BTB Real Estate Investment Trust
Annual Report 2015

Plain-text annual report

2 0 1 5 Annual Report Building Trust Profile BTB is a real estate investment trust listed on the Toronto Stock Exchange. It owns and manages a portfolio of 71 commercial, industrial and office properties, located primarily in the Montréal, Québec City and Ottawa areas. Its portfolio comprises more than 5.1 million square feet of leasable area. Since BTB’s inception in 2006, the total value of its assets has grown steadily and now stands at over $633 million, making BTB the second-largest real estate investment trust in the Province of Québec. BTB’s primary objective is to maximize total return for unitholders by: • generating stable monthly cash distributions that are reliable and tax-efficient; • increasing the Trust’s assets value through internal growth and acquisition strategies in order to increase available income and fund distributions; • managing assets internally in a centralized and controlled fashion in order to reduce operating expenses, management fees and rental expenses; • maximising the value of its assets through dynamic and responsible management so as to ensure the long-term value of its units. TABLE OF COnTEnTS Highlights 1 Message from the Chairman of the Board of Trustees 4 Message from the President and Chief Executive officer 6 Executive Team 8 Our properties Management Discussion and Analysis Audited Consolidated Financial Statements Corporate Information Unitholder Information 9 21 91 143 144 71 number of properties 5.1M Number of square feet $633M Total assets 77.3% Payout ratio of recurring distributable income 72.9M Annual rental income 91.7% 58.0 % Occupancy rate Mortgage debt ratio BTB S&P/TSX Index S&P/TSX Capped REIT Index 1 BTB Annual Report 2015Highlights80,000 80,000 70,000 70,000 60,000 60,000 50,000 50,000 40,000 40,000 30,000 30,000 20,000 20,000 10,000 10,000 0 0 2 9 8 2 7 , 0 7 1 7 6 , 5 3 4 3 6 , 8 1 1 8 4 , 2 1 0 2 3 1 0 2 4 1 0 2 5 1 0 2 9 5 4 1 4 , 1 1 0 2 5 9 5 4 3 , 0 1 0 2 Evolution of rental income for the years ending December 31st (in thousands of dollars) 50,000 50,000 40,000 40,000 30,000 30,000 20,000 20,000 10,000 10,000 0 0 4 9 2 1 4 , 3 8 9 7 3 , 6 3 3 5 3 , 6 9 9 6 2 , 2 1 0 2 3 1 0 2 4 1 0 2 5 1 0 2 7 5 3 9 1 , 0 1 0 2 2 2 1 2 2 , 1 1 0 2 20,000 20,000 15,000 15,000 10,000 10,000 5,000 5,000 0 0 3 3 7 8 1 , 6 2 6 6 1 , 0 1 6 2 1 , 3 1 0 2 4 1 0 2 5 1 0 2 6 2 0 5 , 1 1 0 2 4 8 6 2 , 0 1 0 2 5 0 8 7 , 2 1 0 2 Evolution of net operating income for the years ending December 31st (in thousands of dollars) Evolution of recurring distributable income for the years ending December 31st (in thousands of dollars) 6,000 6,000 5,000 5,000 4,000 4,000 3,000 3,000 2,000 2,000 1,000 1,000 0 0 5 9 0 5 , 2 2 8 4 , 0 8 5 4 , 1 4 3 4 , 2 7 2 3 , 1 1 0 2 2 1 0 2 3 1 0 2 4 1 0 2 5 1 0 2 6 6 8 2 , 0 1 0 2 Evolution of total leasable area for the years ending December 31st (in thousands square feet) 2 BTB Annual Report 2015Sherbrooke London area 5.1% 4.1% Greater Montreal area Ottawa area 19.1% 47.8% 23.7% Greater Quebec City area Breakdown of portfolio by geographical region December 31, 2015 Mixed-use Industrial 4% 5% 17.9% 31.3% 18% 49% 30.8% 20% Office Retail Breakdown by asset type December 31, 2015 3 BTB Annual Report 2015The members of the Board of Trustees join me in recognizing the team’s and management’s leadership, more particularly for their focus on creating value Jocelyn Proteau, Chairman, Board of Trustees 4 BTB Annual Report 2015Message from the Chairman of the Board of TrusteesBuilding trust by sustaining growth and the return on investment In 2015, BTB delivered on the commitments made to its unitholders, its tenants and its employees. While we cannot control the market, we can control how we respond to market conditions both in the short and long term. The decisions we make are always made with a view to building the trust you have placed in us. We are building trust by providing better than market returns for our unitholders, balanced against acceptable levels of risk, by meeting and exceeding the expectations of our tenants, and by recognizing and rewarding performance in our employees. Solid performance BTB once again performed well. We now own 71 properties that contain 5.1 M square feet and our total assets value stands at $633 M, making us the second largest real estate investment trust in Québec. BTB’s returns exceeded the returns of the TSX and the Capped REIT Index Total Return, and that gap further increased in the fourth quarter. At the end of the last fiscal year, distributions to unitholders totalled $14.5M, an increase of 11.8% compared to 2014, and our payout ratio was below 77.3%, a 0.8% improvement over 2014. BTB’s equity totals more than $174.3M. Based on the number of units outstanding as at December 31, 2015 (34.1M), the book value of BTB’s units was $5.02 per unit. These performance indicators reflect quality and efficiency throughout the organization. The members of the Board of Trustees join me in recognizing the team’s and management’s leadership, more particularly for their focus on creating value. The value chain links the whole organization, from employees on the front lines delivering services to our clients to the staff who work internally to ensure our systems stay operational, our environmental standards stay ahead of the pack and our technology provides us with the ability to continue to build trust at all levels. Continuously reducing financing costs is key to maximizing returns Our strategy for mortgage refinancing was to increase the term of our new mortgages where we could opt for a longer term. The average mortgage term went from 4.7 years to 5.5 years. During 2015, we refinanced and renewed $30M of mortgages. On average the refinancing and renewing activities allowed us to reduce the average interest rate and derived annual interest cost savings of over $400K in 2015. We also placed new financings during the year on the four properties we acquired. The average interest rate was 3.60% and for an average mortgage term of 12.7 years. During the last quarter of 2015, we issued a new series of Debentures (Series “F”) to reimburse the Series “C” that were initially coming to maturity on January 31st 2016. While issuing debentures was not our first choice, the market conditions that prevailed at the end of 2015 convinced us that it was the right approach. The new series was issued at a lower interest rate as compared to the Series ”C”, gleaning interest costs savings of $195K annually. We wish to thank our unitholders for the trust they have placed in us and to confirm that we will continue to build that trust by building on profitability. The arc of our growth has been constant since 2006 as we continue in our mission to be a major player in the Canadian real estate market. As we embark on our tenth year, we have every reason to believe our future is bright. 5 BTB Annual Report 2015 With your trust, we are committed to pursuing growth while ensuring the organization’s longevity. Michel Léonard, President and Chief Executive Officer 6 BTB Annual Report 2015Message from the President and Chief Executive OfficerBuilding trust by building on strong relationships Building relationships of trust at all levels of the organization is the key to continuing to build BTB Real Estate Investment Trust into a superior investment vehicle for our unitholders. With your trust comes great responsibility, a responsibility that impels us to consistently ensure we are making the right decisions at the right time to protect the future of BTB. Rest assured that we are. We invest in quality so unitholders make an investment in a quality product. Our commitment to quality drives all levels of the organization and it especially drives our people, the decision makers and relationship builders who manage our capital assets, lease our buildings, manage and maintain our facilities, care for our clients and build on our asset base. Our quest for quality also drives our decisions to cull underperforming assets from our mix of office, industrial, retail and mixed-use spaces, while we add new, higher quality better performing assets with good covenants and located in strong markets. This was the strategic thinking behind disposing of four smaller properties in Fiscal 2015 for total proceeds of $13 M and purchasing four larger, higher performing assets in the greater Ottawa and Montreal areas. This total investment of $63 M will provide greater economies of scale in terms of building management costs and will contribute to BTB’s profitability. Building trust means focusing on relationships BTB has 700 clients in its properties in cities in the provinces of Quebec and of Ontario. Maintaining the highest levels of client service is a priority and continues to guide the implementation of the online access to services system we provide our clients but also how we select, train and manage the frontline people who serve our clients on a daily basis. That was the key to maintaining our occupancy rate at 91.7% on December 31st, 2015 and a roster of clients with the solidity of top tier businesses and government services. We renewed 62.5% of the leases that were expiring during 2015 and during the same period, we secured a total of approximately 475,000 square feet of new tenancy and lease renewals at an average rate increase of 5.9%. Building on a sophisticated and scalable property management infrastructure has allowed us to reduce our dependency on third party managers and absorb our property management function into BTB’s efficient, centralized internal operation. During 2015 we terminated the management agreement with a third party to assume ourselves the management of our Quebec City properties. This decision will produce operating costs savings for BTB. At the end of the year our AFFO ratio stood at 89% while our FFO ratio was 88.6%. With a portfolio of 71 commercial properties totalling 5.1M square feet and with total assets of $633M and total revenues of $72.9M, BTB is still on target to reach its goal of $1 billion in total assets in the near future. With your trust, we are committed to pursuing growth while ensuring the organization’s longevity. 7 BTB Annual Report 2015From left to right: Benoit Cyr, Dominic Gilbert, Frédéric Seigneur and Michel Léonard. 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 8 BTB Annual Report 2015Executive teamIsland of Montreal 1400-1440 Antonio-Barbeau Street, Montreal 5810 and 5878-5882 Sherbrooke Street East, Montreal 7001-7035 St-Laurent Blvd, Montreal 1001 Sherbrooke Street East, Montreal 2153-2155 Crescent Street, Montreal 550-560 Henri-Bourassa Blvd, Montreal 3627-3645 des Sources Blvd, Dollard-des-Ormeaux 3761-3781 des Sources Blvd, Dollard-des-Ormeaux Marché de l’Ouest: 11600-11800 De Salaberry Blvd, Dollard-des-Ormeaux 1863-1865 Trans-Canada Highway, Dorval* 1325 Hymus Blvd, Dorval 5600 Côte-de-Liesse, Mont-Royal 4105 Sartelon Street, St-Laurent 208-244 Migneron Street and 3400-3410 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 4535 Louis B. Mayer Street, Laval 3695 Des Laurentides (Highway-15), Laval 81-83 Turgeon Street, Ste-Thérèse 5791 Laurier Blvd, Terrebonne 2175 Des Entreprises Blvd, Terrebonne 2205-2225 Des Entreprises Blvd, Terrebonne South Shore of Montreal 4890-4898 Taschereau Blvd., Brossard 2340 Lapinière Blvd, Brossard 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 2111 Fernand-Lafontaine Blvd, Longueuil 2350 Chemin du Lac, Longueuil Les Halles St-Jean: 145 St-Joseph Blvd, St-Jean-sur-Richelieu Le Bougainvillier: 315-325 MacDonald Street, St-Jean-sur-Richelieu Les galeries Richelieu: 1000 Du Séminaire Nord Blvd, St-Jean-sur-Richelieu Plaza Delson: 15,19,21,35 et 41 Georges-Gagné Blvd, Delson 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: 6700 Pierre-Bertrand Blvd, Quebec Édifice Lombard: 909-915 Pierre-Bertrand Blvd, Quebec Complexe Lebourgneuf, Phase II: 815 Lebourgneuf Blvd, Quebec Edifice Brinks: 191 D’Amsterdam Street, St-Augustin-de-Desmaures Terrasses des Lilas: 1100 and 1108-1136 St-Joseph Blvd, Drummondville Complexe de Léry: 505 Des Forges Street and 1500 Royale Street, Trois-Rivières 665-669 Thibeau Blvd, Trois-Rivières 3885 Harvey Blvd, Saguenay Promenades St-Noël: 100 1st Street West, Thetford Mines* 175 de Rotterdam Street, St-Augustin-de-Desmaures Sherbrooke 2865-2885 De Portland Blvd, Sherbrooke Place Fleurimont: 1635-1645 King Street East and 150-170 Duplessis Road, Sherbrooke Place Jacques-Cartier: 1640-1650 King Street West, Sherbrooke Les terrasses 777: 747-805 King Street East, Sherbrooke 30-66 Jacques-Cartier Blvd Nord, Sherbrooke 3705 Industrial Blvd, Sherbrooke 2059 René-Patenaude Street, Magog Greater London Area 311 Ingersoll Street, Ingersoll Ottawa Area 80 Aberdeen Street, Ottawa 245 Stafford Road West, Ottawa 1-9 and 10 Brewer Hunt Way and 1260-1280 Teron Rd, Ottawa 400 Hunt Club Rd, Ottawa 7 and 9 Montclair Blvd, Gatineau 705 Boundary Road, Cornwall 725 Boundary Road, Cornwall 805 Boundary Road, Cornwall* 2901 and 2905 Marleau Avenue, Cornwall 2200 Walkley Road, Ottawa 2204 Walkley Road, Ottawa *Properties in redevelopment 9 BTB Annual Report 2015Our propertiesLucie Ducharme, Trustee BUILDING TRUST With Unitholders and the investment community Building trust with our investors is all about profitability and value creation. Our returns are a reflection of the quality and efficiency of our team and our commitment to exceeding expectations in every aspect of the operation. 11 BTB Annual Report 201559 BTB now employs 59 people compared to 3 in 2006 BUILDING TRUST With employees Sylvain Moquin, an employee of BTB and Michel Léonard, CEO 12 BTB Annual Report 2015BUILDING TRUST With clients For most businesses, a commercial space is a strategic asset that is key to competitiveness, profitability and company brand image. Our commitment to clients in every one of our properties is to provide great level of service at the right price—to ensure the investment in their facilities brings the returns they are projecting. 700 Tenants Occupancy rate 91.7% Dominic Gilbert, Vice President, Property Management 13 BTB Annual Report 2015 When brokers recommend a property owned by BTB they are putting their own reputations on the line. Over the years BTB has built trust in the community of real estate professionals and their clients by acting with transparency, respect and understanding of the needs and concerns of all parties involved. After all, the goal is to make their clients our clients. With brokers and the Real Estate Community BUILDING TRUST 14 BTB Annual Report 2015Frédéric Seigneur, Vice President Leasing and Michel Labbé, Broker 15 BTB Annual Report 2015“ I was IT perspective, actually BTB’s first employee when we were listed on the TSX Venture on October 3, 2006. I can tell you that a lot has changed since then. things have From an become more sophisticated and complex. My work is to ensure communications are up and running from the computer and the networks to the cellular phones. I am focussed on our clients even if my direct clients are actually BTB’s employees. Last year, we officially internalised the management of our Quebec City buildings and consequently we had to secure office space in one of our buildings. We also had to hire employees that were to assume the management functions for the area. We started from zero and had to be up and running rapidly. I can happily report that all systems were running on time and the official opening of this office was done as scheduled, all systems functioning. Although BTB has grown substantially, our core values have not changed. We are all about our clients. Treating people well, whether they are employees, tenants, suppliers or others we deal with has always been a priority. I think it’s the key to our success. ” Sylvie Hatotte Director of Information System and Processes 16 BTB Annual Report 2015Employee recognition awards:2015 winners “ I’ve been with BTB for five years now and I’ve seen it grow. It’s a business with an open-door policy. I can reach every employee including the president. From the beginning we’ve always had access to people and to information. As we’ve grown, we’ve had to implement systems to accommodate our growth. I was responsible for creating a database that allows us to share information and understand the status of invoices from the day it is received to the day it has been paid. That allows me to provide information to suppliers, building managers and others who need to know where the invoice is in the system, and it also allows us to follow up if an invoice gets stalled anywhere in the approval and accounting process. ” Jean-Loup Brault Accounts payable 17 BTB Annual Report 2015 “ I have learned very early that one of the most important elements in BTB’s business is its tenants. They are our heart, and you can’t live without a heart. I remind myself of that every day. Together with a co-worker, we’re responsible for the day to day operations of four buildings located on the West Island suburb of Montreal. We work as a team. We can’t let our clients down. I have never seen my work as a problem. I look at it as an opportunity to keep the heart of our business healthy. ” Sergei Novitchi Maintenance Technician 18 BTB Annual Report 2015 ” “ I’ve been with BTB for about a year, after graduating in Environmental Studies receiving a Master’s degree. I have found early that the company puts its trust in employees and encourages them to propose projects, make decisions and take initiative. It’s a stimulating work environment. Some companies use outside consultant to do my job. But there are real advantages to having an in-house expert as we do. In the fall, I was involved in the process of obtaining BOMA Best Certification for eight of our buildings. I was proud to obtain the certification for the eight buildings we submitted. We take environmental risk reduction and sustainability very seriously and we know our clients also do. It is a social responsibility, and it makes business sense. This year I am looking to certify 14 buildings. ” Madeleine-Jane Brammer Lavoie Administration and Sustainable Development 19 BTB Annual Report 2015 Management Discussion and AnalysisQuarter ended December 31, 2015Management Discussion and Analysis Table of Contents Introduction Forward-Looking Statements Caveat Non-IFRS Financial Measures The Trust Objectives and Business Strategies Highlights of the Year (as at December 31, 2015) Selected Financial Information Selected Annual Information Selected Quarterly Information Real Estate Portfolio Performance Indicators Operating Results Operating Results – Same-Property Portfolio Distributable Income and Distributions Funds from Operations (FFO) Adjusted Funds from Operations (AFFO) Segmented Information Real Estate Operations Financial Position Assets Capital Resources 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 23 23 24 25 25 26 28 29 30 31 32 33 41 44 47 48 50 51 53 55 59 70 70 71 81 83 89 BTB Annual Report 2015 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, 2015, 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 17, 2016 should be read together with the audited consolidated financial statements and accompanying notes for the years ended December 31, 2015 and 2014. 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 years ended December 31, 2015 and 2014. Additional information about the Trust, including the 2014 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 dated March 17, 2016. Forward-Looking Statements Caveat From time to time, we make written or oral forward-looking statements within the meaning of applicable Canadian securities legislation. We may make forward-looking statements in this MD&A, other filings with Canadian regulators, reports to unitholders and other communications. These forward-looking statements include statements regarding our future objectives, strategies to achieve our objectives, as well as statements with respect to our beliefs, outlooks, plans, objectives, expectations, forecasts, estimates and intentions. The words “may,” “could,” “should,” “outlook,” “believe,” “plan,” “forecast,” “estimate,” “expect,” “propose,” and the use of the conditional and similar words and expressions are intended to identify forward-looking statements. By their very nature, forward-looking statements involve numerous factors and assumptions, and are subject to inherent risks and uncertainties, both general and specific, which give rise to the possibility that predictions, forecasts, projections and other forward-looking statements will not be achieved. We caution readers not to place undue reliance on these statements as a number of important factors could cause our actual results to differ materially from the expectations expressed in such forward-looking statements. These factors include general economic 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. BTB Annual Report 2015 23 Management Discussion and Analysis 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 quarterly 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 “Net operating income,” “distributable income,” “recurring distributable income,” “funds from operations” ("FFO"), “adjusted funds from operations” ("AFFO") and “recurring AFFO” are non-IFRS performance measures and do not have standardized meanings prescribed by IFRS. These measures 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 2015 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 up to December 31, 2015, it has acquired and owns 71 commercial, office and industrial properties in primary and secondary markets. BTB is an important real estate owner in geographical markets in Québec and eastern Ontario. The units and Series D, E and F convertible debentures are traded on the Toronto Stock Exchange under the symbols “BTB.UN”, “BTB.DB.D” “BTB.DB.E”, and “BTB.DB.F”, respectively. The Series C convertible debentures (BTB.DB.C) were redeemed on December 30, 2015. Most of the Trust’s properties are managed internally, with 65 of the Trust’s 71 properties held as at December 31 entirely managed by the Trust’s employees. Management’s objective is to resume, when favourable circumstances prevail, internal management of the Trust’s properties under 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, 2015(1) (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. Number of properties Leasable area (sq. ft.) Fair value (thousands of $) 71 5,094,866 622,651 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. More specifically, the objectives are as follows: (i) Generate stable monthly cash distributions that are reliable and fiscally beneficial to unitholders. (ii) Grow the Trust’s assets through internal growth and accretive acquisition strategies in order to increase 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 acquire 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’s management also regularly performs a strategic portfolio assessment to determine whether it is financially advisable to hold onto certain investments. BTB may dispose of certain assets if their size, location and/or profitability do not meet the Trust’s current criteria. In such cases, BTB expects to use the proceeds from the sale of assets to reduce debt. BTB Annual Report 2015 25 Management Discussion and Analysis Highlights of the Year as at December 31, 2015 • 71 properties • More than 5 million leasable square feet • More than $630 million in assets • More than $153 million in market capitalization Increase • • • • • 8.5% in rental income 8.7% in net operating income 7.9% in assets 2.8% in recurring distributable income per unit 3.3% in recurring AFFO per unit Improvement • • • In the payout ratio from 77.9% to 77.3% In the weighted average interest rate on mortgage debt from 4.13% to 3.95% In the weighted average term on mortgage debt from 4.7 years to 5.5 years Leasing activities • • • 250,000 square feet of leases renewed 225,000 square feet of new leases signed 5.9% increase in the average rate of expired and renewed leases Acquisitions • A 116,415-square-foot industrial property adjacent to Ottawa’s Macdonald-Cartier International Airport, for $12.5 million • A 145,546-square-foot shopping centre in Delson, a Montréal suburb, for $21.5 million • Two office properties with a combined leasable area of almost 159,000 square feet close to Ottawa International Airport on Walkley Road, for $28.5 million Disposal • Of four commercial properties totalling 135,000 square feet, which no longer met the Trust’s current investment criteria. Proceeds of sale totalling $13.3 million were mainly used to repay mortgage debt and the credit facility. BTB Annual Report 2015 26 Management Discussion and Analysis Capital transactions • Closing of an issuance of Series F convertible debentures bearing interest at 7.15% for total proceeds of $26.7 million. The net proceeds were mainly used to repay the Series C convertible debentures bearing interest at 8 % on December 30, 2015 for total proceeds of $22.8 million. Event subsequent to December 31, 2015 • On February 15, 2016, BTB acquired an office building located in downtown Montréal for $11 million. The property, entirely leased to a single tenant under a long-term lease, has a leasable area of 52,500 square feet. BTB Annual Report 2015 27 Management Discussion and Analysis Selected Financial Information As at December 31, 2015, the Trust owns 71 properties generating, on an annualized basis, revenues of close to $75 million. The following table presents highlights and selected financial information for the quarters and years ended December 31, 2015 and December 31, 2014: Periods ended December 31 (in thousands of dollars, except for ratios and per unit data) Reference Financial information Page 33 Rental income Net operating income(1) Page 36 Net property income from the same-property portfolio(1) Page 41 Recurring distributable income(1) Page 44 Page 45 Distributions Funds from operations (FFO) (1) Page 47 Recurring adjusted funds from operations (AFFO)(1) Page 48 Page 54 Total assets Page 57 Investment properties Page 60 Mortgage loans payable Page 62 Convertible debentures Page 65 Mortgage liability ratio Page 46 Debt-equity ratio – convertible debentures Page 46 Debt-equity ratio – acquisition line of credit Page 65 Total debt ratio Page 60 Weighted average interest rate on mortgage debt Unitholders’ equity Page 66 Market capitalization Financial information per unit Units outstanding (000) Weighted average number of units outstanding (000) Recurring distributable income Distributions Payout ratio on recurring distributable income Cash payout ratio on recurring distributable income FFO Payout ratio on FFO Recurring AFFO Payout ratio on recurring AFFO Unitholders’ equity Market price 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 (1) Financial term not defined by IFRS Page 67 Page 67 Page 45 Page 45 Page 45 Page 45 Page 47 Page 47 Page 48 Page 49 Page 66 Page 71 Page 71 Page 55 Page 56 Page 51 Page 51 Quarter Year 2015 $ 18,539 10,020 5,043 4,211 3,640 3,710 3,588 2014 $ 17,558 10,008 5,847 4,734 3,581 4,214 4,153 34,649 12.2¢ 10.5¢ 86.4% 74.9% 10.7¢ 98.1% 10.4¢ 101.4% 34,088 13.9¢ 10.5¢ 75.6% 67.0% 12.4¢ 85.0% 12.2¢ 86.2% 10.0% 10.7% 2015 $ 72,892 41,294 22,223 18,733 14,479 16,333 16,260 633,082 622,651 366,596 68,866 58.0% 11.5% 1.5% 71.0% 3.95% 2014 $ 67,170 37,983 22,703 16,626 12,953 15,226 14,363 586,737 571,462 329,943 65,186 56.3% 11.7% — 68.0% 4.13% 174,359 153,050 177,599 161,454 34,705 34,450 34,134 31,418 54.4¢ 42.0¢ 77.3% 67.6% 47.4¢ 88.6% 47.2¢ 89.0% 5.02 4.41 0.0% 100% 71 5,095 91.7% 5.9% 52.9¢ 40.8¢ 77.9% 69.2% 48.5¢ 85.1% 45.7¢ 90.2% 5.20 4.73 0,0 % 100 % 71 4,822 92.7% 8.7 % BTB Annual Report 2015 28 Management Discussion and Analysis Selected Annual Information The following table summarizes the Trust’s financial information for the last three years. Years ended December 31 (in thousands of dollars, except for ratios and per unit data) Rental income Net operating income(1), (5) Fair value adjustment on investment properties Net income Recurring distributable income(5) FFO(2), (5) Recurring AFFO(3), (5) Distributions Total assets Long-term debt Per unit financial information Net income Recurring distributable income(5) FFO(2), (5) Recurring AFFO(3), (5) Distributions Recurring payout ratio(4), (5) 2015 $ 72,892 41,294 (5,223) 8,669 18,733 16,333 16,260 14,479 633,082 445,262 2014 $ 67,170 37,983 (1,860) 12,883 16,626 15,226 14,363 12,953 586,737 395,129 25.2¢ 54.4¢ 47.4¢ 47.2¢ 42.0¢ 77.4% 41.0¢ 52.9¢ 48.5¢ 45.7¢ 40.8¢ 77.9% 2013 $ 63,435 35,336 8,375 18,349 12,610 11,632 10,462 10,412 546,559 377,745 71.3¢ 49.0¢ 45.2¢ 40.7¢ 40.0¢ 82.6% (1) Defined as rental income from investment properties less operating expenses. (2) See “Funds from operations” on page 47 for definition and reconciliation to net income. (3) See “Adjusted funds from operations” on page 48 for definition and reconciliation to FFO and net income. (4) Represents total distributions divided by recurring distributable income. (5) Non-IFRS measure. BTB Annual Report 2015 29 Management Discussion and Analysis Selected Quarterly Information The following table summarizes the Trust’s financial information for the last eight quarters. As at December 31 (in thousands of dollars except for per unit data) Rental income Net operating income(1) 2015 Q-4 $ 2015 Q-3 2015 Q-2 $ 2015 Q-1 $ 2014 Q-4 $ 2014 Q-3 $ 2014 Q-2 $ 2014 Q-1 $ 18,539 18,421 17,603 18,329 17,558 16,866 16,202 16,544 10,020 10,958 10,184 10,132 10,008 9,643 9,348 8,984 Net income (loss) and comprehensive income (2,124) 3,669 3,724 3,400 (1,405) 4,968 5,323 3,997 Net income (loss) per unit Recurring distributable income(1) Recurring distributable income per unit(1) Funds from operations (FFO)(1) FFO per unit(1) Recurring adjusted funds from operations (AFFO)(1) Recurring AFFO per unit(1) Distributions Distributions per unit (1)Non-IFRS measure. (6.1¢) 10.6¢ 10.8¢ 9.9¢ (4.1¢) 14.6¢ 18.3¢ 14.1¢ 4,211 5,286 4,739 4,497 4,734 4,224 3,990 3,677 12.2¢ 15.3¢ 13.8¢ 13.1¢ 13.9¢ 12.4¢ 13.7¢ 13.0¢ 3,710 4,321 4,236 4,066 4,214 3,838 3,786 3,388 10.7¢ 12.5¢ 12.7¢ 11.9¢ 12.4¢ 11.3¢ 13.0¢ 11.9¢ 3,588 4,663 4,132 3,876 4,153 3,657 3,436 3,117 10.4¢ 13.5¢ 12.0¢ 11.3¢ 12.2¢ 10.8¢ 11.8¢ 11.0¢ 3,640 3,628 3,615 3,596 3,581 3,514 3,023 2,834 10.5¢ 10.5¢ 10.5¢ 10.5¢ 10.5¢ 10.3¢ 10.0¢ 10.0¢ BTB Annual Report 2015 30 Management Discussion and Analysis Real Estate Portfolio BTB owns 71 quality properties which have a fair value of $623 million representing a total leasable area of more than 5 million square feet. A concise description of the properties owned as at December 31, 2015 can be found in the Trust’s Annual Information Form available at www.sedar.com. The properties acquired in 2015 are described on page 55 of this MD&A. Summary of properties as at December 31, 2015 Operating segment Office Commercial Industrial General purpose Subtotal Properties under redevelopment Total Number of properties Leasable area (sq. ft.) Occupancy rate (%) 22 15 20 11 68 3 71 1,515,435 981,006 1,537,242 878,623 4,912,306 182,560 5,094,866 83.9 92.8 97.2 94.3 91.7 — 91.7 BTB Annual Report 2015 31 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, reduce its operating costs and generate organic growth; • 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 other non-cash items as well as investments in 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. The payout ratios, which enable investors to assess the stability of distributions against distributable income, FFO and AFFO. The increase in average rate of renewed leases, which measures organic growth and the Trust’s ability to increase its rental income. More detailed definitions and analyses of each of these indicators are provided in the appropriate sections. BTB Annual Report 2015 32 Management Discussion and Analysis Operating Results The following table summarizes financial results for the quarters and years ended December 31, 2015 and December 31, 2014. The table should be read in conjunction with our consolidated financial statements and the notes thereto. Periods ended December 31 (in thousands of dollars) Rental income Operating expenses Net operating income Financial income Financial expenses Trust administration expenses Expenses for abandoned transaction Net income before following item: Fair value adjustment on investment properties Net income and comprehensive income Rental income Quarter Year 2015 $ 18,539 8,519 10,020 (19) 5,948 992 — 3,099 5,223 2014 $ 17,558 7,550 10,008 (50) 7,680 1,127 — 1,251 2,656 (2,124) (1,405) 2015 $ 72,892 31,598 41,294 (52) 23,203 4,044 207 13,892 5,223 8,669 2014 $ 67,170 29,187 37,983 (77) 19,108 4,209 — 14,743 1,860 12,883 Reference Page 33 Page 34 Page 36 Page 45 Page 37 Page 38 Page 36 Page 40 Page 40 BTB acquired and sold properties in 2014 and 2015. Acquisitions and sales completed in 2015 are presented in the “Investment Properties” section of this MD&A. Due to this acquisition activity, rental income increased by $981 or 5.6% for the fourth quarter of 2015 and $5,722 or 8.5% for fiscal 2015 compared to the same periods of 2014. Rental income includes all amounts earned from tenants related to lease agreements, including basic rent and additional rent from operating expense recoveries. It also includes other service charges for parking and storage, lease termination revenues and straight-line rent adjustments. Some of the Trust’s leases include clauses providing for the recovery of rental income based on amounts that increase every few years. These increases are negotiated when the leases are signed. Under IFRS, these increases must be recognized on a straight-line basis over the terms of the leases. In the fourth quarter of 2015, rent adjustments of $141 (2014: $143) were recorded on a straight-line basis. For the year ended December 31, 2015, these adjustments totalled $702 (2014: $610). In the fourth quarter of 2015, BTB recorded amortization of $552 (2014: $476) as a reduction in rental income, which represents amortization of lease incentives afforded to lessees. For the year ended December 31, 2015, amortization totalled $2,084 (2014: $1,793). BTB Annual Report 2015 33 Management Discussion and Analysis 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 Operating expenses Quarter Year 2015 $ 18,950 141 (552) 18,539 2014 $ 17,891 143 (476) 17,558 2015 $ 74,274 702 (2,084) 72,892 2014 $ 68,353 610 (1,793) 67,170 Operating expenses are expenses directly related to real estate operations and are generally charged back to tenants 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 tenants depends on the occupancy rate of the properties and the nature of the existing leases containing clauses regarding the recovery of expenses. Most of BTB’s leases are net rental leases under which tenants are required to pay their share of the properties’ operating expenses. BTB pays particular attention to compliance with existing leases and the recovery of these operating expenses. BTB recorded an increase in operating expenses of $969 or 12.8% between the fourth quarter of 2014 and the fourth quarter of 2015, and $2,411 or 8.3% for fiscal 2015 compared to last year. The significant increase in operating expenses in the fourth quarter of 2015 compared to the fourth quarter of 2014 is due to higher maintenance costs and repairs. These were expected during the year, but were mainly paid in the past quarter. On an annual basis, the 7.1% increase in maintenance costs and repairs is lower than the 8.5% growth in revenues. The following table shows the breakdown of operating expenses for the quarters and years ended December 31, 2015 and 2014. 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 2015 $ 3,418 5,101 8,519 46.0 2014 $ 2,907 4,643 7,550 43.0 2015 $ 2014 $ 11,748 19,850 31,598 43.3 10,970 18,217 29,187 43.5 BTB Annual Report 2015 34 Management Discussion and Analysis As a percentage of rental income, operating expenses increased 3.0% over the quarter, from 43.0% for the fourth quarter of 2014 to 46.0%, primarily due to maintenance costs and repairs mainly paid in the last quarter. On an annual basis, operating expenses as a percentage of rental income decreased 0.2%, from 43.5% for fiscal 2014 to 43.3% for fiscal 2015. BTB Annual Report 2015 35 Management Discussion and Analysis Net operating income 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. Periods ended December 31 (in thousands of dollars) Net operating income % of rental income Quarter Year 2015 $ 10,020 54.0% 2014 $ 10,008 57.0% 2015 $ 41,294 56.7% 2014 $ 37,983 56.5% Net operating income was stable for the fourth quarter of 2015 compared to 2014 and increased by 8.7% during fiscal 2015 compared to 2014. Net operating income is reduced by non-cash rental income adjustments. Before adjustments, net operating income increased by 0.9% for the quarter and 9.0% for the full fiscal year, and was as follows: Periods ended December 31 (in thousands of dollars) Net operating income Straight-line rental income adjustments Adjustments related to amortization of lease incentives Net operating income before rental income adjustments % of rental income on the basis of in-place leases Financial expenses Quarter Year 2015 $ 10,020 (141) 552 10,431 55.0 2014 $ 10,008 (143) 476 10,341 57.8 2015 $ 41,294 (702) 2,084 42,676 57.5 2014 $ 37,983 (610) 1,793 39,166 57.3 Financial expenses arise from the following loans and financings: • Mortgage loans payable contracted or assumed totalling approximately $368 million as at December 31, 2015, compared to $331 million as at December 31, 2014. The increase resulted from the financing of acquisitions and refinancing of certain properties during the last 12 months. • Series D, E and F convertible debentures for a total par value of $72.7 million. Series F debentures with a par value of $26.7 million were issued on December 4, 2015 and the proceeds were used to redeem the Series C debentures with a par value of $22.8 million on December 30, 2015. • Operating and acquisition lines of credit used as needed, which allowed primarily for the acquisition of properties during fiscal 2014 and 2015. • 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. BTB Annual Report 2015 36 Management Discussion and Analysis The following table shows the breakdown of financial expenses for the reporting periods: Periods ended December 31 (in thousands of dollars) Interest expense on mortgage loans payable Interest expense on debentures Interest expense on acquisition line of credit Interest expense on operating line of credit and other interest expenses Interest expenses Early repayment fees Accretion of effective interest Accretion of non-derivative liability component of convertible debentures Financial expenses before following item: Fair value adjustment on derivative financial instruments (debenture conversion options and interest rate swap) Financial expenses Quarter Year 2015 $ 3,688 1,412 212 38 5,350 — 378 178 5,906 42 5,948 2014 $ 3,469 1,274 — 32 4,775 — 290 145 5,210 2,470 7,680 2015 $ 14,360 5,228 675 125 20,388 625 1,273 629 22,915 288 23,203 2014 $ 13,523 5,096 161 77 18,857 — 1,069 561 20,487 (1,379) 19,108 Before recognition of fair value adjustments on derivative financial instruments (debenture conversion options and interest rate swap), financial expenses increased by $696 during the fourth quarter of 2015 compared to the same quarter in 2014, and by $2,428 during fiscal 2015 compared to fiscal 2014. The increases are due to financings related to acquisitions completed in the last 12 months. During the third quarter of 2015, BTB refinanced before term mortgage loans in the amount of $12.1 million bearing interest at an average rate of 5.64%, with a new $17.5 million loan bearing interest at 4.06% for a 10-year term. To complete this transaction, the Trust had to assume $625 in early repayment fees fully expensed during the third quarter of 2015. Refinancings and new financings put in place in 2015 are described in more detail in the “Capital Resources” section on page 60 of this MD&A. Financial expenses can be allocated among interest expenses amounting to $5,350 for the quarter (2014: $4,775) and $20,388 for the year (2014: $18,857) and non-monetary items. Non-monetary items include, but are not limited to, fair value adjustments on derivative financial instruments in the amount of $42 for the quarter (2014: $2,470) and $288 for the year (2014: credit positions of $1,379). Fair values fluctuate from one quarter to another. These adjustments result from changes in the value of the Trust’s units on stock exchanges during the reporting quarters and changes in the value of conversion options and interest rate swaps compared with the amounts recorded at the end of previous quarters. As at December 31, 2015, the average weighted contractual rate of interest on mortgage loans payable was 3.95%, 18 basis points lower than the rate in effect at December 31, 2014 and equivalent to the rate in effect at September 30, 2014. For 29 consecutive quarters, the weighted average interest rate has remained stable or declined. Interest rates on first-ranking mortgage financings ranged from 2.83% to 6.8% as at December 31, 2015. The weighted average term of financing in place as at December 31, 2015 was 5.5 years (4.7 years as at December 31, 2014). BTB Annual Report 2015 37 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, office expenses and bad debts and related legal fees. These administrative expenses were up 1.3% for the quarter and down 2.9% for the year compared to the same periods last year. Trust administration expenses include amortization of the head office building and property and equipment, as well as unit-based compensation, a non-monetary item that affects the volatility of administrative expenses from quarter to quarter. Periods ended December 31 (in thousands of dollars) Administrative expenses Amortization Unit-based compensation Trust administration expenses Quarter Year 2015 2014 $ 907 17 68 992 $ 895 32 200 1,127 2015 $ 3,696 69 279 4,044 2014 $ 3,808 117 284 4,209 Expenses for abandoned transaction In the normal course of business, the Trust’s management assesses various investment property acquisition projects. Some of these are not completed and the costs incurred are expensed during the quarter in which the decision not to go through with the acquisition is made. Due diligence expenses of $207 were incurred during the fiscal year for the proposed acquisition of a major property portfolio. As certain preliminary conditions were not met, management decided to terminate the acquisition project and write off any expenses incurred during the year. As the costs were high due to the size of the valued portfolio, they will be treated as an unusual item in the performance indicators. 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 periods 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 BTB Annual Report 2015 38 Management Discussion and Analysis 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. At year-end, the Trust also uses professional valuators to perform an independent external valuation of a portion of its portfolio. The portfolio’s 10 largest properties and approximately a third of the remaining properties were subject to an independent external valuation. The Trust thus intends to ensure that the entire portfolio has been valued by independent valuators every three years. As at December 31, 2015 63% (2014:67%) of the portfolio’s market value was subject to an independent external valuation. However, as at December 31, 2015, five properties with a total fair value of $15.7 million had not been subject to an independent external valuation over the past three years. Market conditions in the Trust’s geographical market remained relatively stable during the fourth quarter and fiscal 2015. However, management determined that a downward fair value adjustment to the portfolio as at December 31, 2015 was required. Accordingly, management recognized a decline in value of $ 4,947 as at December 31, 2015 (2014: $1,860) and incurred transaction fees on disposal of $276 for a total of $5,223. This decline in value was mainly due to the following factors: • Office properties: “Complexe de Léry” in Trois-Rivières, Québec and “1001 Sherbrooke Est” in Montréal, Québec, which lost major tenants during the year and have high vacancy rates, and “Complexe Lebourgneuf Phase 1” in Québec City, Québec, where the occupancy rate has been slow to stabilize. • Commercial properties: “1100-1136 St-Joseph” in Drummondville, Québec, which was partially redeveloped but has not yet attracted the interest of potential tenants as expected, “Marché de l’Ouest” in Dollard-des-Ormeaux, Québec, where major renovations have been budgeted, and “Galeries Richelieu” in St-Jean-sur-Richelieu, Québec which, due to the impending expiry of certain leases, is a more significant risk. The following tables highlight the significant assumptions used in the modelling process for both internal and external appraisals: As at December 31, 2015 Capitalization rate Terminal capitalization rate Discount rate As at December 31, 2014 Capitalization rate Terminal capitalization rate Discount rate Commercial Office Industrial General purpose 6.25% - 10.00% 7.00% - 8.50% 7.75% - 9.00% 6.50% - 9.25% 6.75% - 7.75% 7.50% - 8.50% 6.50% - 9.75% 7.75% - 9.75% 8.25% - 10.50% 7.00% - 8.25% 7.25% - 8.00% 7.75% - 8.50% 6.25% - 10.00% 7.25% - 8.00% 7.75% - 8.75% 6.50% - 9.25% 7.00% - 7.75% 7.50% - 8.50% 7.00% - 10.00% 7.25% - 9.75% 7.75% - 10.50% 7.00% - 8.25% 7.25% - 8.25% 7.75% - 9.00% The weighted average capitalization rate for the entire portfolio as at December 31, 2015 was 7.34% (2014: 7.45%), up/down 5 basis points since September 30, 2015 and down 11 basis points from a year earlier. BTB Annual Report 2015 39 Management Discussion and Analysis As at December 31, 2015, BTB has estimated that a 0.25% change in the capitalization rate applied to the overall portfolio would change the fair value of the investment properties by approximately $22 million. Net income (loss) and comprehensive income For the fourth quarter, the fair value adjustment on investment properties presented a $ 5.2 million decline in value in 2015, compared to a $2.7 million decline in value in 2014. The fair value adjustment on derivative financial instruments showed a $42 expense in 2015 compared to a $2.5 million expense in 2014. Consequently, BTB incurred a net loss of $2.1 million for the fourth quarter of 2015 and generated net income of $8.7 million for the year, down $0.7 million from the fourth quarter of 2014 and $4.2 million for the year. Periods ended December 31 (in thousands of dollars, except for per unit data) Net income (loss) and comprehensive income Per unit Adjusted net income and comprehensive income Quarter Year 2015 $ (2,124) (6.1¢) 2014 $ (1,405) (4.1¢) 2015 $ 8,669 2014 $ 12,883 25.2¢ 41.0¢ 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 derivative 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 and capitalization rates of the property portfolio. The following table presents adjusted net 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 (loss) and comprehensive income Volatile non-monetary items ±Fair value adjustment on investment properties ±Fair value adjustment on derivative financial instruments Adjusted net income and comprehensive income Per unit Quarter Year 2015 $ 2014 $ (2,124) (1,405) 5,223 42 3,141 2,656 2,470 3,721 9.1¢ 10.9¢ 2015 $ 8,669 5,223 288 14,180 41.2¢ 2014 $ 12,883 1,860 (1,379) 13,364 42.5¢ This table shows a decrease of 15.6% in quarterly adjusted net income and an increase of 6.1% in annual adjusted net income, before the non-monetary items mentioned above. Quarterly adjusted net income per unit decreased 16.5% and annual adjusted net income, 3.1%. BTB Annual Report 2015 40 Management Discussion and Analysis Operating Results – Same-Property Portfolio Same-property portfolio The same-property portfolio includes all the properties owned by BTB as at January 1, 2014, but does not include the financial spin-offs of disposals, acquisitions and developments completed in 2014 and 2015. The Trust is planning to completely demolish and redevelop the “Promenades St-Noël” commercial property in Thetford Mines. The Trust is waiting for the required authorizations to proceed. As such, the property is excluded from the same-property portfolio data. The following table summarizes the results of the same-property portfolio. Periods ended December 31 (in thousands of dollars) Rental income Operating expenses Net operating income Interest expense on mortgage loans payable Net property income Quarter Year 2015 $ 15,047 7,007 8,040 2,997 5,043 2014 $ 15,764 6,820 8,944 3,097 5,847 2015 $ 61,245 27,027 34,218 11,995 22,223 2014 $ 62,011 26,767 35,244 12,541 22,703 Increase in net property income from the same-property portfolio (13.7%) (2.1%) Net property income from the same-property portfolio provides an indication of the profitability of existing portfolio operations and BTB’s ability to increase its revenues and reduce its costs. It is defined as rental income from properties from the same-property portfolio, less operating expenses and interest on mortgage financing of the same portfolio. Rental Income Rental income from the same-property portfolio decreased by 4.5% in the fourth quarter ended December 31, 2015 compared to the same quarter of 2014. For fiscal year 2015, rental income from the same-property portfolio decreased by 1.2%. The decrease was mainly felt in the office segment, both for the quarter and the year. Two properties were responsible for substantially all of the decrease: “1001 Sherbrooke Est” in Montréal, which had a 36% occupancy rate as at December 31, 2015, and “50 St-Charles Ouest” in Longueuil, which had a 33% occupancy rate as at December 31, 2015. BTB Annual Report 2015 41 Management Discussion and Analysis The following table provides a reconciliation of income from the same-property portfolio and the total portfolio. Periods ended December 31 (in thousands of dollars) Same-property portfolio Acquisitions, disposals and development Rental income Operating expenses Quarter 2014 ∆% $ 15,764 1,794 17,558 (4.5) n/a 5.6 2015 $ 15,047 3,492 18,539 2015 $ 61,245 11,647 72,892 Year 2014 ∆% $ 62,010 5,160 67,170 (1.2) n/a 8.5 Operating expenses of the same-property portfolio were up 2.7% for the fourth quarter of 2015 compared to the same quarter of 2014, and 1.0% for the year. Higher operating expenses for the quarter were due to an increase of almost 6% in maintenance and repair expenses, while taxes and utilities remained stable in the fourth quarter. The following table provides a reconciliation of operating expenses from the same-property portfolio and the total portfolio. Periods ended December 31 (in thousands of dollars) Same-property portfolio Acquisitions, disposals and development Operating expenses Net operating income Quarter 2014 ∆% $ 6,820 730 7,550 2.7 n/a 12.8 2015 $ 7,007 1,512 8,519 2015 $ 27,027 4,571 31,598 Year 2014 ∆% $ 26,767 2,420 29,187 1.0 n/a 8.3 Net operating income from the same-property portfolio was down 10.1% for the fourth quarter of 2015 compared to the same quarter of 2014, and 2.9% for the year. The following table provides a reconciliation of net operating income from the same-property portfolio and the total portfolio. Periods ended December 31 (in thousands of dollars) Same-property portfolio Acquisitions, disposals and development Net operating income Quarter 2014 ∆% $ 8,944 1,064 (10.1) n/a 2015 $ 8,040 1,980 10,020 10,008 0.1 2015 $ 34,218 7,076 41,294 Year 2014 ∆% $ 35,244 2,739 37,983 (2.9) n/a 8.7 BTB Annual Report 2015 42 Management Discussion and Analysis Net operating income of the same-property portfolio before non-cash adjustments 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 incentives Net operating income before rental income Quarter 2014 ∆% $ 8,944 (115) 451 (10.1) n/a n/a 2015 $ 8,040 (46) 496 2015 $ 34,218 (466) 1,961 Year 2014 ∆% $ 35,244 (563) 1,716 (2.9) n/a n/a adjustments 8,490 9,280 (8.5) 35,713 36,397 (1.9) The Trust is currently making a considerable effort to attract new tenants and fill these new vacancies as quickly as possible. Interest expense As shown by the following table, interest expense on mortgage loans payable in the same-property portfolio decreased by 3.2% in the fourth quarter of 2015 and 4.4% for the year compared to the same periods of 2014, due to the refinancing of loans that matured at more advantageous rates, despite increased financing on certain properties. The following table reconciles the interest expense of the same-property portfolio with the interest expense of the total portfolio. Periods ended December 31 (in thousands of dollars) Same-property portfolio Acquisitions and development Interest expense on mortgage loans payable Quarter 2014 ∆% $ 3,097 372 3,469 (3.2) n/a 6.3 2015 $ 2,997 691 3,688 2015 $ 11,995 2,365 14,360 Year 2014 ∆% $ 12,541 982 13,523 (4.4) n/a 6.2 BTB Annual Report 2015 43 Management Discussion and Analysis 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 fair value adjustments of investment properties and derivative financial instruments, accretion of the liability component of convertible debentures, rental income arising from the recognition of leases on a straight-line basis, the amortization of lease incentives, the accretion of effective interest and certain other non-cash items. The following table shows the calculation of distributable income. Periods ended December 31 (in thousands of dollars) Quarter Year Net income (loss) 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 derivative financial instruments + Amortization of lease incentives - Straight-line rental income adjustment + Accretion of effective interest Distributable income Unusual items Early repayment fees(1) Expenses for abandoned transaction(2) Recurring distributable income 2014 $ (1,405) 2,656 45 200 145 2,470 476 (143) 290 4,734 2015 $ 8,669 5,223 158 279 629 288 2,084 (702) 1,273 2014 $ 12,883 1,860 165 284 561 (1,379) 1,793 (610) 1,069 17,901 16,626 2015 $ (2,124) 5,223 35 68 178 42 552 (141) 378 4,211 — — — — 625 207 — — 16,626 4,211 4,734 18,733 (1) Early repayment fees incurred for a transaction as part of a refinancing before term - see page 37 (2) Due diligence expenses incurred for an unrealized acquisition – see page 38 BTB Annual Report 2015 44 Management Discussion and Analysis 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 operating items - Interest expense on mortgage loans payable - Interest expense on convertible debentures - Interest expense on acquisition line of credit - Interest expense on operating line of credit and other interest expenses - Early repayment fees Distributable income 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 Distributable income Recurring distributable income Distributions Payout ratio (1) Cash payout ratio(2) Quarter Year 2015 $ 12,157 19 (2,615) (3,688) (1,412) (212) (38) — 4,211 2014 $ 13,552 50 (4,093) (3,469) (1,274) — (32) — 4,734 2015 $ 38,238 52 624 (14,360) (5,228) (675) (125) (625) 17,901 2014 $ 36,678 77 (1,272) (13,523) (5,096) (161) (77) — 16,626 Quarter Year 2015 $ 3,154 486 3,640 2014 $ 3,170 411 3,581 2015 $ 2014 $ 12,668 1,811 14,479 11,505 1,448 12,953 13.4% 11.5% 12.5% 11.2% 12.2¢ 12.2¢ 10.5¢ 86.4% 74.9% 13.9¢ 13.9¢ 10.5¢ 75.6% 67.0% 52.0¢ 54.4¢ 42.0¢ 77.3% 67.6% 52.9¢ 52.9¢ 40.8¢ 77.9% 69.2% (1) (2) The payout ratio corresponds to total distributions divided by recurring distributable income. The cash payout ratio corresponds to cash distributions divided by recurring distributable income. Recurring distributable income for the fourth quarter decreased by $523, from $4,734 to $4,211, between 2014 and 2015. The decrease reflects the same-property portfolio’s underperformance for the fourth quarter, as explained on page 38. Nonetheless, distributable income for fiscal 2015 amounted to $18,733, up $2,107 from fiscal 2014. Recurring distributable income per unit for the fourth quarter of 2015 was 12.2¢ compared to 13.9¢ in 2014, a 12.2% decrease, and 54.4¢ for fiscal 2015 compared to 52.9¢ for fiscal 2014, a 2.8% increase. Distributions to unitholders totalled 10.5¢ per issued unit in the fourth quarter of 2015 and 42¢ for the year, compared to 10.5¢ and 40.8¢ for the same periods in 2014. BTB Annual Report 2015 45 Management Discussion and Analysis The payout ratio for recurring distributable income was 86.4% in the fourth quarter of 2015 compared to 75.6% in the fourth quarter of 2014, and 77.3% for the 2015 fiscal year compared to 77.9% for 2014, reflecting a surplus of recurring distributable income over distributions. In the fourth quarter of 2015, 13.4% of distributions (2014: 11.5%) were reinvested under the distribution reinvestment plan implemented by BTB in 2011. More than $1.8 million (2014: $1.4 million) of the Trust’s cash has thereby been preserved through unit conversions since the beginning of the year. BTB Annual Report 2015 46 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 following is a list of some of the 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 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, 2015 and 2014: Periods ended December 31 (in thousands of dollars, except for per unit data) Net income (loss) 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 FFO FFO per unit FFO payout ratio(1) FFO cash payout ratio(2) Quarter Year 2015 $ (2,124) 5,223 17 552 42 3,710 10.7¢ 98.1% 85.0% 2014 $ (1,405) 2,656 17 476 2,470 4,214 12.4¢ 85.0% 75.2% 2015 $ 8,669 5,223 69 2,084 288 16,333 47.4¢ 88.6% 77.6% 2014 $ 12,883 1,860 69 1,793 (1,379) 15,226 48.5¢ 85.1% 75.6% (1) (2) The FFO payout ratio corresponds to total distributions divided by FFO. The FFO cash payout ratio corresponds to cash distributions divided by FFO. FFO decreased by 12.0% for the fourth quarter of 2015 compared to 2014. As explained on page 38, the decrease is due to the same-property portfolio’s under-performance and, more specifically, the high vacancy rate of two office properties during the year. FFO per unit for the fourth quarter amounted to 10.7¢ in 2015 compared to 12.4¢ in 2014. The FFO payout ratio stood at 98.1% for the fourth quarter of 2015 compared to 85.0% for the same period of 2014. For 2015, FFO per unit stood at 47.4¢ compared to 48.5¢ in 2014, a 2.3% decrease, and the payout ratio stood at 88.6% compared to 85.1% in 2014. Unusual items totalling $832 for the year were not deducted in calculating FFO, FFO per unit and the payout ratios. These unusual items are described in the recurring distributable income calculation on page 44. If they had been included, FFO per unit would have been 49.8¢ for the year, and the FFO payout ratio would have been 84.4% for the year, a significant increase compared to the previous year. BTB Annual Report 2015 47 Management Discussion and Analysis 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 and equipment • Unit-based compensation expenses Furthermore, the Trust deducts a provision for non-recoverable capital expenses in calculating AFFO. The Trust allocates significant amounts to the regular maintenance of its properties in an attempt to reduce capital expenses as much as possible. The allocation for non-recoverable capital expenses is calculated on the basis of 2% of rental revenues. 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 2015 48 Management Discussion and Analysis The following table provides a reconciliation of FFO and AFFO for the quarters and years ended December 31, 2015 and 2014: 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 - Provision for non-recoverable capital expenses - Provision for rental fees AFFO Unusual items Early repayment fees (1) Expenses for abandoned transaction(2) Recurring AFFO AFFO per unit Recurring AFFO per unit Recurring AFFO payout ratio(3) Recurring AFFO cash payout ratio(4) Quarter Year 2015 $ 3,710 (141) 378 178 18 68 (371) (252) 3,588 — — 2014 $ 4,214 (143) 290 145 28 200 (351) (230) 4,153 — — 3,588 4,153 2015 $ 16,333 (702) 1,273 629 89 279 (1,456) (1,017) 15,428 625 207 16,260 2014 $ 15,226 (610) 1,069 561 96 284 (1,343) (920) 14,363 — — 14,363 10.4¢ 10.4¢ 101.4% 87.9% 12.2¢ 12.2¢ 86.2% 76.3% 44.8¢ 47.2¢ 89.0% 77.9% 45.7¢ 45.7¢ 90.2% 80.1% (1) Early repayment fees incurred as part of a mortgage refinancing before term – see page 37. (2) Due diligence expenses incurred for an unrealized acquisition – see page 38. (3) The recurring AFFO payout ratio corresponds to total distributions divided by recurring AFFO. (4) The recurring AFFO cash payout ratio corresponds to cash distributions divided by recurring AFFO. Recurring AFFO per unit amounted to 10.4¢ in the fourth quarter of 2015 compared to 12.2¢ in 2014, a 14.8% decrease. The recurring AFFO payout ratio stood at 101.4% at the end of the fourth quarter of 2015 compared to 86.2% at the end of the fourth quarter of 2014. For the year, recurring AFFO per unit stood at 47.2¢ compared to 45.7¢ in 2014, a 3.3% increase. The recurring AFFO payout ratio improved by 1.3%, from 90.2% to 89.0%. BTB Annual Report 2015 49 Management Discussion and Analysis Segmented Information The Trust’s operations are derived from four categories of properties located in Québec and Ontario. The following tables present each category’s contribution to revenues and net operating income for the quarters and years ended December 31, 2015 and 2014. Quarters ended December 31 (in thousands of dollars) Quarter ended December 31, 2015 Commercial $ % Office $ % Industrial $ % General purpose $ % Total $ Investment properties Rental income from properties Net operating income 155,838 4,517 2,687 25.0 24.4 26.8 229,288 7,555 3,379 36.8 40.7 33.7 124,125 2,698 2,241 20.0 14.6 22.4 113,400 3,769 1,713 18.2 20.3 17.1 622,651 18,539 10,020 Quarter ended December 31, 2014 Investment properties Rental income from properties Net operating income 137,362 4,327 2,594 24.0 24.6 25.9 209,200 7,175 3,558 36.6 40.9 35.6 109,025 2,601 2,147 19.1 14.8 21.5 115,875 3,455 1,709 20.3 19.7 17.1 571,462 17,558 10,008 Year ended December 31 (in thousands of dollars) Year ended in 2015 Commercial $ % Office $ % Industrial $ % General purpose $ % Total $ Rental income from properties Net operating income 17,670 10,801 24.2 26.2 28,014 12,930 38.5 31.3 11,242 9,422 15.4 22.8 15,966 8,141 21.9 19.7 72,892 41,294 Year ended in 2014 Rental income from properties Net operating income 14,087 8,687 21.0 22.9 27,771 13,500 41.3 35.5 9,946 8,083 14.8 21.3 15,366 7,713 22.9 20.3 67,170 37,983 BTB Annual Report 2015 50 Management Discussion and Analysis Real Estate Operations Leasing activities The following table summarizes changes in available leasable area during the quarters and years ended December 31. Periods ended December 31 (in square feet) Available leasable area at beginning of period Available leasable area purchased (sold) Leasable area of properties under redevelopment Leasable area of expired leases Leasable area of leases terminated before term Leasable area of renewed leases Leasable area of new leases signed Other Quarter Year 2015 2014 2015 2014 462,131 (22,119) (8,020) 29,651 7,297 (15,286) (37,027) (8,384) 329,970 — — 154,390 46,661 (127,183) (60,164) (3,326) 340,348 (19,053) (8,020) 427,668 150,399 (248,567) (224,399) (10,133) 367,166 5,296 (46,938) 531,266 117,062 (427,218) (204,005) (2,281) Available leasable area at end of period 408,243 340,348 408,243 340,348 The Trust’s leasing operations were significant during the fourth quarter of 2015. More than 52,000 square feet of leases were signed with new tenants or renewed during the quarter (2014: 187,000). At the end of 2015, close to 475,000 square feet (2014: 631,000) were signed with new tenants or renewed. The average rental rate of expired and renewed leases rose 10.0% during the fourth quarter (2014: 10.7%). The average rate for the year increased by 5.8% (2014: 8.7%). Occupancy rates The following table provides occupancy rates by operating segment based on firm lease agreements signed as at the date of this report: Operating segment Office Commercial Industrial General purpose Total portfolio December 31, 2015 % 83.9 92.8 97.2 94.3 91.7 September 30, 2015 % 82.4 92.6 96.7 94.4 91.0 June 30, 2015 March 31, 2015 December 31, 2014 % 81.6 92.1 96.7 94.0 90.8 % 86.8 91.2 98.5 94.5 92.8 % 86.6 92.3 98.3 93.7 92.7 The overall occupancy rate is up by 0.7% since September 30, 2015 but down by 1.0% since December 31, 2014. It stood at 91.7% at the end of the fourth quarter of 2015. The decrease in the industrial segment’s occupancy rate was mainly due to the closing of Groupe Épicia’s warehouse. Retention rate The retention rate for leases expired in 2015 was 62.5% (2014: 70.0%). BTB Annual Report 2015 51 Management Discussion and Analysis Lease maturity The following table shows the lease maturity profile for the next few years: 2016 2017 2018 2019 2020 2021 Office Leasable area (sq. ft.) Average lease rate/square foot ($) % of office portfolio Commercial Leasable area (sq. ft.) Average lease rate/square foot ($) % 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 Top 10 tenants 206,673 $15.15 13.6% 23,008 $15.21 2.3% 92,013 $9.46 6.0% 126,453 $8.81 14.4% 448,147 $12.20 9,1% 128,124 120,545 275,212 122,939 125,225 $13.04 8.4% $13.05 7.9% $14.10 18.1% 104,947 116,678 161,825 $12.84 10.7% $14.35 11.9% $12.64 16.5% 77,072 $4.00 5.0% — — — 122,305 110,222 $11.76 13.9% $11.64 12.5% 540,417 $4.82 35.1% 37,506 $14.83 4.3% 810,994 $7.62 16.5% $13.97 8.1% 83,364 $13.15 8.5% $12.04 8.3% 56,721 $12.08 5.8% 37,310 393,937 $4.91 2.4% 80,380 $12.96 9.1% $5.50 25.6% 147,440 $9.82 16.8% 723,323 $8.03 14.7% 359,528 $13.04 7.3% 624,331 $12.04 12.7% 323,993 $12.47 6.6% As at December 31, 2015, BTB managed more than 600 leases, with an average area of more than 8,000 square feet. The three largest tenants are Société québécoise des infrastructures (SQI), Public Works Canada and Provigo Distribution Inc., accounting respectively for 3.6%, 2.9% and 2.2% of revenues, generated by a number of leases whose maturities are spread over time. Approximately 32% 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. BTB Annual Report 2015 52 Management Discussion and Analysis The following table shows the contribution of the Trust’s top 10 tenants as a percentage of revenues as at December 31, 2015: Client Société québécoise des infrastructures (SQI) Canada Public Works Provigo Distribution Inc. Shoppers Realty Inc. Atis Portes et Fenêtres Corp. Strongco Flextronics Le Groupe SM inc. Germain Larivière Inc. City of Ottawa % of revenue Leased area (square feet) 3.6 2.9 2.2 2.0 1.9 1.8 1.8 1.6 1.6 1.5 123,851 205,836 107,642 64,304 219,941 81,442 48,731 109,185 101,194 29,768 BTB Annual Report 2015 53 Management Discussion and Analysis Financial Position The following table presents the Trust’s balance sheet as at December 31, 2015 and December 31, 2014. It should be read in conjunction with the Trust’s audited annual financial statements and the notes thereto. (in thousands of dollars) Assets Investment properties Amounts receivable from tenants and other receivables Other assets Cash, cash equivalents and reserved cash Total assets Liabilities Mortgage loans payable Convertible debentures Bank loans Accounts payable and other liabilities Total liabilities Equity Unitholders’ equity Total liabilities and equity December 31, 2015 December 31, 2014 Reference $ $ Page 57 Page 59 Page 59 Page 59 Page 60 Page 62 Page 65 Page 66 Page 66 622,651 1,981 4,261 4,189 633,082 366,596 68,866 9,800 13,461 458,723 174,359 633,082 571,462 1,342 5,788 8,145 586,737 329,943 65,186 — 14,009 409,138 177,599 586,737 The main changes in the balance sheet as at December 31, 2015 compared to the balance sheet as at December 31, 2014 reflect the acquisition and disposal of investment properties in fiscal 2015 and the related mortgage financings, as well as the issuance of Series F debentures mainly used to reimburse the Series C debentures. BTB Annual Report 2015 54 Management Discussion and Analysis Assets Investment properties 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. The real estate portfolio consists of direct interests in wholly-owned investment properties and the Trust’s share of the assets, liabilities, revenues and expenses of jointly-controlled investment properties. The fair value of investment properties stood at $623 million as at December 31, 2015 compared to $571 million as at December 31, 2014. Acquisition of investment properties Since the beginning of 2015, the Trust acquired the following properties: • On January 28, 2015, a 116,415-square-foot industrial building, adjacent to Ottawa’s Macdonald- Cartier International Airport, for $12.5 million. Built in 2006 on a six-acre lot, the building is occupied by a single tenant, Lowe-Martin, one of Canada’s largest printers. The sale and leaseback transaction included a 15-year lease. • On January 30, 2015, a major shopping centre in Delson, a Montréal suburb, for $21.5 million. The 145,546-square-foot centre houses several major national retail businesses and restaurants including Loblaws, Pharmaprix, SAQ, National Bank, Tim Hortons, Harvey’s and Subway. • On August 27, 2015, two office buildings on Walkley Road, close to the Ottawa International Airport, for $28.5 million. The buildings, which have a combined leaseable area totalling approximately 159,000 square feet, house mainly Canadian government offices. Disposal of investment properties In November 2015, the Trust disposed of two commercial properties, a 27,537-square-foot property located in Boucherville and a 50,258-square-foot property located in St-Bruno-de-Montarville, for proceeds of sale totalling $7.2 million. In December 2015, the Trust disposed of two commercial properties, a 29,967-square-foot property located in Montréal and a 27,450-square-foot property located in Laval, for proceeds of sale of $3.0 million and $3.1 million, respectively. Proposed disposal of investment properties Following strategic deliberations, the Trust has agreed to sell certain assets when the circumstances are right. The proceeds of disposal from the sale of these assets will be used to repay debt. BTB Annual Report 2015 55 Management Discussion and Analysis Summary by operating segment As at December 31 Office Commercial Industrial General purpose Subtotal Properties under redevelopment Total Number of properties 2015 Leasable area (sq. ft.) 1,515,435 981,006 1,537,242 878,623 4,912,306 182,560 % 29.7 19.3 30.2 17.2 96.4 3.6 5,094,866 100.0 2014 Number of properties Leasable area (sq. ft.) 22 15 19 13 69 2 71 1,443,881 892,704 1,420,827 937,323 4,694,735 126,546 4,821,281 % 29.9 18.5 29.5 19.4 97.4 2.6 100.0 22 15 20 11 68 3 71 Investments in investment properties held BTB invests in permanent capital improvement projects to preserve the quality of infrastructure and services provided to tenants. These disbursements include value-maintenance investments corresponding to expenditures required to keep properties in their current operating condition, as well as property improvement and redevelopment projects intended to increase leasable area, occupancy rates or rental space quality. In some cases, capital expenditures can be recovered from rent. Capital expenditures for the quarter and year ended December 31, 2015 totalled $623 and $4,046 respectively, compared to $2,335 and $5,452 for the same periods of 2014, of which $(115) for the quarter and $1,183 for the year was recoverable (compared to $1,143 and $2,470 for the same periods of 2014). Capital expenditures do not include repair and maintenance costs. Capital expenditures vary from one period to another depending on the activities required or planned for each property. Upon the signing of several leases, the Trust makes disbursements for leasehold improvements or incentives applicable to the leased areas to meet the specific needs of tenants. Leasing fees are also paid to independent brokers. These disbursements amounted to $652 for the fourth quarter and $3,142 for the year ended December 31, 2015, compared to $1,845 and $4,225 for the same periods of 2014. The leasing fees and leasehold improvements apply to both new tenants and tenants whose leases are renewed for all properties. The amount of leasing fees and leasehold improvements varies depending on the renewal schedule, vacancy rates and tenancy profile. BTB Annual Report 2015 56 Management Discussion and Analysis The following table summarizes expenditures in maintenance capital expenditures, as well as incentives and leasing fees, for the periods ended December 31, 2015 and 2014. Periods ended December 31 (in thousands of dollars) Recoverable maintenance capital expenditures Grants Recoverable maintenance capital expenditures net of grants Non-recoverable maintenance capital expenditures Total maintenance capital expenditures Leasing fees and leasehold improvements Total Quarter Year 2015 $ 39 (154) (115) 738 623 652 1,275 2014 $ 1,263 (120) 1,143 1,192 2,335 1,845 4,180 2015 $ 1,469 (286) 1,183 2,863 4,046 3,142 7,188 2014 $ 2,590 (120) 2,470 2,982 5,452 4,225 9,677 The following table shows changes in the fair value of investment properties during the quarters and years ended December 31. Periods ended December 31 (in thousands of dollars) Balance, beginning of period Additions: Acquisitions Disposals Capital expenditures net of grants Leasing fees and leasehold improvements Fair value loss Other non-monetary changes Balance, end of period Quarter 2015 $ 2014 $ Year 2015 $ 2014 $ 639,787 570,271 571,462 529,432 — (13,053) 623 652 (4,947) (411) — — 2,335 1,845 (2,656) (333) 63,383 (13,053) 4,046 3,142 (4,947) (1,382) 40,121 (4,725) 5,452 4,225 (1,860) (1,183) 622,651 571,462 622,651 571,462 Investment properties under redevelopment The Trust decided to invest significant amounts in redeveloping and repositioning three properties: • 1863-1865 Transcanadienne, Montréal – Québec - This industrial property is currently completely vacant. To date, the Trust has invested approximately $1 million to repurpose this property. • 805 Boundary Road, Cornwall – Ontario - The Trust plans to divide this industrial property into two, with one section fully rented under a long-term lease with Canada Post. The Trust plans to significantly redevelop the other section, which is subject to a few short-term leases. The Trust intends to invest approximately $1 million and is waiting for the municipal permits to begin the work. BTB Annual Report 2015 57 Management Discussion and Analysis • 100, 1ère rue Ouest, Thetford Mines – Québec – The Trust is planning to completely demolish this building and redevelop this property into a modern retail business site. The Trust is waiting for the required authorizations. Event subsequent to December 31, 2015 On February 15, 2016, BTB acquired an office building located in downtown Montréal for $11 million. The property, entirely leased to a single tenant under a long-term lease, has a leasable area of 52,500 square feet. BTB Annual Report 2015 58 Management Discussion and Analysis Amounts receivable from tenants and other receivables Amounts receivable from tenants and other receivables increased from $1,342 as at December 31, 2014 to $1,981 as at December 31, 2015. The increase is mainly due to a balance of sale receivable of $600 following the sale of a property in December 2015. These amounts are summarized below: (in thousands of dollars) Amounts receivable from tenants Allowance for doubtful accounts Recovery from unbilled tenants Balance of sale receivable Other receivables Other assets December 31, 2015 December 31, 2014 $ 1,125 (329) 796 105 600 480 $ 1,195 (312) 883 65 — 394 1,981 1,342 Other assets include property and equipment net of accumulated depreciation required for the Trust’s operations, prepaid expenses and derivative financial instruments in debit positions. They are summarized below: (in thousands of dollars) Property and equipment Accumulated depreciation Prepaid expenses Derivative financial instruments Other Cash, cash equivalents and reserved cash (in thousands of dollars) Available cash Reserved cash BTB Annual Report 2015 59 December 31, 2015 December 31, 2014 $ 3,203 (911) 2,292 1,285 — 684 4,261 $ 3,049 (753) 2,296 2,599 53 840 5,788 December 31, 2015 December 31, 2014 $ 4,138 51 4,189 $ 6,428 1,717 8,145 Management Discussion and Analysis Capital Resources Long-term debt The following table shows the balances of BTB’s indebtedness as at December 31, 2015, including mortgage loans payable and convertible debentures, based on year of maturity and corresponding weighted average contractual interest rates: As at December 31, 2015 (in thousands of dollars) Year of maturity 2016 2017 2018 2019 2020 2021 and thereafter Total Balance of convertible debentures $ — — 23,000 — 49,700 — 72,700 Balance of mortgages payable $ 72,742 60,864 38,941 42,281 20,433 132,692 367,953 Weighted average contractual interest rate % 4.07 3.85 5.00 3.57 6.11 4.14 4.47 Weighted average contractual interest rate As at December 31, 2015, the weighted average contractual interest rate of the Trust’s long-term debt stood at 4.47%, i.e. 3.95% for mortgages payable and 7.10% for convertible debentures. Mortgage loans payable As at December 31, 2015, the Trust’s mortgage loans payable amounted to $368 million compared to $330.8 million as at December 31, 2014, before deferred financing costs and valuation adjustments, an increase of $37.2 million due to acquisition financings completed in 2015, certain refinancings and principal repayments on monthly payments. As at December 31, 2015, the weighted average interest rate was 3.95%, compared to 4.13% for mortgage loans on the books as at December 31, 2014, a drop of 18 basis points. As at December 31, 2015, all mortgages payable bear interest at fixed rates or are coupled with an interest rate swap. The weighted average term of existing mortgage financings was 5.5 years as at December 31, 2015 and 4.7 years as at December 31, 2014. BTB spreads the terms of its mortgages over many years in order to mitigate the risk associated with renewing them. BTB Annual Report 2015 60 Management Discussion and Analysis The following table summarizes changes in mortgage loans payable during the quarters and years ended December 31, 2015: As at December 31, 2015 (in thousands of dollars) Balance at beginning of period Mortgage loans contracted or assumed Balance repaid at maturity or upon disposal Monthly principal repayments Balance as at December 31, 2015 Note: Before unamortized financing costs and valuation adjustments. Quarter $ 373,143 7,000 (9,339) (2,851) 367,953 Year $ 330,784 79,875 (31,634) (11,072) 367,953 Except for two properties under redevelopment valued at $4.3 million, and two properties partially securing the acquisition and operating lines of credit as at December 31, 2015, all of the Trust’s other properties were mortgaged as at December 31, 2015. Unamortized loan financing costs totalled $2,383 and are amortized under the effective interest method over the term of the loans. The following table, as at December 31, 2015, shows future mortgage loan repayments for the next few years: As at December 31, 2015 (in thousands of dollars) Maturity 2016 2017 2018 2019 2020 2021 and thereafter Total + Valuation adjustments on assumed loans - Unamortized financing costs Balance as at December 31, 2015 Principal repayment $ Balance at maturity $ 11,174 8,317 6,574 5,165 4,640 35,197 71,067 70,408 57,226 35,493 37,872 17,577 78,310 296,886 % of total 22.2 17.8 11.4 11.7 6.0 30.9 100.0 Total $ 81,582 65,543 42,067 43,037 22,217 113,507 367,953 1,026 (2,383) 366,596 Since the beginning of 2015, the Trust has entered into the following financing agreements: • In January 2015, a loan of $8.3 million for a 15-year term, bearing interest at a rate of 3.58%, for the sale and leaseback acquisition of an industrial property in the city of Ottawa, at a cost of $12.5 million. BTB Annual Report 2015 61 Management Discussion and Analysis • • • • In January 2015, a loan of $14.0 million for a 15-year term, bearing interest at a rate of 3.55%, for the acquisition of a shopping centre in Delson, a Montréal suburb, at a cost of $21.5 million. In July 2015, a refinancing of $17.5 million for a 10-year term, bearing interest at a rate of 4.06%, on two properties. The total amount was used to repay two outstanding financings of $12.1 million bearing interest at an average rate of 5.64% and for general Trust purposes. In August 2015, a loan of $18.5 million for a 10-year term, bearing interest at a rate of 3.64%, for the acquisition of two office buildings in Ottawa, at a cost of $28.5 million. In October 2015, a refinancing of two properties for a total amount of $7 million, at an interest rate of 3.77% maturing in 10 years, to reimburse two financings on these properties, one at 5.26% and the other at 4.0%. • During the year, renewal of three mortgage loans totalling $14 million on six properties, at similar terms and conditions as previously established. Event subsequent to December 31, 2015 In February 2016, a loan of $7.3 million for a 5-year term, bearing interest at rate of 2.77% and a second ranking loan of $2.6 million for a 2 year-term, bearing interest at 5.9%. These two loans were used to acquire an office building in Montréal, Québec for $11 million. In February 2016, BTB entered into a refinancing agreement for $1.6 million for a 5-year term, bearing interest at a rate of 3.30%, on an office property that is 75% owned. Convertible debentures (a) Series C In January 2011, the Trust had issued Series C convertible, unsecured, subordinated debentures, bearing 8% interest, in the amount of $23 million. Interest was payable semi-annually and the debentures matured on January 31, 2016. The debentures were also convertible at the option of the holder at any time no later than January 31, 2016, subject to certain conditions. The conversion price was $5.00 per unit (the "Series C conversion price"). An amount of $146 was converted in 2015. On December 4, 2015, the Trust refinanced the Series C debentures in the amount of $23 million by issuing new Series F debentures, and the Series C subordinated debentures were fully repaid on December 30 2015. (b) 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, 2015, the closing market price of BTB units was $4.41. Since July 31, 2014, but before July 31, 2016, under certain conditions, the debentures will be BTB Annual Report 2015 62 Management Discussion and Analysis 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. (c) 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, 2015, the closing market price of BTB units was $4.41. 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. 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. (d) Series F In December 2015, the Trust issued Series F subordinated, convertible, unsecured debentures, bearing 7.15% interest, in the amount of $26.7 million. Interest is payable semi-annually and the debentures mature on December 31, 2020. The debentures are convertible at the holder’s option at any time before December 31, 2020, subject to certain conditions. The conversion price is $5.65 per unit (the "Series F conversion price"). As at December 31, 2015, the closing market price of BTB units was $4.41. As of December 31, 2018, but before December 31, 2019, 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 F conversion price and, as of December 31, 2019, but before December 31, 2020, at a redemption price equal to their principal amount plus accrued and unpaid interest. BTB Annual Report 2015 63 Management Discussion and Analysis The Trust may, at its option and under certain conditions, elect to satisfy its obligation to pay the principal amount of the Series F debentures by issuing freely tradable units to Series F debenture holders. In 2015, only the Series C debentures met the conditions necessary for an authorized redemption. Debentures totalling $146 were converted in the second quarter of 2015. As at December 31, 2015 (in thousands of dollars) Contractual interest rate Effective interest rate Date of issuance Per-unit conversion price Date of interest payment Maturity date Series D Series E Series F Total 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 2020 7.15% 8.47% December 2015 $5.65 June 30 and December 31 December 2020 Balance as at December 31, 2015 21,627 21,968 25,271 68,866 BTB Annual Report 2015 64 Management Discussion and Analysis Bank loan – operating credit facility BTB has an operating credit facility of $2 million with a Canadian chartered bank. This credit facility is partially secured by a first-ranking collateral mortgage on three properties, a second-ranking collateral mortgage on three properties, and by a third-ranking mortgage. The facility bears interest at the bank’s base rate, plus 0.75%. As at December 31, 2015, the operating credit facility had not been used. Bank loans – acquisition credit facility BTB has an acquisition credit facility of $15 million with a Canadian chartered bank. This credit facility is partially secured by a first-ranking collateral mortgage on three properties, a second-ranking collateral mortgage on three properties, and a third-ranking mortgage on one property. The facility bears interest at the bank’s base rate, plus 3.25%. As at December 31, 2015, $9.8 million of the acquisition credit facility had been used. The Trust intends to repay the acquisition credit facility in full through the issuance of units as soon as circumstances permit. Debt ratio 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. The following table presents the Trust’s debt ratios as at December 31, 2015 and December 31, 2014. 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 Mortgage liability ratio (excluding convertible debentures and acquisition credit facility) Debt-equity ratio – convertible debentures Debt-equity ratio – acquisition line of credit Total debt ratio (1) Gross amounts 2015 $ 367,953 72,700 9,800 450,453 633,993 58.0% 11.5% 1.5% 71.0% 2014 $ 330,784 69,000 — 399,784 587,490 56.3% 11.7% —% 68.0% According to the table above, the mortgage liability ratio, excluding the convertible debentures and acquisition credit facility as at December 31, 2015, amounted to 58.0%, an increase of 1.7% compared to December 31, 2014. Including the convertible debentures and the acquisition credit facility, the ratio stood at 71.0%, up 3.0% from December 31, 2014. This increase reflects two factors: use of $9.8 million of the acquisition credit facility to purchase accretive properties and a decline in the fair BTB Annual Report 2015 65 Management Discussion and Analysis value of investment properties. Management intends to repay the acquisition credit facility through a contingent unit issue as soon as circumstances permit. The Trust seeks to finance its acquisitions with mortgage debt ratios of 60% to 70% because the cost of financings is lower than the capital cost of the Trust’s equity. 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, 2015, the interest coverage ratio stood at 1.88, down 24 points from the fourth quarter of 2014. Despite the decrease, this ratio shows 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(1) Interest coverage ratio Quarter Year 2015 $ 10,020 5,331 1.88 2014 $ 10,008 4,725 2.12 2015 $ 41,294 20,336 2.03 2014 $ 37,983 18,780 2.02 (1) Interest expense excludes accretion of effective interest, accretion of non-derivative liability component of convertible debentures and the fair value adjustment on derivative financial instruments. Accounts payable and other liabilities (in thousands of dollars) Trade and other payables Distributions payable Unit-based compensation Derivative financial instruments Unitholders’ equity Unitholders’ equity consists of the following: (in thousands of dollars) Trust units Cumulative profit Cumulative distributions to unitholders Unitholders’ equity BTB Annual Report 2015 66 December 31 2015 December 31 2014 $ 11,693 1,215 173 380 13,461 $ 12,457 1,194 213 145 14,009 December 31, 2015 December 31, 2014 $ 184,853 42,232 (52,726) 174,359 $ 182,284 33,563 (38,248) 177,599 Management Discussion and Analysis 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, 114,253 units were issued during the fourth quarter of 2015 (2014: 91,789 units) and 408,625 units were issued during the year (2014: 318,482). Approximately 12.5% of the distributions paid in 2015 have been reinvested under the plan, compared to 11.2% in 2014. Units outstanding The following table summarizes units issued and the weighted number of units for the same periods. Periods ended December 31 (in number of units) Units outstanding, beginning of period Units issued Public offering Distribution reinvestment plan Awards under employee unit purchase plan Awards under the restricted unit compensation plan Awards under the deferred unit compensation plan Unit options exercised Conversion of Series C debentures Units outstanding, end of period Weighted average number of units outstanding Unit options Quarter Year 2015 Units 34,590,898 2014 Units 34,042,178 2015 Units 34,133,967 2014 Units 28,325,538 — 114,253 — — — — — 34,705,151 34,648,520 — 91,789 — — — — — 34,133,967 34,088,813 — 408,625 7,758 51,601 — 74,000 29,200 34,705,151 34,449,596 5,436,000 318,482 7,456 10,000 36,491 — — 34,133,967 31,418,057 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. BTB Annual Report 2015 67 Management Discussion and Analysis The following table provides details on unit options granted: Periods ended December 31 (in number of options) 2015 2014 Unit options Weighted average exercise price Unit options Weighted average exercise price Outstanding, beginning of period Expired Exercised Outstanding, end of period Options vested as at December 31 Weighted average remaining term to expiry (years) 74,000 — (74,000) — — — $ — — 4,50 — — — 98,000 (24,000) — 74,000 74,000 — $ 4.51 4.54 — 4.50 4.50 0.40 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. Deferred unit compensation plan The Trust has implemented a deferred unit compensation plan for its trustees and certain executive officers. Under this plan, beneficiaries may elect to receive their compensation in cash, deferred units or a combination of both. The following table summarizes deferred units outstanding during the quarters and years ended December 31, 2015 and 2014: Periods ended December 31 (in number of units) Deferred units outstanding, beginning of period Deferred units issued Distributions converted to deferred units Deferred units paid Deferred units outstanding, end of period Quarter Year 2015 — — — — — 2014 — — — — — 2015 — — — — — 2014 29,771 5,619 1,649 (37,039) — BTB Annual Report 2015 68 Management Discussion and Analysis Restricted unit compensation plan Under this plan, beneficiaries are awarded restricted units that become fully vested over a period of up to three years. The purpose of the plan is to encourage senior officers to achieve the Trust’s long-term growth objectives and align their interests with the interests of unitholders. The plan is also an executive retention tool. The following table summarizes restricted units outstanding during the quarters and years ended December 31, 2015 and 2014. Periods ended December 31 (in number of units) Restricted units outstanding, beginning of period Restricted units issued Restricted units settled Restricted units outstanding, end of period Employee unit purchase plan Quarter Year 2015 51,083 — — 51,083 2014 — 39,816 — 39,816 2015 2014 39,816 62,868 (51,601) — 49,816 (10,000) 51,083 39,816 The Trust offers an optional employee unit purchase plan to all its employees. Under this plan, the employees may contribute, each year, a maximum of 3% to 7% of their base salary depending on their years of experience with the Trust. For each two units purchased by an employee, the Trust shall issue one unit from treasury. During the quarter, no units were issued under the plan (December 31, 2014: nil) and as at December 31, 2015, a liability of 37$ was recorded for the contingent issuance of 8,340 units (2014: $37 for 7,758 units). Off-balance sheet arrangements and contractual commitments BTB does not have any other 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, 2015, BTB complied with all of its loan commitments and was not in default with any covenant at the balance sheet date. BTB Annual Report 2015 69 Management Discussion and Analysis 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, disposals of “real or immovable properties” that are capital properties, dividends, royalties and disposals 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 disposals 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. As at December 31, 2015, 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 2015 or any other subsequent year. BTB Annual Report 2015 70 Management Discussion and Analysis Taxation of Unitholders For Canadian unitholders, distributions are qualified as follows for taxation purposes: Quarters ended December 31 Taxable as other income Tax deferred Total 2015 % — 100 100 2014 % — 100 100 BTB Annual Report 2015 71 Management Discussion and Analysis Summary of Significant Accounting Policies and Estimates BTB’s significant accounting policies and estimates are described in Note 2 to the audited annual consolidated financial statements for the year ended December 31, 2015 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. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. 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) Critical judgements in applying accounting policies The following are critical judgements that management has made in the process of applying accounting policies and that have the most significant effect on the amounts recognized in the consolidated financial statements: 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 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 2015 72 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) Key sources of estimation uncertainty The following are key assumptions concerning the future and other key sources of estimation uncertainty that have a significant risk of resulting in a material adjustment to the carrying amount of assets and liabilities within the next financial year: 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 costs, 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. BTB Annual Report 2015 73 Management Discussion and Analysis 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. (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 2015 74 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. The Trust derecognizes a financial liability when its contractual obligations are discharged or cancelled, or expire. BTB Annual Report 2015 75 Management Discussion and Analysis (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. 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. BTB Annual Report 2015 76 Management Discussion and Analysis 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 The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement and requires an assessment of whether the arrangement conveys a right to use the asset. When substantially all risks and rewards of ownership are transferred from the lessor to the lessee, lease transactions are accounted for as finance leases. All other leases are accounted for as operating leases. (i) Trust as lessor All existing rental leases related to the Trust’s investment properties have been assessed as operating leases. (ii) Trust as lessee Leases of assets classified as finance leases are presented in the consolidated statements of financial position according to their nature. The interest element of the lease payment is recognized over the term of the lease based on the effective interest rate method and is included in financing expense. Payments made under operating leases are recognized in income on a straight-line basis over the term of the lease. BTB Annual Report 2015 77 Management Discussion and Analysis (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 profit or loss, 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. (i) Revenue recognition Rental revenue from property includes rents from tenants under leases, property 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 profit or loss 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, property 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. BTB Annual Report 2015 78 Management Discussion and Analysis (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 other payables, as well as accretion of the non-derivative liability component of convertible debentures, and accretion of effective interest on mortgage loans payable, convertible debentures and bank loans, 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. BTB Annual Report 2015 79 Management Discussion and Analysis (iv) Restricted unit compensation plan Compensation costs related to the restricted unit compensation 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 the end of each reporting period, until settlement. Any changes in fair value are recognized as compensation expense in profit or loss. The compensation expense is amortized using the graded vesting method. (o) Income taxes BTB is a mutual fund trust and a Real Estate Investment Trust (‘’REIT’’) pursuant to the Income Tax Act (Canada). Under current tax legislation, a REIT is entitled to deduct distributions of taxable income such that, it is not liable to pay income tax provided that its taxable income is fully distributed to unitholders. BTB has reviewed the 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. (p) 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 BTB Annual Report 2015 80 Management Discussion and Analysis 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 2015 81 Management Discussion and Analysis New Accounting Policies The following paragraphs present new accounting standards that apply to BTB but that have not been adopted yet. IFRS 9, Financial Instruments (“IFRS 9”) On July 24, 2014 the IASB issued the complete IFRS 9 (IFRS 9 (2014)). IFRS 9 (2014) introduces new requirements for the classification and measurement of financial assets. Under IFRS 9 (2014), financial assets are classified and measured based on the business model in which they are held and the characteristics of their contractual cash flows. The standard introduces additional changes relating to financial liabilities. It also amends the impairment model by introducing a new ‘expected credit loss’ model for calculating impairment. IFRS 9 (2014) also includes a new general hedge accounting standard which aligns hedge accounting more closely with risk management. This new standard does not fundamentally change the types of hedging relationships or the requirement to measure and recognize ineffectiveness, however it will provide more hedging strategies that are used for risk management to qualify for hedge accounting and introduce more judgment to assess the effectiveness of a hedging relationship. Special transitional requirements have been set for the application of the new general hedging model. The new standard is effective for the Trust’s annual period beginning on January 1, 2018. The extent of the impact of adoption of the standard has not yet been determined. IFRS 11, Joint Arrangements (“IFRS 11”) In May 2014, the IASB issued amendments to IFRS 11, Joint Arrangements: Accounting for Acquisitions of Interests in Joint Operations. The amendments provide guidance on how to account for the acquisition of an interest in a joint operation in which the activities constitute a business combination as defined in IFRS 3. Acquirers of such interests are to apply the relevant principals on business combination accounting in IFRS 3 and other standards, as well as disclosing the relevant information specified in these standards for business combinations. The amendment to IFRS 11 is effective for annual periods beginning on or after January 1, 2016 and should be applied prospectively. The Trust does not expect this amendment to significantly impact the consolidated financial statements. IFRS 15, Revenue from Contracts with Customers (“IFRS 15”) In May 2014 the IASB issued IFRS 15 in replacement of IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfer of Assets from Customers, and SIC 31 Revenue – Barter Transactions Involving Advertising Services. The standard contains a single model that applies to contracts with customers and two approaches to recognising revenue: at a point in time or over time. The model features a contract-based five-step analysis of transactions to determine whether, how much and when revenue is recognized. The new standard is effective for the Trust’s annual period beginning on January 1, 2018. The extent of the impact of adoption of the standard has not yet been determined. IFRS 16, Leases (“IFRS 16”) In January 2016, the IASB issued IFRS 16, Leases. The new standard brings most leases on-balance sheet for lessees under a single model, eliminating the distinction between operating and finance leases. Lessor accounting, however, remains largely unchanged and the distinction between operating and finance leases is retained. This standard would be effective for the Trust's annual periods beginning after January 1, 2019 with earlier adoption permitted. The extent of the impact of adoption of the standard has not yet been determined. BTB Annual Report 2015 82 Management Discussion and Analysis IAS 1, Presentation of Financial Statements (“IAS 1”) During December 2014, the IASB issued an amendment to IAS 1 clarifying certain existing IAS 1 requirements. The amendments include the following: the materiality requirements in IAS 1; that specific line items in the consolidated statements of earnings and OCI and the consolidated balance sheets may be disaggregated; that entities have flexibility as to the order in which they present the notes to financial statements; that the share of OCI of associates and joint ventures accounted for using the equity method be presented in aggregate as a single line item, and classified between those items that will or will not be subsequently reclassified to earnings. The amendments also clarify the requirements that apply when additional subtotals are presented in the consolidated balance sheets and the consolidated statement of earnings and OCI. These amendments are effective for annual periods beginning on or after January 1, 2016, with earlier adoption permitted. These amendments are not expected to have any significant impact on our consolidated financial statements. BTB Annual Report 2015 83 Management Discussion and Analysis Risks and Uncertainties Like all real estate entities, BTB 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 redevelopments, 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. At this time, low oil prices have had and continue to have an adverse effect on Canada’s economy. 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. The operating credit facility in the stated amount of $2 million and acquisition credit facility for $15 million are repayable on demand with at least 60 days’ notice. The credit facilities are subject to BTB Annual Report 2015 84 Management Discussion and Analysis review on or around June 1 of each year. 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. BTB Annual Report 2015 85 Management Discussion and Analysis 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. 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. BTB Annual Report 2015 86 Management Discussion and Analysis 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. Retail sector Since the beginning of 2015, the retail sector has suffered economic difficulties that have led to the closing of certain chains and to the bankruptcy of certain companies in Canada. Even though none of these occupied any rental space in BTB’s properties, their disappearance has led to an important increase in available space on the markets. This availability might lead to a downward pressure on leasable space and to an increase in competition to fill the vacant spaces. 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 development projects, development costs, capitalization rates and expected returns are subject to change, which may be material, as assumptions regarding items including, but not limited to, tenant rents, building sizes, leasable areas, and project completion timelines and costs are updated periodically based on revised plans, our cost tendering process, continuing tenant negotiations, demand for leasable space in our markets, our ability to obtain the required building permits, ongoing discussions with municipalities and successful property re-zonings. There can be no assurance that any assumptions in this regard will materialize as expected and changes could have a material adverse effect on our development program, asset values and financial performance. Recruitment and retention of employees and executives Competition for qualified employees and executives is intense. If BTB is unable to attract and retain qualified and capable employees and executives, the conduct of its activities may be adversely affected. Government regulation BTB and its properties are subject to various government statutes and regulations. Any change in such statutes or regulations that is adverse to BTB and its properties could affect BTB’s operating results and financial performance. BTB Annual Report 2015 87 Management Discussion and Analysis 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. Environmental matters Environmental and ecological related policies have become increasingly important in recent years. As an owner or operator of real property, BTB could, under various federal, provincial and municipal laws, become liable for the costs of removal or remediation of certain hazardous or toxic substances released on or in our properties or disposed of at other locations. The failure to remove or remediate such substances, or address such matters through alternative measures prescribed by the governing authority, may adversely affect BTB’s ability to sell such real estate or to borrow using such real estate as collateral, and could, potentially, also result in claims against BTB by private plaintiffs or governmental agencies. BTB is not currently aware of any material non-compliance, liability or other claim in connection with any of our properties, nor is BTB aware of any environmental condition with respect to any properties that it believes would involve material expenditures by BTB. Pursuant to BTB’s operating policies, BTB shall obtain or review a Phase I environmental audit of each immovable property to be acquired by it. Legal Risks BTB’s operations are subject to various laws and regulations across all of its operating jurisdictions and BTB faces risks associated with legal and regulatory changes and litigation. General Uninsured Losses BTB subscribed a blanket comprehensive general liability including insurance against fire, flood, extended coverage and rental loss insurance with policy specifications, limits and deductibles customarily carried for similar properties. There are, however, certain types of risks (generally of a catastrophic nature such as from wars or environmental contamination) which are either uninsurable or not insurable on an economically viable basis. BTB also carries insurance for earthquake risks, subject to certain policy limits and deductibles, and will continue to carry such insurance if it is economical to do so. Should an uninsured or underinsured loss occur, BTB could lose its investment in, and anticipated profits and cash flows from, one or more of its properties, but BTB would continue to be obligated to repay any mortgage loans on such properties. BTB Annual Report 2015 88 Management Discussion and Analysis Many insurance companies have eliminated coverage for acts of terrorism from their policies, and BTB may not be able to obtain coverage for terrorist acts at commercially reasonable rates or at any price. Damage to a property sustained as a result of an uninsured terrorist or similar act would likely adversely impact BTB’s financial condition and results of operation and decrease the amount of cash available for distribution. 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, disposals of “real or immovable properties” that are capital properties, dividends, royalties and disposals 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 disposals 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 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, 2015, 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 2015 89 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 consolidated financial statements. Based on these evaluations, the President and Chief Executive Officer and the Executive Vice-President and Chief Financial Officer concluded that the DC&P were effective as at the end of the year ended December 31, 2015 and that the current controls and procedures provide reasonable assurance that material information about BTB 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 BTB concluded that ICFR was effective as at the end of the year ended December 31, 2015, and, more specifically, that the financial reporting is reliable and that the consolidated financial statements have been prepared for financial reporting purposes in accordance with IFRS. During fiscal year 2015, management made no changes to internal control over financial reporting that materially affected, or are likely to materially affect, internal control over financial reporting. BTB Annual Report 2015 90 Audited Consolidated Financial StatementsYear ended December 31, 2015Consolidated Financial Statements Table of Contents Independent Auditor’s Report 93 Management’s responsibility for Financial Reporting 94 96 Consolidated Statements of Financial Position 97 Consolidated Statements of Comprehensive Income 98 Consolidated Statements of Changes in Unitholders’ Equity 99 Consolidated Statements of Cash Flows 100 Notes to Consolidated Financial Statements BTB Annual Report 2015 92 Consolidated Financial Statements 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, 2015, 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, 2015 and 2014 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 17th 2016 BTB Annual Report 2015 93 KPMG LLP 600 de Maisonneuve Blvd. West Suite 1500, Tour KPMG Montréal (Québec) H3A 0A3 Canada Telephone Fax Internet (514) 840-2100 (514) 840-2187 www.kpmg.ca INDEPENDENT AUDITORS' REPORT To the unitholders of BTB Real Estate Investment Trust We have audited the accompanying consolidated financial statements of BTB Real Estate Investment Trust, which comprise the consolidated statements of financial position as at December 31, 2015 and December 31, 2014, 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, 2015 and December 31, 2014, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards. March 17, 2016 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, 2015 and 2014 (Audited - in thousands of CAD dollars) ASSETS Investment properties Property and equipment Derivative financial instruments 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 17, 2016. Notes 4, 5, 6 7 14 8 9 10 11 12 13 14 15 2015 $ 622,651 2,292 — 51 1,969 1,981 4,138 633,082 366,596 68,866 9,800 380 173 11,693 1,215 458,723 174,359 633,082 2014 $ 571,462 2,296 53 1,717 3,439 1,342 6,428 586,737 329,943 65,186 — 145 213 12,457 1,194 409,138 177,599 586,737 Michel Léonard, Trustee Jocelyn Proteau, Trustee BTB Annual Report 2015 96 Consolidated Financial Statements BTB Real Estate Investment Trust Consolidated Statements of Comprehensive Income For the years ended December 31, 2015 and 2014 (Audited - in thousands of CAD dollars) Notes 17 18 19 20 Operating revenues Rental revenues from properties 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 Expenses for abandoned transaction Net income before the following item Net changes in fair value of investment properties and disposals transaction costs Net income being total comprehensive income for the year See accompanying notes to consolidated financial statements. 2015 $ 2014 $ 72,892 67,170 19,850 11,748 18,217 10,970 31,598 29,187 41,294 37,983 22,863 20,410 288 23,151 4,044 207 (1,379) 19,031 4,209 — 13,892 14,743 (5,223) (1,860) 8,669 12,883 BTB Annual Report 2015 97 Consolidated Financial Statements BTB Real Estate Investment Trust Consolidated Statements of Changes in Unitholders’ Equity For the years ended December 31, 2015 and 2014 (Audited - in thousands of CAD dollars) Balance at January 1, 2015 Issuance of units Distributions to unitholders Comprehensive income Balance as at December 31, 2015 Balance at January 1, 2014 Issuance of units Distributions to unitholders Comprehensive income Balance as at December 31, 2014 See accompanying notes to consolidated financial statements. Notes Unitholders’ contributions Cumulative distributions Cumulative comprehensive income 16 16 16 182,284 2,569 — 184,853 — 184,853 157,207 25,077 — 182,284 — 182,284 (38,248) — (14,478) (52,726) — (52,726) (25,295) — (12,953) (38,248) — (38,248) 33,563 — — 33,563 8,669 42,232 20,680 — — 20,680 12,883 33,563 Total 177,599 2,569 (14,478) 165,690 8,669 174,359 152,592 25,077 (12,953) 164,716 12,883 177,599 BTB Annual Report 2015 98 Consolidated Financial Statements BTB Real Estate Investment Trust Consolidated Statements of Cash Flows For the years ended December 31, 2015 and 2014 (Audited - in thousands of CAD dollars) Notes 20 7 17 17 18 4, 5 7 8 Operating activities Net income for the year Adjustment for: Decrease in fair value of investment properties and disposals transaction costs 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 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 Reduction in restricted cash Interest paid Net cash 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 2015 99 2015 $ 2014 $ 8,669 12,883 5,223 158 279 (702) 2,084 23,151 38,862 (624) 38,238 1,860 165 284 (610) 1,793 19,031 35,406 1,272 36,678 (68,735) (49,553) 12,087 (154) 4,656 (77) (56,802) (44,974) 78,326 (42,708) 18,959 (9,159) 25,251 (22,854) 333 (12,685) 1,666 (20,855) 16,274 (2,290) 6,428 4,138 66,113 (50,264) 2,246 (3,291) — — 23,429 (11,301) 4,115 (18,853) 12,194 3,898 2,530 6,428 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2015 and 2014 (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, 2015 and 2014 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 audited consolidated financial statements have been prepared in accordance with International Financial Reporting Standard (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). These consolidated financial statements were approved by the Board of Trustees on March 17, 2016. (b) Basis of presentation and 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. The Trust presents its consolidated statements of financial position based on the liquidity method, whereby all assets and liabilities are presented in increasing order of liquidity. (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 BTB Annual Report 2015 100 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2015 and 2014 (Audited - in thousands of CAD dollars, except per unit amounts) management’s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. 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) Critical judgements in applying accounting policies The following are critical judgements that management has made in the process of applying accounting policies and that have the most significant effect on the amounts recognized in the consolidated financial statements: 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 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) Key sources of estimation uncertainty The following are key assumptions concerning the future and other key sources of estimation uncertainty that have a significant risk of resulting in a material adjustment to the carrying amount of assest and liabilities within the next financial year: BTB Annual Report 2015 101 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2015 and 2014 (Audited - in thousands of CAD dollars, except per unit amounts) 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 costs, 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. 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 BTB Annual Report 2015 102 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2015 and 2014 (Audited - in thousands of CAD dollars, except per unit amounts) 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. 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. 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 BTB Annual Report 2015 103 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2015 and 2014 (Audited - in thousands of CAD dollars, except per unit amounts) 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. 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. BTB Annual Report 2015 104 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2015 and 2014 (Audited - in thousands of CAD dollars, except per unit amounts) (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 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. BTB Annual Report 2015 105 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2015 and 2014 (Audited - in thousands of CAD dollars, except per unit amounts) 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. (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 BTB Annual Report 2015 106 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2015 and 2014 (Audited - in thousands of CAD dollars, except per unit amounts) amount of an asset exceeds its estimated recoverable amount. Impairment losses are recognized in profit or loss. (e) Leases The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement and requires an assessment of whether the arrangement conveys a right to use the asset. When substantially all risks and rewards of ownership are transferred from the lessor to the lessee, lease transactions are accounted for as finance leases. All other leases are accounted for as operating leases. (i) Trust as lessor All existing rental leases related to the Trust’s investment properties have been assessed as operating leases. (ii) Trust as lessee Leases of assets classified as finance leases are presented in the consolidated statements of financial position according to their nature. The interest element of the lease payment is recognized over the term of the lease based on the effective interest rate method and is included in financing expense. Payments made under operating leases are recognized in income on a straight-line basis over the term of the lease. (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 profit or loss, 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, property 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 profit or loss on a straight-line basis over the term of the BTB Annual Report 2015 107 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2015 and 2014 (Audited - in thousands of CAD dollars, except per unit amounts) 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, property 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. (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 other payables, as well as accretion of the non-derivative liability component of convertible debentures, and accretion of effective interest on mortgage loans payable, convertible debentures and bank loans, 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 BTB Annual Report 2015 108 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2015 and 2014 (Audited - in thousands of CAD dollars, except per unit amounts) 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 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. (iv) Restricted unit compensation plan Compensation costs related to the restricted unit compensation 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 the end of each reporting period, until settlement. Any changes in fair value are recognized as compensation expense in profit or loss. The compensation expense is amortized using the graded vesting method. (m) 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. BTB Annual Report 2015 109 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2015 and 2014 (Audited - in thousands of CAD dollars, except per unit amounts) Accordingly, no current or deferred income taxes have been recorded in the consolidated financial statements. (n) 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 2015 110 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2015 and 2014 (Audited - in thousands of CAD dollars, except per unit amounts) (o) 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, 2015, and have not been applied in preparing these consolidated financial statements. (i) IFRS 9, Financial Instruments (“IFRS 9”) On July 24, 2014 the IASB issued the complete IFRS 9 (IFRS 9 (2014)). IFRS 9 (2014) introduces new requirements for the classification and measurement of financial assets. Under IFRS 9 (2014), financial assets are classified and measured based on the business model in which they are held and the characteristics of their contractual cash flows. The standard introduces additional changes relating to financial liabilities. It also amends the impairment model by introducing a new ‘expected credit loss’ model for calculating impairment. IFRS 9 (2014) also includes a new general hedge accounting standard which aligns hedge accounting more closely with risk management. This new standard does not fundamentally change the types of hedging relationships or the requirement to measure and recognize ineffectiveness, however it will provide more hedging strategies that are used for risk management to qualify for hedge accounting and introduce more judgment to assess the effectiveness of a hedging relationship. Special transitional requirements have been set for the application of the new general hedging model. The new standard is effective for the Trust’s annual period beginning on January 1, 2018. The extent of the impact of adoption of the standard has not yet been determined. (ii) IFRS 11, Joint Arrangements (“IFRS 11”) In May 2014, the IASB issued Amendments to IFRS 11, Joint Arrangements: Accounting for Acquisitions of Interests in Joint Operations. The amendments provide guidance on how to account for the acquisition of an interest in a joint operation in which the activities constitute a business combination as defined in IFRS 3. Acquirers of such interests are to apply the relevant principals on business combination accounting in IFRS 3 and other standards, as well as disclosing the relevant information specified in these standards for business combinations. The amendment to IFRS 11 is effective for annual periods beginning on or after January 1, 2016 and should be applied prospectively. The Trust does not expect this amendment to significantly impact the consolidated financial statements. (iii) IFRS 15, Revenue from Contracts with Customers (“IFRS 15”) In May 2014 the IASB issued IFRS 15 in replacement of IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfer of Assets from Customers, and SIC 31 Revenue – Barter Transactions Involving Advertising Services. The standard contains a single model that applies to contracts with customers and two approaches to recognising revenue: at a point in time or over time. The model features a contract-based five-step analysis of transactions to determine whether, how much and when revenue is recognized. The new standard is effective for the Trust’s annual BTB Annual Report 2015 111 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2015 and 2014 (Audited - in thousands of CAD dollars, except per unit amounts) period beginning on January 1, 2018. The extent of the impact of adoption of the standard has not yet been determined. (iv) IFRS 16, Leases (“IFRS 16”) In January 2016, the IASB issued IFRS 16, Leases. The new standard brings most leases on- balance sheet for lessees under a single model, eliminating the distinction between operating and finance leases. Lessor accounting, however, remains largely unchanged and the distinction between operating and finance leases is retained. This standard would be effective for the Trust's annual periods beginning after January 1, 2019 with earlier adoption permitted. The extent of the impact of adoption of the standard has not yet been determined. (v) IAS 1, Presentation of Financial Statements (“IAS 1”) During December 2014, the IASB issued an amendment to IAS 1 clarifying certain existing IAS 1 requirements. The amendments include the following: the materiality requirements in IAS 1; that specific line items in the consolidated statements of earnings and OCI and the consolidated balance sheets may be disaggregated; that entities have flexibility as to the order in which they present the notes to financial statements; that the share of OCI of associates and joint ventures accounted for using the equity method be presented in aggregate as a single line item, and classified between those items that will or will not be subsequently reclassified to earnings. The amendments also clarify the requirements that apply when additional subtotals are presented in the consolidated balance sheets and the consolidated statement of earnings and OCI. These amendments are effective for annual periods beginning on or after January 1, 2016, with earlier adoption permitted. These amendments are not expected to have any significant impact on our consolidated financial statements. BTB Annual Report 2015 112 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2015 and 2014 (Audited - in thousands of CAD dollars, except per unit amounts) 4. Investment Properties For the years ended December 31, Balance beginning of year Acquisitions of investment properties (note 5) Disposals of investment properties (note 6) Capital expenditures Government grants Capitalized leasing fees Capitalized lease incentives Lease incentives amortization Straight-line lease adjustment Net changes in fair value of investment properties (note 20) Balance end of year 2015 $ 571,462 63,383 (13 053) 4,332 (286) 778 2,364 (2,084) 702 (4,947) 622,651 2014 $ 529,432 40,121 (4,725) 5,572 (120) 1,137 3,088 (1,793) 610 (1,860) 571,462 The fair value of a subset of the Trust’s investment properties comprised of a selection of the most significant investment properties and approximately 1/3 of the remaining investment properties 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. 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 Direct Capitalization method. At December 31, 2015 external appraisals were obtained for investment properties with an aggregate fair value of $394,213 (December 31, 2014 - $381,600) and management’s internal valuations were used for investment properties with an aggregate fair value of $228,438 (December 31, 2014 - $189,862). BTB Annual Report 2015 113 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2015 and 2014 (Audited - in thousands of CAD dollars, except per unit amounts) 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, 2015 Capitalization rate Terminal capitalization rate Discount rate As at December 31, 2014 Capitalization rate Terminal capitalization rate Discount rate Commercial Office Industrial General purpose 6.25% - 10.00% 6.50% - 9.25% 6.50% - 9.75% 7.00% - 8.25% 7.00% - 8.50% 6.75% - 7.75% 7.75% - 9.75% 7.25% - 8.00% 7.75% - 9.00% 7.50% - 8.50% 8.25% - 10.50% 7.75% - 8.50% 6.25% - 10.00% 6.50% - 9.25% 7.00% - 10.00% 7.00% - 8.25% 7.25% - 8.00% 7.00% - 7.75% 7.25% - 9.75% 7.25% - 8.25% 7.75% - 8.75% 7.50% - 8.50% 7.75% - 10.50% 7.75% - 9.00% Valuations determined by the Direct Capitalization method are most sensitive to changes in capitalization rate. The following table summarizes the sensitivity of the fair value of investment properties to changes in capitalization rate: Capitalization rate sensitivity Increase (decrease) (0.50%) (0.25%) Base rate 0.25% 0.50% Fair Value $ 669,495 645,138 622,651 601,320 581,600 Change in fair value $ 46,844 22,487 — (21,331) (41,051) As shown in the sensitivity analysis above, an increase in the capitalization rate, other things being equal, will result in a decrease in fair value of the investment properties and vice-versa. BTB Annual Report 2015 114 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2015 and 2014 (Audited - in thousands of CAD dollars, except per unit amounts) 5. Acquisitions (a) 2015 Asset 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 2015 were as follows: Acquisition date Property type Location Interest acquired January 2015 January 2015 August 2015 August 2015 Transaction costs Total Industrial Commercial Office Office Ottawa, ON Delson, QC Ottawa, ON Ottawa, ON % 100 100 100 100 Fair value recognized on acquisition Investment properties, including transaction costs Mortgage loans payable $ 12,525 21,500 8,560 19,350 1,448 63,383 $ — — — — — — Trade and other payables, including transaction costs $ — 123 (59) 324 1,448 1,836 Total cash consideration paid $ 12,525 21,377 8,619 19,026 — 61,547 (b) 2014 Asset 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 2014 were as follows: Acquisition date Property type Location Interest acquired Fair value recognized on acquisition Investment properties, including transaction costs Mortgage loans payable Total cash consideration paid Trade and other payables, including transaction costs May 2014 Commercial August 2014 Industrial Saint-Jean-sur- Richelieu, QC Saint-Augustin-de- Desmaures, QC Transaction costs Total % 100 $ 31,600 100 8,300 221 40,121 $ — — — — $ 24 — 221 245 $ 31,576 8,300 — 39,876 BTB Annual Report 2015 115 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2015 and 2014 (Audited - in thousands of CAD dollars, except per unit amounts) 6. Disposals (a) 2015 Asset Disposals The following table presents relevant information on disposals recognized in the consolidated financial statements during 2015: Disposal date Property type Location Gross proceeds Trade and other payables, including transaction costs Balance of sale Net proceeds November 2015 November 2015 December 2015 December 2015 Transaction costs* Total Office Office General purpose General purpose Boucherville, QC St-Bruno-de-Montarville, QC Laval, QC Montreal, QC $ 2,945 3,983 3,125 3,000 — 13,053 $ (13) (4) (40) (33) (276) (366) — (600) — — — (600) $ 2,932 3,379 3,085 2,967 (276) 12,087 *Transaction costs are recognized in profit and loss under Net changes in fair value of investment properties and disposals transaction costs. (b) 2014 Asset Disposals The following table presents relevant information on disposals recognized in the consolidated financial statements during 2014: Disposal date Property type Location Gross proceeds Net proceeds Trade and other payables, including transaction costs April 2014 May 2014 Transaction costs* Total Commercial Office** Montreal, QC Sherbooke, QC $ 4,200 525 — 4,725 $ (66) (3) — (69) $ 4,134 522 — 4,656 *Transaction costs are recognized in profit and loss under Net changes in fair value of investment properties and disposals transaction costs. **Partial disposal of one of the two buildings constituting the investment property. BTB Annual Report 2015 116 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2015 and 2014 (Audited - in thousands of CAD dollars, except per unit amounts) 7. Property and Equipment Owner-occupied land Owner-occupied building Equipment, furniture and fixtures Rolling stock $ 494 — 494 — 494 $ 1,924 10 1,934 11 1,945 310 69 379 69 448 494 494 1,555 1,497 $ 472 67 539 55 594 259 81 340 72 412 199 182 $ 82 — 82 88 170 19 15 34 17 51 48 119 Total $ 2,972 77 3,049 154 3,203 588 165 753 158 911 2,296 2,292 Cost Balance at December 31, 2013 Additions Balance at December 31, 2014 Additions Balance at December 31, 2015 Accumulated Depreciation Balance at December 31, 2013 Depreciation for the year Balance at December 31, 2014 Depreciation for the year Balance at December 31, 2015 Net carrying amount Balance at December 31, 2014 Balance at December 31, 2015 8. Restricted Cash Restricted cash consists of an amount of $51 (December 31, 2014 - $1,717) provided in guarantee of mortgage loans. The permitted use of restricted cash is to fund certain future capital expenditures. 9. Other Assets As at December 31, Prepaid expenses Deposits Total 2015 $ 1,285 684 1,969 2014 $ 2,599 840 3,439 BTB Annual Report 2015 117 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2015 and 2014 (Audited - in thousands of CAD dollars, except per unit amounts) 10. Receivables As at December 31, Rents receivable Provision for doubtful accounts Net rents receivable Unbilled recoveries Other receivables Balance of sale (note 6) Total 2015 $ 1,125 (329) 796 105 480 600 1,981 2014 $ 1,195 (312) 883 65 394 — 1,342 Balance of sale is comprise of one mortgage loan receivable bearing interest at an interest rate of 2.75%, payable semi-annually, maturing in November 2020. 11. Mortgage Loans Payable Mortgage loans payable are secured by immovable hypothecs on investment properties having a fair value of approximately $616,301 as at December 31, 2015 (December 31, 2014 – $565,187). 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) Range of annual rates 2015 $ 361,450 6,503 1,026 (2,383) 366,596 3.95% 5.48 2014 $ 317,677 13,107 1,270 (2,111) 329,943 4.13% 4.68 2.83% - 6.80% 2.63% - 6.80% BTB Annual Report 2015 118 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2015 and 2014 (Audited - in thousands of CAD dollars, except per unit amounts) As at December 31, 2015, the mortgage loan scheduled repayments are as follows: 2016 2017 2018 2019 2020 Thereafter Unamortized fair value assumption adjustments Unamortized financing costs Scheduled repayments $ 11,174 8,317 6,574 5,165 4,640 35,197 71,067 Principal maturity $ 70,408 57,226 35,493 37,872 17,577 78,310 296,886 Total $ 81,582 65,543 42,067 43,037 22,217 113,507 367,953 1,026 (2,383) 366,596 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%. As at December 31, 2015, the outstanding principal amount was $6,503 (December 31, 2014 – $6,756). The Trust does not apply hedge accounting to such cash flow hedging relationships (see note 14). 12. Convertible Debentures As at December 31, 2015, the Trust had three series of subordinated, convertible, redeemable debentures outstanding. Series D Series E Series F Capital Interest rates Coupon Effective 23,000 23,000 26,700 % 7.25 6.90 7.15 % 8.47 7.90 8.47 Unit conversion price $ 6.10 6.15 5.65 Interest payments Maturity July 2018 Semi-annual Semi-annual March 2020 Semi-annual December 2020 BTB Annual Report 2015 119 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2015 and 2014 (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 D $ 21,346 1,654 23,000 Series E $ Series F $ 22,690 310 23,000 26,700 — 26,700 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 31,2015 Non-derivative liability component upon issuance Accretion of non-derivative liability component Unamortized financing costs Series D $ Series E $ Series F $ Total $ 21,346 932 22,278 (651) 22,690 106 22,796 (828) 26,700 — 26,700 (1,429) 70,736 1,038 71,774 (2,908) Non-derivative liability component 21,627 21,968 25,271 68,866 Conversion and redemption options (asset) liability component at fair value (5) 2 11 8 As at December 31,2014 Non-derivative liability component upon issuance Accretion of non-derivative liability component Unamortized financing costs Series C $ Series D $ Series E $ Total $ 21,592 1,058 22,650 (408) 21,346 693 22,039 (866) 22,690 66 22,756 (985) 65,628 1,817 67,445 (2,259) Non-derivative liability component 22,242 21,173 21,771 65,186 Conversion and redemption options asset component at fair value (12) (19) (22) (53) BTB Annual Report 2015 120 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2015 and 2014 (Audited - in thousands of CAD dollars, except per unit amounts) 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. During the second quarter of 2015, conversion options were exercised by holders on debentures representing a nominal amount of $146. The remaining debentures were redeemed in December 2015, in the amount of $22,854. 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”). Until 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. 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. BTB Annual Report 2015 121 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2015 and 2014 (Audited - in thousands of CAD dollars, except per unit amounts) Series F In December 2015, the Trust issued Series F subordinated convertible, redeemable, unsecured debentures bearing 7.15% interest payable semi-annually and maturing in December 2020, in the amount of $26,700. The debentures are convertible at the holder’s option at any time before December 2020, at a conversion price of $5.65 per unit (“Series F Conversion Price”). These debentures are not redeemable before December 31, 2018, except in the case of a change in control. As of December 31, 2018, but before December 31, 2019, 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 December 31, 2019, but before December 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 has access to an acquisition line of credit in the amount of $15,000. This line of credit bears interest at a rate of 3.25% above the prime rate. As at December 31, 2015, $9,800 was due under the acquisition line of credit (December 31, 2014 - $nil). The Trust also has access to an operating credit facility for a maximum amount of $2,000. This facility bears interest at a rate of 0.75% above the prime rate. As at December 31, 2015 and 2014, no amount was due under the operating credit facility. The acquisition line of credit and the operating credit facility are secured by an immoveable first rank hypothec on three properties having a value of $7,666, by an immoveable second rank hypothec on three properties having a value of $66,850 and by an immoveable third rank hypothec on a property having a value of $21,000. BTB Annual Report 2015 122 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2015 and 2014 (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. They do not include the fair value of cash and cash equivalents, restricted cash, receivables, deposits, trade and other payables and distributions payable to unitholders, which approximated their carrying amount as at December 31, 2015 and December 31, 2014 because of their short-term maturity. As at December 31, 2015 Carrying amount Fair value Measured at fair value Conversion and redemption options of convertible debentures (note 12) Interest rate swap For which fair values are disclosed Mortgage loans payable (note 11) Convertible debentures, including their conversion and redemption features Bank loans (note 13) Level 1 $ $ Level 2 Level 3 $ $ 8 372 — — — 372 366,596 68,874 9,800 — 72,012 — 377,459 — 9,800 8 — — — — As at December 31, 2014 Carrying amount Fair value Measured at fair value Conversion and redemption options of convertible debentures (note 12) Interest rate swap For which fair values are disclosed Mortgage loans payable (note 11) Convertible debentures, including their conversion and redemption features Level 1 $ $ Level 2 Level 3 $ $ (53) 145 — — — 145 329,943 65,133 — 69,688 337,749 — (53) — — — The fair value of mortgage loans payable was calculated by discounting cash flows from future payments of principal and interest using the period end market rate for various loans with similar risk and credit profiles. The period end market rates have been estimated by reference to published mortgage rates by major financial institutions for similar maturities. The fair value of convertible debentures, including their conversion and redemption features, was determined with reference to the last quoted trading price preceding the period end. The fair value of bank loans was calculated by discounting cash flows from financial obligations using the period end market rate for similar instruments. BTB Annual Report 2015 123 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2015 and 2014 (Audited - in thousands of CAD dollars, except per unit amounts) The fair values of derivative financial instruments, which comprise the conversion and redemption options of convertible debentures and an interest rate swap, are 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’s 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, 2015 Balance beginning of year Change for the year recognized in profit and loss under Net adjustment to fair value of derivative financial instruments Balance end of year Year ended December 31, 2014 Balance beginning of year Change for the year recognized in profit and loss under Net adjustment to fair value of derivative financial instruments Balance end of year Conversion and redemption options of convertible debentures $ (53) 61 8 Conversion and redemption options of convertible debentures $ 1,723 (1,776) (53) BTB Annual Report 2015 124 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2015 and 2014 (Audited - in thousands of CAD dollars, except per unit amounts) The following table provides a sensitivity analysis for the volatility applied in fair value measurement of the conversion and redemption options of convertible debentures at December 31, 2015: Volatility sensitivity Increase (decrease) (0.50%) December 31, 2015 0.50% Conversion and redemption options of convertible debentures $ (100) 8 125 Volatility % 20.24 20.74 21.24 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 (a) 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 2015 125 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2015 and 2014 (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 2015 21 — — — — — — 2014 (3) 17 — 0.40 15.93% 8.88% 0.94% The following table presents relevant information on changes in the number of unit options during the year: For the years ended December 31, Outstanding, beginning of year Forfeited / Cancelled Exercised Outstanding, end of year Options vested Units options 74,000 — (74,000) — — 2015 Weighted average exercise price 4.50 — 4.50 — Units options 98,000 (24,000) — 74,000 — 74,000 2014 Weighted average exercise price 4.51 4.54 — 4.50 4.50 BTB Annual Report 2015 126 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2015 and 2014 (Audited - in thousands of CAD dollars, except per unit amounts) (b) 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 number of deferred units during the year: For the years ended December 31, Outstanding, beginning of year Trustees’ compensation Distributions paid in units Units settled Outstanding, end of year 2015 Deferred Units 2014 Deferred Units — — — — — 29,771 5,619 1,649 (37,039) — As at December 31, 2015, the liability related to the plan was $nil (December 31, 2014 - $nil). No expense was recorded in profit and loss for the year ended December 31, 2015 (for year ended December 31, 2014 - $39). As part of the settlement, the Trust issued 36,491 units and paid an amount of $3 under this plan during the third quarter of 2014 (no issuance and no amount for the year ended December 31, 2015). (c) 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 service with the Trust. For each two units purchased by an employee, the Trust issues one unit from treasury. As at December 31, 2015, the liability related to the plan was $37 representing a total of 8,340 units to issue (December 31, 2014 - $37, representing a total of 7,758 units to issue). The related expense recorded in profit and loss amounted to $37 for the year ended December 31, 2015 (for the year ended December 31, 2014 - $37). The 8,340 units related to 2015 purchases were issued in February 2016 (7,758 units related to 2014 purchases - February 2015). BTB Annual Report 2015 127 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2015 and 2014 (Audited - in thousands of CAD dollars, except per unit amounts) (d) Restricted unit compensation plan The Trust offers a restricted unit compensation plan for all executive officers and key employees. Under this plan, the executive officers and key employees are eligible to receive restricted units. The following table presents relevant information on changes in the restricted units: For the years ended December 31, Outstanding, beginning of year Granted Vested / Settled Outstanding, end of year 2014 Restricted units Restricted units 2015 39,816 62,868 (51,601) 51,083 — 49,816 (10,000) 39,816 As at December 31, 2015, the liability related to the plan was $136 (December 31, 2014 - $159). The related expense recorded in profit and loss amounted to $221 for the year ended December 31, 2015 (for the year ended December 31, 2014 - $205). As part of settlement, the Trust issued 51,601 units under this plan for year ended December 31, 2015 (10,000 units for the year ended December 31, 2014). 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. BTB Annual Report 2015 128 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2015 and 2014 (Audited - in thousands of CAD dollars, except per unit amounts) 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 (a) Issue pursuant to conversion of convertible debentures (note 12) Issue pursuant to the unit option plan (note 15 (a)) Issue pursuant to the deferred unit compensation plan (note 15 (b)) Issue pursuant to the employee unit purchase plan (note 15 (c)) Issue pursuant to the restricted unit compensation plan (note 15 (d)) Units 34,133,967 — — 34,133,967 408,625 29,200 74,000 — 7,758 2015 $ 182,284 — — 182,284 1,772 144 371 — 37 Units 28,325,538 5,436,000 — 33,761,538 318,482 — — 36,491 7,456 51,601 245 10,000 2014 $ 157,207 24,734 (1,305) 180,636 1,400 — — 169 33 46 Units outstanding, end of year 34,705,151 184,853 34,133,967 182,284 (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 a price based on the volume-weighted average of the trading prices on the Toronto Stock Exchange for the last five trading days before the distribution date, less a discount of 5%. (b) Distributions For the years ended December 31, Distributions to unitholders Distributions per unit 2015 $ 14,478 0.42 2014 $ 12,953 0.41 BTB Annual Report 2015 129 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2015 and 2014 (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 Early repayment fees of a mortgage loan Net adjustment to fair value of derivative financial instruments 2015 $ 74,274 (2,084) 702 72,892 2015 $ (52) 14,360 5,228 690 110 2014 $ 68,353 (1,793) 610 67,170 2014 $ (77) 13,523 5,096 172 66 629 561 1,273 625 288 23,151 1,069 — (1,379) 19,031 19. Expenses for abandoned transaction For the year ended December 31, 2015, due diligence expenses of $207 were incurred for the proposed acquisition of a major property portfolio (for the year ended December 31, 2014 - $nil). As certain preliminary conditions were not met, management decided to terminate the acquisition project. BTB Annual Report 2015 130 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2015 and 2014 (Audited - in thousands of CAD dollars, except per unit amounts) 20. Net changes in fair value of investment properties and disposals transaction costs For the years ended December 31, Net changes in fair value of investment properties Disposals transaction costs 21. Expenses by Nature For the years ended December 31, Depreciation Employee benefits expense 22. Earnings per Unit 2015 $ 4,947 276 5,223 2015 $ 158 4,128 2014 $ 1,860 — 1,860 2014 $ 165 3,947 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. 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 2015 $ 8,669 34,449,596 2014 $ 12,883 31,418,057 0.25 0.41 BTB Annual Report 2015 131 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2015 and 2014 (Audited - in thousands of CAD dollars, except per unit amounts) 23. Operating Lease Income The Trust as lessor enters into leases on its investment properties. 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, 2015 are as follows: Within one year Beyond one year but within five years Beyond five years 2015 $ 45,680 126,664 70,150 242,494 24. Capital and Financial Risk Management This note presents information about the Trust’s management of capital and the Trust’s exposure to financial risk and its objectives, policies and processes for measuring and managing risk. (a) Capital Management The Trust’s capital consists of contributions by unitholders, convertible debentures, mortgage loans and bank loans, excluding issuance costs. In managing its capital, the Trust’s objectives are to ensure that it has adequate resources for its 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 2015 132 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2015 and 2014 (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 (b) 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) 2015 $ 367,953 72,700 9,800 450,453 174,359 624,812 2014 $ 330,784 69,000 — 399,784 177,599 577,383 2015 % 71.2 59.7 2014 % 68.1 56.4 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. (i) 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, 2015, overdue rent receivable amounted to $638 (December 31, 2014 - $507), of which a provision for doubtful account of $329 (December 31, BTB Annual Report 2015 133 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2015 and 2014 (Audited - in thousands of CAD dollars, except per unit amounts) 2014 - $312) has been recorded. 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. (ii) 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. As at December 31, 2015, all 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 no impact on the Trust’s comprehensive income for the year ended December 31, 2015. (iii) Liquidity risk Liquidity risk is managed by: • maximizing cash flows from operations; • • adopting an investment property acquisition and improvement program that takes into account 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, 2015, the Trust was in compliance with all the covenants to which it was subject. BTB Annual Report 2015 134 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2015 and 2014 (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, 2015 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 2016 2017 2018 2019 2020 $ $ $ 11,693 11,693 11,693 1,215 9,800 1,215 9,800 1,215 9,800 $ — — — $ — — — $ — — — $ — — — 2021 and thereafter $ — — — 435,462 528,364 100,661 458,170 551,072 123,369 81,276 81,276 77,571 77,571 52,722 52,722 79,456 79,456 136,678 136,678 As at December 31, 2014 Estimated payment schedule Trade and other payables Distributions payable to unitholders Mortgage loans payable and convertible debentures Carrying amount Total contractual cash flows 2015 2016 2017 2018 2019 $ $ $ 12,457 12,457 12,457 1,194 1,194 1,194 $ — — $ — — $ — — $ — — 2020 and thereafter $ — — 395,129 471,409 59,524 116,993 408,780 485,060 73,175 116,993 76,519 76,519 70,609 70,609 46,879 46,879 100,885 100,885 BTB Annual Report 2015 135 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2015 and 2014 (Audited - in thousands of CAD dollars, except per unit amounts) 25. 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, Acquisition and operating Trust (“BTB A&ET”) BTB Real Estate Management Inc. Cagim Real Estate Corporation (“CREC”) 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 A&ET Corporation 100% owned by BTB A&ET Limited Partnership General Partnership Limited Partnership 99.9% owned by BTB A&ET 0.1% owned by CREC 99.9% owned by BTB A&ET 0.1% owned by CREC 70.4% owned by BTB A&ET 29.5% owned by PAL II 0.1% owned by CREC (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** 2015 % 50 50 75 2014 % 50 50 75 * The three investment properties are located in province of Quebec. ** 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 2015 136 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2015 and 2014 (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 26. Operating Segments 2015 $ 48,025 30,098 5,587 3,444 2014 $ 47,454 30,898 5,341 2,015 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), the change in fair value of investment properties and fair 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 operating segments, as follows: • Commercial • Office • • General purpose Industrial BTB Annual Report 2015 137 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2015 and 2014 (Audited - in thousands of CAD dollars, except per unit amounts) Year ended December 31, 2015 Investment properties Rental revenue from properties Net operating income Year ended December 31, 2014 Investment properties Rental revenue from properties Net operating income Commercial Office Industrial $ $ $ 155,838 17,670 10,801 137,362 14,087 8,687 229,288 28,014 12,930 209,200 27,771 13,500 124,125 11,242 9,422 109,025 9,946 8,083 General purpose $ 113,400 15,966 8,141 115,875 15,366 7,713 Total $ 622,651 72,892 41,294 571,462 67,170 37,983 27. 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 2015 $ 1,976 264 2,240 2014 $ 1,935 209 2,144 Key management personnel are comprised of the Company’s executive officers. BTB Annual Report 2015 138 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2015 and 2014 (Audited - in thousands of CAD dollars, except per unit amounts) 28. Commitments and Contingencies (a) Operating leases as lessee The annual future payments required under operating leases expiring between 2017 and 2070 are as follows: Within one year Beyond one year but within five years Beyond five years Total $ 197 787 14,508 15,492 The related expense recorded in profit and loss amounted to $183 for the year ended December 31, 2015 (for the year ended December 31, 2014 - $88). (b) Finance lease as lessee The annual future payments required under finance leases expiring between 2018 and 2024 are as follows: As at December 31, Future minimum lease payments Interest Present value of minimum lease payments 2014 2015 2015 2014 2015 2014 Within one year Beyond one year but within five years Beyond five years $ 244 534 455 1,233 $ 47 201 139 387 $ 55 144 47 246 $ 19 56 25 100 $ 189 390 408 987 $ 28 145 114 287 The present value of the minimum lease payments is recorded in Trade and other payables. (c) Litigation The Trust is involved with litigations and claims which arise from time to time in the normal course of business. These litigations 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. BTB Annual Report 2015 139 Consolidated Financial Statements BTB Real Estate Investment Trust Notes to Consolidated Financial Statements For the years ended December 31, 2015 and 2014 (Audited - in thousands of CAD dollars, except per unit amounts) 29. Subsequent Events In February 2016, the Trust acquired an office building located in the city of Montreal for a purchase price of $11,000. As part of the transaction, the Trust secured a 5 year first ranked mortgage loan of $7,250 bearing interest at a rate of 2.77% and a 2 year second ranked mortgage loan of $2,650 bearing interest at a rate of 5.90%. In February 2016, the Trust concluded a refinancing agreement for one of its properties owned at 75% for a total amount of $1,644, at an interest rate of 3.30% maturing in 5 years. 30. Comparatives Figures Certain comparative figures have been reclassified to conform to the current year’s presentation. BTB Annual Report 2015 140 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 Dominic Gilbert, B.A.A. Vice-President, Property Management Frédéric Seigneur Vice-President, Leasing Jocelyn Proteau(2) President of the Board of Trustees BTB Real Estate Investment Trust Corporate Director Michel Léonard President and Chief Executive Officer BTB Real Estate Investment Trust Luc Lachapelle(1) Secretary of the Board of Trustees BTB Real Estate Investment Trust President and Chief Executive Officer Corlac Immobilier Inc. Lucie Ducharme(1) Executive Vice President Groupe Petra Independent Trustee Claude Garcia(1)(2) Corporate Director Jean-Pierre Janson(2) Executive Vice-President Partenaires Financiers Richardson Limited Sylvie Lachance(3) Executive Vice President Real Estate Development Sobeys inc. Fernand Perreault(3) Corporate Director Peter Polatos(3) President Gestion AMTB inc. (1) Member of the Audit Committee (2) Member of the Human Resources and Governance Committee (3) Member of the Investment Committee BTB Annual Report 2015 143 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 Legal Counsel De Grandpré Chait LLP. 1000 De la Gauchetière St. West Suite 2900 Montreal, Quebec, H3B 4W5 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.D BTB.DB.E BTB.DB.F Unitholders 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 Investor Services. Transfer Agent Computershare Investor Services 1500 Robert-Bourassa Blvd 7th floor 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 2015, for all Canadian unitholders, the distributions were fiscally treated as follow:  Other revenues: 0%  Fiscal Deferral: 100% Auditors KPMG LLP. 600 De Maisonneuve Blvd. West Suite 1500 Montreal, Quebec, H3A 0A3 BTB Annual Report 2015 144 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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