BTB Real Estate Investment Trust Annual Report 2017

Plain-text annual report

BTB Real Estate Investment Trust Annual Report 2017 Building on Quality Profile BTB is a real estate investment trust listed on the Toronto Stock Exchange. It owns and manages a portfolio of 73 commercial, industrial and office properties, located primarily in the Montreal, Quebec City and Ottawa areas. Its portfolio comprises more than 5.4 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 $762 million, making BTB a major player in the real estate industry of the Province of Quebec. 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 accretive 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 1 Highlights 4 Message from the Chairman of the Board of Trustees and from the President and Chief Executive Officer 6 Board of Trustees 7 Executive Team 20 Our Top 10 Tenants 21 Our Tenants 22 Recent Acquisitions 24 Our Properties 27 Management Discussion and Analysis 67 Audited Consolidated Financial Statements 107 Corporate Information 108 Unitholders Information 2 BTB Rapport annuel 2013 Highlights $73.3M $762M Rental income Total assets 73 Number of properties 5.4M Number of square feet 93.7% Payout ratio on recurring distributable income (1) 56.5% Mortgage debt ratio 91.4% Occupancy rate (1) Non-IFRS financial measures. See appropriate sections of the Management Discussion and Analysis for definition and reconciliation to the closest IFRS measure. BTB Annual Report 2017 1 Highlights Evolution of rental income for the years ending December 31st Evolution of net operating income for the years ending December 31st (1) (in thousands of dollars) (in thousands of dollars) 201 7 201 6 201 5 201 4 201 3 201 2 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 73,3 1 7 73,384 72,892 67,170 63,435 48,1 1 8 201 7 201 6 201 5 201 4 201 3 201 2 40,394 41,339 41,294 37,983 35,336 26,996 50,000 40,000 30,000 20,000 10,000 0 2 1 0 2 3 1 0 2 4 1 0 2 5 1 0 2 6 1 0 2 7 1 0 2 2 1 0 2 3 1 0 2 4 1 0 2 5 1 0 2 6 1 0 2 7 1 0 2 Evolution of recurring distributable income for the years ending December 31st (1) Evolution of total leasable area for the years ending December 31st (in thousands of dollars) (in thousands square feet) 201 7 201 6 201 5 201 4 201 3 201 2 20,000 15,000 10,000 5,000 0 1 9,7 2 1 19,7 1 1 18,733 16,626 12,610 7,805 201 7 201 6 201 5 201 4 201 3 201 2 5,435 5,144 5,095 4,822 4,580 4,341 6,000 5,000 4,000 3,000 2,000 1,000 0 2 1 0 2 3 1 0 2 4 1 0 2 5 1 0 2 6 1 0 2 7 1 0 2 2 1 0 2 3 1 0 2 4 1 0 2 5 1 0 2 6 1 0 2 7 1 0 2 (1) Non-IFRS financial measures. See appropriate sections of the Management Discussion and Analysis for definition and reconciliation to the closest IFRS measure. BTB Annual Report 2017 2 Highlights Performance on the markets l e u a V e v i t a l e R 180 170 160 150 140 130 120 110 100 90 80 BTB’s Total Return S&P/TSX Index Total Return S&P/TSX Capped REIT Index Total Return 3 1 0 2 , 1 n a J 3 1 0 2 , 1 r p A 3 1 0 2 , 1 l u J 3 1 0 2 , 1 t c O 1 4 0 2 , 1 n a J 1 4 0 2 , 1 r p A 1 4 0 2 , 1 l u J 1 4 0 2 , 1 t c O 5 1 0 2 , 1 n a J 5 1 0 2 , 1 r p A 5 1 0 2 , 1 l u J 5 1 0 2 , 1 t c O 6 1 0 2 , 1 n a J 6 1 0 2 , 1 r p A 6 1 0 2 , 1 l u J 6 1 0 2 , 1 t c O 7 1 0 2 , 1 n a J 7 1 0 2 , 1 r p A 7 1 0 2 , 1 l u J 7 1 0 2 , 1 t c O 7 1 0 2 , 1 3 c e D Breakdown of portfolio by geographical region at December 31st, 2017 Breakdown by asset type at December 31st, 2017 (per leasable area) (per leasable area) Greater Montreal area Greater Quebec city area Ottawa area Sherbrooke London area 49.4% 24.0% 17.8% 5.0% 3.8% Office Retail Industrial Mixed-use 38.6% 24.6% 29.1% 7.7% Total 100 % Total 100 % BTB Annual Report 2017 3 Message from the Chairman of the Board of Trustees and from the President and Chief Executive Officer Building on the quality of its portfolio to generate stable distributions for its unitholders. Building on quality In 2017 BTB initiated an ambitious strategy to build on its strengths and set higher objectives to evolve into a stronger organization. Commitment to continuous improvement by our people, at every level of the organization, has been extraordinary. At the heart of our strategy was repositioning our portfolio. The process began with an in-depth analysis of each asset by management to identify under- performing properties. Whether large or small, all our properties were analysed. A proposed course of ac- tion was presented to our board of trustees. Once the board agreed with our conclusions, we proceeded with the sale of the targeted properties. We proposed to sell nine properties representing approximately 256,000 square feet. During the year we sold three buildings for a total consideration of $11.5M and after the year end we sold an additional three buildings for total proceeds of $11.9M. The plan was to sell these properties to acquire larger assets to achieve a better performance. We sold “3627- 3645 des Sources Boulevard”, Dollard-des-Ormeaux, QC; “1125-1135 Saint-Martin Boulevard West”, Laval, QC; and “665-669 Thibeau Boulevard”, Trois-Rivières, QC. We then acquired four larger properties inclu- ding a commercial property located on F.-X. Sabourin St. in St-Hubert, a retail property in the City of Levis known as “Carrefour St-Romuald” and two office proper- ties in the Montreal Technoparc. The total acquisition price of these properties amounts to more than $94M. To illustrate the benefit of our capital redeployment, three of the disposed properties generated $590,000 of annual Net Operating Income (NOI) and the total sale price was $11,5M. We redeployed this capital, purchasing the property located on F.-X. Sabourin St. in St-Hubert. This property alone generates upwards of $1.7M of annual NOI and the purchase price was $23.2M. We therefore spent twice as much as the proceeds of the sale of the said three properties to generate almost three times the NOI. This is an example of the execution of our strategic plan that saw us migrating to better properties to provide stability and strength. In addition, our leasing activities were the best leasing activity since our inception. BTB leased 526,000 square feet to new tenants and renewed leases for 591,000 square feet. Therefore our leasing activities totalled 1,117,000 square feet. Regarding our lease renewals, they were concluded at an average increase of revenue of 5.6%. Our mortgage debt ratio decreased from 59.1% to 56.5% Our operating revenues were $73.3M for 2017 equivalent to the previous year which were $73.4M and our net income for the year was $28.2M, showing an increase from $22.1M for the prior year. Because of our acquisition activities, our total assets increased from $658M to $762M, an increase of 16%. BTB Annual Report 2017 4 Message from the Chairman of the Board of Trustees and from the President and Chief Executive Officer Building on the quality of its portfolio to generate stable distributions for its unitholders. To complement the implementation of our strategic plan, we successfully raised $25.3 million by a unit offering in September. The offering was met with success as it was oversubscribed. It allowed us to complete the above-mentioned acquisitions. On December 31, 2017, our portfolio included 73 office, industrial and retail properties totalling more than 5.4 million square feet. We invested in the improvement of our properties as part of our leasing and client retention strategy. It is important to ensure that the quality of our pro- perties remains competitive as client retention is the foundation of our business. For example, we reno- vated the lobby and common areas of our building located at 50 Saint-Charles in Longueuil where we saw its occupancy rate evolve from almost 0% to 50% in 2017. The real estate business is cyclical both on a macro and micro level, as supply and demand fluctuate and as tenants make decisions to move or stay at lease expiry and as their space needs increase or shrink. In 2017 more than 16% of our leases were expiring. This in itself was a major challenge. We are proud to say that our leasing and property management teams, supported by all the other areas of the operation, understood the significance of the challenge and rose to it extremely successfully. Because of this colossal effort in lease renewals and concluding transactions with new tenants, our occupancy rate increased from 90.5% (in 2016) to 91.4% (in 2017). BTB Annual Report 2017 5 , r e c fi f O e v i t u c e x E i f e h C d n a t n e d i s e r P , d r a n o é L l e h c M i s e e t s u r T f o d r a o B e h t f o n a m r i a h C , u a e t o r P n y l e c o J : t h g i r o t t f e l m o r F Excellence in property management retains the best tenants, attracts new ones and ultimately con- tributes positively to our results. The high standard of property management is a source of pride at BTB and reflects our commitment to providing the highest level of client service. The need to improve our properties does not stop there. We believe our people should be searching for continuous improvement as well. That is why our high performing people are committed to a continuous improvement process and investment in themselves. They know that continuous improvement and building on quality are a responsibility for those who strive to be outstanding performers. Those are values we identify with very much at BTB. We worked very hard to achieve our unique posi- tion, and we are proud of our results. We conclude the year with a portfolio of high performing assets that will produce, over time, better results for our unitholders. Jocelyn Proteau Chairman of the Board of Trustees Michel Léonard President and Chief Executive Officer Board of Trustees From left to right Lucie Ducharme President, Human Resources and Governance Committee and trustee Michel Léonard President and Chief Executive Officer and trustee Jean-Pierre Janson Vice President of the Board of Trustees and trustee Sylvie Lachance Trustee Jocelyn Proteau Chairman of the Board of Trustees and trustee Fernand Perreault President of the Investment Committee and trustee Luc Lachapelle Secretary of the Board of Trustees and trustee Luc Martin President, Audit Committee and trustee Peter Polatos Trustee BTB Annual Report 2017 6 Executive Team From left to right Michel Léonard President and Chief Executive Officer Sylvie Laporte Vice President, Property Management Dominic Gilbert, B.B.A Vice President, Leasing Benoit Cyr, CPA, CA, MBA Vice President and Chief Financial Officer BTB Annual Report 2017 7 BTB, at every level of the organization, is building on its existing quality as it continues to be a top-performing real estate investment trust. Jocelyn Proteau Chairman of the Board of Trustees In 2017, just a little over 10 years after we were founded, we undertook an important reflection on the future of BTB. We deve- loped a strategy to reposition our assets and embark on phase II of our growth. Today, the larger scale of BTB provides a cushion against the turbulence of the markets and in some cases even allows us to take advan- tage of it. BTB Annual Report 2017 8 Building on the quality of its properties by continuously improving them to ensure client retention. Olivier Marcadet Chief Financial Officer Veolia Water Technologies Canada In 2017, Veolia and BTB renewed their commitment and signed a 10-year lease that has consolidated their partnership. BTB brought their support and financing resources to Veolia Water Technologies Canada by working with us on the renova- tion of the building and its amenities. BTB is a very effective partner, always available and responsive to our needs. They have been very supportive when it came time for us to choose to renew our lease agreement, and the outcome is an indication of the trust and mutual respect that we have developed. BTB Annual Report 2017 10 Building on quality by responding to tenants’ needs. Marjorie Théodore Chief Executive Officer Vues et Voix Vues et Voix is a non-profit organization, and the individuals that benefit from our esta- blishment have their share of disabilities. BTB has been responsive to our needs in acces- sibility so that our clients can enjoy a safe environment. When we met BTB’s property managers, we were pleasantly surprised. BTB welcomed us with open arms, and made it easy for us to move into the building. BTB Annual Report 2017 12 Building on quality by committing to client satisfaction. Marc Parent CEO Commissionaires Quebec We decided to lease space in BTB’s building at 1001 Sherbrooke East because of its location, and for the openness exhibited by BTB from the moment we started negotiations. We’ve been in the building for a little more than four months, and we can say without reservation that we are completely satisfied with our space and the profile it offers us. BTB is always available and flexible, and those qualities are what characterize our business relationship. Perhaps even more importantly, we have direct access to the decision makers at BTB when we need to reach them. BTB Annual Report 2017 14 Building on quality by developing a shared vision with our tenants. Bruno Tobelem Owner Franchisee, Dunn’s West Island Marché de l’ouest has been on my mind for several years to open a version 2.0 of Dunn’s, because of its location, and because it’s at the epicentre of the West Island. We’ve had great help from BTB to achieve great success in this new market. They listened to my needs and tried to find the right deal for me and for my company. It’s always a big challenge to build a new restaurant, and BTB’s response has always been quick and efficient. I’m very happy to be here. 16 BTB Rapport annuel 201717 BTB Rapport annuel 2017Employees Recognition Awards Winners 2017 Building on the quality of our team by recruiting and retaining the best people. Julie Loiselle, lawyer Lease Manager Sylvain Moquin Maintenance Technician I’m pleased to be part of the BTB team, working with many other departments in the organization – people in accounting, leasing, construction and property manage- ment to name just a few. I support those teams. We work closely together for effec- tive management of our operations. I enjoy being involved in every aspect of our day- to-day operations, and I strongly believe that we all contribute in many ways to the success of the company. I understand how lease management fits in with all the other functions to ensure we are building on the existing quality of the organization at all levels. We are a family, and the company is much stronger than just one person. I’ve been working for BTB for seven years now, ensu- ring the buildings I care for are maintained to the highest quality, and I always give my one hundred percent. I am so proud to have won this Meritas award and I really thank the company for recognizing my contribution. We share the same values and commitment to building on the quality of our work. BTB Annual Report 2017 18 Employees Recognition Awards Winners 2017 Véronique Simard Administrative Assistant – Operations and Property Management Team David Barbarush Property Manager At BTB our priority is to provide a level of service that our clients expect. The pleasure I get from working together on a daily basis colors everything I do including my relation- ship with our tenants. I believe that small things taken together can make a big diffe- rence and that is why I am constantly looking for ways to improve our services and stay in touch with our clients. I love the company I’m working for, and we’re growing and moving forward as a team. Property Management is the engine that drives BTB and it is the heart of how we operate. It touches and calls on every part of the company: construction, leasing, accounting, executive and other depart- ments. My Meritas Award just motivates me all the more to work with all the people who support me, and coordinate our efforts to achieve more for BTB’s success. BTB Annual Report 2017 19 Our Top 10 Tenants Building on the quality of its clients by attracting and retaining a quality mix of successful tenants. BTB Annual Report 2017 20 Our Tenants Here are some of our successful achievements in terms of leasing and lease renewals for the year 2017. Strongco GP Inc. Collège April-Fortier Inc. Groupe Canam Inc. Cision Québec Inc. Deloitte s.e.c. Englobe Corp. Veolia Water Technologies Canada Inc. Morneau Shepell Ltd Edward D. Jones Vues et Voix Médias Transcontinental senc. Corps canadiens des Commissionnaires Randstad Interim Inc. Ville de St-Jean-sur-Richelieu Brookfield Dunn’s Restaurant West Island BTB Annual Report 2017 21 Recent Acquisitions Building on the quality of its assets through strategic acquisition and growth. 7150 Alexander-Fleming Street, St-Laurent 2250 Alfred-Nobel Blvd, St-Laurent BTB Annual Report 2017 22 Recent Acquisitions 1200-1252 De la Concorde Street, Lévis 1939-1979 F.-X. Sabourin Street, St-Hubert BTB Annual Report 2017 23 Our Properties 204 De Montarville Blvd, Boucherville 50 St-Charles Street West, Longueuil 32 St-Charles Street West, Longueuil 245 Menten Place, Ottawa Portfolio listing Montreal 1400-1440 Antonio-Barbeau Street, Montreal 5810 Sherbrooke Street East, Montreal 5878-5882 Sherbrooke Street East, Montreal 7001-7035 St-Laurent Blvd and 25 Mozart Avenue, Montreal 1001 Sherbrooke Street East, Montreal 2101 Sainte-Catherine Street West, Montreal 550-560 Henri-Bourassa Blvd, Montreal 3761-3781 des Sources Blvd, Dollard-des-Ormeaux 11590-11800 De Salaberry Blvd, Dollard-des-Ormeaux 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 2250 Alfred-Nobel Blvd, St-Laurent 7150 Alexander-Fleming Street, St-Laurent 2665-2673 and 2681 Côte Saint-Charles, Saint-Lazare North Shore of Montreal 2900 Jacques-Bureau Street, 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 1939-1979 F.-X. Sabourin Street, St-Hubert 145 St-Joseph Blvd, St-Jean-sur-Richelieu 315-325 MacDonald Street, St-Jean-sur-Richelieu 1000 Du Séminaire Blvd North, St-Jean-sur-Richelieu 15,19,21,31,35 and 41 Georges-Gagné Blvd South, Delson BTB Annual Report 2017 24 Our Properties 31 Georges-Gagné Blvd South, Delson 1252 De la Concorde Street, Lévis 2204 Walkley Road, Ottawa 175 de Rotterdam Street, St-Augustin-de-Desmaures 18 Quebec City 6655 Pierre-Bertrand Blvd, Quebec 6700 Pierre-Bertrand Blvd, Quebec 909-915 Pierre-Bertrand Blvd, Quebec 825 Lebourgneuf Blvd, Quebec 815 Lebourgneuf Blvd, Quebec 1170 Lebourgneuf Blvd, Quebec 1200-1252 De la Concorde Street, Lévis 191 D’Amsterdam Street, St-Augustin-de-Desmaures 175 de Rotterdam Street, St-Augustin-de-Desmaures 505 Des Forges Street and 1500 Royale Street, Trois-Rivières 3885 Harvey Blvd, Saguenay 100 1st Street West, Thetford Mines* Sherbrooke 2865-2885 De Portland Blvd, Sherbrooke 1640-1650 King Street West, Sherbrooke 30-66 Jacques-Cartier Blvd Nord, Sherbrooke 1635-1645 King Street East and 150-170 Duplessis Road, Sherbrooke 747-805 King Street East, Sherbrooke 3705 Industrial Blvd, Sherbrooke 2059 René-Patenaude Street, Magog Greater London Area, Ontario 311 Ingersoll Street, Ingersoll Ottawa Area, Ontario 80 Aberdeen Street, Ottawa 245 Menten Place, Ottawa 1-9 and 10 Brewer Hunt Way and 1260-1280 Teron Rd, Ottawa 400 Hunt Club Rd, Ottawa 2200 Walkley Road, Ottawa 2204 Walkley Road, Ottawa 7 and 9 Montclair Blvd, Gatineau 705 Boundary Road, Cornwall 725 Boundary Road, Cornwall 805 Boundary Road, Cornwall* 2901 Marleau Avenue, Cornwall Properties sold after December 31st, 2017 1863-1865 Trans-Canada Highway, Dorval 2153-2155 Crescent Street, Montreal 1100-1104 and 1108-1136 St-Joseph Blvd, Drummondville 2905 Marleau Avenue, Cornwall *Properties in redevelopment BTB Annual Report 2017 25 Management Discussion and Analysis December 31, 2017 27 BTB Rapport annuel 2017TABLE OF CONTENTS Introduction Forward-Looking Statements – Caveat Non-IFRS Financial Measures The Trust Objectives and Business Strategies Highlights of the Year Ended December 31, 2017 Selected Financial Information Selected Annual Information Selected Quarterly Information Real Estate Portfolio Real Estate Operations Operating Results Operating Results – Same-Property Portfolio Distributable Income and Distributions Funds from Operations (FFO) Adjusted Funds from Operations (AFFO) Segmented Information Financial Position Assets Capital Resources Sustainable Development Income Taxes Taxation of Unitholders Accounting Policies and Estimates New Accounting Policies Risks and Uncertainties Disclosure Controls and Procedures and Internal Control Over Financial Reporting Appendix 1 – Performance Indicators Appendix 2 – Definitions 29 29 30 31 31 32 33 34 34 35 35 39 44 45 47 48 49 50 50 53 59 59 60 60 60 61 61 62 63 BTB Real Estate Investment Trust – Management Discussion and Analysis – December 31, 2017 28 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, 2017, 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 8, 2018 should be read together with the audited consolidated financial statements and accompanying notes for the years ended December 31, 2017 and 2016. 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 quarters and years ended December 31, 2017 and 2016. Additional information about the Trust, including the 2017 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 Management Discussion and Analysis and the annual financial statements. FORWARD-LOOKING STATEMENTS – CAVEAT From time to time, we make written or oral forward-looking statements within the meaning of applicable Canadian securities legislation. We may make forward-looking statements in this MD&A, other filings with Canadian regulators, reports to unitholders and other communications. These forward-looking statements include statements regarding our future objectives, strategies to achieve our objectives, as well as statements with respect to our beliefs, outlooks, plans, objectives, expectations, forecasts, estimates and intentions. The words “may,” “could,” “should,” “outlook,” “believe,” “plan,” “forecast,” “estimate,” “expect,” “propose,” and the use of the conditional and similar words and expressions are intended to identify forward-looking statements. By their very nature, forward-looking statements involve numerous factors and assumptions, and are subject to inherent risks and uncertainties, both general and specific, which give rise to the possibility that predictions, forecasts, projections and other forward-looking statements will not be achieved. We caution readers not to place undue reliance on these statements as a number of important factors could cause our actual results to differ materially from the expectations expressed in such forward-looking statements. These factors include general economic conditions in Canada and elsewhere, the effects of competition in the markets where we operate, the impact of changes in laws and regulations, including tax laws, successful execution of our strategy, our ability to complete and integrate strategic acquisitions successfully, potential dilution, our ability to attract and retain key employees and executives, the financial position of lessees, our ability to refinance our debts upon maturity and to lease vacant space, our ability to complete developments on plan and on schedule and to raise capital to finance our growth, as well as changes in interest rates. We caution that the foregoing list of important factors likely to affect future results is not exhaustive. When relying on forward-looking statements to make decisions with respect to BTB, investors and others should carefully consider these factors and other facts and uncertainties. Additional information about these factors can be found in the “Risks and Uncertainties” section of this 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. BTB Real Estate Investment Trust – Management Discussion and Analysis – December 31, 2017 29 NON-IFRS FINANCIAL MEASURES “Net operating income,” “net operating income of the same-property portfolio,” “distributable income,” “recurring distributable income,” “funds from operations” ("FFO"), “recurring FFO,” “adjusted funds from operations” (“AFFO”), recurring AFFO, “adjusted net income and comprehensive income” and “net property income” and per unit information, if applicable, 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 April 2014. 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 Real Estate Investment Trust – Management Discussion and Analysis – December 31, 2017 30 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, 2017, it owns 73 retail, 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 E and F convertible debentures are traded on the Toronto Stock Exchange under the symbols “BTB.UN”, “BTB.DB.E”, and “BTB.DB.F,” respectively. Most of the Trust’s properties are managed internally, with 70 of the Trust’s 73 properties held as at December 31, 2017 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 real estate portfolio: As at December 31, 2017(1) Number of properties 73 Leasable area (sq. ft.) 5,435,332 Fair value (thousands of $) 751,110 (1) These figures include a 50% interest in a 17,114 square-foot building in a Montréal suburb, a 75% interest in a 140,824 square-foot building in Québec City and a 50% interest in two buildings totalling 74,940 square feet in Gatineau, Québec. BTB’s management is entirely internalized and no service agreements or asset management agreements are in force between BTB and its officers. The Trust therefore ensures that the interests of management and of its employees are aligned with those of the unitholders. OBJECTIVES AND BUSINESS STRATEGIES BTB’s primary objective is to maximize total returns to unitholders. Returns include cash distributions and long-term appreciation in the value of units. 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 on to 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 and/or to make accretive acquisitions. BTB Real Estate Investment Trust – Management Discussion and Analysis – December 31, 2017 31 HIGHLIGHTS OF THE YEAR ENDED DECEMBER 31, 2017         27.6% increase in net income and comprehensive income, from $22.1 million to $28.2 million. Record leasing activities with the renewal of close to 591,000 square feet of leasable area and the leasing of almost 526,000 square feet to new tenants. Increase in occupation rate from 90.5% to 91.4%. Decrease in mortgage debt ratio from 59.1% to 56.5%. Increase of 8.8% in recurring FFO, from $17.7 million to $19.3 million. 15.8% increase in assets, from $658 million to $762 million. Slight decrease of 3.5% in net cash from operating activities, from $39.8 million to $38.5 million. 11.5% decrease in recurring distributable income per unit and 10.6% for recurring AFFO because of a lower effective occupancy rate in 2017 as compared to 2016. Property sales and purchases   Acquisition of four investment properties for a total cost of $94.2 million, generating annual net operating income of $6.5 million. As part of the Trust’s strategic repositioning of its portfolio, sale of three investment properties for total proceeds of $11.5 million. Capital transaction  On October 23, 2017, issuance of 5,561,400 units, at a price of $4.55, for net proceeds of $24.1 million, which was used to purchase other investment properties. Summary of significant items as at December 31, 2017     73 properties Approximately 5.4 million leasable square feet $762 million in assets $224 million in market capitalization Subsequent events In January and February 2018, the Trust sold four properties for a consideration totalling $124 million. Net proceeds from the sale of these properties were applied against the Trust’s credit facilities. In February 2018, the Trust purchased a retail property located in the city of Delson, Québec, for a consideration of $1,865. BTB Real Estate Investment Trust – Management Discussion and Analysis – December 31, 2017 32 SELECTED FINANCIAL INFORMATION As at December 31, 2017, the Trust owns 73 properties generating, on an annualized basis, revenues of close to $85 million. The following table presents highlights and selected financial information for the quarters and years ended December 31, 2017 and 2016: Periods ended December 31 (in thousands of dollars, except for ratios and per unit data) Financial information Rental income Net operating income(1) Net income and comprehensive income Net property income from the same-property portfolio(1) Cash flows from operating activities Recurring distributable income(1) Distributions Recurring funds from operations (FFO)(1) Recurring adjusted funds from operations (AFFO)(1) Total assets Investment properties Mortgage loans payable Convertible debentures Mortgage debt ratio Debt-equity ratio – convertible debentures Debt-equity ratio – acquisition line of credit Total debt ratio Weighted average interest rate on mortgage debt Unitholders’ equity Market capitalization Financial information per unit Units outstanding (000) Weighted average number of units outstanding (000) Net income and comprehensive income Recurring distributable income(1) Distributions Recurring payout ratio on distributable income(1) Recurring FFO(1) Recurring payout ratio on FFO(1) Recurring AFFO(1) Recurring payout ratio on AFFO(1) 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 Retention rate Reference Quarter 2017 $ 2016 $ Year 2017 $ 2016 $ Page 39 Page 40 Page 43 Page 44 Page 44 Page 45 Page 45 Page 47 Page 48 Page 50 Page 50 Page 53 Page 55 Page 56 Page 56 Page 56 Page 56 Page 53 Page 57 Page 57 Page 57 Page 43 Page 45 Page 45 Page 45 Page 47 Page 47 Page 48 Page 48 Page 57 Page 59 Page 60 Page 51 Page 51 Page 37 Page 36 Page 37 19,733 10,460 15,498 5,837 14,121 4,916 5,079 4,865 4,370 18,270 10,121 9,130 6,365 13,250 5,047 4,442 4,808 4,485 47,023 33.0¢ 10.5¢ 10.5¢ 103.3% 10.3¢ 104.4% 9.3¢ 116.2% 42,283 21.6¢ 11.9¢ 10.5¢ 88.0% 11.4¢ 92.4% 10.6¢ 99.0% (0.4)% 10.1% 73,317 40,394 28,171 24,333 38,449 19,721 18,486 19,262 17,599 762,390 751,110 428,382 48,183 73,384 41,339 22,085 26,292 39,850 19,711 16,444 17,710 17,391 658,462 645,485 384,350 47,692 56.5% 6.5% 2.2% 65.0% 3.72% 59.1% 7.6% –% 65.7% 3.79% 248,947 222,262 212,963 189,270 48,423 43,671 64.5¢ 45.2¢ 42.0¢ 93.7% 44.1¢ 96.0% 40.3¢ 105.0% 5.14 4.59 0.0% 100% 73 5,435 91.4% 5.6% 55.9% 42,342 38,546 57.3¢ 51.1¢ 42.0¢ 83.4% 45.9¢ 92.8% 45.1¢ 94.6% 5.04 4.47 0.0% 100% 72 5,144 90.5% 5.6% 61.0% (1) Non-IFRS financial measures. See appropriate sections for definition and reconciliation to the closest IFRS measure. BTB Real Estate Investment Trust – Management Discussion and Analysis – December 31, 2017 33 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 per unit data) Rental income Net operating income(1) (5) Fair value adjustment on investment properties Net income Net cash from operating activities Recurring distributable income(5) Recurring FFO(2) (5) Recurring AFFO(3) (5) Distributions Total assets Long-term debt Financial information per unit Net income Recurring distributable income (5) Recurring FFO (2) (5) Recurring AFFO (3) (5) Distributions Recurring payout ratio on distributable income (4) (5) 2017 $ 73,317 40,394 10,855 28,171 38,449 19,719 19,262 17,597 18,486 762,390 476,565 2016 $ 73,384 41,339 6,200 22,085 39,850 19,711 17,710 17,391 16,443 658,462 432,042 64.5¢ 45.2¢ 44.1¢ 40.3¢ 42.0¢ 93.7% 57.3¢ 51.1¢ 45.9¢ 45.1¢ 42.0¢ 83.4% 2015 $ 72,892 41,294 (5,223) 8,669 38,238 18,733 17,164 16,260 14,478 633,082 445,262 25.2¢ 54.4¢ 49.8¢ 47.2¢ 42.0¢ 77.3% (1) Defined as rental income from investment properties less operating expenses. (2)See “Funds from operations” on page 47 for reconciliation to net income. (3) See “Adjusted funds from operations” on page 48 for reconciliation to FFO and net income. (4) Represents total distributions divided by recurring distributable income. (5) See appropriate sections for definition and reconciliation to the closest IFRS measure. SELECTED QUARTERLY INFORMATION The following table summarizes the Trust’s financial information for the last eight quarters. (in thousands of dollars except for per unit data) Rental income Net operating income(1) 2017 Q-4 $ 2017 Q-3 $ 2017 Q-2 $ 2017 Q-1 $ 2016 Q-4 $ 2016 Q-3 $ 2016 Q-2 $ 2016 Q-1 $ 19,733 17,507 17,712 18,365 18,270 18,264 18,300 18,550 10,460 10,044 10,045 9,848 10,121 10,633 10,466 10,119 Net income and comprehensive income 15,498 4,327 4,362 3,984 9,130 5,422 3,982 3,551 Net income and comprehensive income per unit 33.0¢ 10.1¢ 10.3¢ 9.4¢ 21.6¢ 13.0¢ 11.4¢ 10.2¢ Net cash from operating activities Recurring distributable income(1) 14,121 10,161 4,916 4,883 8,749 4,979 5,417 13,250 10,342 9,549 4,943 5,047 5,285 4,924 6,709 4,455 Recurring distributable income per unit(1) 10.5¢ 11.4¢ 11.7¢ 11.7¢ 11.9¢ 12.7¢ 14.1¢ 12.8¢ Recurring funds from operations (FFO)(1) 4,865 4,902 4,884 4,611 4,808 3,994 4,692 4,216 Recurring FFO per unit(1) 10.3¢ 11.5¢ 11.5¢ 10.9¢ 11.4¢ 9.6¢ 13.4¢ 12.1¢ Recurring adjusted funds from operations (AFFO)(1) 4,370 4,516 4,463 4,250 4,485 4,733 4,333 3,840 Recurring AFFO per unit(1) Distributions Distributions per unit 9.3¢ 10.6¢ 10.5¢ 10.0¢ 10.6¢ 11.4¢ 12.4¢ 11.0¢ 5,079 4,483 4,469 4,456 4,442 4,449 3,897 3,655 10.5¢ 10.5¢ 10.5¢ 10.5¢ 10.5¢ 10.5¢ 10.5¢ 10.5¢ (1) Non-IFRS financial measures. See appropriate sections for definition and reconciliation to the closest IFRS measure. BTB Real Estate Investment Trust – Management Discussion and Analysis – December 31, 2017 34 PERFORMANCE INDICATORS The indicators used to measure BTB’s financial performance are presented and explained in Appendix 1. REAL ESTATE PORTFOLIO BTB owns 73 quality properties which have a fair value of $751 million representing a total leasable area of approximately 5.4 million square feet. A concise description of the properties owned as at December 31, 2017, can be found in the Trust’s Annual Information Form available at www.sedar.com. Summary of properties as at December 31, 2017 Operating segment Office Retail Industrial Mixed use Subtotal Properties under redevelopment Number of properties Leasable area (sq. ft.) Occupancy rate (%) 29 18 20 4 71 2 2,050,462 1,304,773 1,542,093 406,650 5,303,978 131,354 85.2% 96.3% 94.9% 90.0% 91.4% Total On January 1, 2016, the Trust reclassified some properties to better reflect the current mix of tenant activities. 5,435,332 73 Strategic deliberations a) Sale of 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 related mortgages and any remaining proceeds will be allocated to the acquisition of accretive properties. Nine properties representing a leasable area of approximately 256,000 square feet have been put on the market. The proceeds of disposal are estimated at $30 million. Following repayment of mortgage financings and payment of transaction costs, the Trust expects to recover a net amount of approximately $12 million. In March 2017, the Trust sold an investment property for a total consideration of $7.0 million. In September 2017, the Trust sold two investment properties put on the market for a total consideration of $4.450 million. After year-end, the Trust sold four investment properties for a total consideration of $11.9 million. The disposal of three properties in 2017 and four properties at the beginning of 2018 will deprive the Trust of $1.1 million in annualized net operating income. b) Property acquisitions In these strategic deliberations, the Trust agreed to allocate the net proceeds of sale of the properties to the acquisition of accretive properties. Accordingly, in August 2017, the Trust acquired an investment property for a consideration of $23.2 million. This property is expected to generate annual net operating income of $1.7 million. In November 2017, the Trust acquired a retail investment property located in the Quebec City area for $35.9 million. This property is expected to generate approximately $2.4 million in annual net operating income. In November 2017, the Trust also acquired two office properties located in Montreal, in the Ville Saint-Laurent borough, Québec, for $35.1 million. These properties are expected to generate more than $2.4 million in annual net operating income. BTB Real Estate Investment Trust – Management Discussion and Analysis – December 31, 2017 35 REAL ESTATE OPERATIONS Leasing activities The following table summarizes changes in available leasable area during the quarters and years ended December 31, 2017 and 2016. 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 leases terminated and renewed before term Leasable area of renewed leases Leasable area of new leases signed Other Quarter Year 2017 2016 2017 2016 500,712 2,180 42,310 170,935 27,327 47,684 (111,573) (233,419) 7,204 444,999 — — 166,111 5,575 — (70,766) (73,404) (410) 472,105 (7,414) 42,310 905,227 86,149 65,385 (590,956) (525,894) 6,448 408,243 — — 520,883 61,705 — (319,392) (200,332) 998 Available leasable area at end of period 453,360 472,105 453,360 472,105 Fiscal 2017 was quite challenging since more than 905,000 square feet of leasable area expired at the end of leases, and more than 151,000 square feet expired before term, for a total of 1,057,000 square feet (2016: 583,000 square feet). Our property managers renewed close to 591,000 square feet of leasable area, while the leasing team signed new leases with new tenants for almost 526,000 square feet, for a total of 1,117,000 square feet (2016: 520,000 square feet). In both cases, these were record results in the Trust’s history. During the fourth quarter, close to 246,000 square feet (2016: 172,000 square feet) expired at the end of leases (171,000 square feet) or before term (75,000 square feet). Close to 112,000 square feet (2016: 71,000 square feet) were renewed and more than 233,000 square feet (2016: 73,000 square feet) were leased to new tenants. The “805 Boundary Road” property in Cornwall, Ontario and “100, 1ère rue Ouest” in Thetford Mines, Québec, currently under redevelopment, are not included in these statistics. The 1863-1865 Transcanadienne property in Montréal was reclassified as an active property during the quarter and a new lease was signed for its total area. The average rental rate of expired and renewed leases decreased 0.4% during the fourth quarter (2016: 10.1% increase). The average rate rose 5.6% (2016: 5.6%) for the year. BTB Real Estate Investment Trust – Management Discussion and Analysis – December 31, 2017 36 Occupancy rates The following tables provide occupancy rates by operating segment and geographic sector based on firm lease agreements signed as at the date of this report. Approximately 120,000 square feet of rental space is currently subject to firm lease agreements for occupancy over the next few months. Operating segment Office Retail Industrial Mixed use Total portfolio Geographic sector Laval and North Shore Island of Montréal Montréal South Shore Québec City and surrounding area Ottawa and surrounding area Sherbrooke and surrounding area Central Ontario By province Québec Ontario Total portfolio December 31, 2017 September 30, 2017 % 85.2 96.3 94.9 94.0 91.4 % 84.7 96.2 90.8 94.1 90.0 June 30, 2017 % 85.1 94.5 87.0 95.2 88.6 March 31, 2017 December 31, 2016 % 83.5 93.4 93.5 93.1 89.5 % 84.5 94.0 94.1 95.8 90.5 December 31, 2017 % September 30, 2017 % June 30, 2017 % March 31, 2017 % December 31, 2016 % 97.7 91.5 95.1 85.7 92.6 81.9 100.0 91.4 97.7 90.5 94.6 85.0 86.4 81.9 100.00 90.0 December 31, 2017 September 30, 2017 % 90.9 93.5 91.4 % 90.6 88.0 90.0 97.7 91.1 93.8 85.2 79.7 81.3 100.0 88.6 June 30, 2017 % 90.4 82.1 88.6 97.7 89.8 92.7 83.3 90.1 78.5 100.0 89.5 97.4 89.3 91.9 89.4 88.8 79.5 100.0 90.5 March 31, 2017 December 31, 2016 % 89.1 91.2 89.5 % 90.6 90.1 90.5 The overall occupancy rate is up by 1.4% since September 30, 2017 and 0.9% since December 31, 2016. It stood at 91.4% at the end of the fourth quarter of 2017. All of the operating segments and geographic sectors that make up the Trust’s portfolio were stable or had higher occupancy rates in the fourth quarter due to significant leasing activity in the Trust’s properties and the sustained efforts of resources assigned to the leasing of rental spaces. The effective occupancy rate as at December 31, 2017, without the effect of the firm lease agreements, is 88.0% (2016: 89.1%). Vacant space totalling more than 180,000 square feet as at December 31, 2017 is subject to firm lease agreements and will generate additional income in the next few months. Retention rate The renewal rate for leases that expired in 2017 was 55.9% (2016: 61.0%). In 2017, the retention rate was down 5.1% from 2016 due to the loss of industrial tenants that had occupied large leasable areas. Most of this space was re-leased or is subject to firm lease offers for future occupancy. BTB Real Estate Investment Trust – Management Discussion and Analysis – December 31, 2017 37 Lease maturity More than 900,000 square feet of leasable area expired in 2017, making this a record year for leasing activity. The following table shows the lease maturity profile for the next five years: Office Leasable area (sq. ft.) Average lease rate/square foot ($) % of office portfolio Retail Leasable area (sq. ft.) Average lease rate/square foot ($) % of retail portfolio Industrial Leasable area (sq. ft.) Average lease rate/square foot ($) % of industrial portfolio Mixed use Leasable area (sq. ft.) Average lease rate/square foot ($) % of mixed use portfolio Total portfolio Leasable area (sq. ft.) Average lease rate/square foot ($) % of total portfolio Top 10 tenants 2018 2019 2020 2021 2022 239,670 289,309 168,517 282,206 252,657 $14.75 $13.79 $16.11 $13.00 $14.30 11.7% 14.1% 8.2% 13.8% 12.3% 182,711 188,583 $12.57 $12.70 73,272 $14.66 126,669 $13.60 70,741 $16.69 14.0% 14.5% 5.6% 9.7% 5.4% 133,347 94,482 224,677 408,886 240,071 $4.72 8.6% $4.34 6.1% $5.02 14.6% $6.87 26.5% $5.38 15.6% 24,766 $15.58 42,861 $13.38 81,411 $13.29 109,349 $10.97 47,867 $12.80 6.1% 10.5% 20.0% 26.9% 11.8% 580,494 615,235 547,877 927,091 611,336 $12.00 $11.98 $10.95 $10.03 $10.96 10.9% 11.6% 10.3% 17.5% 11.5% As at December 31, 2017, BTB managed more than 650 leases, with an average area of more than 8,000 square feet. The three largest tenants are Public Works Canada, Provigo Distribution Inc. and Atis Portes et Fenêtres Corp., accounting respectively for 6.7%, 2.1% and 1.9% of revenues, generated by a number of leases whose maturities are spread over time. More than 29.3% of the Trust’s total revenues are generated by leases entered into with government agencies (federal, provincial and municipal) and public companies, ensuring stable and high-quality cash flows for the Trust’s operating activities. The following table shows the contribution of the Trust’s top 10 tenants as a percentage of revenues as at December 31, 2017. This contribution accounts for 22.1% of rental income for the year for 20.6% of leased area. Client Public Works Canada Provigo Distribution Inc. (Loblaws) Atis Portes et Fenêtres Corp. Shoppers Realty Inc. Flextronics Société québécoise des infrastructures (SQI) Strongco Le Groupe SM inc. Germain Larivière Inc. CNESST % of revenue % of leased area Leased area (square feet) 6.7 2.1 1.9 1.8 1.8 1.7 1.7 1.5 1.5 1.4 3.9 2.0 4.7 1.2 0.9 1.4 1.5 2.1 1.9 0.9 205,836 107,642 251,878 64,304 48,731 76,003 81,442 109,185 101,194 46,421 22.1 20.6 1,092,636 BTB Real Estate Investment Trust – Management Discussion and Analysis – December 31, 2017 38 OPERATING RESULTS The following table summarizes financial results for the quarters and years ended December 31, 2017 and 2016. 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(1) Other income Financial expenses Trust administration expenses Fair value adjustment on investment properties Investment property disposal costs Net income and comprehensive income (1) Non-IFRS financial measure Rental income Quarter Year 2017 $ 19,733 9,273 10,460 (50) 4,768 1,074 (10,855) 25 15,498 2016 $ 18,270 8,149 10,121 (59) 4,088 1,177 (4,215) — 9,130 2017 $ 73,317 32,923 40,394 (83) 18,761 4,317 (10,855) 83 28,171 2016 $ 73,384 32,045 41,339 (307) 21,431 4,330 (6,200) — 22,085 Reference Page 39 Page 39 Page 40 Page 41 Page 42 Page 42 Page 43 Page 43 BTB disposed of properties during the year, generating an estimated shortfall of approximately $288 for the quarter. BTB covered this shortfall through the acquisition of accretive properties in 2017. The recent acquisitions described in more detail on page 51 of this MD&A generated additional income of $1,704 during the quarter. Combined with the net effect of these transactions, rental income increased by $1,463 or 8.0% for the fourth quarter compared to the same quarter of 2016. However, this increase was offset in recent quarters by the lower “in place” occupancy rate compared to the same quarters of 2016. Several spaces that had been vacated in 2017 have since been re-leased and will generate rental income in 2018. In the fourth quarter of 2017, rent payable adjustments of $182 (2016: $2 receivable) were recorded on a straight-line basis. BTB also recorded amortization of $636 (2016: $610) as a reduction in rental income, which represents amortization of lease incentives afforded to lessees. Recent acquisitions generated additional income of $2,104 for fiscal 2017, while disposals generated a $870 shortfall since the beginning of the year. Despite the net combined effect of these transactions, rental income for fiscal 2017 did not increase compared to 2016 due to a lower average occupancy rate in 2017 than in 2016. For fiscal 2017, rent payable adjustments of $443 (2016: $246) were recorded on a straight-line basis and amortization of $2,449 (2016: $2,177) from lease incentives afforded to lessees was recorded as a reduction in rental income. Operating expenses BTB recorded an increase in operating expenses of $1,124, or 13.8%, between the fourth quarter of 2016 and the fourth quarter of 2017. Recent acquisitions contributed to an increase of $547 in operating expenses for the quarter, while disposals resulted in an estimated reduction of $93. During the last months of the year, BTB invested significant amounts in preventive property maintenance of its properties, which significantly increased certain operating expenses. BTB Real Estate Investment Trust – Management Discussion and Analysis – December 31, 2017 39 Periods ended December 31 (in thousands of dollars) Operating expenses Maintenance, repairs and other operating costs Property taxes and public utilities Total operating expenses % of rental income Quarter Year 2017 $ 3,574 5,699 9,273 47.0 2016 $ 3,058 5,091 8,149 44.6 2017 $ 12,209 20,714 32,923 44.9 2016 $ 11,558 20,487 32,045 43.7 For the entire year, recent acquisitions contributed to an increase of $679 in operating expenses, while the year’s disposals allowed for a reduction in operating expenses of $346. Before the effect of these transactions, annual operating expenses had increased approximately $590 or 1.8% compared to last year, a rate comparable to the increase in the consumer price index (1.6%). As a percentage of rental income, operating costs in the quarter of 2017 increased by 2.4% to 47.0% and by 1.2% to 44.9% for the year. Net operating income Net operating income for the quarter increased by $1,156 because of the year’s acquisitions, while management estimates at approximately $195 the net shortfall after disposals. Had it not been for the effect of these transactions, net operating income would have significantly decreased because of the increase in the portfolio’s effective vacancy rate, that will be resolved in 2018, and recent investments in preventive maintenance of the portfolio buildings. The increase in operating expenses, which was greater than the increase in rental income, explains the decrease in percentage of net operating income over rental income from 55.4% to 53.0% for the quarter, and from 56.3% to 55.1% for the year. Periods ended December 31 (in thousands of dollars) Net operating income(1) % of rental income (1) Non-IFRS financial measure Quarter Year 2017 $ 2016 $ 2017 $ 10,460 10,121 40,394 53.0 55.4 55.1 2016 $ 41,339 56.3 On an annual basis, net operating income was down $945, or 2.3%, despite the effect of acquisitions during the year that contributed to a $1,421 increase, while management estimates the shortfall from disposals at approximately $525. BTB Real Estate Investment Trust – Management Discussion and Analysis – December 31, 2017 40 Net operating income is reduced by non-cash rental income adjustments. Before these adjustments, net operating income 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(1) % of rental income on the basis of in-place leases (1) Non-IFRS financial measure Financial expenses Quarter Year 2017 $ 10,460 (182) 636 10,914 54.1 2016 2017 $ 10,121 2 610 10,733 56.8 $ 40,394 (443) 2,449 42,400 56.3 2016 $ 41,339 (246) 2,177 43,270 57.5 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 Impact of early redemption of Series D convertible debentures 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 2017 $ 3,984 874 205 30 5,093 – 254 12 2016 $ 3,658 874 94 34 4,660 – 240 11 2017 $ 14,871 3,496 351 117 18,835 – 1,008 45 2016 $ 14,582 4,471 519 128 19,700 1,088 1,074 192 5,359 4,911 19,888 22,054 (591) 4,768 (823) 4,088 (1,127) 18,761 (623) 21,431 Interest expenses increased by $433 during the fourth quarter of 2017 compared to the same period of 2016, mainly due to the financing of recent acquisitions which contributed to a $411 increase in interest expense on mortgage loans repayable and the use of the line of credit for these acquisitions. This increase was offset, however, by disposals which generated estimated savings of $86 on interest expense on mortgage loans payable for the quarter. If not for these transactions, interest expense on mortgage loans payable would have been similar to that of the fourth quarter of 2016. Financial expenses can be allocated among interest expenses amounting to $5,093 for the quarter (2016: $4,660) and non-monetary items. Non-monetary items include the accretion of effective interest and the liability component of convertible debentures and fair value adjustments on financial instruments. BTB recognized an increase in the value of derivative financial instruments of $591 for the quarter. The increase, which generated the equivalent in income recorded as a reduction of financial expenses, was due to rising interest rates in Canadian markets over the last few months. As at December 31, 2017, the average weighted contractual rate of interest on mortgage loans payable was 3.72%, 7 basis points lower than the rate in effect as at December 31, 2016. Interest rates on first-ranking mortgage financings ranged from 2.0% to 6.8% as at December 31, 2017. The weighted average term of financing in place as at December 31, 2017 was 6.4 years (5.9 years as at December 31, 2016). BTB Real Estate Investment Trust – Management Discussion and Analysis – December 31, 2017 41 At the end of the year, interest expense on mortgage loans payable increased by $379. Acquisitions during the year contributed to a $503 increase, while disposals generated estimated savings of $179. If not for these transactions, expenses for 2017 would have been similar to 2016. Interest expense on debentures decreased by $97 due to the repayment of Series D convertible debentures in 2016. This redemption also gave rise to a non-recurring expense of $1,088 in 2016. The lines of credit were also used less extensively during 2017, generating savings of approximately $179 compared to the previous year. Lastly, upward adjustments to financial instruments recorded during the year resulted in the recognition of income of $1,127 as a reduction of financial expenses in 2017 compared to $623 in 2016. Total financial expenses were down by $2,670 in 2017 compared to 2016. Trust administration expenses Periods ended December 31 (in thousands of dollars) Administrative expenses Amortization Unit-based compensation Trust administration expenses Quarter Year 2017 $ 952 15 107 1,074 2016 $ 1,075 15 87 1,177 2017 $ 3,940 58 319 4,317 2016 $ 4,063 61 206 4,330 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 should another rate within the provided ranges be more appropriate than the rate previously used, the fair value of the investment properties would increase or decrease accordingly. The Trust annually uses external chartered valuators to appraise a significant portion of its portfolio. The 10 largest properties and approximately a third of the remaining properties are independently appraised. In addition, as part of financing or refinancing and at the request of lenders, other properties were independently appraised during the last months of the year. As at December 31, 2017, 71.4% (2016: 63.4%) of the fair value of the real estate portfolio was subject to an external independent appraisal and 28.6% (2016: 36.6%) was internally appraised by the Trust’s personnel. Following these appraisals, the Trust recorded an increase in value of $10.9 million on its real estate portfolio. Of this amount, $2.3 million was recorded to reflect the selling price of properties sold subsequent to year-end. In addition, a $6.6 million increase in value was recognized on four major properties, which significantly increased the expected operating results for 2018. Lastly, a $1.0 million increase in value was recorded on a property following a decrease in the capitalization rate. BTB Real Estate Investment Trust – Management Discussion and Analysis – December 31, 2017 42 The following tables highlight the significant assumptions used in the modelling process for both internal and external appraisals: As at December 31, 2017 Capitalization rate Terminal capitalization rate Discount rate As at December 31, 2016 Capitalization rate Terminal capitalization rate Discount rate Retail Office Industrial Mixed use 6.25% – 10.00% 6.25% – 8.00% 7.25% – 8.75% 6.25% – 8.50% 6.50% – 7.75% 7.00% – 8.75% 6.50% – 9.75% 7.00% – 9.50% 7.75% – 10.50% 6.75% – 7.50% 6.75% – 7.50% 7.50% – 8.50% 6.25% – 10.00% 6.75% – 8.00% 7.25% – 8.75% 6.50% – 8.50% 6.75% – 8.75% 7.50% – 9.25% 6.50% – 9.75% 7.00% – 7.75% 7.50% – 8.50% 6.75% – 7.75% 7.00% – 7.75% 7.50% – 8.25% The weighted average capitalization rate for the entire portfolio as at December 31, 2017 was 7.05% (December 31, 2016: 7.20%), down 15 basis points since December 31, 2016. As at December 31, 2017, 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 $26.7 million. Investment property disposal costs On March 28, 2017, the Trust disposed of the investment property “3627-3645 Des Sources” in Dollard-des-Ormeaux for $7.0 million. The Trust realized a $482 gain on disposal of this property and incurred transaction and early mortgage repayment fees amounting to $350. This property had been acquired in February 2007 at a cost of $4.7 million, including acquisition costs. On September 5, 2017, the Trust disposed of the investment property “665-669 Thibeau Blvd.” in Trois-Rivières for $1.825 million. The Trust realized a $97 loss on disposal of this property and incurred transaction costs amounting to $74. This property had been acquired in August 2008 at a cost of $1.851 million, including acquisition costs. On September 11, 2017, the Trust disposed of the investment property “1125-1135 St-Martin Blvd. West” in Laval for $2.625 million. The Trust realized a $6 loss on disposal of this property and incurred transaction and early mortgage repayment fees amounting to $116. This property had been acquired in February 2007 at a cost of $2.480 million, including acquisition fees. Net income and comprehensive income BTB generated net income of $15.5 million for the fourth quarter of 2017, up $6.4 million from $9.1 million in the fourth quarter of 2016. Net income for the year totalled $28.2 million, up $6.1 million from 2016. Periods ended December 31 (in thousands of dollars, except for per unit data) Net income and comprehensive income Per unit Adjusted net income and comprehensive income Quarter Year 2017 $ 15,498 33.0¢ 2016 $ 2017 $ 2016 $ 9,130 28,171 22,085 21.6¢ 64.5¢ 57.3¢ Net income and comprehensive income fluctuate from one quarter to another based on certain highly volatile monetary items. Consequently, the fair value of derivative financial instruments and the fair value of the real estate portfolio fluctuate based on the stock market volatility of BTB units, the forward interest rate curve and the discount and capitalization rates of the real estate portfolio. BTB Real Estate Investment Trust – Management Discussion and Analysis – December 31, 2017 43 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 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(1) Per unit (1) Non-IFRS financial measure Quarter Year 2017 $ 2016 $ 2017 $ 2016 $ 15,498 9,130 28,171 22,085 (10,855) (591) 4,052 8.6¢ (4,215) (823) 4,092 9.7¢ (10,855) (1,127) 16,189 37.1¢ (6,200) (623) 15,262 39.6¢ This table shows a slight decrease of 1.0% in quarterly adjusted net income and an increase of 6.1% in annual adjusted income, before the non-monetary items mentioned above. The portfolio’s lower effective occupancy rate in the fourth quarter and for the year, compared to the same periods of 2016, substantially reduced the contribution to net income from acquisitions for the year. For the fourth quarter of 2017, quarterly adjusted net income per unit decreased 11.3% and annual adjusted net income decreased 6.3%. Income per unit was reduced by the issuance of 5.6 million units finalized on October 23, 2017, and the timing difference between receipt of the net proceeds and their allocation to accretive property acquisitions. OPERATING RESULTS – SAME-PROPERTY PORTFOLIO Same-property portfolio The same-property portfolio includes all the properties owned by BTB as at January 1, 2016, but does not include the financial spin-offs of acquisitions and developments completed in 2016 and 2017, as well as the contribution during the ownership period of properties sold in 2016 and 2017. 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(1) Interest expense on mortgage loans payable Net property income(1) Quarter Year 2017 2016  % $ $ 17,814 8,507 9,307 3,470 5,837 17,663 7,794 9,868 3,503 6,365 0.9 9.1 (5.7) (0.9) (7.9) 2017 $ 69,608 31,419 38,189 13,856 24,333 2016  % $ 70,959 30,664 40,295 14,003 26,292 (1.9) 2.5 (5.2) (1.0) (7.5) Decrease in net property income from the same-property portfolio 7.9 7.5 (1) Non-IFRS financial measure Rental income of the same-property portfolio was up 0.9%, but was limited by the lower effective occupancy rate of the same-property portfolio in 2017 compared to that of 2016. Net operating income and net property income were down for the fourth quarter of 2017 compared to the same period of 2016. Significant capital expenditures in preventive maintenance across the portfolio explain the decrease in the same-property portfolio’s performance. For the year, a lower effective occupancy rate and higher preventive maintenance costs explain the decrease in the same-property portfolio’s performance. Currently vacant space totalling more than 180,000 square feet is subject to firm lease agreements and will generate income in the next few months. Based on current rental activities, management is optimistic that the same-property portfolio’s performance indicators will soon improve. BTB Real Estate Investment Trust – Management Discussion and Analysis – December 31, 2017 44 DISTRIBUTABLE INCOME AND DISTRIBUTIONS The following table shows the calculation of distributable income. Periods ended December 31 (in thousands of dollars) Net income (loss) and comprehensive income (IFRS) - Fair value adjustment on investment properties + Amortization of 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 + Impact of early redemption of Series D convertible debentures Distributable income(1) Unusual item Dispute settlement(2) Recurring distributable income (1) Non-IFRS financial measures (2) Income from a dispute settlement 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 2017 $ 15,498 (10,855) 37 107 12 (591) 636 (182) 254 – 2016 $ 9,130 (4,215) 37 87 11 (823) 610 2 240 – 2017 $ 28,171 (10,855) 154 319 45 (1,127) 2,449 (443) 1,008 – 4,916 5,079 19,721 2016 $ 22,085 (6,200) 170 206 192 (623) 2,177 (246) 1,074 1,088 19,923 – 4,916 (32) – (212) 5,047 19,721 19,711 Quarter Year 2017 $ 4,423 656 5,079 2016 $ 3,927 515 4,442 2017 $ 16,199 2,287 18,486 2016 $ 14,474 1,970 16,444 12.9% 11.6% 12.4% 12.0% 10.5¢ 10.5¢ 10.5¢ 103.3% 90.0% 12.0¢ 11.9¢ 10.5¢ 88.0% 77.8% 45.2¢ 45.2¢ 42.0¢ 93.7% 82.1% 51.7¢ 51.1¢ 42.0¢ 83.4% 73.4% (1) The payout ratio corresponds to total distributions divided by recurring distributable income. (2) The cash payout ratio corresponds to cash distributions divided by recurring distributable income. Distributable income for the fourth quarter decreased by $163, from $5,079 to $4,916, between 2016 and 2017. Recurring distributable income per unit for the fourth quarter of 2017 was 10.5¢ compared to 11.9¢ in 2016, an 11.8% decrease. Recurring distributable income for the year was the same as last year, while recurring distributable income per unit was down from 51.7¢ to 45.2¢. Distributions to unitholders totalled 10.5¢ per issued unit for each quarter of 2017 and 2016 and 42.0¢ for the year. The payout ratio for recurring distributable income was 103.3% in the fourth quarter of 2017 compared to 88.0% in the fourth quarter of 2016, and 93.7% for 2017 compared to 83.4% for 2016. Management attributes the decrease in distributable income per unit to the portfolio’s effective occupancy rate, which was lower in 2017 than in 2016, and to higher preventive maintenance costs during the fourth quarter of 2017, as well as the issuance of 5.6 million units on October 23, 2017 and the timing difference between receipt of the net proceeds and their allocation to accretive property acquisitions. Lastly, 180,000 square feet of leasable area are currently subject to firm lease agreements which will generate rental income over the next few quarters and significantly improve these performance indicators. BTB Real Estate Investment Trust – Management Discussion and Analysis – December 31, 2017 45 The following table shows the reconciliation of distributable income (non-IFRS financial 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 - Expenses related to disposal of investment properties ± Net change in non-cash 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 Distributable income Quarter Year 2017 $ 14,122 50 (25) (4,138) (3,984) (874) (205) (30) 4,916 2016 $ 13,250 27 — (3,538) (3,658) (874) (94) (34) 2017 $ 38,449 83 (83) 107 (14,871) (3,496) (351) (117) 5,079 19,721 2016 $ 39,850 95 — (322) (14,582) (4,471) (519) (128) 19,923 The following table, presented in accordance with CSA instructions, enables readers to assess the performance of distributed funds and reconcile them with cash flows and net income. Years ended December 31 (in thousands of dollars) Net cash flows from operating activities (IFRS) - Interest paid Net cash flows from operating activities Net income Total distributions Cash distributions Surplus (deficit) of net cash flows from operating activities compared to total distributions Excess (deficiency) of net income over total distributions 2017 $ 38,448 (18,593) 19,855 28,171 18,486 16,199 1,369 9,685 2016 $ 39,850 (20,630) 19,220 22,085 16,443 14,474 2,777 5,642 2015 $ 38,238 (20,855) 17,383 8,669 14,478 12,688 2,905 (5,809) For the years ended December 31, net cash flows from operating activities exceeded total distributions. If necessary, BTB has access to lines of credit totalling $22 million to cover seasonal fluctuations in certain disbursements. Distribution reinvestment plan In the fourth quarter of 2017, 12.9% of distributions (2016: 11.6%) and 12.4% (2016: 12.0%) were reinvested under the distribution reinvestment plan implemented by BTB in 2011. Approximately $2.3 million (2016: $1.8 million) of the Trust’s cash was thereby preserved through unit conversions during the year. Until April 15, 2016, the plan’s discount rate was 5%. As of May 16, 2016, the rate was lowered to 3% in line with the discount offered by most Canadian REITs. BTB Real Estate Investment Trust – Management Discussion and Analysis – December 31, 2017 46 FUNDS FROM OPERATIONS (FFO) The following table provides a reconciliation of net income and comprehensive income established according to IFRS and FFO for the periods ended December 31, 2017 and 2016: Periods ended December 31 (in thousands of dollars, except for per unit data) Net income and comprehensive income (IFRS) - Fair value adjustment on investment properties - Costs on disposal of investment properties + Amortization of a property recognized at cost + Amortization of lease incentives ± Fair value adjustment on derivative financial instruments + Leasing payroll expenses FFO(1) Unusual item Dispute settlement Recurring FFO(1) FFO per unit Recurring FFO per unit Recurring FFO payout ratio(2) Recurring FFO cash payout ratio(3) Quarter Year 2017 $ 15,498 (10,855) 25 8 636 (591) 144 4,865 – 4,865 10.3¢ 10.3¢ 104.4% 90.9% 2016 $ 9,130 (4,215) — 15 610 (823) 123 4,840 2017 $ 28,171 (10,855) 83 30 2,449 (1,127) 511 19,262 (32) 4,808 — 19,262 11.4¢ 11.4¢ 92.4% 81.7% 44.1¢ 44.1¢ 96.0% 84.1% 2016 $ 22,085 (6,200) — 61 2,177 (623) 422 17,922 (212) 17,710 46.5¢ 45.9¢ 92.8% 81.7% (1) Non-IFRS financial measure (2) The recurring FFO payout ratio corresponds to total distributions divided by recurring FFO. (3) The recurring FFO cash payout ratio corresponds to cash distributions divided by recurring FFO. For fiscal 2017, recurring FFO was 44.1¢, compared to 45.9¢ in 2016, a 3.9% decrease. The payout ratio stood at 96.0% for fiscal 2017 compared to 92.8% for 2016. The decrease in recurring FFO and recurring FFO per unit was due to a lower effective occupancy rate in 2017 than in 2016, significant preventive maintenance expenditures during the last quarter of 2017, and the issuance of 5.6 million units on October 23, 2017 and the timing difference between receipt of the net proceeds and their allocation to accretive property acquisitions. As mentioned above, strong leasing activity in recent months will significantly improve these performance indicators in 2018. BTB Real Estate Investment Trust – Management Discussion and Analysis – December 31, 2017 47 The following table provides a reconciliation of FFO (non-IFRS financial 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) + Straight-line rental income adjustment + Financial revenues + Amortization of a property recognized at cost + Leasing payroll expenses ± Net change in non-cash operating items - Unit-based compensation expenses Interest on mortgage loans payable - Interest on convertible debentures - Interest on the acquisition line of credit - - Other interest expense and operating line of credit - Accretion of the liability component of convertible debentures - Accretion of effective interest Impact of early redemption of Series D convertible debentures - Amortization of other property and equipment FFO(1) (1) Non-IFRS financial measure ADJUSTED FUNDS FROM OPERATIONS (AFFO) Quarter Year 2017 $ 14,122 182 50 8 144 (4,138) (107) (3,984) (874) (205) (30) (12) (254) – (37) 4,865 2016 $ 15,250 (2) 27 15 123 (5,538) (87) (3,658) (874) (94) (34) (11) (240) – (37) 2017 $ 38,449 443 83 30 511 107 (319) (14,871) (3,496) (351) (117) (45) (1,008) – (154) 4,840 19,262 2016 $ 41,850 246 95 61 422 (2,322) (206) (14,582) (4,471) (519) (128) (192) (1,074) (1,088) (170) 17,922 The following table provides a reconciliation of FFO and AFFO for the years ended December 31, 2017 and 2016: 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 + Impact of early redemption of Series D debentures - Provision for maintenance expenditures - Provision for rental fees AFFO(1) Unusual item Dispute settlement Recurring AFFO(1) AFFO per unit Recurring AFFO per unit Recurring AFFO payout ratio(2) Recurring AFFO cash payout ratio(3) Quarter Year 2017 $ 4,865 (182) 254 12 29 107 – (395) (320) 4,370 2016 $ 4,840 2 240 11 22 87 – (365) (320) 4,517 2017 $ 19,262 (443) 1,008 45 124 319 – (1,467) (1,249) 17,599 – (82) – 4,370 4,435 17,599 9.3¢ 9.3¢ 116.2% 101.2% 10.7¢ 10.6¢ 99.0% 87.6% 40.3¢ 40.3¢ 105.0% 92.0% 2016 $ 17,922 (246) 1,074 192 109 206 1,088 (1,462) (1,280) 17,603 (212) 17,391 45.7¢ 45.1¢ 94.6% 83.2% (1) Non-IFRS financial measure (2) The recurring AFFO payout ratio corresponds to total distributions divided by recurring AFFO. (3) The recurring AFFO cash payout ratio corresponds to cash distributions divided by recurring AFFO. Recurring AFFO was down $115 for the quarter and up $208 for the year. Recurring AFFO per unit amounted to 9.3¢ compared to 10.6¢ in 2016, and the payout ratio stood at 116.2% compared to 99.0% in the fourth quarter of 2016. It stood at 40.3¢ compared to 45.7¢ for the full year, with a payout ratio of 105.0% compared to 94.6% in 2016. BTB Real Estate Investment Trust – Management Discussion and Analysis – December 31, 2017 48 The decrease in recurring AFFO and recurring AFFO per unit was due to the lower effective occupancy rate in 2017 compared to 2016, significant preventive maintenance expenditures in the last quarter of 2017, and the issuance of 5.6 million units on October 23, 2017 and the timing difference between receipt of the net proceeds and their allocation to accretive property acquisitions. As mentioned above, strong leasing activity in recent months will significantly improve these performance indicators in 2018. The following table provides a reconciliation of AFFO (non-IFRS financial measure) and cash flows from operating activities presented in the financial statements. Periods ended December 31 (in thousands of dollars, except for per unit data) Cash flows from operating activities (IFRS) + Financial revenues + Leasing payroll expenses ± Net change in non-cash operating items Interest on mortgage loans payable - Interest on convertible debentures - - Interest on the acquisition line of credit - Other interest expense and operating line of credit - Provision for maintenance expenditures - Provision for rental fees Adjusted funds from operations SEGMENTED INFORMATION Quarter Year 2017 $ 14,122 50 144 (4,138) (3,984) (874) (205) (30) (395) (320) 4,370 2016 $ 13,250 27 123 (3,538) (3,658) (874) (94) (34) (365) (320) 2017 $ 38,449 83 511 107 (14,871) (3,496) (351) (117) (1,467) (1,249) 4,517 17,599 2016 $ 39,850 95 422 (322) (14,582) (4,471) (519) (128) (1,462) (1,280) 17,603 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 years ended December 31, 2017 and 2016. Quarters ended December 31 (in thousands of dollars) Quarter ended December 31, 2017 Investment properties Rental income from properties Net operating income(1) Quarter ended December 31, 2016 Investment properties Rental income from properties Net operating income(1) (1) Non-IFRS financial measure Years ended December 31 (in thousands of dollars) Year ended December 31, 2017 Rental income from properties Net operating income(1) % Year ended December 31, 2016 Rental income from properties Net operating income(1) % Retail Office Industrial General purpose $ % $ % $ % $ % Total $ 230,570 5,969 3,385 173,965 4,770 2,782 30.7 30.3 32.4 27.0 26.1 27.5 335,463 9,472 4,334 290,010 8,803 4,157 44.7 48.0 41.4 44.9 48.2 41.1 123,540 2,375 1,779 115,645 2,582 2,116 16.4 12.0 17.0 17.9 14.1 20.9 61,537 1,917 962 65,865 2,115 1,066 8.2 9.7 9.2 751,110 19,733 10,460 10.2 11.6 10.5 645,485 18,270 10,121 Retail % $ Office % $ Industrial % $ General purpose % $ 21,084 12,417 58.9 19,213 11,467 57.9 28.8 30.8 26.2 27.7 34,397 15,885 46.2 35,238 16,869 47.9 46.8 39.3 48.0 40.8 9,944 8,005 80.5 10,366 8,521 82.2 13.6 19.8 14.1 20.6 10.8 10.1 11.7 10.9 7,892 4,087 51.8 8,567 4,482 52.3 Total $ 73,317 40,394 55.1 73,384 41,339 56.3 BTB Real Estate Investment Trust – Management Discussion and Analysis – December 31, 2017 49 Rental income and net operating income of retail properties increased due to the acquisition of the “FX Sabourin” property in August 2017 and the “Carrefour St-Romuald” property in November 2017. The effective occupancy rate of the office segment, which was affected by significant expiries in 2017, declined significantly in certain properties, explaining the decrease in rental income and net operating income. The industrial segment was affected by the expected departure following the discontinuance of business of a major tenant in Cornwall, Ontario, which affected this category’s occupancy rate, rental income and net operating income. The vacated space was partially filled at the end of the year and the beginning of 2018. The decrease in rental income and net operating income of general purpose properties was due to the sale of two major properties in this segment. On January 1, 2016, the Trust reclassified some properties to better reflect the current mix of tenant activities. The comparative figures were reclassified to conform to the current period presentation. FINANCIAL POSITION The following table presents a summary of the Trust’s balance sheet as at December 31, 2017 and December 31, 2016. It should be read in conjunction with the Trust’s consolidated financial statements and the notes thereto. (in thousands of dollars) Assets Investment properties Amounts receivable from tenants and other receivables Other assets Cash and cash equivalents 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, 2017 December 31, 2016 Reference $ $ Page 50 Page 52 Page 53 Page 53 Page 55 Page 55 Page 56 Page 57 751,110 4,212 5,150 1,918 762,390 428,382 48,183 18,130 18,748 513,443 248,947 762,390 645,485 2,743 3,821 6,667 658,716 384,350 47,692 — 13,711 445,753 212,963 658,716 The main changes in the balance sheet as at December 31, 2017 compared to the balance sheet as at December 31, 2016 reflect the acquisition and disposal of investment properties during the year and mortgage financing related to these transactions. 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, retail, industrial and mixed use 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 three jointly-controlled investment properties. The fair value of investment properties stood at $751 million as at December 31, 2017 compared to $645 million as at December 31, 2016. BTB Real Estate Investment Trust – Management Discussion and Analysis – December 31, 2017 50 Acquisitions In August 2017, BTB purchased a retail property with a leasable area of approximately 123,000 square feet located on the Montréal South Shore, for $23.2 million. In November 2017, the Trust purchased a retail property with a leasable area of 121,000 square feet located on the Québec City South Shore, for $35.9 million. In November 2017, the Trust also purchased two office properties with a total leasable area of 132,000 square feet located in Ville Saint-Laurent, Québec, for $35.1 million. Disposal In March 2017, the Trust sold a 35,823 square-foot mixed use property located in Dollard-des-Ormeaux, Québec, for sales proceeds totalling $7.0 million. In September 2017, the Trust sold a 13,471 square-foot property located in Trois-Rivières, Québec, for sale proceeds totalling $1.8 million and a 9,900 square-foot retail property located in Laval, Québec, for sale proceeds totalling $2.6 million. After year-end, the Trust sold three investment properties totalling approximately 54,150 square feet for a total consideration of $11.9 million. Summary by operating segment As at December 31 Number of properties 2017 Leasable area (sq. ft.) Office Retail Industrial Mixed use Subtotal Properties under redevelopment Total Investments in investment properties held 29 18 20 4 71 2 73 2,050,462 1,304,773 1,542,093 406,650 % 38.6 24.6 29.1 7.7 5,303,978 100.0 131,354 5,435,332 Number of properties 2016 Leasable area (sq. ft.) 1,920,977 1,107,058 1,499,783 442,472 % 38.6 22.3 30.2 8.9 4,970,290 100.0 173,665 5,143,955 27 17 19 6 69 3 72 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 ended December 31, 2017 totalled $1,493, compared to $1,024 for the same quarter of 2016, of which $849 was recoverable (2016: $287). Capital expenditures totalled $4,327 for the year (2016: $2,682), of which $1,451 was recoverable (2016: $740). Capital expenditures do not include repair and maintenance costs. Capital expenditures vary from one quarter 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 and incentives applicable to the leased areas to meet the specific needs of tenants, as well as leasing fees that are paid to independent brokers. These disbursements totalled $2,826 for the fourth quarter and $7,360 for the year ended December 31, 2017, compared to $968 and $4,088 for the same periods of 2016. 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 Real Estate Investment Trust – Management Discussion and Analysis – December 31, 2017 51 The following table summarizes expenditures in maintenance capital expenditures, as well as incentives and leasing fees, for the years ended December 31, 2017 and 2016. Years ended December 31 (in thousands of dollars) Recoverable maintenance capital expenditures Non-recoverable maintenance capital expenditures (1) Total maintenance capital expenditures Leasing fees and leasehold improvements Total Quarter Year 2017 $ 848 646 1,494 2,818 4,312 2016 $ 287 737 1,024 968 1,992 2017 $ 1,451 2,876 4,327 7,360 11,687 2016 $ 740 1,942 2,682 4,088 6,770 (1) For the quarter, includes $0 related to investment properties under redevelopment (December 31, 2016: $154). For the cumulative period, includes $26 related to investment properties under redevelopment (December 31, 2016: $630). The following table shows changes in the fair value of investment properties during the years ended December 31, 2017 and 2016. Years ended December 31 (in thousands of dollars) Balance, beginning of period Additions: Acquisitions Dispositions Capital expenditures net of grants Leasing fees and leasehold improvements Net changes in fair value of investment properties Other non-monetary changes Balance, end of period Quarter Year 2017 $ 2016 $ 2017 $ 2016 $ 663,933 639,432 645,485 622,651 72,464 – 1,494 2,818 10,855 (454) 458 – 1,024 968 4,215 (612) 96,057 (11,450) 4,327 7,360 11,337 (2,006) 11,795 – 2,682 4,088 6,200 (1,931) 751,110 645,485 751,110 645,485 Amounts receivable from tenants and other receivables Amounts receivable from tenants and other receivables increased from $2,489 as at December 31, 2016 to $4,212 as at December 31, 2017. These amounts are summarized below: (in thousands of dollars) Amounts receivable from tenants Allowance for doubtful accounts Operating expenses to be recovered Balance of sale receivable Other receivables Amounts receivable from tenants and other receivables December 31, 2017 December 31, 2016 $ 2,721 (460) 2,261 457 600 894 4,212 $ 1,619 (432) 1,187 254 600 702 2,743 BTB Real Estate Investment Trust – Management Discussion and Analysis – December 31, 2017 52 Other assets 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 Other assets CAPITAL RESOURCES Long-term debt December 31, 2017 December 31, 2016 $ 3,335 (1,235) 2,100 1,175 1,370 505 5,150 $ 3,259 (1,081) 2,178 983 242 418 3,821 The following table shows the balances of BTB’s indebtedness as at December 31, 2017, including mortgage loans payable and convertible debentures, based on year of maturity and corresponding weighted average contractual interest rates: As at December 31, 2017 (in thousands of dollars) Year of maturity 2018 2019 2020 2021 2022 2023 and thereafter Total Balance of convertible debentures $ – – 49,700 – – – 49,700 Balance of mortgages payable Weighted average contractual interest rate $ 56,614 48,744 24,073 37,696 39,150 224,326 430,603 % 3.86 4.03 5.94 2.96 3.46 3.80 4.06 Weighted average contractual interest rate As at December 31, 2017, the weighted average contractual interest rate of the Trust’s long-term debt stood at 4.06%, i.e. 3.72% for mortgages payable and 7.03% for convertible debentures. Mortgage loans payable As at December 31, 2017, the Trust’s mortgage loans payable amounted to $431 million compared to $386 million as at December 31, 2016, before deferred financing costs and valuation adjustments, a net increase of $45 million following the financing of acquisitions completed in 2017, certain refinancings and principal repayments on monthly payments and disposals. BTB Real Estate Investment Trust – Management Discussion and Analysis – December 31, 2017 53 The following table summarizes changes in mortgage loans payable during the fourth quarter and year ended December 31, 2017: As at December 31, 2017 (in thousands of dollars) Balance at beginning of the period Mortgage loans contracted or assumed Balance repaid at maturity or upon disposal Monthly principal repayments Balance as at December 31, 2017 Note: Before unamortized financing costs and valuation adjustments. Quarter $ 386,264 85,175 (38,828) (2,008) 430,603 Year $ 386,081 108,088 (51,586) (11,980) 430,603 As at December 31, 2017, the weighted average interest rate was 3.72%, compared to 3.79% for mortgage loans on the books as at December 31, 2016, a decrease of 7 basis points. As at December 31, 2017, except for three loans with a cumulative balance of $21.6 million, all mortgages payable bear interest at fixed rates ($344.3 million) or are coupled with an interest rate swap ($64.7 million). The weighted average term of existing mortgage financings was 6.4 years as at December 31, 2017, and 5.9 years as at December 31, 2016, an increase of 0.5 years (6 months) in one year. BTB spreads the terms of its mortgages over many years in order to mitigate the risk associated with renewing them. Except for one property under redevelopment valued at $0.3 million, and two properties partially securing the acquisition and operating lines of credit as at December 31, 2017, all of the Trust’s other properties were mortgaged as at December 31, 2017. Unamortized loan financing costs totalled $2,931 and are amortized under the effective interest method over the term of the loans. The following table, as at December 31, 2017, shows future mortgage loan repayments for the next few years: As at December 31, 2017 (in thousands of dollars) Maturity 2018 2019 2020 2021 2022 2023 and thereafter Total + Valuation adjustments on assumed loans - Unamortized financing costs Balance as at December 31, 2017 Principal repayment $ Balance at maturity $ 11,560 9,912 9,856 9,160 8,372 45,545 94,405 55,307 46,496 21,849 33,341 33,097 146,108 336,198 % of total 15.5 13.1 7.4 9.9 9.6 44.5 100.0 Total $ 66,867 56,408 31,705 42,501 41,469 191,653 430,603 710 (2,931) 428,382 BTB Real Estate Investment Trust – Management Discussion and Analysis – December 31, 2017 54 Convertible debentures (in thousands of dollars) Par value Contractual interest rate Effective interest rate Date of issuance Per-unit conversion price Date of interest payment Maturity date Series E(1) (3) 23,000 6.90% 7.90% Series F(2) (3) 26,700 7.15% 8.47% Total February 2013 $6.15 March 31 and September 30 March 2020 December 2015 $5.65 June 30 and December 31 December 2020 Balance as at December 31, 2017 22,412 25,771 48,183 (1) Redeemable by the Trust, under certain conditions, as of March 31, 2016, but before March 31, 2018, 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. (2) Redeemable by the Trust, under certain conditions, as of December 31, 2018, but before December 31, 2019, 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. (3) The Trust may, at its option and under certain conditions, elect to satisfy its obligation to pay the principal amount of the Series E and F debentures by issuing freely tradable units to Series E and F debenture holders. Bank loan – operating credit facility BTB has an operating credit facility of $3 million with a Canadian chartered bank. The 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 on one property. The facility bears interest at the bank’s base rate, plus 0.75%. As at December 31, 2017, $1.480 million of the operating credit facility had been used. Bank loans – acquisition credit facility BTB has an acquisition credit facility of $19 million with a Canadian chartered bank. The 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, 2017, $16.560 million of the acquisition credit facility had been used. Following the sale of two properties used as collateral and partial repayment of the authorized acquisition credit facility, the facility was reduced to $15.350 million on February 7, 2018. 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. BTB Real Estate Investment Trust – Management Discussion and Analysis – December 31, 2017 55 The following table presents the Trust’s debt ratios as at December 31, 2017 and December 31, 2016. (in thousands of dollars) Free cash flow Mortgage loans payable (1) Convertible debentures (1) Acquisition credit facility Total long-term debt less free cash flow Gross book value of the Trust less free cash flow Mortgage debt 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 December 31, 2017 December 31, 2016 $ (1,918) 430,603 49,700 16,650 495,035 761,707 56.5% 6.5% 2.2% 65.0% $ (6,667) 386,081 49,700 — 429,114 653,130 59.1% 7.6% —% 65.7% According to the table above, the mortgage debt ratio, excluding the convertible debentures and acquisition credit facility as at December 31, 2017, amounted to 56.5%, down 2.6% from December 31, 2016, mainly due to the appreciation in value of the real estate portfolio. Including the convertible debentures and the acquisition credit facility, net of free cash flow, the overall debt ratio stood at 65.0%, down 0.7% from December 31, 2016. The Trust seeks to finance its acquisitions with mortgage debt ratios of 60% to 65% because the cost of financings is lower than the capital cost of the Trust’s equity. Interest coverage ratio For the quarter ended December 31, 2017, the interest coverage ratio stood at 2.07, down slightly by 11 basis points from the fourth quarter of 2016. The ratio increased by 4 basis points, to 2.15, for the year. 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 2017 $ 10,460 5,043 2.07 2016 $ 10,121 4,633 2.18 2017 $ 40,394 18,752 2.15 2016 $ 41,339 19,605 2.11 (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 Operating expenses to be reimbursed Accounts payable and other liabilities December 31, 2017 December 31, 2016 $ 16,034 1,695 498 521 18,748 $ 11,385 1,482 284 560 13,711 BTB Real Estate Investment Trust – Management Discussion and Analysis – December 31, 2017 56 Unitholders’ equity Unitholders’ equity consists of the following: (in thousands of dollars) Trust units Cumulative profit Cumulative distributions to unitholders Unitholders’ equity Distribution reinvestment plan December 31, 2017 December 31, 2016 $ 244,115 92,488 (87,656) 248,947 $ 217,816 64,317 (69,170) 212,963 On October 1, 2011, the Trust implemented a distribution reinvestment plan under which unitholders may elect to receive distributions in units, with a 3% discount on their market value. Under the program, 137,668 units were issued during the fourth quarter of 2017 (2016: 119,006 units) and 496,248 units were issued during the year (2016: 455,342 units). Close to $2.3 million in cash was thereby preserved in 2017 under the plan. Units outstanding On October 23, 2017, the Trust issued 5,561,400 units at a price of $4.55, for net proceeds of $24.1 million, net of underwriters’ and professional fees. The following table summarizes units issued during the reporting periods and the weighted number of units for the same periods. Periods ended December 31 (in number of units) Units outstanding, beginning of quarter Units issued Public offering Distribution reinvestment plan Awards - employee unit purchase plan Awards - restricted unit compensation plan Units outstanding, end of quarter Weighted average number of units outstanding Unit options Quarter Year 2017 2016 2017 2016 42,724,050 42,223,367 42,342,373 34,705,151 5,561,400 137,668 – – – 119,006 – – 5,561,400 496,248 9,062 14,035 7,159,342 455,342 8,340 14,198 48,423,118 47,023,012 42,342,373 42,283,216 48,423,118 43,670,943 42,342,373 38,546,160 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. 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. As at December 31, 2017, there were no unit options outstanding. BTB Real Estate Investment Trust – Management Discussion and Analysis – December 31, 2017 57 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 periods ended December 31, 2017 and 2016. Years ended December 31 (in number of units) Deferred units outstanding, beginning of period Deferred units issued Deferred units settled Deferred units outstanding, end of period Restricted unit compensation plan Quarter Year 2017 10,190 2,140 – 12,330 2016 2,226 2,007 – 4,233 2017 4,233 8,097 – 12,330 2016 – 4,233 – 4,233 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 and selected employees 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 periods ended December 31, 2017 and 2016. Years ended December 31 (in number of units) Restricted units outstanding, beginning of period Restricted units issued Restricted units cancelled Restricted units settled Restricted units outstanding, end of period Employee unit purchase plan Quarter Year 2017 115,628 – – – 115,628 2016 77,673 – – – 77,673 2017 77,673 51,990 – (14,035) 115,628 2016 51,083 42,919 (2,131) (14,198) 77,673 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 ended December 31, 2017, no units were issued (2016: nil). During fiscal 2017, 9,691 units were issued. Subsequent events On January 25, 2018, the Trust sold the property located at 1863-1865 Autoroute Transcanadienne in Dorval, Québec, for sale proceeds totalling $5.650 million. On February 6, 2018, the trust sold the property located at 2153-2155 Crescent Street in Montréal, Québec, for sale proceeds totalling $3.150 million. On February 27, 2018, the Trust sold the property located at 1100 and 1108-1136 Saint-Joseph Blvd. in Drummondville, Québec, for sale proceeds totalling $3.075 million. In February 2018, the Trust sold a property located at 2905 Marleau in Cornwall, Ontario, for sale proceeds totalling $490. In February 2018, the Trust purchased a retail property located in the city of Delson, Québec, for a consideration of $1,865. Off-balance sheet arrangements and contractual commitments BTB does not have any other off-balance sheet arrangements or commitments 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, 2017, BTB complied with all of its loan commitments and was not in default with any covenant at the balance sheet date. BTB Real Estate Investment Trust – Management Discussion and Analysis – December 31, 2017 58 SUSTAINABLE DEVELOPMENT In line with the principles of sustainable development, BTB incorporates environmental and social considerations into its business practices. Under BTB’s Social Responsibility and Sustainable Development Policy, property is managed and operated so as to integrate sustainable development values into the Trust’s activities, protect the health and well- being of employees and the communities where it operates, involve key shareholders in managing its environmental footprint, and demonstrate a commitment to transparency and continuous improvement of sustainability practices. Ongoing improvement of properties through investment in environmental projects, among other things, is a top priority for BTB. The tangible results of BTB’s responsible behaviour include BOMA BEST certification for 26 portfolio properties, publication of the Social Responsibility and Sustainable Development Policy, a sustainable development good practices guide for tenants, benchmarking of the real estate portfolio’s energy performance, a partnership with a social reintegration organization for parking lot clean-up, development of Sentinelle client service and preventive maintenance software, and environmental risk management. As mentioned above, BTB Real Estate Investment Trust contributes to sustainable development and is committed to mobilizing employees, tenants and suppliers to make it a reality. The Trust believes that its commitment to reduce its environmental footprint should be reflected not only across property operation, maintenance and management, but in everything it does. Accordingly, since September 2015, 26 properties in BTB’s portfolio have received various levels of BOMA BEST certification, including Gold (2), Silver (3), Bronze (5) and Certified (16). This prestigious certification recognizing BTB’s excellence in environmental property management was awarded by the Association des propriétaires et administrateurs d’immeubles - BOMA Québec, a leader in the real estate industry since 1927. In future, BTB plans to continue improving the environmental footprint of its properties. Major projects, such as the Halles St-Jean energy efficiency project in St-Jean-sur-Richelieu, are in the works to optimize overall equipment performance and upgrade buildings. BTB also expects to keep its BOMA BEST certifications and achieve the highest level of performance for certain properties. 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. BTB Real Estate Investment Trust – Management Discussion and Analysis – December 31, 2017 59 As at December 31, 2017, 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 ongoing 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 2017 or any other subsequent year. TAXATION OF UNITHOLDERS For Canadian unitholders, distributions are qualified as follows for taxation purposes: Years ended December 31 Taxable as other income Tax deferred Total 2017 2016 % – 100 100 % – 100 100 ACCOUNTING POLICIES AND ESTIMATES The preparation of consolidated financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Estimates are based on historical experience and other assumptions that are considered reasonable under given circumstances. The result of the continual review of these estimates is the basis for exercising judgment on the carrying amounts of assets and liabilities and the reported amounts of revenues and expenses. Actual results may differ from these estimates. Critical judgments made by BTB in applying significant accounting policies, the most significant of which is the fair value of investment properties, are described in Note 2 to the consolidated financial statements. The Trust used the income approach to determine fair value. Fair value is estimated by capitalizing the cash flow that a property can reasonably be expected to produce over its remaining economic life. The income approach is based on two methods: the overall capitalization rate method, whereby net operating income is capitalized at the requisite overall capitalization rate, or the discounted cash flow method, whereby cash flows are projected over the expected term of the investment plus a terminal value discounted using an appropriate discount rate. NEW ACCOUNTING POLICIES a) Change in accounting policy In January 2016, the IASB issued Disclosure Initiative Amendments to IAS 7 as part of the IASB’s Disclosure Initiative. These amendments require entities to provide additional disclosures that will enable financial statement users to evaluate changes in liabilities arising from financing activities, including changes arising from cash flows and non-cash changes. The Trust adopted the amendments to IAS 7 in its financial statements for the first quarter of 2017, resulting in an additional disclosure. b) Pending standards The following standards have been issued but were not in effect for the quarter ended December 31, 2017, and were therefore not applied to this MD&A. They are described in more detail in the consolidated financial statements for the year ended December 31, 2017. IFRS 9, Financial Instruments (i) (ii) IFRS 15, Revenues from Contracts with Customers (iii) IFRS 16, Leases (iv) Amendment to IAS 40, Investment Property BTB Real Estate Investment Trust – Management Discussion and Analysis – December 31, 2017 60 RISKS AND UNCERTAINTIES Numerous risks and uncertainties could cause BTB’s actual results to differ materially from those expressed, implied or projected in the forward-looking statements, including those described in the “Risk Factors” section of BTB’s 2017 Annual Information Form for the year ended December 31, 2017, which is hereby incorporated by reference. Such risks and uncertainties include: Interest Rate Increases Competition and Rising Property Prices  Access to Capital and to Debt Financing   Ownership of Immovable Property   Availability of Immovable Property for Acquisition  Development Programs  Recruitment and Retention of Employees and Executives  Government Regulation  Limit on Activities Under the Trust Agreement  Tax Regulations  Fluctuations in Cash Distributions  Reliance on Single or Anchor Tenants   Conflicts of Interest  Market Price of Units   Dilution    General Uninsured Losses  Retail Industry Environmental Matters Legal Risks Legal Rights Relating to Units Potential Unitholder Liability BTB has not identified any significant changes to the risks and uncertainties to which it is exposed in its business. 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 December 31, 2017, and that the current controls and procedures provide reasonable assurance that material information about BTB is made known to them during the quarter 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 December 31, 2017, 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 2017, 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 Real Estate Investment Trust – Management Discussion and Analysis – December 31, 2017 61 APPENDIX 1 – PERFORMANCE INDICATORS  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 payout ratios, which enable investors to assess the stability of distributions against distributable income, FFO and AFFO; 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 retention rate, which is used to assess the Trust’s ability to renew leases and retain tenants; The increase in average rate of renewed leases, which measures organic growth and the Trust’s ability to increase its rental income. BTB Real Estate Investment Trust – Management Discussion and Analysis – December 31, 2017 62 Rental income APPENDIX 2 – DEFINITIONS 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. Operating expenses 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. 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 the combined 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. Financial expenses Financial expenses arise from the following loans and financings:  Mortgage loans payable contracted or assumed totalling approximately $431 million as at December 31, 2017, compared to $386 million as at December 31, 2016.  Series E and F convertible debentures for a total par value of $49.7 million.  Operating and acquisition lines of credit used as needed.  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. 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. 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. BTB Real Estate Investment Trust – Management Discussion and Analysis – December 31, 2017 63 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 quarters 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 quarter to the next, or should another rate within the provided ranges be more appropriate than the rate previously used, the fair value of the investment properties would increase or decrease accordingly. Same-property portfolio The same-property portfolio includes all the properties owned by BTB as at January 1, 2016, but does not include the financial impacts from disposals, acquisitions and developments completed in 2016 and 2017. Net property income from the same-property portfolio 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. Distributable income 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. 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:      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; Leasing payroll expenses (starting in 2016). 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. 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 Real Estate Investment Trust – Management Discussion and Analysis – December 31, 2017 64 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; Impact of early redemption of convertible debentures. 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 25¢ (2016: 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 and leasing payroll expenses. BTB Real Estate Investment Trust – Management Discussion and Analysis – December 31, 2017 65 Audited Consolidated Financial Statements Year ended December 31, 2017 TABLE OF CONTENTS 69 Management’s responsibility for Financial Reporting 70 Independent Auditor’s Report 72 Consolidated Statements of Financial Position 73 Consolidated Statements of Comprehensive Income 74 Consolidated Statements of Changes in Unitholders’ Equity 75 Consolidated Statements of Cash Flows 76 Notes to Consolidated Financial Statements BTB Real Estate Investment Trust – Consolidated Financial Statements – December 31, 2017 68 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, 2017, 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, 2017 and 2016 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 9, 2018 BTB Real Estate Investment Trust – Consolidated Financial Statements – December 31, 2017 69 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, 2017 and December 31, 2016, 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, 2017 and December 31, 2016, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards. March 9, 2018 Montréal, Canada *CPA auditor, CA, public accountancy permit No. A105973 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION As at December 31, 2017 and 2016 (Audited - in thousands of CAD dollars) ASSETS Investment properties Property and equipment Derivative financial instruments Other assets Receivables Cash and cash equivalents Total assets LIABILITIES AND UNITHOLDERS’ EQUITY Mortgage loans payable Convertible debentures Bank loans 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 9, 2018. Notes 4, 5, 6 7 13 8 9 10 11 12 14 2017 $ 751,110 2,100 1,370 1,680 4,212 1,918 762,390 428,382 48,183 18,130 498 16,555 1,695 513,443 248,947 762,390 2016 $ 645,485 2,178 242 1,401 2,743 6,667 658,716 384,350 47,692 — 284 11,945 1,482 445,753 212,963 658,716 Michel Léonard, Trustee Jocelyn Proteau, Trustee BTB Real Estate Investment Trust – Consolidated Financial Statements – December 31, 2017 72 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the years ended December 31, 2017 and 2016 (Audited - in thousands of CAD dollars) Operating revenues Rental revenues from properties Operating expenses Property taxes and public utilities Other operating costs Net operating income Other Revenue Dispute settlement Expenses Finance costs Net adjustment to fair value of derivative financial instruments Net financing costs Trust administration expenses 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. Notes 16 17 18 2017 $ 2016 $ 73,317 73,384 20,714 12,209 32,923 20,487 11,558 32,045 40,394 41,339 — 212 19,805 21,959 (1,127) 18,678 4,317 17,399 (623) 21,336 4,330 15,885 10,772 6,200 28,171 22,085 BTB Real Estate Investment Trust – Consolidated Financial Statements – December 31, 2017 73 CONSOLIDATED STATEMENTS OF CHANGES IN UNITHOLDERS’ EQUITY For the years ended December 31, 2017 and 2016 (Audited - in thousands of CAD dollars) Balance at January 1, 2017 Issuance of units Distributions to unitholders Comprehensive income Balance as at December 31, 2017 Balance at January 1, 2016 Issuance of units Distributions to unitholders Comprehensive income Balance as at December 31, 2016 See accompanying notes to consolidated financial statements. Notes Unitholders’ contributions Cumulative distributions Cumulative comprehensive income 15 15 15 15 217,816 26,299 — 244,115 — 244,115 184,853 32,963 — 217,816 — 217,816 (69,170) — (18,486) (87,656) — (87,656) (52,726) — (16,444) (69,170) — (69,170) 64,317 — — 64,317 28,171 92,488 42,232 — — 42,232 22,085 64,317 Total 212,963 26,299 (18,486) 220,776 28,171 248,947 174,359 32,963 (16,444) 190,878 22,085 212,963 BTB Real Estate Investment Trust – Consolidated Financial Statements – December 31, 2017 74 CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 2017 and 2016 (Audited - in thousands of CAD dollars) Notes 18 7 14 16 16 17 4, 5 6 7 25 25 Operating activities Net income for the year Adjustment for: Net changes 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 Repayment of convertible debentures Net proceeds from issue of units Net distributions to unitholders Reduction to restricted cash Interest paid Net cash from (used in) 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. 2017 $ 2016 $ 28,171 22,085 (10,772) 154 319 (443) 2,449 18,678 38,556 (107) 38,449 (104,791) 10,690 (76) (94,177) 107,036 (63,566) 18,130 — — 23,963 (16,041) 50 (18,593) 50,979 (4,749) 6,667 1,918 (6,200) 170 206 (246) 2,177 21,336 39,528 322 39,850 (17,813) — (56) (17,869) 86,822 (69,587) 11,770 (21,570) (23,000) 30,908 (14,216) 51 (20,630) (19,452) 2,529 4,138 6,667 BTB Real Estate Investment Trust – Consolidated Financial Statements – December 31, 2017 75 Notes to Consolidated Financial Statements For the years ended December 31, 2017 and 2016 (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, 2017 and 2016 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 9, 2018. (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 has been rounded to the nearest thousand, except per unit amounts. (d) Use of estimates and judgments The preparation of consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Estimates and assumptions are continuously evaluated and are based on management’s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. 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: BTB Real Estate Investment Trust – Consolidated Financial Statements – December 31, 2017 76 Notes to Consolidated Financial Statements For the years ended December 31, 2017 and 2016 (Audited - in thousands of CAD dollars, except per unit amounts) Business combinations The Trust acquires entities that own real estate. At the time of acquisition, the Trust considers whether the acquisition represents the acquisition of a business, i.e., where an integrated set of activities is acquired in addition to the investment property. More specifically, the following criteria are considered: • The extent to which significant inputs and processes are acquired and in particular the extent of ancillary services provided by the acquiree. • Whether the acquiree has allocated its own staff to manage the investment property and/or to deploy any processes. • The number of investment properties owned by the acquiree. An acquisition of a business is accounted for as a business combination under IFRS 3, Business Combinations. When the acquisition 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 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 independent external appraisers 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 BTB Real Estate Investment Trust – Consolidated Financial Statements – December 31, 2017 77 Notes to Consolidated Financial Statements For the years ended December 31, 2017 and 2016 (Audited - in thousands of CAD dollars, except per unit amounts) appropriate, market-derived discount rate is applied to establish an indication of the present value of the income stream associated with the investment property. The calculated periodic cash flow is typically estimated as gross income less vacancy and collection losses and less operating expenses/outgoings. A series of periodic net operating incomes, along with an estimate of the reversion/terminal/exit value anticipated at the end of the projection period, are discounted to present value. The aggregate of the net present values equals the fair value estimated of the investment property. The Comparable method involves the comparison of the Trust’s investment properties to similar investment properties that have transacted within a recent time frame from which a fair value is estimated based on the price per square foot of these comparable sales. Derivative financial instruments Derivative financial instruments, including embedded derivatives, are recognized on the consolidated statement of financial position at fair value. Subsequent to initial recognition, these derivatives are measured at fair value. The fair value of derivative instruments is based on forward rates considering the market price, rate of interest and volatility and takes into account the credit risk of the financial instrument. Changes in estimated fair value at each reporting date are included in profit and loss. Embedded derivatives are separated from the host contract and accounted for separately if the economic characteristics and risks of the host contract and the embedded derivative are not closely related. Unit options The Trust has a unit option plan for the benefit of management. The plan does not provide for cash settlement. The Trust recognizes compensation expense on unit options granted, based on their fair value, which is calculated using the Black-Scholes model. The compensation expense is amortized using the graded vesting method. The valuation model requires management to make estimates for the expected life, volatility, the average dividend yield of distributions and the average risk-free interest rate. 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. BTB Real Estate Investment Trust – Consolidated Financial Statements – December 31, 2017 78 Notes to Consolidated Financial Statements For the years ended December 31, 2017 and 2016 (Audited - in thousands of CAD dollars, except per unit amounts) (ii) Subsidiaries Subsidiaries are entities controlled by the Trust. Control exists when the Trust has the existing rights that give it the current ability to direct the activities that significantly affect the entities’ returns. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. (iii) Joint operations A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement. Those parties are called joint operators. The consolidated financial statements include the Trust’s proportionate share of the joint operations’ assets, liabilities, revenue and expenses with items of a similar nature on a line-by-line basis, from the date that joint control commences until the date that joint control ceases. (b) Financial instruments Financial assets and liabilities are recognized when the Trust becomes party to the contractual provisions of the financial instrument. Financial assets and financial liabilities are initially recognized at fair value, and their subsequent measurement is dependent on their classification as described below. The classification depends on the purpose for which the financial instruments were acquired or issued, their characteristics and the Trust’s designation of such instruments. (i) Non-derivative financial assets Loans and receivables Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition loans and receivables are measured at amortized cost using the effective interest method, less any impairment losses. Loans and receivables comprise restricted cash, receivables and cash and cash equivalents. Cash and cash equivalents Cash and cash equivalents comprise cash balances and term deposits with original maturities of three months or less. Restricted cash Restricted cash mainly includes amounts which are held in interest-bearing reserve accounts and are expected to be utilized over the coming years to fund certain expenses related to investments, as well as amounts provided in guarantee of mortgage loans. The Trust derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. (ii) Non-derivative financial liabilities The Trust classifies non-derivative financial liabilities into the other financial liabilities category. Such financial liabilities are recognized initially at fair value less any directly attributable transaction costs. Subsequent to initial recognition, these financial liabilities are measured at amortized cost using the effective interest method. Non-derivative financial liabilities comprise mortgage loans payable, convertible debentures, bank loans, trade and other payables and distributions payable to unitholders. BTB Real Estate Investment Trust – Consolidated Financial Statements – December 31, 2017 79 Notes to Consolidated Financial Statements For the years ended December 31, 2017 and 2016 (Audited - in thousands of CAD dollars, except per unit amounts) 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. 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. BTB Real Estate Investment Trust – Consolidated Financial Statements – December 31, 2017 80 Notes to Consolidated Financial Statements For the years ended December 31, 2017 and 2016 (Audited - in thousands of CAD dollars, except per unit amounts) (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 - 7 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. (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. BTB Real Estate Investment Trust – Consolidated Financial Statements – December 31, 2017 81 Notes to Consolidated Financial Statements For the years ended December 31, 2017 and 2016 (Audited - in thousands of CAD dollars, except per unit amounts) 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. (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 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. BTB Real Estate Investment Trust – Consolidated Financial Statements – December 31, 2017 82 Notes to Consolidated Financial Statements For the years ended December 31, 2017 and 2016 (Audited - in thousands of CAD dollars, except per unit amounts) (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. 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. BTB Real Estate Investment Trust – Consolidated Financial Statements – December 31, 2017 83 Notes to Consolidated Financial Statements For the years ended December 31, 2017 and 2016 (Audited - in thousands of CAD dollars, except per unit amounts) 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. (o) Change in accounting policy In January 2016, the IASB issued Disclosure Initiative Amendments to IAS 7 as part of the IASB’s Disclosure Initiative. These amendments require entities to provide additional disclosures that will enable financial statements users to evaluate changes in liabilities arising from financing activities, including changes arising from cash flows and non-cash changes. The Trust adopted the amendments to IAS 7 in its first quarter of 2017, resulting in an additional disclosure (see note 25). (p) New standards and interpretations not yet adopted A number of new standards, and amendments to standards and interpretations, are not yet effective for the year ended December 31, 2017, and have not been applied in preparing these consolidated financial statements. IFRS 9, Financial Instruments (“IFRS 9”) (i) 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 Trust intends to adopt IFRS 9 in its financial statements for the annual period beginning on January 1, 2018 and does not expect the new standard to have a material impact on the financial statements. (ii) 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 BTB Real Estate Investment Trust – Consolidated Financial Statements – December 31, 2017 84 Notes to Consolidated Financial Statements For the years ended December 31, 2017 and 2016 (Audited - in thousands of CAD dollars, except per unit amounts) 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 adoption of the new standard is not expected to have a material impact on the financial statements except for the presentation on a gross basis of property tax recoveries and property tax expenses related to certain single tenants who paid property taxes directly on behalf of the Trust. For the year ended December 31, 2017, the presentation on a gross basis instead of net basis would result in an additional amount in property tax recoveries to revenues, an amount that will equally offset by an increase to property tax expenses thereby generating no incremental net operating income. The Trust’s most material revenue stream is base rental revenue, which is outside the scope of IFRS 15. The recovery of costs related to the provision of services is considered within the scope of IFRS 15 and the Trust has concluded that the pattern of revenue recognition will remain unchanged. On the adoption of IFRS 15, the Trust will be required to disclose revenue recognized from contracts with customers separately from other sources of revenue, including those included within gross leases. (iii) 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. (iv) IAS 40, Investment Property (“IAS 40”) In December 2016, the IASB issued an amendment to IAS 40 clarifying certain existing requirements. The amendment requires that an asset be transferred to or from investment property only when there is a change in use. A change in use occurs when the property meets, or ceases to meet, the definition of investment property and there is evidence of the change in use. In isolation, a change in management’s intentions for the use of a property does not provide evidence of a change in use. These amendments are effective for annual periods beginning on or after January 1, 2018, with earlier adoption permitted. The Trust intends to adopt the amendments to IAS 40 in its financial statements for the annual period beginning on January 1, 2018. The Trust does not expect the amendments to have a material impact on the financial statements. 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 Capitalized leasing fees Capitalized lease incentives Lease incentives amortization Straight-line lease adjustment Net changes in fair value of investment properties (note 18) Balance end of year 2017 $ 645,485 96,057 (11,450) 4,327 1,119 6,241 (2,449) 443 11,337 751,110 2016 $ 622,651 11,795 — 2,682 875 3,213 (2,177) 246 6,200 645,485 BTB Real Estate Investment Trust – Consolidated Financial Statements – December 31, 2017 85 Notes to Consolidated Financial Statements For the years ended December 31, 2017 and 2016 (Audited - in thousands of CAD dollars, except per unit amounts) 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 independent 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, 2017 external appraisals were obtained for investment properties with an aggregate fair value of $536,158 (December 31, 2016 - $409,135) and management’s internal valuations were used for investment properties with an aggregate fair value of $214,952 (December 31, 2016 - $236,350). The fair value of investment properties is based on Level 3 inputs. There have been no transfers during the period between levels. The significant inputs used to determine the fair value of the Trust’s investment properties are as follows: As at December 31, 2017 Capitalization rate Terminal capitalization rate Discount rate As at December 31, 2016 Capitalization rate Terminal capitalization rate Discount rate Retail Office Industrial Mixed use 6.25% - 10.00% 6.25% - 8.50% 6.50% - 9.75% 6.75% - 7.50% 6.25% - 8.00% 6.50% - 7.75% 7.00% - 9.50% 6.75% - 7.50% 7.25% - 8.75% 7.00% - 8.75% 7.75% - 10.50% 7.50% - 8.50% 6.25% - 10.00% 6.50% - 8.50% 6.50% - 9.75% 6.75% - 7.75% 6.75% - 8.00% 6.75% - 8.75% 7.00% - 7.75% 7.00% - 7.75% 7.25% - 8.75% 7.50% - 9.25% 7.50% - 8.50% 7.50% - 8.25% Valuations determined by the Direct Capitalization method are most sensitive to a change in the capitalization rate. 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.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 $ 807,373 777,648 751,110 724,182 699,997 Change in fair value $ 56,263 26,538 — (26,928) (51,113) BTB Real Estate Investment Trust – Consolidated Financial Statements – December 31, 2017 86 Notes to Consolidated Financial Statements For the years ended December 31, 2017 and 2016 (Audited - in thousands of CAD dollars, except per unit amounts) 5. Acquisitions (a) 2017 Asset Acquisitions The fair value of the assets and liabilities recognized in the consolidated statement of financial position on the date of the acquisition during the year ended December 31, 2017 were as follows: Acquisition date Property type Location Fair value recognized on acquisition Investment properties, including transaction costs Interest acquired Mortgage loans payable Assets / (Trade and other payables), including transaction costs Total cash consideration paid August 2017 November 2017 November 2017 November 2017 Transaction costs Total Retail Retail Office Office Longueuil, QC Levis, QC Montreal, QC Montreal, QC % 100 100 100 100 $ 23,200 35,900 19,278 15,772 1,907 96,057 $ — — — — — — $ 107 (457) (127) (6) (1,907) (2,390) $ 23,307 35,443 19,151 15,766 — 93,667 (b) 2016 Asset Acquisitions The fair value of the assets and liabilities recognized in the consolidated statement of financial position on the date of the acquisition during 2016 were as follows: Acquisition date Property type Location February 2016 November 2016* Transaction costs Office Retail Montreal, QC Quebec city, QC Interest acquired % 100 100 Investment properties, including transaction costs $ 11,000 450 345 Total *Acquisition of a condominium that is part of an investment property the Trust already owned. 11,795 6. Disposals Fair value recognized on acquisition Mortgage loans payable Trade and other payables, including transaction costs Total cash consideration paid $ — — — — $ (41) (21) (345) (407) $ 10,959 429 — 11,388 (a) 2017 Asset Disposals The following table presents relevant information on disposals recognized in the consolidated financial statements during the year ended December 31, 2017: Disposal date Property type Location March 2017 September 2017 September 2017 Transaction costs* Mixed use Retail Retail Dollard-des-Ormeaux, QC Trois-Rivieres, QC Laval, QC Gross proceeds Restricted Cash Trade and other payables, including transaction costs Net proceeds $ 7,000 1,825 2,625 — — (50) — — $ (37) (82) (26) (565) $ 6,963 1,693 2,599 (565) Total *Transaction costs are recognized in profit and loss under Net changes in fair value of investment properties and disposals transaction costs (see 11 450 (710) (50) 10,690 note 18). BTB Real Estate Investment Trust – Consolidated Financial Statements – December 31, 2017 87 Notes to Consolidated Financial Statements For the years ended December 31, 2017 and 2016 (Audited - in thousands of CAD dollars, except per unit amounts) (b) 2016 Asset Disposals There was no asset disposal during 2016. 7. Property and Equipment Cost Balance at December 31, 2015 Additions Balance at December 31, 2016 Additions Balance at December 31, 2017 Accumulated Depreciation Balance at December 31, 2015 Depreciation for the year Balance at December 31, 2016 Depreciation for the year Balance at December 31, 2017 Net carrying amount Balance at December 31, 2016 Balance at December 31, 2017 8. Other Assets As at December 31, Prepaid expenses Deposits Total Owner- occupied land Owner- occupied building Equipment, furniture and fixtures $ 494 — 494 — 494 $ 1,945 10 1,955 13 1,968 448 61 509 58 567 494 494 1,446 1,401 $ 594 46 640 56 696 412 80 492 68 560 148 136 Rolling stock $ 170 — 170 7 177 51 29 80 28 108 90 69 Total $ 3,203 56 3,259 76 3,335 911 170 1,081 154 1,235 2,178 2,100 2017 $ 1,175 505 1,680 2016 $ 983 418 1,401 BTB Real Estate Investment Trust – Consolidated Financial Statements – December 31, 2017 88 Notes to Consolidated Financial Statements For the years ended December 31, 2017 and 2016 (Audited - in thousands of CAD dollars, except per unit amounts) 9. Receivables As at December 31, Rents receivable Provision for doubtful accounts Net rents receivable Unbilled recoveries(1) Other receivables Balance of sale(2) Total 2017 $ 2,721 (460) 2,261 457 894 600 4,212 2016 $ 1,619 (432) 1,187 254 702 600 2,743 (1) At December 31, 2017 unbilled credits amounting to $521 are included in Trade and other payables (December 31, 2016 – $560). (2) Balance of sale is comprised of one mortgage loan receivable bearing interest at an interest rate of 2.75%, payable semi-annually, maturing in November 2020. The balance of sale is related to the disposal of an investment property that occurred in November 2015. 10. Mortgage Loans Payable Mortgage loans payable are secured by immovable hypothecs on investment properties having a fair value of approximately $738,360 as at December 31, 2017 (December 31, 2016 – $638,635). 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 2017 $ 344,313 86,290 710 (2,931) 2016 $ 364,669 21,412 845 (2,576) 428,382 384,350 3.72% 6.36 3.79% 5.90 2.00% - 6.80% 2.77% - 6.80% BTB Real Estate Investment Trust – Consolidated Financial Statements – December 31, 2017 89 Notes to Consolidated Financial Statements For the years ended December 31, 2017 and 2016 (Audited - in thousands of CAD dollars, except per unit amounts) As at December 31, 2017, the mortgage loan scheduled repayments are as follows: 2018 2019 2020 2021 2022 Thereafter Unamortized fair value assumption adjustments Unamortized financing costs Scheduled repayments Principal maturity $ 11,560 9,912 9,856 9,160 8,372 45,545 94,405 $ 55,307 46,496 21,849 33,341 33,097 146,108 336,198 Total $ 66,867 56,408 31,705 42,501 41,469 191,653 430,603 710 (2,931) 428,382 The Trust may enter into floating-for-fixed interest rate swap agreements on floating interest rate mortgages to hedge the variability in cash flows attributed to fluctuating interest rates. The Trust does not apply hedge accounting to such cash flow hedging relationships (see note 13). The following table presents relevant information on interest rate swap agreements: Transaction date Original principal amount Effective fixed interest rate Settlement basis Maturity date March 2013 June 2016 November 2017 November 2017 Total $ 7,150 13,000 23,200 23,075 66,425 11. Convertible Debentures % 4.02 3.45 3.8825 3.905 Monthly Quarterly Monthly Monthly April 2023 June 2026 November 2027 December 2027 As at December 31, 2017 Outstanding amount As at December 31, 2016 $ 5,963 12,412 23,200 23,075 64,650 $ 6,238 12,804 — — 19,042 As at December 31, 2017, the Trust had two series of subordinated, convertible, redeemable debentures outstanding. Series E Series F Interest rates Coupon Effective Unit conversion price % 6.90 7.15 % 7.90 8.47 $ 6.15 5.65 Capital 23,000 26,700 Interest payments Maturity March 2020 Semi-annual Semi-annual December 2020 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 E $ 22,690 310 23,000 Series F $ 26,700 — 26,700 BTB Real Estate Investment Trust – Consolidated Financial Statements – December 31, 2017 90 Notes to Consolidated Financial Statements For the years ended December 31, 2017 and 2016 (Audited - in thousands of CAD dollars, except per unit amounts) 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, 2017 Non-derivative liability component upon issuance Accretion of non-derivative liability component Unamortized financing costs Non-derivative liability component Series E $ Series F $ Total $ 22,690 195 22,885 (473) 26,700 — 26,700 (929) 49,390 195 49,585 (1,402) 22,412 25,771 48,183 Conversion and redemption options (asset) liability component at fair value (4) 5 1 As at December 31, 2016 Non-derivative liability component upon issuance Accretion of non-derivative liability component Unamortized financing costs Non-derivative liability component Conversion and redemption options liability component at fair value Series E $ Series F $ Total $ 22,690 149 22,839 (657) 26,700 — 26,700 (1,190) 22,182 25,510 4 3 49,390 149 49,539 (1,847) 47,692 7 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 were redeemed for their nominal value on August 2, 2016. The excess of the redemption cost over the carrying amount of the debentures amounting to $1,088, that would have been otherwise amortized over time, was charged to net financing costs on August 2, 2016 (see note 17). 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”). Until March 31, 2018, under certain conditions, the debentures are redeemable by the Trust at a redemption price equal to their principal amount plus accrued, unpaid interest, provided that the average weighted price based on the volume of units traded on the Toronto Stock Exchange during a period of 20 consecutive trading days ending on the fifth trading day prior to the date on which an advanced notice of redemption is given (the “current market price”) is at least 125% of the conversion price. As of 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 Real Estate Investment Trust – Consolidated Financial Statements – December 31, 2017 91 Notes to Consolidated Financial Statements For the years ended December 31, 2017 and 2016 (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. 12. Bank Loans The Trust has access to an acquisition line of credit in the amount of $19,000. This line of credit bears interest at a rate of 3.25% above the prime rate. As at December 31, 2017, $16,650 was due under the acquisition line of credit (December 31, 2016 – $nil). The Trust also has access to an operating credit facility for a maximum amount of $3,000. This facility bears interest at a rate of 0.75% above the prime rate. As at December 31, 2017, $1,480 was due under the operating credit facility (December 31, 2016 – $nil). 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 $9,545 and by an immoveable second rank hypothec on four properties having a value of $87,175. BTB Real Estate Investment Trust – Consolidated Financial Statements – December 31, 2017 92 Notes to Consolidated Financial Statements For the years ended December 31, 2017 and 2016 (Audited - in thousands of CAD dollars, except per unit amounts) 13. 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, receivables, deposits, trade and other payables and distributions payable to unitholders, which approximated their carrying amount as at December 31, 2017 and December 31, 2016 because of their short-term maturity. As at December 31, 2017 Measured at fair value Conversion and redemption options of convertible debentures (note 11) Interest rate swap For which fair values are disclosed Mortgage loans payable (note 10) Convertible debentures, including their conversion and redemption features (note 11) Bank loans (note 12) As at December 31, 2016 Measured at fair value Conversion and redemption options of convertible debentures (note 11) Interest rate swap For which fair values are disclosed Mortgage loans payable (note 10) Convertible debentures, including their conversion and redemption features (note 11) Carrying amount $ 1 (1,371) 428,382 Carrying amount $ 7 (249) 384,350 Fair value Level 1 Level 2 Level 3 $ — — — $ — (1,371) 423,677 — 18,130 $ 1 — — — — 48,184 18,130 50,988 — Fair value Level 1 Level 2 Level 3 $ — — — $ — (249) 395,410 $ 7 — — — 47,699 50,980 — 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 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 Dollar 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. BTB Real Estate Investment Trust – Consolidated Financial Statements – December 31, 2017 93 Notes to Consolidated Financial Statements For the years ended December 31, 2017 and 2016 (Audited - in thousands of CAD dollars, except per unit amounts) The following tables provide a reconciliation of Level 3 fair value measurements on the consolidated statements of financial position: Year ended December 31, 2017 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, 2016 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 $ 7 (6) 1 Conversion and redemption options of convertible debentures $ 8 (1) 7 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, 2017: Volatility sensitivity Increase (decrease) (0.50%) December 31, 2017 0.50% Conversion and redemption options of convertible debentures $ Volatility % (39) 1 41 13.33 13.83 14.33 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. 14. 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 BTB Real Estate Investment Trust – Consolidated Financial Statements – December 31, 2017 94 Notes to Consolidated Financial Statements For the years ended December 31, 2017 and 2016 (Audited - in thousands of CAD dollars, except per unit amounts) 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. No options were outstanding as at December 31, 2017 and December 31, 2016. (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: For the years ended December 31, Outstanding, beginning of year Trustees’ compensation Distributions paid in units Outstanding, end of year 2017 Deferred units 2016 Deferred units 4,233 7,442 655 12,330 — 4,172 61 4,233 As at December 31, 2017, the liability related to the plan was $57 (December 31, 2016 - $19). The related expense recorded in profit and loss amounted to $38 for the year ended December 31, 2017 (for the year ended December 31, 2016 - $19). (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, 2017, the liability related to the plan was $44 representing a total of 9,691 units to issue (December 31, 2016 - $40, representing a total of 9,062 units to issue).). The related expense recorded in profit and loss amounted to $45 for the year ended December 31, 2017 (for the year ended December 31, 2016 - $39). The 9,691 units related to 2017 purchases were issued in February 2018 (9,062 units related to 2016 purchases - February 2017). (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 Cancelled Settled Outstanding, end of year 2017 2016 Restricted units Restricted units 77,673 51,990 — (14,035) 115,628 51,083 42,919 (2,131) (14,198) 77,673 As at December 31, 2017, the liability related to the plan was $397 (December 31, 2016 - $225). The related expense recorded in profit and loss amounted to $236 for the year ended December 31, 2017 (for the year ended December 31, 2016 - $148). As part of settlement, the Trust issued 14,035 units under this plan for the year ended December 31, 2017 (14,198 units for the year ended December 31, 2016). BTB Real Estate Investment Trust – Consolidated Financial Statements – December 31, 2017 95 Notes to Consolidated Financial Statements For the years ended December 31, 2017 and 2016 (Audited - in thousands of CAD dollars, except per unit amounts) 15. Trust Units Issued and Outstanding BTB is authorized to issue an unlimited number of trust units. Each trust unit represents a single vote at any meeting of unitholders and entitles the unitholder to receive a pro rata share of all distributions. The unitholders have the right to require BTB to redeem their trust units on demand. Upon receipt of the redemption notice, all rights to and under the trust units tendered for redemption are surrendered and the holder thereof is entitled to receive a price per trust unit ("Redemption Price"), as determined by a market formula. The Redemption Price is to be paid in accordance with the conditions provided for in the Declaration of Trust. BTB trust units are considered liability instruments under IFRS because the units are redeemable at the option of the holder, however they are presented as equity in accordance with IAS 32. In October 2017, the Trust completed a public issue of 5,561,400 units, including the over-allotment option, for total net proceeds of $23,963. 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 the employee unit purchase plan (note 14 (c)) Issue pursuant to the restricted unit compensation plan (note 14 (d)) Units 42,342,373 5,561,400 — 47,903,773 496,248 9,062 14,035 2017 $ 217,816 25,304 (1,341) 241,779 2,231 42 63 Units 34,705,151 7,159,342 — 41,864,493 455,342 8,340 14,198 Units outstanding, end of year 48,423,118 244,115 42,342,373 2016 $ 184,853 32,575 (1,667) 215,761 1,961 35 59 217,816 (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 3% discount. (b) Distributions For the years ended December 31, Distributions to unitholders Distributions per unit 16. Rental Revenues from Properties For the years ended December 31, Rental income contractually due from tenants Lease incentive amortization Straight-line lease adjustment BTB Real Estate Investment Trust – Consolidated Financial Statements – December 31, 2017 2017 $ 18,486 0.42 2017 $ 75,323 (2,449) 443 73,317 , 2016 $ 16,444 0.42 2016 $ 75,315 (2,177) 246 73,384 96 Notes to Consolidated Financial Statements For the years ended December 31, 2017 and 2016 (Audited - in thousands of CAD dollars, except per unit amounts) 17. 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 Impact of early redemption of convertible debenture series D (note 11) Net adjustment to fair value of derivative financial instruments 18. 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 (note 4) Disposals transaction costs (note 6) 19. Expenses by Nature For the years ended December 31, Depreciation Employee benefits expense 20. Earnings per Unit 2017 $ (83) 14,871 3,496 382 86 2016 $ (95) 14,582 4,471 533 114 45 192 1,008 1,074 — (1,127) 18,678 1,088 (623) 21,336 2017 $ 11,337 (565) 10,772 2017 $ 154 5,940 2016 $ 6,200 — 6,200 2016 $ 170 5,726 BTB’s trust units being puttable financial instruments presented as equity in accordance with IAS 32 (see note 15), the Trust is not required to report a profit or loss per unit figure on its consolidated statements of comprehensive income. However, for disclosure purposes only, the Trust has determined basic earnings per unit using the same basis that would apply in accordance with lAS 33, Earnings per Share. BTB Real Estate Investment Trust – Consolidated Financial Statements – December 31, 2017 97 Notes to Consolidated Financial Statements For the years ended December 31, 2017 and 2016 (Audited - in thousands of CAD dollars, except per unit amounts) Net earnings per unit are calculated based on the weighted average number of units outstanding as follows: For the years ended December 31, Net income Weighted average number of units outstanding – basic Earnings per unit – basic 21. Operating Lease Income 2017 $ 28,171 43,670,943 2016 $ 22,085 38,546,160 0.65 0.57 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, 2017 are as follows: Within one year Beyond one year but within five years Beyond five years 22. Capital and Financial Risk Management 2017 $ 57,584 182,505 159,689 399,778 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 Real Estate Investment Trust – Consolidated Financial Statements – December 31, 2017 98 Notes to Consolidated Financial Statements For the years ended December 31, 2017 and 2016 (Audited - in thousands of CAD dollars, except per unit amounts) The Trust’s capital is as follows: As at December 31, Cash and cash equivalents Mortgage loans payable(1) Convertible debentures(1) Acquisition line of credit Mortgage loans payable, Convertible debentures and Acquisition line of credit adjusted for Cash and cash equivalents Total assets Accumulated depreciation on Property and equipment Cash and cash equivalents Totals assets adjusted for accumulated depreciation and cash and cash equivalents (1) Excluding issue costs As at December 31, Mortgage loans payable, Convertible debentures and Acquisition line of credit adjusted for Cash and cash equivalents / total assets adjusted for accumulated depreciation and cash and cash equivalents ratio Mortgage loans payable / total assets adjusted for accumulated depreciation and cash and cash equivalents 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 13) 2017 $ (1,918) 430,603 49,700 16,650 495,035 762,390 1,235 (1,918) 761,707 2017 % 65.0 56.5 2016 $ (6,667) 386,081 49,700 — 429,114 658,716 1,081 (6,667) 653,130 2016 % 65.7 59.1 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, 2017, overdue rent receivable amounted to $1,851 (December 31, 2016 - $1,166), of which a provision for doubtful account of $460 (December 31, 2016 - $432) 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. BTB Real Estate Investment Trust – Consolidated Financial Statements – December 31, 2017 99 Notes to Consolidated Financial Statements For the years ended December 31, 2017 and 2016 (Audited - in thousands of CAD dollars, except per unit amounts) Interest rate risk (ii) Interest rate risk reflects the risk of changes in the fair value or future cash flows of a financial instrument because of fluctuations in market interest rates. Except for three mortgage loans outstanding of $21,640 as at December 31, 2017, all other mortgage loans payable and convertible debentures bear interest at fixed rates or are covered by an interest rate swap agreement. Accordingly a 100-basis point increase or decrease in the average interest rates for the fiscal year, assuming that all other variables remain constant, would have an impact of approximately $216 on the Trust’s comprehensive income for the year ended December 31, 2017. (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, 2017, the Trust was in compliance with all the covenants to which it was subject. BTB Real Estate Investment Trust – Consolidated Financial Statements – December 31, 2017 100 Notes to Consolidated Financial Statements For the years ended December 31, 2017 and 2016 (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, 2017 Estimated payment schedule Trade and other payables Distributions payable to unitholders Bank loans Mortgage loans payable and convertible debentures As at December 31, 2016 Trade and other payables Distributions payable to unitholders Mortgage loans payable and convertible debentures Carrying amount $ Total contractual cash flows $ 2018 2019 2020 2021 2022 $ $ $ $ $ 16,555 16,733 15,688 277 269 168 124 1,695 18,130 1,695 18,130 1,695 18,130 — — — — — — — — 2023 and thereafter $ 207 — — 476,565 512,945 578,994 615,552 85,628 121,141 72,944 73,221 95,009 95,278 52,507 52,675 50,236 50,360 222,670 222,877 Estimated payment schedule 2017 2018 2019 2020 2021 Carrying amount $ Total contractual cash flows $ $ 11,691 11,691 10,327 1,482 1,482 1,482 $ 383 — $ 307 — $ 246 — $ 123 — 2022 and thereafter $ 305 — 432,042 445,215 522,578 535,751 92,795 104,604 61,672 62,055 58,133 58,440 89,125 89,371 46,623 46,746 174,230 174,535 BTB Real Estate Investment Trust – Consolidated Financial Statements – December 31, 2017 101 Notes to Consolidated Financial Statements For the years ended December 31, 2017 and 2016 (Audited - in thousands of CAD dollars, except per unit amounts) 23. Subsidiaries and Joint Arrangements (a) Subsidiaries The principal entities included in the Trust’s consolidated financial statements are as follows: Entity BTB Real Estate Investment Trust (“BTB REIT”) BTB, 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 Corporation Corporation Limited Partnership General Partnership Limited Partnership Relationship Parent 100% owned by BTB REIT 100% owned by BTB A&ET 100% owned by BTB A&ET 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** 2017 % 50 50 75 2016 % 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. 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 2017 $ 49,374 29,943 5,648 2,832 2016 $ 48,319 30,647 5,581 3,266 BTB Real Estate Investment Trust – Consolidated Financial Statements – December 31, 2017 102 Notes to Consolidated Financial Statements For the years ended December 31, 2017 and 2016 (Audited - in thousands of CAD dollars, except per unit amounts) 24. Operating Segments For investment properties, discrete financial information is provided to the 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 retail, office, industrial and mixed use segments. Consequently, the Trust is considered to have four operating segments, as follows: • • Retail Office Industrial • • Mixed use Year ended December 31, 2017 Investment properties Rental revenue from properties Net operating income Year ended December 31, 2016 Investment properties Rental revenue from properties Net operating income 25. Supplemental Cash Flow Information Retail $ 230,570 21,084 12,417 173,965 19,213 11,467 Office Industrial Mixed use $ $ $ 335,463 34,397 15,885 290,010 35,238 16,869 123,540 9,944 8,005 115,645 10,366 8,521 61,537 7,892 4,087 65,865 8,567 4,482 Total $ 751,110 73,317 40,394 645,485 73,384 41,339 The following table provides a reconciliation of movements of liabilities to cash flows arising from financing activities Year ended December 31, 2017 Balance beginning of year Mortgage loans, net of financing costs Repayment of mortgage loans Fair value assumption adjustments and financing costs amortization Accretion of non-derivative liability component Balance end of year 26. 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 Convertible debentures $ 47,692 — — 446 45 48,183 Mortgage loans payable $ 384,350 107,036 (63,566) 562 — 428,382 2017 $ 1,934 287 2,221 2016 $ 1,969 155 2,124 Key management personnel are comprised of the Company’s executive officers. BTB Real Estate Investment Trust – Consolidated Financial Statements – December 31, 2017 103 Notes to Consolidated Financial Statements For the years ended December 31, 2017 and 2016 (Audited - in thousands of CAD dollars, except per unit amounts) 27. Commitments and Contingencies (a) Operating leases as lessee The annual future payments required under operating leases expiring between 2018 and 2070 are as follows: Within one year Beyond one year but within five years Beyond five years Total $ 228 864 14,094 15,186 The related expense recorded in profit and loss amounted to $234 for the year ended December 31, 2017 (for the year ended December 31, 2016 - $232). (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, Within one year Beyond one year but within five years Beyond five years Future minimum lease payments Interest $ 143 496 206 845 $ 39 97 10 146 2017 Present value of minimum lease payments $ 104 399 196 699 Future minimum lease payments Interest $ 143 515 331 989 $ 45 121 25 191 2016 Present value of minimum lease payments $ 98 394 306 798 The present value of the minimum lease payments is recorded in Trade and other payables. (c) Litigation The Trust is involved in 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. 28. Subsequent Events In January 2018, the Trust concluded the sale of one investment property for a gross proceed of $5,650. An amount of $3,650 has been used to partially reimburse the acquisition line of credit. In February 2018, the Trust concluded the sale of the owner-occupied land and building for a gross proceed of $3,150. In February 2018, the Trust concluded the sale of one investment property for a gross proceed of $490. An amount of $458 has been used to partially reimburse a mortgage loan. In February 2018, the Trust acquired a commercial building located in the city of Delson for a purchase price of $1,865. The transaction was partly financed by a balance of sale of $1,399 bearing interest at a rate of 4.00% maturing in December 2018. BTB Real Estate Investment Trust – Consolidated Financial Statements – December 31, 2017 104 Notes to Consolidated Financial Statements For the years ended December 31, 2017 and 2016 (Audited - in thousands of CAD dollars, except per unit amounts) In February 2018, the Trust concluded the sale of one investment property for a gross proceed of $3,075. An amount of $1,237 has been used to completely reimburse the mortgage loan. 29. Comparatives Figures Certain comparative figures have been reclassified to conform to the current year’s presentation. BTB Real Estate Investment Trust – Consolidated Financial Statements – December 31, 2017 105 Corporate Information Board of Trustees Executive Team Michel Leonard President and Chief Executive Officer Benoit Cyr, CPA, CA, MBA Vice-President and Chief Financial Officer Dominic Gilbert, B.B.A. Vice President, Leasing Sylvie Laporte Vice President, Property Management Jocelyn Proteau (2) Chairman of the Board of Trustees Corporate Director Michel Leonard President and Chief Executive Officer Jean-Pierre Janson (2) Vice President of the Board of Trustees Executive Vice President Richardson GMP Ltd Luc Martin (1) President, Audit Committee Corporate Director Fernand Perreault (3) President of the Investment Committee Corporate Director Lucie Ducharme (1) (2) President, Human Resources and Governance Committee Corporate Director Luc Lachapelle (1) Secretary of the Board of Trustees Corporate Director Sylvie Lachance (3) Corporate Director Peter Polatos (3) Corporate Director (1) Member of the Audit Committee (2) Member of the Human Resources and Governance Committee (3) Member of the Investment Committee BTB Annual Report 2017 107 Unitholders Information Head office BTB Real Estate Investment Trust 2155 Crescent Montreal, Quebec, H3G 2C1 T 514 286 0188 F 514 286 0011 www.btbreit.com Listing The units and debentures of BTB Real Estate Investment Trust are listed on the Toronto Stock Exchange under the trading symbols: BTB.UN BTB.DB.E BTB.DB.F 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 2017, 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 Legal counsel De Grandpré Chait LLP. 1000 De la Gauchetière St. West Suite 2900 Montreal, Quebec, H3B 4W5 Annual Meeting of Unitholders June 12, 2018 11 : 00 a.m. (EDT) Espace CDPQ 3 Place Ville-Marie Montreal, Quebec, H3B 2E3 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 3%. For further information about the Distribution Reinvestment Plan, please refer to the Investor relations section of our website at www.btbreit.com or contact the Plan agent: Computershare Investor Services. BTB Annual Report 2017 108 BTB Real Estate Investment Trust 2155 Crescent Montreal, Quebec, H3G 2C1 T 514 286 0188 F 514 286 0011 www.btbreit.com

Continue reading text version or see original annual report in PDF format above