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Starwood Property TrustBTB Real Estate Investment Trust Annual Report 2013 Space for growth Profile BTB is a real estate investment trust listed on the Toronto Stock Exchange. BTB owns and manages a portfolio of 69 commercial, industrial and office properties totalling approximately 4.6 million square feet, predominantly situated in and around Montréal, Québec City and Ottawa. Since the Trust’s inception in 2006, its assets have experienced an average annual growth of $100 million and its total assets now stand at $546 million, making it the second largest real estate investment trust in Québec. BTB’s primary objective is to maximize total return for unitholders by: • generating stable monthly cash distributions that are reliable and fiscally beneficial; • growing the Trust’s assets through internal growth and acquisition strategies in order to increase distributable income and therefore fund distributions; • managing assets internally in a centralized and controlled way, thereby reducing operating fees, management fees and rental costs; • optimize the value of assets through dynamic and responsible management of its properties in order to maximize the long-term value of its units. Table of contents 1 Highlights 12 Message from the Chairman of the Board of Trustees 14 Message from the President and Chief Executive Officer 17 Executive Team 19 Our Properties 21 Management Discussion and Analysis 81 Audited Consolidated Financial Statements 125 Corporate Information 126 Unitholder Information 2 BTB Rapport annuel 2013 Highlights 62% 32% 31% Increase in distributable income Increase in rental income Increase in net operating income $546M Total assets 69 4.6M 92% Number of properties Number of square feet Occupancy rate Evolution of operating revenues at December 31st, 2013 Evolution of net operating income at December 31st, 2013 (in thousands of dollars) (in thousands of dollars) 2008 2009 2010 201 1 201 2 201 3 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 27,906 30,325 34,595 41 ,459 48,1 1 8 63,435 2008 2009 2010 201 1 201 2 201 3 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 15,971 17,509 19,357 22,122 26,996 35,336 8 0 0 2 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 3 1 0 2 8 0 0 2 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 3 1 0 2 BTB Annual Report 2013 1 Highlights 1001 Sherbrooke Street East, Montreal 50 St-Charles Street West, Longueuil Evolution of yearly distribution payments at December 31st Evolution of leasable area at December 31st (in thousands of dollars) (in thousands square feet) 2008 2009 2010 201 1 201 2 201 3 15,000 12,000 9,000 6,000 3,000 0 3,888 3,813 2,684 5,026 7,805 12, 610 2008 2009 2010 201 1 201 2 201 3 2,269 2,236 2,866 3,272 4,341 4,580 5,000 4,000 3,000 2,000 1,000 0 8 0 0 2 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 3 1 0 2 8 0 0 2 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 3 1 0 2 BTB Annual Report 2013 2 Highlights Édifice Lombard, 915 Pierre-Bertrand Blvd, Quebec 1400-1440 Antonio-Barbeau Street, Montreal Breakdown of portfolio by geographical region at December 31st, 2013 Breakdown by asset type at December 31st, 2013 (per leasable area) (per leasable area) Greater Quebec city area Island of Montreal Toronto region Ottawa region South shore of Montreal Laval / North shore of Montreal Sherbrooke Total 26% 21% 4% 16% 15% 12% 6% 100% Mixed-use Office Retail Industrial Total . c n I s m r a F a f u L f o y s e t r u o C : o t o h P 21% 32% 14% 33% 100% BTB Annual Report 2013 3 6 BTB Rapport annuel 2013 Highlights “Behind our success are highly competent men and women who, through their commitment, have made us into a major property owner in eastern Canada.” Michel Léonard President and Chief Executive Officer Previous page: 1001 Sherbrooke Street East, Montreal BTB Annual Report 2013 5 Highlights Since the Trust’s inception in 2006, its assets have experienced average annual growth of $100 million and total assets now stand at $546 million, making it the second largest real estate investment trust in Québec. s e r è i v i R - s i o r T l , t e e r t S e a y o R 0 0 5 1 : e g a p t x e N BTB Annual Report 2013 6 9 BTB Rapport annuel 2013 10 BTB Rapport annuel 2013 Highlights In 2013, BTB’s seasoned team iden- tified opportunities leading to the acquisition of four industrial properties and one commercial property. At a total cost of $30 million, these acquisitions added 257,000 square feet to our leasable area. Previous page: 1400-1440 Antonio-Barbeau Street, Montreal. Photo: Courtesy of Lufa Farms Inc. BTB Annual Report 2013 9 Highlights BTB owns and manages a portfolio of 69 commercial, industrial and office properties totalling approxima- tely 4.6 million square feet of leasable area, predominantly in and around Montréal, Québec City and Ottawa. 245 Stafford Road West, Ottawa Next page from top to bottom: Place d’affaires Lebourgneuf, Phase II, 6700 Pierre-Bertrand Blvd, Quebec – 5810 Sherbrooke Street East, Montreal BTB Annual Report 2013 10 13 BTB Rapport annuel 2013 Message from the Chairman of the Board of Trustees “These performance indicators reflect the quality and efficiency of BTB’s team.” Staying the course Again in 2013, BTB delivered a strong performance. The Trust pursued its strategy and targeted acquisitions in its geographical areas and meet its criteria favoring stable and sustainable financial performance for investors. BTB now owns 4.6 million square feet of properties and its total assets now stands at more than $546 million, making it the second largest real estate investment trust in the province of Québec. At the end of the last fiscal year, distributions to unitholders totaled $10.4 million, an increase of 36% compared to our 2012 results, and our payout ratio was below 83%, a 16% improvement over 2012. BTB’s unitholders’ equity totals more than $153 million. Based on the number of units outstanding at December 31, 2013 (28.3 million), the book value of BTB’s units is $5.39 per unit. These performance indicators reflect the quality and efficiency of BTB’s team. The members of the Board of Trustees join me in recognizing the contribution of the team, whose vision and extensive experience have created even more value for our unitholders. The Trust continues to prioritize good relationships with its clientele of more than 650 tenants. Its properties are well maintained and functional and have an occupancy rate of 92%. Through ongoing attention to client needs, BTB has built productive long-term relationships with its tenants. BTB Annual Report 2013 12 Message from the Chairman of the Board of Trustees With year after year of sustained growth, BTB continues to expand and is steadily moving towards its goal of $1 billion of total assets within the next four years, without losing sight of its objective of growing profitably. We wish to thank our unitholders for their confidence and I confirm that we will continue to create value for them. All members of the BTB team—trustees, officers and employees—work together to grow our business, which started from scratch in 2006, and has since become a major player in the Canadian real estate landscape. Jocelyn Proteau Chairman of the Board of Trustees BTB Annual Report 2013 13 Message from the President and Chief Executive Officer “We are proud to announce an overall improve- ment in BTB’s results and performance indicators, resulting in an appreciable 62% increase of net income.” Growing together The strength of BTB’s team shone through once again in 2013. Behind our success are highly competent men and women who, through their commitment, have propelled us into a major property owner in eastern Canada. Performance and growth are the core of our actions and our results prove it. Always mindful of unitholders’ interests and true to our values of integrity, respect and service quality, we surpassed our goals and reached total revenues of $64 million. Also we are proud to announce an overall improvement in BTB’s results and performance indicators, resulting in an appreciable 62% increase of net income, a significant improvement over 2012. Compared to last year, our rental income and net operating income were up by 32% and by 31%, respectively. Throughout the fiscal year, distributable income exceeded distributions with a payout ratio of 82% for the year, attesting to our improvement of profitability. Funds from operations increased 79% and adjusted funds from operations grew by 62%. Responsible debt management The upward pressure of Canadian and U.S. long-term interest rates in 2013 prompted a closer look at our debt management strategy. Although the securities market of Canadian real estate companies and trusts were not immune to this volatility, I am proud to announce that at year-end, BTB ranked among the five best real estate entities in Canada for the performance of its units. Our investors will be pleased to hear that the anticipated rate hikes will not materially impact on BTB’s short-term results. During the coming year, we will renew more than $60 million in mortgages maturing in 2014. We already begun negotiations to refinance these loans and are confident we will reduce significantly the interest expense related to these loans. By way of example, in February 2014, we finalized a refinancing of a $29 million mortgage at a rate of 3.34% for a 5-year term. This refinancing will translate into annual interest savings of more than $500,000 over the next five years. We anticipate the remainder of the refinancings for 2014 will also contribute to reduce our interest expense. BTB Annual Report 2013 14 Message from the President and Chief Executive Officer Strategic acquisitions The key to our success is our ability to critically assess opportunities and confidently plan our strategy for the future. In 2013, BTB’s seasoned team identified opportunities leading to the acquisition of four industrial properties and one commercial property. At a total cost of $30 million, these acquisitions added 257,000 square feet to our total leasable area. Throughout the year, we continued to seek property acquisition opportunities based on strict criteria, in line with our acquisition policy. We understand that smart and strategic growth will ensure a strong future for BTB. I have tremendous confidence in our team of principled and responsible professionals who, since our inception in 2006, have demonstrated vision and leadership. I also wish to acknowledge the invaluable contribution of the members of our Board of Trustees, who guide our actions and support our development initiatives. We are fully equipped to pursue our goal to achieve $1 billion in assets within the next few years. Working to develop BTB’s future means growing together. Michel Léonard President and CEO BTB Annual Report 2013 15 “Our goal is to achieve $1 billion in assets by 2018. There are tremendous opportunities for growth and we are going to tap into them.” Michel Léonard President and Chief Executive Officer BTB Rapport annuel 2013 Executive Team From left to right: Frédéric Seigneur, Dominic Gilbert, Michel Léonard et Benoit Cyr. Michel Léonard President and Chief Executive Officer Benoit Cyr, CPA, CA, MBA Vice President and Chief Financial Officer Dominic Gilbert, B.A.A. Vice President, Property Management Frédéric Seigneur Vice President, Leasing BTB Annual Report 2013 17 20 BTB Rapport annuel 2013 Our Properties Portfolio listing Island of Montreal 7205-7235 St-Jacques Street West, Montreal(3) 1400-1440 Antonio-Barbeau Street, Montreal 5810 and 5878-5882 Sherbrooke Street East, Montreal(3) 7001-7035 St-Laurent Blvd., Montreal 2212-2226 Dollard Street, Montreal 1001 Sherbrooke Street East, Montreal 2153-2155 Crescent Street, Montreal Quebec City Area Place d’Affaires Lebourgneuf, Phase I 6655 Pierre-Bertrand Blvd., Quebec Centre d’affaires Le Mesnil 1170 Lebourgneuf Blvd, Quebec Complexe Lebourgneuf 825 Lebourgneuf Blvd, Quebec Place d’affaires Lebourgneuf, Phase II 550-560 Henri-Bourassa Blvd, Montreal 6700 Pierre-Bertrand Blvd, Quebec 3627-3645 des Sources Blvd., Dollard-des-Ormeaux Édifice Lombard 3761-3781 des Sources Blvd., Dollard-des-Ormeaux 11600-11800 De Salaberry Blvd, Dollard-des-Ormeaux(5) 1863-1865 Trans-Canada Highway, Dorval 1325 Hymus Blvd, Dorval 5600 Côte-de-Liesse, Mont-Royal 4105 Sartelon Street, St-Laurent 909-915 Pierre-Bertrand Blvd, Quebec Complexe Lebourgneuf, Phase II 815 Lebourgneuf Blvd, Quebec(1) Edifice Brinks 191 D’Amsterdam Street, St-Augustin-de-Desmaures 1100 and 1108-1136 St-Joseph Blvd, Drummondville 208-244 Migneron Street and 3400-3410 Complexe de Léry Griffith Street, St-Laurent 7777 Trans-Canada Highway, St-Laurent 2265-2665-2673 et 2681 Côte Saint-Charles, Saint-Lazare Laval/North Shore 2900 Jacques-Bureau Street, Laval 1125-1135 St-Martin Blvd. West, Laval 2004-2016 René-Laennec Blvd., Laval 4535 Louis B. Mayer Street, Laval 3695 Des Laurentides (Highway-15), Laval 81-83 Turgeon Street, Ste-Thérèse 5791 Laurier Blvd., Terrebonne(2) 2175 Des Entreprises Blvd, Terrebonne 505 Des Forges Street and 1500 Royale Street, Trois-Rivières(3) 665-669 Thibeau Blvd, Trois-Rivières 3885 Harvey Blvd, Saguenay Promenades St-Noël 100 1st Street West, Thetford Mines Sherbrooke 2865-2885 De Portland Blvd., Sherbrooke 1635-1645 King Street East and 150-170 Duplessis Road, Sherbrooke(4) 1640-1650 and 1645 King Street West, Sherbrooke(3) Les terrasses 777 2205-2225 Des Entreprises Blvd, Terrebonne 747-805 King Street East, Sherbrooke South Shore of Montreal 4890-4898 Taschereau Blvd., Brossard 2340 Lapinière Blvd, Brossard 100 Montarville Blvd., Boucherville 204 De Montarville Blvd, Boucherville 32 St-Charles Street West, Longueuil 50 St-Charles Street West, Longueuil 85, St-Charles Street West, Longueuil 3036-3094 De Chambly Road, Longueuil(3) 2111 Fernand-Lafontaine Blvd, Longueuil 2350 Chemin du Lac, Longueuil 1400 Marie-Victorin Street, St-Bruno Halles St-Jean 145 St-Joseph Blvd, St-Jean-sur-Richelieu Le Bougainvillier 315-325 MacDonald Street, St-Jean-sur-Richelieu 30-66 Jacques-Cartier Blvd Nord, Sherbrooke 3705 Industrial Blvd, Sherbrooke 2059 René-Patenaude Street, Magog GTA 311 Ingersoll Street, Ingersoll Ottawa Area 80 Aberdeen Street, Ottawa 245 Stafford Road West, Ottawa 1-9 and 10 Brewer Hunt Way and 21-31 Richardson Side Rd, Ottawa 7 and 9 Montclair Blvd, Gatineau(2)(3) 705 Boundary Road, Cornwall 725 Boundary Road, Cornwall 805 Boundary Road, Cornwall 2901 and 2905 Marleau Avenue, Cornwall(3) (1) BTB has a 75% interest in that property. (2) BTB has a 50% interest in that property. (3) Comprises two income-producing properties. (4) Comprises three income-producing properties (5) Comprises four income-producing properties BTB Annual Report 2013 19 Management Discussion and Analysis Quarter ended December 31, 2013 23 BTB Rapport annuel 2013 Management Discussion and Analysis Table of Contents 23 23 24 25 25 26 27 28 29 29 30 31 39 42 43 45 46 47 48 49 52 61 61 62 63 72 74 79 Introduction Forward-Looking Statements Caveat Non-IFRS Financial Measures The Trust Objectives and Business Strategies Highlights of the Fourth Quarter 2013 Highlights of Fiscal 2013 Selected Financial Information Selected Annual 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 Use of proceeds of public offerings - fiscal 2013 Income Taxes Taxation of Unitholders Summary of Significant Accounting Policies and Estimates New Accounting Policies Risks and Uncertainties Disclosure Controls and Procedures and Internal Control over Financial Reporting BTB Annual Report 2013 22 Management Discussion and Analysis 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, 2013, 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 25, 2014 should be read together with the audited annual consolidated financial statements and accompanying notes for the years ended December 31, 2013 and 2012. It discusses any significant information available up to the date of this MD&A. The Trust’s consolidated annual 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 the years ended December 31, 2013 and 2012. 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 2013 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. BTB Annual Report 2013 23 Management Discussion and Analysis 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 conditions 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, except as required under applicable securities regulations. Non-IFRS Financial Measures 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. These measures and net operating income 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. BTB Annual Report 2013 24 Management Discussion and Analysis 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 69 commercial, offices 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 C, D and E convertible debentures are traded on the Toronto Stock Exchange under the symbols “BTB.UN”, “BTB.DB.C”, “BTB.DB.D” and “BTB.DB.E”, respectively. Most of the Trust’s properties are managed internally, with 51 of the Trust’s 69 properties held to date entirely managed by the Trust’s employees. Management’s objective is to resume, when favourable circumstances prevail, internal management 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 a summary of the property portfolio: As at December 31, 2013(1) Number of properties 69 Leasable area (sq. ft.) 4,580,271 Fair value (thousands of $) 529,432 (1) These figures include a 50% interest in a 17,114 square-foot building in a Montréal suburb, a 75% interest in a 140,870 square-foot building in Québec City and a 50% interest in two buildings totalling 74,941 square feet in Gatineau, Québec. BTB’s management is entirely internalized 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. Objectives and Business Strategies BTB’s primary objective is to maximize total returns to unitholders. Returns include cash distributions and long-term appreciation in the value of units. (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 distributable 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. BTB Annual Report 2013 25 Management Discussion and Analysis Highlights of the Fourth Quarter 2013 Increase 23% in rental income 20% in net operating income 58% in distributable income and 10% in distributable income per unit 77% in funds from operations (FFO) and 23% in FFO per unit 60% in adjusted funds from operations (AFFO) and 11% in AFFO per unit Improvement of its payout ratio from 91.0% to 78.9% of its occupancy rate from 91.7% to 91.9% of its average contractual interest rate on mortgages from 4.57% to 4.44% Leasing activities Strong leasing activity during the quarter with the conclusion of renewals for 125,000 square feet that had expired with a 9.8% increase in the average lease rate and the signing of leases with new tenants totalling 46,000 square feet, bringing the occupancy rate to almost 92%. Investing activities On October 30, 2013, the Trust acquired two industrial properties located in Longueuil, Québec and Sherbrooke, Québec and an office building located in Longueuil, Québec. The three buildings totaled 109,000 square feet in rentable area and are fully-leased to the engineering firm S.M. Group Inc. The total purchase price was $14 million. On December 1, 2013, the Trust acquired a residual 50% interest in a retail complex in Saint-Lazare, Québec for $2.5 million. BTB already owned a 50% interest in this complex, which is fully-leased to tenants that include Sobeys, Tim Horton and A&W. Financing activities Arrangement of a first-ranking mortgage financing in the amount of $9.1 million, bearing interest at an annual rate of 3.95% for a 5-year term, on three properties acquired on October 30, 2013. Assumption of a mortgage in the amount of $1.9 million, bearing interest at 3.93% and maturing in October 2016, on the property located in Saint-Lazare, Québec. Subsequent to year end Refinancing of two mortgage loans with outstanding balance totalling $25 million, at 5.74%, on seven properties by concluding six new loans totalling $26.4 million at a rate of 3.34% for a 5-year term, generating annual savings on interests expenses of more than $0.5 million. BTB Annual Report 2013 26 Management Discussion and Analysis Highlights of Fiscal 2013 Increase 32% in rental income 31% in net operating income 62% in distributable income and 17% in distributable income per unit 79% in funds from operations (FFO) and 30% in FFO per unit 68% in adjusted funds from operations (AFFO) and 18% in AFFO per unit Improvement in payout ratio from 98.1% to 82.6% in occupancy rate from 91.7% to 91.9% in average contractual interest rate on mortgages from 4.69% to 4.44% BTB Annual Report 2013 27 Management Discussion and Analysis Selected Financial Information Since the beginning of its real estate operations in October 2006, the Trust has acquired and owns 69 properties generating, on an annualized basis, revenues of more than $64 million. The following table presents highlights and selected financial information for the quarters and years ended December 31, 2013 and 2012: Periods ended December 31 (in thousands of dollars, except for ratios and per unit data) Reference Financial information Rental income Net operating income Net operating income of same-property portfolio Net income & comprehensive income Recurring distributable income Distributions Recurring funds from operations (FFO) Recurring adjusted funds from operations (AFFO) Total assets Investment properties Mortgage loans payable Convertible debentures Debt ratio – excluding convertible debentures Weighted average interest rate on mortgage debt Unitholders’ equity Market capitalization Financial information per unit Units outstanding (000) Weighted average number of units outstanding (000) Net income and comprehensive income Recurring distributable income Payout ratio Cash payout ratio Recurring FFO Recurring AFFO Unitholders’ equity Tax on distributions Revenue Tax deferral Operational information Number of properties Leasable area (thousands of sq. ft.) Occupancy rate Increase in average lease renewal rate Page 31 Page 33 Page 33 Page 39 Page 40 Page 41 Page 42 Page 43 Page 47 Page 48 Page 52 Page 54 Page 57 Page 36 Page 58 Page 59 Page 39 Page 41 Page 41 Page 41 Page 42 Page 44 Page 62 Page 62 Page 48 Page 48 Page 50 Page 49 Quarter 2013 $ 16,348 9,061 6,340 7,732 3,581 2,827 3,490 3,049 2012 $ 13,316 7,551 6,314 5,603 2,273 2,068 1,975 1,905 28,292 27.3¢ 12.7¢ 78.9% 70.7% 12.3¢ 10.8¢ 19,723 28.4¢ 11.5¢ 91.0% 83.4% 10.0¢ 9.7¢ 9.8% 7.8% Year 2013 $ 63,435 35,336 25,052 18,349 12,610 10,412 11,632 10,462 546,559 529,432 313,816 63,929 57.4% 4.44% 152,592 126,332 28,326 25,736 71.3¢ 49.0¢ 82.6% 75.3% 45.2¢ 40.7¢ 5.39 2012 $ 48,118 26,996 24,457 17,967 7,805 7,656 6,493 6,224 504,927 488,521 296,523 54,272 61.6% 4.69% 124,778 101,353 23,792 18,669 96.2¢ 41.8¢ 98.1% 90.6% 34.8¢ 34.5¢ 5.24 0.0% 100.0% 0.0% 100.0% 69 4,580 91.9% 7.7% 65 4,341 91.7% 6.9% BTB Annual Report 2013 28 Management Discussion and Analysis Selected Annual Information Years ended December 31 (in thousands of dollars, except for ratios and per unit data) Rental income Net operating income(1) Fair value adjustment on investment properties Net income FFO(2) AFFO(3) Distributions Total assets Long-term debt Financial information per unit Net income FFO(2) AFFO(3) Distribution Payout ratio(4) 2013 $ 63,435 35,336 8,375 18,349 11,632 10,447 10,412 546,559 377,745 71.3¢ 45.2¢ 40.6¢ 40.0¢ 82.6% 2012 $ 48,118 26,996 7,711 17,967 6,493 6,499 7,656 504,927 350,795 96.2¢ 34.8¢ 34.5¢ 40.0¢ 98.1% 2011 $ 41,459 22,112 8,648 7,450 3,165 3,911 5,631 358,938 265,083 54.4¢ 23.1¢ 28.6¢ 40.0¢ 112.1% (1) Defined as rental income from investment properties less operating expenses. (2) See “Funds from operations” on page 24 for a definition and reconciliation to net income. (3) See “Ajusted Funds from operations” on page 25 for a definition and reconciliation to FFO and net income. (4) Distributable distributions divided by distributable income. Real Estate Portfolio BTB owns 69 properties which have a fair value of $529 million representing a total leasable area of approximately 4.6 million square feet. A concise description of the properties owned can be found in the Trust’s 2013 Annual Information Form available at www.sedar.com. BTB Annual Report 2013 29 Management Discussion and Analysis 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 expenditures 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 using its operating revenues; The occupancy rate, which provides an indication of the optimization of rental space and the potential revenue gain from the Trust’s property portfolio. More detailed definitions and analyses of each of these indicators are provided in the appropriate sections. BTB Annual Report 2013 30 Management Discussion and Analysis Operating Results The table below summarizes financial results for the quarters and years ended December 31, 2013 and 2012. The table should be read in conjunction with our annual consolidated financial statements and the notes thereto. Periods ended December 31 (in thousands of dollars, except for ratios and per unit data) Rental income Operating expenses Net operating income Financial income Financial expenses Trust administration expenses Expenses for abandoned projects Fair value adjustment on investment properties Net income and comprehensive income Reference Page 31 Page 32 Page 33 Page 35 Page 37 Page 37 Page 37 Page 39 Quarter Year 2013 $ 16,348 7,287 9,061 (19) 5,018 824 26 (4,520) 7,732 2012 $ 13,316 5,765 7,551 (36) 3,824 924 — (2,764) 5,603 2013 $ 63,435 28,099 35,336 (105) 21,634 3,715 118 (8,375) 18,349 2012 $ 48,118 21,122 26,996 (141) 13,362 3,511 8 (7,711) 17,967 Same-property portfolio The same-property portfolio includes all the properties owned by BTB as at January 1, 2012, but does not include the financial spin-offs of disposals, acquisitions and developments completed in 2012 and 2013. Rental income BTB actively acquired properties in 2012 and 2013. Due to this acquisition activity as well as internal growth from the same-property portfolio, rental income for the fourth quarter and fiscal 2013 increased by $3,032 or 22.8% and $15,317 or 31.8%, respectively. Rental income includes all amounts earned from tenants related to lease agreements, including basic rent and other service charges for parking and storage, lease termination revenues, 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 fiscal 2013, straight-line rent adjustments of $327 (2012: $281) and $866 (2012: $661), respectively, were recorded. BTB Annual Report 2013 31 Management Discussion and Analysis In the fourth quarter and fiscal 2013, BTB recorded amortization of $407 (2012: $355) and $1,480 (2012: $1,240), respectively, as a reduction in rental income, which represents amortization of lease incentives afforded to lessees. The following table provides a reconciliation of rental income on the basis of in-place leases and rental income from investment properties. 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 Rental income from investment properties Quarter Year 2013 $ 16,428 327 (407) 16,348 2012 $ 13,390 281 (355) 13,316 2013 $ 64,049 866 (1,480) 63,435 2012 $ 48,697 661 (1,240) 48,118 Income from the same-property portfolio increased 1.3% in the fourth quarter ended December 31, 2013 and 3.2% in fiscal 2013, as shown in the table below. Periods ended December 31 (in thousands of dollars) Same-property portfolio Acquisitions, disposals and development Rental income 2013 $ 11,603 4,745 16,348 Quarter 2012 $ 11,453 1,863 13,316 % 1.3 n/a 22.8 2013 $ 45,793 17,642 63,435 Year 2012 $ 44,382 3,736 48,118 % 3.2 n/a 31.8 During the fourth quarter of 2013, the “1863-1865 Transcanadienne” property in Dorval became partially vacant. It will become fully vacant in the first quarter of 2014 following management’s decision to redevelop and repurpose this industrial property. Investments of approximately $1 million are planned and the property will be presented as a property under redevelopment as of January 1, 2014. After extracting this property from the same-property portfolio, rental income from the same-property portfolio would have increased 1.7% for the fourth quarter and 3.3% for fiscal 2013. Operating expenses 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 BTB Annual Report 2013 32 Management Discussion and Analysis expenses. BTB pays particular attention to compliance with existing leases and the recovery of its properties’ operating expenses. The increase in operating expenses of 26.4% between the fourth quarter of 2012 and the fourth quarter of 2013, and 33.0% for fiscal 2013 compared to the previous year, was mainly due to 2012 and 2013 acquisitions. Operating expenses of the same-property portfolio increased 2.4% during the quarter and 4.1% for the year, as shown in the table below. Periods ended December 31 (in thousands of dollars) Same-property portfolio Acquisitions, disposals and development Operating expenses Quarter 2012 $ 5,140 625 5,765 2013 $ 5,263 2,024 7,287 % 2.4 n/a 26.4 2013 $ 20,741 7,358 28,099 Year 2012 $ 19,926 1,196 21,122 % 4.1 n/a 33.0 The table below shows the breakdown of operating expenses for the periods ended December 31, 2013 and 2012: 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 2013 $ 2,837 4,450 7,287 44.6 2012 $ 2,225 3,540 5,765 43.3 2013 $ 10,370 17,729 28,099 44.3 2012 $ 7,710 13,412 21,122 43.9 The nature of acquisitions completed by the Trust at the end of 2012 explains the percentage increase in operating expenses in relation to rental income. In December 2012, the Trust acquired two properties with a higher rate of operating expenses as a percentage of rental income than the portfolio average, which contributed to the increase in the ratio of 1.3% for the quarter and 0.4% for the cumulative period. Net operating income Net operating income increased 20.0% for the fourth quarter of 2013 compared to 2012 and 30.9% for fiscal 2013 compared to 2012. Net operating income of the same-property portfolio was up 0.4% for the fourth quarter of 2013 compared to the fourth quarter of 2012 and 2.4% for fiscal 2013 compared to 2012. As mentioned above, management decided to redevelop and repurpose the “1863-1865 Transcanadienne” property in Dorval. As of the first quarter of 2014, this property will be presented as a property under redevelopment. After extracting this property from the same-property portfolio, net BTB Annual Report 2013 33 Management Discussion and Analysis operating income from the same-property portfolio would have increased 1.3% for the fourth quarter and 2.7% for fiscal 2013. Net operating income was 55.4% of rental income for the quarter ended December 31, 2013 (2012: 56.7%), and 55.7% for fiscal 2013 (2012: 56.1%). Periods ended December 31 (in thousands of dollars) Same-property portfolio Acquisitions, disposals and development Net operating income % of rental income Quarter 2012 $ 6,314 1,237 7,551 56.7 2013 $ 6,340 2,721 9,061 55.4 % 0.4 n/a 20.0 2013 $ 25,052 10,284 35,336 55.7 Year 2012 $ 24,457 2,539 26,996 56.1 % 2.4 n/a 30.9 Net operating income is reduced by non-cash rental income adjustments. Before adjustments, net operating income was as follows: Periods ended December 31 (in thousands of dollars) Net operating income Straight-line rental income adjustments Adjustment related to amortization of lease Quarter 2012 $ 7,551 (281) 2013 $ 9,061 (327) % 20.0 n/a 2013 $ 35,336 (866) Year 2012 $ 26,996 (661) % 30.9 n/a incentives 407 355 n/a 1,480 1,240 n/a Net operating income plus or less rental income adjustments 9,141 7,625 19.9 35,950 27,575 30.4 % of rental income on the basis of in- place leases 55.6 56.9 56.1 56.6 Net operating income is used in the real estate industry to measure operational performance. BTB defines it as rental income from properties, less operating expenses of investment 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. BTB Annual Report 2013 34 Management Discussion and Analysis Financial expenses Financial expenses arise from the following loans and financings: Mortgage loans payable contracted or assumed totalling approximately $314 million as at December 31, 2013, compared to $296 million as at December 31, 2012. 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, D and E convertible debentures. Series E debentures in the amount of $23 million were issued on February 20, 2013. Series B debentures in the amount of $13 million were repaid on March 31, 2013. Operating and acquisition lines of credit used as needed, which allowed primarily for the acquisition of accretive properties during fiscal 2013. The acquisition line of credit in an authorized amount of $15 million was repaid in full on July 30, 2013 and was not used in the last quarter of 2013. 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. 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 expenses Accretion of effective interest Accretion of non-derivative liability component of convertible debentures Financial expenses before following items: Fair value adjustment on warrants Fair value adjustment on derivative financial instruments (debenture conversion options and interest rate swaps) Financial expenses Quarter Year 2013 $ 3,517 1,274 — 18 4,809 223 132 5,164 — 2012 $ 3,195 1,154 88 25 4,462 440 155 5,057 — (146) 5,018 (1,233) 3,824 2013 $ 13,861 5,146 767 54 19,828 1,142 551 21,521 — 113 21,634 2012 $ 11,822 4,622 88 106 16,638 1,412 598 18,648 43 (5,329) 13,362 BTB Annual Report 2013 35 Management Discussion and Analysis Before recognition of fair value adjustments on derivative financial instruments (debenture conversion options, warrants and interest rate swaps), financial expenses increased by $107 during the fourth quarter of 2013 compared to the same quarter in 2012, and by $2,873 for fiscal 2013, due to the financing and assumption of mortgages on acquired properties and the issuance of Series E convertible debentures in February 2013. The issuance of Series E debentures on February 20, 2013 was used to repay Series B debentures in the amount of $13 million on March 31, 2013. During the first quarter of 2013, the Trust incurred 40 days of double interest expenses on convertible debentures between the time of the Series E issuance and Series B repayment. This expense, net of interest income, is estimated at $107. As shown by the following table, interest expense on mortgage loans payable in the same-property portfolio decreased by 14.7% in the fourth quarter of 2013 and 12.3% for fiscal 2013 compared to the same period of 2012, due to the refinancing of loans that matured in the last eight quarters at more advantageous rates, despite increased financing on certain properties. Periods ended December 31 (in thousands of dollars) Same-property portfolio Acquisitions and development Quarter 2012 $ 2,842 353 3,195 2013 $ 2,425 1,092 3,517 % (14.7) n/a 10.1 2013 $ 9,748 4,113 13,861 Year 2012 $ 11,117 705 11,822 % (12.3) n/a 17.2 Financial expenses can be allocated among interest expenses amounting to $4,809 for the quarter ($4,462 in 2012) and $19,828 for the year ($16,638 in 2012) and non-monetary items. Non-monetary items include fair value adjustments on derivative financial instruments and warrants in net credit positions of $146 for the quarter ($1,233 in 2012) and $113 for the year (credit position of $5,329 in 2012). 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, 2013, the average weighted contractual rate of interest on mortgage loans payable was 4.44%, down 13 basis points from September 30, 2013 and 25 basis points from December 31, 2012. These decreases resulted from favourable interest rates on mortgage financing for properties acquired during fiscal 2012 and 2013 and on refinancings carried out. For 21 consecutive quarters, the weighted average interest rate has remained stable or declined. Interest rates on first-ranking mortgage financings range from 2.55% to 6.80% as at December 31, 2013. BTB Annual Report 2013 36 Management Discussion and Analysis Trust administration expenses Trust administration expenses include administrative costs such as payroll expenses and professional fees associated with executive and administrative staff, the compensation plan for trustees, legal and auditing services, expenses related to listed fund status, insurance costs and office expenses. These administrative expenses were down 8.0% for the fourth quarter of 2013 compared to the same period in 2012 and 2.2% for the year. Lastly, Trust administration expenses include amortization of the head office building and property, plant and equipment, unit-based compensation, a non-monetary item that affects the volatility of administrative expenses from period to period, bad debts and related legal fees. Periods ended December 31 (in thousands of dollars) Administrative expenses Amortization Unit-based compensation Trust administration expenses before following item: Bad debts and related legal fees Trust administration expenses Quarter 2013 2012 $ 738 30 47 815 9 824 $ 802 25 (30) 797 127 924 Year 2013 $ 3,146 114 90 3,350 365 3,715 2012 $ 3,217 90 (76) 3,231 280 3,511 Expenses for abandoned projects The Trust incurred analysis and due diligence expenses for property acquisition projects. Based on the results of these analyses, the Trust decided not to go through with the acquisitions. Expenses of $118 (2012: $8) were incurred in fiscal 2013. 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, the capitalized net operating income method or the comparable 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. BTB Annual Report 2013 37 Management Discussion and Analysis 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. As part of recent or potential refinancings, the Trust subjected the applicable properties to independent external valuations. As a result, management determined that an increase in value of $4,520 for the quarter ($2,764 in 2012) and $8,375 for the year (2012: $7,711) was required in order to adequately reflect the fair value of the portfolio held. BTB has estimated that a 0.25% variation in the overall discount rate applied to the overall portfolio would change the fair value of the investment properties by approximately $10.1 million. The following tables highlight the significant assumptions used in the modeling process for both internal and external appraisals: As at December 31, 2013 Capitalization rate Terminal capitalization rate Discount rate As at December 31, 2012 Capitalization rate Terminal capitalization rate Discount rate Commercial Office Industrial General purpose 6.25% - 10.00% 6.50% - 8.25% 7.25% - 9.00% 6.75% - 10.25% 6.50% - 9.25% 7.50% - 9.75% 6.50% - 10.50% 7.00% - 10.50% 7.25% - 10.75% 7.00% - 8.25% 7.25% - 8.50% 8.25% - 9.25% 7.00% - 12.00% 7.25% - 8.75 % 7.25% - 9.75% 6.50% - 10.50% 6.50% - 9.50% 7.50% - 9.25% 7.00% - 9.75% 7.00% - 11.50% 7.00% - 10.75% 7.25% - 8.75% 7.50% - 9.25% 8.25% - 9.00% The weighted average capitalization rate for the entire portfolio as at December 31, 2013 was 7.51% (2012: 7.55%), down three basis points since September 30, 2013, and down four basis points from a year earlier. BTB Annual Report 2013 38 Management Discussion and Analysis Net income and comprehensive income BTB generated net income of $7.7 million for the fourth quarter of 2013 and $18.3 million for the year, up $2.1 million from the fourth quarter of 2012 and $0.4 million for the year. Periods ended December 31 (in thousands of dollars, except for per unit data) Net income and comprehensive income Per unit Quarter Year 2013 $ 7,732 27.3¢ 2012 $ 5,603 28.4¢ 2013 $ 18,349 71.3¢ 2012 $ 17,967 96.2¢ Net income and comprehensive income fluctuate from one quarter and year to another based on certain highly volatile monetary items. Consequently, the fair value of financial instruments and the fair value of the property portfolio fluctuate based on the stock market volatility of BTB units, the forward interest rate curve and the discount rate. The following table presents income and comprehensive income before these volatile non-monetary items. Periods ended December 31 (in thousands of dollars, except for per unit data) Net income and comprehensive income Volatile non-monetary items Net income and comprehensive income before volatile non- monetary items Per unit Quarter Year 2013 $ 7,732 (4,666) 3,066 10.8¢ 2012 $ 5,603 (3,997) 1,606 8.1¢ 2013 $ 18,349 (8,262) 10,087 39.2¢ 2012 $ 17,967 (12,997) 4,970 26.6¢ This table shows an increase of more than 33% in quarterly net income per unit before above- mentioned items and more than 47% for the year. Distributable Income and Distributions The notion of “distributable income” does not constitute financial information as defined by IFRS. It is, however, a measurement 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. BTB Annual Report 2013 39 Management Discussion and Analysis The following table shows the calculation of distributable income: Periods ended December 31 (in thousands of dollars) Net income and comprehensive income (IFRS) - Fair value adjustment on investment properties + Amortization of an investment property and other property and equipment ± Unit-based compensation expense + Accretion of the liability component of convertible debentures ± Fair value adjustment on warrants ± Fair value adjustment on derivative financial instruments + Amortization of lease incentives - Straight-line rental income adjustment + Accretion of effective interest Distributable income Non-recurring item Toronto Stock Exchange listing fees Recurring distributable income Quarter Year 2013 $ 7,732 (4,520) 33 47 132 — (146) 407 (327) 223 3,581 — 3,581 2012 $ 5,603 (2,764) 28 (30) 155 — (1,233) 355 (281) 440 2,273 — 2,273 2013 $ 18,349 (8,375) 126 90 551 — 113 1,480 (866) 1,142 12,610 — 12,610 2012 $ 17,967 (7,711) 97 (76) 598 43 (5,329) 1,240 (661) 1,412 7,580 225 7,805 The following table shows the reconciliation of distributable income (non-IFRS measure) and cash flows from operating activities presented in the financial statements: Periods ended December 31 (in thousands of dollars) Cash flows from operating activities (IFRS) + Financial revenues Net change in operational items - Interest expense on mortgage loans payable - Interest expense on convertible debentures - Interest expense on acquisition line of credit - Other interest expenses Distributable income Year 2013 $ 32,168 105 165 (13,861) (5,146) (776) (45) 12,610 2012 $ 20,426 141 3,651 (11,822) (4,622) (87) (107) 7,580 BTB Annual Report 2013 40 Management Discussion and Analysis Distributions and per unit data Periods ended December 31 (in thousands of dollars, except for per unit data) Distributions Cash distributions Distributions reinvested under the distribution reinvestment plan Total distributions to unitholders Percentage of reinvested distributions Per unit data Recurring distributable income Distribution Payout ratio (1) Cash distribution ratio(2) Quarter 2013 $ 2012 $ Year 2013 $ 2012 $ 2,531 1,895 9,490 7,074 296 2,827 10.5% 12.7¢ 10.0¢ 78.9% 70.7% 173 2,068 8.4% 11.5¢ 10.0¢ 91.0% 83.4% 922 10,412 8.9% 49.0¢ 40.0¢ 82.6% 75.3% 582 7,656 7.6% 41.8¢ 40.0¢ 98.1% 90.6% (1) The payout ratio corresponds to total distributions divided by recurring distributable income. (2) The cash distribution ratio corresponds to cash distributions divided by recurring distributable income. Recurring distributable income for the fourth quarter increased by $1,308, from $2,273 to $3,581, between 2012 and 2013. Recurring distributable income for fiscal 2013 stood at $12,610, up $4,805 from 2012. Recurring distributable income per unit for the fourth quarter of 2013 stood at 12.7¢ per unit compared to 11.5¢ in 2012, and 49.0¢ for fiscal 2013 compared to 41.8¢ for fiscal 2012. Distributions to unitholders totalled 10.0¢ per issued unit for each quarter presented or 40.0¢ for the cumulative period. The payout ratio for recurring distributable income was 78.9% in the fourth quarter of 2013 compared to 91.0% in the fourth quarter of 2012 and 82.6% for fiscal 2013, compared to 98.1% in 2012, reflecting a surplus of distributable income over distributions in the last two years. In fiscal 2013, 8.9% of the distributions (2012: 7.6%) were reinvested under the distribution reinvestment plan implemented by BTB in 2011. More than $0.9 million (2012: $0.6 million) of the Trust’s cash was thereby preserved through unit conversions. BTB Annual Report 2013 41 Management Discussion and Analysis 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 derivative financial instruments 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. The following table provides a reconciliation of net income and comprehensive income established according to IFRS and FFO for the quarters and years ended December 31, 2013 and 2012: Periods ended December 31 (in thousands of dollars, except for per unit data) Net income and comprehensive income (IFRS) - Fair value adjustment on investment properties + Amortization of a property recognized at cost + Amortization of lease incentives + Fair value adjustment on derivative financial instruments + Fair value adjustment on warrants FFO Non-recurring item Toronto Stock Exchange listing fees Recurring FFO Per unit data FFO Recurring FFO Quarter Year 2013 $ 7,732 (4,520) 17 407 (146) — 3,490 — 3,490 12.3¢ 12.3¢ 2012 $ 5,603 (2,764) 14 355 (1,233) — 1,975 — 1,975 10.0¢ 10.0¢ 2013 $ 18,349 (8,375) 65 1,480 113 — 11,632 — 11,632 45.2¢ 45.2¢ 2012 $ 17,967 (7,711) 58 1,240 (5,329) 43 6,268 225 6,493 33.6¢ 34.8¢ BTB Annual Report 2013 42 Management Discussion and Analysis Recurring FFO increased by 76.7% for the fourth quarter of 2013 and 79.1% for the year compared with 2012, 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 12.3¢ in 2013 compared to 10.0¢ in 2012, a 23% increase. For the year, recurring FFO stood at $11,632 or 45.2¢ per unit for 2013 compared to $6,493 or 34.8¢ per unit in 2012, a per-unit increase of 29.9%. 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. Since 2013, the allocation for unrecoverable capital expenses is calculated on the basis of 2% of rental revenues. During fiscal 2012, the allocation was done based on 1.3% of income, explaining why the increase in FFO and AFFO per unit was smaller than for the other performance indicators in 2013. The Trust also deducts a provision for rental fees in the amount of approximately 20¢ per square foot on an annualized basis. Even though quarterly rental fee disbursements vary significantly from one quarter to another, management 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. BTB Annual Report 2013 43 Management Discussion and Analysis The following table provides a reconciliation of FFO and AFFO for the quarters and years ended December 31, 2013 and 2012: Periods ended December 31 (in thousands of dollars, except for per unit data) FFO - Straight-line rental income adjustment + Accretion of effective interest + Accretion of the liability component of convertible debentures + Amortization of other property and equipment ± Unit-based compensation expenses - Reserve for non-recoverable capital expenses - Reserve for rental fees AFFO Non-recurring item Toronto Stock Exchange listing fees Recurring AFFO Per unit data AFFO Recurring AFFO Quarter Year 2013 $ 3,490 (327) 223 132 17 47 (323) (210) 2012 $ 1,975 (281) 440 155 14 (30) (173) (195) 2013 $ 11,632 (866) 1,142 551 62 90 (1,264) (885) 2012 $ 6,268 (661) 1,412 598 39 (76) (626) (730) 3,049 1,905 10,462 6,224 — 3,049 10.8¢ 10.8¢ — 1,905 9.7¢ 9.7¢ — 10,462 40.7¢ 40.7¢ 225 6,449 33.3¢ 34.5¢ The increase of 60.1% in recurring AFFO for the fourth quarter of 2013 compared with the fourth quarter of 2012 and of 62.2% for fiscal 2013 compared to fiscal 2012 is due to acquisitions of income- producing properties and a drop in the average mortgage loan interest rate. Recurring AFFO per unit amounted to 10.8¢ compared with 9.7¢ in 2012 for the fourth quarter, an 11.3% increase. For the year, 2013 recurring AFFO totalled $10,462, or 40.7¢ per unit, compared to $6,449 or 34.5¢ per unit, a per-unit increase of 18.0%. BTB Annual Report 2013 44 Management Discussion and Analysis 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 quarters and years ended December 31, 2013 and 2012. Periods ended December 31 (in thousands of dollars) Commercial $ % Office $ % Industrial $ % General purpose $ % Quarter ended in 2013 Investment properties Rental income from properties Net operating income 101,675 3,006 1,850 Quarter ended in 2012 Investment properties Rental income from properties Net operating income 98,608 2,093 1,496 19.2 18.4 20.4 20.2 15.7 19.8 208,793 6,919 3,309 200,092 6,606 3,214 39.4 42.3 36.5 41.0 49.6 42.6 100,561 2,333 1,937 79,236 1,928 1,528 19.0 14.3 21.4 16.2 14.5 20.2 118,403 4,090 1,965 110,585 2,689 1,313 22.4 25.0 21.7 22.6 20.2 17.4 Year ended in 2013 Total $ 529,432 16,348 9,061 488,521 13,316 7,551 Rental income from properties Net operating income 11,684 7,163 18.4 20.3 27,007 13,058 42.6 37.0 8,855 7,324 14.0 20.7 15,889 7,791 25.0 22.0 63,435 35,336 Year ended in 2012 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 BTB Annual Report 2013 45 Management Discussion and Analysis Comparative Summary of Quarterly Results (in thousands of dollars, except for per unit data) Rental income Net operating income Net income and comprehensive income Net income per unit Distributable recurring income Distributable recurring income per unit Recurring funds from operations (FFO) Recurring FFO per unit Recurring adjusted funds from operations (AFFO) Recurring AFFO per unit Distributions Distributions per unit 2013 Q-4 $ 16,348 9,061 7,732 27.3¢ 3,581 12.7¢ 3,490 12.3¢ 3,049 10.8¢ 2,827 10¢ 2013 Q-3 $ 15,452 8,760 5,660 21.0¢ 3,202 11.9¢ 2,836 10.5¢ 2,668 10.0¢ 2,821 10¢ 2013 Q-2 $ 15,820 8,975 1,616 6.8¢ 3,110 13.0¢ 2,857 12.0¢ 2,569 10.8¢ 2,324 10¢ 2013 Q-1 $ 15,815 8,540 3,342 14.0¢ 2,718 11.4¢ 2,450 10.3¢ 2,182 9.2¢ 2,380 10¢ 2012 Q-4 $ 13,316 7,551 5,603 28.4¢ 2,273 11.5¢ 1,975 10.0¢ 1,905 9.7¢ 2,069 10¢ 2012 Q-3 $ 12,080 7,016 3,429 18.0¢ 2,245 11.7¢ 1,941 10.1¢ 1,903 10.0¢ 1,912 10¢ 2012 Q-2 $ 11,723 6,708 4,963 26.0¢ 2,071 10.8¢ 1,710 9.0¢ 1,739 9.1¢ 1,916 10¢ 2012 Q-1 $ 10,999 5,721 3,972 23.8¢ 1,211 7.3¢ 867 5.2¢ 898 5.4¢ 1,759 10¢ BTB Annual Report 2013 46 Management Discussion and Analysis Financial Position The table below presents a summary of assets, liabilities and unitholders’ equity as at December 31, 2013 and 2012. It should be read in conjunction with the Trust’s audited annual financial statements. Periods ended December 31 (in thousands of dollars) Assets Investment properties Other assets Total assets Liabilities Mortgage loans payable Convertible debentures Acquisition credit facility Derivative financial instruments Other liabilities Total liabilities Equity Unitholders’ equity Total liabilities and equity 2013 $ 529,432 17,127 546,559 313,816 63,929 — 1,472 14,750 393,967 152,592 546,559 2012 $ 488,521 16,406 504,927 296,523 54,272 14,825 927 13,602 380,149 124,778 504,927 The main changes to the statement of financial position as at December 31, 2013 compared to the statement of financial position as at December 31, 2012 primarily reflect investment property acquisitions during fiscal 2013 and the issuance of units in July 2013, convertible debentures in February 2013 and mortgage financings and refinancings concluded in 2013. BTB Annual Report 2013 47 Management Discussion and Analysis 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. Property acquisitions in 2013 In February 2013, the Trust acquired a 50% interest in a 15,186-square-foot retail complex in Saint- Lazare, Quebec, for a purchase price of $2.6 million. The tenants include Tim Hortons, A&W and a Sobeys convenience store. In March 2013, the Trust acquired an industrial property with a leasable area of approximately 132,665 square feet for a purchase price of $11 million, excluding transaction costs. The property is located at the intersection of Highways 15 and 440, about ten minutes from Montreal International Airport, and is fully leased to Pharmetics. In October 2013, the Trust acquired two industrial properties and an office property totalling approximately 109,000 square feet of leasable area for a total purchase price of $14 million, including a $1.3 million contractual commitment to perform reconstruction work. Two of the properties are located on the south shore of Montreal and the third is in the area of Sherbrooke, Quebec. These properties are fully leased to the engineering firm The S.M. Group Inc. In December 2013, the Trust acquired the residual 50% interest in the retail complex located in Saint- Lazare, Québec for a purchase price of $2.6 million. Disposal of a property in 2013 In May 2013, the Trust disposed of a general-purpose property located at 2220 Lapinière, Longueuil, for a net consideration of $2,300. The property no longer met the Trust’s investment criteria. The following table provides summary information about the real estate portfolio: Periods ended December 31 (in thousands of dollars) Investment properties (at fair value) Other assets at unamortized value Gross book value of the Trust Number of properties Leasable area (in thousands of sq. ft.) 2013 $ 529,432 17,715 547,147 69 4,580 2012 $ 488,521 16,868 505,389 65 4,341 BTB Annual Report 2013 48 Management Discussion and Analysis Summary by operating segment as at December 31, 2013 Periods ended December 31, 2013 (in square feet) Office Commercial Industrial General purpose Total Number of properties Leasable area (sq.ft.) 22 14 19 14 69 1,446,352 651,688 1,506,973 975,258 4,580,271 % 31.6 14.2 32.9 21.3 100.0 Real Estate Operations Leasing activities The following table summarizes changes in available leasable area during the periods ended December 31, 2013. Periods ended December 31, 2013 (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 369,760 — 163,023 5,280 (124,828) (46,021) (48) 367,166 Year 359,949 (4,597) 330,889 90,360 (234,301) (173,648) (1,486) 367,166 The Trust’s leasing operations were significant during the fourth quarter of 2013. Almost 171,000 square feet were signed with new lessees or renewed during the quarter. During fiscal 2013, approximately 447,000 square feet were signed or renewed at generally more advantageous conditions than previously. The average rate of expired and renewed leases rose 9.8% during the fourth quarter and 7.7% over the year. BTB Annual Report 2013 49 Management Discussion and Analysis 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, 2013 September 30, 2013 June 30, 2013 March 31, 2012 December 31, 2012 % 87.4 94.2 94.4 93.0 91.9 % 87.2 93.8 93.9 93.4 91.7 % 86.8 93.1 93.9 94.3 91.6 % 86.9 94.4 94.3 94.4 92.1 % 86.4 93.8 93.8 94.9 91.7 The overall occupancy rate is up by 0.2% since both September 30, 3013 and December 31, 2012. It stands at 91.9%. The occupancy rate increased in all sectors of activity except “General purpose” properties. Lease maturity The following table shows the lease maturity profile for the next few years: Periods ended December 31 Office 2014 2015 2016 2017 2018 2019 Leasable area (sq. ft.) Average lease rate/square foot ($) % of office portfolio 133,892 13.53 9.26 219,208 13.52 15.16 163,662 15.02 11.32 Commercial Leasable area (sq. ft.) Average lease rate/square foot ($) % of commercial portfolio Industrial Leasable area (sq. ft.) Average lease rate/square foot ($) % of industrial portfolio General purpose Leasable area (sq. ft.) Average lease rate/square foot ($) % of general purpose portfolio Total portfolio Leasable area (sq. ft.) Average lease rate/square foot ($) % of total portfolio 66,564 9.31 10.21 147,984 3.84 9.82 104,292 12.84 10.69 452,732 9.58 9.88 36,594 12.11 5.62 4,325 5.55 0.29 91,087 10.82 9.34 351,214 12.58 7.67 49,878 10.69 7.65 64,013 11.05 4.25 148,781 9.25 15.26 426,334 11.91 9.31 160,663 12.45 11.11 26,475 17.42 4.06 554,539 4.66 36.80 50,921 14.40 5.22 792,598 7.29 17.30 133,679 12.10 9.24 113,905 14.08 17.48 — — — 100,437 12.40 10.30 348,021 12.83 7.60 147,471 13.01 10.20 109,638 12.00 16.82 24,500 4.00 1.63 62,759 12.06 6.44 344,368 11.87 7.52 BTB Annual Report 2013 50 Management Discussion and Analysis Top 10 lessees As at December 31, 2013, BTB managed close to 700 leases, with an average area of approximately 6,000 square feet. The three largest lessees are Société québécoise des infrastructures (SQI), the Groupe Épicia inc. and Atis, Portes et Fenêtres Corp., accounting respectively for 3.9%, 2.2% and 2.0% of revenues, generated by a number of leases whose maturities 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. The following table shows the contribution of the Trust’s top 10 lessees as a percentage of revenues as at December 31, 2013: Client Société québécoise des infrastructures (SQI) Groupe Épicia inc. Atis. Portes et Fenêtres Corp. Germain Larivière Inc. Sobeys Québec Inc. City of Ottawa Commission de la Santé et de la Sécurité du Travail (CSST) Flextronics Groupe Aro Inc. CSSS Lucille-Teasdale % of revenue Leased area (square feet) 3.9 2.2 2.0 1.7 1.6 1.6 1.5 1.5 1.5 1.4 139,785 87,175 219,725 101,194 44,988 29,768 46,421 48,731 40,825 26,900 BTB Annual Report 2013 51 Management Discussion and Analysis Capital Resources Long-term debt The following table shows the balances of BTB’s indebtedness as at December 31, 2013, including mortgage loans payable and convertible debentures, based on year of maturity and corresponding weighted average contractual interest rates: Year of maturity 2014 2015 2016 2017 2018 2019 and thereafter Total Balance of convertible debentures $ — — 23,000 — 23,000 23,000 69,000 Balance of mortgages payable Weighted average contractual interest rate $ 61,777 21,503 77,624 64,316 41,259 47,694 314,173 % 5.21 4.11 4.80 4.25 4.66 5.47 4.84 As at December 31, 2013, the weighted average contractual interest rate of the Trust’s long-term debt stood at 4.84%, i.e. 4.44% for mortgages payable and 7.38% for convertible debentures. The average maturity of mortgage loans is 4.4 years. Mortgage loans payable As at December 31, 2013, the Trust’s mortgage loans payable amounted to $314.2 million compared to $296.2 million as at December 31, 2012, before deferred financing costs and valuation adjustments, an increase of $18.0 million due to acquisitions and refinancings in the last four quarters. As at December 31, 2013, the weighted average interest rate was 4.44%, compared to 4.69% for mortgage loans on the books as at December 31, 2012, a drop of 25 basis points. Except for a $1.4 million loan as at December 31, 2013, all other mortgages payable bear interest at fixed rates or are coupled with an interest rate swap. BTB spreads the terms of its mortgages over many years in order to mitigate the risk associated with renewing them. BTB Annual Report 2013 52 Management Discussion and Analysis The following table summarizes changes in mortgage loans payable during the fourth quarter and fiscal 2013: (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, 2013 N.B.: Before unamortized financing costs and valuation adjustments. Quarter 302,368 34,177 (20,195) (2,177) 314,173 Year 296,214 60,567 (34,260) (8,348) 314,173 All of the Trust’s properties were mortgaged as at December 31, 2013. Unamortized loan financing costs totalled $1,999 and are amortized under the effective interest method over the term of the loans. The following table, as at December 31, 2013, shows future mortgage loan repayments for the next few years: Year ended December 31 (in thousands of dollars) Maturity 2014 2015 2016 2017 2018 2019 and thereafter Total Principal repayment $ Balance at maturity $ Total $ (%) of total % 8,260 7,567 6,864 4,173 2,309 21,226 50,399 60,731 20,362 70,038 57,527 35,493 19,623 68,991 27,929 76,902 61,700 37,802 40,849 263,774 314,173 22.0 8.9 24.5 19.6 12.0 13.0 100 + Valuation adjustments on assumed loans - Unamortized financing costs Balance as at December 31, 2013 1,642 (1,999) 313,816 BTB Annual Report 2013 53 Management Discussion and Analysis Financings completed As a result of acquisitions completed recently and refinancings, the Trust assumed or contracted the following mortgage loans: Arrangement of a second-ranking mortgage financing in the amount of $8.6 million on a commercial property acquired in December 2012, at a rate of 4.91% for an 11-year term. Arrangement of a second-ranking mortgage financing in the amount of $2.75 million on a commercial and office property acquired in December 2012, at a rate of 5.45% for a 40-month term. Assumption of a first-ranking mortgage financing in the amount of $1.6 million on a retail complex acquired in February 2013, at a rate of 3.93% for a 44-month term. Arrangement of a first-ranking mortgage financing in the amount of $7.15 million on an industrial building acquired in March 2013, at a rate of 4.02% for a 5-year term. As part of refinancings, increase in two first-ranking mortgages on three retail properties, generating a cash inflow of $4.8 million and a rate decrease of approximately 150 basis points on these loans. Refinancing of a construction loan bearing interest at a floating rate as a first-ranking mortgage financing in the amount of $15.4 million, divided into three tranches of approximately $5 million, at a weighted average rate of 3.3% for 2-, 3- and 5-year terms. Arrangement of a first-ranking mortgage financing in the amount of $9.1 million on three industrial properties acquired in October 2013, at a rate of 3.95% for a 5-year term. Subsequent to the reporting date, refinancing of two mortgage loans on seven properties totalling approximately $25 million, bearing interest at an average rate of 5.74% through the arrangement of six mortgage loans totalling $26.4 million at a rate of 3.34%. This refinancing will generate substantial savings on interest expenses of more than $0.5 million per year. Convertible debentures (a) Series B In March 2008, the Trust issued Series B convertible, unsecured, subordinated debentures in the amount of $13 million. Interest is at the rate of 8.5% and is payable semi-annually. The debentures matured and were repaid on March 31, 2013. (b) Series C In January 2011, the Trust issued Series C convertible, unsecured, subordinated 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, 2013, the closing market price of BTB units was $4.46. 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, at a price equal to their principal amount plus accrued, unpaid interest. BTB Annual Report 2013 54 Management Discussion and Analysis 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 derivative financial instrument component. (c) Series D In July 2011, the Trust issued Series D convertible, unsecured, subordinated 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, 2013, the closing market price of BTB units was $4.46. 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, at 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 derivative financial instrument component. (d) Series E In February 2013, the Trust issued Series E convertible, unsecured, subordinated debentures, bearing 6.90% interest, in the amount of $23 million. Interest is 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 is $6.15 per unit (the "Series E conversion price"). As at December 31, 2013, the closing market price of BTB units was $4.46. As of March 31, 2016, but before March 31, 2018, 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 E conversion price and, as of March 31, 2018, but before March 31, 2020, to a price equal to their principal amount plus accrued, unpaid interest. BTB Annual Report 2013 55 Management Discussion and Analysis The Trust may, at its option and subject to certain conditions, elect to satisfy its obligation to pay the principal amount of the Series E debentures by issuing freely tradable units to Series E debenture holders. On the date of issuance, the debentures were recorded as a $22.7 million non-derivative liability component and a $0.3 million derivative financial instrument component. The net proceeds from issue in the amount of $21.8 million were used as planned, i.e. $13 million allocated to the repayment of Series B debentures maturing on March 31, 2013 and the remainder to property acquisitions. As at December 31, 2013, none of the three series met the conditions necessary for an authorized redemption. Contractual interest rate Effective interest rate Date of issuance Per-unit conversion price Date of interest payment Maturity date Series C Series D Series E Total 8% 9.78% January 2011 $5.00 January 31 and July 31 January 2016 7.25% 8.47% July 2011 $6.10 January 31 and July 31 July 2018 6.90% 7.90% February 2013 $6.15 March 31 and September 30 March 31, 2020 Balance as at December 31, 2013 21,586 20,754 21,589 63,929 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, 2013, a total of $1.045 million was outstanding related to this credit facility. Bank loans – Acquisition credit facility The Trust’s acquisition line of credit in the amount of $15,000 has matured in November 2013. BTB Annual Report 2013 56 Management Discussion and Analysis Debt ratio The following table presents the Trust’s debt ratios as at December 31, 2013 and 2012. As at December 31 (in thousands of dollars) Mortgage loans payable (1) Convertible debentures (1) Acquisition credit facility Total long-term debt Gross book value of the Trust Debt ratio (excluding convertible debentures) Total debt ratio (1) Gross amounts 2013 $ 314,173 69,000 — 383,173 547,147 57.6% 70.0% 2012 $ 296,214 59,020 15,000 370,234 505,389 61.6% 73.3% According to the table above, the debt ratio excluding the convertible debentures as at December 31, 2013, amounted to 57.6% compared to 61.6% as at December 31, 2012. The Trust seeks to finance its acquisitions with debt ratios of 60% to 70% because the cost of mortgage financings is lower than the capital cost of the Trust’s equity. After including the convertible debentures, the ratio stood at 70.0% compared to 73.3% 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. 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 revenues. For the quarter ended December 31, 2013, the interest coverage ratio stood at 1.89, up 18 points from the fourth quarter of 2012 and at 1.79, up 15 points for fiscal 2013 compared to fiscal 2012, showing the Trust’s financial strength and ability to cover the cost of its debt. Periods ended December 31 (in thousands of dollars, except for the ratios) Net operating income Interest expense, net of interest income Interest coverage ratio Quarter Year 2013 $ 9,061 4,790 1.89 2012 $ 7,551 4,426 1.71 2013 $ 35,336 19,723 1.79 2012 $ 26,996 16,497 1.64 BTB Annual Report 2013 57 Management Discussion and Analysis Unitholders’ equity Unitholders’ equity consists of the following: As at December 31 (in thousands of dollars) Trust units Cumulative profit Cumulative distributions to unitholders 2013 $ 157,207 20,680 (25,295) 152,592 2012 $ 137,330 2,331 (14,883) 124,778 Unit issue On July 29, 2013, the Trust completed an issue of 4,328,600 units, including the over-allotment option of 15%, at an issue price of $4.65 per unit, for net proceeds of approximately $19 million. As specified in the prospectus dated July 22, 2013, $15 million were immediately used to reimburse the acquisition line of credit, and the residual amount was kept for future acquisitions of real estate properties. Consolidation 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, 66,682 units were issued during the last quarter (2012: 40,206 units) and 205,141 units were issued during the year (2012: 132,857). BTB Annual Report 2013 58 Management Discussion and Analysis The following table summarizes units issued and the weighted number of units for the specified periods: Periods ended December 31 (in number of units) Units outstanding, beginning of period Units issued Public placement and warrants exercised Distribution reinvestment plan Units outstanding, end of period Weighted average number of units outstanding Quarter 2013 $ 2012 $ Year 2013 $ 2012 $ 28,258,856 19,153,591 23,791,797 14,810,790 — 66,682 28,325,538 28,291,857 4,598,000 40,206 23,791,797 19,723,581 4,328,600 205,141 28,325,538 25,735,696 8,848,150 132,857 23,791,797 18,668,871 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 determined 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: Years ended December 31 Outstanding, beginning of year Expired Outstanding, end of year Options vested as at December 31 Weighted average remaining term to expiry (years) Unit options 227,000 (129,000) 98,000 98,000 2013 Weighted average exercise price $ 5.07 5.55 4.51 4.51 1.48 Unit options 551,000 (324,000) 227,000 227,000 2012 Weighted average exercise price $ 10.20 13.77 5.07 5.07 1.59 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. BTB Annual Report 2013 59 Management Discussion and Analysis 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 fourth quarter and fiscal 2013: Periods ended December 31 (in number of units) Deferred units outstanding, beginning of period Deferred units issued Distributions converted to deferred units Deferred units outstanding, end of quarter Quarter Year 2013 $ 26,206 3,075 490 29,771 2012 $ — 15,264 717 15,981 2013 $ 15,981 11,948 1,842 29,771 2012 $ — 15,264 717 15,981 Employee unit purchase plan The Trust offers an optional employee unit purchase plan to all its employees. Under this plan, the employees may contribute, each year, pursuant to a maximum of 3% to 7% of their base salary depending of their years of experience with the Trust. For each two units purchased by an employee, the Trust shall issue one unit from treasury. As at December 31, 2013, the liability related to the plan was $33, representing a total of 7,456 units to issue. The related expenses recorded in profit and loss amount to $33 for the year ended December 31, 2013. The units have been issued after year-end. 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. During the quarter ended December 31, 2013, BTB complied with all of its loan commitments and was not in default with any covenant at the balance sheet date. BTB Annual Report 2013 60 Management Discussion and Analysis Use of proceeds of public offerings - fiscal 2013 Prospectus February 2013 Series E debentures – $23 million July 2013 3,764,000 units at $4.65 per unit Anticipated Use Actual Use Variation Repayment of Series B debentures and/or partial repayment of acquisition line of credit and/or future property acquisitions Repayment of Series B debentures Property acquisitions Repayment of acquisition line of credit and/or future property acquisitions Repayment of acquisition line of credit Property acquisitions NIL NIL 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. A special tax regime applies to trusts that are considered specified investment flow-through (SIFT) entities as well as those individuals who invest in SIFT entities. Under this regime, SIFT entities must generally pay taxes on their income at rates that are close to those of companies. In short, a SIFT entity is an entity (including a trust) that resides in Canada, whose investments are listed on a stock exchange or other public market and that holds one or more non-portfolio properties. However, for a given taxation year, BTB is not considered a SIFT entity and is therefore not subject to SIFT rules if, during that year, it constitutes a real estate investment trust (REIT). Generally, to qualify as a REIT, a trust must be resident in Canada and meet the following conditions all year long: i) the total fair market value of all the ”non-portfolio properties“ that are “qualified REIT properties” held by the trust is at least 90% of the total fair market value at that time of all the “non- portfolio assets” held by the trust ii) not less than 90% of its “gross REIT revenue” for the taxation year is from one or more of the following sources: rent from “real or immovable properties,” interest, dispositions of “real or immovable properties” that are capital properties, dividends, royalties and dispositions of “eligible resale properties” iii) not less than 75% of its “gross REIT revenue” for the taxation year comes from one or more of the following sources: rent from “real or immovable properties,” interest from mortgages on “real or immovable properties,” and dispositions of “real or immovable properties” that are capital properties iv) at each time in the taxation year, an amount that is equal to 75% or more of the equity value of the trust at that time, is the amount that is the total fair market value of all properties held by the trust, each of which is “real or immovable property” which is a capital property, an “eligible resale property,” an indebtedness of a Canadian corporation represented by a banker’s acceptance, cash or, generally, an amount receivable from the Government of Canada or from certain other public agencies; and v) the investments that are made therein are, at any time in the taxation year, listed or traded on a stock exchange or other public market. BTB Annual Report 2013 61 Management Discussion and Analysis As at December 31, 2013, 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. Nonetheless, there is no guarantee that BTB will continue to meet all the required conditions to be eligible for the REIT exception for 2014 or any other subsequent year. Taxation of Unitholders For Canadian unitholders, distributions for taxation purposes are qualified as follows: Periods ended December 31 Taxable as other income Tax deferred Total 2013 % — 100 100 2012 % — 100 100 BTB Annual Report 2013 62 Management Discussion and Analysis Summary of Significant Accounting Policies and Estimates BTB’s significant accounting policies are described in Notes 2 and 3 to the audited annual consolidated financial statements for the year ended December 31, 2013 and the reader is invited to refer to these financial statements. (a) Functional and presentation currency The consolidated financial statements are presented in Canadian dollars, which is BTB's functional currency. All financial information presented in Canadian dollars has been rounded to the nearest thousand, except per unit amounts. (b) 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: (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. Whether the acquiree has allocated its own staff to manage the investment property and/or to deploy any processes. The number of investment properties owned by the acquiree. 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. BTB Annual Report 2013 63 Management Discussion and Analysis 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: Valuation of investment properties Investment properties 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 techniques. These models and techniques comprise both the Discounted Cash Flow Method and the Direct Capitalization method. In some cases, the fair values are determined using the Comparable method which is 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 expenditures of fixtures and fittings, any environmental matters and the overall repair and condition of the property) and discount rates applicable to those cash flows. 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 properties 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 estimated 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. BTB Annual Report 2013 64 Management Discussion and Analysis Derivative financial instruments Derivative financial instruments, including embedded derivatives, are recognized 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 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 vesting method. The valuation model requires management to make estimates for the expected life, volatility, the average dividend yield of distributions and the average risk-free interest rate. (c) Basis of consolidation (i) Business combinations Business combinations are accounted for using the acquisition method. Accordingly, the consideration transferred for the acquisition of a business is the fair value of the assets transferred, and any debt and trust units issued by the Trust on the date control of the acquired entity is obtained. Acquisition-related costs, other than those associated with the issue of debt or trust units, are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are generally measured initially at their fair values at the acquisition date. 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. (ii) Subsidiaries Subsidiaries are entities controlled by the Trust. Control exists when the Trust has the existing rights that give it the current ability to direct the activities that significantly affect the entities’ returns. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. BTB Annual Report 2013 65 Management Discussion and Analysis (iii) Joint operations A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement. Those parties are called joint operators. The consolidated financial statements include the Trust’s proportionate share of the joint operations’ 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. (d) Financial instruments Financial assets and liabilities are recognized when the Trust becomes party to the contractual provisions of the financial instrument. Financial assets and financial liabilities are initially recognized at fair value, and their subsequent measurement is dependent on their classification as described below. The classification depends on the purpose for which the financial instruments were acquired or issued, their characteristics and the Trust’s designation of such instruments. (i) 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 restricted cash, receivables and cash and cash equivalents. Cash and cash equivalents Cash and cash equivalents comprise cash balances and term deposits with original maturities of three months or less. 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 amounts provided in guarantee of mortgage loans. 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. (ii) Non-derivative financial liabilities The Trust classifies non-derivative financial liabilities into the other financial liabilities category. Such financial liabilities are recognized initially at fair value less 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 mortgage loans payable, convertible debentures, bank loans, trade and other payables and distributions payable to unitholders. BTB Annual Report 2013 66 Management Discussion and Analysis The Trust derecognizes a financial liability when its contractual obligations are discharged or cancelled, or expire. (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 (“IAS 32”), 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 and redemption 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. (e) 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. The Trust capitalizes into investment property the costs incurred to increase their capacity, replace certain components and make improvements after the acquisition date. The Trust also capitalizes major maintenance and repair expenses providing benefits that will last far beyond the end of the reporting period. Investment property includes income properties, properties under development and land held for future development if necessary. 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. (f) 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. BTB Annual Report 2013 67 Management Discussion and Analysis 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. (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 - 5 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. (g) 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. (h) 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. BTB Annual Report 2013 68 Management Discussion and Analysis (i) 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, revenue 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 additions. 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. Any deferred amounts related to the straight-line lease adjustments are recognized within investment properties. 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. Lease incentives which are mostly leasehold improvements and 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. (j) 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. (k) 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. (l) 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 debentures, bank loans and others, accretion of the non-derivative liability component of convertible debentures, accretion of BTB Annual Report 2013 69 Management Discussion and Analysis 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. (m) 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. (n) Unit-based compensation (i) 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. (ii) Deferred unit compensation plan for trustees and certain executive officers Compensation costs related to the deferred 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 as compensation expense in profit or loss. (iii) Employee unit purchase plan Compensation costs related to the employee unit purchase plan 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 settlement date. Any changes in fair value are recognized as compensation expense in profit or loss. (o) 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. (p) 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 BTB Annual Report 2013 70 Management Discussion and Analysis unitholders. BTB has reviewed the proscribed 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. (q) Fair value measurement The Trust measures financial instruments, such as derivatives, and non-financial assets,such as investment properties, at fair value at each reporting date. 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 under current market conditions. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: In the principal market for the asset or liability, or In the absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most advantageous market must be accessible by the Trust. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability assuming that market participants act in their economic best interests. A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. The Trust uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs. All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole: Level 1 - Quoted (unadjusted) market prices in active markets for identical assets or liabilities Level 2 – Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable Level 3 - Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable For assets and liabilities that are recognized in the financial statements on a recurring basis, the Trust determines whether transfers have occurred between Levels in the hierarchy by reassessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. For the purpose of fair value disclosures, the Trust has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above. BTB Annual Report 2013 71 Management Discussion and Analysis New Accounting Policies The following paragraphs present new accounting standards that apply to BTB for the year ended December 31, 2013 as well as the new accounting standards and interpretations that are not yet effective for the year ended December 31, 2013. (a) New standards adopted for year ended December 31, 2013 In 2011, the IASB issued IFRS 13, Fair Value Measurement (“IFRS 13”), which establishes a single framework for the fair value measurement and disclosure of financial and non-financial assets and liabilities. The new standard unifies the definition of fair value and also introduces new concepts including ‘highest and best use’ and ‘principle markets’ for non-financial assets and liabilities. There are additional disclosure requirements, including increased fair value disclosure for financial instruments for interim and annual financial statements and increased disclosures for non-financial assets and liabilities for annual financial statements. The Trust implemented this standard prospectively in the first quarter of 2013. There were no measurement impacts on the Trust’s condensed consolidated interim financial statements as a result of the adoption of IFRS 13. The Trust has included the additional disclosures required by this standard in notes 4 and 14 to the annual consolidated financial statements. In 2013, the Trust adopted IFRS 10, Consolidated Financial Statements and IFRS 12, Disclosure of Interests in Other Entities. The application of these standards had no impact on the Trust’s consolidated financial statements. The Trust has included the additional disclosures required by this standard in note 23 to the annual consolidated financial statements. In 2013, the Trust also adopted IFRS 11, Joint Arrangements (“IFRS 11”). IFRS 11 replaces IAS 31, Interests in Joint Ventures. Under IFRS 11, the Trust classifies its interests in joint arrangements as either joint operations or joint ventures depending on the Trust’s rights to the assets and obligations for the liabilities of the arrangements. When making this assessment, the Trust considers the structure of the arrangements, the legal form of any separate vehicles, the contractual terms of the arrangements and other facts and circumstances The Trust’s interests in joint arrangements have been classified as joint operations. Notwithstanding the reclassification, the investments continue to be recognized by including the Trust’s share of any assets, liabilities, revenue and expenses incurred jointly and therefore the application of this standard had no impact on the Trust’s consolidated financial statements. (b) 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, 2013, and have not been applied in preparing these consolidated financial statements. IFRS 9, Financial Instruments (“IFRS 9”) (i) IFRS 9 as issued reflects the IASB’s work to date on the replacement of IAS 39, Financial Instruments: Recognition and Measurement (“IAS 39”), and applies to the classification and measurement of financial assets and financial liabilities as defined in IAS 39. In November 2013, the IASB issued a new version of IFRS 9 (IFRS 9 (2013)) which includes the new hedge accounting requirements and some related amendments to IAS 39 and IFRS 7, Financial Instruments: Disclosures. IFRS 9 (2013) does not have a mandatory effective date. The impact of BTB Annual Report 2013 72 Management Discussion and Analysis this ongoing project will be assessed by the Trust as remaining phases of the project are completed. (ii) Amendments to IAS 32, Financial Instruments: Presentation – Offsetting Financial Assets and Financial Liabilities (“IAS 32”) In December 2011, the IASB issued certain amendments to IAS 32, which establishes disclosure requirements that are intended to help clarify for financial statement users the effect or potential effect of offsetting arrangements on a company’s financial position. These amendments are effective for the Trust’s annual period beginning on January 1, 2014. The Trust has determined that the adoption of these amendments will not have a material impact on its consolidated financial statements. (iii) IFRIC 21, Levies (“IFRIC 21”) IFRIC 21 clarifies that an entity recognizes a liability for a levy when the activity that triggers payment occurs, as identified by the relevant legislation. The IFRIC 21 does not apply to accounting for income taxes, fines and penalties or for the acquisition of assets from governments. IFRIC 21 is effective for annual periods beginning on or after January 1, 2014. The extent of the impact of adoption of the amendments has not yet been determined. BTB Annual Report 2013 73 Management Discussion and Analysis 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 acquisitions 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. New 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 Annual Report 2013 74 Management Discussion and Analysis 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 significant 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 economic conditions, local real estate markets, demand for leased premises, competition from other vacant premises, municipal valuations and assessments, and various other factors. 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 relationship 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. BTB Annual Report 2013 75 Management Discussion and Analysis 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 without 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 investments and reducing their yield. In addition, numerous property developers, managers and owners compete with BTB in seeking tenants. The existence 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 distributions to unitholders will increase in the future. 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. BTB Annual Report 2013 76 Management Discussion and Analysis 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 decades. 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 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"). 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. In order to qualify for the REIT Exemption in respect of a taxation year, the REIT must meet the following conditions: i) the total fair market value of all the ”non-portfolio properties“ that are “qualified REIT properties” held by the trust is always at least 90% of the total fair market value at that time of all the “non-portfolio assets” held by the trust; (ii) not less than 90% of the REIT’s gross revenues for that year come from one or more of the following sources: rent from “real or immovable properties,” interest, dispositions of “real or immovable properties” that are capital properties, dividends, royalties and dispositions of “eligible resale properties,” (iii) not less than 75% of the REIT’s gross revenues for that year must come from one or more of the following sources: rent from “real or immovable properties,” interest from mortgages on “real or immovable properties” and dispositions of “real or immovable properties” that are capital properties; (iv) the REIT must, throughout the year, hold properties, each of which is a “real or immovable property” which is a capital property, an “eligible resale property,” debt from a Canadian company represented by a banker’s acceptance, cash, or generally a Canadian BTB Annual Report 2013 77 Management Discussion and Analysis 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; and v) the investments that are made therein are, at any time in the taxation year, listed or traded on a stock exchange or other public market. As at December 31, 2013, 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. 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. However, as the requirements of the REIT Exemption include complex revenue and asset tests, no assurance can be given that the REIT will in fact qualify for the REIT Exemption at all times. BTB Annual Report 2013 78 Management Discussion and Analysis 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 Instrument 52-109. Evaluations are performed regularly to assess the effectiveness of DC&P, including this MD&A and the financial statements. 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, 2013 and 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 reporting is reliable and that the financial statements have been prepared for financial reporting purposes in accordance with IFRS. During the fourth quarter of 2013, no changes were made in internal control over financial reporting that materially affected, or are likely to materially affect, internal control over financial reporting. BTB Annual Report 2013 79 Audited Consolidated Financial Statements Year ended December 31, 2013 25 BTB Rapport annuel 2013 Consolidated Financial Statements Table of Contents Independent Auditor’s Report 83 Management’s responsibility for Financial Reporting 84 86 Consolidated Statements of Financial Positions 87 Consolidated Statements of Comprehensive Income 88 Consolidated Statements of Changes in Unitholders’ Equity 89 Consolidated Statements of Cash Flows 90 Notes to Consolidated Financial Statements BTB Annual Report 2013 82 Consolidated Financial Statements BTB Real Estate Investment Trust 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, 2013, the President and Chief Executive Officer and the Vice President and Chief Financial Officer of BTB had an evaluation carried out, under their direct supervision, of the effectiveness of the controls and procedures 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 responsibilities 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, 2013 and 2012 and their report follows. The auditors have full and unrestricted access to the Audit Committee to discuss their audit and related findings. Michel Léonard President and Chief Executive Officer Benoit Cyr, CPA, CA, MBA Vice President and Chief Financial Officer Montreal, March 25th 2014 BTB Annual Report 2013 83 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 AUDITOR’S 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, 2013 and December 31, 2012, 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 overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. 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, 2013 and December 31, 2012, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards. March 25, 2014 Montréal, Canada *FCPA auditor, FCA, public accountancy permit No. A106087 Consolidated Financial Statements BTB Real Estate Investment Trust Consolidated Statements of Financial Position As at December 31, 2013 and 2012 (Audited - in thousands of CAD dollars) ASSETS Investment properties Property and equipment Derivative financial instrument Restricted cash Other assets Receivables Cash and cash equivalents Total assets LIABILITIES AND UNITHOLDERS’ EQUITY Mortgage loans payable Convertible debentures Bank loans Derivative financial instruments Unit-based compensation Trade and other payables Distributions payable to unitholders Total liabilities Unitholders’ equity See accompanying notes to consolidated financial statements. Approved by the Board on March 25, 2014 Notes 4, 5, 6 7 14 8 9 10 11 12 13 14 15 2013 $ 529,432 2,384 251 5,832 3,671 2,459 2,530 546,559 313,816 63,929 1,045 1,723 187 12,324 943 393,967 152,592 546,559 2012 $ 488,521 2,163 — 1,857 5,036 2,744 4,606 504,927 296,523 54,272 14,825 927 22 12,788 792 380,149 124,778 504,927 Michel Léonard, Trustee Jocelyn Proteau, Trustee BTB Annual Report 2013 86 Consolidated Financial Statements BTB Real Estate Investment Trust Consolidated Statements of Comprehensive Income For the years ended December 31, 2013 and 2012 (Audited - in thousands of CAD dollars) Operating revenues Rental revenues from properties 17 63,435 48,118 Notes 2013 $ 2012 $ Operating expenses Property taxes and public utilities Other operating costs Net operating income Finance costs Net adjustment to fair value of derivative financial instruments Net financing costs Trust administration expenses 18 Net income before the following item Increase in fair value of investment properties Net income being total comprehensive income for the year See accompanying notes to consolidated financial statements. 17,729 10,370 13,412 7,710 28,099 21,122 35,336 26,996 21,416 18,507 113 (5,286) 21,529 3,833 13,221 3,519 9,974 10,256 8,375 7,711 18,349 17,967 BTB Annual Report 2013 87 Consolidated Financial Statements BTB Real Estate Investment Trust Consolidated Statements of Changes in Unitholders’ Equity For the years ended December 31, 2013 and 2012 (Audited - in thousands of CAD dollars) Notes Unitholder’s contributions Cumulative distributions Cumulative comprehensive income (loss) Balance at January 1, 2013 Issuance of units Distributions to unitholders Comprehensive income Balance as at December 31, 2013 16 Balance at January 1, 2012 Issuance of units Distribution to unitholders Comprehensive income Balance as at December 31, 2012 See accompanying notes to consolidated financial statements. 137,330 19,877 — — 157,207 99,503 37,827 — — 137,330 (14,883) — (10,412) — (25,295) (7,227) — (7,656) — (14,883) 2,331 — — 18,349 20,680 (15,636) — — 17,967 2,331 Total 124,778 19,877 (10,412) 18,349 152,592 76,640 37,827 (7,656) 17,967 124,778 BTB Annual Report 2013 88 Consolidated Financial Statements BTB Real Estate Investment Trust Consolidated Statements of Cash Flows For the years ended December 31, 2013 and 2012 (Audited - in thousands of CAD dollars) Notes 7 17 17 18 4, 5 6 7 8 Operating activities Net income for the year Adjustment for: Increase in fair value of investment properties Depreciation of property and equipment Unit-based compensation Straight-line lease adjustment Lease incentive amortization Net financing costs Net change in non-cash operating items Net cash from operating activities Investing activities Additions to investment properties Net proceeds from disposal of investment properties Additions to property and equipment Additions to investment properties under development Net cash used in investing activities Financing activities Mortgage loans, net of financing costs Repayment of mortgage loans Bank loans, net of financing costs Repayment of bank loans Net proceeds from issue of convertible debentures Repayment of convertible debentures Net proceeds from issue of units Net distributions to unitholders Additions to restricted cash Interest paid Net cash (used in) from financing activities Net (decrease) increase in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year See accompanying notes to consolidated financial statements. BTB Annual Report 2013 89 2013 $ 2012 $ 18,349 17,967 (8,375) 126 90 (866) 1,480 21,529 32,333 (165) 32,168 (7,711) 97 (76) (661) 1,240 13,221 24,077 (3,651) 20,426 (30,928) (89,103) 2,300 (347) 1,266 (173) — (383) (28,975) (88,393) 56,600 (42,607) — (13,963) 21,756 (13,020) 18,996 (9,382) (3,975) (19,674) (5,269) (2,076) 4,606 2,530 89,533 (47,135) 14,790 — — — 36,938 (6,778) (1,857) (16,365) 69,126 1,159 3,447 4,606 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2013 and 2012 (Audited - in thousands of CAD dollars, except per unit amounts) 1. Reporting Entity BTB Real Estate Investment Trust (“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 BTB’s registered office is 2155, Crescent street, Montreal, Quebec, Canada. The consolidated financial statements of BTB for the years ended December 31, 2013 and 2012 comprise BTB and its wholly owned subsidiaries (together referred to as the “Trust”) and the Trust’s interest in joint operations. 2. Basis of Preparation (a) Statement of compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). These consolidated financial statements were approved by the Board of Directors on March 25, 2014. (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 are measured at fair value; 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 BTB'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: (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: BTB Annual Report 2013 90 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2013 and 2012 (Audited - in thousands of CAD dollars, except per unit amounts) 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. Whether the acquiree has allocated its own staff to manage the investment property and/or to deploy any processes. The number of investment properties owned by the acquiree. 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: Valuation of investment properties Investment properties 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 techniques. These models and techniques comprise both the Discounted Cash Flow Method and the Direct Capitalization method. In some cases, the fair values are determined using the Comparable method which is 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 expenditures of fixtures and fittings, any environmental matters and the overall repair and condition of the property) and discount rates applicable to those cash flows. These estimates are based on local market conditions existing at the reporting date. BTB Annual Report 2013 91 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2013 and 2012 (Audited - in thousands of CAD dollars, except per unit amounts) 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 properties 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 estimated 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. Derivative financial instruments Derivative financial instruments, including embedded derivatives, are recognized 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 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 vesting method. The valuation model requires management to make estimates for the expected life, volatility, the average dividend yield of distributions and the average risk-free interest rate. (e) Change in accounting policy In 2011, the IASB issued IFRS 13, Fair Value Measurement (“IFRS 13”), which establishes a single framework for the fair value measurement and disclosure of financial and non-financial assets and liabilities. The new standard unifies the definition of fair value and also introduces new concepts including BTB Annual Report 2013 92 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2013 and 2012 (Audited - in thousands of CAD dollars, except per unit amounts) ‘highest and best use’ and ‘principle markets’ for non-financial assets and liabilities. There are additional disclosure requirements, including increased fair value disclosure for financial instruments for interim and annual financial statements and increased disclosures for non-financial assets and liabilities for annual financial statements. The Trust implemented this standard prospectively in the first quarter of 2013. There were no measurement impacts on the Trust’s consolidated financial statements as a result of the adoption of IFRS 13. The Trust has included the additional disclosures required by this standard in notes 4 and 14. In 2013, the Trust adopted IFRS 10, Consolidated Financial Statements and IFRS 12, Disclosure of Interests in Other Entities. The application of these standards had no impact on the Trust’s consolidated financial statements. The Trust has included the additional disclosures required by this standard in note 23. In 2013, the Trust also adopted IFRS 11, Joint Arrangements (“IFRS 11”). IFRS 11 replaces IAS 31, Interests in Joint Ventures. Under IFRS 11, the Trust classifies its interests in joint arrangements as either joint operations or joint ventures depending on the Trust’s rights to the assets, and obligations for the liabilities, of the arrangements. When making this assessment, the Trust considers the structure of the arrangements, the legal form of any separate vehicles, the contractual terms of the arrangements and other facts and circumstances The Trust’s interests in joint arrangements have been classified as joint operations. Notwithstanding the reclassification, the investments continue to be recognized by including the Trust’s share of any assets, liabilities, revenue and expenses incurred jointly and therefore the application of this standard had no impact on the Trust’s consolidated financial statements. 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 Business combinations are accounted for using the acquisition method. Accordingly, the consideration transferred for the acquisition of a business is the fair value of the assets transferred, and any debt and trust units issued by the Trust on the date control of the acquired entity is obtained. Acquisition-related costs, other than those associated with the issue of debt or trust units, are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are generally measured initially at their fair values at the acquisition date. 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. BTB Annual Report 2013 93 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2013 and 2012 (Audited - in thousands of CAD dollars, except per unit amounts) 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. (ii) Subsidiaries Subsidiaries are entities controlled by the Trust. Control exists when the Trust has the existing rights that give it the current ability to direct the activities that significantly affect the entities’ returns. 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) Joint operations A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement. Those parties are called joint operators. The consolidated financial statements include the Trust’s proportionate share of the joint operations’ 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 Financial assets and liabilities are recognized when the Trust becomes party to the contractual provisions of the financial instrument. Financial assets and financial liabilities are initially recognized at fair value, and their subsequent measurement is dependent on their classification as described below. The classification depends on the purpose for which the financial instruments were acquired or issued, their characteristics and the Trust’s designation of such instruments. (i) 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 restricted cash, receivables and cash and cash equivalents. Cash and cash equivalents Cash and cash equivalents comprise cash balances and term deposits with original maturities of three months or less. 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 amounts provided in guarantee of mortgage loans. BTB Annual Report 2013 94 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2013 and 2012 (Audited - in thousands of CAD dollars, except per unit amounts) 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. (ii) Non-derivative financial liabilities The Trust classifies non-derivative financial liabilities into the other financial liabilities category. Such financial liabilities are recognized initially at fair value less 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 mortgage loans payable, convertible debentures, bank loans, trade and other payables and distributions payable to unitholders. The Trust derecognizes a financial liability when its contractual obligations are discharged or cancelled, or expire. (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 (“IAS 32”), 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 and redemption 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. (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. The Trust capitalizes into investment property the costs incurred to increase their capacity, replace certain components and make improvements after the acquisition date. The Trust also capitalizes major maintenance and repair expenses providing benefits that will last far beyond the end of the reporting period. Investment property BTB Annual Report 2013 95 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2013 and 2012 (Audited - in thousands of CAD dollars, except per unit amounts) includes income properties, properties under development and land held for future development if necessary. 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) 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. (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 - 5 years Depreciation methods, useful lives and residual values are reviewed at each annual reporting date and adjusted when appropriate. BTB Annual Report 2013 96 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2013 and 2012 (Audited - in thousands of CAD dollars, except per unit amounts) (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. (e) 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. (f) 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. (g) 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, revenue 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 additions. 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. Any deferred amounts related to the straight-line lease adjustments are recognized within investment properties. 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. Lease incentives which are mostly leasehold improvements and 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 BTB Annual Report 2013 97 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2013 and 2012 (Audited - in thousands of CAD dollars, except per unit amounts) 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. (h) 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. (i) 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. (j) 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 debentures, 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. (k) 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. (l) Unit-based compensation (i) 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 BTB Annual Report 2013 98 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2013 and 2012 (Audited - in thousands of CAD dollars, except per unit amounts) measured at fair-value at each reporting period and the change in the fair value is recognized as compensation expense in profit and loss. (ii) Deferred unit compensation plan for trustees and certain executive officers Compensation costs related to the deferred 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 as compensation expense in profit or loss. (iii) Employee unit purchase plan Compensation costs related to the employee unit purchase plan 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 settlement date. Any changes in fair value are recognized as compensation expense in profit or loss. (m) 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. (n) 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 proscribed 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. (o) Fair value measurement The Trust measures financial instruments, such as derivatives, and non-financial assets,such as investment properties, at fair value at each reporting date. 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 under current market conditions. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: In the principal market for the asset or liability, or In the absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most advantageous market must be accessible by the Trust. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the BTB Annual Report 2013 99 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2013 and 2012 (Audited - in thousands of CAD dollars, except per unit amounts) asset or liability assuming that market participants act in their economic best interests. A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. The Trust uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs. All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole: Level 1 - Quoted (unadjusted) market prices in active markets for identical assets or liabilities Level 2 – Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable Level 3 - Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable For assets and liabilities that are recognized in the financial statements on a recurring basis, the Trust determines whether transfers have occurred between Levels in the hierarchy by reassessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. For the purpose of fair value disclosures, the Trust has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above. (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, 2013, and have not been applied in preparing these consolidated financial statements. (i) IFRS 9, Financial Instruments (“IFRS 9”) IFRS 9 as issued reflects the IASB’s work to date on the replacement of IAS 39, Financial Instruments: Recognition and Measurement (“IAS 39”), and applies to the classification and measurement of financial assets and financial liabilities as defined in IAS 39. In November 2013, the IASB issued a new version of IFRS 9 (IFRS 9 (2013)) which includes the new hedge accounting requirements and some related amendments to IAS 39 and IFRS 7, Financial Instruments: Disclosures. IFRS 9 (2013) does not have a mandatory effective date. The impact of this ongoing project will be assessed by the Trust as remaining phases of the project are completed. (ii) Amendments to IAS 32, Financial Instruments: Presentation – Offsetting Financial Assets and Financial Liabilities (“IAS 32”) In December 2011, the IASB issued certain amendments to IAS 32, which establishes disclosure requirements that are intended to help clarify for financial statement users the effect or potential BTB Annual Report 2013 100 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2013 and 2012 (Audited - in thousands of CAD dollars, except per unit amounts) effect of offsetting arrangements on a company’s financial position. These amendments are effective for the Trust’s annual period beginning on January 1, 2014. The Trust has determined that the adoption of these amendments will not have a material impact on its consolidated financial statements. (iii) IFRIC 21, Levies (“IFRIC 21”) IFRIC 21 clarifies that an entity recognizes a liability for a levy when the activity that triggers payment occurs, as identified by the relevant legislation. The IFRIC 21 does not apply to accounting for income taxes, fines and penalties or for the acquisition of assets from governments. IFRIC 21 is effective for annual periods beginning on or after January 1, 2014. The extent of the impact of adoption of the amendments has not yet been determined. 4. Investment Properties For the years ended December 31, Balance beginning of year Acquisition of investment properties (note 5) Disposal of investment properties (note 6) Capital expenditures Government grants Capitalized leasing fees Capitalized lease incentives Lease incentives amortization Straight-line lease adjustment Net transfer from investment properties under development Increase in fair value of investment properties Balance end of year 2013 $ 488,521 29,614 (2,300) 3,663 (176) 478 1,833 (1,480) 904 — 8,375 529,432 2012 $ 343,383 128,446 (1,266) 3,378 — 678 2,454 (1,240) 661 4,316 7,711 488,521 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 the Discounted Cash Flow, the Direct Capitalization and Comparable methods for a subset of the Trust’s 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 a particular individual investment property. The fair value of the remaining investment properties is determined by management using internally generated valuations based on the Discounted Cash Flow method. BTB Annual Report 2013 101 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2013 and 2012 (Audited - in thousands of CAD dollars, except per unit amounts) At December 31, 2013 external appraisals were obtained for investment properties with an aggregate fair value of $349,282 (December 31, 2012 - $361,021) and management’s valuation model was used for investment properties with an aggregate fair value of $180,150 (December 31, 2012 - $127,500). The fair value of investment properties is based on Level 3 inputs. There have been no transfers during the year between levels. The significant inputs used to determine the fair value of the Trust’s investment properties are as follows: As at December 31, 2013 Capitalization rate Terminal capitalization rate Discount rate As at December 31, 2012 Capitalization rate Terminal capitalization rate Discount rate Commercial Office Industrial General purpose 6.25% - 10.00% 6.75% - 10.25% 6.50% - 10.50% 7.00% - 8.25% 6.50% - 8.25% 6.50% - 9.25% 7.00% - 10.50% 7.25% - 8.50% 7.25% - 9.00% 7.50% - 9.75% 7.25% - 10.75% 8.25% - 9.25% 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% Significant increases (decreases) in estimated rental value and rent growth per annum in isolation would result in a significantly higher (lower) fair value of income properties. Significant increases (decreases) in long-term vacancy rate and exit yield in isolation would result in significantly lower (higher) fair value. Generally, a change in the assumption made for the estimated rental value is accompanied by: A directionally similar change in the rent growth per annum and discount rate and exit yield An opposite change In the long term vacancy rate Valuations determined by the Discounted Cash Flow method are most sensitive to changes in discount rate. The following table summarizes the sensitivity of the fair value of investment properties to changes in discount rate assuming all properties were valued under a Discounted Cash Flow method: Discount rate sensitivity Increase (decrease) (0.50%) (0.25%) Base rate 0.25% 0.50% Fair Value $ 550,004 539,598 529,432 519,343 509,619 Change in fair value $ 20,572 10,166 — (10,089) (19,813) BTB Annual Report 2013 102 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2013 and 2012 (Audited - in thousands of CAD dollars, except per unit amounts) As shown in the sensitivity analysis above, an increase in the discount rate, other things being equal, will result in a decrease in fair value of the investment properties and vice-versa. 5. Acquisitions (a) 2013 Asset acquisitions In December 2013, the Trust acquired the residual 50% interest in a general purpose building located in the city of Saint-Lazare for a purchase price of $2,552, $1,555 through the assumption of a mortgage loan, $475 through the assumption of trade and other payables and $522 in cash. In October 2013, the Trust acquired an office property and an industrial property located in the city of Longueuil and an industrial property located in the city of Sherbrooke for a purchase price of $12,700 in cash. In March 2013, the Trust acquired an industrial property located in the city of Laval for a purchase price of $11,000 in cash. In February 2013, the Trust acquired a 50% interest in a general purpose building located in the city of Saint-Lazare for a purchase price of $2,563, $1,586 through the assumption of a mortgage loan, $69 through the assumption of trade and other payables and $908 in cash. In addition to the purchase price, transaction costs of $799 were recognized in 2013. The relative fair value of the assets and liabilities recognized in the consolidated statement of financial position on the date of the acquisition during 2013 were as follows: Investment properties, including transaction costs Mortgage loans payable Trade and other payables, including transaction costs Total cash consideration paid Fair value recognized on acquisition $ 29,614 (3,141) (1,343) 25,130 (b) 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. BTB Annual Report 2013 103 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2013 and 2012 (Audited - in thousands of CAD dollars, except per unit amounts) 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. 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., 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 follows: Investment properties, including transaction costs Mortgage loans payable Trade and other payables, including transaction costs Total cash consideration paid BTB Annual Report 2013 104 Fair value recognized on acquisition $ 128,446 (29,597) (16,256) 82,593 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2013 and 2012 (Audited - in thousands of CAD dollars, except per unit amounts) 6. Disposal In May 2013, the Trust disposed of a general purpose building located in the city of Brossard for net proceeds of $2,300. In March 2012, the Trust disposed of a commercial building located in the city of Montréal for net proceeds of $1,266. 7. Property and Equipment Cost Balance at December 31, 2011 Additions Balance at December 31, 2012 Additions Balance at December 31, 2013 Accumulated Depreciation Balance at December 31, 2011 Depreciation for the year Balance at December 31, 2012 Depreciation for the year Balance at December 31, 2013 Net carrying amount Balance at December 31, 2012 Balance at December 31, 2013 8. Restricted Cash Owner-occupied land Owner-occupied building Equipment, furniture and fixtures Rolling stock $ 494 — 494 — 494 $ 1,715 9 1,724 200 1,924 187 58 245 65 310 494 494 1,479 1,614 $ 129 105 234 124 358 64 32 96 49 145 138 213 $ — 59 59 23 82 — 7 7 12 19 52 63 Total $ 2,338 173 2,511 347 2,858 251 97 348 126 474 2,163 2,384 Restricted cash consists of an amount of $3,522 (December 31, 2012 - $1,272) provided in guarantee of the existing mortgage loan on the buildings disposed in March 2012 and May 2013 (see note 6) and an amount of $2,310 (December 31, 2012 - $585) provided in guarantee of mortgage loans. BTB Annual Report 2013 105 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2013 and 2012 (Audited - in thousands of CAD dollars, except per unit amounts) 9. Other Assets As at December 31, Prepaid expenses Deposits Total 10. Receivables As at December 31, Rents receivable Provision for doubtful accounts Net rents receivable Other receivable Total 11. Mortgage Loans Payable 2013 $ 3,273 398 3,671 2012 $ 3,605 1,431 5,036 2013 $ 2,619 (263) 2,356 103 2,459 2012 $ 2,996 (271) 2,725 19 2,744 Mortgage loans payable are secured by immovable hypothecs on investment properties having a fair value of approximately $525,342 as at December 31, 2013 (December 31, 2012 – $484,641) and by restricted cash (see note 8). As at December 31, Fixed rate mortgage loans payable Floating rate mortgage loans payable Unamortized fair value assumption adjustments Unamortized financing costs Mortgage loans payable Weighted average interest rate Weighted average term to maturity (years) Annual rated ranging 2013 $ 305,794 8,379 1,642 (1,999) 313,816 4.44% 4.44 2012 $ 280,313 15,901 2,111 (1,802) 296,523 4.69% 4.51 2.55% - 6.80% 3.18% - 8.50% BTB Annual Report 2013 106 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2013 and 2012 (Audited - in thousands of CAD dollars, except per unit amounts) As at December 31, 2013, mortgage loan scheduled repayments are as follows: 2014 2015 2016 2017 2018 Thereafter Unamortized fair value assumption adjustments Unamortized financing costs Scheduled repayments $ 8,260 7,567 6,864 4,173 2,309 21,226 50,399 Principal maturity $ 60,731 20,362 70,038 57,527 35,493 19,623 263,774 Total $ 68,991 27,929 76,902 61,700 37,802 40,849 314,173 1,642 (1,999) 313,816 In March 2013, the Trust entered into an interest rate swap agreement on a floating interest rate mortgage to hedge the variability in cash flows attributed to fluctuating interest rates. Settlement on both the fixed and variable portion of the interest rate swap occurs on a monthly basis. The original principal amount of the interest rate swap was $7,150, the maturity date is April 2023 and the effective fixed interest rate is 4.02%. The Trust does not apply hedge accounting to such cash flow hedging relationships. 12. Convertible Debentures As at December 31, 2013, the Trust had three series of subordinated, convertible, redeemable debentures outstanding. Series C Series D Series E Capital Interest rates Coupon Effective 23,000 23,000 23,000 % 8.00 7.25 6.90 % 9.78 8.47 7.90 Unit conversion price $ 5.00 6.10 6.15 Interest payments Maturity Semi-annual Semi-annual Semi-annual January 2016 July 2018 March 2020 BTB Annual Report 2013 107 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2013 and 2012 (Audited - in thousands of CAD dollars, except per unit amounts) The components of the subordinated convertible debentures on the issue date were allocated as follows: Non-derivative liability component Conversion and redemption options liability component Series C $ 21,592 1,408 23,000 Series D $ 21,346 1,654 23,000 Series E $ 22,690 310 23,000 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 and redemption options liability component is measured at fair value. As at December 31,2013 Non-derivative liability component upon issuance Accretion of non-derivative liability component Unamortized financing costs Series C $ Series D $ Series E $ Total $ 21,592 754 22,346 (760) 21,346 472 21,818 (1,064) 22,690 30 22,720 (1,131) 65,628 1,256 66,884 (2,955) Non-derivative liability component 21,586 20,754 21,589 63,929 Conversion and redemption options liability component at fair value As at December 31,2012 Non-derivative liability component upon issuance Accretion of non-derivative liability component Unamortized financing costs 780 361 582 Series B $ Series C $ Series D $ 12,339 639 12,978 (65) 21,592 477 22,069 (1,079) 21,346 270 21,616 (1,247) 1,723 Total $ 55,277 1,386 56,663 (2,391) Non-derivative liability component 12,913 20,990 20,369 54,272 Conversion and redemption options liability component at fair value — 598 329 927 BTB Annual Report 2013 108 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2013 and 2012 (Audited - in thousands of CAD dollars, except per unit amounts) Series B In March 2008, the Trust issued Series B subordinated convertible, redeemable, unsecured debentures, bearing 8.5% interest payable semi-annually which were repaid at maturity in March 2013, in the amount of $13,020. 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”). As of January 31, 2014, but before January 31, 2015, under certain conditions, the debentures are 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 redeemable 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. 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 redeemable 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. BTB Annual Report 2013 109 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2013 and 2012 (Audited - in thousands of CAD dollars, except per unit amounts) Series E In February 2013, the Trust issued 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. The debentures are convertible at the holder’s option at any time before March 2020, at a conversion price of $6.15 per unit (“Series E Conversion Price”). These debentures are not redeemable before March 31, 2016, except in the case of a change in control. As of March 31, 2016, but before March 31, 2018, 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 March 31, 2018, but before March 31, 2020, under certain conditions, the debentures will be redeemable 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. 13. Bank Loans The Trust’s acquisition line of credit in the amount of $15,000 has matured in November 2013. As at December 31, 2012, $15,000 was due under the acquisition line of credit and the unamortized financing costs amounted to $175. 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 $4,308 (December 31, 2012 - $4,224). As at December 31, 2013, $1,045 was due under the operating credit facility (December 31, 2012 - $nil). BTB Annual Report 2013 110 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2013 and 2012 (Audited - in thousands of CAD dollars, except per unit amounts) 14. Fair Value Measurement The following tables show the carrying amounts and fair values of financial assets and financial liabilities, including their levels in the fair value hierarchy. It does not include the fair value of the cash and cash equivalents, restricted cash, receivables, other assets, trade and other payables and distributions payable to unitholders, which approximated their carrying amount as at December 31, 2013 and 2012 because of their short-term maturity. As at December 31, 2013 Carrying amount Fair value Measured at fair value Conversion and redemption options of convertible debentures (note 12) Interest rate swap asset For which fair values are disclosed Mortgage loans payable Convertible debentures, including their conversion and redemption features Bank loans Level 1 $ $ Level 2 Level 3 $ $ 1,723 (251) — — — (251) 1,723 — 313,816 65,652 1,045 — 67,505 — 317,816 — 1,045 — — — As at December 31, 2012 Carrying amount Fair value Measured at fair value Conversion and redemption options of convertible debentures (note 12) For which fair values are disclosed Mortgage loans payable Convertible debentures, including their conversion and redemption features Bank loans Level 1 Level 2 Level 3 $ 927 $ — $ $ — 927 296,523 55,199 14,825 — 59,882 — 300,046 — 15,030 — — — The fair value of mortgage loans payable was calculated by discounting cash flows from future payments of principal and interest using the year end market rate for various loans with similar risk and credit profiles. The year end market rates have been estimated by reference to published mortgage rates by major financial institutions for similar maturity. The fair value of convertible debentures, including their conversion and redemption features, was determined with reference to the last quoted trading price preceding the year end. The fair value of bank loans was calculated by discounting cash flows from financial obligations using the year end market rate for similar instruments. BTB Annual Report 2013 111 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2013 and 2012 (Audited - in thousands of CAD dollars, except per unit amounts) The fair value of derivative instruments, which comprise conversion and redemption options of convertible debentures and an interest rate swap, is based respectively on the partial differential equation method and the discounted future cash flows method. The assumptions used in the partial differential equation method are estimated by reference to the Trust unit price and its volatility, and take into account the credit risk of the financial instrument. The assumptions used in the discounted future cash flows method are estimated by reference to the Canadian Dealer Offered Rate (“CDOR”) forward rates. Such fair value estimates are not necessarily indicative of the amounts the Trust might pay or receive in actual market transactions. Potential transaction costs have also not been considered in estimating fair value. The following tables provide a reconciliation of Level 3 fair value measurements on the consolidated statements of financial position: Year ended December 31, 2013 Balance beginning of year Losses for the year recognized in profit and loss under Net adjustment to fair value of derivative financial instruments Issue of Series E subordinated convertible redeemable debentures Balance end of year Year ended December 31, 2012 Balance beginning of year (Gains) Losses for the year recognized in profit and loss under Net adjustment to fair value of derivative financial instruments Exercise of warrants Balance end of year Conversion and redemption options of convertible debentures $ 927 486 310 1,723 Warrants Conversion and redemption options of convertible debentures $ $ 265 42 (307) — 6,256 (5,329) — 927 BTB Annual Report 2013 112 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2013 and 2012 (Audited - in thousands of CAD dollars, except per unit amounts) The following table provides a sensitivity analysis for the volatility applied in fair value valuation of the conversion and redemption options of convertible debentures at December 31, 2013: Volatility sensitivity Increase (decrease) (0.50%) December 31, 2013 0.50% CONVERSION AND REDEMPTION OPTIONS OF CONVERTIBLE DEBENTURES $ 1,594 1,723 1,971 VOLATILITY % 19.25 19.75 20.25 As shown in the sensitivity analysis above, the fair value of the conversion and redemption options of convertible debentures is impacted by a change in the volatility used in the valuation model. Generally, an increase in the volatility, other things being equal, will result in an increase in fair value of the conversion and redemption options of convertible debentures and vice-versa. In some cases, when the fair value of the redemption option component is increasing more than the fair value of the conversion option component, an increase in volatility will result in a decrease in fair value of the conversion and redemption options. 15. Unit-based Compensation and Warrants (a) Unit-based compensation (i) 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. BTB Annual Report 2013 113 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2013 and 2012 (Audited - in thousands of CAD dollars, except per unit amounts) Unit-based compensation expense and the assumptions used in the calculation thereof using the Black & Scholes option valuation model are as follows: As at December 31, Unit-based compensation expense Liability recognized for unit-based compensation Unit options granted Remaining life (years) Volatility rate Distribution yield Risk-free interest rate 2013 2012 (8) 14 — (76) 22 — 1.40 - 2.22 0.69 - 3.53 17.54 - 16.41% 17.35 - 32.07% 8.97% 9.44% 1.10 - 1.13% 1.01 - 1.33% The following tables present relevant information on options outstanding at year-end and changes in the balances during the year: Grant date March 25, 2011 June 22, 2011 Number of units Maturity date Exercise price 10,000 March 21, 2016 May 26,2015 88,000 $4.60 $4.50 98,000 For the years ended December 31, Outstanding, beginning of year Forfeited/Cancelled Outstanding, end of year Units options 227,000 (129,000) 98,000 2013 Weighted average exercise price $5.07 $5.55 $4.51 Units options 551,000 (324,000) 227,000 2012 Weighted average exercise price $10.20 $13.17 $5.07 Options vested 98,000 $4.51 227,000 $5.07 Weighted average remaining life (years) 1.48 1.59 BTB Annual Report 2013 114 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2013 and 2012 (Audited - in thousands of CAD dollars, except per unit amounts) (ii) 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 presents relevant information on changes in the unit balances: For the years ended December 31, Outstanding, beginning of year Trustees’ compensation Distributions paid in units Outstanding, end of year 2013 Units 15,981 11,948 1,842 29,771 2012 Units — 15,264 717 15,981 As at December 31, 2013, the liability related to the plan was $140 (December 31, 2012 - $75). The related expenses recorded in profit and loss amount to $65 for the year ended December 31, 2013 (for the year ended December 31, 2012 - $75). No amount was paid under this plan for the years ended December 31, 2013 and 2012. (iii) Employee unit purchase plan The Trust offers an optional employee unit purchase plan to all its employees. Under this plan, the employees may contribute, each year, pursuant to a maximum of 3% to 7% of their base salary depending of their years of experience with the Trust. For each two units purchased by an employee, the Trust shall issue one unit from treasury. As at December 31, 2013, the liability related to the plan was $33, representing a total of 7,456 units to issue. The related expenses recorded in profit and loss amount to $33 for the year ended December 31, 2013. The units have been issued after year-end. (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. The related expenses recorded in profit and loss amount to $42 for the year ended December 31, 2012. BTB Annual Report 2013 115 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2013 and 2012 (Audited - in thousands of CAD dollars, except per unit amounts) 16. Trust 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 accordance 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 in accordance with IAS 32. In July 2013, the Trust completed a public issue of 4,328,600 units, including the over-allotment option, for total net proceeds of $18,996. 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. Trust units issued and outstanding are as follows: For the years ended December 31, Units outstanding, beginning of year Issue pursuant to a public issue Unit issue costs Issue pursuant to the distribution reinvestment plan Issue pursuant to the exercise of warrants Units outstanding, end of year Units 23,791,797 4,328,600 — 28,120,397 205,141 — 28,325,538 2013 Value $ 137,330 20,128 (1,132) 156,326 881 — Units 14,810,790 8,348,150 — 23,158,940 132,857 500,000 157,207 23,791,797 2012 Value $ 99,503 37,252 (2,225) 134,530 582 2,218 137,330 (a) 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 units 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, less a discount of 5%. BTB Annual Report 2013 116 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2013 and 2012 (Audited - in thousands of CAD dollars, except per unit amounts) 17. Rental Revenues from Properties For the years ended December 31, Rental income contractually due from tenants Lease incentive amortization Straight-line lease adjustment 18. Net Financing Costs For the years 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 loans Net adjustment to fair value of derivative financial instruments 19. Expenses by Nature For the years ended December 31, Depreciation Employee benefits expense 20. Earnings per Unit 2013 $ 64,049 (1,480) 866 63,435 2013 $ (105) 13,861 5,146 776 45 2012 $ 48,697 (1,240) 661 48,118 2012 $ (141) 11,822 4,622 87 107 551 598 1,142 113 21,529 1,412 (5,286) 13,221 2013 $ 126 3,665 2012 $ 97 2,856 BTB’s trust units being puttable financial instruments presented as equity in accordance with IAS 32 (see note 16), the Trust is not required to report a profit or loss per unit figure on its consolidated statements of 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. BTB Annual Report 2013 117 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2013 and 2012 (Audited - in thousands of CAD dollars, except per unit amounts) Net earnings per unit are calculated based on the weighted average number of units outstanding as follows: For the years ended December 31, Net income Weighted average number of units outstanding – basic Earnings per unit – basic 21. Operating Lease Income 2013 $ 2012 $ 18,349 25,735,969 17,967 18,668,871 0.71 0.96 The Trust as lessor has entered into leases on its property portfolio. Initial lease terms are generally between three and ten years and include clauses to enable periodic upward revision of the rental charge according to prevailing market conditions. Some leases contain options to terminate before the end of the lease term. Future minimum base rentals receivable under non-cancellable operating leases as at December 31, 2013 are as follows: Within one year Over one year but within five years Over five years 22. Capital Management 2013 $ 40,424 117,451 70,396 228,271 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 operations and development, while maximizing returns for unitholders and 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. BTB Annual Report 2013 118 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2013 and 2012 (Audited - in thousands of CAD dollars, except per unit amounts) The Trust’s capital is as follows: As at December 31, Mortgage loans payable(1) Convertible debentures(1) Bank loans(1) Unitholders’ equity (1) Excluding issue costs As at December 31, Mortgage loans payable, Convertible debentures and Bank loans / total asset value ratio Mortgage loans payable and Bank loans/ total asset value ratio 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 (see note 14) 2013 $ 314,173 69,000 1,045 384,218 152,592 536,810 2012 $ 296,214 59,020 15,000 370,234 124,778 495,012 2013 % 70.3 57.7 2012 % 73.3 61.6 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, 2013, overdue rent receivable amounted to $1,037 (December 31, 2012 - $953), of which a provision for doubtful account of $263 (December 31, 2012 - $271) has been recorded. BTB Annual Report 2013 119 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2013 and 2012 (Audited - in thousands of CAD dollars, except per unit amounts) Management 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. (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 one mortgage loan outstanding of $1,380 as at December 31, 2013, all other mortgage loans payable and convertible debentures bear interest at fixed rates or are covered by an interest rate swap agreement, accordingly a 100-basis point increase or decrease in the average interest rates for the fiscal year, assuming that all other variables remain constant, would have an impact of approximately $14 on the Trust’s comprehensive income for the year ended December 31, 2013. (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 BTB’s 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, 2013, the Trust was in compliance with all the covenants to which it was subject. BTB Annual Report 2013 120 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2013 and 2012 (Audited - in thousands of CAD dollars, except per unit amounts) The Trust’s cash position is regularly monitored by management. The following are contractual maturities of financial liabilities, including estimated interest payments: As at December 31, 2013 Estimated payment schedule Trade and other payables Distributions payable to unitholders Bank loans Mortgage loans payable and convertible debentures Carrying amount Total contractual cash flows 2014 2015 2016 2017 2018 $ $ $ 12,357 12,357 12,357 943 1,045 943 1,045 943 1,045 $ — — — $ — — — $ — — — $ — — — 2019 and thereafter $ — — — 377,745 455,083 86,132 43,033 111,917 392,090 469,428 100,477 43,033 111,917 70,223 70,223 66,170 66,170 77,608 77,608 As at December 31, 2012 Estimated payment schedule Trade and other payables Distributions payable to unitholders Bank loans Mortgage loans payable and convertible debentures Carrying amount Total contractual cash flows 2013 2014 2015 2016 2017 $ $ $ 12,788 12,788 12,788 792 14,825 792 16,031 792 16,031 $ — — — $ — — — $ — — — $ — — — 2018 and thereafter $ — — — 350,795 419,307 76,441 379,200 448,918 106,052 85,176 85,176 30,486 30,486 93,522 93,522 65,219 65,219 68,463 68,463 BTB Annual Report 2013 121 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2013 and 2012 (Audited - in thousands of CAD dollars, except per unit amounts) 23. Subsidiaries and Joint Arrangements (a) Subsidiaries 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”) Gestion immobilière BTB Inc. Corporation immobilière Cagim (“CIC”) Lombard SEC Place d’affaire Lebourgneuf Phase II, SENC (“PAL II”) Société immobilière Cagim, SEC Type Trust Trust Relationship Parent 100% owned by BTB REIT Corporation 100% owned by BTB FA&E Corporation 100% owned by BTB FA&E Limited Partnership General Partnership Limited Partnership 99.9% owned by BTB FA&E 0.1% owned by CIC 99.9% owned by BTB FA&E 0.1% owned by CIC 70.4% owned by BTB FA&E 29.5% owned by PAL II 0.1% owned by CIC (b) Joint arrangements The Trust has investments in joint arrangements whereby the parties that have joint control of the arrangements have rights to the assets, and obligations for the liabilities, relating to the arrangements. Therefore, the joint arrangements are classified as joint operations. The joint operations included in the Trust’s consolidated financial statement are as follows: As at December 31, Property* Immeuble BTB/Laplaine Huntington/BTB Montclair Complexe Lebourgneuf Phase II** * The three investments properties are located in Quebec. 2013 % 50 50 75 2012 % 50 50 75 ** Structured through a separate vehicle. The legal form of the separate vehicle gives the parties rights to the assets, and obligations for the liabilities, relating to the arrangement. Accordingly, the joint arrangement is classified as a joint operation. BTB Annual Report 2013 122 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2013 and 2012 (Audited - in thousands of CAD dollars, except per unit amounts) The consolidated financial statements include the Trust’s proportionate share of the assets, liabilities, revenues and expenses of these three joint arrangements. As at and for the years ended December 31, Assets Liabilities Revenues Expenses 24. Operating Segments 2013 $ 45,615 31,273 4,852 1,860 2012 $ 45,587 32,153 4,572 1,888 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), valuation 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 Office General purpose Industrial Commercial Office Industrial $ $ $ General purpose $ 118,403 15,889 7,791 100,561 8,855 7,324 79,236 6,841 5,517 110,585 9,795 4,701 Total $ 529,432 63,435 35,336 488,521 48,118 26,996 Year ended December 31, 2013 Investment properties Rental revenue from properties Net operating income Year ended December 31, 2012 Investment properties Rental revenue from properties Net operating income 101,675 11,684 7,163 98,608 7,898 5,360 208,793 27,007 13,058 200,092 23,584 11,418 BTB Annual Report 2013 123 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2013 and 2012 (Audited - in thousands of CAD dollars, except per unit amounts) 25. Compensation of Key Management Personnel and Trustees Key management personnel and trustees compensation is as follows: For the years ended December 31, Salaries and short-term benefits Unit-based compensation Total 2013 $ 1,654 83 1,737 2012 $ 1,527 (21) 1,506 Key management personnel are comprised of the Company’s executive officers. 26. Commitments and Contingencies (a) Contractual obligations on real estate The Trust entered into a binding agreement under which the Trust is committed to pay, up to a maximum of $1,275, for the refurbishment work of one investment property recently acquired. The execution of this obligation will not require any net cash disbursement as $1,275 presented as restricted cash will be available for the payment of the refurbishment work. (b) Litigation The Trust is involved with litigation and claims which arise from time to time in the normal course of business. These litigation and claims are generally covered by insurance. In the opinion of management, any liability that may arise from such contingencies will not have a significant adverse effect on the Trust’s consolidated financial statements. 27. Subsequent Events In February 2014, the Trust concluded a refinancing agreement for six of its properties for a total amount of $26,395, at an interest rate of 3.34%. The amount has been used to reimburse two existing financings of $ 24,857 bearing a weighted average interest rate of 5.74% and for general Trust purposes. BTB Annual Report 2013 124 Corporate Information Board of Trustees Executive Team Michel Léonard President and Chief Executive Officer Benoit Cyr, CPA, CA, MBA Vice-President and Chief Financial Officer Frédéric Seigneur Vice-President, Leasing Dominic Gilbert, B.A.A. Vice-President, Property Management 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 Léonard President and Chief Executive Officer BTB Real Estate Investment Trust Normand Beauchamp(2)(3) President and Chief Executive Officer Capital NDSL inc. 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 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 BTB Annual Report 2013 125 Legal Counsel De Grandpré Chait s.e.n.c.r.l. 1000 De la Gauchetière St. West Suite 2900 Montreal, Quebec, H3B 4W5 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 reinvested 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 Investor relations section of our website at www.btbreit.com or contact the Plan agent: Computershare Trust Company of Canada. Unitholders Information Head Office BTB Real Estate Investment Trust 2155 Crescent Montreal, Quebec, H3G 2C1 T 514 286-0188 F 514 286-0011 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.C BTB.DB.D BTB.DB.E Transfer Agent Computershare trust company of Canada 1500 University St. Suite 700 Montreal, Quebec, H3A 3S8 Canada T 514 982-7555 T Toll free: 1 800 564-6253 F 514 982-7850 service@computershare.com Taxability of distributions In 2013, for all Canadian unitholders, the distributions are fiscally treated as follow: Other revenues: 0% Fiscal Deferral: 100% Auditors KPMG s.r.l. / S.E.N.C.R.L. 600 De Maisonneuve Blvd. West Suite 1500 Montreal, Quebec, H3A 0A3 BTB Annual Report 2013 126 l s o c u D t r e b l i G : m a e t B T B d n a s t i a r t r o p / s o t o h P n g i s e D t o u H e n a h p é t S : n g i s e D i s n o i t a c n u m m o C o r a g F i : g n i t i r w y p o C BTB Real Estate Investment Trust 2155, Crescent Montreal, Quebec, H3G 2C1 T 514 286 0188 F 514 286 0011 www.btbreit.com
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