2 0 19 A N N U A L R E P O R T
Consolidating Canada’s
Automotive Dealership
Properties
TM
Dear fellow unitholders,
Please find enclosed Automotive Properties REIT’s (“APR” or the “REIT”) 2019 Management Discussion
and Analysis and Financial Statements.
We maintained our track record of positive momentum in 2019 with continued growth in the REIT’s AFFO
and property portfolio, in addition to a strengthened balance sheet at year-end. This builds upon the
consistent, steady execution of our growth strategy since the time of APR’s initial public offering in 2015.
Today, the quality of the REIT’s assets, enhanced diversification, increased scale and available liquidity,
positions us well as we face this period of economic uncertainty caused by the COVID-19 pandemic.
We expanded and strengthened APR’s property portfolio through acquisitions in 2019, with the addition
of seven dealership properties for a combined purchase price of approximately $100 million. Through
these acquisitions, we further diversified the REIT’s tenant base and geographic presence in attractive
metropolitan markets across Canada.
APR’s expanding property portfolio and triple-net leases with contractual rent increases continues to drive
significant growth in each of our key performance measures. In comparison to 2018, the REIT’s property
rental revenue grew 40.1%, cash net operating income increased by 42.3%, and Adjusted Funds from
Operations (“AFFO”) grew by 36.3%. AFFO per unit increased to 90.8 cents, up from 87 cents a year ago.
This growth in AFFO per unit was achieved even as we issued approximately 7.9 million REIT units in the
third week of December through a $92 million equity offering and have yet to fully deploy proceeds from
this offering. The REIT’s 2019 AFFO per unit figure also reflects a one-time cost of approximately $1 million
related to the internalization of the REIT’s management and operations.
For 2019, the REIT paid total distributions of $28.7 million to unitholders, representing an AFFO payout
ratio of 88.6 percent. Excluding one-time costs associated with the aforementioned internalization, our
AFFO payout ratio for 2019 would have been 86.1 percent, in line with our target range.
The internalization of the REIT’s management and operations was an important milestone, signifying the
next step in APR’s ongoing development and growth, and providing further alignment with unitholders.
The REIT’s Strategic Alliance Agreement with the Dilawri Group has remained intact. Subsequent to 2019,
in early February 2020, APR completed the acquisitions of two more dealership properties from Dilawri,
Regina BMW and North Shore Acura in Vancouver, for an aggregate purchase price of $28.9 million.
To support APR’s growth, we completed two public equity offerings in 2019, raising aggregate gross
proceeds of approximately $176 million, thereby further enhancing the REIT’s capital market liquidity and
positioning APR for continued expansion of its portfolio through acquisitions.
This strong momentum was interrupted in March 2020 due to the COVID-19 public health crisis and
related economic uncertainty. Fortunately, our December 2019 equity raise has provided us with a strong
liquidity position to manage through this period. The REIT currently has $65 million in undrawn credit
facilities, approximately $19.5 million in cash, and eight unencumbered properties with an IFRS value in
excess of $100 million.
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APR has a well-balanced level of annual debt maturities, with interest rate swap terms ranging between
three and 8.8 years, and a weighted average interest rate swap term of six years. The REIT’s capital
requirements over the next two years are low and capital expenditure requirements are expected to be
minimal. APR’s debt to GBV is approximately 44%, well below our target of approximately 55% with capital
fully deployed.
The COVID-19 pandemic is having a significant near-term, adverse impact on the automotive dealership
industry. APR is working to support its tenants during this difficult time. Since inception of the REIT, we
have been selective on which dealership groups we choose to partner with. Accordingly, we have full
confidence in our tenants and expect them to rebound from this pandemic, though the timing is uncertain.
It is important to remember that automobiles are an essential part of our daily lives, and current delays
in vehicle service or purchases are expected to provide a strong recovery for our tenants as the crisis
subsides.
We are now focused on prudently managing the REIT’s available resources and liquidity during this period
of economic uncertainty. We have also proactively raised our level of planning to adapt more quickly
should risk levels rise and we will continue to monitor and adjust our business continuity and other plans
as this situation evolves.
With a strong liquidity position, long-term, triple-net lease structure, 100% occupancy with some of
Canada’s largest automotive dealership groups, strong relationships with lenders, and a portfolio of
properties located in attractive commercial corridors of major Canadian urban markets, APR is well
positioned to weather this period of uncertainty.
As conditions improve, we look forward to resuming our strategy of further expanding and diversifying
the REIT’s property portfolio through accretive consolidation opportunities in attractive markets, growing
cash flow in support of unitholder distributions and building long-term value for all of our stakeholders.
On behalf of the Board of Trustees and management of Automotive Properties REIT, thank you for your
confidence and support.
Kapil Dilawri
Chair of the Board
Milton Lamb
President & Chief Executive Officer
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Automotive Properties Real Estate Investment Trust
Management’s Discussion and Analysis
December 31, 2019
Table of Contents
SECTION 1 – GENERAL INFORMATION AND CAUTIONARY STATEMENTS......................................... 3
Basis of Presentation ....................................................................................................................... 3
The REIT .......................................................................................................................................... 3
Forward-Looking Statements ........................................................................................................... 5
Non-IFRS Financial Measures ......................................................................................................... 6
SECTION 2 – OVERVIEW, STRATEGY AND OBJECTIVES ...................................................................... 8
Overview .......................................................................................................................................... 8
Strategy and Objectives ................................................................................................................... 9
SECTION 3 - PROPERTY PORTFOLIO .................................................................................................... 10
Portfolio Overview .......................................................................................................................... 10
Income Producing Property Portfolio Summary ............................................................................ 11
Profile of the Dilawri Leases .......................................................................................................... 11
Profile of Other Leases .................................................................................................................. 12
Profile of Overall Lease Maturity.................................................................................................... 12
Property Use and Brand Diversification ......................................................................................... 12
Description of the REIT’s Key Tenant ........................................................................................... 14
Dilawri Additional and Non-ASPE Measures ................................................................................. 14
SECTION 4 –KEY PERFORMANCE INDICATORS AND SELECTED FINANCIAL INFORMATION ....... 15
SECTION 5 – RESULTS OF OPERATIONS ............................................................................................. 16
Net Income (Loss) and Comprehensive Income (Loss) ................................................................ 16
Rental Revenue and Property Costs ............................................................................................. 16
General and Administrative Expenses .......................................................................................... 17
Interest Expense and Other Financing Charges ........................................................................... 17
Changes in Fair Values of Investment Properties ......................................................................... 18
Changes in Fair Values of Class B LP Units, DUs, IDUs and Interest Rate Swaps ..................... 18
SECTION 6 – NON-IFRS FINANCIAL MEASURES .................................................................................. 18
Reconciliation of NOI, Cash NOI, FFO and AFFO to Net Income (Loss)
and Comprehensive Income (Loss) ............................................................................................... 18
FFO, AFFO and Cash NOI ............................................................................................................ 19
Same Property Cash Net Operating Income ................................................................................. 20
Reconciliation of Cash Flow from Operating Activities to ACFO ................................................... 20
SECTION 7 – LIQUIDITY AND CAPITAL RESOURCES........................................................................... 22
Capital Structure ............................................................................................................................ 22
Debt Financing ............................................................................................................................... 23
Unitholders’ Equity (including Class B LP Units) ........................................................................... 24
Financing Metrics and Debt Covenants ......................................................................................... 26
SECTION 8 – RELATED PARTY TRANSACTIONS .................................................................................. 27
Administration Agreement ............................................................................................................. 28
Automotive Properties REIT 2019
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Automotive Properties REIT 2019 Strategic Alliance Agreement ........................................................................................................ 29
SECTION 9 − OUTLOOK ........................................................................................................................... 29
SECTION 10 – OTHER DISCLOSURES ................................................................................................... 30
Commitments and Contingencies .................................................................................................. 30
Disclosure Controls and Internal Controls over Financial Reporting ............................................. 30
SECTION 11 – QUARTERLY RESULTS OF OPERATIONS .................................................................... 31
SECTION 12 – RISKS & UNCERTAINTIES, CRITICAL JUDGEMENTS & ESTIMATES ......................... 32
APPENDIX .................................................................................................................................................. 49
Property List as at December 31, 2019 ......................................................................................... 49
Automotive Properties REIT 2019
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Automotive Properties REIT 2019
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 years ended December 31, 2019 and December 31, 2018. 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. All comparisons of results
for the three months ended December 31, 2019 (“Q4 2019”) are against results for the three months ended December
31, 2018 (“Q4 2018”), and comparisons of results for the twelve months ended December 31, 2019 (“2019”) are against
results for the twelve months ended December 31, 2018 (“2018”).
This MD&A should be read in conjunction with the audited consolidated financial statements of the REIT and
accompanying notes for the years ended December 31, 2019 and December 31, 2018. Further information about the
REIT can be found in the REIT’s annual information form dated March 23, 2020 (the “AIF”). The AIF, along with other
continuous disclosure documents required by the Canadian securities regulators, can be found on the REIT’s SEDAR
profile 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. The REIT
commenced operations on July 22, 2015 following completion of its initial public offering of units (the “IPO”). In
connection with the IPO, the REIT indirectly acquired a portfolio of 26 commercial properties from certain members of
the Dilawri Group (as defined below) (the “Initial Properties”), and leased the Initial Properties to the applicable member
of the Dilawri Group (collectively, and including members of the Dilawri Group that became tenants of a property owned
by the REIT subsequent to the IPO, the “Dilawri Tenants”).
As at the date of this MD&A, the REIT owns a portfolio of 64 income-producing commercial properties. The properties
are located in metropolitan areas across British Columbia, Alberta, Saskatchewan, Manitoba, Ontario and Quebec,
totaling approximately 2.4 million square feet of gross leasable area (“GLA”).
893353 Alberta Inc. (“Dilawri”) is a privately held corporation which, together with certain of its affiliates, holds an
approximate 25.6% effective interest in the REIT as at December 31, 2019, 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”), and 2,280,552 REIT Units (as defined below). The Class B LP Units are
economically equivalent to REIT Units and are exchangeable generally on a one-for-one basis for REIT Units. Dilawri
and its affiliates, other than its shareholders and controlling persons, are referred to herein as the “Dilawri Group”.
In January 2019, the REIT’s former development property in Kitchener-Waterloo, Ontario, became classified as an
income-producing property. The tenant, Tesla Motors Canada ULC (“Tesla KW”), has opened a service centre on the
premises.
On March 29, 2019, the REIT acquired from AutoCanada Inc. the real estate underlying two automotive dealership
properties located in Winnipeg, Manitoba (“St. James VW” and “McNaught Cadillac Buick GMC”) for approximately
$23,950, plus capital improvement costs of $245 and acquisition costs of $685. The acquisition consists of two full-
service automotive dealership properties totaling 96,135 square feet of GLA.
On June 25, 2019, the REIT acquired from AutoCanada Inc. the real estate underlying three automotive dealership
properties, including two located in Guelph, Ontario (“Wellington Motors” and “Guelph Hyundai”), and one located in
Abbotsford, British Columbia (“Abbotsford VW”), for approximately $30,400, plus acquisition costs of $518. The
acquisition consists of three full-service automotive dealership properties totaling 91,721 square feet of GLA.
On June 28, 2019, the REIT issued an aggregate of 8,000,000 trust units of the REIT (“REIT Units”) at a price of $10.45
per REIT Unit in connection with a public offering of REIT Units for gross proceeds of $83,600 (the “June Equity
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Automotive Properties REIT 2019 Offering”). The REIT incurred issuance costs of $3,829. The June Equity Offering included 1,000,000 REIT Units issued
upon the partial exercise of the underwriters’ over-allotment option. The Dilawri Group waived its pre-emptive right to
acquire REIT Units in connection with the June Equity Offering.
On September 19, 2019, the REIT acquired from the Dilawri Group the real estate underlying an automotive dealership
property located in Etobicoke, Ontario (“Audi Queensway”) for approximately $36,500, plus acquisition costs of $1,556.
The acquisition consists of a full-service automotive dealership property totaling 65,547 square feet of GLA.
On December 3, 2019, the REIT announced that the independent trustees of the REIT (the “Independent Trustees”) had
notified Dilawri of the REIT’s intention to terminate the Administration Agreement effective December 31, 2019.
Following termination of the Administration Agreement, the REIT’s management, operating and administrative support
personnel were employed directly by the REIT. As the termination of the Administration Agreement was completed in
accordance with its terms, the REIT was not required to pay Dilawri any termination fees. See Section 8 “Related Party
Transactions”.
On December 16, 2019, the REIT acquired the real estate underlying an automotive dealership property located in
Calgary, Alberta (“Straightline Kia”) for approximately $8,415, plus acquisition costs of $90. The acquisition consists of
a full-service automotive dealership property totaling 21,808 square feet of GLA.
The REIT provided capital commitments for facility improvements to the tenants of the 401 Dixie Automall and
Meadowvale Honda automotive dealership properties located in Mississauga, Ontario. The total capital commitments
were approximately $7,000 in aggregate, plus transaction costs of $7, and resulted in an annual rent increase for both
properties effective December 16, 2019. An additional $1,401 of capital commitments for facility improvements was
provided to another tenant in 2019.
On December 23, 2019, the REIT issued an aggregate of 7,900,500 REIT Units at a price of $11.65 per REIT Unit in
connection with a public offering of REIT Units for gross proceeds of $92,041 (the “December Equity Offering”). The
REIT incurred issuance costs of $3,389. The December Equity Offering included 1,030,500 REIT Units issued upon the
full exercise of the underwriters’ over-allotment option. The Dilawri Group exercised its pre-emptive right to acquire
1,800,000 REIT Units in connection with the December Equity Offering.
As at December 31, 2019, the total number of issued and outstanding REIT Units and Class B LP Units was 37,697,052
and 9,933,253, respectively, for a total of 47,630,305 Units (as defined below). The REIT Units are listed on the Toronto
Stock Exchange under the symbol “APR.UN”. REIT Units and Class B LP Units are collectively referred to in this MD&A
as “Units”.
The REIT announced monthly cash distributions of $0.067 per REIT Unit, resulting in total distributions declared of
$8,515 and paid of $7,986 for Q4 2019 (Q4 2018 - declared $6,378 and paid $6,036). For the year ended December
31, 2019, the REIT declared distributions of $29,794 and paid distributions of $28,729 (2018 - declared $22,276 and
paid $21,901).
The REIT became internally managed effective as of December 31, 2019 (the “Internalization’). Prior to December 31,
2019, the REIT was externally administered by Dilawri pursuant to the Administration Agreement. The Strategic Alliance
Agreement with Dilawri continues to allow 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 Section 8 “Related
Party Transactions” in this MD&A.
On February 5, 2020, the REIT entered into an agreement to purchase the BMW Regina automotive dealership property
(“BMW Regina Property”), for $11,350 from the Dilawri Group. The BMW Regina Property is a 19,619 square foot, full-
service automotive dealership facility.
On February 6, 2020, the REIT entered into an agreement to purchase the North Shore Acura automotive dealership
property (“North Shore Acura Property”), for $17,500 from the Dilawri Group. The North Shore Acura Property is a
22,273 square foot, full-service automotive dealership facility.
The REIT provided capital commitments for facility improvements to one of the tenants of the automotive dealership
properties located in Winnipeg, Manitoba. The total capital commitment of $2,003, results in an annual rent increase
effective March 6, 2020.
Automotive Properties REIT 2019
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Automotive Properties REIT 2019 This MD&A is dated March 23, 2020.
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 impact of the global coronavirus (COVID-19) pandemic on the REIT;
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, and (ii) expected transactions to be entered
into between Dilawri and the REIT (including pursuant to the Strategic Alliance Agreement);
the expenditures related to the Tesla KW property;
the REIT’s intention with respect to, and ability to execute, its external and internal growth strategies;
the level of new vehicle sales in Canada in 2020;
the maintenance by the REIT of a strong balance sheet and prudent financial management and associated
minimization of financial risk;
the REIT representing a unique alternative for automotive dealership operators considering a sale or
recapitalization of their business;
the REIT’s estimated increase in general and administrative expenses in 2020 due to the Internalization;
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;
potential trade tariff policies and their impact on future retail automotive sales;
the REIT’s ability to meet its stated objectives;
the REIT’s ability to expand its asset base and make accretive acquisitions;
the ability of the REIT to qualify as a “Mutual Fund Trust” as defined in the Income Tax Act (Canada) (the “Tax
Act”), and as a “Real Estate Investment Trust”, as defined in the SIFT Rules (as defined below); and
the REIT’s ability to consolidate automotive dealership properties.
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,
Automotive Properties REIT 2019
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Automotive Properties REIT 2019 including that inflation will remain relatively low, that interest rates will remain stable or at lower levels for the near term,
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
Section 12 “Risks & Uncertainties, Critical Judgments & 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 Financial 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”), adjusted cash flow from operations (“ACFO”),
FFO payout ratio, AFFO payout ratio, ACFO payout ratio, net operating income (“NOI”), cash net operating income
(“Cash NOI”), Same Property cash net operating income (“Same Property Cash NOI”), and earnings before income tax,
depreciation, and amortization (“EBITDA”) are key measures of performance used by the REIT’s management and real
estate businesses.
Gross book value (“GBV”), indebtedness (“Indebtedness”), net asset value (“Net Asset Value”), debt to gross book value
(“Debt to GBV”), debt service coverage ratio (“Debt Service Coverage Ratio”), 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 earnings performance and is indicative of the REIT’s
ability to pay distributions from earnings, while FFO, NOI, Cash NOI, Same Property Cash NOI and EBITDA are
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Automotive Properties REIT 2019 important measures of operating performance of real estate businesses and properties. The IFRS measurement most
directly comparable to FFO, AFFO, NOI, Cash NOI, Same Property Cash NOI and EBITDA is net income. ACFO is a
supplementary measure used by management to improve the understanding of the operating cash flow of the REIT.
The IFRS measurement most directly comparable to ACFO is cash flow from operating activities.
“FFO” is a non-IFRS financial measure of operating performance widely used by the real estate industry, particularly by
those publicly traded entities that own and operate income-producing properties. FFO should not be considered as an
alternative to net income or cash flows provided by operating activities determined in accordance with IFRS. The REIT
calculates FFO in accordance with the Real Property Association of Canada’s White Paper on Funds from Operations
& Adjusted Funds from Operations for IFRS issued in February 2019. 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 properties; (iv) amortization of tenant incentives; (v) distributions on redeemable or exchangeable units
treated as interest expense; and (vi) operational revenue and expenses from the right-of-use assets in respect of Q4
2019 and 2019 (referred to as “ROU” assets).
“FFO payout ratio” is calculated as distributions paid per Unit divided by the FFO per Unit diluted.
“AFFO” is a non-IFRS measure of economic earnings operating performance widely used in the real estate industry to
assess an entity’s distribution capacity from earnings. The REIT calculates AFFO in accordance with the Real Property
Association of Canada’s White Paper on Funds from Operations & Adjusted Funds from Operations for IFRS issued in
February 2019. AFFO is calculated as FFO subject to certain adjustments, to remove the impact of: (i) any adjustments
resulting from recognizing property rental revenues or expenses (including ground lease rental payments in respect of
Q4 2019 and 2019) on a straight-line basis; and (ii) capital expenditures. Beginning in the first quarter of 2019 (“Q1
2019), the REIT adopted a capital expenditure reserve of 0.5% of base rent in the AFFO calculation. To date, the REIT
has not incurred capital expenditure costs. The capital expenditure reserve is based on management’s best estimate of
cost that the REIT may incur, related to the sustaining/maintaining of the existing leased area.
“AFFO payout ratio” is a non-IFRS measure of the sustainability of the REIT’s distribution payout capacity from earnings.
The REIT uses this metric to provide clarity of the performance of earnings and the overall management of the current
portfolio of assets. Management considers AFFO payout ratio as the key measure of the REIT’s distribution capacity
from earnings. AFFO payout ratio is calculated as distributions paid per Unit divided by AFFO per Unit diluted.
“ACFO” is a non-IFRS financial measure. The REIT calculates ACFO in accordance with the Real Property Association
of Canada’s White Paper on Adjusted Cash Flow from Operations for IFRS issued in February 2019. ACFO is calculated
as cash flow from operating activities subject to certain adjustments, to (a) remove the impact of: (i) changes in non-
cash working capital that are not sustainable in nature; (ii) amortization of financing costs and indemnity payable in
respect of the third party tenant portfolio sublease structure; and (iii) capital expenditures and (b) deduct interest
expense. Beginning in Q1 2019, the REIT adopted a capital expenditure reserve of 0.5% of base rent in the ACFO
calculation. To date, the REIT has not incurred capital expenditure costs. The capital expenditure reserve is based on
management’s best estimate of cost that the REIT may incur, related to the sustaining/maintaining of the existing leased
area.
“ACFO payout ratio” is calculated as distributions declared divided by ACFO.
“NOI” is a non-IFRS financial measure and 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 interest, general and administrative expenses, fair value adjustments
and amortization.
“Cash NOI” is defined as NOI prior to the effects of straight-line adjustments. Beginning in Q1 2019, Cash NOI also
deducts land lease payments.
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Automotive Properties REIT 2019 “Same Property Cash NOI” is a non-IFRS measure which reports the period-over-period performance of the same asset
base having consistent GLA during both periods of Cash NOI. The REIT uses this measure to assess financial returns
and changes in property value.
FFO, AFFO, FFO payout ratio, AFFO payout ratio, ACFO, ACFO payout ratio, NOI, Cash NOI and Same Property 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, ACFO, ACFO payout ratio, NOI, Cash NOI and Same Property Cash NOI may differ
from other issuers’ methods and, accordingly, may not be comparable to measures used by other issuers. See Section
6 “Non-IFRS Financial Measures” in this MD&A for a reconciliation of these measures to net income or cash flow from
operating activities, as applicable.
“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.
“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 under IFRS and 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.
“Debt to GBV” means the ratio of Indebtedness to GBV at a particular time.
“Debt Service” means the total payments of principal and interest on debt.
“Debt Service Coverage Ratio” means the ratio of EBITDA divided by Debt Service 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
Canada’s automotive retail industry is characterized by strong industry fundamentals. According to Statistics Canada,
automotive retail industry sales totaled a record $165 billion in 2019 (up 2% from $161 billion in 2018), representing
approximately 27% of Canada’s overall retail sales of products and merchandise. Over the last 20 years, retail
Automotive Properties REIT 2019
8
8
Automotive Properties REIT 2019 automotive sales grew at a compound annual rate of 4.4%. The tables below contain new automobile sales by units in
Canada for the 2019 and 2018 calendar years:
Twelve Months Ended December 31 (units)
2019
YoY unit
increase/
(decrease)
YoY %
increase/
(decrease)
Alberta
British Columbia and the Territories
Manitoba
New Brunswick
Newfoundland and Labrador
Nova Scotia
Ontario
Prince Edward Island
Québec
Saskatchewan
Total Canada
(Source: Statistics Canada)
222,286
208,315
57,402
40,984
30,498
51,146
843,559
8,110
450,318
48,670
1,961,288
(14,483)
(17,224)
(10,492)
(330)
244
(1,651)
(18,754)
376
(10,676)
(1,554)
(74,544)
(6.1%)
(7.6%)
(15.5%)
(0.8%)
0.8%
(3.1%)
(2.2%)
4.9%
(2.3%)
(3.1%)
(3.7%)
2018
236,769
225,539
67,894
41,314
30,254
52,797
862,313
7,734
460,994
50,224
2,035,832
New vehicle sales represent a portion of overall dealer profitability, with significant contribution of profit generated from
used vehicle sales, service and parts, finance and insurance. The REIT’s portfolio of diverse dealership properties,
strong industry fundamentals and an attractive leasing profile support the stability of distributions to holders of REIT
Units and Class B LP Units (collectively, “Unitholders”).
Strategy and Objectives
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.
The REIT has a well defined, long term growth strategy which includes both external and internal elements.
External Growth
Accretive Acquisitions
Management believes that the REIT is well-positioned to capitalize on opportunities for accretive acquisitions from third-
party automotive dealership 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;
Automotive Properties REIT 2019
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9
Automotive Properties REIT 2019
Capital redeployment needs – Monetizing the real estate underlying automotive dealership properties allows
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.
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 entity in Canada exclusively
focused on owning and acquiring automotive dealership properties.
The REIT evaluates acquisition opportunities 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.
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, the REIT has a 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.
Since completion of the IPO, the REIT has acquired 11 automotive dealership properties from the Dilawri Group under
the Strategic Alliance Agreement as of the date of this MD&A.
Internal Growth
Management believes that the REIT is well-positioned to achieve organic increases in cash flow and, as a result,
increase the value of its properties over time. These increases are expected to come from the following sources:
Each of the leases with a member of the Dilawri Group (each, a “Dilawri Lease”) contains annual contractual
basic rent escalators in the amount of 1.5% per annum. 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 non-structural capital improvements so that rent escalators are expected to flow directly
to NOI; and
Contractual fixed rent escalators or consumer price index adjustments are expected, wherever possible, to be
negotiated into new leases entered into by the REIT.
SECTION 3 - PROPERTY PORTFOLIO
Portfolio Overview
At December 31, 2019, the REIT’s portfolio consisted of 62 income-producing commercial properties. Out of the 62
income-producing commercial properties, 33 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 29 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 the remaining 27 properties are exclusively occupied by other
dealership groups for use as automotive dealerships or for automotive dealership ancillary services, such as a vehicle
service compound facility or a repair facility. Consequently, the Dilawri Group is the REIT’s most significant tenant and
accounts for approximately 61.7% of the REIT’s base rent in 2019, including rent from properties subleased to third
parties (83.3% in 2018).
The applicable Dilawri Tenant is the lead tenant for Dixie Auto Mall until July 2030. A Dixie Auto Mall sub-tenant that
operated the Hyundai dealership moved from the premises at the end of the second quarter of 2019 (“Q2 2019”). As of
Automotive Properties REIT 2019
10
10
Automotive Properties REIT 2019
December 31, 2019, the premises were leased but unoccupied; however, this change does not affect the term of the
applicable Dilawri Lease.
Overall, at December 31, 2019, the REIT’s properties had a weighted average rental rate of $25.29 per square foot.
Income Producing Property Portfolio Summary
As at December 31, 2019
Greater Vancouver Area (GVA) (2)
Calgary
Edmonton
Regina
Winnipeg
KW/Guelph
Greater Toronto Area (GTA)
Ottawa/Kingston
Greater Montréal Area (GMA)
Total Portfolio
As at December 31, 2018
Greater Vancouver Area (GVA) (2)
Calgary
Edmonton
Regina
Greater Toronto Area (GTA)
Ottawa/Kingston
Greater Montréal Area (GMA)
Total Portfolio
Number of
Properties GLA (sq. ft.)
Average
rental rate
(per sq. ft.)(1)
Weighted
Average Lease
Term (yrs)
7
7
6
8
2
3
13
11
5
62
176,871
293,158
174,350
183,941
96,135
87,300
691,908
303,817
317,608
2,325,088
$34.79
$25.71
$29.80
$20.75
$17.55
$21.50
$27.98
$23.84
$18.65
$25.29
13.6
12.6
13.6
9.4
18.3
16.5
10.9
17.5
15.1
13.4
Number of
Properties
GLA (sq. ft.)
Average
rental rate
(per sq. ft.)(1)
Weighted
Average Lease
Term (yrs)
6
6
6
8
12
11
5
54
153,950
271,350
174,350
183,941
619,861
303,817
317,608
2,024,877
$33.57
$25.13
$29.77
$20.44
$26.29
$23.61
$18.48
$24.83
13.9
13.4
14.6
10.4
11.0
18.5
16.1
13.7
(1) Based on 2020 (12-month period) contractual rental revenue.
(2) Excludes Land leases, which expenses are passed on to the tenant.
Appendix “A” in this MD&A contains a list and description of the REIT’s properties as at December 31, 2019.
Profile of the Dilawri Leases
As at December 31, 2019, the remaining terms of the Dilawri Leases range from 6.5 years to 17.7 years, with a weighted
average lease term of approximately 12.0 years. As at December 31, 2019, the weighted average annual basic rent
payable under the Dilawri Leases is approximately $26.32 per square foot ($25.20 in 2018). The basic annual rental
rates of each of these leases increase by 1.5% each applicable lease year.
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 the applicable Dilawri Group tenant to extend the applicable Dilawri Lease for successive
five-year periods as long as the Dilawri Group tenant meets certain conditions;
The leases are triple-net to the REIT, with the Dilawri Group tenant responsible for costs relating to the
properties, including property taxes, repairs and maintenance;
Automotive Properties REIT 2019
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Automotive Properties REIT 2019
Rights on the part of the applicable Dilawri Group tenant to cease operations under certain circumstances,
provided it continues to comply with the other terms of its Dilawri Lease; 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 Other Leases
All of the REIT’s other leases are tenanted by affiliates of other automotive dealership groups and, with the exception of
one property whereby the lease was assumed by the REIT at the time of acquiring the property, are substantially the
same as the Dilawri Leases, except for changes in contractual rental rates. Terms for the changes in contractual rental
rates for the REIT’s other leases are based on either a fixed amount, or on changes to consumer price indices (either
national or provincial, with some caps and floors), with the exception of one lease. The timing of the changes in
contractual rental rates vary lease by lease.
Profile of Overall Lease Maturity
With the exception of one property, the lease portfolio matures between 2026 and 2038 as set out in the chart below:
Lease Maturity Profile (*)
5.0
I
4.0
O
N
h
s
3.0
a
C
f
o
2.0
%
1.0
-
4.0%
2.7%
2.0%
8.9%
8.2% 8.5%
8.0%
7.6%
12.5%
9.5%
7.7%
7.0%
7.0%
6.4%
25%
20%
15%
10%
5%
-
'19
'20
'21
'22
'23
'24
'25
'26
'27
'28
'29
'30
'31
'32
'33
'34
'35
'36
'37
'38
(*) Based on 2020(12-month period) contractual rental revenue.
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 following table sets out the breakdown of automotive brands that are marketed, retailed
and serviced at the REIT’s properties as of December 31, 2019:
Manufacturer / Brand
REIT Auto
Dealership GLA
(Sq. Feet)
% of REIT Auto
Dealership GLA
% of REIT Auto
Dealership Rent
No. of REIT Locations
Honda (1)
313,155
13.6%
14.2%
9
Automotive Properties REIT 2019
12
12
Automotive Properties REIT 2019
BMW (2)
Volkswagen
Audi(3)
Toyota
Acura (1)
Other (4)
General Motors
Nissan (5)
Porsche (6)
Chrysler (7)
Mazda
Hyundai
Mercedes Benz
Infiniti
Kia
Ford
Subaru
Lexus
Mitsubishi
301,205
252,299
237,484
210,360
139,708
102,176
99,851
85,411
84,569
81,750
81,352
80,950
60,850
44,904
39,543
39,287
19,033
16,226
14,750
13.1%
11.0%
10.3%
9.2%
6.1%
4.4%
4.3%
3.7%
3.7%
3.5%
3.5%
3.5%
2.6%
2.0%
1.7%
1.7%
0.8%
0.7%
0.6%
11.1%
10.9%
9.1%
8.9%
6.5%
5.9%
3.3%
4.2%
5.8%
1.6%
4.5%
3.3%
2.7%
3.3%
0.9%
1.7%
0.7%
0.7%
0.7%
6
7
6
5
5
8
2
3
2
2
4
4
1
4
2
1
2
1
2
Total
2,304,863
100.0%
100.0%
76
Notes:
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Includes Honda Used Car and Regina Collision Centre. Regina Honda/Acura split 75% and 25% of 30,863 sq. ft.
Includes MINI.
Includes the Audi service property (formerly Infiniti Vancouver).
Includes 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. Also includes the former Dilawri Acura and BMW property in Regina at 1921 1st Avenue which is being used for
ancillary dealership purposes by both the Dilawri Pre Owned and the Triple 7 Chrysler dealerships. It continues to be leased by a
Dilawri Tenant under the same lease as Dilawri BMW. Also includes the former Toyota and Hyundai dealerships which have vacated
their premises located in Dixie Auto Mall; and the applicable Dilawri Tenant will continue to be the lead tenant for Dixie Auto Mall until
July 2030. Includes 3 vehicle compound facilities that were acquired as part of the Mierins Auto Group Portfolio. Also includes the
Tesla KW service centre.
Includes the new Nissan Truck expansion in the former KIA dealership at Dixie Auto Mall.
Includes Porsche JLR Edmonton.
Includes Dodge, FIAT, Jeep and RAM.
Automotive Properties REIT 2019
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Automotive Properties REIT 2019
Description of the REIT’s Key Tenant
The following chart summarizes certain relevant financial information of the Dilawri Group for the twelve months ended
December 31, 2019 with comparative figures for the twelve months ended December 31, 2018 as provided to the REIT
by Dilawri (all figures are approximations, not in thousands):
Dilawri Group’s Financial Information (approximations, not in thousands)
December 31, 2019
LTM(3)
December 31, 2018
LTM(3)
Combined Revenues (not audited or reviewed)
$3.8 billion
EBITDA (not audited or reviewed)
$123.7 million
Pro Forma Adjusted Rent Coverage Ratio (not audited or
reviewed)
3.5(1)
$3.0 billion
$85.6 million
2.9(2)
Term Debt (not audited or reviewed)
$440.1 million(1)
$140.0 million(2)
Term Debt to EBITDA Ratio (not audited or reviewed)
3.6(1)
1.6(2)
Notes:
(1)
(2)
(3)
As at December 31, 2019.
As at December 31, 2018.
“LTM” means the last twelve months.
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 this 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 term debt reflected in its non-consolidated combined
financial statements 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.
Automotive Properties REIT 2019
14
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Automotive Properties REIT 2019
SECTION 4 –KEY PERFORMANCE INDICATORS AND SELECTED FINANCIAL
INFORMATION
Key Performance Indicators
The REIT’s performance is measured by management’s selection of certain key indicators including those set out in the
table below. For further information on the REIT’s operating measures and non-IFRS measures, please refer to Sections
5 and 6 of this MD&A.
Operating Results
Rental Revenue
NOI
Cash NOI
Same Property Cash NOI
Net Income (Loss)
FFO
AFFO (1)
Fair value adjustment to investment properties
Distributions per Unit
Net Income (Loss) per Unit – basic (2)
Net Income (Loss) per Unit – diluted (3)
FFO per Unit – basic (4)
FFO per Unit – diluted (5)
AFFO per Unit – basic (1)(4)
AFFO per Unit – diluted (1)(5)
Weighted average Units – basic (6)
Weighted average Units – diluted (7)
Payout ratio (%)
FFO
AFFO
Balance Sheet and Other Metrics
Three Months Ended
December 31,
2018
2019
Twelve Months Ended
December 31,
2018
2019
$18,122
15,144
14,301
10,377
3,894
8,983
8,227
1,266
$0.201
0.096
0.096
0.222
0.220
0.203
0.202
40,502,680
40,767,092
$67,580
57,354
53,844
36,164
(4,499)
36,148
32,906
3,150
$0.804
$13,741
11,493
10,805
10,254
13,666
7,274
6,531
(2,261)
$0.201
0.442
0.440
0.235
0.234
0.211
0.210
(0.125)
(0.124)
1.003
0.997
0.913
0.908
30,898,283 36,023,242
31,057,609 36,257,034
$48,254
40,745
37,835
35,624
39,150
27,247
24,145
4,099
$0.804
1.425
1.418
0.991
0.987
0.879
0.874
27,483,193
27,617,646
91.2%
99.6%
85.9%
95.6%
80.6%
88.6%
81.5%
92.0%
Total assets
Total liabilities (excluding Class B LP Units)
Number of units outstanding (includes Class B LP Units)
Market price per REIT Unit – close (end of period)
Market capitalization (includes Class B LP Units)
Overall capitalization rate
Fixed weighted average effective interest rate on debt (excludes revolving
credit facilities) (8)
Proportion of total debt at fixed interest rates through swaps and
mortgages
Weighted average interest rate swap term remaining (years)
Weighted average term to maturity of debt
Interest Coverage Ratio (9)
Debt Service Coverage Ratio (9)
Debt to GBV
As at
December 31,
2019
$935,733
$420,452
47,630,305
$12.15
$578,708
6.6%
As at
December
31, 2018
$766,239
$424,664
31,729,805
$8.97
$284,616
6.6%
As at
December
31, 2017
$547,606
269,023
26,149,253
$10.91
$285,288
6.5%
3.77%
3.79%
3.35%
95%
91%
83%
6.0
3.9
2.9X
1.6X
43.6%
6.7
4.3
3.3X
1.9X
54.7%
5.3
3.6
3.8X
2.0X
48.5%
(1) Comparative figures have been adjusted to reflect the change to the calculation of AFFO in 2019. See “Non-IFRS Financial Measures”.
Automotive Properties REIT 2019
15
15
Automotive Properties REIT 2019
(2) Net Income (Loss) per Unit – basic is calculated in accordance with IFRS by dividing the Net Income (Loss) by the amount of the weighted average number of
outstanding REIT Units and Class B LP Units.
(3) Net Income (Loss) per Unit – diluted is calculated in accordance with IFRS by dividing the Net Income (Loss) by the amount of the weighted average number of
outstanding REIT Units, Class B LP Units, DUs and IDUs (each as defined below) granted to certain Trustees and management of the REIT.
(4) 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.
(5) 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, DUs and IDUs granted to certain Trustees and management of the REIT.
(6) The weighted average number of outstanding Units – basic includes the Class B LP Units.
(7) The weighted average number of outstanding Units – diluted includes the Class B LP Units, DUs and IDUs granted to certain Trustees and management of the REIT
(8) The fixed weighted average effective interest rate on debt is calculated on an annualized basis.
(9) For 2019 ratios, see Section 7 “Financing Metrics and Debt Covenants”.
SECTION 5 – RESULTS OF OPERATIONS
Net Income (Loss) and Comprehensive Income (Loss)
Net Property Income
Base rent
Property tax recoveries
Straight-line rent adjustment
Rental Revenue
Property tax expense
Land leases
Straight- line land lease adjustment
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,
DUs and IDUs
Fair value adjustment on investment
properties
Net Income (Loss) and Comprehensive
Income (Loss)
Three Months Ended
December 31,
2018
2019
Twelve Months Ended
December 31,
Variance
2019
2018 Variance
$14,460
2,978
684
18,122
(2,978)
-
-
(2,978)
15,144
(1,887)
(4,207)
6,395
(1,997)
(10,820)
$10,949
2,078
714
13,741
(2,078)
(144)
(26)
(2,248)
11,493
(1,057)
(3,162)
(6,550)
(1,997)
17,200
$3,511
900
(30)
4,381
(900)
144
26
(730)
3,651
(830)
(1,045)
12,945
-
$54,384
10,226
2,970
67,580
(10,226)
-
-
(10,226)
57,354
(4,090)
(16,948)
(3,902)
(7,988)
$38,441
6,801
3,012
48,254
(6,831)
(576)
(102)
(7,509)
40,745
$15,943
3,425
(42)
19,326
(3,395)
576
102
(2,717)
16,609
(3,002)
(1,088)
(10,496)
(6,452)
(3,669)
(7,988)
(233)
-
(28,020)
(32,075)
19,461
(51,536)
1,266
(2,261)
3,527
3,150
4,099
(949)
$3,894
$13,666
$(9,772)
$(4,499)
$39,150 $(43,649)
For Q4 2019, net income was $3,894 compared to $13,666 in Q4 2018. For 2019, a net loss was $4,499 compared to
a net income of $39,150 in 2018. The decreases were primarily due to fair value adjustments for Class B LP Units, as
well as higher interest expense and other financing charges, partially offset by higher NOI and fair value adjustments on
investment properties. NOI was $15,144 in Q4 2019 as compared to $11,493 in Q4 2018, and for 2019 was $57,354
compared to $40,745 in 2018. The increases were primarily due to the properties acquired during and subsequent to
Q4 2018, and contractual rent increases.
Rental Revenue and Property Costs
Rental revenue is based on triple net leases with tenants. As such, rental revenue also includes recoverable realty taxes
and straight-line adjustments.
For Q4 2019, rental revenue of $18,122 was $4,381, or 31.9%, higher than Q4 2018, primarily due to the properties
acquired during and subsequent to Q4 2018, and contractual rent increases.
For 2019, rental revenue of $67,580 was $19,326, or 40.1%, higher than 2018, primarily due to the properties acquired
during and subsequent to Q4 2018, and contractual rent increases.
Automotive Properties REIT 2019
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Automotive Properties REIT 2019
Property costs of $2,978 and $10,226 for Q4 2019 and 2019, respectively, were $900 and $3,395 higher than Q4 2018
and 2018, respectively. The increases are attributable to the properties acquired during and subsequent to Q4 2018,
and 2018.
General and Administrative Expenses
The REIT’s general and administrative expenses consisted of: (i) outsourced costs, (ii) public entity costs, (iii) unit-based
compensation expense in the form of Deferred Units (“DUs”) and Income Deferred Units (“IDUs”) and (iv) management
short term compensation expense. The outsourced costs were largely related to the services provided by Dilawri
pursuant to the Administration Agreement which was terminated on December 31, 2019 in accordance with its terms.
The REIT reimbursed Dilawri for costs incurred in connection with the provision of such services so long as such costs
were identified in the then current annual budget of the REIT or were otherwise approved by the REIT. The REIT paid
to Dilawri $266 and $1,050 in respect of services provided in Q4 2019 and 2019, respectively (Q4 2018 – $273 and
2018 – $1,054).
The public entity costs reflect the expenses related to ongoing operations of the REIT, including professional fees for
legal and audit services and depreciation expense for an office lease ROU asset, which were $11 lower and $61 higher
than Q4 2018 and 2018, respectively. Public entity costs will fluctuate from quarter to quarter depending on when such
expenses are incurred.
The non-cash unit-based compensation expense relates to DUs and IDUs granted in accordance with the REIT’s Equity
Incentive Plan (the “Plan”). As at December 31, 2019, all Independent Trustees of the REIT 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 a result of the
Internalization, $1,480 of DUs was issued to the REIT’s management. Approximately $737 of such DUs vested and
were accounted for in Q4 2019, with the balance vesting over a three to five-year period from the date of grant and
accounted for accordingly. For Q4 2019 and 2019, the REIT incurred expenses of $933 and $1,338, respectively, related
to the granting of DUs, IDUs, and the vesting of long-term DUs.
For Q4 2019 and 2019, the REIT accrued management short-term incentive awards of $125 and $384, respectively,
which will be settled by the granting of DUs.
The table below illustrates the breakdown of general and administrative expenses incurred in Q4 2019 and 2019 as
compared to Q4 2018 and 2018:
Administration Agreement
Public entity and other costs
DUs and IDUs expense
Management short term compensation expense
Q4 2019
Q4 2018
Variance
$266
563
933
125
$273
574
84
126
$(7)
(11)
849
(1)
General and administrative expenses
$1,887
$1,057
$830
2019
$1,050
1,318
1,338
384
$4,090
2018
Variance
$1,054
1,257
348
343
$3,002
$(4)
61
990
41
$1,088
As result of the Internalization, the REIT’s general and administrative expenses are expected to increase approximately
$500 for the 2020 fiscal year.
Interest Expense and Other Financing Charges
Interest expenses include amounts payable to lenders under the REIT’s Credit Facilities and Mortgages (each as defined
in Section 7 “Liquidity and Capital Resources” below), as well as amortization of upfront costs and costs to hedge the
applicable Credit Facilities and Mortgages at fixed rates. For Q4 2019 and 2019, the interest expense and other financing
charges were $4,207 and $16,948, respectively, representing increases of $1,045 and $6,452 from Q4 2018 and 2018,
respectively. The increases are primarily due to additional debt incurred by the REIT to acquire properties during and
subsequent to Q4 2018, and a higher cost of borrowing as a result of the extension of the maturities on certain interest
rate swaps. Also included in Q4 2019 and 2019 is $95 and $379, respectively, of interest expense on lease liabilities
due to the adoption of IFRS 16.
Automotive Properties REIT 2019
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Automotive Properties REIT 2019
Changes in Fair Values 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.
Property under development is measured using both a comparable sales method and a discounted cash flow method,
net of costs to complete. The REIT’s valuation inputs are supported by quarterly market reports from an independent
appraiser which indicate no change in capitalization rates from December 31, 2018 for the markets the REIT is in. For
Q4 2019 and 2019, the fair value adjustments in investment properties were $1,266 and $3,150, respectively, compared
to $(2,261) for Q4 2018 and $4,099 for 2018. The fair value gain adjustment for Q4 2019 was primarily due to NOI
increases, partially offset by the transaction costs related to the Straightline Kia property acquisition and adjustment of
ROU assets (two land leases). The additional fair value adjustment in 2019 was due to Q1 2019 NOI increases as well
as the write-off of a straight-line lease liability balance, partially offset by the transaction costs related to the St. James
VW, McNaught Cadillac, Buick GMC, Wellington Motors, Guelph Hyundai and Audi Queensway property acquisitions.
The overall capitalization rate applicable to the REIT’s entire portfolio remained at 6.6% (December 31, 2018 – 6.6%),
which is equivalent to the REIT’s overall assessment as at December 31, 2019.
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 would be 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 $34,700 or ($32,200), respectively.
Changes in Fair Values of Class B LP Units, DUs, IDUs and Interest Rate Swaps
The Class B LP Units, DUs, IDUs and the interest rate hedges (see Section 7 “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 (loss) and comprehensive income (loss).
Under IFRS, the Class B LP Units, DUs and IDUs are classified as financial liabilities and measured at fair value through
profit and loss (FVTPL). The fair value of the Class B LP Units, DUs and IDUs will be measured every period by reference
to the traded value of the REIT Units, with changes in measurement recorded in net income (loss) and comprehensive
income (loss). 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 impact of the movement in the traded value of the REIT Units resulted in a decrease in fair value adjustment for
Class B LP Units in Q4 2019 of $10,820 (Q4 2018 – increase of $17,200) and $32,075 for 2019 (2018 – increase of
$19,461).
The REIT enters into interest rate swaps to limit its exposure to fluctuations in the interest rates on variable rate
financings for certain of its Credit Facilities. 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).
The fair value adjustments for interest rate swaps for Q4 2019 and 2019 were $6,395 (Q4 2018 – $(6,550)) and $(3,902)
(2018 – $(3,669)), respectively. The variances reflect a decline in interest rates in the derivative market as at December
31, 2019.
SECTION 6 – NON-IFRS FINANCIAL MEASURES
Reconciliation of NOI, Cash NOI, FFO and AFFO to Net Income (Loss) and Comprehensive
Income (Loss)
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
Automotive Properties REIT 2019
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Automotive Properties REIT 2019 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 Financial
Measures”).Beginning in Q1 2019, the REIT adopted a capital expenditure reserve of 0.5% of base rent in the AFFO
calculation. To date, the REIT has not incurred capital expenditure costs. The capital expenditure reserve is based on
the length of the lease terms, renewal retention rates, triple-net lease structure and management’s best estimate of cost
that the REIT may incur, related to the sustaining/maintaining of the existing leased area. Comparative figures have
been adjusted to reflect the change to the calculation of AFFO in 2019. The calculations of these measures and the
reconciliation to net income (loss) and comprehensive income (loss) are set out in the following table:
($000s, except per Unit amounts)
Calculation of NOI
Property revenue
Property costs
NOI (including straight-line adjustments)
Adjustments:
Land lease payments (1)
Straight-line adjustment (rent and land lease) (2)
Cash NOI
Reconciliation of net income (loss) 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, DUs and IDUs
Change in fair value – investment properties
ROU asset net balance of depreciation/interest and lease
payments (3)
FFO
Adjustments:
Straight-line adjustment (rent and land leases) (2)
Capital expenditure reserve
AFFO
Number of Units outstanding (including Class B LP Units)
Weighted average Units Outstanding – basic
Weighted average Units Outstanding – diluted
FFO per Unit – basic (4)
FFO per Unit – diluted (5)
AFFO per Unit – basic (4)
AFFO per Unit – diluted (5)
Distributions per Unit
FFO payout ratio
AFFO payout ratio
Three Months Ended
December 31,
2018
2019
$18,122
(2,978)
$15,144
(159)
(684)
$14,301
$13,741
(2,248)
$11,493
-
(688)
$10,805
Twelve Months Ended
December 31,
2018
2019
67,580
(10,226)
$57,354
(540)
(2,970)
$53,844
$48,254
(7,509)
$40,745
-
(2,910)
$37,835
Variance
$19,326
(2,717)
$16,609
(540)
(60)
$16,009
Variance
$4,381
(730)
$3,651
(159)
4
$3,496
$3,894
$13,666
$(9,772)
$(4,499)
$39,150
$(43,649)
(6,395)
1,997
10,820
(1,266)
(67)
6,550
1,997
(17,200)
2,261
(12,945)
-
28,020
(3,527)
-
(67)
3,902
7,988
32,075
(3,150)
(168)
3,669
7,988
(19,461)
(4,099)
-
233
-
51,536
949
(168)
$8,983
$7,274
$1,709
$36,148
$27,247
$8,901
(684)
(72)
$8,227
47,630,305
40,502,680
40,767,092
$0.222
$0.220
$0.203
$0.202
$0.201
91.2%
99.6%
(688)
(55)
$6,531
31,729,805
30,898,283
31,057,609
$0.235
$0.234
$0.211
$0.210
$0.201
85.9%
95.6%
4
(17)
$1,696
15,900,500
9,604,397
9,709,483
$(0.013)
$(0.014)
$(0.008)
$(0.008)
$-
5.3%
4.0%
(2,970)
(272)
$32,906
47,630,305
36,023,242
36,257,034
$1.003
$0.997
$0.913
$0.908
$0.804
80.6%
88.6%
(2,910)
(192)
$24,145
31,729,805
27,483,193
27,617,646
$0.991
$0.987
$0.879
$0.874
$0.804
81.5%
92.0%
(60)
(80)
$8,761
15,900,500
8,540,049
8,639,388
$0.012
$0.010
$0.034
$0.034
$-
(0.9)%
(3.4)%
(1)
In 2019, the REIT adopted IFRS 16. For Q4 2019 and 2019, land lease payments applied to lease liability. For Q4 2018 and 2018, land lease
payments are included in property costs.
(2) For Q4 2019 and 2019, the REIT did not include straight-line adjustments for land leases since the REIT reclassified land leases in
accordance with IFRS 16 as ROU assets.
In 2019, the REIT adopted IFRS 16, resulting in the classification of one office lease as a ROU asset.
(3)
(4) 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.
(5) 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, DUs and IDUs granted to certain independent Trustees and management of the REIT.
FFO, AFFO and Cash NOI
In Q4 2019, FFO increased 23.5% to $8,983, which represented a decrease to $0.220 per Unit, compared to $7,274, or
$0.234 per Unit, in Q4 2018. The increase in FFO was primarily due to the properties acquired during and subsequent
to Q4 2018, and contractual rent increases. The decline in FFO per Unit was primarily due to the one-time Internalization
Automotive Properties REIT 2019
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Automotive Properties REIT 2019
cost and the timing difference between the closing of the December Equity Offering and the deployment of proceeds
from the December Equity Offering, as a portion of the proceeds was used to repay the debt incurred to fund the
acquisition of the Straightline Kia property, which closed on December 16, 2019.
FFO for 2019 increased 32.7% to $36,148, or $0.997 per Unit, compared to $27,247, or $0.987 per Unit, in 2018. The
increase was primarily due to the properties acquired during and subsequent to 2018, and contractual rent increases.
In Q4 2019, AFFO increased 26.0% to $8,227, or decreased to $0.202 per Unit, compared to $6,531, or $0.210 per
Unit, in Q4 2018; and Cash NOI in Q4 2019 was $14,301 on $18,122 of revenue (compared to Cash NOI of $10,805 on
revenue of $13,741 in Q4 2018). The increases were primarily due to the properties acquired during and subsequent to
Q4 2018, and contractual rent increases. The decline in AFFO per Unit in Q4 2019 reflects one-time Internalization costs
incurred and the timing difference between the closing of the December Equity Offering and the deployment of proceeds,
as noted above.
AFFO for 2019 increased 36.3% to $32,906, or $0.908 per Unit, compared to $24,145, or $0.874 per Unit, in 2018; and
Cash NOI in 2019 was $53,844 on $67,580 of revenue (compared to Cash NOI of $37,835 on revenue of $48,254 in
2018). The increases were primarily due to the properties acquired during and subsequent to 2018, and contractual rent
increases.
Excluding the total of cost of $957 directly associated with the Internalization, which consists of $737 relating to the
issuance of DUs and $220 of advisor fees incurred, AFFO for 2019 would have been $33,863, or $0.934 per Unit, and
the REIT’s AFFO payout ratio would have been 86.1%.
For Q4 2019, the REIT declared distributions to Unitholders of $8,515 and paid distributions to Unitholders of $7,986, or
$0.201 per Unit (Q4 2018 – declared $6,378 and paid $6,036), and for 2019 the REIT declared distributions of $29,794
and paid distributions of $28,729, or $0.804 per Unit (2018 – declared $22,276 and $21,901 paid). This resulted in an
AFFO payout ratio of 99.6% in Q4 2019 (Q4 2018 – 95.6%) and 88.6% in 2019 (2018 – 92.0%). The AFFO payout ratio
was higher in Q4 2019 due to the timing difference between the closing of the December Equity Offering and the
deployment of proceeds. The 2019 AFFO payout ratio was lower than 2018 as a result of organic growth in NOI and
acquisitions made during and subsequent to 2018.
Same Property Cash Net Operating Income
Same property base rental revenue
Land lease payments
Same Property Cash NOI
Three Months Ended
December 31,
2018
$10,398
(144)
2019
$10,536
(159)
Variance
$138
(15)
$10,377
$10,254
$123
Twelve Months Ended
December 31,
2019
$36,704
(540)
$36,164
2018 Variance
$504
36
$36,200
(576)
$35,624
$540
Same Property Cash NOI increased 1.20% to $10,377 in Q4 2019 from $10,254 in Q4 2018, and 1.52% to $36,164 in
2019 from $35,624 from 2018. The increases are primarily a result of contractual rent increases. For 2019, the increase
is also attributable to a rent escalation of 10% which occurred in August 2018 on three investment properties in
Edmonton, Alberta. The next rent escalations for these three properties will occur in August 2023.
Reconciliation of Cash Flow from Operating Activities to ACFO
The REIT calculates its ACFO in accordance with the Real Property Association of Canada’s White Paper on Adjusted
Cash Flow from Operations (ACFO) for IFRS issued in February 2019. The REIT believes that ACFO provides useful
supplemental information to both management and investors in measuring the financial performance and financial
condition of the REIT. ACFO does not have a standardized meaning prescribed by IFRS and therefore may not be
comparable to similarly titled measures utilized by other publicly traded real estate investment trusts and should not be
considered as an alternative to other financial measures determined in accordance with IFRS (see “Non-IFRS Financial
Measures”). To date, the REIT has not incurred capital expenditure costs. The capital expenditure reserve of 0.5% of
Automotive Properties REIT 2019
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Automotive Properties REIT 2019
base rent is based on the lease terms, renewal retention rates, triple-net lease structure and management’s best
estimate of cost on a per square foot basis related to sustaining/maintaining existing space that the REIT may incur.
Comparatives figures have been adjusted to reflect the change to the calculation of ACFO in 2019. The calculation of
ACFO and the reconciliation to cash flow from operating activities are set out in the table below:
($000s)
Cash flow from operating activities
Change in non-cash working capital
Interest paid
Amortization of financing fees
Amortization of indemnification fees
Net interest expense and other financing charges
in excess of interest paid
Capital expenditure reserve
ACFO
ACFO payout ratio
Three Months Ended
December 31,
2018
$10,183
(452)
(2,927)
(167)
(19)
2019
$9,668
3,480
(3,995)
(128)
(41)
Twelve Months Ended
December 31,
2018
$36,757
(525)
(9,923)
(465)
(74)
2019
$52,186
(762)
(15,969)
(642)
(154)
Variance
$(515)
3,932
(1,068)
39
(22)
(84)
(68)
(16)
(337)
(108)
(72)
$8,828
96.5%
(55)
$6,495
92.9%
(17)
$2,333
3.6%
(272)
$34,050
87.5%
(192)
$25,470
86.0%
Variance
$15,429
(237)
(6,046)
(177)
(80)
(229)
(80)
$8,580
1.5%
ACFO increased in Q4 2019 to $8,828 and to $34,050 in 2019, as compared to $6,495 in Q4 2018 and $25,470 in 2018
primarily due to the quarterly and contractual rent increases. This resulted in an ACFO payout ratio of 96.5% in Q4 2019
and 87.5% in 2019 (Q4 2018 – 92.9% and 2018 – 86.0%). The ACFO payout ratios for Q4 2019 were higher than the
comparative periods primarily due to costs associated with the one-time Internalization, the December Equity Offering,
and to prior-period adjustments for non-cash working capital from non-operating activity.
Automotive Properties REIT 2019
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Automotive Properties REIT 2019
SECTION 7 – LIQUIDITY AND CAPITAL RESOURCES
Capital Structure
Debt
Facility 1
Facility 2
Facility 3
Term (yrs)
3.5 (1)
4.5 (2)
3.9 (3)
Hedged
Term
(yrs)
2.6 to
9.0
2.6 to
9.5
6.0 to
8.9
Interest
Rate
BA + 150
bps, Prime
+25 bps
BA + 150
bps, Prime
+25 bps
BA + 150
bps, Prime
+50 bps
(1)
(2)
(3)
Mortgages
1.0 to 7.5
n/a
Fixed 3.22%
to 3.72 %
P&I, 20 yrs and
25yrs
Key Terms
Payments &
Interest/Amortization
Effective
Interest
Rate (fixed)
Outstanding as at
December 31, 2019
Outstanding as
at December
31, 2018
3.75%
$194,665(9)
$210,347
3.53%
4.05%
3.52%
99,913
85,791
90,250
95,000
15,471
28,376
$400,299
$ 419,514
(2,371)
(2,642)
Financing fees
Weighted Average
/Total
3.9
6.0
3.77%
$397,929
$ 416,872
Class B LP Units, DUs and IDUs
Cash Balance
$123,935
$90,173
$45,266
$295
Key Financing Metrics and Debt
Covenants (4)(7)
Debt
Covenant
Declaration of Trust
(5)
As at December 31,
2019
As at December
31, 2018
Interest coverage
Debt to GBV
Unitholders’ Equity (including
Class B LP Units, DUs and IDUs)
Debt Service Coverage
AFFO payout ratio
-
-
<60% (6)
<60% (6)
>$120,000
>1.35
<100%
-
-
-
2.9
43.6%
3.3
54.7%
$518,527
$342,647
1.6
88.6%
1.9
92.0%
(1) Facility 1 and the associated revolving facility matures in June 2023.
(2) The REIT has extended the maturity of Facility 2 and the revolving facility to June 2024.
(3) Facility 3 and the associated revolving facility matures in December 2023.
(4) The calculations of these ratios, which are non-IFRS measures, are set out under “Financing Metrics and Debt Covenants” below.
(5) 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, the maximum ratio is 65%.
(6)
(7) The debt agreements for Facility 1, Facility 2 and Facility 3 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 1, Facility 2, Facility 3 and the
Mortgages.
(8) Comparative figures have been adjusted to reflect the change to the calculation of AFFO in 2019.
(9) $19,206 of the non-revolving balance of Facility 1 remains at floating rates.
Automotive Properties REIT 2019
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Automotive Properties REIT 2019
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 repayments are as follows:
2020 ......................................................................................................................................
2021 ......................................................................................................................................
2022 ......................................................................................................................................
18,130
23,750
18,156
2023 ......................................................................................................................................
260,259
2024 ......................................................................................................................................
Thereafter ..............................................................................................................................
72,081
7,923
Total ......................................................................................................................................
$400,299
The REIT’s liquidity position as at December 31, 2019, includes approximately $75,000 of undrawn revolving credit
facilities and cash on hand of $45,266. As at the date of the MD&A, the REIT undrawn revolving credit facilities remained
at $75,000 and cash on hand was approximately $13,000, which management believes is sufficient to carry out its
obligations, discharge liabilities as they come due and fund distributions to Unitholders. A mortgage in the amount of
$11,957 expired in September 2019 and was repaid through the use of the REIT’s revolving credit facilities. As at
December 31, 2019, six properties are unencumbered and able to be used as security in respect of future financing
requirements, as and when needed.
Capital requirements in the next two years are low 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.
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 rates to lessen exposure to interest rate fluctuations; and
(iii) extend loan terms 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
53%-55% of GBV. As at December 31, 2019, the REIT’s Debt to GBV ratio was 43.6% (2018 – 54.7%). The reduction
from December 31, 2018 is attributable to the repayment of outstanding debt under the REIT’s revolving credit facilities
from the net proceeds of the June Equity Offering and the December Equity Offering (collectively, “2019 Equity
Offerings”) and the increase in the REIT’s assets through acquisitions funded by the 2019 Equity Offerings. The reduced
leverage position allows for more than $100,000 in acquisition capacity. 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 to ensure appropriate debt management strategies
are implemented.
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Automotive Properties REIT 2019
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 exceed 60% of GBV (or 65%
of GBV including convertible debentures).
Secured Credit Facilities, Mortgages and Interest Rate Swap Arrangements
All the Credit Facilities and mortgages are with Canadian Schedule 1 banks and are secured by all but six of the REIT’s
investment properties. In March 2019, the REIT increased the amount available to be drawn under the non-revolving
portion of Facility 1 by $19,800 and in June 2019 the REIT increased the amount available to be drawn under the non-
revolving portion of Facility 2 by $29,704.
As at December 31, 2019, the REIT had total revolving credit facilities of $75,000, of which $75,000 was undrawn
($30,000 in Facility 1, $15,000 in Facility 2, and $30,000 in Facility 3).
Financing Fees
During 2019, the REIT incurred financing fees of $407 (2018 – $2,117). The amounts are accounted for using the
effective interest method, $2,371 remains unamortized at December 31, 2019 (2018 – $2,642).
Interest Rate Swaps
The REIT enters into interest rate derivative contracts to limit its exposure to fluctuations in the interest rates payable
on its variable rate financings under Facility 1, Facility 2 and Facility 3. 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). On June 26, 2019, the REIT increased the amount available to be drawn under Facility 2
by $29,704 to a total of $102,189 and extended the term to maturity from June 2022 to June 2024. The REIT also
entered into a $29,704 10-year interest rate swap at a rate of 3.5%.
As a result of the above, the REIT’s weighted average interest rate swap term increased from 6.4 years in Q1 2019 to
6.5 years in Q2 2019. The REIT’s weighted average interest rate swap term as of December 31, 2019 is 6.0 years.
The following table sets out the combined borrowings under Facility 1, Facility 2 and Facility 3 and the remaining
expected term to maturity of the related interest rate swaps as at December 31, 2019.
Remaining
Term (yrs)
Amount
($000s)
3.0
87,887
5.2
6.1
8.8
6.0
88,871
76,510
112,354
365,622
Total Swapped
Fixed Rate Debt
(%)
24.0
24.3
20.9
30.8
100.0
As at December 31, 2019, the notional principal amount of the interest rate swaps was $365,600 (December 31, 2018
– $352,000) and a liability balance of $5,016 as at December 31, 2019 (December 31, 2018 – $1,114).
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. All REIT Units rank equally among themselves without discrimination, preference or priority and entitle
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Automotive Properties REIT 2019
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 if, as and when declared by the Board of
Trustees (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 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.
As at December 31, 2019, the total number of REIT Units outstanding was 37,697,052.
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 on a one-for-one basis (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 to which such Special Voting
Unit is attached 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 net income (loss) and
comprehensive income (loss). 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, 2019, the total number of Class B LP Units outstanding was 9,933,253.
Deferred Units
The REIT offers an Equity Incentive Plan. Under the Plan, DUs may be granted to Trustees, officers and employees of
the REIT on a discretionary basis by the Governance, Compensation and Nominating Committee of the Board. The
maximum number of REIT Units available for issuance under the Plan is 1,000,000. 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.
During the year ended December 31, 2019, a total of 232,953 DUs and IDUs were granted (2018 – 83,444), of which
100,999 DUs and IDUs will be accounted for in accordance with the vesting schedule (2018 – 25,999). As at December
31, 2019, a total of 398,571 DUs and IDUs have been granted (2018 - 165,618), of which 267,187 were accounted as
outstanding and vested.
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
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Automotive Properties REIT 2019 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.
In determining the amount of the monthly cash distributions paid to holders of REIT Units, the Board applies discretionary
judgment to forward-looking, which includes forecasts, 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 REIT is currently paying monthly cash distributions to Unitholders of $0.067 per Unit, representing $0.804
per Unit on an annualized basis.
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 earnings performance) and other factors when establishing cash distributions to holders of REIT Units.
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
Net Asset Value
Investment properties, IFRS value
Cash, prepaid and other assets
Accounts payable and accrued liabilities
Credit Facilities, Mortgages and interest rate swaps
Total Net Asset Value
REIT Units and Class B LP Units outstanding
Debt to GBV
Indebtedness outstanding :
Credit Facilities & Mortgages (excludes deferred financing costs)
Lease Liability
Gross Book Value
Total assets
Debt to GBV (1)
Unitholders’ Equity & Class B LP Units & DUs & IDUs
Unitholders’ Equity
Value of DUs & IDUs
Value of Class B LP Units
Total Unitholders’ Equity & Class B LP Units & DUs & IDUs
As at December 31,
2019
As at December 31,
2018
$888,129
47,604
(14,261)
(402,945)
$518,527
47,630,305
$763,998
2,241
(5,606)
(417,986)
$342,647
31,729,805
A
A1
B
$400,300
7,356
$419,514
-
935,733
766,239
((A+A1)/B) X 100
43.6%
54.7%
$394,592
3,246
120,689
$518,527
$252,474
1,072
89,101
$342,647
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Automotive Properties REIT 2019
Calculations of financial metrics and debt covenants
Interest coverage
Cash NOI
General and administrative expenses
Income before interest expense and fair value adjustments C
Interest expense and other financing charges
D
Q4 2019
$14,301
(1,887)
12,414
4,207
Q4 2018
2019
2018
$10,805
(1,057)
9,748
3,162
$53,844
$37,835
(4,090)
49,754
16,948
(3,002)
34,833
10,496
Interest Coverage Ratio (2)
C/D
3.0X
3.1X
2.9X
3.3X
Debt Service Coverage
Consolidated net income (loss)
Interest expense and other financing charges
Distribution expense on Class B LP Units
Amortization of other assets
Fair value adjustments, net
EBITDA
Principal payments (pay down of debt)
Interest payments on debt (excludes bank charges)
Debt Service
Debt Service Ratio (3)
AFFO payout ratio
AFFO
Distributions on REIT Units
Distributions on Class B LP Units
$3,894
$13,666
$(4,499)
$39,150
4,207
1,997
41
3,159
13,298
4,512
3,953
8,465
3,162
1,997
19
(8,389)
10,455
2,827
2,927
5,754
16,948
7,988
154
32,827
53,418
17,483
15,927
33,410
10,496
7,988
74
(19,891)
37,817
9,530
9,923
19,453
E
F
E/F
1.6X
1.8X
1.6X
1.9X
8,227
5,989
1,997
7,986
6,531
4,381
1,997
5,353
32,906
20,741
7,988
28,729
24,145
14,288
7,988
15,898
AFFO payout ratio (4)
99.6%
95.6%
88.6%
92.0%
Notes:
(1)
(2)
(3)
(4)
The Debt to GBV ratio as at December 31, 2019 decreased as compared to December 31, 2018, primarily due to the 2019 Equity Offerings, the proceeds of which were used, in part, to
fund the 2019 automotive dealership property acquisitions and to repay debt.
The Interest Coverage Ratio for Q4 2019 and 2019 decreased compared to the same periods in the previous year, mainly due to the increase in interest expense and other financing
charges.
The Debt Service Ratio for Q4 2019 and 2019 decreased compared to the same periods in the previous year, mainly due to the increase in interest and principal payments.
The AFFO payout ratio is calculated as distributions per REIT Unit divided by the AFFO per Unit - diluted.
SECTION 8 – RELATED PARTY TRANSACTIONS
The REIT’s largest Unitholder and lead tenant is the Dilawri Group, which as at December 31, 2019 held an approximate
25.6% (2018 - 32.8%) effective interest in the REIT on a fully diluted basis, through its ownership of all of the issued and
outstanding Class B LP Units and 2,280,552 REIT Units.
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.
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Automotive Properties REIT 2019
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, on October 24, 2017, Dilawri paid the REIT $896 in respect of the recoverable land transfer tax associated
with the acquisition of the Initial Properties. The REIT subsequently issued letters of credit to the land transfer tax
authority in the amount of approximately $753 to defer the land transfer tax, on behalf of specific members of the Dilawri
Group that sold certain of the Initial Properties to the REIT in connection with the IPO. The Dilawri Group held all of the
9,933,253 issued and outstanding Class B LP Units for three years subsequent to the IPO and, accordingly, the LCs
are expected to be released. The REIT is working with the applicable tax authorities and Dilawri to secure the release
of the LCs.
For additional information on related party agreements and arrangements with Dilawri, please refer to the REIT’s AIF,
which can be found on SEDAR at www.sedar.com and on the REIT’s website www.automotivepropertiesreit.ca.
Administration Agreement
On December 3, 2019, the REIT announced that the Independent Trustees had notified Dilawri of the REIT’s intention
to terminate the Administration Agreement, which termination was effective as of December 31, 2019. Following
termination, the REIT’s management, operating and administrative support personnel were employed directly by the
REIT. As the termination of the Administration Agreement was completed in accordance with its terms, the REIT was
not required to pay Dilawri any termination fees.
Pursuant to the Administration Agreement, Dilawri 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.
Subject to certain exceptions, Dilawri provided these services to the REIT on a cost-recovery basis, reflecting Dilawri’s
actual costs in providing such services. The REIT was responsible for reimbursing Dilawri for costs incurred in
connection with the provision of the above services so long as such costs were identified in the then current annual
budget of the REIT or were otherwise approved by the REIT.
The initial term of the Administration Agreement was for five years commencing on closing of the IPO and was subject
to automatic renewal unless otherwise terminated in accordance with its terms.
Following termination of the Administration Agreement, limited transition services continue to be provided between the
REIT and Dilawri on a reimbursement of cost basis for a limited period of time following termination, and the Strategic
Alliance Agreement continues in effect in accordance with its terms.
General and administrative expenses include $266 and $1,050 for Q4 2019 and YTD 2019, respectively (Q4 2018 –
$273, YTD 2018 – $1,054), paid by the REIT to Dilawri pursuant to the Administration Agreement.
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Automotive Properties REIT 2019 Strategic Alliance Agreement
In connection with the IPO, the REIT and Dilawri 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. Among other things, 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 and supported by an independent appraisal report. Pursuant to the Strategic
Alliance Agreement, the REIT acquired the following investment properties in 2019 and 2018:
On September 19, 2019, the REIT acquired the Audi Queensway property from a member of the Dilawri Group for
approximately $36,500 and leased it to a Dilawri Tenant.
On June 19, 2018, the REIT acquired the Country Hills property from a member of the Dilawri Group for
approximately $18,000 and leased it to a Dilawri Tenant.
SECTION 9 − OUTLOOK
For 2019, new vehicle sales in Canada declined 3.7% as compared to 2018 (Source: Statistics Canada). Although
industry analysts had previously projected new vehicle sales in Canada to be stable for the 2020 calendar year. The
COVID-19 outbreak is likely to have an adverse impact on consumer spending, which will impact new vehicle sales and
the REIT’s tenants’ overall business, at least in the near term. However, it is too early in the COVID-19 pandemic to
provide any assurance in this regard. The supply chain of new vehicles and parts could also be disrupted. However,
new vehicle sales represent only a portion of overall dealer profitability. Automotive dealerships also typically generate
a significant amount of profit from used vehicle sales, service and parts, and finance and insurance. The Canadian
automotive retail industry is a large and stable business with a track record of long-term stability. According to Statistics
Canada, overall automotive retail industry sales totaled a record $165 billion in 2019 (up 2% from $161 billion in 2018),
representing approximately 27% of Canada’s overall retail sales of products and merchandise. Over the last 20 years,
Canadian automobile retail sales grew at a compound annual rate of 4.4%.
Diversification of automobile brand and geography remain important, as some brands continue to gain market share
while certain brands are experiencing sales deterioration. Acquisitions will be made on a selective basis and generally
funded through debt financing and timely equity offerings. The overall Canadian automotive retail fundamentals support
the ability of the automobile dealership tenants and their parent companies within the REIT’s portfolio to meet their
current lease obligations and the annual rent escalators in place.
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 dealership owners
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. The Canadian automotive
dealership industry is highly fragmented, and the REIT expects consolidation will continue due to increased industry
sophistication and growing capital requirements for owner operators, which encourages them to pursue increased
economies of scale, although the pace of consolidation may be affected by the COVID-19 pandemic and resultant
economic uncertainty.
The REIT is in a strong liquidity position with a debt to gross book value of 43.6%, $75,000 of undrawn credit facilities
and with approximately $13,000 cash on hand. The past four weeks have seen unusual volatility in financial markets. It
is too early for management to know what impact this will have on the cost and availability of capital to the REIT.
Management and Trustees are closely monitoring the impact of the COVID-19 pandemic on the REIT’s business and
the business of the REIT’s tenants, and will prudently manage the REIT’s available resources during this economic
uncertainty. Management has also proactively raised its level of preparedness planning to adapt more quickly should
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Automotive Properties REIT 2019 risk levels rise and will continue to monitor and adjust its business continuity and other plans as the COVID-19 pandemic
evolves.
SECTION 10 – OTHER DISCLOSURES
Commitments and Contingencies
The REIT, as lessee, is committed under long term land and other leases that are classified as a liability to make lease
payments with minimum annual rental commitments as follows:
Within 1 year .................................................................................................................................................
After 1 year, but not more than 5 years ........................................................................................................
$700
2,392
More than 5 years .........................................................................................................................................
4,4264
Total ..............................................................................................................................................................
$7,356
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 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 ICFR.
Management has evaluated, or caused to be evaluated, the REIT’s ICFR and DC&P and has determined that the design
and operation of the REIT’s ICFR and DC&P were effective as at December 31, 2019. There have been no changes to
the REIT’s ICFR during Q4 2019 and the year ended December 31, 2019, 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, the REIT
has filed certificates on Form 52-109F1.
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Automotive Properties REIT 2019
SECTION 11 – QUARTERLY RESULTS OF OPERATIONS
The following is a summary of selected consolidated financial information for each of the eight most recently completed
quarters:
($ thousands except where otherwise
indicated)
Fourth
Quarter
2019
Third
Quarter
2019
Second
Quarter
2019
First
Quarter
2019
Fourth
Quarter
2018
Third
Quarter
2018
Second
Quarter
2018
First
Quarter
2018
Number of Properties
62
61
60
57
54
42
40
39
GLA (sq. ft.)
Rental revenue
Net Operating Income
Net Income (Loss)
Net Income (Loss) per Unit – basic(i)
Net Income (Loss) per Unit – diluted(ii)
FFO per Unit – basic(iii)
FFO per Unit – diluted(iv)
AFFO per Unit – basic(iii), (v)
AFFO per Unit – diluted(iv), (v)
AFFO payout ratio(v)
Distribution declared per Unit
2,325,088
2,296,780
2,231,233
2,139,512
2,024,877
1,665,460
1,467,568
1,425,212
18,122
15,144
3,894
0.096
0.096
0.222
0.220
0.203
0.202
99.6%
0.201
17,349
14,667
1,054
0.027
0.026
0.247
0.246
0.226
0.224
89.7%
0.201
16,425
15,684
13,972
13,571
8,436
(17,882)
0.264
0.262
0.274
0.272
0.248
0.247
81.4%
0.201
(0.564)
(0.561)
0.270
0.269
0.245
0.243
82.7%
0.201
13,741
11,493
13,666
0.442
0.440
0.235
0.234
0.211
0.210
95.7%
0.201
11,834
11,373
11,306
9,993
5,675
0.213
0.212
0.250
0.249
0.222
0.220
91.4%
0.201
9,659
5,317
0.203
0.202
0.253
0.252
0.223
0.222
90.7%
0.201
9,600
14,492
0.554
0.552
0.255
0.254
0.224
0.224
89.7%
0.201
Weighted average Units – basic
40,502,680
39,729,805
31,993,541
31,729,805
30,898,283
26,629,805
26,212,622
26,149,253
Weighted average Units – diluted
40,767,092
39,981,885
32,238,171
31,898,661
31,057,609
26,780,847
26,355,338
26,232,967
Market price per REIT Unit – close
(end of period)
Total assets
Debt to GBV
$12.15
$11.09
$10.33
$10.78
$8.97
$10.68
$10.44
$10.09
935,733
871,762
862,580
800,014
766,239
641,630
580,865
555,301
43.6%
49.6%
49.7%
56.3%
54.7%
53.1%
49.1%
48.7%
Debt service coverage
1.6X
1.6X
1.6X
1.6x
1.8X
1.8X
2.5X
1.9x
Notes:
(i)
(ii)
(iii)
(iv)
(v)
Net Income (Loss) per Unit – basic is calculated in accordance with IFRS by dividing the Net Income (Loss) by the amount of the weighted average
number of outstanding REIT Units and Class B LP Units.
Net Income (Loss) per Unit – diluted is calculated in accordance with IFRS by dividing the Net Income (Loss) by the amount of the weighted average
number of outstanding REIT Units, Class B LP Units, DUs and IDUs granted as at December 31, 2019, to certain Trustees and management of the REIT.
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 basic comparable numbers were adjusted in accordance with the Real Property Association of Canada’s White Paper on Funds from
Operations & Adjusted Funds from Operations for IFRS issued in February 2019.
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, 2019 to certain Trustees and management of the REIT. The FFO and AFFO per Unit – diluted comparable numbers were
adjusted in accordance with the Real Property Association of Canada’s White Paper on Funds from Operations & Adjusted Funds from Operations for
IFRS issued in February 2019.
Comparative figures have been adjusted to reflect the change to the calculation of AFFO in 2019. See “Non-IFRS Measures”.
The increase in rental revenue and NOI is primarily attributable to the thirty-six property acquisitions completed since
the REIT’s IPO. The net income (loss) is also impacted by the fluctuations in fair value adjustments of Class B LP Units,
investment properties and interest rate swaps.
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Automotive Properties REIT 2019
SECTION 12 – 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, 2019.
Global Coronavirus Pandemic
In December 2019, a novel strain of coronavirus, COVID-19, was reported to have surfaced in Wuhan, China. On March
11, 2020, the World Health Organization declared this outbreak a global pandemic. Major health issues and pandemics,
such as COVID-19, may adversely affect trade and local, national or global economies and could result in a general or
acute decline in economic activity in the markets in which the REIT operates, reduced traffic at the REIT’s Properties,
mobility restrictions and other quarantine measures, supply shortages, increased government regulation, and the
quarantine or contamination of one or more of the REIT’s Properties. Contagion in one of the REIT’s Properties or in a
market in which the REIT operates could negatively impact the REIT's reputation, the reputation or operations of the
REIT’s automotive dealership tenant at such Property, and the attractiveness of that market. All of these factors may
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 Unitholders.
The extent to which COVID-19 impacts the REIT will depend on future developments, which are highly uncertain and
cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and actions
taken to contain COVID-19 or its impact, among others. The REIT is unable to accurately predict the impact that COVID-
19 will have on its results of operations, due to uncertainties including the ultimate geographic spread of the virus, the
severity of the disease, the duration of the outbreak, and actions that may be taken by governmental authorities to
contain COVID-19 or to treat its impact. If the outbreak of COVID-19 and related developments lead to a prolonged or
significant impact on global, national or local markets or economic growth, the REIT’s cash flows, financial condition or
results of operations and its ability to make cash distributions to Unitholders may be materially and adversely affected.
Furthermore, the outbreak of COVID-19 may affect the REIT’s automotive dealership tenants by disrupting supply chains
and transactional activities. The REIT’s automotive dealership tenants rely on third-party suppliers and manufacturers,
many of which are located outside of Canada. This outbreak has resulted, or may result, in the extended shutdown of
certain businesses, including automotive manufacturers, which may in turn result in disruptions, delays or reductions to
the REIT’s automotive dealership tenants’ supply of motor vehicles or replacement parts. These may include disruptions
from the temporary closure of third-party supplier and manufacturer facilities, interruptions in supply or restrictions on
the export or shipment of key automobile components, including those sourced from China or Europe. The outbreak of
COVID-19 may also negatively impact consumer demand for automobiles and motor vehicle consumer spending, which
may negatively impact the business of the REIT’s automotive dealership tenants. These factors may impact the REIT’s
automotive dealership tenants’ ability to meet their rental payments and other obligations due to the REIT, which could
have a material adverse effect on the REIT.
Risk Factors Related to the REIT’s Relationship with Dilawri
Significant Ownership by the Dilawri Organization
As at December 31, 2019, Dilawri had an approximate 25.6% effective interest in the REIT on a fully-diluted basis
through ownership, direction or control of all of the Class B LP Units and 2,280,552 REIT Units. Each Class B LP Unit
has attached to it, a Special Voting Unit of the REIT, providing for voting rights in the REIT.
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
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Automotive Properties REIT 2019 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, 2019, the REIT derives approximately 61.7% 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 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, the MB West Island Property, the VW Barrie Property, the Heritage Honda Property,
the Mazda Des Sources Property, the Country Hills VW Property and the Audi Queensway Property (collectively, the
“Dilawri Properties”). Under such leases, Dilawri provided an indemnity for the lease obligations of each other member
of the Dilawri Group for the initial lease terms. Consequently, the Dilawri Group will be the REIT’s most significant tenant
for the foreseeable future, with members of the Dilawri Group occupying 58.8% of the REIT’s GLA with the remaining
41.2% the REIT’s GLA occupied by other dealership groups as at December 31, 2019.
The initial terms of the Dilawri Leases range from approximately 6.5 to 17.7 years, with a weighted average lease term
as at December 31, 2019 of approximately 12.0 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. 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 its
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
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Automotive Properties REIT 2019 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 remaining
development and other services to be performed by Mr. Lamb for Dilawri may lead to conflicts of interest between Mr.
Lamb and Dilawri. 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.
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, global
health conditions 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
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Automotive Properties REIT 2019 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 other dealership groups. 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 dealership groups under a triple-net lease, which
subjects the REIT to additional risk related to the financial strength of the Dilawri Group and such dealership groups
relative to multi-tenant properties. Furthermore, as the Dilawri Group will head lease all of the premises currently
occupied by both the Dilawri Group and third party tenants at two properties, the Dilawri Group not the REIT, will have
control over the re-leasing of such premises at these two properties. 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 in 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. Furthermore, Honda and Acura dealerships
collectively represent approximately 20.7% of the gross automotive dealership rent paid to the REIT in 2019 and
approximately 19.7% of the REIT’s GLA as at December 31, 2019. Volkswagen and Audi dealerships collectively
represent approximately 20.0% of the gross automotive dealership rent paid to the REIT in 2019 and approximately
21.3% of the REIT’s GLA as at December 31, 2019. Because Acura is a division of Honda and Audi is a division of
Volkswagen, any material adverse changes to the business of Honda and/or Volkswagen 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 British Columbia, Alberta, Saskatchewan, Manitoba,
Ontario 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
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Automotive Properties REIT 2019 British Columbia, Alberta, Saskatchewan, Manitoba, Ontario and Québec. Adverse changes in the economic condition
or regulatory environment of British Columbia, Alberta, Saskatchewan, Manitoba, Ontario 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
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Automotive Properties REIT 2019 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.
Cybersecurity Risk
The REIT is in possession of certain confidential or sensitive information, including tenant and lease details, employee
information, financial records and operational data (“Confidential Information”). Some of this Confidential Information is
held and managed by third party service providers. The REIT has implemented processes, procedures and controls to
prevent unauthorized access to Confidential Information and to build and sustain a reliable information technology
infrastructure. However, these measures, and any similar measures implemented by the REIT’s third party service
providers, may not be sufficient to anticipate, timely identify or appropriately respond to the sophisticated means by
which computer hackers, cyber terrorists and others may attempt to breach the security of the REIT’s information
technology systems or those of its third party service providers. Additionally, employee errors, including with respect to
ineffective password management, may result in a breach of the REIT’s or its third party service providers’ security
measures, which could result in a breach of Confidential Information.
Any system vulnerability or failure of data security measures of the REIT or its third party service providers could result
in, among other things, operational interruption, harm to the reputation or competitive position of the REIT, the loss of
or unauthorized access to Confidential Information or other assets, remediation costs, litigation, regulatory enforcement
proceedings, violation of privacy, security or other laws and regulations and damage to the REIT’s business relationship
with its tenants.
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 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 fibers 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.
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Automotive Properties REIT 2019 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 operations 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 operations and may decrease or eliminate the amount of cash available for distribution
to REIT Unitholders.
Financing Risks
The REIT has outstanding Indebtedness of approximately $400.3 million as of December 31, 2019. 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 and
Mortgages 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 or
suspended. In particular, Facility 1, Facility 2 and Facility 3 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
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Automotive Properties REIT 2019 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 43.6% as of December 31, 2019. 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.
As of the date of this MD&A, the REIT has implemented interest rate swap arrangements in respect of Facility 1, Facility
2 and Facility 3 in order to offset the risk of interest rate fluctuations 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 value.
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 to Unitholders. The
land leases are also subject to renewal terms and may or may not be renewed by their respective third-party lessors.
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 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
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Automotive Properties REIT 2019
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 risks related to 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.
Furthermore, potential trade tariff policies may have a negative impact on future retail automotive sales through, among
other things, increases to new automobile prices.
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 REIT’s 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.
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Automotive Properties REIT 2019 Derivative Risks
As at the date of this MD&A, the REIT has swap facilities in place as part of Facility 1, Facility 2 and Facility 3. See
“Section 7 – 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 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’.
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.
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Automotive Properties REIT 2019 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. 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
other dealer group 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; litigation; or potential trade tariff policies that may impact future
retail automotive sales through, among other things, increases to new automobile prices. 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, unemployment levels and consumer confidence, as well as the level of discretionary personal income, credit
availability and interest rates. 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 brand
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Automotive Properties REIT 2019 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.
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
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Automotive Properties REIT 2019 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 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 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.
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Automotive Properties REIT 2019 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 or 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.
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.
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Automotive Properties REIT 2019 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
Although the REIT intends to make distributions of its available cash to Unitholders in accordance with its distribution
policy, these cash distributions may be reduced or suspended. The actual amount distributed by the REIT will depend
on various factors including capital market conditions, the financial performance of the Properties, debt covenants and
obligations, working capital requirements, fluctuations in interest rates or any other business needs that the Trustees
deem reasonable. The terms of the certain indebtedness of the REIT from time to time may prohibit payments or
distributions from the REIT in certain circumstances. The REIT’s Trustees retain the right to re-evaluate the distribution
policy from time to time as they consider appropriate.
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, 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
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Automotive Properties REIT 2019 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
management, administrative, operational and accounting resources. In order to meet such requirements, the REIT has
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 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 judgments 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.
Automotive Properties REIT 2019
47
47
Automotive Properties REIT 2019 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.
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.
Automotive Properties REIT 2019
48
48
Automotive Properties REIT 2019
APPENDIX
Property List as at December 31, 2019
Operating Name
Address
City/
Province
Year Built
/Renov.
GLA
Properties (as at December 31, 2019)
1. Dixie Auto Mall
Dilawri-Owned Auto
Volkswagen
5500 Ambler Drive
Mississauga, ON
Nissan & Nissan Truck
5500 Dixie Road
Mississauga, ON
Mazda
Infiniti
Mitsubishi
Third Party Auto
5500 Ambler Drive
Mississauga, ON
5500 Ambler Drive
Mississauga, ON
5525 Ambler Drive
Mississauga, ON
Ancillary-other (formerly Toyota)
Kia
5500 Dixie Road
5500 Dixie Road
Mississauga, ON
Mississauga, ON
Ancillary-other (formerly Hyundai)
5515 Ambler Drive
Mississauga, ON
1988/2011
1988/2001
1987/2014
1988/2014
1998
1987
1987
1998
Third Party Retail
Montana’s
Kelsey’s
A&W
Subway/NY Fries
Enterprise Rent-a-Car
3 Asians Express
Dixie Auto Mall Total
2. Markham Honda and Ford
Dilawri-Owned Auto
Markham Honda
Third Party Auto
1495 Aerowood Drive
Mississauga, ON
1485 Aerowood Drive
Mississauga, ON
1465 Aerowood Drive
Mississauga, ON
1475 Aerowood Drive
Mississauga, ON
1475 Aerowood Drive
Mississauga, ON
1475 Aerowood Drive
Mississauga, ON
2001/2017
2001/2017
1999/2016
1999/2011/2012
1999/2011/2012
1999/2011/2012
8220 Kennedy Road
Markham, ON
2004
Markville Ford Lincoln
8210 Kennedy Road
Markham, ON
1988/2010
Markham Honda and Ford Total
3. Calgary BMW
4. Calgary Honda
5. Triple 7 Chrysler
6. Porsche Centre Vancouver
7. Frost Chevrolet Buick GMC
Cadillac
8. Honda Used Car and Regina
Collision Centre
9. Oakville Honda
10. Markham Acura
11. Regina Honda/Acura
12. Agincourt Mazda
13. Dilawri Nissan Infiniti
34 Heritage Meadows Road
S.E.
Calgary, AB
11700 Lake Fraser Dr S.E.
Calgary, AB
2007
2005
700 Broad Street
Regina, SK
1959/2011
688 Terminal Avenue
Vancouver, BC
150 Bovaird Drive West
Brampton, ON
2013
2013
815 Broad Street
Regina, SK
2012/2015
500 Iroquois Shore Road
Oakville, ON
5201 Highway 7 E
Markham, ON
789 Broad Street
Regina, SK
5500 Finch Avenue E
Toronto, ON
1775 5th Avenue
Regina, SK
2003/2006
2002
2003/2015
2005
1998/2015
2013
2007
2015
14. Audi Sales Downtown Vancouver
1788 West 2nd Avenue
Vancouver, BC
15. Meadowvale Honda
16. Burrard Acura(1)
2210 Battleford Road
Mississauga, ON
730 Terminal Avenue
Vancouver, BC
Automotive Properties REIT 2019
49
49
39,209
40,259
16,713
14,592
8,000
22,078
17,735
9,345
5,150
5,000
4,000
2,200
2,000
1,875
188,156
32,723
39,287
72,010
87,724
43,511
40,957
39,790
43,210
32,457
33,334
32,025
30,863
30,788
30,864
29,300
34,539
27,640
Automotive Properties REIT 2019
17. Langley Acura(1)
18. Distinctive Collection
19. Bolton Toyota
20. Hyundai Gallery
20257 Langley Bypass
Langley, BC
150 Glendeer Circle S.E.
Calgary, AB
12050 Albion Vaughan Road
Bolton, ON
11770 Lake Fraser Dr S.E.
Calgary, AB
2015
1988/2008
2004
2006
21. North Vancouver Nissan Infiniti
819 Automall Drive
N. Vancouver, BC
1992/2002
22. Regina Hyundai
23. Ancillary-other (formerly Dilawri BMW)
24. Ancillary-other (1921 1st Avenue,
formerly Dilawri Acura)
25. Audi Service (formerly Infiniti
Vancouver)
26. Dilawri Mitsubishi
27. Toyota Woodland
444 Broad Street
1919 1st Avenue
1921 1st Avenue
Regina, SK
Regina, SK
Regina, SK
1718 West 3rd Avenue
Vancouver, BC
2005
1997
1997
1999
1750 6th Avenue
1000-1009 Woodland
Avenue
Regina, SK
Montreal, QC
1993/2003
2007/2008
28. Porsche Centre Edmonton and Jaguar
Land Rover Edmonton(2)…………………
29. Audi Barrie…………………
17007 111th Avenue N.W.
Edmonton, AB
2482 Doral Drive
Innisfil, ON
30. Pfaff Audi (2)………………………..
9088 Jane Street
Vaughan, ON
2014
2015
2006
31. St. Bruno Audi and Volkswagen
1905&1917 Boulevard Sir
Wilfrid Laurier
St. Bruno, QC
1987/2014
32. Mercedes Benz West Island
4525 Boulevard Saint-Jean
Montreal, QC
2016
33. Go Mazda(2)
34. Volkswagen Barrie
9704 & 9710 35 Avenue
N.W.
Edmonton, AB
2006/2017
50 and 60 Fairview Road &
5 Little Avenue
Barrie, ON
35. Heritage Honda
11609 40 Street S.E.
Calgary, AB
36. Kentwood Ford Compound(2)
8603,8703,8735,8815 127th
Avenue N.W.
Edmonton, AB
37. Southtown Hyundai(2)
3603 99th Street N.W.
Edmonton, AB
38. Ericksen Infiniti(2)
39. Mazda des Sources
40. Country Hills VW
41. BMW Laval(2)
42. Sherwood Park VW(2)
43. Brimell Toyota(2)
44. Elite BMW(2)
45. Civic Motors(2)
17616 111th Avenue N.W.
Edmonton, AB
2345 Place Transcanadienne
Dorval, QC
11380 Stonehill Drive NE,
Calgary
Calgary, AB
2440-2450 Chomeday
Boulevard
Laval, QC
2000/2012
2365 Broadmoor Boulevard,
Sherwood Park
5060 Sheppard Avenue East,
Toronto
Sherwood Park, AB
2015
Scarborough, ON
2002/2010
1040 Ogilvie Road
Ottawa, ON
1171 St. Laurent Boulevard
Ottawa, ON
2017
2016
1969
2004
2008
2017
2018
2007/2016
2002/2012
1989
2016
46. Elite BMW Service(2)
595 St. Laurent Boulevard
Ottawa, ON
47. Camco Acura(2)
1475 Carling Avenue
Ottawa, ON
Automotive Properties REIT 2019
50
50
26,448
24,367
22,741
22,185
19,050
18,204
12,456
11,390
11,722
6,750
49,737
44,779
24,982
68,874
62,705
60,850
17,150
20,102
58,913
4,040
12,554
25,550
16,701
34,650
127,615
70,277
55,600
48,366
30,000
7,500
45,879
Automotive Properties REIT 2019
48. MINI Ottawa(2)
49. Mendes Toyota(2)
50. Ogilvie Subaru(2)
1501 Carling Avenue
Ottawa, ON
1811 Bank Street
Ottawa, ON
1056 Parisien Street
Ottawa, ON
2015
2013
2014
51. Subaru Detailing Centre(2)
1352 Gosset Street
Ottawa, ON
1969/2015
52. Orleans Honda(2)
53. Kingston Toyota(2)
2055 Mer Bleue Road
Ottawa, ON
1911 Bath Road
Kingston, ON
54. Lexus of Kingston(2)
1917 Bath Road
Kingston, ON
55. Tesla KW Service Centre(2)
663 Victoria Street North
Kitchener, ON
56. St. James Volkswagen(2)
670 Century Street
Winnipeg, MB
57. McNaught Cadillac Buick GMC (2)
1000-1717 Waverly Street
Winnipeg, MB
58. Wellington Motors(2)
935 Woodlawn Road West
Guelph, ON
59. Guelph Hyundai(2)
60. Abbotsford VW(2)
61. Audi Queensway
62. Straightline Kia(2)
Portfolio Total
Subsequent Acquisitions(3)
765 Woodlawn Road West
Guelph, ON
30150 & 30195 Automall
Drive
Abbotsford, BC
1635 The Queensway
Etobicoke, ON
100 Glendeer Circle SE
Calgary, AB
63. Regina BMW……...
1001 Broad Street
Regina, SK
64. Acura North Vancouver
828 Automall Drive
Vancouver, BC
2015
2005
2005
2019
2004
2015
2003
2014
2018
2018
2018
2019
2010
Total as at date of the MD&A
_____________
Notes:
(1) The REIT has a leasehold interest in this property.
(2) The REIT has leased this property to other dealership group tenants unrelated to the Dilawri Group.
(3) Regina BMW was acquired by the REIT on February 5, 2020. Acura North Vancouver was acquired by the REIT on February 6, 2020.
30,000
57,152
13,533
5,500
24,531
25,130
16,226
18,500
39,494
56,641
40,793
28,007
22,921
65,547
21,808
2,325,088
19,619
37,700
2,382,407
Automotive Properties REIT 2019
51
51
Automotive Properties REIT 2019
Automotive Properties Real Estate Investment Trust
Consolidated Financial Statements
For the year ended December 31, 2019 and 2018
Tel: 416-865-0200
Fax: 416-865-0887
www.bdo.ca
BDO Canada LLP
222 Bay Street
Suite 2200, PO Box 131
Toronto, ON M5K 1H1 Canada
Independent Auditor’s Report
To the Unitholders of Automotive Properties Real Estate Investment Trust
Opinion
We have audited the consolidated financial statements of Automotive Properties Real Estate Investment Trust
(the “REIT”), which comprise the consolidated balance sheets as at December 31, 2019 and 2018, and the
consolidated statements of income (loss) and comprehensive income (loss), changes in unitholders’ equity and
cash flows for the years then ended, and notes to the consolidated financial statements, including a summary
of significant accounting policies.
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects,
the consolidated financial position of the REIT as at December 31, 2019 and 2018, and its consolidated financial
performance and its consolidated cash flows for the years then ended in accordance with International
Financial Reporting Standards (“IFRS”).
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our
responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of
the Consolidated Financial Statements section of our report. We are independent of the REIT in accordance
with the ethical requirements that are relevant to our audit of the consolidated financial statements in
Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We
believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
opinion.
Other Information
Management is responsible for the other information. The other information comprises:
•
•
the information included in Management’s Discussion and Analysis for the year ended December 31,
2019; and
the information, other than the consolidated financial statements and our auditor’s report thereon,
in the 2019 Annual Report.
Our opinion on the consolidated financial statements does not cover the other information and we do not and
will not express any form of assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other
information identified above and, in doing so, consider whether the other information is materially
inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise
appears to be materially misstated.
We obtained Management’s Discussion and Analysis prior to the date of this auditor’s report. If, based on the
work we have performed on this other information, we conclude that there is a material misstatement of this
other information, we are required to report that fact in this auditor’s report. We have nothing to report in
this regard.
The 2019 Annual Report is expected to be made available to us after the date of the auditor’s report. If,
based on the work we will perform on this other information, we conclude that there is a material
misstatement of this other information, we are required to report that fact to those charged with governance.
Responsibilities of Management and Those Charged with Governance for the Consolidated Financial
Statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements
in accordance with IFRS, 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.
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.
53
Automotive Properties REIT 2019
In preparing the consolidated financial statements, management is responsible for assessing the REIT’s ability
to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going
concern basis of accounting unless management either intends to liquidate the REIT or to cease operations,
or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the REIT’s financial reporting process.
Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a
whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report
that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an
audit conducted in accordance with Canadian generally accepted auditing standards will always detect a
material misstatement when it exists. Misstatements can arise from fraud or error and are considered material
if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of
users taken on the basis of these consolidated financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise
professional judgment and maintain professional skepticism throughout the audit. We also:
•
Identify and assess the risks of material misstatement of the consolidated financial statements, whether
due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit
evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a
material misstatement resulting from fraud is higher than for one resulting from error, as fraud may
involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit 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 REIT’s internal control.
•
•
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates
and related disclosures made by management.
Conclude on the appropriateness of management’s use of the going concern basis of accounting and,
based on the audit evidence obtained, whether a material uncertainty exists related to events or
conditions that may cast significant doubt on the REIT’s ability to continue as a going concern. If we
conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to
the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to
modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our
auditor’s report. However, future events or conditions may cause the REIT to cease to continue as a going
concern.
•
Evaluate the overall presentation, structure and content of the consolidated financial statements,
including the disclosures, and whether the consolidated financial statements represent the underlying
transactions and events in a manner that achieves fair presentation.
• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business
activities within the REIT to express an opinion on the consolidated financial statements. We are
responsible for the direction, supervision and performance of the group audit. We remain solely
responsible for our audit opinion.
We communicate with those charged with governance regarding, among other matters, the planned scope and
timing of the audit and significant audit findings, including any significant deficiencies in internal control that
we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical
requirements regarding independence, and to communicate with them all relationships and other matters
that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
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.
54
Automotive Properties REIT 2019
The engagement partner on the audit resulting in this independent auditor’s report is Stephen Spiers.
Chartered Professional Accountants, Licensed Public Accountants
Toronto, Canada
March 23, 2020
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.
55
Automotive Properties REIT 2019
Automotive Properties REIT
Consolidated Balance Sheets
(in thousands of Canadian dollars)
Note
December 31, 2019
December 31, 2018
As at
As at
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 and mortgages payable
Interest rate swaps
Deferred Units and Income Deferred Units
Class B LP Units
Total liabilities
Unitholders’ equity
7
6
9
8
8
12
11
$45,266
2,338
888,129
$295
1,946
763,998
$935,733
$766,239
$14,261
397,929
5,016
3,246
120,689
$5,606
416,872
1,114
1,072
89,101
541,141
513,765
394,592
252,474
Total liabilities and unitholders’ equity
$935,733
$766,239
See accompanying notes to the consolidated financial statements.
Approved on behalf of the Board of Trustees
“Louis Forbes”
Louis Forbes
Trustee, Audit Committee Chair
Automotive Properties REIT 2019
“John Morrison”
John Morrison
Trustee, Lead Independent
56
2
Automotive Properties REIT 2019
Automotive Properties REIT
Consolidated Statements of Income (Loss) and Comprehensive Income
(Loss)
(in thousands of Canadian dollars)
For the year ended December 31,
Net Property Income
Rental revenue from investment properties
Property costs
Net Operating Income
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
Note
2019
2018
13
13
8
10
$67,580
(10,226)
$48,254
(7,509)
57,354
40,745
(4,090)
(3,002)
(16,948)
(10,496)
(3,902) (3,669)
(7,988)
(7,988)
19,461
4,099
Fair value adjustment on Class B LP Units and Deferred Units
11, 12
(32,075)
Fair value adjustment on investment properties
6
3,150
Net Income (Loss) and Comprehensive Income (Loss)
($4,499)
$39,150
See accompanying notes to the consolidated financial statements.
Automotive Properties REIT 2019
57
3
Automotive Properties REIT 2019
Automotive Properties REIT
Consolidated Statements of Changes in Unitholders’ Equity
For the year ended December 31, 2019
(in thousands of Canadian dollars)
Note
Trust Units
Cumulative
Net Income
Cumulative
Distributions
to Unitholders
Total
Unitholders’ Equity at December 31, 2018
$212,334
$77,637
$(37,497)
$252,474
Issuance of Units
Net Loss
Distributions
11
168,423
10
-
-
-
(4,499)
-
-
168,423
(4,499)
-
(21,806)
(21,806)
Unitholders’ Equity at December 31, 2019
$380,757
$73,138
$(59,303)
$394,592
For the year ended December 31, 2018
(in thousands of Canadian dollars)
Note
Trust Units
Cumulative
Net Income
Cumulative
Distributions
to Unitholders
Total
Unitholders’ Equity at December 31, 2017
$154,933
$38,487
$(23,209)
$170,211
Issuance of Units
Net Income
Distributions
11
10
57,401
-
-
-
39,150
-
-
57,401
39,150
-
(14,288)
(14,288)
Unitholders’ Equity at December 31, 2018
$212,334
$77,637
$(37,497)
$252,474
See accompanying notes to the consolidated financial statements.
Automotive Properties REIT 2019
4
58
Automotive Properties REIT 2019
Automotive Properties REIT
Consolidated Statements of Cash Flow
(in thousands of Canadian dollars)
For the year ended December 31,
OPERATING ACTIVITIES
Net income (loss)
Straight-line rent
Non-cash compensation expense
Fair value adjustment on interest rate swaps
Distribution expense on Class B LP Units
Fair value adjustment on Class B LP Units and Deferred Units
Fair value adjustment on investment properties
Interest expense and other charges
Financing fees
Amortization of other assets
Change in non-cash operating accounts
Cash Flow from operating activities
INVESTING ACTIVITIES
Acquisitions of investment properties
Additions to investment properties
Cash Flow used in investing activities
FINANCING ACTIVITIES
Proceeds from Credit Facilities and Mortgages-net
Principal repayment on Credit Facilities and Mortgages
Interest paid
Financing fees paid
Repayments on lease liabilities
Issuance of Units, net of costs
Distributions to REIT unitholders and Class B LP unitholders
Cash Flow from financing activities
Net increase in cash and cash equivalents during the year
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Note
2019
2018
19
$(4,499)
(2,970)
1,687
3,902
7,988
32,075
(3,150)
16,306
642
154
51
52,186
$39,150
(2,910)
690
3,669
7,988
(19,461)
(4,099)
10,031
465
74
1,160
36,757
(102,290)
(207,346)
(8,401)
(2,008)
(110,691)
(209,354)
61,604
(80,821)
(15,969)
(407)
(625)
168,423
(28,729)
103,476
44,971
295
45,266
183,050
(28,845)
(9,923)
(2,117)
-
52,401
(21,901)
172,665
68
227
$295
Supplemental cash flow information
Issuance of units on acquisition of investment property (Note 5) $- $5,000
See accompanying notes to the consolidated financial statements.
Automotive Properties REIT 2019
5
59
Automotive Properties REIT 2019
Notes to the Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(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. The REIT was formed
primarily to own income-producing automotive dealership properties located in Canada. 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 trust
units (“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 25.6% (2018 - 32.8%) effective interest in the REIT as at December 31, 2019, 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”), and 2,280,552 Units. 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 commenced operations on July 22, 2015 following completion of an initial public offering of Units (the
“IPO”). 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”) and leased the Initial Properties to the
applicable member of the Dilawri Group (collectively, and including members of the Dilawri Group that became
tenants at a REIT property after the IPO, the “Dilawri Tenants”).
As at December 31, 2019, the REIT owned a portfolio of 62 income-producing commercial properties. The properties
are located in metropolitan areas across British Columbia, Alberta, Saskatchewan, Manitoba, Ontario and Quebec,
totaling approximately 2.3 million square feet of gross leasable area. The Dilawri Tenants are the REIT’s major tenant,
occupying 35 of the REIT’s 62 income-producing commercial properties as at December 31, 2019.
The subsidiaries of the REIT included in the REIT’s consolidated financial statements include the Partnership and
Automotive Properties REIT GP Inc. Effective December 31, 2019, management, operating and administrative
support personnel were employed directly by 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 23, 2020.
(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 6;
interest rate swaps as described in note 8;
Class B LP Units which are exchangeable for Units at the option of the holder as described in note 11; and
Deferred Units (“DUs”) and Income Deferred Units (“IDUs”) which are exchangeable for Units in accordance
with their terms as described in note 12.
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.
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(d) Investment Properties
Investment properties include properties held to earn rental income and/or for capital appreciation, and property
under development. 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 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. Lease incentives provided to tenants are deferred and amortized on a straight-line basis
against revenue over the term of the lease.
(f) Expenses
Property costs and general and administrative expenses are recognized in income in the period in which they are
incurred. The indemnity fee is amortized over the average lease term with the Dilawri Tenants that have third party
sub-tenants.
(g) Leases
The REIT adopted IFRS 16 – Leases (“IFRS 16”) on January 1, 2019 on a modified retrospective basis. In January
2016, the IASB issued IFRS 16 which replaced IAS 17 — Leases (“IAS 17”) 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 introduced 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 past accounting practice.
The REIT is the lessee for two land leases and one office lease, which are in the scope of IFRS 16 and, as at January
1, 2019, the REIT recognized right-of-use assets and lease liabilities of $7,694. For all leases for which the REIT is
a lessee of investment properties, the right-of-use assets have been measured at fair value with no straight line
depreciation and classified as investment property at the date of initial application on January 1, 2019. The office
lease right-of-use asset is recognized in prepaid expenses and other assets. IFRS 16 replaces the straight-line
operating lease expense with a depreciation charge presented in the general and administrative expense.
Amortization is recorded on a straight line basis over the term of the lease. Lease-related expenses previously
recorded in property costs were recorded as a fair value adjustment on investment properties recorded in the
consolidated statements of income (loss) and comprehensive income (loss). Lease liabilities were discounted at the
REIT’s incremental borrowing rate as at January 1, 2019.
The difference between the operating lease commitments disclosed under IAS 17 as at December 31, 2018 and the
opening balance for lease liabilities as at January 1, 2019, under IFRS 16, is due to the effect of discounting the
operating lease commitments using the REIT’s incremental borrowing rate.
The REIT elected the following practical expedients when applying IFRS 16 to leases previously classified as
operating leases under IAS 17:
Applied IFRS 16 only to contracts that were previously identified as leases;
Excluded initial direct costs from measuring right-of-use assets; and
Used hindsight when determining the lease term if the contract contains options to extend or terminate the
lease.
(h) 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.
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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).
(i) 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 IAS 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 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.
(j) 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, 2019,
there were $44,000 of cash equivalents (December 31, 2018 - $nil).
(k) Financial instruments
Financial instruments are classified as one of the following: (i) measured at amortized cost, (ii) fair value through
other comprehensive income (“FVTOCI”), or (iii) FVTPL. 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 amortized cost are measured at amortized cost,
using the effective interest method. FVTOCI 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
Financial liabilities
Accounts payable and accrued liabilities
Credit facilities and mortgages
Class B LP Units, Deferred Units and Income Deferred Units
Interest rate swaps
Classification/Measurement
Amortized cost
Amortized cost
Amortized cost
Amortized cost
FVTPL
FVTPL
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.
(l) Unit-Based Compensation
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DUs may be granted to members of the Board (“Trustees”), officers and employees of the REIT (each, a “Participant”).
Each DU shall receive a distribution of additional 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 judgments 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.
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. The REIT applies
judgment when reporting any property under development. The cost of the property under development includes the
acquisition of the property, direct development costs and borrowing costs attributable to the development.
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.
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. NEW STANDARDS AND INTERPERTATIONS NOT YET ADOPTED
(i) Definition of material
The IASB issued amendments to IAS 1 – Presentation of Financial Statements and IAS – 8 Accounting Policies,
Changes in Accounting Estimates and Errors in October 2018. The amendments clarified the definition of material,
within the context that information is material if omitting, misstating or obscuring it could reasonably be expected to
influence the decisions that the primary users of general purpose financial statements make on the basis of those
financial statements, which provide financial information about a specific reporting entity.
The amendments are effective from January 1, 2020 and are required to be applied prospectively. Management does
not expect these amendments to have a significant impact on the consolidated financial statements.
(ii) Definition of business
The IASB issued amendments to IFRS 3 - Business Combinations in October 2018, the amendments clarified and
tightened the definition of a business. The amendments will aid companies in determining whether an acquisition is
of a business or a group of assets. An abridged assessment of whether an acquired set of activities and assets is a
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group of assets rather than a business is also permitted. It is important to differentiate between a business and a
group of assets due to the recognition of goodwill only upon the acquisition of a business.
The amendments apply to transactions for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after January 1, 2020. Management does not expect these amendments to have a
significant impact on the consolidated financial statements.
5. ACQUISITIONS
During the year ended December 31, 2019, the REIT completed the following acquisitions:
Property
Location
Date of Acquisition
St. James VW & McNaught Cadillac
Buick GMC(i)
Wellington Motors & Guelph
Hyundai(ii)
Audi Queensway(iii)
Straightline Kia(iv)
Total Acquisitions
Winnipeg, MB
Guelph, ON
Etobicoke, ON
Calgary, AB
March 29
June 25
September 19
December 16
Total Investment
Properties(1)
$24,880
$30,918
$38,056
$8,505
$102,359
(1)
(i)
(ii)
(iii)
(iv)
Includes acquisition costs.
On March 29, 2019, the REIT acquired the real estate underlying two automotive dealership properties
located in Winnipeg, Manitoba, for approximately $23,950 plus capital improvement costs of $245 and
acquisition costs of $685. The acquisition consists of two full-service automotive dealership properties
totaling 96,135 square feet of gross leasable area.
On June 25, 2019, the REIT acquired the real estate underlying three automotive dealership properties
located in Guelph, Ontario and Abbotsford, British Columbia for approximately $30,400 plus acquisition costs
of $518. The acquisition consists of three full-service automotive dealership properties totaling 91,721 square
feet of gross leasable area.
On September 19, 2019, the REIT acquired the real estate underlying an automotive dealership property
located in Etobicoke, Ontario for approximately $36,500 plus acquisition costs of $1,556. The acquisition
consists of a full-service automotive dealership property totaling 65,547 square feet of gross leasable area.
On December 16, 2019, the REIT acquired the real estate underlying an automotive dealership property
located in Calgary, Alberta for approximately $8,415 plus acquisition costs of $90. The acquisition consists
of a full-service automotive dealership property totaling 21,808 square feet of gross leasable area.
During the year ended December 31, 2018, the REIT completed the following acquisitions:
Location
Date of Acquisition
Total Investment
Properties(1)
Property
Tesla KW
Country Hills VW
BMW Laval & Sherwood Park VW
Brimell Toyota
Kitchener-Waterloo, ON
February 13
Calgary, AB
Laval, QC & Sherwood Park,
AB
Scarborough, ON
June 19
September 28
November 30
Mierins Auto Group Portfolio
Ottawa, ON & Kingston, ON
December 12
Total Acquisitions
Includes acquisition costs.
(1)
(2) The total purchase price includes the issuance of 480,552 Units to one of the vendors, valued at approximately $5,000.
Automotive Properties REIT 2019
$5,541
$18,069(2)
$56,509
$27,182
$103,925
$211,226
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6.
INVESTMENT PROPERTIES
Balance, beginning of year
Adoption of IFRS 16 (Note 2(g))
Acquisitions(3)
Additions(3), (4)
Fair value adjustment on
investment properties
Straight-line rent(5)
Balance, end of year
Income producing
properties(1)
$763,998
-
102,359
8,408
Right-of-use
assets(2)
$-
7,244
-
-
December 31,
2019
$763,998
7,244
102,359
8,408
3,602
2,970
$881,337
(452)
-
$6,792
3,150
2,970
$888,129
December 31, 2018
$543,135
-
211,226
2,628
4,099
2,910
$763,998
Includes the Tesla KW property that became an income producing property in January 2019.
(1)
(2) Refers to two land leases.
Includes acquisition costs.
(3)
Includes capitalized interest of $nil (2018 - $620).
(4)
Includes a deduction for amortization of tenant allowance of $115 (2018 - $nil).
(5)
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. Property under development is measured using both a comparable sales method and a discounted cash flow
method, net of costs to complete. The REIT’s valuation inputs are supported by market reports from an independent
appraiser which indicate no significant change in the capitalization rates for the markets the REIT is in from December
31, 2018. The overall capitalization rate applicable to the REIT’s entire portfolio is 6.6% (December 31, 2018 – 6.6%).
In 2019, the REIT provided capital commitments for facility improvements to the tenants of 401 Dixie Automall and
Meadowvale Honda automotive dealership properties located in Mississauga, Ontario. The total capital commitments
of $7,000, plus transaction costs of $7, resulted in an annual rent increase on these properties effective December
16, 2019. An additional $1,401 of capital commitments for facility improvements was provided to another tenant in
2019.
In 2018, the REIT funded the completed dealership facility expansion at its Frost GM automotive dealership property
located in Brampton, Ontario. The total expansion cost approximately $2,000 plus transaction costs of $8, resulting
in an annual rent increase effective June 1, 2018. An additional $620 of capitalized interest was incurred on another
investment property in 2018.
A 25 basis point decrease or increase in capitalization rates would result in an increase or decrease in the fair value
of the investment properties of approximately $34,700 or $(32,200), respectively as at December 31, 2019.
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
7. PREPAID EXPENSES AND OTHER ASSETS
As at
Prepaid indemnity fee
Right-of-use assets, net of depreciation
Prepaid other
Automotive Properties REIT 2019
$59,408
240,124
545,781
$845,313
December 31, 2019
December 31, 2018
$671
269
1,398
$2,338
$746
-
1,200
$1,946
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Automotive Properties REIT 2019
8. CREDIT FACILITIES AND MORTGAGES PAYABLE
(a) Credit facilities and mortgages consist of:
As at
Facility 1(i)
Facility 2(ii)
Facility 3(iii)
Mortgages(iv)
Total
December 31, 2019
December 31, 2018
$194,665
$210,347
99,913
85,791
90,250
95,000
15,471
28,376
400,299
419,514
Financing fees(v)
(2,371)
(2,642)
$397,929
$416,872
(i)
Facility 1 includes:
A non-revolving loan in the amount of $194,665 (December 31, 2018 – $182,847) bearing interest at the
bankers’ acceptance (“BA”) rate plus 150 basis points (“bps”) or the Canadian Prime rate (“Prime”) plus
25 bps, maturing in June 2023. The principal is repayable in equal quarterly payments based on a 25 year
amortization. The REIT entered into floating-to-fixed interest rate swaps, with remaining terms of 3 to 9 years
as at December 31, 2019, which resulted in a weighted average effective interest rate of 3.75% (2018 –
3.75%), of which $19,206 (2018 – $nil) of the non-revolving balance remains at floating rates.
A revolving credit facility in the amount of $30,000 bearing interest at Prime plus 25 bps or BA rate plus 150
bps, maturing in June 2023, of which $nil was drawn as at December 31, 2019 (2018 – $27,500) and of
which $838 was secured for the issuance of irrevocable letters of credit (the “LCs”) on October 24, 2017.
(ii)
Facility 2 includes:
A non-revolving loan in the amount of $99,913 (2018 – $73,991) bearing interest at the BA rate plus 150 bps
or Prime plus 25 bps, maturing in June 2024. The principal is repayable in monthly blended payments based
on a 20 year amortization. The REIT entered into floating-to-fixed interest rate swaps with remaining terms
of 3 to 10 years, which resulted in a weighted average effective interest rate of 3.54% (2018 – 3.55%). On
June 26, 2019, the REIT entered into a new floating-to-fixed interest rate swap in the amount of $29,704 for
a term of 10 years.
A revolving credit facility in the amount of $15,000 bearing interest at Prime plus 25 bps or BA rate plus 150
bps, maturing in June 2024, of which $nil was drawn as at December 31, 2019 (2018 – $11,800).
(iii)
Facility 3 includes:
A non-revolving loan in the amount of $90,250 (2018 – $95,000) bearing interest at the BA rate plus 150 bps
or Prime plus 50 bps, maturing in December 2023. The principal is repayable in monthly blended payments
based on a 20 year amortization. The REIT entered into floating-to-fixed interest rate swaps with remaining
terms of 6 to 9 years, which resulted in a weighted average effective interest rate of 4.05% (2018 – 4.05%).
A revolving credit facility in the amount of $30,000 bearing interest at Prime plus 25 bps or BA rate plus 150
bps, maturing in December 2023, of which $nil was drawn as at December 31, 2019 (2018 – $nil).
(iv)
Mortgages:
The REIT has entered into certain mortgages with Canadian Schedule 1 banks that have interest rates that
range from 3.22% to 3.72% and have maturity dates that range from January 2021 to June 2027 (the
“Mortgages”). A mortgage in the amount of $11,938 was repaid and fully discharged on September 16, 2019.
As at December 31, 2019, the weighted average interest rate of the Mortgages was 3.52% (2018 – 3.51%).
(v)
During 2019, the REIT incurred financing fees of $407 (2018 – $2,117). The amounts are accounted for using
the effective interest method, and $2,371 remains unamortized at December 31, 2019 (2018 – $2,642).
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Automotive Properties REIT 2019
The credit facilities described above (the “Credit Facilities”) and the Mortgages are secured by the REIT’s investment
properties. The REIT has six unencumbered properties with a value of $102,000.
Principal repayments are as follows:
2020 .......................................................................................................................................................
$18,130
2021 .......................................................................................................................................................
2022 .......................................................................................................................................................
23,750
18,156
2023 .......................................................................................................................................................
260,259
2024 .......................................................................................................................................................
Thereafter ..............................................................................................................................................
72,081
7,923
Total .......................................................................................................................................................
$400,299
(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, Facility 2, and Facility 3. 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 8 (a)(i), (ii) and (iii) above).
As at December 31, 2019, the notional principal amount of the interest rate swaps was approximately $365,600
(December 31, 2018 – approximately $352,000) and the fair value adjustment of the interest rate swaps was $(3,902)
(December 31, 2018 – $(3,669)). This resulted in a liability balance of $5,016 (December 31, 2018 – $1,114).
9. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of:
As at
December 31, 2019
December 31, 2018
Accounts payable and accrued liabilities
Accrued interest
Distributions payable (Note 10)
Lease liabilities (Note 2(g))
$3,332
381
3,192
7,356
$14,261
$3,057
423
2,126
-
$5,606
As at December 31, 2019, the REIT, as lessee, is committed under long term land and other leases that are classified
as a liability to make lease payments with minimum annual rental commitments as follows (not including imputed
interest costs):
Within 1 year ...........................................................................................................................................
After 1 year, but not more than 5 years ..................................................................................................
More than 5 years ...................................................................................................................................
Total ........................................................................................................................................................
$700
2,392
4,264
$7,356
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10. DISTRIBUTIONS
Paid in Cash
Declared
Payable as at period end
December 31, 2019
December 31, 2018
Units
$20,741
21,806
2,526
Class B
LP Units
$7,988
Total
$28,729
Units
Class B
LP Units
Total
$13,913
$7,988
$21,901
7,988
29,794
666
3,192
14,288
1,460
7,988
22,276
666
2,126
11. 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 Unitholders) 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 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.
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 to which such Special
Voting Unit is attached would be entitled.
For the year ended December 31, 2019
Units, beginning of year
Units issued, 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
Automotive Properties REIT 2019
Units
21,796,552
15,900,500
37,697,052
9,933,253
-
9,933,253
47,630,305
Amount
$212,334
168,423
380,757
$89,101
31,588
$120,689
$501,446
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Automotive Properties REIT 2019
For the year ended December 31, 2018
Units, beginning of year
Units issued, 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
12. UNIT BASED-COMPENSATION
Units
16,216,000
5,580,552
21,796,552
9,933,253
-
9,933,253
31,729,805
Amount
$154,933
57,401
$212,334
$108,372
(19,271)
$89,101
$301,435
The REIT offers an Equity Incentive Plan (the “Plan”) whereby DUs may be granted to eligible Participants on a
discretionary basis by the Governance, Compensation and Nominating Committee of the Board. The maximum
number of Units available for issuance under the Plan is 1,000,000. 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 its 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. As the exemption under IAS 32 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, 2019, the REIT accrued short-term incentive awards in the amount of $384
which will be settled by the granting of DUs (December 31, 2018 – $343).
Certain independent trustees of the REIT 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 outstanding under the Plan is
outlined below:
As at December 31, 2019
As at December 31, 2018
Outstanding DUs and IDUs, beginning of period
DUs
IDUs
Fair value adjustments
Units
119,417
133,366
14,404
-
$1,072
59,088
1,505
52,538
182
487
7,791
-
Outstanding DUs and IDUs, end of period (1)
267,187
$3,246 119,417
Amount
Units
Amount
$645
537
82
(192)
$1,072
(1) During the year ended December 31, 2019, a total of 232,953 DUs and IDUs were granted (2018 – 83,444), of which 100,999 DUs and IDUs
will be accounted for in accordance with the vesting schedule (2018 – 25,999). As at December 31, 2019, a total of 398,571 DUs and IDUs
have been granted (2018 - 165,618).
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13. RENTAL REVENUE AND PROPERTY COSTS
(a) Rental Revenue
For the year ended December 31,
Base rent
Property tax recoveries
Straight line rent adjustment
Rental revenue
(b) Property Costs
For the year ended December 31,
Property tax expense
Land lease
Straight line land lease adjustment
Property cost
2019
$54,384
10,226
2,970
$67,580
2019
$10,226
-
-
$10,226
2018
$38,441
6,801
3,012
$48,254
2018
$6,831
576
102
$7,509
Two of the Initial Properties are subject to land leases. In 2018, land lease expense included straight line rent on the
land leases over the expected lease term and recoverable realty taxes that was paid by the REIT. In 2019, the REIT
adopted IFRS 16. For a description of the resulting changes, see note 2(d) - “Significant Accounting Policies”.
14. 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.
15. CAPITAL MANAGEMENT
The REIT defines its capital as the aggregate of Unitholders’ equity, Class B LP Units, Credit Facilities and Mortgages
which, as at December 31, 2019, totaled $913,210 (December 31, 2018 – $758,447). The REIT is free to determine
the appropriate level of capital in the context of its cash flow requirements, overall business risks and potential
business opportunities. The REIT will make adjustments to its capital based on its investment strategies and changes
to economic conditions.
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 growth; 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 and Mortgages, 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, 2019, the REIT was in compliance with each
of the covenants under these agreements.
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16. FAIR VALUES AND FINANCIAL INSTRUMENT RISK MANAGEMENT
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, 2019:
Financial Assets/(Liabilities)
Credit Facilities and Mortgages Payable
Interest Rate Swaps
Class B LP Units
DUs and IDUs
Classification/
Measurement Carrying Value Fair Value
Amortized Cost
$(400,299)
$(397,929)
FVTPL
FVTPL
FVTPL
(5,016)
(120,689)
(3,246)
(5,016)
(120,689)
(3,246)
$(526,905)
$(529,250)
The following table provides the classification and measurement of financial assets and liabilities as at December
31, 2018:
Financial Assets/(Liabilities)
Credit Facilities and Mortgages Payable
Interest Rate Swaps
Class B LP Units
DUs and IDUs
Classification/
Measurement Carrying Value Fair Value
$(419,514)
Amortized Cost
$(416,872)
FVTPL
FVTPL
FVTPL
(1,114)
(89,101)
(1,072)
(1,114)
(89,101)
(1,072)
$(508,159)
$(510,801)
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, 2019 is $888,129 (December 31, 2018 – $763,998) (Level 3).
(ii)
Credit Facilities and Mortgages
The fair value of the REIT’s Credit Facilities and Mortgages 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 balance as at December 31,
2019 is $5,016 (December 31, 2018 – $1,114). The fair value of an interest rate swap is determined
using rates observable in the market (Level 2).
(iv)
Class B LP Units
The fair value of the Class B LP Units as at December 31, 2019 is $120,689 (December 31, 2018 –
$89,101). The fair value of the Class B LP Units is based on the traded value of the Units as at December
31, 2019 (Level 1).
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(v)
DUs and IDUs
The fair value of the DUs and IDUs as at December 31, 2019 is $3,246 (December 31, 2018 – $1,072).
The fair value of the DUs and IDUs is based on the traded value of the Units as at December 31, 2019
(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 (loss) when the Unit price rises and positively impact net income (loss) when the Unit price declines.
Liquidity Risk
Liquidity risk arises from the possibility of an inability to renew maturing debt or not having sufficient capital
available to the REIT. Mitigation of liquidity risk is discussed above in Note 15 - Capital Management. A significant
portion of the REIT’s assets have been pledged as security under the REIT’s Credit Facilities and Mortgages.
Certain of the Credit Facilities allow for an extension of the term in advance of expiration.
Credit Risk
The REIT is exposed to credit risk from the possibility that counterparties could default on their financial
obligations to the REIT. Exposure to credit risk arises from the possibility that the REIT’s counterparties may
experience financial difficulty and be unable to meet their obligations. The REIT’s revenues will be dependent on
the ability of the tenants to meet their obligations and the REIT’s ability to collect rent thereon.
17. RELATED PARTY TRANSACTIONS
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 accounted for
approximately 61.7% of the REIT’s rental income for the year ended December 31, 2019 (December 31, 2018 –
83.3%).
Pursuant to the Administration Agreement prior to its termination effective December 31, 2019, Dilawri provided, or
caused 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. Services were provided under the
Administration Agreement on a cost-recovery basis.
General and administrative expenses include $1,050 for the twelve month period ended December 31, 2019 paid by
the REIT to Dilawri pursuant to the Administration Agreement (December 31, 2018 - $1,054).
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 the time of closing of the IPO (amortizable over the term of
the leases).
On October 24, 2017, Dilawri paid the REIT $896 in respect of the recoverable land transfer tax associated with the
acquisition of the Initial Properties. To defer the land transfer tax, the REIT subsequently issued the LCs to the land
transfer tax authority in the amount of approximately $753 on behalf of specific members of the Dilawri Group that
sold certain of the Initial Properties to the REIT in connection with the IPO. The Dilawri Group held all of the 9,933,253
issued and outstanding Class B LP Units for 3 years subsequent to the IPO and, accordingly, the LCs are expected
to be released. The REIT is working with the applicable tax authorities and Dilawri to secure the release of the LCs.
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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 and supported by an independent appraisal report. Pursuant to the Strategic Alliance Agreement, the
REIT acquired the following investment properties in 2019 and 2018:
•
Group for $36,500 and leased it to a Dilawri Tenant.
On September 19, 2019, the REIT acquired the Audi Queensway property from a member of the Dilawri
•
$18,000 and leased it to a Dilawri Tenant.
On June 19, 2018, the REIT acquired the Country Hills property from a member of the Dilawri Group for
18. SUPPLEMENTARY INFORMATION
Changes in non-cash operating accounts
(in thousands of Canadian dollars)
Prepaid expenses and other assets
Additions to right-of-use assets
Accounts payable and accrued liabilities
Additions to lease liabilities
Change in non-cash operating accounts
19. SUBSEQUENT EVENTS
2019
$(197)
(7,603)
248
7,603
$51
2018
$(330)
-
1,490
-
$1,160
On February 5, 2020, the REIT purchased the BMW Regina automotive dealership property for $11,350 from the Dilawri
Group.
On February 6, 2020, the REIT purchased the North Shore Acura automotive dealership property for $17,500 from the
Dilawri Group
The REIT provided capital commitments for facility improvements to one of the tenants of the automotive dealership
properties located in Winnipeg, Manitoba. The total capital commitment of $2,003, results in an annual rent increase
effective March 6, 2020.
Subsequent to December 31 2019, there has been a negative impact on the financial markets a result of the global
outbreak of the COVID-19 virus. On March 12, 2020 the World Health Organization declared COVID-19 a pandemic.
This has resulted in economic uncertainty and it is difficult to measure the impact of the uncertainty on the REIT’s future
financial results.
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