BTB Real Estate Investment Trust
Annual Report 2012

Plain-text annual report

ON OUR WAY TO A BILLION Annual report 2012 ON OUR WAY TO A BILLIONTABLE OF CONTENT 4 6 11 53 97 MESSAGE TO UNITHOLDERS CORPORATE PROFILE MANAGEMENT DISCUSSION AND ANALYSIS CONSOLIDATED FINANCIAL STATEMENTS CORPORATE INFORMATION 98 UNITHOLDER INFORMATION MESSAGE TO UNITHOLDERS Dear investors, BTB continued to grow profitably in 2012 and ended the year with a 141% increase of net income, an increase of 105% in our recurring funds from operations, an increase of 55% in the distributable income, an increase of 65% in its recurring adjusted funds from operations and an increase of 22% in BTB’s net operating income. We saw a return to a payout ratio of less than 100%. Indeed, for the year 2012, our payout ratio stood at 98% (compared to 112% for the year 2011) and was 91% for the fourth quarter of 2012. This ratio shows an important improvement in the profitability of BTB. During the same year, BTB significantly reduced its mortgage financing costs. The average interest rate fell from 5.27% to 4.69%. This reduction was mainly caused by replacing the mortgages that were maturing in 2012, more specifically refinancing two large mortgages of a total principal amount of $41M. We anticipate that these refinan- cing will provide an annual savings of interest expense of more than $800,000. In 2013, the Fund will renew or replace mortgages of a total principal amount of approximately $40M and the average contractual interest rate of these mortgages is 5.89%. We therefore expect a further reduction in interest costs related to these mortgages maturing in the second half of 2013. BTB has acquired 10 properties and an additional 50% participation in a building located in Quebec City. The total value of BTB’s acquisitions in 2012 is $126.8M and these acquisitions added 958,000 square feet of leasable area to the Fund. The total value of its assets is now over $504M and the Fund currently owns more than 4.3 million square feet. We are focussed on growing profitably our asset base and, in the coming years, our goal is to reach a billion dollars of total asset value. At the end of 2012, BTB’s unitholders’ equity totaled more than $124M (an increase of 63% as compared to 2011). This equity is based on the fair market value appraisal of BTB’s properties and its excellent performance. Based on the number of outstanding units in circulation at the end of the year (23.8 million units), the book value of BTB’s units is $5.24 per unit compared to a recent trading price of $4.60 (closing price on March 21st, 2013), suggesting an interesting potential gain for unitholders. We thank you for your trust. Michel Léonard President, CEO and Trustee Jocelyn Proteau Chairman of the Board of Trustees 4 5 CORPORATE PROFILE Evolution of the number of Properties , , , , , , , , , , , , , , , 6 , , , , , , , , , , , , , * 2006-2009: Amounts presented in accordance with Canadian GAAP before the changeover to International Financial Reporting Standards (“IFRS”) 2010-2012: Presented in accordance with International Financial Reporting Standards (“IFRS”) * Includes our properties in Trois-Rivieres 7 , , , , , , , , , , , , * 2006-2009: Amounts presented in accordance with Canadian GAAP before the changeover to International Financial Reporting Standards (“IFRS”) 2010-2012: Presented in accordance with International Financial Reporting Standards (“IFRS”) , , , , , , , , , , , , * 2006-2009: Amounts presented in accordance with Canadian GAAP before the changeover to International Financial Reporting Standards (“IFRS”) 2010-2012: Presented in accordance with International Financial Reporting Standards (“IFRS”) 8 , , , , , , , , , , , , , 9 MANAGEMENT DISCUSSION AND ANALYSIS Year ended December 31, 2012 MANAGEMENTDISCUSSION AND ANALYSISTABLE OF CONTENTS INTRODUCTION FORWARD-LOOKING STATEMENTS CAVEAT NON-IFRS FINANCIAL MEASURES HIGHLIGHTS OF FISCAL 2012 THE TRUST OBJECTIVES AND BUSINESS STRATEGIES ADOPTION OF IFRS HIGHLIGHTS AND SELECTED FINANCIAL INFORMATION REAL ESTATE PORTFOLIO PERFORMANCE INDICATORS OPERATING RESULTS DISTRIBUTABLE INCOME AND DISTRIBUTIONS FUNDS FROM OPERATIONS (FFO) ADJUSTED FUNDS FROM OPERATIONS (AFFO) SEGMENTED INFORMATION COMPARATIVE SUMMARY OF QUARTERLY RESULTS FINANCIAL POSITION REAL ESTATE PORTFOLIO REAL ESTATE OPERATIONS CAPITAL RESOURCES INCOME TAXES TAXATION OF UNITHOLDERS IMPACT OF ADOPTING IFRS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES NEW ACCOUNTING POLICIES RISKS AND UNCERTAINTIES DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL REPORTING 13 13 14 14 15 16 16 16 17 18 18 24 26 27 28 29 29 30 32 34 41 42 42 42 46 48 51 INTRODUCTION The purpose of this Management Discussion and Analysis is to allow the reader to evaluate the operating results of BTB Real Estate Investment Trust («BTB» or the «Trust») for the year ended December 31, 2012, as well as its financial position on that date. The report also presents the Trust’s business strategies and the risk exposure it faces. This MD&A dated March 21, 2013 should be read together with the audited annual consolidated financial statements and accompanying notes for the years ended December 31, 2012 and 2011. It discusses any signifi- cant information available up to the date of this MD&A. The Trust’s annual consolidated financial statements were prepared in accordance with International Financial Reporting Standards («IFRS»), as issued by the International Accounting Standards Board («IASB»). Unless otherwise indicated, all amounts are in thousands of Canadian dollars, except for per unit and per square foot amounts. Per unit amounts are calculated using the weighted average number of Trust units outstanding for the periods and fiscal years ended December 31, 2012 and 2011. They have been restated to take into account the unit consolidation that took place on June 7, 2012 at a ratio of five pre-consolidation units for one post-consolidation unit. Additional information about the Trust, including the 2012 Annual Information Form, is available on the Canadian Security Administrators («CSA») website at www.sedar. com and on our website at www.btbreit.com. The Audit Committee and the Trust’s Board of Trustees have approved the contents of this Annual Management Discussion and Analysis and the annual financial statements. FORWARD-LOOKING STATEMENTS CAVEAT From time to time, we make written or oral forward-looking statements within the meaning of applicable Canadian securities legislation. We may make forward-looking statements in this MD&A, other filings with Canadian regulators, reports to unitholders and other communications. These forward-looking statements include statements regarding our future objectives, strategies to achieve our objectives, as well as statements with respect to our beliefs, outlooks, plans, objectives, expectations, forecasts, estimates and intentions. The words “may,” “could,” “should,” “outlook,” “believe,” “plan,” “forecast,” “estimate,” “expect,” “propose,” and the use of the conditional and similar words and expressions are intended to identify forward-looking statements. By their very nature, forward-looking statements involve numerous factors and assumptions, and are subject to inherent risks and uncertainties, both general and specific, which give rise to the possibility that predictions, forecasts, projections and other forward-looking statements will not be achieved. We caution readers not to place undue reliance on these statements as a number of important factors could cause our actual results to differ materially from the expectations expressed in such forward-looking statements. These factors include general economic condi- tions in Canada and elsewhere, the effects of competition in the markets where we operate, the impact of changes in laws and regulations, including tax laws, successful execution of our strategy, our ability to complete and integrate strategic acquisitions successfully, potential dilution, our ability to attract and retain key employees and executives, the financial position of lessees, our ability to refinance our debts upon maturity and to lease vacant space, our ability to complete developments on plan and on schedule and to raise capital to finance our growth, as well as changes in interest rates. We caution that the foregoing list of important factors likely to affect future results is not exhaustive. When relying on forward-looking statements to make decisions with respect to BTB, investors and others should carefully consider these factors and other facts and uncertainties. Additional information about these factors can be found in the “Risks and Uncertainties” section of this Annual MD&A. BTB cannot assure investors that actual results will be consistent with any forward-looking statements and BTB assumes no obligation to update or revise such forward-looking statements to reflect new events or circumstances. 13 NON-IFRS FINANCIAL MEASURES Net operating income, distributable income, funds from operations («FFO») and adjusted funds from operations («AFFO») are non-IFRS performance measures and do not have standardized meanings prescribed by IFRS. They are used by BTB to improve the investing public’s understanding of operating results and the Trust’s performance. IFRS are International Financial Reporting Standards defined and issued by the IASB, in effect as at the date of this MD&A. These measures cannot be compared to similar measures used by other issuers. However, BTB presents its FFO in accordance with the Real Property Association of Canada (REALpac) White Paper on Funds from Operations, as revised in November 2012. Securities regulations require that these measures be clearly defined, that they be readily comparable to the most similar IFRS measures, and that they not be assigned greater weight than IFRS measures. HIGHLIGHTS OF FISCAL 2012 Increase: • • • • • 141% in net income 105% in recurring FFO 55% in distributable recurring income 65% in recurring AFFO 22.1% in net operating income Improvement: • • from 5.27% to 4.69% (58 basis points) average contractual interest rate on mortgage loans. of payout ratio from 112.1% to 98.1% for the year and from 105.2% to 91% for the quarter. Listing on the Toronto Stock Exchange in June 2012 and a unit consolidation at a ratio of five pre-consolidation for one post-consolidation unit. Property acquisitions During the year, the Trust acquired ten properties, including five industrial buildings, three office buildings and two commercial buildings, as well as an additional 50% interest in a Quebec City office complex. For a total cost of $126.8 million, these acquisitions added 958,000 square feet to the Trust’s leasable area, including 418,000 square feet in Ontario and 540,000 in Quebec. 14 Financing activities In addition to arranging and fully using a $15 million acquisition line of credit, the Trust carried out the following financing transactions: • • • • Seven new first- and second-ranking mortgage financings, totalling $51 million, at rates ranging from 3.18% to 5.50%, on certain acquisitions during the year. Assumption of four mortgages totalling $28 million, at rates ranging from 4.75% to 6.80%, on certain acquisitions during the year. Refinancing of two mortgage loans in the amount of $41 million by a new $43 million financing at 4.11%, generating annual savings of more than $800. Two unit issues for a total of 8,848,150 units and gross proceeds of $37.7 million, which were allocated to the acquisition and investment program and BTB’s general requirements. THE TRUST BTB is an unincorporated open-ended real estate trust formed and governed under the laws of the Province of Québec pursuant to a trust agreement. BTB began its real estate operations on October 3, 2006 and to date, it has acquired and owns 66 commercial and industrial properties in primary and secondary markets. BTB has now become an important real estate owner in geographical markets east of Ottawa. The units and Series B, C, D and E convertible debentures are traded on the Toronto Stock Exchange under the symbols «BTB.UN,» «BTB.DB.B,» «BTB. DB.C,» «BTB.DB.D» and «BTB.DB.E», respectively. Most of the Trust’s properties are managed internally, with 46 of the Trust’s 66 properties entirely managed by the Trust’s employees. Management’s objective is to resume, when favourable circumstances prevail, internal manage- ment of the Trust’s properties upon the expiry of agreements between the Trust and its external managers, thereby achieving savings in management and operating fees through centralized and improved property management. The following table provides the total acquisitions of the Trust since its inception: Number of properties Leasable area (sq. ft.) Assets acquired at cost (thousands of $) As at December 31, 2012(1) Subsequent acquisition(2) Total to date 65 1 66 4,341,197 15,186 4,356,383 476,549 2,500 479,049 (1) These figures include a 50% interest in a 17,114 square foot building in a Montréal suburb, a 75% interest in a 140,907 square foot building in Québec City and a 50% interest in two buildings totalling 74,941 square feet in Gatineau, Québec. (2) These figures include a 50% interest in this building. BTB’s management is entirely internalized since April 1, 2009 and no service agreements or asset management agreements are in force between BTB and its officers. The Trust therefore ensures that the interests of management and of its employees are aligned with those of the unitholders. 15 OBJECTIVES AND BUSINESS STRATEGIES BTB’s primary objective is to maximize returns to unitholders. Returns include cash distributions and long-term appreciation in the value of units. More specifically, the objectives are as follows: (i) Generate stable monthly cash distributions that are reliable and fiscally beneficial to unitholders. (ii) Grow the Trust’s assets through internal growth and accretive acquisition strategies in order to increase distri- butable income and therefore fund distributions. (iii) Optimize the value of its assets through dynamic management of its properties in order to maximize the long-term value of its units. Strategically, BTB has purchased and seeks to purchase properties with low vacancy rates, good lessee quality, superior locations, low lease turnover potential and properties that are well maintained and require a minimum of future capital expenditures. ADOPTION OF IFRS Since January 1, 2011, the Trust is required to present its interim and annual financial statements in accordance with International Financial Reporting Standards (“IFRS”), with comparative IFRS figures. IFRS are based on a conceptual framework similar to Canadian GAAP; however, significant differences exist in the recognition, measure- ment, presentation and disclosure for certain accounting items. The adoption of IFRS had a material impact on the consolidated statements of financial position (formerly called the balance sheet) and comprehensive income (formerly called the statement of income), but had no impact on the net cash flows reported by BTB. Before the adoption of IFRS, the Trust’s financial statements were prepared in accordance with Canadian generally accepted accounting principles («GAAP»). HIGHLIGHTS AND SELECTED FINANCIAL INFORMATION Since the beginning of its real estate operations in October 2006, the Trust has acquired 66 properties generating, on an annualized basis, revenues of more than $60 million. The following table presents highlights and selected financial information for the quarters and the years ended December 31, 2012 and 2011: 16 Periods ended December 31 (in thousands of dollars, except ratios and per unit data) Reference Quarter Year 2012 2011 2012 2011 Financial information Rental income Net operating income Net income Recurring distributable income Distributions Recurring funds from operations (FFO) Recurring adjusted funds from operations (AFFO) Investment properties Total assets Mortgage loans payable Convertible debentures Debt ratio – excluding convertible debentures Unitholders’ equity Financial information per unit Weighted average number of units outstanding (in thousands) Net income Distributable income – recurring Distributions Payout ratio Recurring FFO Recurring AFFO Tax on distributions Revenue Tax deferral Operational information Number of properties Leasable area (in thousands of sq. ft.) Occupancy rate Development Property under development Estimated leasable area (in thousands of sq.ft.) Page 19 Page 20 Page 20 Page 24 Page 25 Page 25 Page 26 Page 27 Page 29 Page 29 Page 37 Page 38 Page 39 13,316 10,995 7,551 5,603 2,273 2,068 1,975 1,905 5,432 746 1,414 1,488 938 1,127 48,118 26,996 17,967 7,805 7,656 6,493 6,449 41,459 22,112 7,450 5,026 5,631 3,165 3,911 488,521 343,383 504,927 358,938 296,523 212,145 54,272 61.6% 124,778 52,938 59.3% 76,640 Page 39 19,723 14,802 18,669 13,699 28.4¢ 11.5¢ 10.0¢ 91.0% 10.0¢ 9.7¢ 5.0¢ 10.1¢ 10.0¢ 105.2% 6.3¢ 7.6¢ Page 20 Page 24 Page 25 Page 25 Page 26 Page 27 Page 42 Page 42 Page 31 Page 31 Page 32 96.2¢ 41.8¢ 40.0¢ 98.1% 34.8¢ 34.5¢ 0% 100% 65 4,341 91.7% --- --- 54.4¢ 36.7¢ 40.0¢ 112.1% 23.1¢ 28.6¢ 0% 100% 54 3,272 91.1% 1 141 REAL ESTATE PORTFOLIO BTB owns 66 properties at a total acquisition cost of approximately $479 million and representing a total leasable area of more than 4.3 million square feet. A concise description of the properties owned can be found in the Trust’s 2012 Annual Information Form available at www.sedar.com. A concise description of the properties acquired in 2012 and to date can be found on pages 28 and following of this MD&A. 17 PERFORMANCE INDICATORS The following indicators are used to measure the financial performance of BTB: • Net operating income of the same-property portfolio, which provides an indication of the profitability of existing portfolio operations and BTB’s ability to increase its revenues and reduce its operating costs; • • • • • • Distributable income per unit, which enables investors to determine the stability of distributions; Funds from operations («FFO») per unit, which provide an indication of BTB’s ability to generate cash flow; Adjusted funds from operations («AFFO») per unit, which takes into account rental fees and capital expen- ditures and which may vary substantially from one year to the next; The debt-equity ratio, which is used to assess BTB’s financial integrity and its capacity for additional acquisitions; The interest coverage ratio, which is used to measure BTB’s ability to use operating results to pay interest on its debt; The occupancy rate, which provides an indication of the optimization of rental space and the potential reve- nue gain from the Trust’s property portfolio. More detailed definitions and analyses of each of these indicators are provided in the appropriate sections. OPERATING RESULTS The table below summarizes financial results for the quarters and years ended December 31, 2012 and 2011. The table should be read in conjunction with our consolidated financial statements and the notes thereto. Periods ended December 31 (in thousands of dollars) Reference 2012 2011 2012 2011 Quarter Year Rental income Operating expenses Net operating income Financial income Financial expenses Trust administration expenses Page 19 Page 20 Page 20 Page 21 Page 23 Fair value adjustment on investment properties Page 23 Net income and comprehensive income Page 24 Same-property portfolio 13,316 10,995 5,765 7,551 (36) 3,824 924 (2,764) 5,603 48,118 21,122 26,996 41,459 19,347 22,112 5,563 5,432 8,662 725 (14) (141) (120) 13,362 20,664 3,519 (4,687) (7,711) 746 17,967 2,766 (8,648) 7,450 The same-property portfolio includes all the properties owned by BTB as at January 1, 2011, but does not include the financial spin-offs of disposals, acquisitions and developments completed in 2011 and 2012. 18 Rental income BTB actively acquired properties in 2011 and 2012. Due to this acquisition activity as well as internal growth from the same-property portfolio, recurring rental income for the fourth quarter and fiscal 2012 increased by $2,566 or 23.9% and $6,904 or 16.8%, respectively. Rental income includes all amounts earned from tenants related to lease agreements, including basic rent and other service charges for parking and storage, operating expenses and realty tax recoveries, and straight-line rent adjustments. BTB accounts for rent step-ups incrementally over the term of the non-cancellable lease. In the fourth quarter and for fiscal 2012, straight-line rent adjustments of $281 (2011: $51) and $661 (2011: $498), respectively, were recorded. In the fourth quarter and for fiscal 2012, BTB recorded amortization of $355 (2011: $228) and $1,240 (2011: $864), respectively, as a reduction in rental income, which represents amortization of lease incentives afforded to lessees. Periods ended December 31 (in thousands of dollars) Rental income on the basis of in-place leases Straight-line rental income adjustment Amortization of lease incentives Quarter Year 2012 13,390 281 (355) 2011 11,172 51 (228) 2012 48,697 661 (1,240) 48,118 2011 41,825 498 (864) 41,459 Rental income from investment properties 13,316 10,995 Recurring income from the same-property portfolio increased 2.7% in the fourth quarter ended December 31, 2012 and 1.5% in fiscal 2012. Periods ended December 31 (in thousands of dollars) Same-property portfolio Non-recurring items (1) Recurring same-property portfolio 10,690 10,408 Acquisitions, disposals and development 2,626 342 Quarter 2012 2011 ∆% 2012 Year 2011 10,690 10,653 --- (245) 0.3 N/A 2.7 N/A 41,309 40,936 --- (245) 41,309 40,691 6,809 523 ∆% 0.9 N/A 1.5 N/A Recurring rental income 13,316 10,750 23.9 48,118 41,214 16.8 (1) Non-recurring partial recovery of retroactive Québec Sales Tax (QST) charges on energy expenses. 19 Operating expenses The increase in recurring operating expenses of 16.1% between the fourth quarter of 2011 and the fourth quarter of 2012, and 12.7% for fiscal 2012 compared to last year, was mainly due to fiscal 2011 and 2012 acquisitions. Operating expenses of the same-property portfolio increased 1.0% during the quarter and 3.4% over the year. Periods ended December 31 (in thousands of dollars) Same-property portfolio Non-recurring items Recurring same-property portfolio 1) Acquisitions, disposals and development Recurring operating expenses Quarter 2011 5,499 --- (598) 4,901 64 4,965 2012 4,952 4,952 813 5,765 ∆% 2012 Year 2011 (9.9) 19,217 19,190 N/A 1.0 N/A --- (598) 19,217 18,592 1,905 157 ∆% 0.1 N/A 3.4 N/A 16.1 21,122 18,749 12.7 (1) Retroactive Québec Sales Tax (QST) charges on energy expenses The table below shows the breakdown of operating expenses for the periods ended December 31, 2012 and 2011: Periods ended December 31 (in thousands of dollars) Operating expenses - Operating costs - Property taxes and public utilities Total operating expenses % of rental income Quarter Year 2012 2011 2012 2011 2,225 3,540 5,765 1,964 3,599 5,563 7,710 13,412 21,122 6,955 12,392 19,347 43.3 50.6 43.9 46.7 Operating expenses are expenses directly related to real estate operations and are generally charged back to lessees as provided for in the contractual terms of the leases. Operating expenses include property taxes and public utilities, costs related to indoor and outdoor maintenance, heating, ventilation and air conditioning, elevators, insurance, janitorial services and management and operating fees. The amount of operating expenses that BTB can recover from its lessees depends on the occupancy rate of the properties and the nature of the existing leases containing clauses regarding the recovery of expenses. BTB pays particular attention to compliance with existing leases and the recovery of its properties’ operating expenses. Net operating income Recurring net operating income increased 30.5% for the fourth quarter of 2012 compared to 2011 and 20.2% for fiscal 2012 compared to 2011. Recurring operating income of the same-property portfolio was up 4.2% for the quarter compared to the fourth quarter of 2011 and stable for fiscal 2012 compared to 2011. Recurring net operating income was 56.7% of recurring rental income for the quarter ended December 31, 2012 (2011: 53.8%) and 56.1% for fiscal 2012 (2011: 54.5%), an increase over the same periods of the previous year. These increases were mainly due to the nature of acquisitions completed by the Trust in the last four quarters, which primarily consist of single-tenant industrial properties with “triple net” leases under which operating expenses are paid directly by the tenants rather than being charged back to them by the Trust. 20 Periods ended December 31 (in thousands of dollars) Same-property portfolio Non-recurring items (1) Recurring net operating income Acquisitions, disposals and development Recurring net operating income % of recurring rental income 2012 5,738 --- 5,738 1,813 7,551 56.7 Quarter 2011 5,154 353 5,507 278 5,785 53.8 ∆% 2012 Year 2011 11.3 22,092 21,746 N/A 4.2 N/A --- 353 22,092 22,099 4,904 367 ∆% 1.6 N/A 0.0 N/A 30.5 26,996 22,466 20.2 56.1 54.5 (1) Non-recurring Québec Sales Tax (QST) charges on energy expenses, less partial recoveries. Recurring net operating income is reduced by non-cash rental income adjustments. Before adjustments, recurring net operating income was as follows: Periods ended December 31 (in thousands of dollars) Recurring net operating income Straight-line rental income adjustments Adjustment related to amortization of lease incentives Recurring net operating income, net of rental income adjustments 2012 7,551 (281) Quarter 2011 5,785 ∆% 30.5 2012 Year 2011 26,996 22,466 (51) 451.0 (661) (498) ∆% 20.2 32.7 355 228 55.7 1,240 844 46.9 7,625 56.9% 5,962 53.4% 27.9 27,575 22,812 20.9 56.6% 54.5% Although net operating income is not a financial measure recognized under IFRS, it is used in the real estate industry to measure operational performance. BTB defines it as operating income before financial revenues and financial expenses, Trust administration expenses and fair value adjustment of properties. This definition may differ from that of other issuers and accordingly, BTB’s net operating income may not be comparable to the net operating income of other issuers. Financial expenses Financial expenses arise from the following loans and financings: • Mortgage loans payable contracted or assumed totalling approximately $296 million as at December 31, 2012, compared to $213 million as at December 31, 2011. The increase resulted from the financing or assumption of mortgage loans payable on acquisitions completed and the refinancing of certain properties during the last 12 months. • • • Series B, C and D convertible debentures issued in a total amount of $59 million ($59 million as at December 31, 2011). Operating and acquisition lines of credit used as needed, which allowed primarily for the acquisition of accre- tive properties during the fourth quarter. Financing costs on mortgages, convertible debentures and other loans netted against the related debt and amortized on an effective interest basis over the expected life of the debt. 21 Periods ended December 31 (in thousands of dollars) Interest expense on mortgage loans payable Interest expense on debentures Interest expense on acquisition lines of credit Interest expense on operating lines of credit and other interest expenses Interest expense Accretion of effective interest Accretion of non-derivative liability component of convertible debentures Financial expenses before following items: Fair value adjustment on warrants Quarter Year 2012 3,195 1,154 88 25 2011 2,709 1,155 --- 5 4,462 3,869 440 155 5,057 --- 377 132 4,378 165 2012 11,822 4,622 88 106 16,638 1,412 2011 10,515 4,437 356 5 15,313 1,528 598 731 18,648 17,572 43 13 Fair value adjustment on derivative financial instruments (de- benture conversion options) (1,233) 4,119 (5,329) 3,079 Financial expenses 3,824 8,662 13,362 20,664 Before recognition of fair value adjustments on debenture conversion options and warrants, financial expenses increased by $679 during the fourth quarter of 2012 compared to the same quarter in 2011 and $1,076 for fiscal 2012, due to the financing and assumption of mortgages on property acquisitions and the issuance of Series D convertible debentures in July 2011. However, these increases were limited by the refinancing of matured loans at more advantageous rates than outstanding loans and the repayment of Series A debentures in October 2011. As shown by the following table, interest expense on mortgage loans payable in the same-property portfolio de- creased by 7.6% in the fourth quarter and 2.8% for fiscal 2012 compared to the same period of 2011, due to the refinancing of loans that matured in the last few quarters at more advantageous rates. However, the decrease was limited by increased financing on certain properties. Periods ended December 31 (in thousands of dollars) Same-property portfolio Acquisitions and development 2012 2,426 769 3,195 Quarter 2011 2,626 83 2,709 2012 Year 2011 10,054 10,342 1,768 173 ∆% (7.6) N/A 17.9 11,822 10,515 ∆% (2.8) N/A 12.4 Financial expenses can be allocated among interest expenses amounting to $4,462 for the quarter and $16,638 for the year ($3,869 and $15,313 in 2011, respectively) and non-monetary items. Non-monetary items include fair value adjustments on derivative financial instruments and warrants in net credit positions of $1,233 for the quarter and $5,286 for the year (debit positions of $4,284 and $3,092, respectively, in 2011). Fair values fluctuate from one period to another. These adjustments result from changes in the value of the Trust’s units on stock exchanges during the periods concerned and changes in the value of conversion options and warrants compared with the amounts recorded at the end of previous periods. As at December 31, 2012, the average weighted contractual rate of interest on mortgage loans payable was 4.69%, down 58 basis points from December 31, 2011 and 44 basis points from the previous quarter. These decreases resulted from favourable interest rates on mortgage financing for properties acquired during fiscal 2011 and on refinancings carried out. For 17 consecutive quarters, the weighted average interest rate has remained stable or declined. Interest rates on first-ranking mortgage financings range from 3.18% to 6.80%. A single second- ranking mortgage financing in the amount of $2.2 million bears interest at 8.5%. 22 Trust administration expenses Trust administration expenses include administrative costs such as payroll expenses and professional fees associa- ted with executive and administrative staff, the compensation plan for trustees, legal and auditing services, expenses related to listed fund status, insurance costs, office expenses and bad debts and related legal fees. They also include amortization of the head office building and property, plant and equipment, unit-based compensation, and a monetary item that affects the volatility of administrative expenses from period to period. Periods ended December 31 (in thousands of dollars) Recurring administrative expenses Toronto Stock Exchange listing fees Amortization Unit-based compensation Trust administration expenses Quarter Year 2012 929 --- 25 (30) 924 2011 694 --- 21 10 725 2012 3,280 225 90 (76) 2011 2,617 --- 84 65 3,519 2,766 Since June 7, 2012, the Trust’s units and debentures have been listed on the Toronto Stock Exchange. Listing fees and other expenses related to the graduation are assessed at $225 and considered non-recurring. Fair value adjustment on investment properties Under IAS 40, the Trust accounts for its investment properties at fair value and recognizes the gain or loss arising from a change in the fair value in profit or loss for the period in which it arises. The fair value of investment properties is determined using the discounted cash flow method or the capitalized net operating income method, which are generally accepted valuation methods. Management receives quarterly capitalization rate and discount rate data from external chartered valuators and independent experts. The capitalization rate reports provide a range of rates for various geographic regions and for various types and qualities of properties within each region. The Trust utilizes capitalization and discount rates within ranges provided by external valuators. To the extent that the externally-provided capitalization rate ranges change from one reporting period to the next; or should another rate within the provided ranges be more appropriate than the rate previously used, the fair value of the investment properties would increase or decrease accordingly. Yearly independent external valuations are done on a rotating three-year cycle. In addition, the portfolio’s ten largest properties are independently appraised each year. Management determined that an increase in value of $2,764 for the quarter ($4,687 in 2011) and $7,711 for the year ($8,648 in 2011) was required in order to adequately reflect the fair value of the portfolio held. BTB has estimated that a 0.10% variation in the capitalization rate applied to the overall portfolio would change the fair value of the investment properties by approximately $6.5 million. The following table highlights the significant assumptions used in the modeling process for both internal and external appraisals: As at December 31, 2012 Capitalization rate Commercial Office 7.00% - 12.00% 6.50% - 10.50% Industrial 7.00% - 9.75% General purpose 7.25% - 8.75% Terminal capitalization rate 7.25% - 8.75% 6.50% - 9.50% 7.00% - 11.50% 7.50% - 9.25% Discount rate 7.25% - 9.75% 7.50% - 9.25% 7.00% - 10.75% 8.25% - 9.00% As at December 31, 2011 Capitalization rate Commercial 7.25% - 10.25% Office 6.75% - 9.75% Industrial 7.50% - 10.25% General purpose 7.50% - 9.00% Terminal capitalization rate 7.75% - 10.50% 6.75% - 9.50% 7.75% - 10.50% 7.75% - 9.25% Discount rate 7.50% - 10.25% 7.75% - 9.25% 8.00% - 11.25% 8.00% - 9.75% 23 The weighted average capitalization rate for the entire portfolio as at December 31, 2012 was 7.55% (2011: 7.82%), down 16 basis points since September 30, 2012, and 27 basis points from a year earlier. Net income and comprehensive income BTB generated net income of $5.6 million for the fourth quarter of 2012, up $4.9 million from the fourth quarter of 2011 and $18.0 million for fiscal 2012 compared to $7.5 million in 2011. Periods ended December 31 (in thousands of dollars, except per unit data) Net income and comprehensive income Per unit Quarter Year 2012 5,603 28.4¢ 2011 746 5.0¢ 2012 17,967 96.2¢ 2011 7,450 54.4¢ DISTRIBUTABLE INCOME AND DISTRIBUTIONS The notion of “distributable income” does not constitute financial information as defined by IFRS. It is, however, a mea- surement that is frequently used by investors in real estate trusts. In our opinion, distributable income is an effective tool for assessing the Trust’s performance. We define distributable income as net income determined under IFRS, before unrealized fair value adjustments, transaction costs incurred upon business combinations, rental revenue arising from the recognition of leases on a straight-line basis, the amortization of lease incentives, the accretion of effective interest and certain other non-cash items. The following table shows the calculation of distributable income: Periods ended December 31 (in thousands of dollars) Net income and comprehensive income (IFRS) Quarter Year 2012 5,603 2011 746 2012 17,967 2011 7,450 - Fair value adjustment on investment properties (2,764) (4,687) (7,711) (8,648) + Amortization of an investment property and other property and 28 equipment ± Unit-based compensation expense + Accretion of the liability component of convertible debentures ± Fair value adjustment on warrants (30) 155 --- 21 10 132 165 97 (76) 598 43 89 65 731 13 ± Fair value adjustments on conversion options of convertible (1,233) 4,119 (5,329) 3,079 debentures + Amortization of lease incentive - Straight-line rental income adjustment + Accretion of effective interest Distributable income Non-recurring items 355 (281) 440 228 (51) 378 2,273 1,061 1,240 (661) 1,412 7,580 864 (498) 1,528 4,673 - Toronto Stock Exchange listing fees - Net retroactive sales tax charges on energy expenses Recurring distributable income --- --- 2,273 --- 225 --- 353 1,414 --- 7,805 353 5,026 24 The Canadian Securities Administrators (CSA) requires the Trust to reconcile distributable income (non-IFRS mea- sure) and cash flows from operating activities presented in the financial statements. The following table shows the reconciliation: Periods ended December 31 (in thousands of dollars) Cash flows from operating activities (IFRS) + Toronto Stock Exchange listing fees + Net retroactive sales tax charges on energy expenses + Financial revenues + Net change in working capital items - Interest expense on mortgage loans payable - Interest expense on convertible debentures - Interest expense on acquisition line of credit - Other interest expenses Recurring distributable income Distributions and per unit data Quarter 2012 8,491 225 --- 141 15,586 (11,822) (4,622) (87) (107) 7,805 2011 17,934 --- 353 120 1,932 (10,461) (4,437) (356) (59) 5,026 Periods ended December 31 Quarter Year (in thousands of dollars, except for per unit data) 2012 2011 2012 2011 Distributions Distributions to unitholders Distributions reinvested under the distribution reinvestment plan Total distributions to unitholders Per unit data Recurring distributable income Distribution per unit Distribution ratio (1) 1,895 173 2,068 11.5¢ 10.0¢ 1,435 53 1,488 10.1¢ 10.0¢ 91.0% 105.2% 7,074 582 7,656 41.8¢ 40.0¢ 98.1% 5,578 53 5,631 36.7¢ 40.0¢ 112.1% (1) The distribution ratio corresponds to distributions divided by recurring distributable income. Recurring distributable income for the fourth quarter increased by $859, from $1,414 to $2,273, between 2011 and 2012. Recurring distributable income for fiscal 2012 was $7,805, up $2,779 from fiscal 2011. Recurring dis- tributable income per unit for the fourth quarter of fiscal 2012 stood at 11.5¢ per unit compared to 10.1¢ in 2011 and 41.8¢ compared to 36.7¢ for fiscal 2011. Distributions to unitholders totalled 10¢ per issued unit for each quarter presented. The distribution ratio was 91.0% in the fourth quarter of 2012 compared to 105.2% in the fourth quarter of 2011, and 98.1% compared to 112.1% for the year, reflecting a surplus of distributable income over distributions for the quarter of 2012 and for the year. 25 FUNDS FROM OPERATIONS (FFO) The notion of funds from operations («FFO») does not constitute financial and accounting information as defined by IFRS. It is, however, a measurement that is frequently used by real estate companies and real estate investment trusts. The Canadian Real Property Association of Canada (“REALpac”) amended its White Paper on Funds from Operations in 2010 to reflect the impact of IFRS. The following is a list of some of the new adjustments to net income, calculated according to IFRS, which are non-cash items that create volatility: • • • • • Fair value adjustment on investment properties; Amortization of properties that continue to be recognized at acquisition cost (Trust’s head office); Amortization of lease incentives; Fair value adjustment on conversion instrument for convertible debentures; Fair value adjustment on warrants. Our calculation method is consistent with the method recommended by REALpac, but may differ from measures used by other real estate investment trusts. Consequently, this method may not be comparable to methods used by other issuers. In order to fairly measure FFO, the Trust can present in the reconciliation unusual and non-recurring items which could affect results for the quarters and years in question. For the second quarter of 2012, the Trust incurred non- recurring expenses of $225 related to the Toronto Stock Exchange listing. In the fourth quarter of 2011, the Trust incurred retroactive net sales tax expenses on energy expenses amounting to $353. The following table provides a reconciliation of net income and comprehensive income established according to IFRS and recurring FFO for the quarters and years ended December 31, 2012 and 2011: - Fair value adjustment on investment properties (2,764) (4,687) Periods ended December 31 (in thousands of dollars, except for per unit data) Net income and comprehensive income (IFRS) + Amortization of an investment property + Amortization of lease incentives + Fair value adjustments on conversion options of convertible debentures + Fair value adjustment on warrants FFO + Toronto Stock Exchange listing fees + Net retroactive sales tax charges on energy expenses Recurring FFO Per unit data - FFO - Recurring FFO Quarter Year 2012 2011 2012 5,603 2011 746 14 355 14 228 17,967 (7,711) 58 1,240 (1,233) 4,119 (5,329) 1,975 --- --- --- 1,975 10.0¢ 10.0¢ 165 585 --- 353 938 4.0¢ 6.3¢ 43 6,268 225 --- 6,493 33.6¢ 34.8¢ 7,450 (8,648) 54 864 3,079 13 2,812 --- 353 3,165 20.5¢ 23.1¢ Recurring FFO increased by close to 110.5% for the fourth quarter of 2012 and 105.2% for the year compared with 2011, mainly as a result of acquisitions of income-producing properties and a decrease in the average mortgage loan interest rate. Recurring FFO per unit for the fourth quarter amounted to 10.0¢ in 2012 compared to 6.3¢ in 2011 and 34.8¢ per unit for fiscal 2012 compared to 23.1¢ in 2011, representing respective increases of 58.7% for the fourth quarter and 50.6% for the year. 26 ADJUSTED FUNDS FROM OPERATIONS (AFFO) The notion of adjusted funds from operations («AFFO») is widely used by real estate companies and real estate investment trusts. It is an additional measure to assess the Trust’s performance and its ability to maintain and increase distributions in the long term. However, AFFO is not a financial or accounting measure prescribed by IFRS. The method of computing may differ from those used by other companies or real estate investment trusts and may not be used for comparison purposes. BTB defines AFFO as its FFO, adjusted to take into account other non-cash items that impact comprehensive income and do not enter into the calculation of FFO, including: • • • • • Straight-line rental income adjustment; Accretion of effective interest following amortization of financing expenses; Accretion of the liability component of convertible debentures; Amortization of other property, plant and equipment; Unit-based compensation expenses. The Trust deducts a provision for unrecoverable capital expenses in calculating AFFO. The Trust allocates significant amounts to the regular maintenance of its properties in an attempt to reduce capital expenses as much as possible. The allocation for unrecoverable capital expenses is calculated on the basis of 1.3% of rental revenues. The Trust also deducts a provision for rental fees in the amount of approximately 20¢ per square foot on an annua- lized basis. Even though quarterly rental fee disbursements vary significantly from one quarter to another, manage- ment considers that this provision fairly presents, in the long term, the average disbursements that the Trust will undertake. These disbursements consist of inducements paid or granted when leases are signed, and of brokerage commissions. The following table provides a reconciliation of recurring FFO and recurring AFFO for the quarters and years ended December 31, 2012 and 2011: Periods ended December 31 (in thousands of dollars, except for per unit data) Recurring FFO - Straight-line rental income adjustment + Accretion of effective interest + Accretion of the liability component of convertible deben- tures + Amortization of property and equipment + Unit-based compensation expenses - Reserve for non-recoverable capital expenses - Reserve for rental fees Recurring AFFO Per unit data Recurring AFFO Quarter Year 2012 1,975 (281) 440 155 14 (30) (173) (195) 1,905 2011 938 (51) 377 132 7 10 (142) (144) 1,127 2012 6,493 (661) 1,412 598 39 (76) (626) (730) 6,449 2011 3,165 (498) 1,528 731 30 65 (538) (572) 3,911 9.7¢ 7.6¢ 34.5¢ 28.6¢ 27 The increase of 69% in AFFO for the fourth quarter of 2012 compared with the fourth quarter of 2011 and 65% for fiscal 2012 compared with fiscal 2011 is due to acquisitions of income-producing properties and a drop in the average mortgage loan interest rate. AFFO per unit amounted to 9.7¢ compared with 7.6¢ in 2011 for the fourth quarter and 34.5¢ compared with 28.6¢ for the year. The increase in recurring AFFO per unit takes into account the dilution resulting from capital contributions in February and December 2012, but does not yet reflect the full use of funds from accretive acquisitions completed during the periods. SEGMENTED INFORMATION The Trust’s operations are derived from four categories of properties, located in Québec and in Ontario. The following tables present each category’s contribution to revenues and net operating income for the periods ended December 31, 2012 and 2011. Three-month period ended December 31, 2012 (in thousands of dollars) Investment properties Rental income from properties Net operating income Year ended December 31, 2012 (in thousands of dollars) Commercial Office Industrial General purpose Total $ 98,608 2,093 1,496 % 20.2 15.7 19.8 $ 200,092 6,606 3,214 % 41.0 49.6 42.6 $ 79,236 1,928 1,528 % 16.2 14.5 20.2 $ 110,585 2,689 1,313 % 22.6 20.2 17.4 $ 488,521 13,316 7,551 Commercial Office Industrial General purpose Total Rental income from properties Net operating income $ 7,898 5,360 % 16.4 19.9 $ 23,584 11,418 % 49.0 42.3 $ 6,841 5,517 % 14.2 20.4 $ 9,795 4,701 % 20.4 17.4 $ 48,118 26,996 Three-month period ended December 31, 2011 (in thousands of dollars) Commercial Office Industrial General purpose Total Investment properties 70,175 20.4 152,600 44.4 53,269 15.5 67,339 19.6 343,383 $ % $ % $ % $ % $ Investment properties under development Rental income from properties Net operating income Year ended December 31, 2011 (in thousands of dollars) --- 1,956 1,284 --- 17.8 23.6 3,933 5,539 2,403 100.0 50.4 44.3 --- 980 705 --- 8.9 13.0 --- 2,520 1,040 --- 22.9 19.1 3,933 10,995 5,432 Commercial Office Industrial General purpose Total Rental income from properties Net operating income $ 7,630 4,988 % 18.4 22.6 $ 20,857 9,987 % 50.3 45.1 $ 3,493 2,565 % 8.4 11.6 $ 9,479 4,572 % 22.9 20.7 $ 41,459 22,112 28 COMPARATIVE SUMMARY OF QUARTERLY RESULTS 2012 2012 2012 2012 2011 2011 2011 2011 (in thousands of dollars, except for per unit data) Q-4 Q-3 Q-2 Q-1 Q-4 Q-3 Q-2 Rental income 13,316 12,080 11,723 10,999 10,995 10,503 10,215 Net operating income Net income (loss) Net income (loss) per unit Recurring funds from operations (FFO) Recurring FFO per unit Recurring adjusted funds from operations (AFFO) Recurring AFFO per unit 7,551 5,603 28.4¢ 1,975 10.0¢ 1,905 9.7¢ 7,016 3,429 18.0¢ 1,941 10.1¢ 1,903 10.0¢ 6,708 4,963 26.0¢ 1,710 9.0¢ 1,739 9.1¢ 5,721 3,972 23.9¢ 867 5.2¢ 899 5.4¢ 5,432 746 5.0¢ 938 6.5¢ 1,136 7.5¢ 5,861 4,503 30.5¢ 936 6.5¢ 1,070 7.0¢ 5,760 3,237 22.0¢ 1,000 6.8¢ 1,312 8.9¢ Q-1 9,746 5,099 (1,036) (9.9)¢ 291 2.8¢ 412 3.9¢ FINANCIAL POSITION The table below presents a summary of assets, liabilities and unitholders’ equity as at December 31, 2012 and December 31, 2011. It should be read in conjunction with the Trust’s audited annual financial statements. (in thousands of dollars) Assets Investment properties Property under development Other assets totAl Assets liAbilities Mortgage loans payable Convertible debentures Acquisition line of credit Other liabilities totAl liAbilities equity Unitholders’ equity totAl liAbilities And equity December 31, 2012 December 31, 2011 488,521 --- 16,406 504,927 296,523 54,272 14,825 14,529 380,149 124,778 504,927 343,383 3,933 11,622 358,938 212,145 52,938 --- 17,215 282,298 76,640 358,938 The main changes to the statement of financial position as at December 31, 2012 compared to the statement of financial position as at December 31, 2011 primarily reflect investment property acquisitions during 2012, the issuance of units in February 2012 and December 2012 and mortgage financings and refinancings concluded in 2012. 29 REAL ESTATE PORTFOLIO Over the years, BTB has fuelled its growth through high-quality property acquisitions based on strict selection criteria, while maintaining an appropriate allocation among four activity segments: office, commercial, industrial and general- purpose properties. Entry into operation Since its first lessees have arrived, Complexe Lebourgneuf Phase 2 is now considered an investment property. To date, 118,221 square feet of leasable space of a total of 140,907 square feet is either occupied or has received a firm lease offer, resulting in an occupancy rate of 83.9%. The Trust has a 75% interest in this building, whose construction was completed in December 2011. The building was officially inaugurated on March 28, 2012. Disposal of a building On March 20, 2012, the Trust sold a building located on Laurentian Boulevard in Montréal because it no longer met the Trust’s investment criteria. Its historical cost was $1.4 million and the sale resulted in proceeds of disposition of $1.3 million. The decline in value had already been reflected in the financial statements of prior periods. Property acquisitions during the second quarter In April 2012, the Trust acquired three industrial buildings for a total purchase price of $14.7 million: • • • • 4535 Louis B. Mayer, Laval, Québec – This industrial building, of a leasable area of 41,000 square feet, is located near highways 13, 15 and 440, within about 10 minutes of the Montréal International Airport. The property is fully leased to Société Strongco GP Inc. (TSX: SQP), a company specializing in the sale, leasing and repair of heavy equipment and machinery. 7777 Trans-Canada Highway, Saint-Laurent, Québec – Located in one of the largest industrial parks on the Island of Montréal along the Trans-Canada Highway, this property has a leasable area of 73,000 square feet. The building is leased on a long-term basis by Plastifab, a subsidiary of PFP Corporation (TSX: PFP), which specializes in the manufacture of moulded polystyrene products. 208-244 Migneron, Saint-Laurent, Québec – This industrial building is located in the heart of the Saint- Laurent borough’s industrial park just a few minutes from the Trans-Canada Highway and Côte-de-Liesse Road, and has a total leasable area of 52,100 square feet. The property is leased to several lessees, of which the main ones are ClickTouch Amérique Inc., a manufacturer specializing in the custom design and manufacture of membrane keypads and CPT Canada Power Technology, Canada’s largest distributor of air-cooled engines and supplies. In May 2012, the Trust acquired an office building for $14.1 million located at 80 Aberdeen, Ottawa, Onta- rio near Highway 417. This office building of a leasable area of 53,933 square feet is fully leased. Its main lessee is the City of Ottawa, which occupies 54% of the building. Property acquisitions during the third quarter On September 24, 2012, the Trust acquired an additional 50% interest in Complexe Lebourgneuf Phase 2 for a purchase price of $12.1 million. 30 Property acquisitions during the fourth quarter On October 15, 2012, the Trust acquired an office building located at 245 Stafford West in Ottawa, Ontario for a purchase price of $6.6 million. The 31,757-square-foot building is fully leased. The main tenants are TD Bank and the LCBO. On November 1, 2012, the Trust acquired a 50% interest in two commercial retail and office buildings located at 7-9 Montclair in Gatineau, Québec, for $6.1 million. The properties cover a total of 74,941 square feet and are fully leased. The tenants are a “Houston” chain restaurant, a “L’Aubainerie” store and federal government offices. On November 5, 2012, the Trust acquired an industrial building located at 311 Ingersoll in Ingersoll, Ontario for a purchase price of $10.5 million. The 200,615-square-foot property is fully leased to a single tenant, a subsidiary of an American multinational. On December 21, 2012, the Trust acquired the following properties: • • • 1 to 9 and 10 Brewer Hunt Way in Ottawa (Kanata), Ontario – Acquired for a price of $18.9 million, this campus-style office complex of five interlinked buildings has approximately 132,067 square feet of leasable area. The buildings are fully leased to several tenants including Flextronics (36.9%) (NASDAQ: FLEX) and Optelian (29.5%). 11600 to 11800 De Salaberry Blvd., Dollard-des-Ormeaux, Québec – This mall known as “Marché de l’Ouest” was purchased for $27 million. With approximately 128,737 square feet of leasable area, the mall is a prominent food centre in Montréal’s West Island. The occupancy rate is 99.7% and the main tenants include IGA (Sobeys), Dollarama (TSX: DOL.TO), Bulk Barn and a Madisons restaurant. 315-325 MacDonald, Saint-Jean-sur-Richelieu, Québec – This $16.9 million property is mainly rented to retail and office tenants on the ground floor, and office tenants on the second and third floors. The property has a leasable area of approximately 170,074 square feet and a 97.8% occupancy rate. Its largest tenants include Saint-Jean-sur-Richelieu City Hall, the city’s police station, and the Government of Québec. These tenants generate 60% of the property’s gross revenue. The following table provides summary information about the real estate portfolio: (in thousands of dollars) Investment properties (at fair value) Property under development Others assets at unamortized value Gross book value of the Trust Number of properties Leasable area (in thousands of sq. ft.) December 31, 2012 December 31, 2011 488,521 --- 16,868 505,389 65 4,341 343,383 3,933 11,987 359,303 54 3,272 Summary by operating segment as at December 31, 2012 Office Commercial Industrial General purpose Total Number of proper- ties Leasable area (sq.ft.) 21 14 16 14 65 1,400,181 650,613 1,312,953 977,451 4,341,197 % 32.3 15.0 30.2 27.5 100 31 Subsequent acquisitions On February 19, 2013, the Trust acquired a 50% interest in a retail complex property located in Saint-Lazare, Qué- bec, with 15,186 square feet of leasable area, for a purchase price of $2.5 million. Tenants include a Tim Hortons, an A&W and a Sobey’s convenience store. REAL ESTATE OPERATIONS Leasing activities The following table summarizes changes in available leasable area during the periods ended December 31, 2012, except for Complexe Lebourgneuf Phase 2: In square feet Available leasable area at beginning of period Available leasable area purchased (sold) Leasable area of expired leases Leasable area of leases terminated before term Leasable area of expired and renewed leases Leasable area of new leases signed Other Available leasable area at end of period Quarter 312,669 3,603 92,511 1,876 (49,698) (20,798) (2,900) 337,263 Year 291,688 (12,837) 350,426 54,213 (262,774) (89,251) 5,798 337,263 The Trust’s leasing operations were significant during the fourth quarter of 2012. More than 70,000 square feet were signed with new lessees or renewed during the quarter. During 2012, more than 250,000 square feet were signed with new lessees or renewed. The average rate of expired and renewed leases rose 7.76% during the fourth quarter and 6.91% for the year. The first lessees have arrived at Phase 2 of Complexe Lebourgneuf and the official inauguration was held on March 28, 2012. It has an area of 140,907 square feet, and 118,221 square feet are now occupied or have received a firm leasing offer. The Trust holds a 75% interest in this property. Occupancy rates The following table provides occupancy rates by sector based on firm lease agreements signed as at the date of this report. Sector of activity Office Commercial Industrial General purpose Total portfolio December 31, 2012 September 30, 2012 June 30, 2012 March 31, 2012 December 31, 2011 86.4% 93.8% 93.8% 94.9% 91.7% 86.7% 92.8% 94.5% 89.5% 90.5% 88.1% 92.4% 94.2% 90.6% 91.0% 89.0% 92.3% 93.2% 90.4% 91.0% 89.4% 89.9% 93.2% 92.1% 91.1% The overall occupancy rate is up by 0.6% since December 31, 2011 and 1.2% since September 30, 2012. It stands at 91.7%. 32 The increase in the occupancy rate is due to strong leasing activity in recent months and recent acquisitions with an occupancy rate higher than the overall rate of the portfolio then in place. Only the office sector has an occupancy rate lower than the portfolio’s overall rate. The bankruptcy of a major tenant in Complexe Lebourgneuf Phase 1 and the status of Complexe Lebourgneuf Phase 2, which is still being developed, partially explain the low occupancy rate in this sector. Management is aware of the situation and has taken steps to improve this performance indicator. In addition, as a result of strong rental activity in the Lebourgneuf area and a buoyant real estate market in the Québec City area, the Trust is confident that Complexe Lebourgneuf will achieve a stable short-term leasing situation, which will improve the occupancy rate in this activity sector. Lease maturity The following table shows the lease maturity profile for the coming years: 2013 2014 2015 2016 2017 2018 Office Leasable area (sq. ft.) 115,284 143,376 216,514 166,096 162,225 100,738 Average lease rate/square foot ($) % of office portfolio Commercial Leasable area (sq. ft.) 11.58 8.23% 13.54 10.24% 13.63 14.85 12.59 15.46% 11.86% 11.59% 12.12 7.19% 37,351 54,815 47,419 45,515 20,778 101,261 Average lease rate/square foot ($) % of commercial portfolio Industrial 12.57 5.74% 10.84 8.43% Leasable area (sq. ft.) 34,115 130,933 Average lease rate/square foot ($) % of industrial portfolio General purpose Leasable area (sq. ft.) 6.48 2.60% 3.76 9.97% 14.02 7.29% 4,325 5.45 0.33% 10.34 7.00% 19.28 3.19% 11.70 15.56% 60,013 554,539 4.64 11.27 4.57% 42.24% 0.00% --- --- 46,874 66,387 75,101 145,975 49,503 83,071 Average lease rate/square foot ($) % of general purpose portfolio 10.46 4.80% 15.68 6.79% 8.65 7.68% 9.20 14.93% 13.28 5.06% 11.83 8.50% Total portfolio Leasable area (sq. ft.) 233,624 395,511 343,359 417,599 787,045 285,070 Average lease rate/square foot ($) % of portfolio 10.77 5.38% 10.29 9.11% 12.49 7.91% 11.87 9.62% 7.21 18.13% 11.89 6.57% Top 10 lessees As at December 31, 2012, BTB managed more than 700 leases, with an average area of 6,000 square feet. The three largest lessees are Société immobilière du Québec (SIQ), the «Epicia» group and Melco Doors and Windows Corp., accounting respectively for 4.6%, 2.8% and 2.3% of revenues, generated by a number of leases whose matu- rities are spread over time. Approximately 29% of the Trust’s total revenues are generated by leases entered into with government agencies (federal, provincial and municipal) and public companies, ensuring stable and high-quality cash flows for the Trust’s operating activities. 33 The following table shows the contribution of the Trust’s top 10 lessees as a percentage of revenues as at December 31, 2012: Client Société immobilière du Québec (SIQ) Epicia group Melco Doors & Windows Corp. Germain Larivière Inc. Groupe Aro Inc. Commission de la Santé et de la Sécurité du Travail (CSST) Hydro-Québec Canada Post Corporation Canadian Tire Cornwall Warehousing Ltd. % of revenue Leased area (square feet) 4.6 2.8 2.3 2.3 1.9 1.9 1.8 1.7 1.5 1.4 123,239 87,190 214,000 101,194 40,825 46,435 37,364 61,623 56,025 157,879 CAPITAL RESOURCES Long-term debt The following table shows the balances of BTB’s indebtedness as at December 31, 2012, including mortgage loans payable and convertible debentures, based on year of maturity and corresponding weighted average contractual interest rates: Year of maturity Balance of convertible debentures ($) Balance of mortgages pay- able ($) Weighted average contrac- tual interest rate (%) 2013 2014 2015 2016 2017 2018 2019 and thereafter Total 13,020(1) --- --- 23,000 --- 23,000 --- 59,020 40,455 68,396 15,514 66,064 65,969 12,508 27,308 296,214 5.89 5.32 5.60 5.12 4.25 6.04 4.95 5.21 (1) February 2013 in the amount of $23,000. Will be redeemed on March 31, 2013, from the proceeds of the issuance of convertible debentures series E issued in As at December 31, 2012, the weighted average contractual interest rate of the Trust’s long-term debt stood at 5.21%, i.e. 4.69% for mortgages payable and 7.82% for convertible debentures. The average maturity of mortgage loans is 4.51 years. 34 Mortgage loans payable As at December 31, 2012, the Trust’s mortgage loans payable amounted to $296.2 million compared to $213.0 million as at December 31, 2011, before deferred financing costs and valuation adjustments, an increase of $83.2 million due to acquisitions and refinancings in the last four quarters. As at December 31, 2012, the weighted average interest rate was 4.69%, compared to 5.27% for mortgage loans on the books as at December 31, 2011, a drop of 58 basis points. Of the balance of $296.2 million in loans as at December 31, 2012, $280.3 million bear interest at fixed rates, with the remaining $15.9 million bearing interest at floating rates. The latter consist of a $2.4 million loan that is in the process of being renewed and the $13.5 million construction loan for Complexe Lebourgneuf Phase 2. BTB attempts to spread the terms of its mortgages over many years in order to mitigate the risk associated with renewing them. The following table summarizes changes in mortage loan payable during fiscal 2012: (in thousands of dollars) Balance at beginning of period Mortgage loans contracted or assumed Balance repaid at maturity Monthly principal repayments Balance as at December 31, 2012 N.B.: Before unamortized financing costs. Quarter 239,581 99,973 (41,051) (2,289) 296,214 Year to date 212,998 130,351 (41,051) (6,084) 296,214 All of the Trust’s properties were mortgaged as at December 31, 2012. Unamortized loan financing costs totalled $1,802 and are amortized under the effective interest method over the term of the loans. The following table, as at December 31, 2012, shows future mortgage loan repayments for the next few years: Years ended December 31 (in thousands of dollars) Maturity Principal repayment Balance at maturity 2013 2014 2015 2016 2017 2018 2019 and thereafter Total 7,659 6,526 5,539 5,048 2,662 974 19,226 47,634 39,741 65,935 14,121 57,412 57,527 10,687 3,157 248,580 Plus: Valuation adjustments on assumed loans Less: Unamortized financing costs Balance as at December 31, 2012 Total 47,400 72,461 19,660 62,460 60,189 11,661 22,383 296,214 2,111 (1,802) 296,523 (%) of total 16.0 24.5 6.6 21.1 20.3 3.9 7.6 100.0 35 Financings completed The Trust renegotiated the renewal of an acquisitions line of credit totalling $15 million on more favourable terms. This credit line had been fully used on December 31, 2012. As a result of acquisitions completed at the end of the quarter, the Trust assumed or contracted the following mor- tgage loans: • • • • • • • • • On October 15, 2012, new $4.3 million loan, 3.25%, maturing in 2017, on the property located in Ottawa, Ontario. On October 31, 2012, refinancing of two loans totalling $41 million and bearing interest at 6.17% by a new $43 million loan, 4.11%, maturing in 2017, on seven properties already owned by the Trust. The loan will generate annual savings of more than $0.8 million. On November 1, 2012, new $4.2 million loan, 3.18%, maturing in 2017, on the property located in Gati- neau, Québec. On November 5, 2012, assumption of a $6.6 million loan, 6.14%, maturing in 2014, on the property loca- ted in Ingersoll, Ontario. On December 21, 2012, new $11.4 million loan, 3.63%, maturing in 2018, on the property located on Brewer Hunt Way in Ottawa, Ontario. On December 21, 2012, assumption of a $7.4 million loan, 6.80%, maturing in April 2024, on the property located on De Salaberry Blvd. in Dollard-des-Ormeaux, Québec. On December 21, 2012, new second-ranking $8.6 million loan in the form of balance of sale, 4.5%, matu- ring on February 28, 2013, on the property located on De Salaberry Blvd. in Dollard-des-Ormeaux. This loan was fully refinanced with the first-ranking lender on February 28, 2013 with a second-ranking loan, $8.6 million, 4.91%, maturing in April 2024. On December 21, 2012, assumption of a $7.3 million loan, 5.63%, maturing in June 2016, on the property located on MacDonald Blvd., St-Jean-sur-Richelieu. On December 21, 2012, new $2.75 million second-ranking loan in the form of balance of sale price, 4.5%, maturing on February 28, 2013, on the property located on MacDonald Blvd., St-Jean-sur-Richelieu. This loan was fully refinanced in February 2013 with a $2.75 million second-ranking mortgage loan, 5.5%, maturing in June 2016. Convertible debentures (a) Series B In March 2008, the Trust issued Series B subordinated unsecured convertible debentures in the amount of $13 mil- lion. Interest is at the rate of 8.5% and is payable semi-annually. The debentures mature on March 31, 2013. Subject to certain terms and conditions, the debentures are convertible at the option of the holder at any time no later than March 31, 2013. The conversion price per unit is of $11.50 (the «Series B conversion price»). As at December 31, 2012, the closing market price of BTB units was $4.26. The debentures are also redeemable at the discretion of the Trust, subject to certain terms and conditions, as of March 31, 2012, at a price equal to the principal amount thereof plus accrued and unpaid interest provided that the current market price of the units is at least 125% of the Series B conversion price. 36 The Trust may, at its option and subject to certain conditions, elect to satisfy its obligation to pay the principal amount of the Series B debentures by issuing freely tradable units to Series B debenture holders. On the date of issuance, the debentures were recorded as a $12.3 million non-derivative liability component and a $0.7 million financial derivative instrument component. (b) Series C In January 2011, the Trust issued Series C subordinated, convertible, unsecured debentures bearing 8% interest, in the amount of $23 million. Interest is payable semi-annually and the debentures mature on January 31, 2016. The debentures are convertible at the option of the holder at any time no later than January 31, 2016, subject to certain conditions. The conversion price is $5.00 per unit (the «Series C conversion price»). As at December 31, 2012, the closing market price of BTB units was $4.26. As of January 31, 2014, but before January 31, 2015, under certain conditions, the debentures will be redeemable by the Trust at a redemption price equal to their principal amount plus accrued, unpaid interest, provided that the unit market price is at least 125% of the Series C conversion price and as of January 31, 2015, but before January 31, 2016, to a price equal to their principal amount plus accrued, unpaid interest. The Trust may, at its option and subject to certain conditions, elect to satisfy its obligation to pay the principal amount of the Series C debentures by issuing freely tradable units to Series C debenture holders. On the date of issuance, the debentures were recorded as a $21.6 million non-derivative liability component and a $1.4 million financial derivative instrument component. (c) Series D In July 2011, the Trust issued Series D subordinated, convertible, unsecured debentures, bearing 7.25% interest, in the amount of $23 million. Interest is payable semi-annually and the debentures mature on July 31, 2018. The debentures are convertible at the option of the holder at any time no later than July 31, 2018, subject to certain conditions. The conversion price is $6.10 per unit (the «Series D conversion price»). As at December 31, 2012, the closing market price of BTB units was $4.26. As of July 31, 2014, but before July 31, 2016, under certain conditions, the debentures will be redeemable by the Trust at a redemption price equal to their initial principal amount plus accrued, unpaid interest, provided that the unit market price is at least 125% of the Series D conversion price and, as of July 31, 2016, but before July 31, 2018, to a price equal to their principal amount plus accrued, unpaid interest. The Trust may, at its option and subject to certain conditions, elect to satisfy its obligation to pay the principal amount of the Series D debentures by issuing freely tradable units to Series D debenture holders. On the date of issuance, the debentures were recorded as a $21.3 million non-derivative liability component and a $1.7 million financial derivative instrument component. As at December 31, 2012, none of the three series met the conditions necessary for an authorized redemption. Contractual interest rate Effective interest rate Date of issuance Unit conversion price Date of interest payment Series B 8.5% 11.15% Series C 8% 9.78% Series D 7.25% 8.47% March 2008 January 2011 July 2011 $11.50 $5.00 March 31 and September 30 January 31 and July 31 $6.10 January 31 and July 31 Total Maturity date March 2013 January 2016 July 2018 Balance as at December 31, 2012 12,913 20,990 20,369 54,272 37 Subsequent issuance – Series E debentures On February 20, 2013 and February 28, 2013, to exercise the over-allotment option, BTB issued Series E 6.90% convertible unsecured subordinated debentures in the amount of $23,000,000. The interest will be payable semi- annually and the debentures mature on March 31, 2020. The debentures are convertible at the option of the holder at any time, no later than March 31, 2020, subject to certain conditions. The conversion price will be $6.15 per unit. Bank loans – Operating credit facility BTB has an operating credit facility of $2 million with a Canadian chartered bank. This credit facility is guaranteed by a collateral mortgage on two properties and bears interest at the bank’s prime rate, plus 1%. As at December 31, 2012, the credit facility had not been used. Bank loans – Acquisition credit facility BTB has an acquisition credit facility of $15 million with a capital corporation. The credit facility is secured by a first- and second-ranking mortgage on certain properties. As at December 31, 2012, the credit facility had been fully used. Debt ratio The following table presents the Trust’s debt ratios as at December 31, 2012 and 2011. (in thousands of dollars) Mortgage loans payable (1) Acquisition credit facility(1) Convertible debentures (1) Total long-term debt Gross book value of the Trust Debt ratio (excluding convertible debentures) Total debt ratio (1) Gross amounts December 31, 2012 December 31, 2011 296,214 15,000 59,020 370,234 505,389 61.6% 73.3% 212,998 --- 59,020 272,018 359,303 59.3% 75.7% According to the table above, the debt ratio excluding the convertible debentures as at December 31, 2012, amounted to 61.6% compared to 59.3% as at December 31, 2011. The increase reflects recent acquisitions with debt ratios higher than the portfolio average and use of the acquisition line of credit in the amount of $15,000. The Trust seeks to finance its acquisitions with debt ratios of 60% to 70% because the cost of mortgage financings is lower than the Trust’s capital cost. After including the convertible debentures, the ratio stood at 73.3% compared to 75.7% one year earlier. Under the terms of its trust agreement, the Trust cannot contract a mortgage loan if, after having contracted the said loan, the total debt exceeds 75% of the gross carrying amount of the Trust. When establishing this calculation, the convertible debentures are not considered in the calculation of total indebtedness. Moreover, also under its trust agreement, in case of default with respect to this condition, the Trust has 12 months from the date of recognizing this default to perform the transactions necessary to remedy the situation. 38 Interest coverage ratio The Trust calculates its interest coverage ratio by dividing net operating income by interest expense net of interest income. The interest coverage ratio is used to assess BTB’s ability to pay interest on its debt using its operating reve- nues. For the quarter ended December 31, 2012, the interest coverage ratio stood at 1.71, up 30 points from the fourth quarter of 2011, and at 1.64 for fiscal 2012, up 18 points from 2011, showing the Trust’s financial strength and abililty to cover the cost of its debt. Periods ended December 31, 2012 (in thousands of dollars, except for the ratios) Net operating income Interest expense, net of interest income Interest coverage ratio Unitholders’ equity Unitholders’ equity consists of the following: (in thousands of dollars) Trust units Cumulative profit (loss) Cumulative distributions to unitholders Consolidation Quarter Year 2012 2011 7,551 4,426 1.71 5,432 3,855 1.41 2012 26,996 16,497 1.64 2011 22,112 15,193 1.46 December 31, 2012 December 31, 2011 137,330 2,331 (14,883) 124,778 99,503 (15,636) (7,227) 76,640 On June 7, 2012, the Trust consolidated its outstanding units at a ratio of five pre-consolidation units for one post- consolidation unit. Prior period comparative figures were adjusted accordingly. Distribution reinvestment plan On October 1, 2011, the Trust implemented a distribution reinvestment plan under which unitholders may elect to receive distributions in units, with a 5% discount on their market value. Under the program, 40,206 units were issued during the last quarter and 132,857 during fiscal 2012. The following table summarizes units issued and the weighted number of units for the specified periods: Periods ended December 31 (in # of units) Quarter Cumulative 2012 2011 2012 2011 Units outstanding, beginning of period 19,153,591 14,797,945 14,810,790 10,338,345 Units issued Public placement and warrants exercised 4,598,000 --- 8,848,150 4,459,600 Distribution reinvestment plan 40,206 12,845 132,857 12,845 Units outstanding, end of period 23,791,797 14,810,790 23,791,797 14,810,790 Weighted average number of units outstanding 19,723,581 14,801,635 18,668,871 13,698,715 39 Unit options The Trust may grant options to its trustees, senior officers, investor relations consultants and technical consultants. The maximum number of units reserved for issuance under the unit option plan may not exceed 10% of the total number of issued and outstanding units. The trustees have and will set the exercise price at the time that an option is granted under the plan, which exercise price shall not be less than the quoted market price of the units, as deter- mined under a related agreement. The options have a maximum term of five years from the date of grant. Details of unit options granted during the reporting periods are as follows: Quarters ended December 31 2012 2011 Outstanding, beginning of quarter Granted Expired Outstanding, end of quarter Options vested since December 31 Weighted average remaining term to expiry (years) Unit options 551,000 --- (324,000) 227,000 227,000 Weighted aver- age exercise price ($) 10.20 --- 13.77 5.07 5.07 1.59 Unit options 557,000 108,000 (114,000) 551,000 546,000 Weighted aver- age exercise price ($) 11.30 4.55 10.20 10.20 10.25 1.33 The purpose of granting unit options is to encourage the holder to acquire an ownership interest that increases over time and provides a financial incentive for the holder to consider the long-term interests of BTB and its unitholders. Options also serve as non-cash compensation, thus preserving the cash resources of BTB during its early years. Deferred unit compensation plan The Trust has implemented a deferred unit compensation plan for trustees and certain officers. Under the program, beneficiaries may elect to receive their compensation in cash, deferred units or a combination of both. The following table summarizes deferred units issued during the year: Years ended December 31 (in # of units) Deferred units outstanding, beginning of period Deferred units issued Distributions converted to deferred units Deferred units outstanding, end of period Subscription warrants 2012 --- 15,264 717 15,981 2011 --- --- --- --- At the time of disbursement of the acquisition line of credit, the Trust granted Firm Capital Mortgage Fund a disbursement fee of 500,000 warrants to purchase units of the Trust. Each warrant entitled its owner to purchase one unit of the Trust at a price of $3.822 per unit until September 1, 2012 and until May 31, 2013 if the loan is renewed. These warrants, which were exercised in March 2012, provided cash of $1.9 million. Years ended December 31 Outstanding, beginning of year Warrants granted Warrants exercised Outstanding, end of year 40 Number 500,000 --- (500,000) --- 2012 2011 Exercise price Number Exercise price 3,822 --- 3,822 --- --- 500,000 --- 500,000 --- 3.822 --- 3.822 Off-balance sheet arrangements and contractual commitments BTB does not have any off-balance sheet arrangements that have or are likely to have an impact on its operating results or financial position, specifically its cash position and sources of financing. The Trust has no contractual commitments other than those arising from long-term debt. During the year ended December 31, 2012, BTB complied with all of its loan commitments and was not in default with any covenant at the balance sheet date. INCOME TAXES The Trust is taxed as a mutual fund trust for Canadian income tax purposes. The trustees intend to distribute or allocate all of the taxable income to its unitholders and to deduct these distributions for income tax purposes. Accordingly, prior to September 12, 2007, no provision for income taxes was recorded in the consolidated financial statements. On September 12, 2007, amendments to the Income Tax Act (Canada) were proposed, which modified the tax treatment of certain income trusts and limited partnerships that are specified investment flow-through trusts or partnerships («SIFTs»). On February 6, 2009, the Minister of Finance of Canada introduced legislation including cer- tain measures previously announced and modifying the tax treatment applicable to SIFTs, which came into force on March 12, 2009. Pursuant to these measures, beginning on January 1, 2011, certain distributions from a SIFT that are related to the earnings arising from a business carried on in Canada by such SIFT will no longer be deductible from its income and will therefore be taxable in the hands of such SIFT at a rate generally similar to the combined provincial and federal tax rates applicable to the earnings of a corporate entity. The allocations or distributions of income and of capital gains subject to the SIFT rules will be similar to the tax treatment of a taxable dividend from a taxable Canadian corporation in the hands of the beneficiaries or partners of the SIFT. Real estate investment trusts that satisfy specified conditions (the «REIT Exception») are excluded from the SIFT definition and will therefore not be subject to the SIFT rules. In order to qualify for the REIT Exception in respect of a taxation year (i) the REIT must, at no time in that taxation year, hold non-portfolio property other than «qualified REIT properties» (as defined in the Income Tax Act (Canada)); (ii) not less than 95% of the REIT’s revenues for that taxation year must be derived from rent from real or immovable properties, interest, capital gains from dispositions of real or immovable properties, dividends and royalties; (iii) not less than 75% of the REIT’s revenues for that taxation year must be derived from rent from real or immovable properties located in Canada; and (iv) the REIT must, throughout the taxation year, hold real or immovable properties located in Canada, cash and certain government guaranteed debt or other bonds guaranteed by the Canadian government with a total fair market value that is not less than 75% of the REIT’s equity value. As at December 31, 2012, BTB met all of these conditions and qualified as a REIT. As a result, the SIFT trust tax rules do not apply to BTB. BTB’s management intends to take the necessary steps to meet the conditions for the REIT Exception on an on-going basis in the future. 41 TAXATION OF UNITHOLDERS For Canadian unitholders, distributions for taxation purposes are qualified as follows: Years ended December 31 Taxable as other income Tax deferred Total 2012 --- 100% 100% 2011 --- 100% 100% IMPACT OF ADOPTING IFRS Since January 1, 2011, the Trust is required to present its interim and annual financial statements in accordance with International Financial Reporting Standards (“IFRS”), with comparative IFRS figures. IFRS are based on a concep- tual framework similar to Canadian GAAP; however, significant differences exist in the recognition, measurement, presentation and disclosure for certain accounting items. The adoption of IFRS had a material impact on the conso- lidated statements of financial position (formerly called the balance sheet) and comprehensive income (formerly called the statement of income). The Trust prepared an opening statement of financial position as at January 1, 2010 (changeover date) in accordance with IFRS, restated all 2010 operations based on the new standards and converted the balance sheet as at December 31, 2010 to an IFRS statement of financial position. Details and explanations concerning these conversions were presented in the first quarter 2011 MD&A dated June 14, 2011. The reconciliation between Canadian GAAP and IFRS for unitholders’ equity as at December 31, 2010 and the reconciliation of net income for the year ended December 31, 2010 between Canadian GAAP and IFRS were recorded in the management discussion and analysis of December 31, 2011, dated March 28, 2012. Before the adoption of IFRS, the Trust’s financial statements were prepared in accordance with Canadian generally accepted accounting principles («GAAP»). SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES BTB’s significant accounting policies are described in Notes 2 and 3 to the financial statements as at December 31, 2012 and the reader is invited to refer to these financial statements. Management believes that the accounting methods most affected by estimates and by management’s discretionary decisions during the preparation of finan- cial statements are outlined below: 42 a) Basis of preparation BTB’s consolidated financial statements have been prepared in accordance with International Financial Reporting Standards («IFRS») applicable to the preparation of financial statements. The accounting policies and application methods thereof have been consistently applied throughout each of the years presented in these consolidated finan- cial statements. b) Basis of presentation Consolidation These consolidated financial statements include the accounts of BTB and its wholly-owned subsidiaries and its proportionate share of the assets, liabilities, revenues and expenses of the property it co-owns. Use of estimates The preparation of financial statements in accordance with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements. Those esti- mates and assumptions also affect the disclosure of contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the year. Actual results that could differ materially from those estimates are described below: • Investment property Investment property is recorded at fair value at the balance sheet date. Fair value is determined using both management’s internal measurements and valuations from independent real estate appraisers, perfor- med in accordance with recognized valuation techniques. The techniques used include the capitalized net operating income method and the discounted cash flow method, including estimates of capitalization rates and future net operating income as well as estimates of discount rates and future cash flows applicable to investment property, respectively. Management’s internal fair value measurements rely on internal financial information and are corrobora- ted by capitalization rates obtained from independent experts. However, internal measurements and values obtained from independent appraisers are both subject to significant judgments, estimates and assump- tions about market conditions at the balance sheet date. • Financial instruments Financial instruments must be initially measured at fair value. BTB must also estimate and disclose the fair value of certain financial instruments for information purposes in the financial statements presented for subsequent periods. When fair value cannot be derived from active markets, it is determined using valuation techniques, namely the discounted cash flow method. If possible, data related to these models are derived from observable markets, and if not, judgment is required to determine fair value. Judgments take into account liquidity risk, credit risk and volatility. Any changes in assumptions related to these factors could modify the reported fair value of financial instruments. • Convertible debentures BTB’s management must estimate, if applicable, the fair value of the conversion option included in conver- tible debentures presented as liability. Should this estimate be inappropriate, it will have an impact on the interest expense recognized in the financial statements for the periods subsequent to their issuance. 43 • Business combinations Business combinations are accounted for using the acquisition method. The cost of a business combination is the value, at the acquisition date, of the assets transferred, liabilities incurred and Unitholders’ equity ins- truments issued in exchange for control of the acquired business. When the cost of a business combination exceeds the fair value of the assets acquired and liabilities assumed, such excess is recorded as goodwill. Transaction-related costs, as well as costs related to the acquisition of real estate assets, are expensed as incurred. BTB accounts for investment property acquisitions in accordance with IFRS 3, “Business Combinations” (“IFRS 3”), only when it considers that a business has been acquired. Under IFRS 3, a business is defined as an integrated set of activities and assets conducted and managed for the purpose of providing a direct return to investors in the form of lower costs or other economic benefits. If the acquisition does not cor- respond to this definition, a group of assets is deemed to have been acquired. If goodwill is present, the acquisition is presumed to be a business. Judgment is therefore used by management in determining if the acquisition qualifies as a business combination under IFRS 3 or as an asset acquisition. Generally, when BTB acquires a property or property portfolio (and not a legal entity) without taking on the management of personnel or acquiring an operational platform, it categorizes the acquisition as an asset acquisition. • Unit options The compensation expense related to unit options is measured at fair value and is amortized based on the graded vesting method using the Black-Scholes model. This model requires management to make many estimates on various data, such as expected life, volatility, the weighted average dividend yield of distribu- tions, the weighted average risk-free interest rate and the expected forfeiture rate. Any changes to certain assumptions could have an impact on the compensation expense related to unit options recognized in the financial statements. • Investment property Investment property is immovable property held by the Trust to earn rentals or for capital appreciation, or both, rather than for use in the production or supply of goods and services or for administrative purposes, or for sale in the ordinary course of business. Investment properties include income properties, properties under development and land held for future development if necessary. BTB presents its investment property based on the fair value model. Fair value is the amount for which the properties could be exchanged between knowledgeable, willing parties in an arm’s length transaction. Any change in the fair value is recognized in income for the period in which it arises. The fair value of investment property shall reflect market conditions at the end of the reporting period. Fair value is time-specific as of a given date. As market conditions could change, the amount presented as fair value could be incorrect or inadequate at another date. The fair value of investment property is based on measurements derived from management’s estimates or from independent appraisers, plus capital expenditures made since the most recent appraisal. Management regularly reviews appraisals of its investment property between the apprai- sal dates in order to determine whether the related assumptions, such as net operating income and capi- talization rates, still apply. These assumptions are compared to market data issued by independent experts. When increases or decreases are required, BTB adjusts the carrying amount of its investment property. 44 Capitalization of costs BTB capitalizes into investment property the costs incurred to increase their capacity, replace certain compo- nents and make improvements after the acquisition date. The Trust also capitalizes major maintenance and re- pair expenses providing benefits that will last far beyond the end of the reporting period. When BTB determines that the acquisition of an investment property is an asset acquisition, the Trust capitalizes all costs that are directly related to the acquisition of the property, as well as all expenses incurred to carry out the transaction. Concerning properties under development and re-development and land held for future development, the Trust capitalizes all direct costs incurred for their acquisition, layout and construction. Such capitalized costs also include borrowing costs that are directly attributable to the property concerned. BTB begins capitalizing bor- rowing costs when it incurs expenditures for the properties in question and it undertakes activities that are necessary to prepare these properties for their intended use. BTB ceases capitalizing borrowing costs when the asset is ready for management’s intended use. Restricted cash Restricted cash mainly includes amounts which are held in interest-bearing reserve accounts and are expected to be utilized over the coming years to fund certain expenses related to investments, as well as supplementary amounts drawn by financial institutions to cover the payment of realty taxes for certain investment properties. Revenue recognition Management has determined that all leases concluded between BTB and its tenants are operating leases. Mini- mum lease payments are recognized using the straight-line method over the term of the related leases, and the excess of payments recognized over amounts payable is recorded on BTB’s Consolidated Balance Sheet under investment property. Leases generally provide for the tenants’ payment of maintenance expenses of common elements, realty taxes and other operating costs, such payment being recognized as operating revenues in the period when the right to payment vests. Percentage leases are recognized when the minimum sales level has been reached pursuant to the related leases. Lease cancellation fees are recognized when they are due. Finally, incidental income is recognized when services are rendered. Cash and cash equivalents Cash and cash equivalents consist of cash and investments that are readily convertible into a known amount of cash, that are not subject to a significant risk of change in value and that have original maturities of three months or less. Bank borrowings are considered to be a financing activity. Deferred financing costs Issue costs incurred to obtain term loan financing, typically through mortgage loans, convertible debentures, are applied against the borrowings and are amortized using the effective interest rate method over the term of the related debt. Leasing costs Leasehold improvements, incurred directly by BTB or through an allowance to tenants, as well as initial direct costs, mostly brokerage fees incurred to negotiate or prepare leases, are not amortized. Tenant inducements, mostly the payment of a monetary allowance to tenants and the granting of free occu- pancy periods, are recognized in profit or loss and are subsequently amortized on a straight-line basis over the related lease term. All these costs are added to the carrying amount of investment property as they are incurred. 45 Income taxes BTB is considered a mutual fund trust for income tax purposes. In exercising their discretionary power regarding distributions under the Contract of Trust, the trustees intend to distribute or designate all taxable income directly earned by BTB to unitholders and to deduct such distributions and designations for income tax purposes. Therefore, no provision for income taxes is required for the Trust. Incentive plan based on equity securities BTB has an incentive plan based on equity securities in order to attract, retain and motivate those who act as service providers. This plan does not provide for any cash settlements. Unit purchase options The Trust recognizes compensation expense on unit options granted, based on their fair value, which is calculated using an option valuation model. The compensation expense is amortized using the graded ves- ting method. Deferred units The Trust recognizes compensation expense on deferred unit options granted, based on their fair value on the date of the grant. The fair value of restricted units represents the market value of BTB units on the date of the grant. The compensation expense is amortized using the graded vesting method. Per unit calculations Basic net income per unit is calculated based on the weighted average number of units outstanding for the year. The calculation of net income per unit on a diluted basis considers the potential exercise of outstanding unit options and the potential issuance of units under convertible debentures, if dilutive. Segment information Segment information is presented in accordance with IFRS 8, which recommends presenting and disclosing segment information in accordance with information that is regularly assessed by the chief operating decision makers in order to determine the performance of each segment. NEW ACCOUNTING POLICIES The following paragraphs present accounting standards that apply to BTB but that have not yet been adopted: IFRS 9 – “Financial Instruments” In November 2009, the IASB issued IFRS 9, “Financial Instruments: Classification and Measurement,” a new stan- dard on the classification and measurement of financial instruments, which will replace IAS 39, “Financial Instru- ments: Recognition and Measurement.” IFRS 9 presents two measurement categories: amortized cost and fair value. All equity instruments are measured at fair value. Debt instruments are measured at amortized cost only if they are held in order to collect contractual cash f lows and if the cash flows are solely payments of principal and interest. Otherwise, they are held at fair value through profit or loss. Requirements for financial liabilities were added in October 2010 and most of them were carried forward unchan- ged from IAS 39, except for the fair value changes attributable to the credit risk of financial liabilities designated at fair value through profit or loss, which should usually be included in comprehensive income. 46 This new standard is effective for annual periods beginning on or after January 1, 2015, and early adoption is permit- ted. BTB is currently evaluating the impact that this new standard will have on its financial statements. In May 2011, the IASB issued the following standards: IFRS 10, “Consolidated Financial Statements,” IFRS 11, “Joint Arrangements,” IFRS 12, “Disclosure of Interests in Other Entities,” IAS 27, “Separate Financial Statements,” IFRS 13, “Fair Value Measurement,” and the amended IAS 28, “Investments in Associates and Joint Ventures.” Each of the new standards is effective for annual periods beginning on or after January 1, 2013, with early adoption permitted. The following is a brief summary of the new standards: IFRS 10 – “Consolidated Financial Statements” IFRS 10 requires an entity to consolidate an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Under existing IFRS, consolidation is required when an entity has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. IFRS 10 replaces SIC-12, “Consolidation—Special Purpose Entities” and parts of IAS 27, “Consolidated and Separate Financial Statements.” BTB does not expect the adoption of this new standard to have any impact on its consolidated financial statements. IFRS 11 – “Joint Arrangements” IFRS 11 requires a venturer to classify its interest in a joint arrangement as a joint venture or joint operation. Joint ventures will be accounted for using the equity method of accounting, whereas for a joint operation, the venturer will recognize its share of the assets, liabilities, revenue and expenses of the joint operation. Under existing IFRS, entities may elect to account for interests in joint ventures using proportionate consolidation or the equity method. IFRS 11 supersedes IAS 31, “Interests in Joint Ventures,” and SIC-13, “Jointly Controlled Entities—Non-monetary Contribu- tions by Venturers.” BTB does not expect the adoption of this new standard to have any impact on its consolidated financial statements. IFRS 12 – “Disclosure of Interests in Other Entities” IFRS 12 establishes disclosure requirements for interests in other entities, such as joint arrangements, associates, special purpose entities and off-balance sheet instruments. The standard carries forward existing disclosures and also introduces significant additional disclosure requirements that address the nature of, and risks associated with, an entity’s interests in other entities. BTB does not expect the adoption of this new standard to have any impact on its consolidated financial statements. IFRS 13 – “Fair Value Measurement” IFRS 13 is a comprehensive standard on fair value measurement and disclosure requirements for use across all IFRS standards. The new standard clarifies that fair value is the price that would be received to sell an asset, or paid to transfer a liability in an orderly transaction between market participants, at the measurement date. It also establishes disclosures about fair value measurement. Under existing IFRS, guidance on measuring and disclosing fair value is dispersed among the specific standards requiring fair value measurements and in many cases does not reflect a clear measurement basis or consistent disclosures. BTB will add the required information as of the first quarter of 2013. Amendments to other standards In addition, there have been amendments to existing standards, including IAS 27, “Consolidated and Separate Finan- cial Statements,” and IAS 28, “Investments in Associates and Joint Ventures.” IAS 27 addresses accounting for subsidiaries, jointly controlled entities and associates in separate financial statements. IAS 28 has been amended to include joint ventures in its scope and to address the changes in IFRS 10, IFRS 11, IFRS 12 and IFRS 13. BTB does not expect the adoption of this new standard to have any impact on its consolidated financial statements. 47 RISKS AND UNCERTAINTIES Like all real estate entities, the BTB REIT is exposed, in the normal course of business, to various risk factors that may have an impact on its capacity to attain its strategic objectives. Accordingly, unitholders should consider the following risks and uncertainties when assessing the Trust’s outlook in terms of investment potential. BTB has not identified any significant changes to the risks and uncertainties to which it is exposed in its business. Access to capital and debt financing, and current global financial conditions The real estate industry is capital-intensive. BTB will require access to capital to maintain its properties, as well as to fund its growth strategy and significant capital expenditures from time to time. There can be no assurance that BTB will have access to sufficient capital (including debt financing) on terms favorable to BTB for future property acqui- sitions and developments, including for the financing or refinancing of properties, for funding operating expenses or for other purposes. In addition, BTB may not be able to borrow funds under its credit facilities due to limitations on BTB’s ability to incur debt set forth in the Contract of Trust. Failure by BTB to access required capital could adversely impact BTB’s financial position and results of operations and reduce the amount of cash available for distributions. Recent market events and conditions, including disruptions in international and regional credit markets and in other financial systems and deteriorating global economic conditions, could impede BTB’s access to capital (including debt financing) or increase the cost of such capital. Failure to raise capital in a timely manner or under favourable terms could have a material adverse effect on BTB’s financial position and results of operations, including on its acquisition and development program. Debt financing BTB has and will continue to have substantial outstanding consolidated borrowings comprised primarily of hypothecs, property mortgages, debentures, and borrowings under its acquisition and operating credit facilities. BTB intends to finance its growth strategy, including acquisitions and developments, through a combination of its working capital and liquidity resources, including cash f lows from operations, additional borrowings and public or private sales of equity or debt securities. BTB may not be able to refinance its existing debt or renegotiate the terms of repayment at favourable rates. In addition, the terms of BTB’s indebtedness in general contain customary provisions that, upon an event of default, result in accelerated repayment of the amounts owed and that restrict the distributions that may be made by BTB. Therefore, upon an event of default under such borrowings or an inability to renew same at maturity, BTB’s ability to make distributions will be adversely affected. A portion of BTB’s cash flows is dedicated to servicing its debt, and there can be no assurance that BTB will continue to generate sufficient cash flows from operations to meet required interest or principal payments, such that it could be required to seek renegotiation of such payments or obtain additional financing, including equity or debt financing. BTB is exposed to debt financing risks, including the risk that the existing hypothecary borrowings secured by its properties cannot be refinanced or that the terms of such refinancing will not be as favourable as the terms of the existing loans. In order to minimize this risk, BTB tries to appropriately structure the timing of the renewal of signifi- cant tenant leases on its respective properties in relation to the times at which the hypothecary borrowings on such properties become due for refinancing. Ownership of immovable property All immovable property investments are subject to risk exposures. Such investments are affected by general eco- nomic conditions, local real estate markets, demand for leased premises, competition from other vacant premises, municipal valuations and assessments, and various other factors. 48 The value of immovable property and improvements thereto may also depend on the solvency and financial stability of tenants and the economic environment in which they operate. BTB’s income and distributable income would be adversely affected if one or more major tenants or a significant number of tenants were unable to meet their lease obligations or if a significant portion of vacant space in the properties in which BTB has an interest cannot be leased on economically favorable lease terms. In the event of default by a tenant, delays or limitations may be experienced in enforcing BTB’s rights as a lessor and substantial costs may be incurred to protect BTB’s investment. The ability to rent unleased space in the properties in which BTB has an interest will be affected by many factors, including the level of general economic activity and competition for tenants by other properties. Costs may need to be incurred to make improvements or repairs to property as required by a new tenant. The failure to rent unleased space on a timely basis or at all or at rents that are equivalent to or higher than current rents would likely have an adverse effect on BTB’s financial position and the value of its properties. Certain significant expenditures, including property taxes, maintenance costs, hypothecary payments, insurance costs and related charges must be made throughout the period of ownership of immovable property regardless of whether the property is producing any income. If BTB is unable to meet mortgage payments on a property, a loss could be sustained as a result of the mortgage creditor’s exercise of its hypothecary remedies. Immovable property investments tend to be relatively illiquid, with the degree of liquidity generally fluctuating in rela- tionship with the demand for and the perceived desirability of such investments. Such illiquidity may tend to limit BTB’s ability to make changes to its portfolio promptly in response to changing economic or investment conditions. If BTB were to be required to liquidate its immovable property investments, the proceeds to BTB might be significantly less than the aggregate carrying value of its properties. Leases for BTB’s properties, including those of significant tenants, will mature from time to time over the short and long term. There can be no assurance that BTB will be able to renew any or all of the leases upon maturity or that rental rate increases will occur or be achieved upon any such renewals. The failure to renew leases or achieve rental rate increases may adversely impact BTB’s financial position and results of operations and decrease the amount of cash available for distribution. Competition BTB competes for suitable immovable property investments with individuals, corporations and institutions (both Canadian and foreign) which are presently seeking or which may seek in the future immovable property investments similar to those desired by BTB. Many of those investors have greater financial resources than BTB, or operate wit- hout the investment or operating restrictions of BTB or under more flexible conditions. An increase in the availability of investment funds and heightened interest in immovable property investments could increase competition for immovable property investments, thereby increasing the purchase prices of such invest- ments and reducing their yield. In addition, numerous property developers, managers and owners compete with BTB in seeking tenants. The exis- tence of competing developers, managers and owners and competition for the BTB’s tenants could have an adverse effect on the BTB’s ability to lease space in its properties and on the rents charged, and could adversely affect the BTB’s revenues and, consequently, its ability to meet its debt obligations. Acquisitions BTB’s business plan focuses on growth by identifying suitable acquisition opportunities, pursuing such opportunities, completing acquisitions and effectively operating and leasing such properties. If BTB is unable to manage its growth effectively, this could adversely impact BTB’s financial position and results of operations, and decrease the amount of cash available for distribution. There can be no assurance as to the pace of growth through property acquisitions or that BTB will be able to acquire assets on an accretive basis, and as such there can be no assurance that distri- butions to unitholders will increase in the future. 49 Development program Information regarding our re-development projects, development costs, capitalization rates and expected returns are subject to change, which may be material, as assumptions regarding items including, but not limited to, tenant rents, building sizes, leasable areas, and project completion timelines and costs are updated periodically based on revised plans, our cost tendering process, continuing tenant negotiations, demand for leasable space in our markets, our ability to obtain the required building permits, ongoing discussions with municipalities and successful property re-zonings. There can be no assurance that any assumptions in this regard will materialize as expected and changes could have a material adverse effect on our development program, asset values and financial performance. Recruitment and retention of employees and executives Competition for qualified employees and executives is intense. If BTB is unable to attract and retain qualified and capable employees and executives, the conduct of its activities may be adversely affected. Government regulation BTB and its properties are subject to various government statutes and regulations. Any change in such statutes or regulations that is adverse to BTB and its properties could affect BTB’s operating results and financial performance. In addition, environmental and ecological legislation and policies have become increasingly important in recent de- cades. Under various laws, BTB could become liable for the costs of removal or remediation of certain hazardous or toxic substances released on or in its properties or disposed of at other locations, or for the costs of other remedial or preventive work. The failure to remove or remediate such substances, or to effect such remedial or preventive work, if any, may adversely affect an owner’s ability to sell such real estate or to borrow using such real estate as collateral, and could potentially also result in claims against the owner by private plaintiffs or governmental agencies. Notwithstanding the above, BTB is not aware of any material non-compliance, liability or other claim in connection with any of its properties, nor is BTB aware of any environmental condition with respect to any of its properties that it believes would involve material expenditure by BTB. Limit on activities In order to maintain its status as a «mutual fund trust» under the Income Tax Act, BTB cannot carry on most active business activities and is limited in the types of investments it may make. The Contract of Trust contains restrictions to this effect. Tax-related risks Legislation (the «SIFT Rules») relating to the income taxation of publicly listed or traded trusts (such as income trusts and Real Estate Investment Trusts) and partnerships changes the manner in which certain flow-through entities and the distributions from such entities are taxed. Under the SIFT Rules, certain publicly listed or traded flow-through trusts and partnerships referred to as «specified investment flow-through» or «SIFT» trusts and partnerships are taxed in a manner similar to the taxation of corporations, and investors in SIFTs are taxed in a manner similar to shareholders of a corporation. The new taxation regime introduced by the SIFT Rules is not applicable to funds that qualify for the exemption under the SIFT Rules applicable to certain Real Estate Investment Trusts (the «REIT Exemption»). The stated intention of the Minister of Finance (Canada) in introducing the REIT Exemption is to exempt certain Real Estate Investment Trusts from taxation as SIFTs in recognition of «the unique history and role of collective real estate investment vehicles.» If the Trust fails to qualify for the REIT Exemption, it will be subject to certain tax consequences including taxation in a manner similar to corporations and taxation of certain distributions in a manner similar to taxable dividends from a taxable Canadian corporation. 50 In order to qualify for the REIT Exemption in respect of a taxation year (i) the REIT must, at no time in that taxation year, hold non-portfolio property other than «qualified REIT properties»; (ii) not less than 90% of the REIT’s gross reve- nues for that taxation year must be derived from (a) rent from real or immovable properties, (b) interest, (c) capital gains from dispositions of “real or immovable properties” or “eligible resale properties,” (d) dividends or (e) royalties; (iii) not less than 75% of the REIT’s gross revenues for that taxation year must be derived from (a) rent from real or immovable properties, (b) interest from mortgages or hypothecs on real or immovable properties, and (c) capital gains from the disposition of real or immovable properties; and (iv) the REIT must, throughout the year, hold “real or immovable properties,” debt from a Canadian company represented by a banker’s acceptance, cash, or generally a Canadian government debt instrument or one from another government agency with a total fair market value that is not less than 75% of the REIT’s equity value at that time. As at December 31, 2012, based on a review of BTB’s assets and revenues from its regular business activities, management believes the Trust currently meets all the conditions to qualify for the REIT Exemption, both under the REIT Exemption as currently enacted and under proposed amendments to the SIFT rules. Accordingly, management does not expect the SIFT tax rules to apply to BTB. Management intends to conduct the REIT’s business so that it continues to qualify for the REIT Exemption at all times after 2012. However, as the requirements of the REIT Exemption include complex revenue and asset tests, no assu- rance can be given that the REIT will in fact qualify for the REIT Exemption at all times. DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL REPORTING The President and Chief Executive Officer and the Executive Vice-President and Chief Financial Officer of BTB are responsible for establishing and maintaining disclosure controls and procedures («DC&P») and internal control over financial reporting («ICFR»), as those terms are defined in Canadian Securities Administrators Multilateral Instru- ment 52-109. Evaluations are performed regularly to assess the effectiveness of DC&P, including this MD&A and the financial sta- tements. Based on these evaluations, the President and Chief Executive Officer and the Executive Vice-President and Chief Financial Officer of BTB concluded that the DC&P were effective as at the end of the year ended December 31, 2012, and, more specifically, that the current controls and procedures provide reasonable assurance that material information about the Trust, including its consolidated subsidiaries, is made known to them during the period in which these filings are being prepared. Evaluations are also performed to assess the effectiveness of ICFR. Based on those evaluations, the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer of the Trust concluded that ICFR was effective as at the end of the period ended December 31, 2012, and, more specifically, that the financial repor- ting is reliable and that the financial statements have been prepared for financial reporting purposes in accordance with IFRS. During fiscal 2012, no changes were made in internal control over financial reporting that materially affected, or are likely to materially affect, internal control over financial reporting. 51 CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2012 and 2011 CONSOLIDATED FINANCIAL STATEMENTSConsolidated Financial Statements For the years ended December 31, 2012 and 2011 CONSOLIDATED FINANCIAL STATEMENTS Independent auditors’ report Management’s responsibility for financial reporting Consolidated Statements of Financial Position Consolidated Statements of Comprehensive Income Consolidated Statements of Changes in Unitholders’ Equity Consolidated Statements of Cash Flows 55 57 58 59 60 61 62 Notes to Consolidated Financial Statements 54 BTB REAL ESTATE INVESTMENT TRUSTNotes to Consolidated Financial StatementsFor the years ended December 31, 2012 and 2011 (in thousands of CAD dollars, except per unit amounts) KPMG LLP 600 de Maisonneuve Blvd. West Suite 1500 Tour KPMG Montréal (Québec) H3A 0A3 Telephone Fax Internet (514) 840-2100 (514) 840-2187 www.kpmg.ca INDEPENDENT AUDITORS’ REPORT To the unitholders of BTB Real Estate Investment Trust We have audited the accompanying consolidated financial statements of BTB Real Estate Investment Trust, which comprise the consolidated statements of financial position as at December 31, 2012 and December 31, 2011, the consolidated statements of comprehensive income, changes in unitholders’ equity and cash flows for the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management’s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the consolidated financial statements. the overall presentation of We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. KPMG Canada provides services to KPMG LLP. Page 2 Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of BTB Real Estate Investment Trust as at December 31, 2012 and December 31, 2011, and its consolidated financial performance and its consolidated cash flows for the years then ended, in accordance with International Financial Reporting Standards. March 21, 2013 Montréal, Canada *FCPA auditor, FCA, public accountancy permit No. A106087 MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING The accompanying consolidated financial statements of BTB Real Estate Investment Trust («BTB») were prepared by management, which is responsible for the integrity and fairness of the information presented, including the many amounts that must of necessity be based on estimates and judgments. These consolidated financial statements were prepared in accordance with International Financial Reporting Standards («IFRS»). Financial information appearing throughout our MD&A is consistent with these consolidated financial statements. In discharging our responsibility for the integrity and fairness of the consolidated financial statements and for the accounting systems from which they are derived, we maintain the necessary system of internal controls designed to ensure that transactions are authorized, assets are safeguarded and proper records are maintained. As at December 31, 2012, the President and Chief Executive Officer and the Vice President and Chief Financial Offi- cer of BTB had an evaluation carried out, under their direct supervision, of the effectiveness of the controls and pro- cedures used for the preparation of filings, as defined in Multilateral Instrument 52-109 of the Canadian Securities Administrators. Based on that evaluation, they concluded that the disclosure controls and procedures were effective. The Board of Trustees oversees management’s responsibility for financial reporting through an Audit Committee, which is composed entirely of Trustees who are not members of BTB’s management or personnel. This Committee reviews our consolidated financial statements and recommends them to the Board for approval. Other key responsi- bilities of the Audit Committee include reviewing our existing internal control procedures and planned revisions to those procedures, and advising the trustees on auditing matters and financial reporting issues. KPMG s.r.l./S.E.N.C.R.L., independent auditors appointed by the unitholders of BTB upon the recommendation of the Board, have performed an independent audit of the Consolidated Financial Statements as at December 31, 2012 and 2011 and their report follows. The auditors have full and unrestricted access to the Audit Committee to discuss their audit and related findings. Michel Leonard President and Chief Executive Officer Benoit Cyr, CPA, CA Vice President and Chief Financial Officer Montreal, March 21st 2013 57 BTB REAL ESTATE INVESTMENT TRUSTNotes to Consolidated Financial StatementsFor the years ended December 31, 2012 and 2011 (in thousands of CAD dollars, except per unit amounts)Consolidated Statements of Financial Position For the years ended December 31, 2012 and 2011 (in thousands of CAD dollars) ASSETS Non-current Assets Investment properties Non-current assets Investment properties under development Property and equipment Restricted cash Current assets Other assets Receivables Cash and cash equivalents LIABILITIES AND UNITHOLDERS’ EQUITY Non-current liabilities Mortgage loans payable Convertible debentures Bank loans Derivative financial instruments Unit-based compensation and warrants Current liabilities Trade and other payables Distributions payable to unitholders 7 8 9 10 11 12 13 14 13 15 Unitholders’ equity 16 See accompanying notes to consolidated financial statements. Notes 2012 2011 4, 5, 6 488,521 343,383 --- 2,163 1,857 3,933 2,087 --- 492,541 349,403 5,036 2,744 4,606 12,386 504,927 296,523 54,272 14,825 927 22 3,520 2,568 3,447 9,535 358,938 212,145 52,938 --- 6,256 363 366,569 271,702 12,788 792 13,580 380,149 124,778 504,927 10,100 496 10,596 282,298 76,640 358,938 Approved by the Board on March 21th, 2013: ! " 58 Michel Léonard, Trustee Jocelyn Proteau, Trustee BTB REAL ESTATE INVESTMENT TRUSTNotes to Consolidated Financial StatementsFor the years ended December 31, 2012 and 2011 (in thousands of CAD dollars, except per unit amounts) Consolidated Statements of Comprehensive Income For the years ended December 31, 2012 and 2011 " (in thousands of CAD dollars) Notes 2012 2011 Operating revenues: Rental revenues from properties 17 48,118 41,459 Operating expenses: Property taxes and public utilities Other operating costs 13,412 7,710 12,392 6,955 21,122 19,347 Net operating income 26,996 22,112 Finance costs Net adjustment to fair value of derivative financial instruments Net financing costs Trust administration expenses 18 18,507 (5,286) 13,221 3,519 17,452 3,092 20,544 2,766 Net income (loss) before the following item 10,256 (1,198) Increase to fair value of investment properties 7,711 8,648 Net income being total comprehensive income for the period See accompanying notes to consolidated financial statements. See accompanying notes to consolidated financial statements. 17,967 7,450 #" 59 BTB REAL ESTATE INVESTMENT TRUSTNotes to Consolidated Financial StatementsFor the years ended December 31, 2012 and 2011 (in thousands of CAD dollars, except per unit amounts) ! Consolidated Statements of Changes in Unitholders’ Equity For the years ended December 31, 2012 and 2011 (in thousands of CAD dollars) BTB REAL ESTATE INVESTMENT TRUST Consolidated Statements of Changes in Unitholders’ Equity For the years ended December 31, 2012 and 2011 (in thousands of CAD dollars) Notes Unitholders’ contributions Balance at January 1st, 2012 Issuance of units 16 Distributions to unitholders Comprehensive income Balance as at December 31, 2012 99,503 37,827 --- --- Cumulative comprehensive income (loss) (15,636) --- --- 17,967 Cumulative distributions (7,227) --- (7,656) --- Total 76,640 37,827 (7,656) 17,967 137,330 2,331 (14,883) 124,778 Notes Unitholders’ contributions Balance at January 1st, 2011 Issuance of units 16 Distributions to unitholders Comprehensive income Balance as at December 31, 2011 80,679 18,824 --- --- Cumulative comprehensive income (loss) (23,086) --- --- 7,450 Cumulative distributions (1,596) --- (5,631) --- Total 55,997 18,824 (5,631) 7,450 99,503 (15,636) (7,227) 76,640 See accompanying notes to consolidated financial statements. See accompanying notes to consolidated financial statements. " ! 60 BTB REAL ESTATE INVESTMENT TRUSTNotes to Consolidated Financial StatementsFor the years ended December 31, 2012 and 2011 (in thousands of CAD dollars, except per unit amounts) ! Consolidated Statements of Cash Flows BTB REAL ESTATE INVESTMENT TRUST Consolidated Statements of Cash Flows (in thousands of CAD dollars) (in thousands of CAD dollars) Operating activities Net income for the period Adjustment for : Increase to fair value of investment properties Depreciation of property and equipment Net financing costs Unit-based compensation Straight-line lease adjustment Lease incentive amortization Net change in non-cash working capital items Net cash from operating activities Investing activities Additions to property and equipment Additions to investment properties Net proceeds from disposal of investment property Additions to investment properties under development Net cash used in investing activities Financing activities Net proceeds from issue of units Net proceeds from issue of convertible debentures Mortgage loans, net of financing costs Repayment of mortgage loans Bank loans, net of financing costs Repayment of bank loans Repayment of convertible debentures Net distributions to unitholders Additions to restricted cash Interest paid Net cash from financing activities Net increase in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period See accompanying notes to consolidated financial statements. See accompanying notes to consolidated financial statements. Notes 2012 2011 8 18 15 17 17 8 5 6 7 16 13 14 9 17,967 (7,711) 97 13,221 (76) (661) 1,240 24,077 (3,651) 20,426 (173) (89,103) 1,266 (383) (88,393) 36,938 --- 89,533 (47,135) 14,790 --- --- (6,778) (1,857) (16,365) 69,126 1,159 3,447 4,606 7,450 (8,648) 89 20,544 65 (498) 864 19,866 (1,932) 17,934 (116) (34,543) --- (3,341) (38,000) 18,771 42,863 64,759 (49,659) --- (22,850) (12,883) (5,428) --- (13,935) 21,638 1,572 1,875 3,447 " ! 61 BTB REAL ESTATE INVESTMENT TRUSTNotes to Consolidated Financial StatementsFor the years ended December 31, 2012 and 2011 (in thousands of CAD dollars, except per unit amounts) 1. REPORTING ENTITY: BTB real estate Investment Trust (the “Trust” or “BTB”) is an unincorporated open-ended real estate investment trust formed and governed under the Civil code of Quebec pursuant to a trust agreement and is domiciled in Canada. The address of the Trust’s registered office is 2155, Crescent street, Montreal (Quebec), Canada. The consolidated financial statements of the Trust for the years ended December 31, 2012 and December 31, 2011 comprise the Trust and its wholly owned subsidiaries (together referred to as the “Trust”) and the Trust’s interest in jointly controlled entities and jointly controlled assets. 2. BASIS OF PREPARATION: (a) Statement of compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”). These consolidated financial statements were approved by the Board of Directors on March 21th, 2013. (b) Basis of measurement The consolidated financial statements have been prepared on the historical cost basis except for the following material items in the statement of financial position: • Investment properties are measured at fair value; • Derivative financial instruments and warrants are measured at fair value; and • Unit-based compensation is measured using a fair value-based method of accounting (c) Functional and presentation currency These consolidated financial statements are presented in Canadian dollars, which is the Trust’s functional currency. All financial information presented in Canadian dollars has been rounded to the nearest thousand, except per unit amounts. (d) Use of estimates and judgments The preparation of consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Estimates and assumptions are continuously evaluated and are based on management’s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. Information about significant areas of estimation, uncertainty and critical judgments in applying accounting policies that have the most significant effect on the amounts recognized in the consolidated financial statements are as follows: 62 BTB REAL ESTATE INVESTMENT TRUSTNotes to Consolidated Financial StatementsFor the years ended December 31, 2012 and 2011 (in thousands of CAD dollars, except per unit amounts) 2. BASIS OF PREPARATION (CONTINUED): (d) Use of estimates and judgments (continued) (i) Judgments The key judgments made in applying accounting policies that have the most significant effect on the amounts recognized in these consolidated financial statements are as follows: Business combinations The Trust acquires entities that own real estate. At the time of acquisition, the Trust considers whether the acquisition represents the acquisition of a business, i.e., where an integrated set of activities is acquired in addition to the investment property. More specifically, the following criteria are considered: • The extent to which significant inputs and processes are acquired and in particular the extent of ancillary services provided by the acquiree • The number of investment properties owned by the acquiree • Whether the acquiree has allocated its own staff to manage the investment property and/or to deploy any processes An acquisition of a business is accounted for as a business combination under IFRS 3 Business Combinations. When the acquisition of subsidiaries does not represent a business, it is accounted for as an acquisition of assets and liabilities. The cost of the acquisition is allocated to the assets and liabilities acquired based upon their relative fair values. Operating lease contracts – Trust as lessor The Trust enters into commercial property leases on its investment properties. The Trust has determined, based on an evaluation of the terms and conditions of the arrangements, that it retains all the significant risks and rewards of ownership of these properties and therefore accounts for the leases as operating leases. (ii) Use of estimates The key estimates made in applying accounting policies that have the most significant effect on the amounts recognized in these consolidated financial statements are as follows: 63 BTB REAL ESTATE INVESTMENT TRUSTNotes to Consolidated Financial StatementsFor the years ended December 31, 2012 and 2011 (in thousands of CAD dollars, except per unit amounts)2. BASIS OF PREPARATION (CONTINUED): (d) Use of estimates and judgments (continued) (ii) Use of estimates (continued) Valuation of property Investment properties and investment properties under development are stated at fair value at each reporting date. Gains or losses arising from changes in the fair values are included in profit or loss in the period in which they arise. Fair value is determined by management using internally generated valuation models and by independent real estate valuation experts using recognized valuation tech- niques. These techniques comprise both the Discounted Cash Flow Method and the Direct Capitalization method. In some cases, the fair values are determined based on recent real estate transactions with similar characteristics and location to those of the Trust’s investment properties. The determination of the fair value of investment properties requires the use of estimates such as future cash flows from assets (including lease income and cost, future revenue streams, capital values of fixtures and fittings, any environmental matters and the overall repair and condition of the property) and discount rates applicable to those cash flows. In addition, development risks (such as construction and leasing risks) are also taken into consideration when determining the fair value of investment properties under construction. These estimates are based on local market conditions existing at the reporting date. The significant methods and assumptions used by management and the valuators in estimating the fair value of investment properties are set out below: Techniques used for valuing investment property The Direct Capitalization method converts anticipated future cash flow benefits in the form of rental income into present value. This approach requires estimation of future cash inflows and application of investor yield or return requirements. The Discounted Cash Flow method involves the projection of a series of periodic cash flows either to an operating investment property or a development investment property. To this projected cash flow series, an appropriate, market-derived discount rate is applied to establish an indication of the present value of the income stream associated with the investment property. The calculated periodic cash flow is typically estimated as gross income less vacancy and collection losses and less operating expenses/ outgoings. A series of periodic net operating incomes, along with an estimate of the reversion/ terminal/exit value anticipated at the end of the projection period, are discounted to present value. The aggregate of the net present values equals the fair value of the investment property. The Comparable method involves the comparison of the Trust’s investment properties to similar investment properties that have transacted within a recent time frame from which a fair value is estimated based on the price per square foot of these comparable sales. 64 BTB REAL ESTATE INVESTMENT TRUSTNotes to Consolidated Financial StatementsFor the years ended December 31, 2012 and 2011 (in thousands of CAD dollars, except per unit amounts)2. BASIS OF PREPARATION (CONTINUED): (d) Use of estimates and judgments (continued) (ii) Use of estimates (continued) Derivative financial instruments Derivative instruments, including embedded derivatives, are recorded on the consolidated statement of financial position at fair value. Subsequent to initial recognition, these derivatives are measured at fair value. The fair value of derivative instruments is based on forward rates considering the market price, rate of interest and volatility and takes into account the credit risk of the financial instrument. Changes in estimated fair value at each reporting date are included in the profit and loss. Embedded derivatives are separated from the host contract and accounted for separately if the economic characteristics and risks of the host contract and the embedded derivative are not closely related. Unit options The Trust has a unit option plan for the benefit of management. The plan does not provide for cash settlement. The Trust recognizes compensation expense on unit options granted, based on their fair value, which is calculated using the Black-Scholes model. The compensation expense is amortized using the graded ves- ting method. The valuation model requires management to make estimates on various data, such as the expected life, volatility, the average dividend yield of distributions and the average risk-free interest rate. 3. SIGNIFICANT ACCOUNTING POLICIES The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements. (a) Basis of consolidation (i) Business combinations The Trust measures goodwill as the fair value of the consideration transferred including the recognized amount of any non-controlling interest in the acquiree, less the net recognized amount (generally fair value) of the identifiable assets acquired and liabilities assumed, all measured as of the acquisition date. When the excess is negative, a bargain purchase gain is recognized immediately in profit or loss. The Trust elects on a transaction-by-transaction basis whether to measure non-controlling interest at its fair value, or at its proportionate share of the recognized amount of the identifiable net assets, at the acquisition date. Transaction costs, other than those associated with the issue of debt or equity securities, that the Trust incurs in connection with a business combination are expensed as incurred. 65 BTB REAL ESTATE INVESTMENT TRUSTNotes to Consolidated Financial StatementsFor the years ended December 31, 2012 and 2011 (in thousands of CAD dollars, except per unit amounts)3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (a) Basis of consolidation (continued) (ii) Subsidiaries Subsidiaries are entities controlled by the Trust. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. (iii) Jointly controlled assets Jointly controlled assets involve the venturers having joint control, and often joint ownership, of assets dedicated to the joint venture. These joint ventures do not involve the establishment of a corporation, partnership or other entity, or a financial structure that is separate from the venturers themselves. Each venturer has control over its share of future economic benefits through its share of the jointly controlled asset. The consolidated financial statements include the Trust’s proportionate share of the jointly controlled assets, liabilities, revenue and expenses with items of a similar nature on a line-by-line basis, from the date that joint control commences until the date that joint control ceases. (iv) Jointly controlled entities Joint ventures are those entities over whose activities the Trust has joint control, established by contractual agreement. The consolidated financial statements include the Trust’s proportionate share of the entities’ assets, liabilities, revenue and expenses with items of a similar nature on a line-by-line basis, from the date that joint control commences until the date that joint control ceases. (b) Financial instruments (i) Non-derivative financial assets The Trust derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. The Trust has the following non-derivative financial assets: Loans and receivables Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition loans and receivables are measured at amortized cost using the effective interest method, less any impairment losses. Loans and receivables comprise receivables, other receivables and cash and cash equivalents. 66 BTB REAL ESTATE INVESTMENT TRUSTNotes to Consolidated Financial StatementsFor the years ended December 31, 2012 and 2011 (in thousands of CAD dollars, except per unit amounts) 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (b) Financial instruments (continued) (i) Non-derivative financial assets (continued) Cash and cash equivalents Cash and cash equivalents comprise cash balances and term deposits with original maturities of three months or less. (ii) Non-derivative financial liabilities The Trust derecognizes a financial liability when its contractual obligations are discharged or cancelled, or expire. The Trust classifies non-derivative financial liabilities into the other financial liabilities category. Such financial liabilities are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, these financial liabilities are measured at amortized cost using the effective interest method. Non-derivative financial liabilities comprise bank loans, mortgage loans payable, convertible debentures, distributions payable to unitholders and trade and other payables. (iii) Trust units Trust units are redeemable at the option of the holder and, therefore, are considered puttable instruments. Puttable instruments are required to be accounted for as financial liabilities, except where certain conditions are met in accordance with lAS 32 Financial Instruments: Presentation, in which case, the puttable instruments may be presented as equity. BTB’s trust units meet the conditions of lAS 32 and are therefore presented as equity. (iv) Convertible debentures The convertible debentures, which are considered financial liabilities, are convertible into trust units of the Trust. Since BTB’s trust units meet the definition of a financial liability, the conversion options are considered embedded derivatives. (v) Derivative financial instruments Derivative financial instruments are recognized initially at fair value; attributable transaction costs are recognized in profit or loss as incurred. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are recognized immediately in profit or loss. 67 BTB REAL ESTATE INVESTMENT TRUSTNotes to Consolidated Financial StatementsFor the years ended December 31, 2012 and 2011 (in thousands of CAD dollars, except per unit amounts)3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (c) Investment property Investment property is property held either to earn rental income or for capital appreciation or for both, but not for sale in ordinary course of business, use in the production or supply of goods or services or for administrative purposes. Investment property is measured at cost on initial recognition and subsequently at fair value with any change therein recognized in profit or loss. Cost includes expenditures that are directly attributable to the acquisition of the investment property. The Trust makes payments to agents for services in connection with negotiating lease contracts with the Trust’s lessees. These leasing fees are capitalized within the carrying amount of the related investment property and then considered in the fair value adjustment of the investment property at the next reporting period. Should the use of a property change and be reclassified as property and equipment, its fair value at the date of reclassification would become its cost for subsequent accounting. (d) Investment property under development Investment property under development is measured at cost on initial recognition and subsequently at fair value with any change therein recognized in profit or loss to the extent that fair value is reliably determinable. To the extent that fair value is not reliably determinable, the property is carried at cost until either the fair value becomes reliably determinable or construction is completed, whichever is earlier. Cost includes expenditures that are directly attributable to the acquisition, the layout and the construction of the asset. The cost of a self-constructed asset includes the cost of materials, direct labour, and any other directly attributable costs during the development of the asset. (e) Property and equipment (i) Recognition and measurement Property and equipment is measured at cost less accumulated depreciation and accumulated impairment losses in accordance with the cost model. When parts of an item of property and equipment have different useful lives, they are accounted for as separate items (major components) of property and equipment. Gains and losses on disposal of an item of property and equipment are determined by comparing the proceeds from disposal with the carrying amount of property and equipment, and are recognized within profit or loss on a net basis. 68 BTB REAL ESTATE INVESTMENT TRUSTNotes to Consolidated Financial StatementsFor the years ended December 31, 2012 and 2011 (in thousands of CAD dollars, except per unit amounts)3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (e) Property and equipment (continued) (ii) Depreciation Depreciation is calculated over the depreciable amount, which is the cost of an asset, less its residual value. Depreciation is recognized in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property and equipment, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. The estimated useful lives for the current and comparative periods are as follows: Owner-occupied building Equipment, furniture and fixtures Rolling stock 40 years 2 - 12 years 2 - 4 years Depreciation methods, useful lives and residual values are reviewed at each annual reporting date and adjusted when appropriate. (iii) Impairment The carrying amount of the Trust’s property and equipment is reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. The recoverable amount of an asset is the greater of its value in use and its fair value less costs to sell. An impairment loss is recognized if the carrying amount of an asset exceeds its estimated recoverable amount. Impairment losses are recognized in profit or loss. (f) Leases All existing rental leases related to the Trust’s investment properties have been assessed as operating leases. The tenants have a unilateral right to terminate within the statutory period. (g) Provisions Provisions are recognized when the Trust has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Where the Trust expects some or all of a provision to be reimbursed, the reimbursement is recognized as a separate asset. The expense relating to any provision is presented in net earnings, net of any reimbursement. If the effect of the time value of money is material, provisions are discounted using a current rate that reflects the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as a finance cost. 69 BTB REAL ESTATE INVESTMENT TRUSTNotes to Consolidated Financial StatementsFor the years ended December 31, 2012 and 2011 (in thousands of CAD dollars, except per unit amounts) 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (h) Revenue recognition Rental revenue from property includes rents from tenants under leases, realty taxes and operating cost recoveries, lease cancellation fees and incidental income. Rental revenue is recognized when service has been rendered and the amount of expected consideration can be reliably estimated. The Trust commences revenue recognition on its leases based on a number of factors. In most cases, reve- nue recognition under a lease begins when the tenant takes possession of, or controls, the physical use of the leased property. Generally, this occurs on the lease commencement date, or when the Trust is required to make additions to the leased property in the form of tenant improvements, upon substantial completion of the addi- tions. Certain leases provide for tenant occupancy during periods for which no rent is due (“free rent period”) or where minimum rent payments change during the term of the lease. Accordingly, rental revenue is recognized in comprehensive income on a straight-line basis over the term of the lease unless another systematic basis is more representative of the time pattern in which user’s benefit derived from the leased asset is diminished. These amounts are accounted for as amortization of straight-line lease adjustments within investment properties. Lease incentives which are mostly payments of monetary allowances to tenants, are amortized over the lease term as a reduction of rental revenue. The lease term is the non-cancellable period of the lease together with any further extension for which the tenant has the option to continue the lease, where, at the inception of the lease, the Trust is reasonably certain that the tenant will exercise that option. Lease incentives and amortization of lease incentives are recognized as adjustments to the carrying amount of investment properties. Cancellation fees or premiums received to terminate leases are recognized in profit and loss when they arise. (i) Government grants Government grants are recognized initially as deferred income at fair value when there is reasonable assurance that they will be received and the Trust will comply with the conditions associated with the grant. Grants that compensate the Trust for expenses incurred are recognized in profit or loss on a systematic basis in the same periods in which the expenses are recognized. Grants that compensate the Trust for the cost of an asset are deducted from the carrying amount of the asset. (j) Earnings per unit The Trust presents basic earnings per unit data for its Trust units. Basic earnings per unit are calculated by dividing the profit or loss attributable to unit holders of the Trust by the weighted average number of units outstanding during the period, adjusted for own units held. 70 BTB REAL ESTATE INVESTMENT TRUSTNotes to Consolidated Financial StatementsFor the years ended December 31, 2012 and 2011 (in thousands of CAD dollars, except per unit amounts)3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (k) Finance income and finance costs Finance income comprises interest income on funds invested. Interest income is recognized as it accrues in profit or loss, using the effective interest method. Finance costs comprise interest on mortgage loans payable, convertible debenture, bank loans and others, accretion of the non-derivative liability component of convertible debentures, accretion of effective interest on mortgage loans payable, bank loans and convertible debentures and finance income. Net financing costs comprise finance costs and changes in the fair value of derivative financial instruments. (l) Operating segment An operating segment is a component of the Trust that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Trust’s other components. All operating segments’ operating results are reviewed regularly by the Trust’s Chief Executive officer (‘’CEO’’) to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. Segment results that are reported to the CEO include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. (m) Unit-based compensation Unit option plan The Trust uses the fair value-based method of accounting for its unit-based awards, under which compensation expense is measured at grant date and recognized over the vesting period. The units are considered financial liabilities and the awards are also considered financial liabilities and measured at fair-value at each reporting period and the change in the fair value is recognized as compensation expense in profit and loss. Deferred unit compensation plan for trustees and certain executive officers Compensation costs related to the unit compensation plan for trustees and certain executive officers are recognized at the time they are granted. These units are initially measured at fair value based on the trading price of the Trust’s unit, and are revalued at the end of each reporting period, until settlement. Any changes in fair value are recognized in profit or loss. (n) Warrants Since all the units are considered liabilities, the warrants are measured at fair-value at each reporting period and the change in the fair value is recognized in profit or loss. The warrants are presented as liabilities. 71 BTB REAL ESTATE INVESTMENT TRUSTNotes to Consolidated Financial StatementsFor the years ended December 31, 2012 and 2011 (in thousands of CAD dollars, except per unit amounts)3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (o) Income taxes BTB is a mutual fund trust and a Real Estate Investment Trust (‘’REIT’’) pursuant to the Income Tax Act (Canada). Under current tax legislation, a REIT is entitled to deduct distributions of taxable income such that, it is not liable to pay income tax provided that its taxable income is fully distributed to unitholders. BTB has reviewed the pros- cribed conditions under the Income Tax Act (Canada) and has determined that it qualifies as a REIT for the year. BTB intends to continue to qualify as a REIT and to make distributions not less than the amount necessary to ensure that BTB will not be liable to pay income taxes. Accordingly, no current or deferred income taxes have been recorded in the consolidated financial statements. (p) New standards and interpretations not yet adopted A number of new standards, and amendments to standards and interpretations, are not yet effective for the year ended December 31, 2012, and have not been applied in preparing these consolidated financial state- ments. The extent of the impact of these standards has not been determined, except when otherwise indicated. (i) IFRS 9, (Financial Instruments) IFRS 9 replaces the guidance in IAS 39, Financial Instruments — Recognition and Measurement, on the classification and measurement of financial instruments and is effective for annual periods beginning on or after January 1, 2015, with early adoption permitted. (ii) IFRS 10, (Consolidated Financial Statements), IFRS 11, Joint Arrangements, IFRS 12, Disclosure of Interests in Other Entities, IAS 27, Separate Financial Statements, IAS 28, Investments in Associates and Joint Ventures. IFRS 13, Fair Value Measurement, and amended Each of these new standards is effective for annual periods beginning on or after January 1, 2013, with early adoption permitted. The following is a brief summary of these new standards: IFRS 10, Consolidated Financial Statements, requires an entity to consolidate an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Under existing IFRS, consolidation is required when an entity has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. IFRS 10 replaces SIC 12, Consolidation — Special Purpose Entities, and parts of IAS 27, Consolidated and Separate Financial Statements. The impact of this new standard is considered not to be significant as the Trust does not expect any change to the entities included in the consolidated financial statements. 72 BTB REAL ESTATE INVESTMENT TRUSTNotes to Consolidated Financial StatementsFor the years ended December 31, 2012 and 2011 (in thousands of CAD dollars, except per unit amounts)3. Significant accounting policies (continued) (p) New standards and interpretations not yet adopted (continued) (iii) IFRS 10, (Consolidated Financial Statements), IFRS 11, Joint Arrangements, IFRS 12, Disclosure of Interests in Other Entities, IAS 27, Separate Financial Statements, IAS 28, Investments in Associates and Joint Ventures (continued). IFRS 13, Fair Value Measurement, and amended IFRS 11, Joint Arrangements, requires a venturer to classify its interest in a joint arrangement as a joint venture or joint operations. Joint ventures will be accounted for using the equity method of accounting whereas for a joint operation, the venturer will recognize its share of the assets, liabilities, revenue and expenses of the joint operation. Under existing IFRS, entities have the choice to proportionately consolidate or equity account for interests in joint ventures. IFRS 11 supersedes IAS 31, Interests in Joint Ventures, and SIC 13, Jointly Controlled Entities — Non-monetary Contributions by Venturers. The impact of this new standard is considered not to be significant as the Trust’s interest in joint arrangements will be classified as joint operations and will therefore be accounted for using the proportionate consolidation method. IFRS 12, Disclosure of Interests in Other Entities, establishes disclosure requirements for interests in other entities, such as joint arrangements, associates, special purpose vehicles and off-balance sheet vehicles. The standard carries forward existing disclosures and also introduces significant additional disclosure requirements that address the nature of, and risks associated with, an entity’s interests in other entities. Adoption of this standard will not materially impact the consolidated financial statements other than disclosure. IFRS 13, Fair Value Measurement, is a comprehensive standard for fair value measurement and disclosure requirements for use across all IFRS standards. The new standard clarifies that fair value is the price that would be received to sell an asset, or paid to transfer a liability in an orderly transaction between market participants, at the measurement date. It also establishes disclosures about fair value measurement. Under existing IFRS, guidance on measuring and disclosing fair value is dispersed among the specific standards requiring fair value measurements and in many cases does not reflect a clear measurement basis or consistent disclosures. The Trust does not expect that this standard will result in a material impact to the consolidated financial statements. (iv) Amendments to Other Standards There have been amendments to existing standards, including IAS 27, Separate Financial Statements, and IAS 28, Investments in Associates and Joint Ventures. IAS 27 addresses accounting for subsidiaries, jointly controlled entities and associates in non-consolidated financial statements. IAS 28 has been amended to include joint ventures in its scope and to address the changes in IFRS 10 - 12 as explained above. 73 BTB REAL ESTATE INVESTMENT TRUSTNotes to Consolidated Financial StatementsFor the years ended December 31, 2012 and 2011 (in thousands of CAD dollars, except per unit amounts)4. INVESTMENT PROPERTIES For the years ended Decembre 31, Balance beginning of period Acquisition of investment properties (note 5) Disposal of investment property (note 6) Capital expenditures Government grant Capitalized leasing fees Capitalized lease incentives Lease incentives amortization Straight-line lease adjustment Net transfer from investment properties under development Increase to fair value of investment properties Balance end of the period 2012 343,383 128,446 (1,266) 3,378 --- 678 2,454 (1,240) 661 4,316 7,711 488,521 2011 283,095 47,765 --- 2,084 (135) 510 1,782 (864) 498 --- 8,648 343,383 The fair value is determined annually on the basis of valuations made by independent external appraisers having appropriate professional qualifications, using recognized valuation techniques, comprising both the Discounted Cash Flow and the Direct Capitalization methods for a subset of the Trust investment properties comprised of the ten most significant investment properties and approximately 1/3 of the remaining investment properties. The selection of investment properties subject to external valuation is determined by management based on its assessment of circumstances that in its view, may impact the value of particular individual investment property. The fair value of the remaining investment properties is determined by management using internally generated valuation models. (a) External Valuation At December 31, 2012 external appraisals were obtained for investment properties with an aggregate fair value of $361,021 (December 31, 2011 - $216,940). (c) Internal Valuation At December 31, 2012 management’s valuation models were used for investment properties with an aggre- gate fair value of $127,500 (December 31, 2011 - $126,443). 74 BTB REAL ESTATE INVESTMENT TRUSTNotes to Consolidated Financial StatementsFor the years ended December 31, 2012 and 2011 (in thousands of CAD dollars, except per unit amounts) 4. INVESTMENT PROPERTIES (CONTINUED) In its determination of fair value, management utilizes capitalization rate data from external knowledgeable property valuators. The data provides a range of rates for various geographic regions and for various types and qualities of properties within each region. To the extent that the externally provided capitalization rate ranges change from one reporting period to the next; or should another rate within the provided ranges be more appropriate than the rate previously used, the fair value of the investment properties would increase or decrease accordingly. The following table highlights the significant assumptions used in the modeling process for both internal and external appraisals: As at December 31, 2012 Capitalization rate Terminal capitalization rate Discount rate As at December 31, 2011 Capitalization rate Terminal capitalization rate Discount rate Commercial Office Industrial General purpose 7.00% - 12.00% 6.50% - 10.50% 7.00% - 9.75% 7.25% - 8.75% 7.25% - 8.75% 6.50% - 9.50% 7.00% - 11.50% 7.50% - 9.25% 7.25% - 9.75% 7.50% - 9.25% 7.00% - 10.75% 8.25% - 9.00% Commercial Office Industrial General purpose 7.25% - 10.25% 6.75% - 9.75% 7.50% - 10.25% 7.50% - 9.00% 7.75% - 10.50% 6.75% - 9.50% 7.75% - 10.50% 7.75% - 9.25% 7.50% - 10.25% 7.75% - 9.25% 8.00% - 11.25% 8.00% - 9.75% 5. ACQUISITIONS (a) 2012 Asset acquisitions In December 2012, the Trust acquired a general purpose building located in the city of Saint-Jean-sur-Richelieu for a purchase price of $17,025, $7,630 through the assumption of a mortgage loan, $2,384 through the assumption of trade and other payables and $7,011 in cash. In December 2012, the Trust acquired a general purpose building located in the city of Ottawa for a purchase price of $18,286, $345 through the assumption of trade and other payables and $17,941 in cash. In December 2012, the Trust acquired a commercial building located in the city of Dollard-des-Ormeaux for a purchase price of $27,260, $8,809 through the assumption of a mortgage loan, $8,767 through the assumption of trade and other payables and $9,684 in cash. In November 2012, the Trust acquired an industrial building located in the town of Ingersoll for a purchase price of $10,532, $6,774 through the assumption of a mortgage loan, $53 through the assumption of trade and other payables and $3,705 in cash. 75 BTB REAL ESTATE INVESTMENT TRUSTNotes to Consolidated Financial StatementsFor the years ended December 31, 2012 and 2011 (in thousands of CAD dollars, except per unit amounts) 5. ACQUISITIONS (CONTINUED) (a) 2012 Asset acquisitions (Continued) In October 2012, the Trust acquired a 50% interest in a general purpose building located in the city of Gatineau for a purchase price of $6,050, $629 through the assumption of trade and other payables and $5,421 in cash. In October 2012, the Trust acquired an office building located in the city of Ottawa for a purchase price of $6,580, $60 through the assumption of trade and other payables and $6,520 in cash. In September 2012, the Trust acquired a supplemental 50% interest in Complexe Lebourgneuf Phase II Inc., a joint venture which owns and operates an office building located in Québec City for a purchase price of $12,089, $6,384 through the assumption of a mortgage loan, $1,830 through the assumption of trade and other payables and $3,875 in cash. In May 2012, the Trust acquired an office building located in the city of Ottawa for a purchase price of $14,100, $212 through the assumption of trade and other payables and $13,888 in cash. In April 2012, the Trust acquired three industrial buildings located in the cities of St-Laurent and Laval for a purchase price of $14,700, $152 through the assumption of trade and other payables and $14,548 in cash. In addition to the purchase price, transaction costs of $1,824 were incurred for these acquisitions. The relative fair value of the assets and liabilities recognized in the consolidated statement of financial position on the date of the acquisition during 2012 were as follow: Fair value recognized on acquisition Investment properties, including transaction costs Mortgage loans payable Trade and other payables, including transaction costs Total cash consideration paid (b) 2011 Asset acquisitions 128,446 (29,597) (16,256) 82,593 In December 2011, the Trust acquired an industrial building located in the city of Dorval for a purchase price of $5,500, including $2,689 through the assumption of a mortgage loan, $7 through the assumption of trade and other payables and $2,804 in cash. In December 2011, the Trust acquired an industrial building located in Ville Mont-Royal for a purchase price of $7,550 in cash. In October 2011, the Trust acquired two industrial buildings located in the city of Terrebonne for a purchase price of $12,225, $226 through the assumption of trade and other payables and $11,999 in cash. In August 2011, the Trust acquired a 50% interest in a commercial building located in the city of Terrebonne for a purchase price of $2,190, $1,167 through the assumption of a mortgage loan and $1,023 in cash. 76 BTB REAL ESTATE INVESTMENT TRUSTNotes to Consolidated Financial StatementsFor the years ended December 31, 2012 and 2011 (in thousands of CAD dollars, except per unit amounts)5. ACQUISITIONS (CONTINUED) (b) 2011 Asset acquisitions (Continued) In April 2011, the Trust acquired the remaining 50% interest in a commercial building located in Québec City for a purchase price of $19,350, $12,424 through the assumption of a mortgage loan and $6,926 in cash. In addition to the purchase price, transaction costs of $950 were incurred for these acquisitions. The relative fair value of the assets and liabilities recognized in the consolidated statement of financial position on the date of the acquisition during 2011 were as follow: Fair value recognized on acquisition Investment properties, including transaction costs Mortgage loans payable Trade and other payables, including transaction costs Total cash consideration paid 6. DISPOSAL 47,765 (16,280) (1,183) 30,302 In March 2012, the Trust disposed of a commercial building located in the city of Montréal for net proceeds of $1,266. The gross proceeds of $1,272 have been provided as a guarantee of the existing mortgage loan which is for multiple buildings still held. 7. INVESTMENT PROPERTIES UNDER DEVELOPMENT For the years ended December 31, Balance beginning of period Capital expenditures Net transfer to investment properties Balance end of period 2012 3,933 383 (4,316) --- 2011 592 3,341 --- 3,933 In January 2012, the Trust has completed the development of lands adjacent to an existing investment property located in Québec City. The Trust had a 25% interest in this jointly controlled entity. Subsequent of the transfer from Investment Properties Under Development to Investment Properties, the Trust has increased its participation in this jointly controlled entity to 75%. 77 BTB REAL ESTATE INVESTMENT TRUSTNotes to Consolidated Financial StatementsFor the years ended December 31, 2012 and 2011 (in thousands of CAD dollars, except per unit amounts) 8. PROPERTY AND EQUIPMENT Owner- occupied land Owner- occupied building Equipment, furniture and fixtures Rolling stock Total Cost Balance at December 31, 2010 Additions Disposals Balance at December 31, 2011 Additions Balance at December 31, 2012 494 --- --- 494 --- 494 1,656 59 --- 1,715 9 1,724 184 57 (112) 129 105 234 --- --- --- --- 59 59 Accumulated Depreciation Balance at December 31, 2010 Depreciation for the year Disposals Balance at December 31, 2011 Depreciation for the year Balance at December 31, 2012 Owner- occupied building Equipment, furniture and fixtures Rolling stock 132 55 --- 187 58 245 80 34 (50) 64 32 96 --- --- --- --- 7 7 Owner- occupied land Owner- occupied building Equipment, furniture and fixtures Rolling stock 2,334 116 (112) 2,338 173 2,511 Total 212 89 (50) 251 97 348 Total Net book value At December 31, 2011 At December 31, 2012 494 494 1,528 1,479 65 138 --- 52 2,087 2,163 78 BTB REAL ESTATE INVESTMENT TRUSTNotes to Consolidated Financial StatementsFor the years ended December 31, 2012 and 2011 (in thousands of CAD dollars, except per unit amounts)9. RESTRICTED CASH Restricted cash consists of an amount of $1,272 provided in guarantee of the existing mortgage loan on the building disposed in March 2012 (see note 6) and an amount of $585 provided in guarantee of a mortgage loan. 10. OTHERS ASSETS Prepaid expenses Deposits 11. RECEIVABLES Rents receivable Provision for doubtful accounts Total December 31, 2012 December 31, 2011 3,605 1,431 5,036 3,173 347 3,520 December 31, 2012 December 31, 2011 3,015 (271) 2,744 2,720 (152) 2,568 12. MORTGAGE LOANS PAYABLE Mortgage loans payable are secured by immovable hypothecs on investment properties having a fair value of approxi- mately $484,641 as at December 31, 2012 (December 31, 2011 – $337,183). December 31, 2012 December 31, 2011 Fixed rate mortgage loans payable Floating rate mortgage loans payable Unamortized fair market value assumption ad- justments Unamortized financing costs Mortgage loans payable Weighted average interest rate Weighted average term to maturity (years) Annual rates ranging 280,313 15,901 2,111 (1,802) 296,523 4.69% 209,848 3,150 197 (1,150) 212,145 5.27% 4.51 3.18% - 8.50% 2.74 3.50% - 8.50% 79 BTB REAL ESTATE INVESTMENT TRUSTNotes to Consolidated Financial StatementsFor the years ended December 31, 2012 and 2011 (in thousands of CAD dollars, except per unit amounts)12. MORTGAGE LOANS PAYABLE (CONTINUED) As at December 31, 2012, mortgage loan scheduled repayments are as follows: 2013 2014 2015 2016 2017 Thereafter Unamortized fair market value assumption adjustments Unamortized financing costs Scheduled Repayments 7,659 6,526 5,539 5,048 2,662 20,200 Principal maturity 39,741 65,935 14,121 57,412 57,527 13,844 Total 47,400 72,461 19,660 62,460 60,189 34,044 47,634 248,580 296,214 2,111 (1,802) 296,523 13. CONVERTIBLE DEBENTURES As at December 31, 2012, the Trust had three series of subordinated convertible debentures outstanding. Capital Interest rates Unit conversion price Interest payments Maturity Series B 13,020 Series C 23,000 Series D 23,000 Coupon Effective 8.50% 8.00% 7.25% 11.15% 9.78% 8.47% $11.50 $5.00 $6.10 Semi-annual Semi-annual Semi-annual March 2013 January 2016 July 2018 The components of the subordinated convertible debentures on the issue date were allocated as follows: Non-derivative liability component Conversion option liability component Series B 12,339 681 13,020 Series C 21,592 1,408 23,000 Series D 21,346 1,654 23,000 80 The accretion of the non-derivative liability component of the subordinated convertible debentures, which increases as of the initial allocation on the issuance date to the final amount repayable, is recorded under finance costs. The conversion option liability component is measured at fair value. BTB REAL ESTATE INVESTMENT TRUSTNotes to Consolidated Financial StatementsFor the years ended December 31, 2012 and 2011 (in thousands of CAD dollars, except per unit amounts) 13. CONVERTIBLE DEBENTURES (CONTINUED) December 31, 2012 Non-derivative liability component upon issuance Accretion of non-derivative liability component Unamortized financing costs Non-derivative liability component Conversion option liability component at fair value Series B Series C Series D Total 12,339 21,592 21,346 55,277 639 12,978 (65) 477 22,069 (1,079) 270 21,616 1,386 56,663 (1,247) (2,391) 12,913 20,990 20,369 54,272 --- 598 329 927 December 31, 2011 Non-derivative liability component upon issuance Accretion of non-derivative liability component Unamortized financing costs Non-derivative liability component Conversion option liability component at fair value Series B Series B Series C Series D Total 12,339 21,592 21,346 55,277 479 12,818 (324) 225 21,817 (1,368) 83 21,429 787 56,064 (1,434) (3,126) 12,494 20,449 19,995 52,938 --- 3,307 2,949 6,256 In March 2008, the Trust issued Series B subordinated convertible, redeemable, unsecured debentures, bearing 8.5% interest payable semi-annually and maturing in March 2013, in the amount of $13,020. The debentures are convertible at the holder’s option at any time before March 2013, at a conversion price of $11.50 per unit («Series B Conversion Price»). As of March 31, 2012, but before March 31, 2013, under certain conditions, the debentures may be redeemed by the Trust, in whole or in part at any time and for a redemption price equal to the principal amount thereof plus accrued and unpaid interest, provided that the average weighted price based on the volume of units traded on the Toronto Stock Exchange during a period of 20 consecutive trading days ending on the fifth trading day prior to the date on which an advance notice of redemption is given is at least 125% of the conversion price. At the Trust’s option, Series B debentures may be redeemed in Trust units at maturity or redemption. 81 BTB REAL ESTATE INVESTMENT TRUSTNotes to Consolidated Financial StatementsFor the years ended December 31, 2012 and 2011 (in thousands of CAD dollars, except per unit amounts)13. CONVERTIBLE DEBENTURES (CONTINUED) Series C In January 2011, the Trust issued Series C subordinated convertible, redeemable, unsecured debentures bearing 8% interest payable semi-annually and maturing in January 2016, in the amount of $23,000. The debentures are convertible at the holder’s option at any time before January 2016, at a conversion price of $5.00 per unit («Series C Conversion Price»). These debentures are not redeemable before January 31, 2014, except in the case of a change in control. As of January 31, 2014, but before January 31, 2015, under certain conditions, the debentures will be redeemable by the Trust at a redemption price equal to their principal amount plus accrued, unpaid interest, provided that the average weighted price based on the volume of units traded on the Toronto Stock Exchange during a period of 20 consecutive trading days ending on the fifth trading day prior to the date on which an advanced notice of redemption is given (the “current market price”) is at least 125% of the conversion price. As of January 31, 2015, but before January 31, 2016, under certain conditions, the debentures will be redeemed by the Trust, in whole or in part at any time and for a redemption price equal to the principal amount thereof plus accrued and unpaid interest. The Trust may, under certain conditions, elect to satisfy its obligation to pay the principal amount of the debentures that are to be redee- med or that have matured by issuing a number of units obtained by dividing the principal amount of the debentures by 95% of the current market price on the date of redemption or maturity. Series D In July 2011, the Trust issued Series D subordinated convertible, redeemable, unsecured debentures bearing 7.25% interest payable semi-annually and maturing in July 2018, in the amount of $23,000. The debentures are convertible at the holder’s option at any time before July 2018, at a conversion price of $6.10 per unit («Series D Conversion Price»). These debentures are not redeemable before July 31, 2014, except in the case of a change in control. As of July 31, 2014, but before July 31, 2016, under certain conditions, the debentures will be redeemable by the Trust at a redemption price equal to their principal amount plus accrued, unpaid interest, provided that the average weighted price based on the volume of units traded on the Toronto Stock Exchange during a period of 20 consecutive trading days ending on the fifth trading day prior to the date on which an advanced notice of redemption is given (the “current market price”) is at least 125% of the conversion price. As of July 31, 2016, but before July 31, 2018, under certain conditions, the debentures will be redeemed by the Trust, in whole or in part at any time and for a redemption price equal to the principal amount thereof plus accrued and unpaid interest. The Trust may, under certain conditions, elect to satisfy its obligation to pay the principal amount of the debentures that are to be redeemed or that have matured by issuing a number of units obtained by dividing the principal amount of the debentures by 95% of the current market price on the date of redemption or maturity. 82 BTB REAL ESTATE INVESTMENT TRUSTNotes to Consolidated Financial StatementsFor the years ended December 31, 2012 and 2011 (in thousands of CAD dollars, except per unit amounts)14. BANK LOANS The Trust has access to an acquisition line of credit in the amount of $15,000 maturing in November 2013. The line of credit is guaranteed by mortgages against properties held by the Trust. As at December 31, 2012, $15,000 was drawn under the acquisition line of credit (December 31, 2011 - $Nil). The Trust also has access to an operating credit facility for a maximum amount of $2,000. This facility bears interest at a rate of 1% above the prime rate. This credit facility is secured by an immoveable hypothec on two properties having a value of $4,224. As at December 31, 2012 and 2011, no amount was due under the credit facility. 15. UNIT-BASED COMPENSATION AND WARRANTS (a) Unit-based compensation Unit option plan The Trust may grant options to its trustees, senior officers, investor relations consultants, and technical consultants. The maximum number of units reserved for issuance under the unit option plan is limited to 10% of the total number of issued and outstanding units. The trustees set the exercise price at the time that the units are granted under the plan; the exercise price may not be less than the discounted market price of the units as determined under the policies of the Toronto Stock Exchange on the date of grant. The options have a minimum term of five years as of the grant date and vest over a period of up to 18 months. Unit-based compensation expense and the assumptions used in the calculation thereof using the Black & Scholes option valuation model are as follows: For the years ended December 31 Unit-based compensation expense Liability recognized for unit-based compensation Unit options granted Unit option holding period (years) Volatility rate Distribution yield Risk-free interest rate 2012 (76) 22 --- --- --- --- --- 2011 65 98 108,000 4-5 46.5% 9.0% 1.0% -1.3% 83 BTB REAL ESTATE INVESTMENT TRUSTNotes to Consolidated Financial StatementsFor the years ended December 31, 2012 and 2011 (in thousands of CAD dollars, except per unit amounts) 15. UNIT-BASED COMPENSATION AND WARRANTS (CONTINUED) (a) Unit-based compensation (continued) The following tables present relevant information on options and changes in the balances during the year: Grant date September 8, 2008 March 25, 2011 June 22, 2011 July 11, 2011 Number of units 119,000 10,000 88,000 10,000 227,000 Maturity date September 8, 2013 March 21, 2016 May 26, 2015 July 11, 2016 Exercise price $ 5.55 $ 4.60 $ 4.50 $ 4.75 Outstanding, beginning of period Granted Forfeited/Cancelled Outstanding, end of period Options vested Weighted average remaining life (years) December 31, 2012 December 31, 2011 Units options 551,000 --- (324,000) 227,000 227,000 Weighted average exercise price $ 10.20 --- $13.77 $ 5.07 $ 5.07 1.59 Units options 557,000 108,000 (114,000) 551,000 546,000 Weighted average exercise price $11.30 $4.55 $ 10.20 $ 10.20 $ 10.25 1.33 Deferred unit compensation plan for trustees and certain executive officers The Trust offers a deferred unit compensation plan for its trustees and certain executive officers. Under this plan, the trustees and certain executive officers may elect to receive as compensation either cash, deferred units, or a combination of both. The following table present changes in the balances during the year: Outstanding, beginning of period Trustees’ compensation Distributions paid in units Outstanding, end of period 84 December 31, 2012 --- 15,264 717 15,981 BTB REAL ESTATE INVESTMENT TRUSTNotes to Consolidated Financial StatementsFor the years ended December 31, 2012 and 2011 (in thousands of CAD dollars, except per unit amounts) 15. UNIT-BASED COMPENSATION AND WARRANTS (CONTINUED) (a) Unit-based compensation (continued) As at December 31, 2012, the liability related to the plan was $75. The related expenses recorded in profit and loss amount to $75 for the year ended December 31, 2012. No amount was paid under this plan for the year ended December 31, 2012. (b) Warrants In March 2012, all the 500,000 outstanding warrants were exercised at a price of $3.822 per unit, for proceeds of $1,911. The warrants had a fair value of $307 before being exercised (December 31, 2011 – $265). The related expenses recorded in profit and loss amount to $42 for the year ended December 31, 2012 (December 31, 2011 - $13). 16. TRUSTS UNITS ISSUED AND OUTSTANDING BTB is authorized to issue an unlimited number of trust units. Each trust unit represents a single vote at any meeting of unitholders and entitles the unitholder to receive a pro rata share of all distributions. The unitholders have the right to require BTB to redeem their trust units on demand. Upon receipt of the redemption notice, all rights to and under the trust units tendered for redemption are surrendered and the holder thereof is entitled to receive a price per trust unit («Redemption Price»), as determined by a market formula. The Redemption Price is to be paid in a ccordance with the conditions provided for in the Declaration of Trust. BTB trust units are considered liability instruments under IFRS because the units are redeemable at the option of the holder, however they are presented as equity at December 31, 2012 and 2011 in accordance with IAS 32. In December 2012, the Trust completed a public issue of 4,598,000 units for total net proceeds of $18,914. In June 2012, the Trust completed a five to one unit consolidation. All references to unit and per unit amounts in the consolidated financial statements and accompanying notes to the consolidated financial statements have been retroactively restated to reflect the five to one unit consolidation In February 2012, the Trust completed a public issue of 3,750,150 units, including the over-allotment option, for total net proceeds of $16,113. In April 2011, the Trust completed a public issue of 4,459,600 units, including the over-allotment option, for total net proceeds of $18,771. 85 BTB REAL ESTATE INVESTMENT TRUSTNotes to Consolidated Financial StatementsFor the years ended December 31, 2012 and 2011 (in thousands of CAD dollars, except per unit amounts)16. TRUSTS UNITS ISSUED AND OUTSTANDING (CONTINUED) Trust units issued and outstanding are as follows: For the years ended December 31, 2012 2011 Units value ($) Units value ($) Units outstanding, beginning of period Issue pursuant to a public issue 14,810,790 8,348,150 99,503 37,252 10,338,345 4,459,600 80,679 20,068 Unit issue costs 23,158,940 136,755 14,797,945 100,747 (2,225) (1,297) Issue pursuant to the distribution reinvestment plan Issue pursuant to the exercice of warrants Units outstanding, end of period 132,857 582 12,845 53 500,000 23,791,797 2,218 137,330 --- 14,810,790 --- 99,503 Distribution reinvestment plan BTB offers a distribution reinvestment plan for its trust unitholders. Participation in the plan is optional and under the terms of the plan, cash distributions on trust unit are used to purchase additional trust units. The trust units are issued from BTB’s treasury at an average market price based on the last five trading days before the distribution date, with a discount of 5%. 17. RENTAL REVENUES FROM PROPERTIES For the year ended December 31, Rental income contractually due from tenants Lease incentive amortization Straight-line lease adjustment 2012 48,697 (1,240) 661 48,118 2011 41,825 (864) 498 41,459 86 BTB REAL ESTATE INVESTMENT TRUSTNotes to Consolidated Financial StatementsFor the years ended December 31, 2012 and 2011 (in thousands of CAD dollars, except per unit amounts)18. NET FINANCING COSTS For the year ended December 31, Financial income Interest on mortgage loans payable Interest on convertible debentures Interest on bank loans Other interest expense Accretion of non-derivative liability component of convertible debentures Accretion of effective interest on mortgage loans payable, convertible debentures and bank loan Net adjustment to fair value of derivative financial instruments 2012 (141) 11,822 4,622 87 107 598 1,412 (5,286) 2011 (120) 10,461 4,437 356 59 731 1,528 3,092 13,221 20,544 19. OPERATING LEASE INCOME The Trust as lessor has entered into leases on its property portfolio. Future minimum base rentals receivable under non-cancellable operating leases as at December 31, 2012 are as follows: Within one year Over one year but within five years Over five years December 31, 2012 37,519 110,193 55,432 203,144 87 BTB REAL ESTATE INVESTMENT TRUSTNotes to Consolidated Financial StatementsFor the years ended December 31, 2012 and 2011 (in thousands of CAD dollars, except per unit amounts) 20. EARNINGS PER UNIT BTB’s trust units are required to be accounted for as financial liabilities and, therefore, are not equity instruments for which a profit or loss per unit is required to be presented. Accordingly, the Trust does not report a profit or loss per unit figure on its consolidated statements of income and comprehensive income. However, for disclosure purposes only, the Trust has determined basic earnings per unit using the same basis that would apply in accordance with lAS 33 Earnings Per Share, as if BTB’s trust units been presented as equity. Net earnings per unit are calculated based on the weighted average number of shares outstanding as follows: For the year ended December 31, Net income 2012 17,967 2011 7,450 Weighted average number of units outstanding - basic 18,668,871 13,698,715 Earnings per unit - basic 0.96 0.54 21. CAPITAL MANAGEMENT The Trust’s capital consists of contributions by unitholders, convertible debentures, mortgage loans and bank loans, excluding issuance costs. In managing its capital, the Trust’s objectives are to ensure that it has adequate resources for its operation and development, while maximizing returns for unitholders while maintaining a balance between debt and equity. The Trust manages its capital structure based on changes in its operations, the economic climate and the availability of capital. December 31, 2012 December 31, 2011 296,214 59,020 15,000 370,234 124,778 495,012 212,998 59,020 --- 272,018 76,640 348,658 The Trust’s capital is as follows: Mortgage loans payable(1) Convertible debentures(1) Bank loans(1) Unitholders’ equity (1) Excluding issue costs 88 BTB REAL ESTATE INVESTMENT TRUSTNotes to Consolidated Financial StatementsFor the years ended December 31, 2012 and 2011 (in thousands of CAD dollars, except per unit amounts)21. CAPITAL MANAGEMENT (CONTINUED) The trust agreement states that the Trust cannot incur a new debt if such debt would cause the Trust’s total debt, exclu- ding convertible debentures, to exceed 75% of the gross carrying amount of its investment properties and other assets. December 31, 2012 December 31, 2011 73.3% 61.6% 75.7% 59.3% Total debt / gross asset value ratio Debt (2) / gross asset value ratio (2) Excluding convertible debentures Financial risk management The Trust has exposure to the following risks from its use of financial instruments: • • • • credit risk interest rate risk liquidity risk fair value risk This note presents information about the Trust’s exposure to each of the above risks, the Trust’s objectives, policies and processes for measuring and managing risk, and the Trust’s management of capital. Further quantitative disclosures are included throughout these consolidated financial statements. (a) Credit risk Credit risk arises from the possibility that tenants may experience financial difficulty and be unable to fulfill their lease commitments. The Trust mitigates this risk by varying its tenant mix and staggering lease terms; avoiding dependence on a single tenant for a significant portion of the Trust’s operating revenues and conducting credit assessments for all major new tenants. The Trust analyzes its trade receivable on a regular basis and records a provision for doubtful accounts when there is a significant risk of non-recovery. As at December 31, 2012, overdue rent receivable amounted to $953 (December 31, 2011 - $653), of which a provision for doubtful account of $271 (December 31, 2011 - $152) has been recorded. Management fully expects to recover the amounts not provisioned as all lease agreements are signed, and they are in continuous discussions for collections with the tenants. The Trust places its cash and cash equivalent investments with Canadian financial institutions with high credit ratings. Credit ratings are actively monitored and these financial institutions are expected to meet their obligation. 89 BTB REAL ESTATE INVESTMENT TRUSTNotes to Consolidated Financial StatementsFor the years ended December 31, 2012 and 2011 (in thousands of CAD dollars, except per unit amounts) 21. CAPITAL MANAGEMENT (CONTINUED) (b) Interest rate risk Interest rate risk reflects the risk of changes in the fair value or future cash flows of a financial instrument because of fluctuations in market interest rates. Except for two mortgage loans outstanding of $15,901 and the acquisition line of credit outstanding of $15,000 as at December 31, 2012, all other mortgage loans payable and convertible debentures bear interest at fixed rates, accordingly 100-basis point increase or decrease in the average interest rate for the fiscal year, assuming that all other variables remain constant, would have an impact of approximately $309 on the Trust’s comprehensive income for the year ended December 31, 2012. (c) Liquidity risk Liquidity risk is managed by: • maximizing cash flows from operations; • • • adopting an investment property acquisition and improvement program that takes account of available liquidity; using credit facilities on the market; staggering mortgage loan maturities; • maximizing the value of investment properties, thus increasing mortgage financing on renewal of loans; and • issuing debt securities or Fund units on the financial markets. Management believes that the Trust will be able to obtain the financing required to make the payments coming due in the next year. However, there is a risk that changes affecting market conditions and access to financing may invalidate this assumption. Some mortgage loans include subjective and restrictive covenant clauses under which the Trust must comply with financial conditions and ratios. As at December 31, 2012, the Trust was in compliance with all the covenants to which it was subject. The Trust’s cash position is regularly monitored by management. The following are contractual maturities of finan- cial liabilities, including estimated interest payments: 90 BTB REAL ESTATE INVESTMENT TRUSTNotes to Consolidated Financial StatementsFor the years ended December 31, 2012 and 2011 (in thousands of CAD dollars, except per unit amounts)21. CAPITAL MANAGEMENT (CONTINUED) (c) Liquidity risk (continued) As at December 31, 2012 Estimated payment schedule Carrying amount Total contractual cash flows 2013 2014 2015 2016 2017 2018 and thereafter 12,788 12,788 12,788 792 14,825 792 792 16,031 16,031 --- --- --- --- --- --- --- --- --- --- 350,795 419,307 76,441 85,176 30,486 93,522 65,219 68,463 379,200 448,918 106,052 85,176 30,486 93,522 65,219 68,463 As at December 31, 2011 Estimated payment schedule Carrying amount Total contractual cash flows 2012 2013 2014 2015 2016 2017 and thereafter 10,100 10,100 10,100 --- --- --- --- --- 496 496 496 265,083 319,190 76,482 51,736 51,251 22,247 80,454 37,020 275,679 329,786 87,078 51,736 51,251 22,247 80,454 37,020 Trade and other payables Distributions payable to unitholders Bank loans Mortgage loans payable and convertible debentures Trade and other payables Distributions payable to unitholders Mortgage loans payable and convertible debentures 91 BTB REAL ESTATE INVESTMENT TRUSTNotes to Consolidated Financial StatementsFor the years ended December 31, 2012 and 2011 (in thousands of CAD dollars, except per unit amounts) 21. CAPITAL MANAGEMENT (CONTINUED) (d) Fair value risk The fair value of the Trust receivables, trade and other payables and distributions payable to unitholders, approximated their carrying amount as at December 31, 2012 because of their short-term maturity. The fair value of mortgage loans was calculated by discounting cash flows from financial obligations using the year end market rate for various loans with similar risk and credit profiles. Using these assumptions, the estimated fair value of mortgage loans on December 31, 2012 amounted to $300,046 (December 31, 2011 - $216,657). The fair value of debentures, including their conversion features, was determined with reference to year end quoted market price. Using these values, the fair values of debentures, including the conversion features, on December 31, 2012 amounted to $59,882 (December 31, 2011 - $56,820). The fair value of bank loans was calculated by discounting cash flows from financial obligations using the year end market rate. Using these assumptions, the estimated fair value of bank loans on December 31, 2012 amounted to $15 030. The Trust uses a fair value hierarchy to categorize the type of valuation techniques from which fair value are derived. The different levels of the hierarchy are; quoted market prices (Level 1), internal models using obser- vable market information as inputs (Level 2) and internal models without observable market information as inputs (Level 3).The fair value of conversion option liabilities were estimated using internal models using observable market information as inputs (Level 2). Using these models, the estimated fair value of conversion option liabilities on December 31, 2012 amounted to $927 (December 31, 2011 - $6,256). A sensitivity analysis has been performed for the fair value of conversion option liabilities. The table below summarize the results obtained: Conversion option liability Fair value Variation in unit price at year end +0.05$ - 0.05$ 927 975 830 92 BTB REAL ESTATE INVESTMENT TRUSTNotes to Consolidated Financial StatementsFor the years ended December 31, 2012 and 2011 (in thousands of CAD dollars, except per unit amounts)22. SUBSIDIARIES, JOINTLY CONTROLLED ASSETS AND JOINTLY CONTROLLED ENTITIES The principal entities included in the Trust’s consolidated financial statements are as follows: Entity BTB Real Estate Investment Trust (“BTB REIT”) BTB, Fiducie d’acquisitions et d’exploitation (“BTB FA&E”) Type Trust Trust Gestion immobilière BTB Inc. Corporation immobilière Cagim (“CIC”) Corporation Corporation Relationship Parent 100% owned by BTB REIT 100% owned by BTB FA&E 100% owned by BTB FA&E Lombard SEC Limited Partnership 99.9% owned by BTB FA&E Place d’affaire Lebourgneuf Phase II, SENC (“PAL II”) General Partnership 99.9% owned by BTB FA&E Société immobilière Cagim, SEC Limited Partnership 70.4% owned by BTB FA&E 0.1% owned by CIC 0.1% owned by CIC 29.5% owned by PAL II 0.1% owned by CIC Complexe Lebourgneuf Phase II Inc. Corporation 75% owned by BTB FA&E (a) Jointly controlled entities The Trust has an investment in a joint venture that is a jointly controlled entity. This joint venture holds a single commercial property and a related mortgage. As at December 31, 2012, the Trust has an interest of 75% (December 31, 2011 – 25%) in the following jointly controlled property holding entity: Complexe Lebourgneuf Phase II Inc. (b) Jointly controlled assets The Trust, via two of its nominee entities, has an interest in two properties that are subject to joint control and accordingly, the Trust has recorded its proportionate share of the related assets, liabilities, revenue and expenses of these properties. As at December 31, 2012, the Trust has an interest of 50% in the following jointly controlled asset: Immeuble BTB/Laplaine and Huntington/BTB Montclair (December 31, 2011 – 50% in Immeuble BTB/Laplaine). 93 BTB REAL ESTATE INVESTMENT TRUSTNotes to Consolidated Financial StatementsFor the years ended December 31, 2012 and 2011 (in thousands of CAD dollars, except per unit amounts) 22. SUBSIDIARIES, JOINTLY CONTROLLED ASSETS AND JOINTLY CONTROLLED ENTITIES (CONTINUED) (b) Jointly controlled assets (continued) The consolidated financial statements include the Trust’s proportionate share of the assets, liabilities, revenues and expenses of these three joint ventures. December 31, 2012 December 31, 2011 Assets: Non-current Current Liabilities: Non-current Current Revenues Expenses 43,458 2,129 29,779 2,374 4,572 1,888 19,050 544 10,294 3,904 164 32 23. OPERATING SEGMENTS For investment properties, discrete financial information is provided to the Chief Executive Officer (‘’CEO’’) on an aggregated investment property basis. The information provided is net rentals (including gross rent and property expenses), valuations gains/losses and the net value of investment properties. The individual investment properties are aggregated into segments with similar economic characteristics. The CEO considers that this is best achieved by aggregating into commercial, office, industrial and general purpose segments. Consequently the Trust is considered to have four reportable operating segments, as follows: • • • • Commercial segment Office segment Industrial segment General purpose 94 BTB REAL ESTATE INVESTMENT TRUSTNotes to Consolidated Financial StatementsFor the years ended December 31, 2012 and 2011 (in thousands of CAD dollars, except per unit amounts) 23. OPERATING SEGMENTS (CONTINUED) December 31, 2012 Commercial Office Industrial General purpose Total Investment properties Rental revenue from properties Net operating income 98,608 200,092 79,236 110,585 488,521 7,898 5,360 23,584 11,418 6,841 5,517 9,795 4,701 48,118 26,996 December 31, 2011 Commercial Office Industrial General purpose Total Investment properties Investment properties under development Rental revenue from properties Net operating income 70,175 152,600 53,269 67,339 343,383 --- 3,933 --- --- 3,933 7,630 4,988 20,857 9,987 3,493 2,565 9,479 4,572 41,459 22,112 24. COMPENSATION OF KEY MANAGEMENT PERSONNEL AND TRUSTEES Key management personnel and trustees compensation is as follows: For the year ended December 31, Salaries and short-term benefits Unit-based compensation Total 2012 1,527 (21) 1,506 2011 1,312 101 1,413 Key management personnel are comprised of the Company’s executive officers. 25. COMMITMENTS The Trust currently has one investment property under firm contract, where conditions have been waived that, if completed, represents $11,000 of acquisition. It is expected that the transaction will close during the first or second quarters of 2013. 95 BTB REAL ESTATE INVESTMENT TRUSTNotes to Consolidated Financial StatementsFor the years ended December 31, 2012 and 2011 (in thousands of CAD dollars, except per unit amounts)26. SUBSEQUENT EVENTS In February 2013, the Trust acquired a 50% interest in a retail building located in the city of Saint-Lazare for a purchase price of $2,500. In February 2013, the Trust completed a public issue of Series E subordinated convertible, redeemable, unsecured debentures bearing 6.90% interest payable semi-annually and maturing in March 2020, in the amount of $23,000, including an over-allotment option, for total estimated net proceeds of $21,780. 27. COMPARATIVE FIGURES Certain comparative figures have been reclassified to conform to the current year’s presentation. 96 BTB REAL ESTATE INVESTMENT TRUSTNotes to Consolidated Financial StatementsFor the years ended December 31, 2012 and 2011 (in thousands of CAD dollars, except per unit amounts)CORPORATE INFORMATION Board of Trustees Jocelyn Proteau (2) President of the Board of Trustees BTB Real Estate Investment Trust Corporate director Luc Lachapelle (1)(3) Secretary of the Board of Trustees BTB Real Estate Investment Trust President and Chief Executive Officer Corlac Immobilier Inc. Michel Leonard President and Chief Executive Officer BTB Real Estate Investment Trust Normand Beauchamp (2) (3) President and Chief Executive Officer Capital NDSL inc. Executive Team Claude Garcia (1) (3) Corporate director Jean-Pierre Janson (2) Executive Vice-President Partenaires Financiers Richardson Limited Richard Lord (1) (2) Corporate director Fernand Perreault (1) (3) Corporate director Peter Polatos (3) President Gestion AMTB inc. (1) Member of the Audit Committee (2) Member of the Human Resources and Governance Committee (3) Member of the Investment Committee Michel Leonard President and Chief Executive Officer Daniel G. Oana Vice-President, Leasing Benoit Cyr, CPA, CA Vice-President and Chief Financial Officer Georges A. Renaud, FRI, CPM Vice-President, Property management 97 UNITHOLDER INFORMATION Head office Auditors BTB Real Estate Investment Trust 2155, Crescent, suite 300 Montréal (Québec) H3G 2C1 KPMG s.r.l. /S.E.N.C.R.L. 600 De Maisonneuve West Blvd., suite 1500 H3A 0A3 Montreal, QC T 514 286 0188 F 514 286 0011 Web site: www.btbreit.com Listing The units and convertible debentures of BTB Real Estate Investment Trust are listed on the Toronto Stock Exchange under the trading symbols: « BTB.UN », « BTB.DB.B », « BTB.DB.C », « BTB.DB.D, » « BTB.DB.E » Legal counsel De Grandpré Chait 1000, De la Gauchetière West, suite 2900 Montreal, QC H3B 4W5 Annual meeting of unitholders June 12th, 2012 11: 00 a.m. VIP Center 1 000 de la Gauchetière Montreal, QC H3B 4W5 Transfer Agent Computershare trust company of Canada 1500, rue University, suite 700 Montreal (Québec) Canada H3A 3S8 T 514-982-7555 T Toll free: 1-800-564-6253 F 514 982-7850 E service@computershare.com Taxability of distributions In 2012, for all Canadian unitholders, the distributions are fiscally treated as follow: • • Other revenues : 0% Fiscal Deferral : 100% Unitholder distribution reinvestment plan BTB Real Estate Investment trust offers a distribution reinvestment plan to unitholders whereby the participants may elect to have their monthly cash distribution rein- vested in additional units of BTB at a price based on the weighted average price for BTB’s Units on the Toronto Stock Exchange for the five trading days immediately preceding the distribution date, discounted by 5%. For further information about the DRIP, please refer to the Investors rebtion section of our website at www.btbreit.com or contact the Plan agent: Computershare Trust Com- pany of Canada. 98 

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