property on the tax-deferred acquisition of such property. The undepreciated capital cost of such property was less than the fair market value of such properties. As a result, the capital cost allowance that the Partnership may claim in respect of such properties is less than it would have been if such properties had been acquired with a tax cost basis equal to their fair market values. Loss Restriction Event — The ITA contains “loss restriction event” (“LRE”) rules that may apply to certain trusts, including the REIT. In general, the REIT will experience an LRE each time any person, together with all other persons with whom that person is affiliated within the meaning of the ITA, or any group of persons acting in concert, acquires REIT Units having a fair market value that is greater than 50% of the fair market value of all the outstanding REIT Units. If an LRE occurs, then among other things (i) the REIT will be deemed to have a year-end for tax purposes, (ii) any undistributed net income and net realized capital gains of the REIT at such year-end will be distributed to REIT Unitholders, and (iii) the REIT will be restricted in its ability to use tax losses (including any unrealized capital losses) that exist at the time of the LRE. Change in Law — There can be no assurance that income tax laws applicable to the REIT, including the treatment of real estate investment trusts and mutual fund trusts under the ITA, will not be changed in a manner which adversely affects the REIT of the REIT Unitholders. Any such changes may have a negative effect on the value of the REIT Units. Potential Volatility of REIT Unit Prices The market price for REIT Units may be volatile and subject to wide fluctuations in response to numerous factors, many of which are beyond the REIT’s control, including the following: (i) actual or anticipated fluctuations in the REIT’s quarterly results of operations; (ii) recommendations by securities research analysts; (iii) changes in the economic performance or market valuations of other issuers that investors deem comparable to the REIT; (iv) addition or departure of the REIT’s executive officers and other key personnel; (v) release or expiration of lock-up or other transfer restrictions on outstanding REIT Units; (vi) sales or perceived sales of additional REIT Units; (vii) significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving the REIT or its competitors; and (viii) news reports relating to trends, concerns, technological or competitive developments, regulatory changes and other related issues in the REIT’s industry or target markets. Another factor that may influence the market price of the REIT Units is the annual yield on the REIT Units. An increase in market interest rates may lead purchasers of REIT Units to demand a higher annual yield, which accordingly could materially adversely affect the market price of the REIT Units. Financial markets have recently experienced significant price and volume fluctuations that have particularly affected the market prices of equity securities of public entities and that have, in many cases, been unrelated to the operating performance, underlying asset values or prospects of such entities. Accordingly, the market price of the REIT Units may decline even if the REIT’s operating results, underlying asset values or prospects have not changed. Additionally, these factors, as well as other related factors, may cause decreases in asset values that are deemed to be other than temporary, which may result in impairment losses. As well, certain institutional investors may base their investment decisions on consideration of the REIT’s environmental, governance and social practices and performance against such institutions’ respective investment guidelines and criteria, and failure to meet such criteria may result in limited or no investment in the REIT Units by those institutions, which could materially adversely affect the trading price of the REIT Units. There can be no assurance that continuing fluctuations in price and volume will not occur. If such increased levels of volatility and market turmoil continue for a protracted period of time, the REIT’s operations could be materially adversely impacted and the trading price of the REIT Units may be materially adversely affected. 44 2016 MD&A Restrictions on Redemptions It is anticipated that the redemption right attached to the REIT Units will not be the primary mechanism by which REIT Unitholders liquidate their investment. The entitlement of REIT Unitholders to receive cash upon the redemption of their REIT Units is subject to the following limitations: (i) the total amount payable by the REIT in respect of such REIT Units and all other REIT Units tendered for redemption in the same calendar month must not exceed $50,000 (provided that such limitation may be waived at the discretion of the Trustees); (ii) on the date such REIT Units are tendered for redemption, the outstanding REIT Units must be listed for trading on a stock exchange or market which the Trustees believe, in their sole discretion, provides fair market value prices for the REIT Units; (iii) the normal trading of REIT Units is not suspended or halted on any stock exchange on which the REIT Units are then listed (or, if not listed on a stock exchange, on any market on which the REIT Units are quoted for trading) on the date on which the REIT Units were surrendered for redemption (the “Redemption Date”) for more than five trading days during the 10-day trading period commencing immediately after the Redemption Date; and (iv) the redemption of the REIT Units must not result in the delisting of the REIT Units from the principal stock exchange on which the REIT Units are then listed. “Subsidiary Notes” (being promissory notes of the Partnership, a trust all of the units of which, or a corporation all of the shares of which, are owned directly or indirectly by the REIT or another entity that would be consolidated with the REIT under IFRS, having a maturity date and interest rate determined by the Trustees at the time of issuance) (“Subsidiary Notes”) which may be distributed to REIT Unitholders in connection with a redemption will not be listed on any exchange, no market is expected to develop in Subsidiary Notes and such securities may be subject to an indefinite “hold period” or other resale restrictions under applicable securities laws. Subsidiary Notes so distributed do not currently qualify as qualified investments for trusts governed by a registered retirement savings plan, registered retirement income fund, registered disability savings plan, deferred profit sharing plan, tax-free savings account and registered education savings plan, each within the meaning of the ITA. Nature of Investment The REIT Units represent a fractional interest in the REIT and do not represent a direct investment in the REIT’s assets and should not be viewed by investors as direct securities of the REIT’s assets. A holder of a REIT Unit does not hold a share of a body corporate. As holders of REIT Units, the REIT Unitholders will not have statutory rights normally associated with ownership of shares of a corporation including, for example, the right to bring “oppression” or “derivative” actions. The rights of REIT Unitholders are based primarily on the Declaration of Trust. There is no statute governing the affairs of the REIT equivalent to the Canada Business Corporations Act which sets out the rights and entitlements of shareholders of corporations in various circumstances. As well, the REIT may not be a recognized entity under certain existing insolvency legislation such as the Bankruptcy and Insolvency Act (Canada) and the Companies Creditors’ Arrangement Act (Canada), and thus the treatment of REIT Unitholders upon an insolvency of the REIT is uncertain. Availability of Cash Flow AFFO may exceed actual cash available to the REIT from time to time because of items such as principal repayments, leasing costs and capital expenditures in excess of stipulated reserves identified by the REIT in its calculation of AFFO. The REIT may be required to use part of its debt capacity or to reduce distributions to REIT Unitholders in order to accommodate such items. The terms of the certain indebtedness of the REIT from time to time may prohibit payments or distributions from the REIT in certain circumstances. Dilution The number of REIT Units that the REIT is authorized to issue is unlimited. The REIT may, in its sole discretion, issue additional REIT Units from time to time (including pursuant to the Plan or any employee incentive compensation plan that may be introduced in the future), and the interests of REIT Unitholders may be diluted thereby. The issuance of additional REIT Units may have a dilutive effect on the interests of REIT Unitholders. Structural Subordination of REIT Units In the event of a bankruptcy, liquidation or reorganization of the Partnership, holders of its indebtedness and its trade creditors will generally be entitled to payment of their claims from the assets of the Partnership before any assets are made available for distribution to the REIT or REIT Unitholders. The REIT Units are effectively subordinated to the debt and other obligations of the Partnership. The Partnership generates all of the REIT’s cash available for distribution to REIT Unitholders and holds substantially all of the REIT’s assets. Limited Control REIT Unitholders have limited control over changes in the REIT’s policies and operations, which increases the uncertainty and risks of an investment in the REIT. The Board will determine major policies, including policies regarding financing, growth, debt capitalization, REIT qualification and distributions to REIT Unitholders. The Board may amend or revise these and other policies without a vote of Unitholders. Pursuant to the Declaration of Trust, 45 2016 MD&A Unitholders have a right to vote only on limited matters. The Trustees’ broad discretion in setting policies and REIT Unitholders’ inability to exert control over those policies increases the uncertainty and risks of an investment in the REIT. Unitholder Liability The Declaration of Trust provides that no REIT Unitholder will be subject to any liability whatsoever to any person in connection with the holding of a REIT Unit. In addition, legislation has been enacted in the Province of Ontario and certain other provinces that is intended to provide REIT Unitholders in those provinces with limited liability. However, there remains a risk, which is considered by the REIT to be remote in the circumstances, that a REIT Unitholder could be held personally liable for the obligations of the REIT to the extent that claims are not satisfied out of the assets of the REIT. It is intended that the affairs of the REIT will be conducted to seek to minimize such risk wherever possible. Financial Reporting and Other Public Company Requirements The REIT is subject to reporting and other obligations under applicable Canadian securities laws and rules of the stock exchange on which the REIT Units are listed, including National Instrument 52-109 — Certification of Disclosure in Issuers’ Annual and Interim Filings. These reporting and other obligations place significant demands on the REIT’s and Dilawri’s management, administrative, operational and accounting resources. In order to meet such requirements, the REIT and Dilawri have established systems, implemented financial and management controls, reporting systems and procedures and hired accounting and finance staff. However, any failure to maintain effective internal controls could cause the REIT to fail to meet its reporting obligations or result in material misstatements in its financial statements. If the REIT cannot provide reliable financial reports or prevent fraud, its reputation and operating results could be materially harmed which could also cause investors to lose confidence in the REIT’s reported financial information, which could result in a reduction in the trading price of the REIT Units. Management does not expect that the REIT’s and Dilawri’s disclosure controls and procedures and internal controls over financial reporting will prevent all error and all fraud. A control system, no matter how well-designed and implemented, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues within an organization are detected. The inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Controls can also be circumvented by individual acts of certain persons, by collusion of two or more people or by management override of the controls. Due to the inherent limitations in a cost- effective control system, misstatements due to error or fraud may occur and may not be detected in a timely manner or at all. The preparation of the consolidated financial statement requires management to make judgements and estimates in applying the REIT’s accounting policies that affect the reported amounts and disclosures made in the consolidated financial statements and accompanying notes. Within the context of these consolidated financial statements, a judgment is a decision made by management in respect of the application of an accounting policy; a recognized or unrecognized financial statement amount and/or note disclosure, following an analysis of relevant information that may include estimates and assumptions. Estimates and assumptions are used mainly in determining the measurement of balances recognized or disclosed in the consolidated financial statements and are based on a set of underlying data that may include management’s historical experience, knowledge of current events and conditions and other factors that are believed to be reasonable under the circumstances. Management continually evaluates the estimates and judgments it uses. Critical Accounting and Judgments and Estimates The following are the accounting policies subject to judgments and key sources of estimation uncertainty that the REIT believes could have the most significant impact on the amounts recognized in the consolidated financial statements. Investment Properties The REIT assesses whether the properties it acquires are considered to be asset acquisitions or business combinations. The REIT considers all the properties it has acquired to date to be asset acquisitions. Investment properties are reviewed by management in conjunction with independent appraisers. Valuations are completed by undertaking a discounted cash flow approach whereby a current discount rate is applied to the projected net operating income which a property can reasonably be expected to produce in the future. The external valuators review of projected cash flows involves a review of assumptions relating to rental rates and residual values. These assumptions may not ultimately be achieved. 46 2016 MD&A Leases The REIT is required to make judgments in determining whether certain leases are operating or finance leases, in particular long-term leases. All tenant leases have been determined to be operating leases. Income Taxes The REIT is a mutual fund trust and a real estate investment trust as defined in the ITA. The REIT is not liable to pay Canadian income taxes provided that its taxable income is fully distributed to Unitholders each year. The REIT is a real estate investment trust if it meets the prescribed conditions under the ITA relating to the nature of its assets and revenue. The REIT uses judgment in reviewing these prescribed conditions and assessing its interpretation and application to the REIT’s assets and revenue. It has determined that it qualifies as a real estate investment trust for the current period. The REIT expects to continue as a mutual fund trust and real estate investment trust under the ITA, however, should it no longer qualify, it would not be able to flow through its taxable income to Unitholders and would be subject to tax. 47 2016 MD&A City/ Province Year Built /Renov. GLA Mississauga, ON Mississauga, ON Mississauga, ON Mississauga, ON Mississauga, ON Mississauga, ON Mississauga, ON Mississauga, ON Mississauga, ON Mississauga, ON Mississauga, ON Mississauga, ON Mississauga, ON Mississauga, ON Mississauga, ON 1988/2011 1988/2001 1987/2014 1988/2014 1998 1987 1987 2002/2006 1998 2001 2001 1999 1999/2011/2012 1999/2011/2012 1999/2011/2012 39,209 26,369 16,713 14,592 8,000 22,078 17,735 13,890 9,345 5,150 5,000 4,000 2,200 2,000 1,875 188,156 APPENDIX Property List as at December 31, 2016 Name Address Properties (as at December 31, 2016) 1. Dixie Auto Mall Dilawri-Owned Auto Volkswagen Nissan Mazda Infiniti Mitsubishi Third Party Auto 5500 Ambler Drive 5500 Dixie Road 5500 Ambler Drive 5500 Ambler Drive 5525 Ambler Drive Ancillary-other (formerly Toyota) 5500 Dixie Road Ancillary-other (formerly Honda) 5500 Dixie Road Kia Hyundai Third Party Retail Montana’s Kelsey’s A&W Subway/NY Fries 5505 Ambler Drive 5515 Ambler Drive 1495 Aerowood Drive 1485 Aerowood Drive 1465 Aerowood Drive 1475 Aerowood Drive Enterprise Rent-a-Car 1475 Aerowood Drive Made in Japan 1475 Aerowood Drive Dixie Auto Mall Total 2. Markham Honda and Ford Dilawri-Owned Auto Markham Honda Third Party Auto 8220 Kennedy Road Markham, ON 2004 32,723 Markville Ford Lincoln 8210 Kennedy Road Markham, ON 1988/2010 Markham Honda and Ford Total 3. Calgary BMW 34 Heritage Meadows Road S.E. Calgary, AB 4. Calgary Honda 5. Triple 7 Chrysler 11700 Lake Fraser Dr S.E. Calgary, AB 700 Broad Street Regina, SK 1959/2011 6. Porsche Centre Vancouver 688 Terminal Avenue Vancouver, BC 150 Bovaird Drive West Brampton, ON 39,287 72,010 87,724 43,511 40,957 39,790 35,504 2007 2005 2013 2013 815 Broad Street Regina, SK 2012/2015 32,457 7. Frost Chevrolet Buick GMC Cadillac 8. Honda Used Car and Regina Collision Centre 9. Oakville Honda 10. Markham Acura 500 Iroquois Shore Road Oakville, ON 5201 Highway 7 E Markham, ON 11. Regina Honda/Acura 789 Broad Street 12. Agincourt Mazda 5500 Finch Avenue E 13. Dilawri Nissan Infiniti 1775 5th Avenue Regina, SK Toronto, ON Regina, SK 14. Audi Sales Downtown Vancouver 1788 West 2nd Avenue Vancouver, BC 15. Meadowvale Honda 2210 Battleford Road Mississauga, ON 16. Burrard Acura(1) 17. Langley Acura(1) 18. Distinctive Collection 150 Glendeer Circle S.E. 730 Terminal Avenue Vancouver, BC 20257 Langley Bypass Langley, BC Calgary, AB 2003/2006 2002 2003/2015 2005 1998/2015 2013 2007 2015 2015 1988/2008 33,334 32,025 30,863 30,788 30,864 29,300 28,039 27,640 26,448 24,367 48 2016 MD&A 19. Bolton Toyota 20. Hyundai Gallery 12050 Albion Vaughan Road Bolton, ON 11770 Lake Fraser Dr S.E. Calgary, AB 2004 2006 21. North Vancouver Nissan Infiniti 819 Automall Drive N. Vancouver, BC 1992/2002 22. Regina Hyundai 23. Dilawri BMW 444 Broad Street 1919 1st Avenue Regina, SK Regina, SK 24. Infiniti Vancouver 1718 West 3rd Avenue Vancouver, BC 25. Ancillary-other 1921 1st Avenue (formerly Dilawri Acura) 1921 1st Avenue Regina, SK 26. Dilawri Mitsubishi 27. Toyota Woodland 1750 6th Avenue Regina, SK 1000-1009 Woodland Avenue Montreal, QC 28. Porsche Centre Edmonton and Jaguar Land Rover Edmonton(2)………………… 17007 111th Avenue N.W. 29. Audi Barrie………………… 2482 Doral Drive Edmonton, AB Innisfil, ON 30. Pfaff Audi (2)……………………….. 9088 Jane Street Vaughan, ON 2005 1997 1999 1997 1993/2003 2007/2008 2014 2015 2006 22,741 22,185 19,050 18,204 12,456 11,722 11,390 6,750 49,737 44,779 24,982 68,874 31. St. Bruno Audi and Volkswagen 1905&1917 Boulevard Sir Wilfrid Laurier St. Bruno, QC 1987/2014 67,705 32. Mercedes Benz West Island 4525 Boulevard Saint-Jean Montreal, QC 2016 60,850 1,270,202 Portfolio Total _____________ Notes: (1) The REIT has a leasehold interest in this property. (2) The REIT has leased this property to a third party tenant unrelated to the Dilawri Group. 49 Automotive Properties Real Estate Investment Trust Consolidated Financial Statements For the year ended December 31, 2016 MANAGEMENT’S STATEMENT OF RESPONSIBILITY FOR FINANCIAL REPORTING The management of Automotive Properties Real Estate Investment Trust (the “REIT”) is responsible for the preparation, presentation and integrity of the accompanying consolidated financial statements and Management’s Discussion and Analysis. This responsibility includes the selection and consistent application of appropriate accounting principles and methods in addition to making the judgments and estimates necessary to prepare the consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). It also includes ensuring that the financial information presented in the Management’s Discussion and Analysis is consistent with that in the consolidated financial statements. Management is also responsible for providing reasonable assurance that assets are safeguarded and that relevant and reliable financial information is produced. Management is required to design a system of internal controls and certify as to the design and operating effectiveness of internal controls over financial reporting. BDO Canada LLP, whose report follows, are the independent auditors engaged to audit the consolidated financial statements of the REIT. The Board of Trustees, acting through an Audit Committee comprised solely of directors who are independent, is responsible for determining that management fulfills its responsibilities in the preparation of the consolidated financial statements and the financial control of operations. The Audit Committee recommends the independent auditors for appointment by the Unitholders. The Audit Committee meets regularly with senior and financial management and the independent auditors to discuss internal controls, auditing activities and financial reporting matters. The independent auditors have unrestricted access to the Audit Committee. These consolidated financial statements and Management’s Discussion and Analysis have been approved by the Board of Trustees based on the review and recommendation of the Audit Committee. Toronto, Canada March 20, 2017 “Milton Lamb” “Andrew A. Kalra” Milton Lamb President and Chief Executive Officer Andrew A. Kalra, CPA, CA Chief Financial Officer Page 2 of 23 Tel: 416 865 0200 Fax: 416 865 0887 www.bdo.ca BDO Canada LLP TD Bank Tower 66 Wellington Street West Suite 3600, PO Box 131 Toronto, ON M5K 1H1 Canada Independent Auditor’s Report To the Unitholders of Automotive Properties Real Estate Investment Trust We have audited the accompanying consolidated financial statements of Automotive Properties Real Estate Investment Trust, which comprise the consolidated balance sheets as at December 31, 2016 and 2015 and the consolidated statements of income (loss) and comprehensive income (loss), changes in unitholders’ equity, and cash flows for the year ended December 31, 2016 and the period from June 1, 2015 to December 31, 2015, and a summary of significant accounting policies and other explanatory information. Management's Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Automotive Properties Real Estate Investment Trust as at December 31, 2016 and 2015 and its financial performance and its cash flows for the year ended December 31, 2016 and the period from June 1, 2015 to December 31, 2015 in accordance with International Financial Reporting Standards. Chartered Professional Accountants, Licensed Public Accountants March 20, 2017 Toronto, Ontario BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. Automotive Properties REIT Consolidated Balance Sheets (in thousands of Canadian dollars) ASSETS Cash and cash equivalents Prepaid expenses and other assets Investment properties Total assets LIABILITIES AND UNITHOLDERS’ EQUITY Liabilities: Accounts payable and accrued liabilities Credit facilities Interest rate swaps Deferred Units and Income Deferred Units Class B LP Units Total liabilities Unitholders’ equity As at As at Note December 31, 2016 December 31, 2015 8 7 10 9 9 13 12 $257 2,272 461,809 $1,769 2,420 389,650 $464,338 $393,839 $4,200 238,541 2,650 79 106,087 $4,319 215,878 4,172 - 81,950 351,557 306,319 112,781 87,520 Total liabilities and unitholders’ equity $464,338 $393,839 See accompanying notes to the consolidated financial statements. Approved on behalf of the Board of Trustees “Janet Graham” Janet Graham Trustee, Audit Committee Chair “John Morrison” John Morrison Trustee, Lead Independent Page 4 of 23 Automotive Properties REIT Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) For the Year ended December 31, 2016 and the period from June 1, 2015 (date of formation) to December 31, 2015 (in thousands of Canadian dollars) Note 2016 2015 Net Property Income Rental revenue from investment properties Property costs Net Operating Income Other Income (Expenses) 14 14 $34,274 (4,788) $13,300 (1,734) 29,486 11,566 General and administrative expenses (2,409) (780) Interest expense and other financing charges (7,177) (2,732) Fair value adjustment on interest rate swaps 9 1,522 (4,172) Distribution expense on Class B LP Units Fair value adjustment on Class B LP Units and Deferred Units Fair value adjustment on investment properties 11 12 7 (7,986) (24,139) 5,316 (3,546) 17,383 (94) Net Income (Loss) and Comprehensive Income (Loss) ($5,387) $17,625 See accompanying notes to the consolidated financial statements. Page 5 of 23 Automotive Properties REIT Consolidated Statements of Changes in Unitholders’ Equity For the year ended December 31, 2016 (in thousands of Canadian dollars) Trust Units Cumulative Net Income (Loss) Cumulative Distributions to Unitholders Total Note Unitholders’ Equity at December 31, 2015 $72,794 $17,625 $(2,899) $87,520 Issuance of Units Over-allotment Issuance of Units Net loss Distributions 12 12 11 33,156 5,050 — — — (5,387) — — (7,558) 33,156 5,050 (5,387) (7,558) Unitholders’ Equity at December 31, 2016 $111,000 $12,238 $(10,457) $112,781 For the period from June 1, 2015 (date of formation) to December 31, 2015 (in thousands of Canadian dollars) Unitholders’ Equity at June 1, 2015 Issuance of Units in connection with IPO Over-allotment Issuance of Units Net income Distributions Trust Units Cumulative Net Income Cumulative Distributions to Unitholders $— 66,966 5,828 — — 12 12 11 $— — — 17,625 $— — — — — (2,899) Total $— 66,966 5,828 17,625 (2,899) Unitholders’ Equity at December 31, 2015 $72,794 $17,625 $(2,899) $87,520 See accompanying notes to the consolidated financial statements. Page 6 of 23 Automotive Properties REIT Consolidated Statements of Cash Flow For the year ended December 31, 2016, and the period from June 1, 2015 (date of formation) to December 31, 2015 (in thousands of Canadian dollars) OPERATING ACTIVITIES Net income (loss) Straight-line rent Non-cash compensation expense Fair value adjustment on interest rate swaps Distributions expense on Class B LP Units Fair value adjustment on Class B LP Units and Deferred Units Fair value adjustment on investment properties Amortization of financing fees Amortization of other assets Change in non-cash operating accounts 20 Cash Flow from operating activities INVESTING ACTIVITIES Acquisitions of investment properties Other assets Cash Flow used in investing activities FINANCING ACTIVITIES Proceeds from Credit Facilities Principal repayment on Credit Facilities Financing fees paid Issuance of Units Issuance costs Distributions to REIT unitholders and Class B LP unitholders Cash Flow from financing activities Net increase (decrease) in cash and cash equivalents during the year Cash and cash equivalents, beginning of year Note 2016 2015 $ (5,387) (2,714) 439 (1,522) $ 17,625 (1,156) - 4,172 7,986 24,139 (5,316) 201 73 (771) 17,128 (64,129) - (64,129) 30,950 (8,214) (166) 40,330 (2,124) (15,287) 45,489 (1,512) 1,769 3,546 (17,383) 94 56 34 2,463 9,451 (289,255) (1,863) (291,118) 218,990 (2,527) (585) 81,200 (8,406) (5,236) 283,436 1,769 - Cash and cash equivalents, end of year $ 257 $ 1,769 See accompanying notes to the consolidated financial statements. Page 7 of 23    Notes to the Consolidated Financial Statements For year ended December 31, 2016, and the period from June 1, 2015 (date of formation) to December 31, 2015 (in thousands of Canadian dollars, except Unit and per Unit amounts) 1. NATURE OF OPERATIONS Automotive Properties Real Estate Investment Trust (the “REIT”) is an unincorporated, open-ended real estate investment trust existing pursuant to a declaration of trust dated June 1, 2015, as amended and restated on July 22, 2015 (the “Declaration of Trust”) under, and governed by, the laws of the Province of Ontario. In connection with the formation of the REIT, one trust unit of the REIT (each, a “Unit”) was issued for $10.00 in cash on June 1, 2015 and subsequently redeemed for $10.00 in cash following closing of the REIT’s initial public offering on July 22, 2015 (the “IPO”). From June 1, 2015 to July 22, 2015, the REIT had no operations or activity other than holding $10.00 cash and an equivalent amount of equity. Accordingly, the information contained in these consolidated financial statements with respect to the period ended December 31, 2015 reflects commencement of operations as of July 22, 2015. The principal, registered and head office of the REIT is located at 133 King Street East, Suite 300, Toronto, Ontario M5C 1G6. The REIT’s Units are listed on the Toronto Stock Exchange and are traded under the symbol “APR.UN”. 893353 Alberta Inc. (“Dilawri”) is a privately held corporation, which, together with certain of its affiliates, held an approximate 45% effective interest in the REIT as at December 31, 2016 (December 31, 2015 – approximately 55%), through the ownership, direction or control of all of the Class B limited partnership units (“Class B LP Units”) of Automotive Properties Limited Partnership, the REIT’s operating subsidiary (the “Partnership”). The Class B LP Units are economically equivalent to, and exchangeable for, Units. Dilawri and its affiliates, other than its shareholders and controlling persons, are referred to herein as the “Dilawri Group”. The REIT was formed primarily to own income-producing automotive dealership properties located in Canada. In connection with the completion of the IPO, the REIT indirectly acquired a portfolio of 26 commercial properties from certain members of the Dilawri Group (the “Initial Properties”). The REIT currently owns a portfolio of 32 income producing commercial properties, including the Initial Properties, located in Ontario, Saskatchewan, Alberta, British Columbia and Quebec, totaling approximately 1.3 million square feet of gross leasable area. Out of the 32 properties, 28 are exclusively occupied by the Dilawri Group for use as automotive dealerships or, in one case, an automotive repair facility, while two of the other four properties are jointly occupied by the Dilawri Group (for use as automotive dealerships) and one or more third parties (for use as automotive dealerships or complementary uses, including restaurants), and two are exclusively occupied by third party tenants for use as automotive dealerships. At the time of the acquisition of each applicable investment property, the REIT entered into a lease with the applicable member of the Dilawri Group (collectively, the “Dilawri Tenants”) in respect of each of the 30 investment properties occupied by the Dilawri Group, and either entered into a new lease or assumed the existing lease in respect of the two investment properties occupied by third parties. The Dilawri Tenants are the REIT’s major tenant, providing approximately 93.2% of the REIT’s rental income (2015 – 100%). The subsidiaries of the REIT included in the REIT’s consolidated financial statements include the Partnership and Automotive Properties REIT GP Inc. the general partner of the Partnership and a wholly-owned subsidiary of the REIT. 2. SIGNIFICANT ACCOUNTING POLICIES (a) Statement of Compliance The consolidated financial statements of the REIT have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and using the accounting policies described herein. These consolidated financial statements were authorized for issuance by the Board of Trustees of the REIT (the “Board”) on March 20, 2017. (b) Basis of Presentation The consolidated financial statements of the REIT have been prepared using the historical cost basis except for the following items that were measured at fair value: investment properties as described in note 7; interest rate swaps as described in note 9;    Class B LP Units which are exchangeable for Units at the option of the holder as described in note 12; and  Deferred Units and Income Deferred Units which are exchangeable for Units at the option of the holder as described in note 13 Page 8 of 23 The consolidated financial statements are presented in Canadian Dollars, the REIT’s functional and reporting currency. (c) Basis of Consolidation The consolidated financial statements include the accounts of the REIT and the other entities that the REIT controls in accordance with IFRS 10 — Consolidated Financial Statements. Control requires exposure or rights to variable returns and the ability to affect those returns through power over an investee. All intercompany transactions and balances have been eliminated on consolidation. (d) Investment Properties Investment properties include properties held to earn rental income and/or for capital appreciation. Investment properties are initially measured at cost, including directly attributable acquisition costs. Directly attributable acquisition costs include professional fees, land transfer taxes and other transaction costs. Subsequent to initial recognition, investment properties are measured at fair value. Fair value is determined based on available market evidence, at each balance sheet date. The fair value of investment properties reflects, among other things, rental income from current leases and assumptions about rental income from future leases in light of current market conditions. Related fair value gains and losses are recorded in net income (loss) and comprehensive income (loss) in the period in which they arise. (e) Revenue Recognition The REIT has retained substantially all of the risks and benefits of ownership of its investment properties and, therefore, accounts for its leases with tenants as operating leases. Property revenue includes basic rents earned from tenants under lease agreements and realty tax recoveries. The REIT follows the straight-line method of recognizing rental revenue, whereby the total amount of basic rent to be received from leases is accounted for on a straight-line basis over the term of the lease. Accordingly, an accrued rent receivable/payable is recorded for the current difference between the straight-line rent recorded as rental revenue and the rent that is contractually due from the tenant and is included as part of investment properties on the consolidated balance sheet. (f) Expenses Property costs and general and administrative expenses are recognized in income in the period in which they are incurred. The indemnity fee will be amortized over the average lease term with the Dilawri Tenants that have third party sub-tenants. The REIT follows a straight-line method for recognizing land lease expense. (g) Income Taxes The REIT qualifies as a “mutual fund trust” under the Income Tax Act (Canada). The Board intends to annually distribute all taxable income directly earned by the REIT to holders of Units (“Unitholders”) and to deduct such distributions for income tax purposes. Legislation relating to the federal income taxation of Specified Investment Flow Through trusts or partnerships (“SIFT”) provide that certain distributions from a SIFT will not be deductible in computing the SIFT’s taxable income and that the SIFT will be subject to tax on such distributions at a rate that is substantially equivalent to the general tax rate applicable to Canadian corporations. However, distributions paid by a SIFT as return of capital should generally not be subject to tax. Under the SIFT rules, the taxation regime will not apply to a real estate investment trust that meets prescribed conditions relating to the nature of its assets and revenue (the “REIT Exception”). The REIT has reviewed the SIFT rules and has assessed their interpretation and application to the REIT’s assets and revenue. While there are uncertainties in the interpretation and application of the SIFT rules, the REIT believes that it meets the REIT Exception and accordingly, no net current income tax expense or deferred income tax assets or liabilities have been recorded in the consolidated statements of net income (loss) and comprehensive income (loss). (h) Units and Class B LP Units Units are redeemable at the holder’s option subject to certain limitations and restrictions. As a result, the Units are liabilities by definition but qualify for presentation as equity under certain limited exceptions within International Accounting Standards 32 — Financial Instruments: Presentation (“IAS 32”). The Class B LP Units are economically equivalent to Units, receive distributions equal to the distributions paid on Units and are exchangeable at the option of the holder into Units. One special voting unit in the REIT (the “Special Voting Units”) has been issued to the holder of each Class B LP Unit issued (such Special Voting Unit does not have any entitlement in the REIT with respect to distributions, but does generally entitle the holder to that number of votes at any meeting of Unitholders to which a holder of the number of Units that are obtained upon the exchange of the Class B LP Unit to which such Special Voting Unit is attached would be entitled). The limited IAS 32 exception for presentation as equity does not extend to the Class B LP Units. As a result, the Class B LP Units have been classified as financial liabilities and are measured at fair value through profit and loss (“FVTPL”). The fair value of the Class B LP Units is measured every period by Page 9 of 23 reference to the traded value of the Units, with changes in value recorded through profit and loss. Distributions on the Class B LP Units are recorded as an expense in the consolidated statements of income (loss) and comprehensive income (loss) in the period in which they become payable. (i) Cash and Cash Equivalents Cash consists of cash on hand and unrestricted cash. Cash equivalents consist of highly liquid marketable investments with an original maturity date of 90 days or less from the date of acquisition. As at December 31, 2016 and December 31, 2015, there were no cash equivalents. (j) Financial instruments Financial instruments are classified as one of the following: (i) held-to-maturity, (ii) loans and receivables, (iii) FVTPL, (iv) available-for-sale, or (v) other financial liabilities. Financial assets and liabilities classified as FVTPL are measured at fair value with gains and losses recognized in the consolidated statements of income (loss) and comprehensive income (loss). Financial instruments classified as held-to-maturity, loans and receivables or other financial liabilities are measured at amortized cost, using the effective interest method. Available-for-sale financial instruments are measured at fair value and any unrealized gains and losses will be recognized in other comprehensive income (loss). The following summarizes the REIT’s classification and measurement of financial assets and liabilities: Financial assets  Cash and cash equivalents Accounts receivable Classification  Measurement FVTPL Loans and receivables Fair value Amortized cost Financial liabilities  Accounts payable and accrued liabilities Credit facilities payable Class B LP Units, Deferred Units and Income Deferred Units Other financial liabilities Other financial liabilities FVTPL Amortized cost Amortized cost Fair value Interest rate swaps FVTPL Fair value Acquisition costs other than those related to financial instruments classified as FVTPL, which are expensed as incurred, are capitalized to the carrying amount of the instrument and amortized using the effective interest method. These costs primarily include interest and finance fees that are incurred in connection with borrowings. (k) Unit-Based Compensation Deferred Units (“DUs”) may be granted to members of the Board (“Trustees”), officers and employees of the REIT (each, a “Participant”). Each Deferred Unit shall receive a distribution of additional Income Deferred Units (“IDUs”) equal to the amount of distributions paid per Unit by the REIT on its Units. Liability in respect of the DUs and IDUs is adjusted to reflect the change in their fair value at each reporting period with the changes in fair value recognized in the consolidated statements of income (loss) and comprehensive income (loss). The holder of such DUs and IDUs cannot settle their DUs or IDUs for cash. 3. CRITICAL ACCOUNTING JUDGEMENTS AND ESTIMATES The preparation of the consolidated financial statements requires management to make judgements and estimates in applying the REIT’s accounting policies that affect the reported amounts and disclosures made in the consolidated financial statements and accompanying notes. Within the context of these consolidated financial statements, a judgment is a decision made by management in respect of the application of an accounting policy; a recognized or unrecognized financial statement amount and/or note disclosure, following an analysis of relevant information that may include estimates and assumptions. Estimates and assumptions are used mainly in determining the measurement of balances recognized or disclosed in the consolidated financial statements and are based on a set of underlying data that may include management’s historical experience, knowledge of current events and conditions and other factors that are believed to be reasonable under the circumstances. Management continually evaluates the estimates and judgments it uses. The following are the accounting policies subject to judgments and key sources of estimation uncertainty that the REIT believes could have the most significant impact on the amounts recognized in the consolidated financial statements. The REIT’s significant accounting policies are described in note 2. Page 10 of 23        Investment Properties The REIT assesses whether the properties it acquires are considered to be asset acquisitions or business combinations. The REIT considers all the properties it has acquired to date to be asset acquisitions. Investment properties are valued by management. Valuations are completed by undertaking a discounted cash flow approach, whereby a current discount rate is applied to the projected net operating income that a property can reasonably be expected to produce in the future. These assumptions may not ultimately be achieved. Leases The REIT is required to make judgments in determining whether certain leases are operating or finance leases, in particular long-term leases. All tenant leases entered into or assumed to date have been determined to be operating leases. Income Taxes The REIT is a mutual fund trust and a real estate investment trust as such terms are defined in the Income Tax Act (Canada). The REIT is not liable to pay Canadian income taxes provided that its taxable income is fully distributed to Unitholders each year. The REIT is a real estate investment trust if it meets the prescribed conditions under the Income Tax Act (Canada) relating to the nature of its assets and revenue. The REIT uses judgment in reviewing these prescribed conditions and assessing its interpretation and application to the REIT’s assets and revenue. The REIT has determined that it qualifies as a real estate investment trust in respect of the current period. The REIT expects to continue to qualify as a mutual fund trust and real estate investment trust under the Income Tax Act (Canada), however, should it no longer qualify, the REIT would not be able to flow through its taxable income to Unitholders and would, therefore, be subject to tax. 4. FUTURE ACCOUNTING STANDARDS In July 2014, the IASB issued the final version of IFRS 9 — Financial Instruments (‘‘IFRS 9’’) which brings together the classification and measurement, impairment and hedge accounting phases of the IASB’s project to replace IAS 39 — Financial Instruments: Recognition and Measurement. The key elements of the final standard are as follows: Classification and measurement — introduces a logical approach for the classification of financial assets, which is driven by cash flow characteristics and the business model in which an asset is held. Impairment — introduces a new, expected-loss impairment model that will require more timely recognition of expected credit losses. IFRS 9 also includes new disclosure requirements about expected credit losses and credit risk. Hedge accounting — introduces a substantially reformed model for hedge accounting that more closely aligns with risk management activities undertaken by entities when hedging their financial and non-financial risk exposures. Own credit — removes the volatility in profit or loss that was caused by changes in the credit risk of liabilities elected to be measured at fair value. This change in accounting means that gains caused by the deterioration of an entity’s own credit risk on such liabilities are no longer recognized in profit or loss and are recognized in other comprehensive income (loss) instead. IFRS 9 will be applied retrospectively for annual periods beginning on or after January 1, 2018. Early adoption is permitted. The REIT is assessing the impact of this standard on its consolidated financial statements. In May 2014, the IASB issued IFRS 15 — Revenue from Contracts with Customers (‘‘IFRS 15’’), which replaces IAS 11 — Construction Contracts and IAS 18 — Revenue, as well as various other interpretations regarding revenue. IFRS 15 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers, except for contracts that are within the scope of the standards on leases, insurance contracts and financial instruments. IFRS 15 also contains enhanced disclosure requirements. It will be applied retrospectively for annual periods beginning on or after January 1, 2018, with early adoption permitted. The REIT is assessing the impact of this standard on its consolidated financial statements. In January 2016, the IASB issued IFRS 16 — Leases (‘‘IFRS 16’’) which replaces IAS 17 — Leases and its associated interpretative guidance. IFRS 16 applies a control model to the identification of leases, distinguishing between a lease and a service contract on the basis of whether the customer controls the asset being leased. For those assets determined to meet the definition of a lease, IFRS 16 introduces significant changes to the accounting by lessees, introducing a single, on-balance sheet accounting model that is similar to current finance lease accounting, with limited exceptions for short-term leases or leases of low value assets. Lessor accounting remains similar to current accounting practice. The standard is effective for annual periods beginning on or after January 1, 2019, with early application permitted for entities that apply IFRS 15. The REIT does not expect this standard to have a significant impact on its combined financial statements. Page 11 of 23 5. PUBLIC OFFERING AND ACQUISITION OF INVESTMENT PROPERTIES (a) Initial Public Offering On July 22, 2015, the REIT completed the IPO and indirectly acquired the Initial Properties from certain members of the Dilawri Group for the consideration outlined in Note 5(b) below. The IPO, through the issuance of 7,500,000 Units at a price of $10.00 per Unit (the “IPO price”), resulted in net proceeds to the REIT of $66,966, after payment of transaction costs of $8,034. On August 14, 2015, pursuant to the exercise of the over-allotment option granted to the underwriters in connection with the IPO, the REIT issued a further 620,000 Units at the IPO price, resulting in net proceeds to the REIT of $5,828, after payment of the underwriters’ fees of $372. (b) Acquisition of the Initial Properties In connection with the IPO, the REIT indirectly acquired the Initial Properties from certain members of the Dilawri Group, through an investment in the Partnership. In consideration for the Initial Properties, the REIT issued Class B LP Units (accompanied by an equivalent number of Special Voting Units) and the remainder was paid in cash. The purchase of the Initial Properties has been accounted for as an asset acquisition. Allocation of the identifiable net assets acquired is as follows: Investment properties(i) Consideration provided for the acquisition and related acquisition costs was as follows: Class B LP Units ................................................................................................................................ Cash consideration for Initial Properties(ii) .......................................................................................... $357,742 $99,333 258,409 Total cost of the acquisition ................................................................................................................ $357,742 (i) Initial Properties were initially recorded at $357,742 which includes the purchase price of $354,181 representing fair value at the time of acquisition, and acquisition costs of $3,561. (ii) Total cash consideration for the Initial Properties consisted of: Acquisition of Initial Properties ........................................................................................................... 254,848 Acquisition costs ................................................................................................................................ 3,561 Total ................................................................................................................................................... $258,409 The REIT paid an indemnity fee to Dilawri of $1,000 for the applicable Dilawri Tenants leasing the entirety of two Initial Properties with third party tenants (and thereby bearing occupancy, rental and other risks associated with the portions of these properties which are subleased to third party tenants for the initial lease terms of 12 and 15 years). In addition, the REIT paid Dilawri $1,800 in respect of recoverable land transfer taxes associated with the acquisition that may become payable by Dilawri over the 3 years following the IPO. Subsequently this amount was adjusted to $896 (Note 8) and the remaining balance of $904 was paid back to the REIT from Dilawri. Page 12 of 23 6. ACQUISITIONS During the year ended December 31, 2016, the REIT completed the following acquisitions: Property Location Date of Acquisition Total Investment Properties(1) Debt Assumed Payables Cash Consideration Audi Barrie (i) Barrie, ON January 14 $11,455 $ - $ - $11,455 Pfaff Audi (ii) Vaughan, ON September 20 17,485 - - 17,485 St. Bruno Audi & VW (iii) St. Bruno, QC December 8 14,573 11,250 273 3,050 MB West Island (iv) West Island, QC December 22 20,616 20,250 353 13 Total Acquisitions (1) Includes acquisition costs. $64,129 $31,500 $626 $32,003 (i) (ii) (iii) (iv) On January 14, 2016, the REIT acquired the real estate underlying the Audi Barrie dealership located in Innisfil, Ontario (the “Audi Barrie Property”), for approximately $11,130 net of acquisition costs of $325, from a member of the Dilawri Group and leased it to a Dilawri Tenant. Audi Barrie is newly constructed and is a 24,982 square foot automotive dealership property. The Audi Barrie Property was one of the three development properties owned by the Dilawri Group at the time of the IPO. Pursuant to the Strategic Alliance Agreement, the Audi Barrie Property was offered for purchase to the REIT by the Dilawri Group. On September 20, 2016, the REIT acquired the real estate underling the Pfaff Audi dealership located in Vaughan, Ontario (the “Pfaff Audi Property”), for $17,150 net of acquisition costs of $335 from a third party. The Pfaff Audi Property is a 68,874 square foot automotive dealership property. On December 8, 2016, the REIT acquired the real estate underlying the automotive dealership property located at 1905 and 1917 Boulevard Sir Wilfrid Laurier in St. Bruno, Quebec (“St. Bruno Audi & VW Property”) from a third party for $14,280 net of acquisition costs of $293. St. Bruno Audi & VW Property includes a Volkswagen and an Audi dealerships and have a combined total gross leasable area of 62,705 square feet. Pursuant to the Strategic Alliance Agreement, the St. Bruno Audi & VW Property is leased to a Dilawri Tenant. On December 22, 2016, the REIT acquired automotive dealership property at 4525 Boulevard Saint-Jean in suburban Montreal, Quebec (“MB West Island Property”) for $20,250 net of acquisition costs of $366. The MB West Island Property has a total gross leasable area of 60,850 square feet. Pursuant to the Strategic Alliance Agreement, the MB West Island Property was offered for purchase to the REIT by the Dilawri Group and is leased to a Dilawri Tenant. The table below summarizes the acquisitions made in 2015 beginning with the IPO: Date of Acquisition Total Investment Properties (2) Non-cash (1) Debt Assumed Consideration Initial Properties Subsequent Acquisitions (i) Total Acquisitions July 22 4th quarter 2015 $357,742 30,846 $388,588 $99,333 - $99,333 $ - 25,200 $25,200 (1) (2) Non-cash consideration on the Initial Properties consisted of Class B LP Units valued at $99,333. Includes acquisition costs. Cash $258,409 5,646 $264,055 Page 13 of 23    (i) On December 23, 2015, the REIT acquired from a third party the real estate underlying Toyota Woodland (the “Toyota Woodland Property”), located in Montréal, Québec for approximately $7,200 net of acquisition costs of $524. The Toyota Woodland Property has a total leasable area of 49,737 square feet. This was the first acquisition undertaken by the REIT with the Dilawri Group pursuant to the Strategic Alliance Agreement entered into with Dilawri at the closing of REIT’s IPO. On December 30, 2015, the REIT acquired from a third party the real estate underlying the Porsche Centre Edmonton and Jaguar Land Rover Edmonton dealerships (the “Porsche Edmonton Property”) located in Edmonton, Alberta, for approximately $23,000 net of acquisition costs of $122. The Porsche Edmonton Property has a total leasable area of 44,779 square feet and is leased to two automotive dealerships. 7. INVESTMENT PROPERTIES Balance, beginning of period Acquisition of Initial Properties (i) Acquisitions during the period Fair value adjustment on investment properties Straight-line rent Balance, end of period As at December 31, 2016 As at December 31, 2015 $389,650 — 64,129 5,316 2,714 $461,809 $— 357,742 30,846 (94) 1,156 $389,650 (i) The purchase price of the Initial Properties includes acquisition costs of $3,562 and an initial portfolio premium of $480. Subsequent to the acquisition, these amounts were not included in the determination of the fair value of investment properties and were charged to net income, as part of the net change in fair value of investment properties. Valuation of Investment Properties The REIT valued the investment properties using a discounted cash flow approach whereby a current discount rate was applied to the projected net operating income which a property can reasonably be expected to produce in the future. The REIT’s valuation inputs are supported by quarterly market reports from an independent appraiser which indicate a decrease in capitalization rates in the Vancouver and Toronto markets which were offset by a capitalization rate increase in the Regina market. The overall implied capitalization rate applicable to the entire portfolio remained at 6.5%, which is equivalent to the REIT’s overall assessment as at December 31, 2015. In accordance with the REIT’s valuation policy, an independent appraiser is engaged to prepare valuations on a portion of the portfolio annually, such that the entire portfolio is appraised at least once every three years. In addition, any investment property which represents greater than 15% of the overall portfolio value is appraised annually. A 25 basis point decrease or increase in capitalization rates would result in an increase or decrease in the fair value of investment properties of approximately $18,500 or ($17,100), respectively. Rental Commitments Minimum rental commitments on non-cancellable tenant operating leases are as follows: Within 1 year ........................................................................................................................................... After 1 year, but not more than 5 years ................................................................................................... More than 5 years .................................................................................................................................... $30,904 159,177 281,734 $471,815 One of the Initial Properties includes an industrial property with approximately 53,000 square feet of gross leasable area which was not included as part of the Initial Properties as it is not an asset over which the REIT has control or beneficial interest. This property was acquired by the REIT for nominal consideration on July 22, 2015. This property has been leased to a Dilawri Tenant for nominal consideration, severance approvals have been granted and the property will be transferred to that Dilawri Tenant for the same nominal consideration that the REIT originally paid and is expected to be completed by June 30, 2017. Page 14 of 23 8. PREPAID EXPENSES AND OTHER Prepaid indemnity fee(i) Recoverable land transfer taxes(ii) Prepaid other December 31, 2016 $894 896 482 $2,272 December 31, 2015 $967 896 557 $2,420 (i) (ii) The unamortized balance of the indemnity fee of $894 (December 31, 2015 - $967); the initial balance was $1,000 at the time of the IPO. This amount was paid to Dilawri as part of the purchase price with respect to the recoverable land transfer taxes associated with the acquisition of the Initial Properties. 9. CREDIT FACILITIES (a) Credit Facilities payable consists of: Facility 1(i) Facility 2(ii) Facility 3(iii) Facility 4(iv) Facility 5(v) Total Facilities Financing fees(vi) December 31, 2016 $141,485 64,436 13,415 6,913 12,950 $239,199 (658) $238,541 December 31, 2015 $143,515 59,074 13,874 - - $216,463 (585) $215,878 (i) Facility 1 includes: A non-revolving loan in the amount $113,535 (December 31, 2015 - $118,315) bearing interest at the bankers’ acceptance (“BA”) rate plus 150 basis points (bps) or Canadian prime rate (“Prime”) plus 25 bps, maturing in July 2020, repayable in equal quarterly principal payments which commenced on December 31, 2015, based on a 25 year amortization. The REIT entered into floating-to-fixed interest rate swaps on August 7, 2015 for terms of 3 to 10 years which resulted in a weighted average effective interest rate of 3.1%. A non-revolving loan in the amount of $14,400 (December 31, 2015 - $15,000) bearing interest at the BA rate plus 150 bps or Prime plus 25 bps, maturing in December 2020, repayable in equal quarterly principal payments which commenced on March 31, 2016, based on a 25 year amortization. The REIT entered into a floating-to-fixed interest rate swap on December 30, 2015 for a term of 7 years which resulted in a weighted average effective interest rate of 3.17%. A $15,000 revolving credit facility bearing interest at Prime plus 25 bps or CDOR plus 1.00%, maturing in July 2018, of which $13,550 was drawn as at December 31, 2016 (December 31, 2015 - $10,200). (ii) Facility 2 includes: A non-revolving loan in the amount of $56,936 (December 31, 2015 - $59,074) bearing interest at the BA rate plus 150 bps or Prime plus 25 bps, maturing in July 2020, repayable in monthly blended payments based on a 20 year amortization. The REIT entered into floating-to-fixed interest rate swaps on August 7, 2015 for terms of 3 to 10 years which resulted in a weighted average effective interest rate of 3.1%. Page 15 of 23 A $7,500 revolving credit facility bearing interest at Prime plus 25 bps maturing in July 2020, of which $7,500 was drawn as at December 31, 2016 (December 31, 2015 – $nil). (iii) Facility 3 includes: A non-revolving loan in the amount of $13,415 (December 31, 2015 - $13,874) bearing interest at 3.5% maturing in February 2019, repayable in monthly blended payments based on a 20 year amortization. (iv) Facility 4 includes: A non-revolving loan in the amount of $6,913 bearing interest at 3.22% maturing in January 2021, repayable in monthly blended payments based on a 20 year amortization (December 31, 2015 – $nil). (v) Facility 5 includes: A $14,600 revolving credit facility bearing interest at the BA rate plus 150 bps or Prime plus 50 bps maturing in October 2019, of which $12,950 was drawn as at December 31, 2016 (December 31, 2015 – $nil). (vi) During 2016 the REIT incurred financing fees of $273 (December 31, 2015 – $641). The amounts are accounted for using the effective interest method, $658 remains unamortized at December 31, 2016 (December 31, 2015 - $585). The credit facilities described above (the “Credit Facilities”) are secured by the REIT’s investment properties except for the MB West Island Property and St. Bruno Audi & VW Property. Principal repayments are as follows: 2017 .................................................................................................................................................... 2018 .................................................................................................................................................... 2019 .................................................................................................................................................... 8,577 22,330 33,622 2020 .................................................................................................................................................... 168,903 Thereafter ........................................................................................................................................... 5,767 Total .................................................................................................................................................... $239,199 (b) Interest Rate Swaps The REIT entered into interest rate derivative contracts to limit its exposure to fluctuations in the interest rates payable on variable rate financings for Facility 1 and Facility 2. Gains or losses arising from changes in the fair value of the interest rate derivative contracts are recognized in the consolidated statements of net income (loss) and comprehensive income (loss) (terms described in Note 9(a)(i) and (ii) above). As at December 31, 2016, the notional principal amount of the interest rate swaps was $184,871 (December 31, 2015 - $192,389) and the fair value adjustment of the interest rate swaps was $1,522 (December 31, 2015 - $4,172) resulting in a liability balance of $2,650 (December 31, 2015 - $4,172). 10. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities consist of: Accounts payable and accrued liabilities Accrued interest Distributions payable (Note 11) December 31, 2016 December 31, 2015 $2,508 225 1,467 $4,200 $2,914 196 1,209 $4,319 Page 16 of 23 11. DISTRIBUTIONS December 31, 2016 December 31, 2015 Paid in Cash Declared Payable as at period end $7,301 7,558 801 Units Class B LP Units Total $7,986 $15,287 15,544 7,986 666 1,467 Units $2,355 2,899 543 Class B LP Units Total $2,881 $5,236 6,445 1,209 3,546 666 12. UNITHOLDERS’ EQUITY AND CLASS B LP UNITS Units The REIT is authorized to issue an unlimited number of Units. Each Unit is transferable and represents an equal, undivided beneficial interest in the REIT and any distributions from the REIT, whether of net income, net realized capital gains (other than such gains allocated and distributed to redeeming holders of Units) or other amounts and, in the event of the termination or winding-up of the REIT, in the net assets of the REIT remaining after satisfaction of all liabilities. All Units rank equally among themselves without discrimination, preference or priority and entitle the holder thereof to receive notice of, to attend and to one vote at all meetings of holders of Units (“Unitholders”) and holders of Special Voting Units or in respect of any written resolution thereof. Unitholders are entitled to receive distributions from the REIT (whether of net income, net realized capital gains or other amounts) if, as and when declared by the Board. Upon the termination or winding-up of the REIT, Unitholders will participate equally with respect to the distribution of the remaining assets of the REIT after payment of all liabilities. Such distribution may be made in cash, as a distribution in kind, or both, all as the Board in its sole discretion may determine. Units have no associated conversion or retraction rights. No person is entitled, as a matter of right, to any pre-emptive right to subscribe for or acquire any Unit, except for Dilawri as set out in the Exchange Agreement entered into on closing of the IPO between the REIT and certain members of the Dilawri Group, pursuant to which such members of the Dilawri Group have been granted, among other things, certain rights to participate in future offerings of the REIT. On September 19, 2016, the REIT issued an aggregate of 3,841,000 Units at a price of $10.50 per Unit in connection with a public offering of Units for gross proceeds of $40,330, which included the exercise in full of the over-allotment option granted to the underwriters, whereby an additional 501,000 Units were issued at a price of $10.50 per Unit (the “September 2016 Equity Offering”). Issuance costs of $2,124 were netted against the gross proceeds. The Dilawri Group waved its pre-emptive right to acquire Units in connection with the September 2016 Equity Offering. Class B LP Units In conjunction with the IPO, and as partial consideration for the Initial Properties, the REIT, through the Partnership, issued Class B LP Units to certain members of the Dilawri Group. Each Class B LP Unit is exchangeable at the option of the holder for one Unit (subject to certain anti-dilution adjustments), is accompanied by a Special Voting Unit (which provides the holder with that number of votes at any meeting of Unitholders to which a holder of the number of Units that may be obtained upon the exchange of the Class B LP Unit to which such Special Voting Unit is attached would be entitled), and will receive distributions of cash from the Partnership equal to the distributions to which a holder of the number of Units that may be obtained upon the exchange of the Class B LP Unit would be entitled. Page 17 of 23 For the year ended December 31, 2016 Units, beginning of year Units issued, net of costs Over-allotment option, net of costs Total Units, end of year Class B LP Units, beginning of year Fair value adjustment on Class B LP Units Total Class B LP Units, end of year Total Units and Class B LP Units, end of year For the period ended December 31, 2015 Units, beginning of period Units issued, net of costs Overallotment, net of costs Total Units, end of period Class B LP Units, beginning of period Class B LP Units issued Fair value adjustment on Class B LP Units Total Class B LP Units, end of period Units 8,120,000 3,340,000 501,000 11,961,000 9,933,253 — 9,933,253 21,894,253 Units — 7,500,000 620,000 8,120,000 — 9,933,253 — 9,933,253 Amount $72,794 33,156 5,050 $111,000 $81,950 24,137 $106,087 $217,087 Amount $— 66,966 5,828 $72,794 $— 99,333 (17,383) $81,950 Total Units and Class B LP Units, end of period 18,053,253 $154,744 13. UNIT BASED-COMPENSATION On June 8, 2016, the Unitholders approved the adoption of the Equity Incentive Plan (the “Plan”) whereby DUs may be granted to a Participant on a discretionary basis by the Governance, Compensation and Nominating Committee. The maximum number of Units available for issuance under the Plan is 500,000. Each DU is economically equivalent to one Unit, however, under no circumstances shall DUs be considered Units nor entitle a Participant to any rights as a Unitholder, including, without limitation, voting rights or rights on liquidation. Each DU shall receive a distribution of additional IDUs equal to the amount of distributions paid per Unit by the REIT on it Units. Upon vesting of the DUs and IDUs, a Participant may elect, prior to the expiry of such DU or IDU, to exchange such vested DUs and IDUs (subject to satisfaction of any applicable withholding taxes) for an equal number of Units. The holder of such DUs and IDUs cannot settle the DUs and IDUs for cash. Under the Plan, the fair value of the DUs and IDUs is recognized as compensation expense over the vesting period. Fair value is determined with reference to the market price of the Units. The Units are redeemable at the option of the holder and are considered puttable instruments in accordance with IAS 32, “Financial instruments: presentation”. As the exemption under IAS 32, “Financial instruments: presentation”, does not apply to IFRS 2, “Share based payments”, the DUs and IDUs are accounted for as a liability. The deferred unit liability is adjusted to reflect the change in their fair value at each reporting period with the changes in fair value recognized as compensation expense. During the year ended December 31, 2016, the REIT accrued for short-term incentive awards in the amount of $360 which will be settled by the granting of DUs. Page 18 of 23 Certain independent Trustees elected to receive board and committee fees in the form of DUs. The fair value of each DU granted is measured based on the volume-weighted average trading price of the Units for the five trading days immediately preceding the grant date. A summary of DUs and IDUs grants under the Plan is outlined below: Outstanding DUs and IDUs, beginning of period DUs Granted IDUs Granted Outstanding DUs and IDUs, end of period 14. RENTAL REVENUE AND PROPERTY COSTS Rental Revenue Base rent Property tax recoveries Straight line rent adjustment Rental revenue Property Costs Property tax recoveries Land lease Straight line land lease adjustment Property cost As at December 31, 2016 Units Amount - 7,359 69 7,428 $ - 79 - $79 2016 2015 $27,348 $10,657 4,110 2,816 1,442 1,201 $34,274 $13,300 2016 $4,110 576 102 2015 $1,442 247 45 $4,788 $1,734 Two of the Initial Properties are subject to land leases. Land lease expense includes straight line rent on the land leases over the expected lease term and recoverable realty taxes that have been paid by the REIT. 15. SEGMENT INFORMATION All of the REIT’s assets and liabilities are in, and its revenues are derived from, the Canadian real estate industry segment. The REIT’s investment properties are, therefore, considered by management to have similar economic characteristics. 16. CAPITAL MANAGEMENT The REIT defines its capital as the aggregate of Unitholders’ equity, Class B LP Units and Credit Facilities. The REIT is free to determine the appropriate level of capital in context with its cash flow requirements, overall business risks and potential business opportunities. As a result of this, the REIT will make adjustments to its capital based on its investment strategies and changes to economic conditions. Page 19 of 23 In order to maintain or adjust its capital structure, the REIT may increase or decrease the amount of distributions paid to Unitholders, issue new Units and debt, or repay debt. The REIT manages its capital structure with the objective of: • complying with the guidelines set out in its Declaration of Trust; • complying with debt covenants; • ensuring sufficient liquidity is available to support its financial obligations and to execute its operating and strategic plans; • maintaining financial capacity and flexibility through access to capital to support future development; and • minimizing its cost of capital while taking into consideration current and future industry, market and economic risks and conditions. The REIT has certain key financial covenants in its Credit Facilities, including debt service ratios and leverage ratios, as defined in the respective agreements. These ratios are measured by the REIT on an ongoing basis to ensure compliance with the agreements. As at December 31, 2016, the REIT was in compliance with each of the covenants under these agreements. 17. FAIR VALUES AND FINANCIAL INSTRUMENT RISK MANAGEMENT (a) The fair value of the REIT’s financial assets and financial liabilities, except as noted below, approximate their carrying values due to their short-term nature. The following table provides the classification and measurement of financial assets and liabilities as at December 31, 2016: Fair value through profit or loss Loans and receivables / other financial liabilities Total Total (Fair value) (Amortized cost) (Fair value) (Carrying value) (Fair value) Measurement basis Financial Liabilities Credit Facilities Interest rate swaps Class B LP Units Deferred Units and Income Deferred Units $— 2,650 106,087 79 $238,541 — — — $108,816 $238,541 $239,199 — — — $239,199 $238,541 2,650 106,087 79 $347,357 $239,199 2,650 106,087 79 $348,015 The following table provides the classification and measurement of financial assets and liabilities as at December 31, 2015: Measurement basis Financial Liabilities Credit Facilities Interest rate swaps Class B LP Units Deferred Units and Income Deferred Units Fair value through profit or loss Loans and receivables / other financial liabilities Total Total (Fair value) (Amortized cost) (Fair value) (Carrying value) (Fair value) $— 4,172 81,950 — $215,878 — — — $86,122 $215,878 $216,643 — — — $216,643 $215,878 4,172 81,950 — $216,643 4,172 81,950 — $302,000 $302,765 Page 20 of 23 The REIT uses various methods to estimate the fair values of assets and liabilities that are measured at fair value on a recurring or non-recurring basis in the statement of financial position after initial recognition. The fair value hierarchy reflects the significance of inputs used in determining the fair values. - Level 1 – quoted prices in active markets for identical assets and liabilities; - Level 2 – inputs other than quoted prices in active markets or valuation techniques where significant inputs are based on observable market data; and - Level 3 – valuation technique for which significant inputs are not based on observable market data. The following summarizes the significant methods and assumptions used in estimating the fair value of the REIT’s assets and liabilities measured at fair value: (i) Investment Properties The REIT assessed the valuation of the investment properties using a discounted cash flow approach whereby a current discount rate was applied to the projected net operating income which a property can reasonably be expected to produce in the future. The fair value of investment properties as at December 31, 2016 is $461,809 (December 31, 2015 - $389,650) (Level 3). (ii) Credit Facilities The fair value of the REIT’s Credit Facilities is determined based on the present value of future payments, discounted at the yield on Government of Canada bonds, plus an estimated credit spread at the reporting date for a comparable loan (Level 2). (iii) Interest rate swaps The fair value of the REIT’s interest rate swaps which represents a liability as at December 31, 2016 is $2,650 (December 31, 2015 - $4,172). The fair value of an interest rate swap is determined using rates unobservable in the market (Level 2). (iv) Class B LP Units The fair value of the Class B LP Units as at December 31, 2016 is $106,087 (December 31, 2015 - $81,950). The fair values of the Class B LP Units are based on the traded value of the Units as at December 31, 2016 (Level 1). (v) Deferred Units and Income Deferred Units The fair value of the Deferred Units and Income Deferred Units as at December 31, 2016 is $79 (December 31, 2015 - $nil). The fair values of the Deferred Units and Income Deferred Units are based on the traded value of the Units as at December 31, 2016 (Level 1). Financial Risk Management The REIT’s activities expose it to a variety of financial risks. The main risks arising from the REIT’s financial instruments are market and liquidity risks. The following is a description of those risks and how the exposures are managed: Market Risk The REIT is exposed to market risk as a result of changes in factors such as interest rates and the market price of the Units. Interest Rate Risk - The majority of the REIT’s debt is financed with floating rates. Interest rate swaps (with maturities staggered over 10 years) have been entered into to mitigate interest rate fluctuations, thereby mitigating the exposure to changes in interest rates. Unit Price Risk - The REIT is exposed to Unit price risk as a result of the issuance of Class B LP Units. Class B LP Units are recorded at their fair value based on market trading prices. Class B LP Units negatively impact net income when the Unit price rises and positively impact net income when the Unit price declines. Liquidity Risk Liquidity risk arises from the possibility of not having sufficient capital available to the REIT. Mitigation of liquidity risk is discussed above in Note 16 - Capital Management. A significant portion of the REIT’s assets have been pledged as security under the related Credit Facilities. Page 21 of 23 18. COMMITMENTS AND CONTINGENCIES In conjunction with the IPO, the REIT and Dilawri entered into an Administration Agreement which covers various operational and administrative services to be provided to the REIT by Dilawri on a cost-recovery basis. The Administration Agreement has a term of 5 years from the closing of the IPO and will be automatically renewed for successive one year terms, subject to termination rights. The REIT, as lessee, is committed under long-term land leases that are classified as operating leases with expiry dates to 2033 with minimum annual rentals as follows: Within 1 year ......................................................................................................................................... After 1 year, but not more than 5 years ................................................................................................. More than 5 years ................................................................................................................................. $576 3,115 8,356 Total ...................................................................................................................................................... $12,047 19. RELATED PARTY TRANSACTIONS The REIT was formed primarily to own income-producing automotive dealership properties located in Canada. In connection with the closing of the IPO on July 22, 2015, the REIT indirectly acquired the Initial Properties from certain members of Dilawri Group, for use as automotive dealerships, an automotive repair facility, or complementary uses, including restaurants, and leased these properties to Dilawri Tenants. The REIT’s independent Trustees approve all related party transactions in accordance with the Related Party Transaction Policy adopted by the Board. The Dilawri Tenants are the REIT’s major tenant and provide approximately 93.2% (2015 – 100%) of the REIT’s rental income. Pursuant to the Administration Agreement, Dilawri will provide, or cause to be provided, if and as requested by the REIT, subject to the overriding supervision and direction of the Board, management consisting of the REIT’s President and Chief Executive Officer, Chief Financial Officer and Corporate Secretary and operating and administrative support functions. The Administration Agreement has a term of 5 years and will be automatically renewed for successive one year terms, subject to termination rights. Services are provided under the Administration Agreement on a cost-recovery basis. General and administrative expenses include $771 for the twelve month period ended December 31, 2016 paid by the REIT to Dilawri pursuant to the Administration Agreement (December 31, 2015 - $311). In consideration of the applicable Dilawri Tenants leasing the entirety of the two Initial Properties with third party tenants (and thereby bearing occupancy, rental and other risks associated with the portions of those properties subleased to third party tenants for the initial lease terms of 12 and 15 years), the REIT paid to such Dilawri Tenants an indemnity fee in the aggregate amount of $1,000 at time of closing of the IPO (amortizable over the term of the leases). In addition, the REIT paid Dilawri $1,800 in respect of recoverable land transfer taxes associated with the acquisition of the Initial Properties that may become payable by Dilawri over the 3 years following closing of the IPO. Subsequently this amount was adjusted to $896 (Note 8) and the remaining balance of $904 was paid back to the REIT from Dilawri. In connection with the IPO, the REIT and Dilawri entered into the Strategic Alliance Agreement which established a preferential and mutually beneficial business and operating relationship between the REIT and Dilawri. The Strategic Alliance Agreement will be in effect so long as Dilawri and certain other entities related to Dilawri own, control or direct, in the aggregate, an effective interest of at least 10% (on a fully-diluted basis) in the REIT. The Strategic Alliance Agreement provides the REIT with the first right to purchase REIT-Suitable Properties (as defined in the Strategic Alliance Agreement) in Canada or the United States acquired or developed by the Dilawri Group. The purchase price in respect of a REIT-Suitable Property will be mutually agreed by the REIT and Dilawri at the applicable time. Pursuant to the Strategic Alliance Agreement, the REIT acquired the following investment properties:  On December 23, 2015, the REIT acquired the Toyota Woodland Property from a third party and leased it to a Dilawri Tenant.  On January 14, 2016 the REIT acquired the Audi Barrie Property from a member of the Dilawri Group and leased it to a Dilawri Tenant.  On December 8, 2016 the REIT acquired the St. Bruno Audi & VW Property from a third party and leased it to a Dilawri Tenant. Page 22 of 23  On December 22, 2016 the REIT acquired the MB West Island Property from a member of the Dilawri Group and leased it to a Dilawri Tenant. 20. SUPPLEMENTRY INFORMATION Changes in non-cash operating accounts (in thousands of Canadian dollars) Prepaid expenses and other assets Accounts payable and accrued liabilities Change in non-cash operating accounts Supplemental Cash Flow Information (in thousands of Canadian dollars) Interest paid on Credit Facilities Total interest and financing charges $7,177 (December 31, 2015 - $2,732) 21. SUBSEQUENT EVENTS 2016 $74 (845) 2015 ($557) 3,020 $(771) $2,463 2016 $6,936 2015 $2,480 On February 7, 2017, the REIT issued an aggregate of 4,255,000 Units at a price of $10.85 per Unit in connection with a public offering of Units for gross proceeds of $46,167, which included the exercise in full of the over-allotment option granted to the underwriters, whereby an additional 555,000 Units were issued at a price of $10.85 per Unit (the “February 2017 Equity Offering”). Issuance costs of $2,248 were netted against the gross proceeds. The Dilawri Group waived its pre-emptive right to acquire Units in connection with the February 2017 Equity Offering. On March 17, 2017, the REIT entered into an agreement to purchase the Go Mazda dealership property (“Go Mazda Property”) located in Edmonton, Alberta, for approximately $8,000 from a third party. The Go Mazda Property has a gross leasable area of 17,150 square-foot, full-service dealership facility located on 2.27 acres at 9704 and 9710 35th Avenue NW in Edmonton, Alberta. Page 23 of 23 Notes Auditors BDO Canada LLP TD Bank Tower 66 Wellington Street West, Suite 3600 Toronto, Ontario M5K 1H1 Legal Counsel Torys LLP TD South Tower 79 Wellington Street West, 30th Floor Toronto, Ontario M5K 1N2 Stock Exchange Listing Automotive Properties Real Estate Investment Trust is listed on the Toronto Stock Exchange under the symbol APR.UN. Units issued and outstanding as at March 20, 2017: 26,149,253 (including Class B LP Units). Investor Contact Bruce Wigle Bay Street Communications Tel: (647) 496-7856 Annual General Meeting 10:00 am, Tuesday, June 20, 2017 Toronto Region Board of Trade First Canadian Place 77 Adelaide St. West, Suite 350 Toronto, Ontario Unitholder Information Head Office 133 King Street East Suite 300 Toronto, Ontario M5C 1G6 Board of Trustees Kapil Dilawri, Chair of the Board Co-founder, Vice President and Secretary of the Dilawri Group John Morrison, Lead Independent Trustee¹ ² President and Chief Executive Officer of Choice Properties Real Estate Investment Trust Janet Graham² ³ Managing Director of IQ Alliance Incorporated Stuart Lazier¹ ⁴ Co-founder and Chief Executive Officer of Fiera Properties Limited James Matthews Chief Financial Officer of the Dilawri Group Officers Milton Lamb President and Chief Executive Officer Andrew Kalra Chief Financial Officer Registrar and Transfer Agent Computershare Trust Company 100 University Avenue, 8th Floor Toronto, Ontario M5J 2Y1 Tel: 1 (800) 564-6253 Notes: (1) Member of the Audit Committee (2) Member of the Governance, Compensation and Nominating Committee (3) Chair of the Audit Committee (4) Chair of the Governance, Compensation and Nominating Committee I N V E S T M EN T H I G H L I GH T S > > > > > > > Solid platform to consolidate Canadian automotive dealership properties The REIT provides a unique monetization opportunity for automotive dealership owners, which is expected to continue to generate accretive acquisition opportunities Right of first refusal on proprietary property pipeline from the Dilawri Group Average lease term to maturity of 14 years, based on Cash NOI of properties Long-term, triple-net leases with fixed annual rent increases provide stable, predictable cash flows The REIT’s properties are located in prime, high-traffic locations in strategic markets across Canada Portfolio properties represent 29 automotive manufacturers, providing strong brand diversification Automotive Properties REIT 133 King Street East Suite 300 Toronto, Ontario M5C 1G6 T: 647.789.2440 automotivepropertiesreit.ca

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