Building
AnnuAl RepoRt 2014
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in 2014, we focused on building: building
scale with acquisitions and development, and
building capacity by implementing an enterprise
resource management system and internalizing
our leasing, property accounting and property
management functions. By successfully
executing on our strategy, choice properties
built value – for all of our stakeholders.
475(1)
39.9m(1)
properties
sQuare feet (of gla)
$7.9B(2)
98.1%(2)
fair value
occupancy
(1) Includes acquisitions subsequent to year-end 2014.
(2) As of December 31, 2014.
aBout us
Choice Properties Real Estate Investment Trust is an owner, manager and
developer of well-located retail and commercial real estate across Canada. Its
portfolio spans approximately 39.9 million square feet of gross leasable area and
consists of 475 properties primarily focused on supermarket-anchored shopping
centres and stand-alone supermarkets. Choice Properties’ strategy is to create
value by enhancing and optimizing its portfolio through accretive acquisitions,
strategic development and active management. Choice Properties’ principal tenant
and largest Unitholder is Loblaw Companies Limited, Canada’s largest retailer.
Choice Properties’ strong alliance with Loblaw positions it well for future growth.
unencumBered
assets Base
Property Portfolio
geographic distriBution
RETAIL
WAREHOUSE
LAND
INDUSTRIAL
OFFICE
YUKON TERRITORY
RETAIL
1
1
NORTHWEST
TERRITORIES
RETAIL
49
ALBERTA
RETAIL
SASKATCHEWAN
RETAIL
MANITOBA
RETAIL
BRITISH
COLUMBIA
RETAIL
20
12
12
SURREY, BC
LAND 1
WAREHOUSE 1
SURREY, BC
CALGARY, AB
WAREHOUSE 1
183ONTARIO
RETAIL
REGINA, SK
WAREHOUSE
1
4
ONTARIO
INDUSTRIAL 1
ONTARIO
WAREHOUSE 2
1
BRAMPTON, ON
OFFICE
ONTARIO
LAND
PRINCE EDWARD ISLAND
RETAIL
104
QUEBEC
RETAIL
NEWFOUNDLAND
& LABRADOR
RETAIL
9
26
3
3
37
ST. JOHN’S, NL
WAREHOUSE
1
NOVA SCOTIA
RETAIL
NEW BRUNSWICK
WAREHOUSE
QUEBEC
WAREHOUSE 2
NEW BRUNSWICK
RETAIL
adjusted funds from operations
(AFFO) (per unit)
affo payout ratio
(per unit)
0.20
0.15
0.10
0.05
0
4
8
1
0
$
.
Q3
2013
6
7
1
0
$
.
Q4
2013
5
8
1
0
$
.
Q1
2014
4
8
1
0
$
.
Q2
2014
9
8
1
0
$
.
Q3
2014
8
8
1
0
$
.
Q4
2014
100
80
60
40
20
0
%
0
5
8
.
Q3
2013
%
3
2
9
.
Q4
2013
%
8
7
8
.
Q1
2014
%
3
8
8
.
Q2
2014
%
0
6
8
.
Q3
2014
%
4
6
8
.
Q4
2014
0.20
0.15
0.10
0.05
0
4
8
1
0
$
.
Q3
2013
6
7
1
0
$
.
Q4
2013
5
8
1
0
$
.
Q1
2014
4
8
1
0
$
.
Q2
2014
9
8
1
0
$
.
Q3
2014
8
8
1
0
$
.
Q4
2014
AFFO
distribution
per unit
diluted
AFFO
distribution
payout
ratio
choice properties reit AnnuAl report 2014
AFFO
distribution
per unit
diluted
1
0.20
0.15
0.10
0.05
0.00
100
80
60
40
20
0
0.20
0.15
0.10
0.05
0.00
%
0
.
5
8
Q3
2013
%
3
.
2
9
Q4
2013
%
8
.
7
8
Q1
2014
%
3
.
8
8
Q2
2014
%
0
.
6
8
Q3
2014
%
4
.
6
8
Q4
2014
AFFO
distribution
payout
ratio
100
80
60
40
20
0
100
80
60
40
20
0
letter to unitholders
It has been less than two years since Choice Properties REIT was created to
maximize the value of an unrivalled portfolio of geographically diverse, retail-
focused real estate properties. Over that short time, we have grown our portfolio
from approximately 35.3 million to 39.9 million square feet of gross leasable area,
including a warehouse property and a shopping centre we acquired early in 2015.
As at December 31, 2014, our fair value was $7.9 billion, an 8.5% increase over
the prior year. We accomplished this while maintaining a conservative debt to
total assets ratio and growing our funds from operations to the current $0.912 per
unit on a fully diluted basis. In 2014, our first full year of operation, we continued
building a real estate entity that offers investors stable income generation,
predictable distributions and growth potential.
In the following pages, we share details of the progress we made in the past
year. In 2014, we acquired approximately 2.6 million square feet of gross leasable
area and completed two development projects, one in Toronto, Ontario and the
other in Stoney Creek, Ontario. Both were on budget and on schedule. We also
invested approximately $29.0 million in our properties, maintained our strong
occupancy rates and continued to move our development program forward, with
ongoing construction at our Surrey, British Columbia site and pre-development
work for projects targeted to start in 2015. In order to expand our growth pipeline,
we established new strategic relationships that will open doors to additional
investment opportunities.
“in 2014, our first full year of operation,
we continued building a real estate
entity that offers investors stable
income generation, predictable
distributions and growth potential.”
2
choice properties reit AnnuAl report 2014
Since its inception, Choice Properties has been focused on achieving incremental
growth, while generating stable and predictable income. An important part of our
long-term growth strategy is to be fully engaged in all aspects of managing our
portfolio. Over the course of the year, we built an efficient infrastructure to enable
us to transition to a fully internalized real estate organization. Today, we have an
expanded team of real estate professionals focused entirely on supporting and
driving value from our portfolio of 475 properties across Canada. Managing all
aspects of our business will give us greater control over our future and provide
us with the opportunity to further develop our talent base. It will also enable us
to use the skills and relationships of our team to attract strong tenants, to lease
space while it is still in the concept and development phase and to retain our
tenants for the long term.
In addition to deepening and broadening our bench strength, we successfully
implemented a state-of-the-art enterprise resource planning system to deliver
timely, real estate–focused information and reporting. Together, our new talent and
systems will help Choice Properties deliver best-in-class management, leasing and
development of our properties.
In 2015, we remain focused on delivering solid operating and financial results as
well as predictable and growing distributions for our Unitholders. With the financial
flexibility afforded to us by our strong balance sheet and investment-grade credit
rating, we expect to invest more than $100 million in development projects in 2015.
We will continue to pursue accretive growth opportunities in desirable, well-located
properties that are strategically aligned with our existing portfolio. This year we will
apply the capabilities of our newly internalized team to manage renewal rates and
enhance the speed and efficiency of our new leasing transactions.
The Choice Properties management team is excited about the future. The talent,
systems and infrastructure that will take our REIT to the next level are now in place.
Together, we will continue building the long-term growth potential of our portfolio,
while remaining a stable and secure investment for our valued Unitholders.
executive team
john r. morrison
President and Chief Executive Officer
Bart munn
Executive Vice President,
Chief Financial Officer
pina alberelli
Vice President, Finance, Controller
Kim lee
Vice President, Investor Relations and
Planning & Analysis
jacquie varkony
Vice President, Human Resources
adam Walsh
Vice President, General Counsel and Secretary
dallas Wingerak
Vice President, Real Estate and Operations
Western Canada
evan Williams
Vice President, Real Estate and Operations
Eastern Canada
robert yamamoto
Vice President, Development
john r. morrison
president and Chief executive officer
choice properties reit AnnuAl report 2014
3
financial and operational highlights
choice properties has identified specific key financial and operational
performance indicators to monitor its objectives. selected information is set
out below:
As at or for the years ended December 31
(in thousands of Canadian dollars except where otherwise indicated) (unaudited)
2014
2013 (6)
Total assets
Long-term debt and Class C LP Units
Debt to total assets(1)
Debt service coverage(1)
Debt to EBITDA(1) (2)
Indebtedness(3) – weighted average term to maturity
Indebtedness(3) – weighted average coupon rate
Number of properties
Gross leasable area (in millions of square feet)
Remaining weighted average lease term
Average base rent (per occupied square foot)
Occupancy
Rental revenue
Cash flows from operating activities(4)
Net Operating Income(2)
Funds from Operations(2) per unit diluted (excluding other charges)(5)
Funds from Operations(2) payout ratio (excluding other charges)(5)
Adjusted Funds from Operations(2) per unit diluted
Adjusted Funds from Operations(2) payout ratio
Distributions per unit
Weighted average Units outstanding – diluted
$
$
$
$
$
$
$
$
$
8,192,438
3,436,621
44.0%
3.5x
7.3x
5.3 years
3.58%
472
38.9
11.7 years
13.86
98.1%
682,923
476,368
475,739
0.912
71.3%
0.745
87.2%
0.650004
382,636,320
$
$
$
$
$
$
$
$
$
7,447,742
3,376,167
47.0%
3.4x
7.4x
5.0 years
3.40%
435
36.3
12.7 years
14.32
97.7%
318,507
288,181
222,267
0.444
71.8%
0.360
88.6%
0.318917
363,767,339
Indebtedness reflects senior unsecured debentures only.
(1) Debt ratios include Class C LP Units, but exclude Exchangeable Units. The ratios are non-GAAP financial measures calculated based on the trust indentures as supplemented.
(2) See Section 18, “Non-GAAP Financial Measures”, of the Management’s Discussion and Analysis of the 2014 Annual Report.
(3)
(4) Cash flows from operating activities are presented before deducting interest paid.
(5) See Section 7, “Other Measures of Performance”, of the Management’s Discussion and Analysis of the 2014 Annual Report for the breakdown of the other charges.
(6) Based on operations for the period from July 5, 2013 to December 31, 2013.
forWard-looKing statements
This Annual Report for Choice Properties REIT (“Choice Properties” or the “Trust”) contains forward-looking statements about the Trust’s objectives, plans,
goals, aspirations, strategies, financial condition, results of operations, cash flows, performance, prospects and opportunities. Forward-looking statements
are typically identified by words such as “expect”, “anticipate”, “believe”, “foresee”, “could”, “estimate”, “goal”, “intend”, “plan”, “seek”, “strive”, “will”, “may”,
“should” and similar expressions, as they relate to Choice Properties and its management. Forward-looking statements reflect Choice Properties’ current
estimates, beliefs and assumptions, which are based on management’s perception of historic trends, current conditions and expected future developments,
as well as other factors it believes are appropriate in the circumstances. Choice Properties’ expectation of operating and financial performance is based
on certain assumptions including assumptions about the Trust’s future growth potential, prospects and opportunities, industry trends, future levels of
indebtedness, current tax laws, current economic conditions and no new competition in the market that leads to reduced revenues and profitability.
Management’s estimates, beliefs and assumptions are inherently subject to significant business, economic, competitive and other uncertainties and
contingencies regarding future events and as such, are subject to change. Choice Properties can give no assurance that such estimates, beliefs
and assumptions will prove to be correct.
Numerous risks and uncertainties could cause Choice Properties’ actual results to differ materially from those expressed, implied or projected in the forward-
looking statements, including, but not limited to: those discussed in the forward-looking statements disclaimer found on pages 2 to 3 and the Enterprise
Risks and Risk Management section on pages 27 to 32 of the Management’s Discussion and Analysis of the 2014 Annual Report – Financial Review. Other risks
and uncertainties not presently known to the Trust could also cause actual results or events to differ materially from those expressed in its forward-looking
statements. Additional risks and uncertainties are discussed in Choice Properties’ materials filed with the Canadian securities regulatory authorities from
time to time, including the Trust’s 2014 Annual Information Form. Readers are cautioned not to place undue reliance on these forward-looking statements,
which reflect Choice Properties’ expectations only as of the date of this Annual Report. Except as required by applicable law, Choice Properties does not
undertake to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
4
choice properties reit AnnuAl report 2014
strategy
choice properties’ goal is to create value
by growing our portfolio and distributable
income. Building on our competitive
advantages, including our sizable asset
base, our strong alliance with loblaw
and our solid balance sheet, our strategy
is to buy well-located and desirable
assets, to enhance our properties through
development and to manage our assets to
improve operations and profitability.
choice properties reit AnnuAl report 2014
choice properties reit AnnuAl report 2014
5
5
strategy scorecard
these key achievements
illustrate choice properties’
success in executing its
growth strategy in 2014.
6
choice properties reit AnnuAl report 2014
Building through acquisitions
We grow our portfolio of strong performing, grocery-anchored,
retail-focused properties primarily through our dedicated
pipeline of acquisition opportunities from Loblaw, but also by
acquiring well-located and desirable assets available from
other vendors.
Acquired 39 properties or 2.6 million square feet:
~$28m
in stabilized NOI
~$457m
in value
>500,000
square feet of
development
potential
s
t
n
e
m
e
v
e
h
c
a
4
1
0
2
i
maintaining a strong foundation
through sound financial management
in addition to our unrivalled portfolio,
choice properties’ foundation is built
upon maintaining a strong balance sheet,
financial flexibility and prudent and
disciplined financial management.
Building through development
Building through
active management
We drive incremental growth by developing on existing
properties to enhance their value and through greenfield
development on purchased land.
We use active management to build strong tenant
relationships, to maintain high standards of quality at our
sites, to create strategies for increasing cash flow and to
add value to our properties.
Constructed
51,000
square feet
of new GLA
Achieved
1 million
square feet of
new GLA in pre-
development
Established
strategic
partnerships,
expanding
development
pipeline by
>200,000
square feet
Transitioned
to an internally
managed
business
model
Implemented
real estate–
focused
enterprise
resource
planning
system
Maintained
high occupancy
rate, closing
the year at
98.1%
2014 achievements include:
$450m
raised in senior
unsecured deBentures
44.0%
deBt to total assets
3.5x
deBt service
coverage ratio
choice properties reit AnnuAl report 2014
7
Board of trustees
Kerry d. adams
Ms. Adams currently serves as President
of K. Adams & Associates Limited. She
is a member of the Bank of Nova Scotia’s
Master Trust and Pension Investment and
Administration Committees.
Ms. Adams is a Fellow Chartered Accountant and
a Fellow Chartered Professional Accountant and
holds a B.A. (Honours Economics) from Queen’s
University. Ms. Adams is an Institute-certified
Director of the Institute of Corporate Directors.
In addition to her public board experience, Ms.
Adams currently serves as a member of Fidelity
Investments Canada ULC’s Independent Review
Committee. She also served as a Commissioner
and Director of the OSC (1996 to 2003), and
Chair of its Investor Education Fund (2000 to
2006), and was a member of the IIROC board
and governance committee from 2008 to 2011.
Ms. Adams has also served as a Director of
Walmart Canada Bank, President of Widcor
Limited and Widcor Financial and she was a
partner at KPMG Peat Marwick.
christie j.B. clark
Mr. Clark, a corporate director, is a former
Chief Executive Officer and senior partner of
PricewaterhouseCoopers LLP. Prior to being
elected as Chief Executive Officer, Mr. Clark was
a National Managing Partner and a member of the
firm’s Executive Committee from 2001 to 2006.
Mr. Clark graduated from Queen’s University with
a B.Comm. and the University of Toronto with an
M.B.A. He is a Fellow Chartered Accountant and
a Fellow Chartered Professional Accountant.
Mr. Clark is a director of Loblaw Companies
Limited and Air Canada. In addition to public
company board memberships, Mr. Clark is
Chair of the board of the Canadian Partnership
Against Cancer Corporation, Chair of the Finance
Committee of Alpine Canada and a member
of the Advisory Council of Queen’s University
School of Business.
graeme m. eadie
Mr. Eadie is the Senior Managing Director,
Head of Real Estate Investments for Canada
Pension Plan Investment Board, where he is
responsible for the global real estate program
which encompasses both equity and debt
investments. Prior to joining the Canada Pension
Plan Investment Board, Mr. Eadie held multiple
positions at Cadillac Fairview, including Chief
Financial Officer, Chief Operating Officer
and President. Mr. Eadie graduated from the
University of British Columbia with a B.Comm.
and Master of Science, Business Administration.
Mr. Eadie is currently a director of Aliansce
Shopping Centers S.A. He also previously
served as a trustee of Morguard Real Estate
Investment Trust and was a director of the
Ontario Realty Corporation.
8
choice properties reit AnnuAl report 2014
michelle felman
Ms. Felman, a corporate director, is a former
Executive Vice President, Acquisitions of
Vornado Realty Trust. Prior to joining Vornado,
Ms. Felman held the positions of Managing
Director, Portfolio Acquisitions and Business
Ventures and Managing Director, Business
Development at GE Capital, Real Estate Division.
Ms. Felman graduated from the University of
California, Berkeley with a B.A. (Honours), and
from The Wharton School at the University
of Pennsylvania with an M.B.A. where she is
currently an adjunct professor.
Ms. Felman serves on the Executive Committee
of The Zell-Lurie Center at the University of
Pennsylvania, and formerly served on the Fisher
Center Policy Advisory Board at the University
of California and was formerly a trustee of Big
Brothers Big Sisters of New York. Ms. Felman is
also a former director of LNR Property LLC.
michael p. Kitt
Mr. Kitt is Executive Vice President, Canada of
Oxford Properties Group. Prior to joining Oxford
Properties, Mr. Kitt held various senior roles at
Cadillac Fairview, leading both its Investment
and Development Groups. Mr. Kitt graduated
from the University of Manitoba with a B.Comm.
and holds a CFA designation.
Mr. Kitt is also a member of Building Owners
and Managers Association of Canada’s National
Advisory Council.
john r. morrison
Mr. Morrison is the President and Chief
Executive Officer of Choice Properties. Prior
to joining Choice Properties, Mr. Morrison
was President and Chief Executive Officer of
Primaris Real Estate Investment Trust. Prior
to serving in that role, he was President,
Real Estate Management, at Oxford Properties
Group. In 2014, Mr. Morrison earned the
Institute-certified Director designation. He
is former Vice Chairman of the Urban Land
Institute Toronto District Council. Mr. Morrison
is also a past Trustee for the International
Council of Shopping Centers, and served
on the Executive Committee as Divisional
Vice President for Canada.
daniel f. sullivan
Mr. Sullivan, a corporate director, held the
position of Consul General for Canada in
New York City from 2006 to 2011. Prior to
Mr. Sullivan’s appointment as Consul General
for Canada, he spent a majority of his career in
the financial services sector, with a focus on the
real estate sector, including serving as Deputy
Chairman of Scotia Capital Inc., the corporate
and investment banking division of Scotiabank.
Mr. Sullivan graduated from Columbia University
with a B.A. and M.B.A. and holds an M.B.A.
from the University of Toronto. Mr. Sullivan is
a director of Allied Properties Real Estate
Investment Trust, Crius Energy Trust, the
Ontario Teachers’ Pension Plan and IMP
Group International Inc. Mr. Sullivan is a former
Chairman and director of The Toronto Stock
Exchange and former Chairman of the
Investment Dealers Association of Canada.
Mr. Sullivan is also a former director of Allstream
Inc., Cadillac Fairview Corporation, Camco Inc.,
Monarch Development Corporation and
Schneider Corporation. Mr. Sullivan has served
on advisory boards or committees of Canada
Post Corporation, Canada Deposit Insurance
Corporation, the Canadian Securities
Administrators and the Ontario Securities
Commission.
paul r. Weiss
Mr. Weiss, a corporate director, spent his career
with KPMG LLP Canada serving as a member of
the Management Committee and as a member
of the International Global Audit Steering Group,
and is also the former Managing Partner for
KPMG LLP Canada’s Canadian Audit Practice.
Earlier in his career, Mr. Weiss was responsible
for KPMG LLP Canada’s Real Estate Practice.
Mr. Weiss graduated from Carleton University with
a B.Comm. and is a Fellow Chartered Accountant
and a Fellow Chartered Professional Accountant.
Mr. Weiss is a director of Bell Canada, BCE Inc.
and Torstar Corporation. In addition to public
board memberships, Mr. Weiss is a former
director of Bell Alliant, ING Bank of Canada
and Empire Life Insurance Company. Mr. Weiss
is past Chairman and director of Soulpepper
Theatre Company and past Chairman of Toronto
Rehab Foundation.
galen g. Weston
Mr. Weston is Executive Chairman and
President of Loblaw. He previously held several
senior executive positions with Loblaw and its
subsidiaries. Prior to joining Loblaw, he was
an investment banking analyst for Salomon
Brothers in the UK.
Mr. Weston graduated from Harvard University
with a B.A. and from Columbia University with
an M.B.A.
Mr. Weston is a director of Wittington
Investments, Limited.
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unitholder information
head office
Choice Properties Real Estate Investment Trust
22 St. Clair Avenue East, Suite 500
Toronto, Ontario M4T 2S5
Tel: 416-960-6990
Toll free: 1-855-322-2122
Fax: 416-324-7845
stock exchange listing and symbol
The Trust’s Units are listed
on the Toronto Stock Exchange
and trade under the symbol “CHP.UN”
distribution policy
Choice Properties’ Board of Trustees
retains discretion with respect to the timing
and quantum of distributions. Declared
distributions are paid to Unitholders of record
at the close of business on the last business
day of a month on or about the 15th day of the
following month.
independent auditors
KPMG LLP
Chartered Accountants
Toronto, Canada
registrar and transfer agent
Canadian Stock Transfer Company Inc.
P.O. Box 700, Station B
Montreal, Quebec H3B 3K3
Tel: 416-682-3860
Toll free: 1-800-387-0825 (Canada and US)
Toll free fax: 1-888-249-6189
E-mail: inquiries@canstockta.com
Website: www.canstockta.com
investor relations
Tel: 416-960-6990
Toll free: 1-855-322-2122
E-mail: investor@choicereit.ca
Website: www.choicereit.ca
annual general meeting
April 29, 2015 at 11:00 a.m.
St. Andrew’s Club and Conference Centre
St. Andrew’s Hall
150 King Street West, 27th Floor
Toronto, Ontario, Canada
Additional financial information has been filed
electronically with various securities regulators
in Canada through the System for Electronic
Document Analysis and Retrieval (SEDAR),
www.sedar.com.
Why invest in choice properties?
39.9m square feet of well-located retail
properties across canada
canada’s leading food retailer as principal
tenant and anchor, providing regular
consumer traffic and stable and secure
income from long-term leases
existing development potential in current
portfolio comprising excess land for
intensification, redevelopment and
greenfield construction
a dedicated source of acquisition
opportunities from loblaw’s remaining
portfolio of properties
a strong balance sheet and
investment-grade credit ratings
internal management with deep experience
and passion for successfully developing
and managing retail real estate
www.choicereit.ca
Building
annual report 2014
Financial r eview
2014 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
Forward-Looking Statements
Overview
Objectives and Strategies
3.1 Annual Highlights
Key Performance Indicators
Investment Properties
5.1 Valuation Method
5.2 Acquisition of Investment Properties
5.3 Development Activities
5.4 Active Management
5.5 Disposition of Investment Properties
Results of Operations
Other Measures of Performance
Quarterly Results of Operations
Long Term Debt and Class C LP Units
9.1 Financial Covenants
Liquidity and Capital Resources
10.1 Major Cash Flow Components
10.2 Sources of Liquidity
10.3 Credit Ratings
10.4 Unit Equity
10.5 Contractual Obligations
Disclosure Controls and Procedures
Internal Control over Financial Reporting
Enterprise Risks and Risk Management
13.1 Operating Risks and Risk Management
13.2 Financial Risks and Risk Management
Related Party Transactions
Critical Accounting Estimates and Judgments
Accounting Standards Implemented in 2014 and Future Accounting Standards
Outlook
Non-GAAP Financial Measures
Additional Information
2
3
3
4
5
6
6
7
8
9
10
11
16
19
20
22
23
23
24
24
24
26
26
26
27
28
31
33
34
35
35
36
38
Footnotes
(1)
(2)
See Section 18, “Non-GAAP Financial Measures”, of this MD&A.
To be read in conjunction with Section 1, “Forward-Looking Statements”, of this MD&A.
Note: Tables, charts and graphs have their own footnote legends where applicable.
Choice Properties REIT 2014 Annual Report 1
The following Management’s Discussion and Analysis (“MD&A”) for Choice Properties Real Estate Investment Trust and its subsidiaries
(collectively, “Choice Properties” or the “Trust”) should be read in conjunction with the Trust’s audited consolidated financial statements and
the accompanying notes included in this Annual Report for the year ended December 31, 2014 and for the period ended December 31, 2013.
The Trust’s consolidated financial statements and the accompanying notes have been prepared in accordance with International Financial
Reporting Standards (“IFRS” or “GAAP”). The consolidated financial statements include the accounts of the Trust and other entities that the
Trust controls.
Choice Properties completed its initial public offering (“IPO”) on July 5, 2013. As such, the comparative information presented in this MD&A
covers the period from July 5, 2013 to December 31, 2013, and therefore the year end results for 2014 and 2013 are not comparable. The
comparative analysis of the results of operations will primarily focus on the three month periods ended December 31, 2014 and 2013,
respectively.
This MD&A is dated February 24, 2015. Disclosure contained in this document is current to that date, unless otherwise noted.
All amounts in this MD&A are in thousands of Canadian dollars, except unit and square footage amounts, or where otherwise noted. A Glossary
of terms and ratios used throughout this Annual Report can be found beginning on page 77.
Certain income and expense measurements that must be recognized under GAAP are not necessarily appropriate to evaluate Choice
Properties’ underlying operating performance. For this reason, management uses certain non-GAAP financial measures to exclude the impact
of these items when analyzing operating performance. Choice Properties uses the following non-GAAP financial measures: Funds from
Operations(1) (“FFO”), Adjusted Funds from Operations(1) (“AFFO”), Net Operating Income(1) (“NOI”) and Earnings Before Interest, Taxes,
Depreciation, Amortization and Fair Value(1) (“EBITDAFV”) which are widely used for evaluating the performance of Canadian real estate
investment trusts (“REITs”). Choice Properties believes these non-GAAP financial measures provide useful information to both management
and investors in measuring the financial performance and financial condition of Choice Properties.
1. FORWARD-LOOKING STATEMENTS
This Annual Report, including this MD&A, contains forward-looking statements about Choice Properties’ objectives, plans, goals, aspirations,
strategies, financial condition, results of operations, cash flows, performance, prospects and opportunities. Specific statements with respect
to anticipated future results can be found in various sections of this MD&A, included but not limited to Section 3 “Objectives and Strategies”,
Section 5 “Investment Properties”, Section 6 “Results of Operations”, Section 7 “Other Measures of Performance”, Section 10 “Liquidity and
Capital Resources” and Section 17 “Outlook”. Forward-looking statements are typically identified by words such as “expect”, “anticipate”,
“believe”, “foresee”, “could”, “estimate”, “goal”, “intend”, “plan”, “seek”, “strive”, “will”, “may”, “should” and similar expressions, as they relate
to Choice Properties and its management.
Forward-looking statements reflect Choice Properties’ current estimates, beliefs and assumptions, which are based on management’s
perception of historic trends, current conditions and expected future developments, as well as other factors it believes are appropriate in the
circumstances. Choice Properties’ expectation of operating and financial performance is based on certain assumptions, including assumptions
about the Trust’s future growth potential, prospects and opportunities, industry trends, future levels of indebtedness, current tax laws, current
economic conditions and no new competition in the market that leads to reduced revenues and profitability. Management’s estimates, beliefs
and assumptions are inherently subject to significant business, economic, competitive and other uncertainties and contingencies regarding
future events and as such, are subject to change. Choice Properties can give no assurance that such estimates, beliefs and assumptions will
prove to be correct.
Numerous risks and uncertainties could cause Choice Properties’ actual results to differ materially from those expressed, implied or projected
in the forward-looking statements, including, those described in Section 13 “Enterprise Risks and Risk Management” of this MD&A. Such
risks and uncertainties include:
•
•
•
•
•
changes in economic conditions, including changes in interest rates, and the rate of inflation or deflation;
the inability of Choice Properties to maintain and leverage its relationship with Loblaw Companies Limited (“Loblaw”), including in respect
of: (i) Loblaw’s retained interest in Choice Properties; (ii) the services to be provided to Choice Properties (whether directly or indirectly)
by Loblaw; (iii) expected transactions to be entered into between Loblaw and Choice Properties (including Choice Properties’ acquisition
of certain interests in properties held by Loblaw); and (iv) the Strategic Alliance Agreement between Choice Properties and Loblaw;
changes in Loblaw’s business, activities or circumstances which may impact Choice Properties, including Loblaw’s inability to make rent
payments or perform its obligations under its leases;
failure to manage its growth effectively in accordance with its growth strategy or acquire assets on an accretive basis;
changes in timing to obtain municipal approvals, development costs, and tenant leasing and occupancy of properties under development
or intensification;
Choice Properties REIT 2014 Annual Report 2
•
•
•
•
•
•
changes in Choice Properties’ capital expenditure and fixed cost requirements;
the inability of Choice Properties Limited Partnership to make distributions or other payments or advances;
the inability of Choice Properties to obtain financing;
changes in Choice Properties’ degree of financial leverage;
changes in laws or regulatory regimes, which may affect Choice Properties, including changes in the tax treatment of the Trust and its
distributions to Unitholders or the inability of the Trust to continue to qualify as a “mutual fund trust” and as a “real estate investment
trust”, as such terms are defined in the Income Tax Act (Canada); and
changes in Choice Properties’ competitiveness in the real estate market or the unavailability of desirable commercial real estate assets.
This is not an exhaustive list of the factors that may affect Choice Properties’ forward-looking statements. Other risks and uncertainties not
presently known to Choice Properties could also cause actual results or events to differ materially from those expressed in its forward-looking
statements. Additional risks and uncertainties are discussed in Choice Properties’ materials filed with the Canadian securities regulatory
authorities from time to time, including the Trust’s 2014 Annual Information Form. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect Choice Properties’ expectations only as of the date of this MD&A. Except as required by applicable
law, Choice Properties does not undertake to update or revise any forward-looking statements, whether as a result of new information, future
events or otherwise.
2. OVERVIEW
Choice Properties is an owner, manager and developer of well-located retail and commercial properties across Canada. Choice Properties
is one of Canada’s largest retail REITs, with a portfolio comprised of 472 properties with a total Gross Leasable Area (“GLA”) of 38.9 million
square feet as at December 31, 2014. Choice Properties’ portfolio includes 457 retail properties, ten warehouse properties, one office complex,
one industrial site and three undeveloped parcels of land (including one parcel held in a subsidiary and one parcel held in a joint venture).
The retail properties are made up of: (i) 293 properties with a stand-alone retail store operating under a Loblaw banner; (ii) 159 properties
anchored by a retail store operating under a Loblaw banner that also contain one or more ancillary tenants; and (iii) five properties containing
only ancillary tenants. Subsequent to the end of 2014, the Trust’s portfolio increased to 475 properties and 39.9 million square feet of GLA.
The parent company of Choice Properties is Loblaw, which held an 82.9% effective interest in Choice Properties as at December 31, 2014.
Loblaw’s controlling shareholder is George Weston Limited (“GWL”), which also held a 5.4% direct interest in Choice Properties as at December
31, 2014. As at February 24, 2015, after giving effect to the acquisition completed on January 9, 2015 and the Exchangeable Units issued
to Loblaw as partial consideration, and distributions paid to GWL and the public Unitholders under the Distribution Reinvestment Plan, Loblaw’s
effective interest in the Trust decreased to 82.8% and GWL’s direct ownership in the Trust increased to 5.5%.
3. OBJECTIVES AND STRATEGY(2)
Choice Properties’ objectives are to:
•
•
•
provide Unitholders with stable, predictable and growing monthly cash distributions;
expand Choice Properties’ asset base while also increasing its AFFO(1) per unit, including through accretive acquisitions and site
intensification; and
enhance the value of Choice Properties’ assets in order to maximize long-term Unitholder value.
Choice Properties’ strategy is to grow its portfolio and distributable income by leveraging its sizable base of assets, its relationship with Loblaw,
and its solid capital structure. The Trust is focused on driving growth through acquisitions of assets that meet or exceed the Trust’s investment
criteria, the development and redevelopment of properties for their highest and best use, and active management of properties to maximize
their occupancy and profitability. Choice Properties closely monitors market and economic conditions to ensure its strategy remains aligned
with its business environment.
Choice Properties REIT 2014 Annual Report 3
The Trust’s strategy includes:
Acquisitions Choice Properties plans to grow its asset base through accretive acquisitions, including those from a dedicated pipeline of
properties from Loblaw and desirable assets from other vendors, that offer geographic and tenant diversification and potential development
opportunities.
Development Choice Properties believes that development and redevelopment of properties for their highest and best use are key drivers
of incremental and accretive growth. Choice Properties development program intends to leverage the Trust’s grocery anchored asset base
with a focus on retail and retail mixed-use developments. The Trust’s pipeline of development opportunities includes: (i) excess density within
its existing portfolio that is available for at-grade intensification, (ii) redevelopment of its properties in primary markets for mixed-use, and (iii)
greenfield retail or mixed-use developments.
Active Management Choice Properties is an internally managed trust that employs experienced and regionally focused staff to actively
manage its assets. Choice Properties expects to increase cash flow and the value of its portfolio through initiatives to enhance operating
performance, including leasing and merchandising strategies and effective capital investment in its properties.
3.1 Annual Highlights
During 2014, Choice Properties:
•
•
•
•
•
Reported FFO(1) per unit diluted of $0.912 for the first full year of operations;
Acquired 39 properties, 37 of which were purchased from Loblaw, adding approximately 2.6 million square feet of GLA to its portfolio
across Canada at a cost of $457,100, excluding acquisition costs;
Expanded its development pipeline through the acquisition of a 70% interest in a limited partnership for $17,957 in cash, excluding
acquisition costs, which holds 21 acres of land in Brampton, Ontario zoned for retail development with a total value of $25,653;
Constructed 51,050 square feet of incremental GLA, including a new retail store for each of Dollarama and the Liquor Control Board of
Ontario in Toronto, Ontario, a new Fortinos grocery store in Stoney Creek, Ontario and an expansion of a Maxi grocery store in
Drummondville, Quebec;
Completed initiatives, including the implementation of a real estate focused enterprise reporting and planning system, in order to internalize
the leasing and property management functions to become a fully internally managed REIT at the start of 2015;
• Maintained a high occupancy rate of 98.1% compared to 97.7% as at December 31, 2013;
•
Issued senior unsecured debentures totaling $450,000 increasing the Trust’s weighted average term to maturity of its outstanding debt
instruments.
Choice Properties REIT 2014 Annual Report 4
4. KEY PERFORMANCE INDICATORS
Choice Properties has identified specific key financial and operational performance indicators to monitor objectives. Certain key performance
indicators are set out below:
As at or for the years ended December 31
(in thousands of Canadian dollars except where otherwise indicated)
(unaudited)
Total assets
Long term debt and Class C LP Units
Debt to total assets(i)
Debt service coverage(i)
Debt to EBITDAFV(1)(i)
Indebtedness(ii) – weighted average term to maturity
Indebtedness(ii) – weighted average coupon rate
Number of properties
Gross Leasable Area (in millions of square feet)
Remaining weighted average lease term
Average base rent (per occupied square foot)
Occupancy
Rental revenue
Cash flows from operating activities(iii)
Net Operating Income(1)
Funds from Operations(1) per unit diluted (excluding other charges)(iv)
Funds from Operations(1) payout ratio (excluding other charges)(iv)
Adjusted Funds from Operations(1) per unit diluted
Adjusted Funds from Operations(1) payout ratio
Distribution declared per unit
Weighted average units outstanding – diluted
2014
8,192,438
3,436,621
$
$
2013(v)
7,447,742
3,376,167
$
$
44.0%
3.5x
7.3x
47.0%
3.4x
7.4x
5.3 years
5.0 years
3.58%
472
38.9
3.40%
435
36.3
11.7 years
12.7 years
$
$
$
$
$
$
$
13.86
98.1%
682,923
476,368
475,739
0.912
71.3%
0.745
87.2%
0.650004
$
$
$
$
$
$
$
14.32
97.7%
318,507
288,181
222,267
0.444
71.8%
0.360
88.6%
0.318917
382,636,320
363,767,339
(i)
Debt ratios include Class C LP Units, but exclude Exchangeable Units. The ratios are non-GAAP financial measures calculated based on the trust indentures as
supplemented.
(ii)
Indebtedness reflects senior unsecured debentures only.
(iii) Cash flows from operating activities are presented before deducting interest paid.
(iv)
(v)
See Section 7, “Other Measures of Performance”, of this MD&A for the breakdown of the other charges.
Based on operations for the period from July 5, 2013 to December 31, 2013.
Choice Properties REIT 2014 Annual Report 5
5. INVESTMENT PROPERTIES
As at December 31, 2014, Choice Properties owns, develops and manages 472 retail focused commercial properties totaling 38.9 million
square feet of GLA throughout Canada. The Trust’s portfolio consists of 457 retail locations, ten warehouse properties, one office complex,
one industrial site and three undeveloped parcels of land. At December 31, 2014, the fair value of Choice Properties’ investment property
portfolio was $7,905,978 (December 31, 2013 - 36.3 million square feet and $7,287,759).
The Trust’s properties are well located and well suited within their respective markets. Choice Properties’ principal tenant, Loblaw, represents
88.4% of the Trust’s GLA; the remaining GLA is designated ancillary space for leasing to third-party tenants. Choice Properties’ internally
managed operations team, including leasing and property management, is focused on delivering best-in-class service, attracting tenants with
strong covenants that are complementary to the anchor grocery stores, improving occupancy rates, and achieving rent increases on renewals.
As at December 31, 2014, Choice Properties’ portfolio occupancy rate was 98.1%, higher than the 97.7% occupancy rate as at December
31, 2013.
(unaudited)
(in millions of square feet)
Loblaw banners
Ancillary tenants
Total
5.1 Valuation Method
As at December 31, 2014
As at December 31, 2013
GLA Occupied GLA
34.3
34.3
Occupancy
100.0%
GLA Occupied GLA
32.1
32.1
Occupancy
100.0%
4.6
38.9
3.8
38.1
83.6%
98.1%
4.2
36.3
3.4
35.5
80.1%
97.7%
Investment properties were measured at fair value, which was primarily determined by using the discounted cash flow method. Under the
discounted cash flow methodology, discount rates were applied to the projected annual operating cash flows, generally over a minimum term
of ten years, including a terminal value based on a capitalization rate applied to the estimated NOI(1) in the terminal year.
Valuations are most sensitive to changes in capitalization rates. The net fair value adjustment of $81,931, over the previous year, was primarily
driven by the refinement in forward-looking assumptions. Choice Properties’ valuation inputs such as capitalization rates are supported by
quarterly reports from independent external appraisers. Below are the key rates used in the modeling process for both internal and external
appraisals:
(unaudited)
Discount rate
Terminal capitalization rate
Overall capitalization rate
Weighted average at
December 31, 2014
7.09%
Weighted average at
December 31, 2013
7.08%
6.50%
6.18%
6.50%
6.18%
Certain investment properties acquired from Loblaw may include excess land with development potential. No value was attributed to this land
at the time of acquisition or in the fair value of the Trust’s investment properties as at December 31, 2014 and December 31, 2013. Choice
Properties will compensate Loblaw with an intensification fee, determined by the site intensification payment grid set forth in the Strategic
Alliance Agreement (see Section 14, “Related Party Transactions”, of this MD&A), if and to the extent that Choice Properties further develops,
intensifies and/or redevelops these properties.
Choice Properties REIT 2014 Annual Report 6
5.2 Acquisition of Investment Properties
In 2014, Choice Properties acquired 39 properties (2013 (post-IPO) - 12 properties), 37 of which were purchased from Loblaw, adding to its
portfolio approximately 2.6 million square feet of GLA (2013 (post-IPO) - approximately 1.0 million square feet) across Canada for an aggregate
purchase price of $457,100, excluding acquisition costs (2013 - $185,956).
The table below shows a summary of the acquisitions in 2014 (the “2014 Acquisitions”). For a detailed list of the acquired properties, refer
to Section 19, “Additional Information”, of this MD&A.
(in thousands of Canadian dollars except where
otherwise indicated)
(unaudited)
Number of
Properties
GLA
(in square
feet)
Purchase
Price(i)
Exchangeable
Units Issued
Debt
Assumed
Ownership
Interest
Acquired
Cash
Acquisitions from third-parties:
Acquisition in first quarter
Acquisition in fourth quarter(ii)
Acquisitions from Loblaw:
Portfolio acquisition in second quarter
Portfolio acquisition in fourth quarter
Investment Properties Acquired
Acquisition from Loblaw in fourth quarter(iii)
Total Acquisitions Including Equity
Investment
1
1
20
16
38
1
148,245 $
15,500 $
—
25,653
— $
—
— $ 15,500
— 25,653
1,181,206
1,265,927
198,695
211,022
119,632
111,260
— 79,063
3,603
96,159
2,595,378 $ 450,870 $
230,892 $
3,603 $216,375
100%
70%
100%
100%
—
6,230
—
—
6,230
40%
39
2,595,378 $ 457,100 $
230,892 $
3,603 $222,605
(i)
(ii)
Purchase price excludes acquisition costs.
Total consolidated cash consideration of $25,653 includes a $17,957 cash contribution from Choice Properties and a $7,696 cash contribution from a non-controlling
interest. See Note 8, “Interests in Other Entities”, of the consolidated financial statements for the year ended December 31, 2014.
(iii) The 40% investment in 500 LS Limited Partnership, of $6,230, is recognized using the equity method of accounting. See Note 8, “Interests in Other Entities”, of the
consolidated financial statements for the year ended December 31, 2014.
In the first quarter of 2014, the Trust acquired a 148,245 square foot industrial property in Mississauga, Ontario, at a purchase price of $15,500,
excluding acquisition costs. Upon acquisition, Choice Properties entered into a lease with ACE Bakery Limited, a subsidiary of GWL, for an
initial term of 15 years with multiple renewal options at this property. The acquisition was immediately accretive with an estimated stabilized
NOI(1) of approximately $1,340, representing a capitalization rate of 7.34%.
In the second quarter of 2014, the Trust acquired a portfolio of 20 investment properties from Loblaw, at a purchase price of $198,695, excluding
acquisition costs. The acquisition added approximately 1.2 million square feet of GLA across Canada. The acquired portfolio was immediately
accretive, with an estimated stabilized NOI(1) of approximately $13,000, representing a capitalization rate of 6.50%. At acquisition, the occupancy
rate of the acquired portfolio was approximately 97.9%.
In the fourth quarter of 2014, Choice Properties acquired an additional 17 investment properties from Loblaw, comprised of a portfolio of 16
income producing properties and one parcel of land. The portfolio of 16 properties added approximately 1.3 million square feet of GLA across
Canada, at a purchase price of $211,022, excluding acquisition costs. The acquired portfolio was immediately accretive with an estimated
stabilized NOI(1) of approximately $13,600, representing a capitalization rate of 6.57%, excluding $4,000 for acreage available for immediate
development in Guelph, Ontario. At acquisition, the occupancy rate of the acquired portfolio was approximately 98.1%. The portfolio also
offers potential to develop up to 280,000 square feet of additional GLA within five years, including medium to long-term, mixed-use
redevelopment potential for three urban Toronto sites. In addition, Choice Properties acquired a partial interest in two limited partnerships:
a 70% interest in a limited partnership for $17,957, which holds a 21-acre site in Brampton, Ontario with a total value of $25,653, and a 40%
interest in a second limited partnership for $6,230 which holds land in Toronto, Ontario with a total value of $15,576. Upon 95% occupancy
of the property in Brampton, Ontario, Choice Properties has the option to acquire the remaining share of the property. Refer to “Development
Activities” in this section of the MD&A for further details.
Choice Properties REIT 2014 Annual Report 7
Subsequent to the end of 2014, Choice Properties completed the following acquisitions:
(in thousands of Canadian dollars except where otherwise indicated)
(unaudited)
Number of
Properties
GLA
(in square
feet)
Purchase
Price(i)
Exchangeable
Units Issued
Liabilities
Assumed
Cash
Land acquisition in Barrie, Ontario from Loblaw
50% interest in land in Kanata, Ontario from a third-party(ii)
Warehouse acquisition in Pickering, Ontario from Loblaw
Retail acquisition in Porter’s Lake, Nova Scotia from a third-party
Total
(i)
Purchase price excludes acquisition costs.
1
1
1
1
4
— $ 11,500 $
2,808 $ 1,933 $ 6,759
—
2,025
921,256
81,200
54,569
5,200
—
—
—
—
2,025
— 81,200
—
5,200
975,825 $ 99,925 $
2,808 $ 1,933 $ 95,184
(ii) Choice Properties recognized its proportionate share of the assets held jointly in the co-ownership, which is $2,025, or 50% of the $4,050 purchase price of the parcel
of land. See Note 8, “Interests in Other Entities”, of the consolidated financial statements for the year ended December 31, 2014.
On January 9, 2015, Choice Properties acquired a 16-acre site in Barrie, Ontario from Loblaw at a purchase price of $11,500, excluding
acquisition costs. The site is well-located with easy access to Highway 400, at a major intersection (Duckworth Street and Cundles Road) in
north Barrie. Choice Properties intends to co-develop the property with PenEquity Realty Corporation (“PenEquity”), which holds an adjacent
21-acre parcel of land, to construct an integrated retail centre that spans a total of 37 acres. Upon 85% occupancy of the retail centre, Choice
Properties has the option to acquire the PenEquity parcel. Refer to “Development Activities” in this section of the MD&A for further details.
On January 30, 2015, Choice Properties entered into a co-ownership agreement with PenEquity and another partner to acquire a nine-acre
parcel of land in Kanata, Ontario. The purchase price for the property was $4,050 with Choice Properties’ proportionate share being 50%, or
$2,025. This co-ownership acquisition provides Choice Properties with the opportunity to benefit from an existing and maturing purchase
option held by PenEquity and its partner to acquire this desirable parcel of land situated within a developing community in the Fernbank area
of Kanata. Upon 95% occupancy of the property, Choice Properties has the option to acquire the remaining share of the property. Refer to
“Development Activities” in this section of the MD&A for further details.
On January 30, 2015, Choice Properties acquired a 921,256 square foot warehouse in Pickering, Ontario from Loblaw, for a purchase price
of $81,200, excluding acquisition costs. The acquisition is immediately accretive with an estimated stabilized NOI(1) of $5,300 representing
a capitalization rate of 6.50%. The modern ambient temperature warehouse, which was originally constructed in 2005 and further expanded
in 2012, is well-located east of Toronto and with access to major transportation routes. The warehouse is fully occupied by Loblaw as the
single tenant with a 20-year initial lease term with six five-year renewal options.
On February 19, 2015, Choice Properties acquired a 54,569 square foot shopping centre in Porter’s Lake, Nova Scotia from a third-party,
for a purchase price of $5,200, excluding acquisition costs. The acquisition is immediately accretive with an estimated stabilized NOI(1) of
approximately $494 representing a capitalization rate of 9.5%. The shopping centre is currently 85% occupied by 20 tenants, including a
number of national retailers, with lease maturities ranging from 2015 to 2022. The shopping centre is anchored by the 47,000 square foot
grocery store on an adjacent property that Choice Properties owns.
5.3 Development Activities
In 2014, Choice Properties constructed 51,050 square feet of incremental GLA, including a new retail store for each of Dollarama and the
Liquor Control Board of Ontario in Toronto, Ontario; a new Fortinos grocery store in Stoney Creek, Ontario; and an expansion of a Maxi grocery
store in Drummondville, Quebec.
As at December 31, 2014, ongoing projects included the construction of a Real Canadian Superstore in Surrey, British Columbia and pre-
development work to expand the warehouse property in Boucherville, Quebec.
During 2014, Choice Properties established strategic relationships expanding the Trust’s development pipeline to include greenfield
development sites in Brampton, Ontario (“Brampton”), Barrie, Ontario (“Barrie”), and Kanata, Ontario (“Kanata”) as well as a mixed-use
redevelopment site at 500 Lake Shore Boulevard West in Toronto, Ontario (“500 Lake Shore”). Refer to “Acquisition of Investment Properties”
in this section of the MD&A for further details.
•
Brampton Choice Properties established a partnership with PenEquity to develop a 200,000 square foot Loblaw grocery anchored retail
centre on 21 acres of land. Pursuant to the terms of the lease with Loblaw, construction of the retail centre in Brampton is scheduled to
commence upon satisfaction of certain conditions(2).
Choice Properties REIT 2014 Annual Report 8
•
•
•
Barrie Choice Properties intends to co-develop its 16-acre parcel alongside PenEquity’s 21-acre parcel to construct an integrated retail
centre spanning a total of 37 acres. The total retail offering is expected to span approximately 350,000 square feet, of which Choice
Properties will develop approximately 150,000 square feet, including a Loblaw grocery store of approximately 60,000 square feet.
Pursuant to the lease terms, Choice Properties expects to start construction of the grocery store in mid-2015 that involves the relocation
and expansion of an existing Loblaw grocery store on a nearby Choice Properties site, for which marketing and leasing activity is currently
underway(2). In order to facilitate the development of the adjacent PenEquity parcel, Choice Properties has provided mezzanine and
bridge financing to PenEquity in the form of a two-year mortgage of $22,500 at a rate of 8% per annum with an option to extend, under
certain conditions, for an additional year and a six-month loan of $500 at a rate of 6% per annum, respectively.
Kanata This site is a longer-term development project with construction of a grocery anchored retail centre on nine acres anticipated to
commence in the second half of 2017(2).
500 Lake Shore Choice Properties holds an interest in a limited partnership that expects to redevelop the site for mixed-use, potentially
incorporating retail, office and residential components anchored by a Loblaw grocery store(2).
Choice Properties continues to refine its development pipeline based on municipal approvals, tenant leasing and occupancy and development
costs. As at December 31, 2014, the Trust had approximately 1,000,000 square feet in various stages of pre-development. In 2014, Choice
Properties invested $7,700 for pre-development activity and projects currently in development. Over the next 24 to 36 months, Choice
Properties is expecting to invest approximately $415,000 to develop up to 1,370,000 square feet of additional GLA. Development yields are
expected to be accretive upon tenant occupancy. The following table describes the anticipated square footage to be completed by year and
the total cumulative expected capital cost to complete the projects, including investments made in prior years(2).
(in thousands of Canadian dollars except where otherwise indicated)
(unaudited)
Potential Development GLA (in square feet)
Estimated Project Capital to Completion
$
5.4 Active Management
2015
245,000
67,000
2016
785,000
2017
340,000
Total
1,370,000
$
228,000
$
120,000
$
415,000
Choice Properties’ leasing activities are focused on driving value by adding ancillary tenants in business sectors that complement the grocery
anchor tenant. The following details illustrate the change in GLA during 2014:
(in thousands of square feet except where otherwise indicated)
(unaudited)
Occupied Square
Footage
Occupancy
Weighted Average Rent per
Occupied Square Foot
Opening occupied GLA as at January 1, 2014
35,534
97.7% $
Tenant openings
Tenant closures
Acquisitions
Dispositions
Developments - tenant openings coming on line
202
(144)
2,546
(60)
51
$
$
$
$
$
Closing occupied GLA as at December 31, 2014
38,129
98.1% $
14.32
13.94
9.87
10.35
15.50
17.29
13.86
Loblaw is Choice Properties’ largest tenant. As at December 31, 2014, Loblaw represented 88.4% (December 31, 2013 - 88.5%) of total GLA
and approximately 91.4% (December 31, 2013 - 91.0%) of annual base rent. The weighted average lease term-to-maturity on the Loblaw
leases was 12.7 years. The first maturity of a Loblaw lease does not occur until 2023. Loblaw leases 34.4 million square feet of GLA, with
approximately 85.8%, 12.6% and 1.6% of such GLA attributed to retail, warehouse and office space, respectively.
Choice Properties has approximately 4.6 million square feet of GLA designated to lease to ancillary tenants that benefit from the consumer
traffic that a food retailer attracts to a shopping centre. At December 31, 2014, 3.8 million square feet was leased to ancillary tenants with a
weighted average lease term to maturity of 5.2 years.
Choice Properties REIT 2014 Annual Report 9
The future financial performance of investment properties will be impacted by occupancy rates, trends in rental rates achieved on leasing or
renewing space currently leased, and contractual increases in rent(2). Rental activity by quarter varies based on the mix of tenants renewing.
For the years ended December 31
(in square feet except where otherwise indicated)
(unaudited)
2014
New Leasing:
Previously vacant GLA
Newly developed GLA
Renewals
Total
GLA
201,685
Weighted Average
Rent per Square Foot
13.94
$
51,020
384,062
636,767
$
$
$
17.29
12.98
13.64
2013
Weighted Average
Rent per Square Foot
10.22
$
N/A
11.14
10.66
GLA
101,988
—
224,522
326,510
$
$
In 2014, Choice Properties entered into leases or offers to lease totaling 636,767 square feet with an average lease term of 7.1 years. Of
these leases, 384,062 square feet represented the renewal of expiring leases. Base rent for leases renewed in 2014 increased 6.5% on
average. In the fourth quarter of 2014, Choice Properties entered into leases or offers to lease totaling 185,446 square feet with an average
lease term of 5.7 years. Of these leases, 149,480 square feet represented the renewal of expiring leases. Base rent on leases renewed
during the fourth quarter increased 7.9% on average.
For the years ended December 31
(in square feet except where otherwise indicated)
(unaudited)
Square footage renewed
Average net rent per square foot
Percentage increase in average net rent per square foot
Renewal retention rate
2014
384,062
$
12.98
$
6.5%
84.3%
2013
224,522
11.14
6.6%
81.1%
As at December 31, 2014, 550,081 square feet, or 12.2%, of the total ancillary GLA is expiring in 2015(2). The GLA expiring in 2015 includes
a large industrial tenant occupying approximately 137,000 square feet with a lease termination date of December 31, 2015, and 90,000 square
feet of urban space that will be held for development. Of the remaining GLA expected to expire in 2015, 75,530 square feet, or 23.4%, has
renewed to date.
(in square feet except where otherwise
indicated)
(unaudited)
Month-to-month
2015
2016
2017
2018
2019
2020 & Beyond
Vacant
Portfolio Ancillary Total
Expiring GLA as a
Percentage of
Ancillary GLA
4.1%
Expiring GLA as a
Percentage of Total
GLA
0.5%
Annualized Base
Rent
2,057
Weighted Average
Rent per Square
Foot
$11.16
12.2%
7.1%
8.5%
6.9%
5.1%
39.7%
16.4%
100.0%
1.4%
0.8%
1.0%
0.8%
0.6%
4.6%
1.9%
11.6%
6,154
4,914
5,638
4,865
3,962
21,096
—
48,686
$11.19
$15.25
$14.72
$15.60
$17.32
$11.73
$0.00
$10.76
GLA
184,361
550,081
322,223
383,117
311,845
228,758
1,798,918
743,549
4,522,852
5.5 Disposition of Investment Properties
On March 28, 2014, Loblaw, acquired all the outstanding shares of Shoppers Drug Mart Corporation. In relation to this acquisition, Loblaw
and the Competition Bureau reached an agreement that required Loblaw to divest certain food store operations at locations owned by the
Trust. Initially, four food stores, included within Choice Properties’ portfolio, were identified for divestiture. During the second quarter of 2014,
this number was reduced to two locations. On August 30, 2014, the two subject properties (the “2014 Dispositions”), with a combined fair
value of $13,480, were sold for proceeds of $13,030. In connection with the 2014 Dispositions, Choice Properties received $450 of lease
surrender revenue from Loblaw.
Choice Properties REIT 2014 Annual Report 10
6. RESULTS OF OPERATIONS
Choice Properties was formed on May 21, 2013 with no operating activity from the date of formation to July 4, 2013. Choice Properties
completed its IPO and commenced operations on July 5, 2013. As a result, the comparative year end reflects operating results from only
July 5, 2013 to December 31, 2013. While comparative information is presented on an annual basis, the operating periods in the 2014 and
2013 fiscal years cover different time frames and, as such, are not comparable. The analysis of the results of operations will focus on the
three month periods ending December 31, 2014 and 2013.
For the periods ended December 31
(in thousands of Canadian dollars)
Rental Revenue
Base rent
Three Months
(unaudited)
Year End
(audited)
2014
2013
Variance
Favourable /
(Unfavourable)
2014
2013(i)
Variance
Favourable /
(Unfavourable)
$
132,704
$
124,960 $
7,744
$
514,904
$
243,072 $
271,832
Property tax recoveries
33,848
32,980
Operating cost recoveries
Other revenue
Property Operating Costs
8,113
581
6,687
225
175,246
164,852
Property taxes
(34,699)
(33,985)
Recoverable operating costs
Non-recoverable operating costs
(8,014)
(575)
(7,617)
(767)
868
1,426
356
10,394
(714)
(397)
192
135,556
29,419
3,044
682,923
63,734
11,361
340
318,507
71,822
18,058
2,704
364,416
(139,651)
(65,821)
(73,830)
(30,141)
(12,731)
(17,410)
(2,758)
(1,204)
(1,554)
Net Property Income
131,958
122,483
9,475
510,373
238,751
271,622
Other Expenses
General and administrative
expenses
Amortization of other assets
Net interest expense and other
financing charges
Loss on disposal of investment
properties
Net Income before Fair Value
Adjustments
Fair value adjustment on
Exchangeable Units
Fair value adjustment on
investment properties
(6,213)
(87)
(4,789)
(188)
(1,424)
(23,315)
(12,234)
(11,081)
101
(414)
(472)
58
(85,030)
(80,758)
(4,272)
(380,654)
(155,785)
(224,869)
—
—
—
(450)
—
(450)
40,628
36,748
3,880
105,540
70,260
35,280
(51,063)
(111,976)
60,913
12,143
(147,401)
159,544
97,452
68,750
28,702
81,931
144,289
(62,358)
Net Income
$
87,017
$
(6,478) $
93,495
$
199,614
$
67,148 $
132,466
(i) Based on operations for the period from July 5, 2013 to December 31, 2013.
Choice Properties REIT 2014 Annual Report 11
Rental Revenue Rental revenue for Choice Properties is comprised primarily of base rent and recoveries collected from tenants for property
taxes, operating costs and qualifying capital expenditures.
For the periods ended December 31
(unaudited)
(in thousands of Canadian dollars)
Same Properties(i)
Acquisitions
Dispositions
Total Revenue
Three Months
Variance
Favourable /
(Unfavourable)
(201)
2013
161,639 $
$
2,893
320
10,921
(326)
$
2014
647,089
34,535
1,299
Year End
Variance
Favourable /
(Unfavourable)
332,102
2013(ii)
314,987 $
$
2,893 $
627 $
31,642
672
$
2014
161,438
13,814
(6)
$
175,246
$
164,852 $
10,394
$
682,923
$
318,507
364,416
(i) Properties that were owned throughout both the current and comparative periods (“Same Properties”).
(ii) Based on operations for the period from July 5, 2013 to December 31, 2013.
For the year ended December 31, 2014, rental revenue was $682,923 (December 31, 2013 - $318,507). Rental revenue included $647,089
for a full calendar year of operations for the Same Properties, and $16,606 for the post-IPO properties acquired in 2013 (the “2013 Acquisitions”)
(see Section 19, “Additional Information”, of this MD&A for a list of the post-IPO properties acquired in 2013), plus partial year rental revenue
of $17,929 for the 2014 Acquisitions and $1,299 for the 2014 Dispositions. The rental revenue for all properties owned during the 2013 year
end represents a partial calendar year and is, therefore, not comparable to the rental revenue for the 2014 year end, even for the Same
Properties.
2014 annual rental revenue included $1,545 of lease surrender revenue and $1,622 of revenue from the recovery of capital expenditures and
interest from tenants which were nil and $21 for the year ended December 31, 2013.
During the fourth quarter of 2014, rental revenue increased $10,394 or 6.3%, compared to the fourth quarter of 2013 primarily due additional
rental revenue of $10,921 attributable to the properties acquired in both 2013 and 2014 since the IPO (the “Acquisitions”), partially offset by
a $326 decrease of revenue from the 2014 Dispositions, and a $201 decrease in same property revenue.
In addition, total rental revenue in the fourth quarter of 2014 included $150 from lease surrender revenue and $735 from recovery of capital
expenditures and interest which were nil and $21 in the fourth quarter of 2013, respectively.
Rental revenue includes certain non-cash amounts. Rental revenue is recorded on a straight-line basis over the full term of a lease which
results in a difference between cash rent received and revenue recognized for accounting purposes. The amortization of tenant improvement
allowances is also included in rental revenue. During the fourth quarter and year ended December 31, 2014, the net amount of these items
positively impacted rental revenue by $8,781 and $34,178, respectively (December 31, 2013 - $8,367 and $16,476, respectively).
Choice Properties REIT 2014 Annual Report 12
Net Operating Income(1) All Properties
For the periods ended December 31
(unaudited)
(in thousands of Canadian dollars)
Rental revenue
Reverse - Straight-line rental revenue
Property operating costs
2014
$ 175,246
(8,783)
166,463
(43,288)
Three Months
Year End
Variance
Favourable /
(Unfavourable)
10,394
2013
$ 164,852 $
(8,375)
156,477
(42,369)
(408)
9,986
(919)
Variance
Favourable /
(Unfavourable)
364,416
2013(i)
$ 318,507 $
(16,484)
302,023
(79,756)
(18,150)
346,266
(92,794)
2014
$ 682,923
(34,634)
648,289
(172,550)
Net Operating Income(1) All Properties
$ 123,175
$ 114,108 $
9,067
$ 475,739
$ 222,267 $
253,472
(i) Based on operations for the period from July 5, 2013 to December 31, 2013.
For the year ended December 31, 2014, NOI(1) was $475,739, and included $450,856 for a full calendar year of operations for the Same
Properties and $11,185 for the 2013 Acquisitions, plus partial year NOI(1) of $12,593 attributable to the 2014 Acquisitions and $1,105 for the
2014 Dispositions. The NOI(1) for all properties owned during 2013 represents a partial calendar year and is, therefore, not comparable to
the NOI(1) for the 2014 year end, even for the Same Properties.
2014 annual NOI(1) included $1,545 of lease surrender revenue and $1,622 of revenue from the recovery of capital expenditures and interest
from tenants which were nil and $21 for the year ended December 31, 2013.
During the fourth quarter of 2014, NOI(1) increased $9,067 or 7.9% compared to the fourth quarter of 2013, primarily driven by an increase of
$7,747 from the Acquisitions, partially offset by a $309 decline of NOI(1) as a result of the 2014 Dispositions. The Same Properties NOI(1)
increased $1,629 compared to the fourth quarter of 2013, primarily due to $735 of capital expenditures and interest recoveries which was
$21 for the fourth quarter of 2013.
Net Operating Income(1) Same Properties
For the periods ended December 31
(unaudited)
(in thousands of Canadian dollars)
Rental revenue - same GLA
Rental revenue - developed GLA
Reverse - Straight-line rental revenue
Property operating costs
2014
$ 161,080
358
(8,008)
153,430
(40,151)
Three Months
Year End
Variance
Favourable /
(Unfavourable)
(559)
2013
$ 161,639 $
2014
$ 646,731
358
(32,731)
614,358
358
213
12
1,617
(163,502)
Variance
Favourable /
(Unfavourable)
331,744
2013(i)
$ 314,987 $
—
(16,316)
298,671
(79,038)
358
(16,415)
315,687
(84,464)
—
(8,221)
153,418
(41,768)
Net Operating Income(1) Same Properties
$ 113,279
$ 111,650 $
1,629
$ 450,856
$ 219,633 $
231,223
(i) Based on operations for the period from July 5, 2013 to December 31, 2013.
NOI(1), for the year end December 31, 2014, for properties owned throughout both the current and comparative periods, was $450,856, which
included $1,545 of lease surrender revenue and $1,604 of revenue from the recovery of capital expenditures and interest from tenants which
were nil and $21 for the year ended December 31, 2013. The NOI(1) for all properties owned during 2013 represents a partial calendar year
and is, therefore, not comparable to the NOI(1) for 2014, even for the NOI(1) Same Properties measurement.
During the fourth quarter of 2014, Same Properties NOI(1) increased $1,629 or 1.5% compared to the fourth quarter of 2013, primarily due to
a $714 increase in revenue from the recovery of capital expenditures and interest, a $368 increase in net recoveries, $358 of rental revenue
contributed from the development of new GLA, and $150 from lease surrender revenue.
Choice Properties REIT 2014 Annual Report 13
General and Administrative Expenses
For the periods ended December 31
(unaudited)
(in thousands of Canadian dollars)
Internal expenses of the Trust
Investor relations and other public entity costs
Professional fees
Net services agreements(i)
General and administrative expenses
Less: Capitalized salary costs
Less: Legal costs capitalized to acquisitions
Three Months
Year End
Variance
Favourable /
(Unfavourable)
(1,393)
$
2013
$ 3,031
2014
$ 15,877
2013(iii)
$ 5,415
Variance
Favourable /
(Unfavourable)
(10,462)
$
295
38
1,425
4,789
—
—
(310)
(653)
639
2,162
1,713
4,421
892
3,077
2,850
(1,717)
24,173
12,234
193
100
(658)
(200)
—
—
(1,270)
1,364
(1,571)
(11,939)
658
200
2014
$ 4,424
605
691
786
6,506
(193)
(100)
Net general and administrative expenses(ii)
$ 6,213
$ 4,789
$
(1,424)
$ 23,315
$ 12,234
$
(11,081)
Other charges:
Less: Internalization or start-up costs
Less: Direct leasing costs eligible to be added
back to FFO(1)
(196)
(366)
450
—
646
366
(2,568)
(2,524)
(366)
—
44
366
General and administrative expenses
(excluding other charges)
$ 5,651
$ 5,239
$
(412)
$ 20,381
$ 9,710
$
(10,671)
As a percent of revenue
3.2%
3.2%
—%
3.0%
3.0%
—%
(i) The services agreement is described in Section 14, “Related Party Transactions”, of this MD&A.
(ii) General and Administrative expenses in 2013 included start-up costs and 2014 expenses included costs to internalize property and asset management functions.
(iii) Based on operations for the period from July 5, 2013 to December 31, 2013.
Active management is a component of Choice Properties’ strategy. Choice Properties became a fully internally managed REIT at the beginning
of 2015 allowing for a stronger focus on improving, repositioning, and strengthening the current tenant mix and merchandising of its existing
properties. In order to internalize, the Trust built its business platform which includes systems, processes and people. Experienced property
managers joined the Choice Properties team effective January 2015.
General and administrative expenses, for the year ended December 31, 2014, were $23,315, including the costs to internalize active
management. During the third and fourth quarters of 2014, Choice Properties incurred costs to internalize active management including the
leasing and property management functions. The total costs of $2,568 included charges for restructuring and implementation of a real-estate
focused enterprise resource planning system (“ERP”). As a step towards becoming an internally managed trust, Choice Properties internalized
the leasing function at the beginning of the fourth quarter of 2014. Direct leasing costs, primarily salaries, of $366 were incurred in the fourth
quarter of 2014 and are eligible to be added back to FFO(1) based on the revision to the definition of FFO(1), from the Real Property Association
of Canada White Paper published in April 2014, to include an adjustment on incremental leasing costs of full-time or salaried staff. This
adjustment to FFO(1) makes results more comparable between real estate entities that expense their internal leasing departments and those
that capitalize the costs incurred with third-party leasing. General and administrative expenses, excluding costs to internalize and direct leasing
costs that are eligible to be added back to FFO(1), for the year ended December 31, 2014, were $20,381.
General and administrative expenses, for the year ended December 31, 2013, of $12,234, included start-up costs of the Trust of $2,524,
primarily related to professional fees. The 2013 expenses were for a partial calendar year and are, therefore, not comparable to the 2014
year end expenses.
For the fourth quarter of 2014, net general and administrative expenses increased $1,424 compared to the same period in 2013. Excluding
adjustments for internalization costs, start-up costs and direct leasing costs, the general and administrative expenses in the fourth quarter of
2014 increased $412 or 7.9% compared to the fourth quarter of 2013. This increase was primarily driven by increased internal expenses,
investor relations and public entity costs and professional fees, partially offset by a decrease in services agreement expense. The decrease
in service agreement expense resulted in a corresponding increase in internal costs of the Trust to reflect the functions that the Trust assumed
directly.
Choice Properties REIT 2014 Annual Report 14
Variance
Favourable /
(Unfavourable)
12,857
2013(iii)
31,128 $
22,692
(23,558)
$
11,846
—
741
(60,587)
(49)
(2,224)
2014
18,271
46,250
72,433
49
2,965
Net Interest Expense and Other Financing Charges
For the periods ended December 31
(unaudited)
(in thousands of Canadian dollars)
Interest on Transferor Notes(i)
$
— $
2014
Variance
Favourable /
(Unfavourable)
16,085
2013
16,085 $
$
Distributions on Class C LP Units(i)
11,562
11,541
(21)
Three Months
Year End
Interest on Senior Unsecured
Debentures
Interest on Mortgage
Interest on Credit Facility
Subtotal (for use in Debt Service
Coverage calculation)
Distributions on Exchangeable
Units(i)
Subtotal (for use in EBITDAFV(1)
calculation)
Effective interest rate amortization
of debt discounts and premiums(ii)
Effective interest rate amortization
of debt placement costs
Capitalized borrowing costs
Interest income
Net interest expense and other
financing charges
22,976
49
1,188
6,054
—
387
(16,922)
(49)
(801)
35,775
34,067
(1,708)
139,968
66,407
(73,561)
49,730
45,984
(3,746)
191,267
88,607
(102,660)
85,505
80,051
(5,454)
331,235
155,014
(176,221)
(673)
298
(28)
(72)
640
211
—
(144)
1,313
48,891
(87)
28
(72)
1,127
(166)
(433)
678
417
—
(324)
(48,213)
(710)
166
109
$
85,030
$
80,758 $
(4,272)
$
380,654
$
155,785 $
(224,869)
(i)
(ii)
Related party amounts.
Includes finance charge for Transferor Note transactions of $48,911 for the year ended December 31, 2014, as described in Section 9, “Long Term Debt and Class C LP
Units”, of this MD&A.
(iii) Based on operations for the period from July 5, 2013 to December 31, 2013.
Net interest expense and other financing charges, for the year ended December 31, 2014, of $380,654 included a non-cash finance charge
of $48,911 related to Transferor Note transactions (see Section 9, “Long Term Debt and Class C LP Units”, of this MD&A). Annual expenses
for 2014 were impacted by the issuance of additional Exchangeable Units in connections with the Acquisitions, the issuance of Series C and
D senior unsecured debentures, the replacement of Series 5 to 10 Transferor Notes and the repayment of Series 3 and 4 Transferor Notes
(see Section 9, “Long Term Debt and Class C LP Units”, of this MD&A).
The 2013 expenses were for a partial calendar year and are, therefore, not comparable to the 2014 year end expenses.
During the fourth quarter of 2014, net interest expense and other financing charges increased $4,272 or 5.3% compared to the fourth quarter
of 2013. The increase was primarily due to $3,746 of distributions on the additional Exchangeable Units issued as partial consideration for
properties acquired from Loblaw in 2014 and higher interest expense on the Credit Facility due to larger drawn balances in 2014. In addition,
the interest rates on the Series C and D senior unsecured debentures issued in the first quarter of 2014 were higher than the interest rates
on the Series 3 and 4 Transferor Notes that they replaced.
Choice Properties REIT 2014 Annual Report 15
7. OTHER MEASURES OF PERFORMANCE
Funds from Operations(1) Except as otherwise noted, Choice Properties calculates its FFO(1) in accordance with the Real Property Association
of Canada White Paper on Funds from Operations for IFRS issued in April, 2014 (see Section 18,”Non-GAAP Financial Measures”, of this
MD&A).
For the periods ended December 31
(unaudited)
(in thousands of Canadian dollars)
2014
2013
Variance
Favourable /
(Unfavourable)
Three Months
Year End
2014
2013(iii)
Variance
Favourable /
(Unfavourable)
Funds from Operations(1)(i)
$
90,685
$
82,764
$
Net income
Fair value adjustment on
Exchangeable Units
Fair value adjustment on investment
properties
Fair value adjustment on unit-based
compensation
Loss on disposal of investment
properties
Exchangeable Units distributions
Amortization of tenant improvement
allowances
Direct leasing costs
Other charges:
Reverse: Finance charge(ii)
Reverse: Internalization costs
Reverse: Start-up costs
Funds from Operations(1) (excluding
other charges)
FFO(1) per unit - basic (excluding other
charges)(ii)
FFO(1) per unit - diluted (excluding
other charges)(ii)
FFO(1) payout ratio (excluding other
charges)(ii)
Distribution declared per unit
Weighted average units outstanding -
basic
Weighted average units outstanding -
diluted
$
87,017
$
(6,478) $
93,495
$
199,614
$
67,148
$
132,466
51,063
111,976
(60,913)
(12,143)
147,401
(159,544)
(97,452)
(68,750)
(28,702)
(81,931)
(144,289)
62,358
(41)
—
24
—
49,730
45,984
2
366
8
—
—
196
—
—
—
(450)
90,881
0.231
0.230
$
$
$
82,314
0.224
0.224
$
$
$
$
$
(65)
—
3,746
(6)
366
7,921
—
196
450
8,567
0.007
0.006
(591)
450
17
—
(608)
450
191,267
88,607
102,660
456
366
8
—
448
366
$
297,488
$
158,892
$
138,596
48,911
2,568
—
348,967
$
$
0.913
0.912
—
—
2,524
$
$
$
161,416
0.444
0.444
$
$
$
48,911
2,568
(2,524)
187,551
0.469
0.468
70.7%
72.5%
1.8%
71.3%
71.8%
0.5%
$
0.162501
$
0.162501
$
—
$
0.650004
$
0.318917
$
0.331087
394,237,610
367,911,089
26,326,521
382,344,615
363,642,405
18,702,210
394,578,356
368,059,697
26,518,659
382,636,320
363,767,339
18,868,981
Number of units outstanding, end of period
395,287,115
371,688,983
23,598,132
395,287,115
371,688,983
23,598,132
(i)
FFO(1) per unit on a diluted basis, before adjusting for other charges, was $0.230 and $0.225 for the three months ended December 31, 2014 and 2013, respectively.
FFO(1) per unit on a diluted basis, before adjusting for other charges, was $0.777 and $0.437 for the year end periods ended December 31, 2014 and 2013, respectively.
(ii) Described in Section 9, “Long Term Debt and Class C LP Units”, of this MD&A.
(iii) Based on operations for the period from July 5, 2013 to December 31, 2013.
For the year ended December 31, 2014, FFO(1) of $297,488 included net property income of $510,829 which was driven by a full calendar year
of operations for the Same Properties and 2013 Acquisitions, plus partial year of operations for the 2014 Acquisitions and the 2014 Dispositions.
The net property income is partially offset by other expenses of $213,341 from general and administrative expenses, amortization of other assets,
and interest expense and other charges. FFO(1) (excluding other charges), for the year ended December 31, 2014, was $0.912 per unit on a
diluted basis.
The FFO(1) for the 2013 year end represents a partial calendar year and is, therefore, not comparable to the FFO(1) for the 2014 year end.
Choice Properties REIT 2014 Annual Report 16
For the fourth quarter of 2014, FFO(1) increased $7,921 or 9.6% compared to the fourth quarter of 2013, due to an increase in net property
income of $9,469, and a reduction of amortization of other assets of $101, partially offset by general and administrative expenses of $1,123,
and interest and other financing charges of $526.
For the fourth quarter of 2014, FFO(1) (excluding other charges) per unit on a diluted basis of $0.230 increased $0.006 compared to the fourth
quarter of 2013.
Adjusted Funds from Operations(1) There is currently no standard industry-defined measure of AFFO(1). Please refer to Section 18, “Non-
GAAP Financial Measures”, of this MD&A, for a reconciliation of AFFO(1) to cash flows from operating activities, a GAAP measure.
For the periods ended December 31
(unaudited)
(in thousands of Canadian dollars)
Three Months
Year End
2014
2013
Variance
Favourable /
(Unfavourable)
2014
2013(ii)
Variance
Favourable /
(Unfavourable)
Funds from Operations(1)
$
90,685
$
82,764
$
7,921
$
297,488
$
158,892
$
138,596
Internalization costs
Start-up costs
Straight-line rental revenue
Effective interest rate amortization of
finance charges
Unit-based compensation expense
Property capital expenditures -
incurred
Property and leasing capital
expenditures - normalized(i)
Leasing capital expenditures -
incurred
Adjusted Funds from Operations(1)
AFFO(1) per unit - basic
AFFO(1) per unit - diluted
AFFO(1) payout ratio
196
—
(8,783)
(375)
439
—
(450)
(8,375)
851
438
196
450
(408)
(1,226)
1
2,568
—
—
2,524
(34,634)
(16,484)
50,018
2,104
1,095
808
2,568
(2,524)
(18,150)
48,923
1,296
(11,247)
(7,769)
(3,478)
(29,523)
(8,934)
(20,589)
3,670
(1,877)
(489)
(902)
$
$
$
74,096
0.188
0.188
$
$
$
64,680
0.176
0.176
$
$
$
5,547
413
9,416
0.012
0.012
—
(5,712)
5,712
(2,785)
(1,250)
(1,535)
$
$
$
285,236
0.746
0.745
$
$
$
130,939
0.360
0.360
$
$
$
154,297
0.386
0.385
86.4%
92.3%
5.9%
87.2%
88.6%
1.4%
Distribution declared per unit
$
0.162501
$
0.162501
$
—
$
0.650004
$
0.318917
$
0.331087
Weighted average units outstanding - basic
Weighted average units outstanding -
diluted
394,237,610
367,911,089
26,326,521
382,344,615
363,642,405
18,702,210
394,578,356
368,059,697
26,518,659
382,636,320
363,767,339
18,868,981
Number of units outstanding, end of period
395,287,115
371,688,983
23,598,132
395,287,115
371,688,983
23,598,132
(i)
(ii)
Seasonality impacts the timing of capital expenditures. The AFFO(1) calculation was adjusted for this factor to make the quarters more comparable.
Based on operations for the period from July 5, 2013 to December 31, 2013.
For the year ended December 31, 2014, AFFO(1) was impacted by $32,308 of capital activity. The capital activity in 2014 was more representative
of future expenditures(2) than the 2013 year end. Although most capital projects are executed in the summer and fall, the capital activity in 2013
was lower due to late project starts in the Trust’s first year of operations. AFFO(1), for the year ended December 31, 2014, was $0.745 per unit
on a diluted basis and the annual AFFO(1) payout ratio was 87.2%.
AFFO(1) for 2013 represents a partial calendar year and is, therefore, not comparable to AFFO(1) for 2014.
For the fourth quarter of 2014, AFFO(1) increased $9,416 or 14.6% compared to the fourth quarter of 2013. The largest adjustment to FFO(1)
required to calculate AFFO(1) is the deduction of capital expenditures. The normalized expenditures of $8,067 deducted for the fourth quarter
of 2014 were $2,482 lower than the expenditures deducted in the comparative period of 2013. The capital activity in 2014 was more representative
of future expenditures(2) given later project starts in 2013, the first year of operations.
AFFO(1) per unit, for the quarter ended December 31, 2014, of $0.188 had a favourable variance of $0.012 per unit on a diluted basis compared
to the comparative quarter (December 31, 2013 - $0.176).
Choice Properties REIT 2014 Annual Report 17
The results for AFFO(1) reflect property capital expenditures occurring evenly over the year. If AFFO(1) were to be calculated deducting the
incurred capital expenditures of $11,736, AFFO(1) would have been $70,426 or $0.178 per unit on a diluted basis (December 31, 2013 - $66,557
or $0.181).
Property Capital and Leasing Capital Expenditures
Property Capital Choice Properties differentiates between those capital expenditures incurred to sustain its properties and capital incurred to
achieve a long-term improvement in the Trust’s ability to generate incremental cash flow. The following is a summary of the treatment of these
two types of capital expenditures:
•
•
Property capital expenditures incurred on existing space, which are treated as costs to sustain productive capacity, are recovered
from tenants over the life of the improvement.
Acquisitions and the development of existing assets are treated as capital expenditures increasing the productive capacity of the
enterprise.
Property capital expenditures are expected to be approximately $0.87 per square foot or approximately $0.11 of AFFO(1) per unit diluted, per
annum(2).
In the year ended December 31, 2014, Choice Properties incurred $29,523 of property capital expenditures (December 31, 2013 - $8,934)
comprised of non-recoverable structural improvements of $2,718 and recoverable capital improvements of $26,805, which are recoverable from
tenants under the terms of their leases over the useful life of the improvements. Recoverable capital improvements may include, but are not
limited to, items such as parking lot resurfacing and roof replacement. These items are recorded as part of investment properties and the
recoveries from tenants are recorded as revenue. The balance yet to be recovered was $34,254 as at December 31, 2014 (December 31, 2013
- $8,430), the majority of which Choice Properties expects to recover from tenants over the useful lives of the improvements(2).
Leasing Capital Leasing capital varies with tenant demand and the balance between new and renewal leasing, as capital expenditures relating
to securing new tenants are generally higher than the costs relating to renewing existing tenants. Choice Properties incurred $2,785 of leasing
costs in 2014 (December 31, 2013 - $1,250), comprised of $1,541 in tenant improvement allowances and $1,244 in direct leasing costs.
Choice Properties endeavours to fund property capital and leasing capital from cash flow from operations(2).
Choice Properties REIT 2014 Annual Report 18
8. QUARTERLY RESULTS OF OPERATIONS
The following is a summary of selected consolidated information for the six most recently completed quarters.
(unaudited)
(in thousands of Canadian dollars except
where otherwise indicated)
Number of Properties
Gross Leasable Area (in millions of square
feet)
Occupancy
Rental revenue
Net Operating Income(1)
Net Income
Cash flows from operating activities(ii)
Funds from Operations(1) per unit - diluted
Funds from Operations(1) per unit - diluted
(excluding other charges)(iii)
Adjusted Funds from Operation(1) per unit
diluted
Adjusted Funds from Operations(1) payout
ratio
Fourth
Quarter
2014
472
38.9
98.1%
$ 175,246
$ 123,175
$
87,017
$ 200,656
0.230
$
$
$
0.230
0.188
86.4%
Third
Quarter
2014
454
37.6
Second
Quarter
2014
456
37.6
First
Quarter
2014
436
36.4
Fourth
Quarter
2013
435
36.3
Third
Quarter
2013(i)
425
35.3
97.9%
97.7%
97.7%
97.7%
97.6%
$
$
$
$
$
$
$
170,293
118,551
122,306
119,994
0.223
0.229
0.189
$
$
$
$
$
$
$
170,339
118,681
(1,538)
86,692
0.091
0.228
0.184
$
$
$
$
$
$
$
167,045
115,332
(8,171)
69,026
0.233
0.224
0.185
$
$
$
$
$
$
$
164,852
114,108
(6,478)
170,915
0.225
0.224
0.176
$
$
$
$
$
$
$
153,655
108,159
73,626
152,608
0.212
0.220
0.184
86.0%
88.3%
87.8%
92.3%
85.0%
Distribution declared per unit
$ 0.162501
$ 0.162501
$ 0.162501
$ 0.162501
$ 0.162501
$ 0.156416
Number of units outstanding
395,287,115
384,073,936
383,670,554
372,029,705
371,688,983
359,997,871
Total Assets (in millions)
$
8,192
$
7,774
$
7,719
$
7,407
$
7,448
$
7,174
Debt to total assets(iv)
Debt service coverage(iv)
44.0%
3.5x
45.7%
46.3%
46.9%
3.4x
3.4x
3.5x
47.0%
3.4x
49.4%
3.3x
Based on operations for the period from July 5, 2013 to September 30, 2013.
(i)
(ii) Cash flows from operating activities are presented before deducting interest paid. 2013 amounts have been adjusted to conform with the current year presentation.
(iii) The first two quarters of 2014 FFO calculations were adjusted for the finance charge related to the Transferor Note transactions as described in Section 9 "Long Term Debt
and Class C LP Units", of this MD&A. The third quarters of 2013 and 2014 were adjusted for start-up and internalization costs of $2,974 and $2,372, respectively. The
fourth quarters of 2013 and 2014 were adjusted for start-up and internalization costs of ($450) and $196, respectively.
(iv) Debt ratios include Class C LP Units but exclude Exchangeable Units. The ratios are non-GAAP financial measures calculated based on the trust indentures as supplemented.
Acquisitions, since Choice Properties’ IPO in the third and fourth quarters of 2013 and the first, second, third and fourth quarters of 2014 have
positively impacted quarterly results. The second quarter of 2014 was also positively impacted by $945 of lease surrender revenue.
In addition to the above, net income is impacted by fluctuations in fair value adjustments on Exchangeable Units and investment properties
and therefore is often not comparable from quarter to quarter.
Choice Properties REIT 2014 Annual Report 19
9. LONG TERM DEBT AND CLASS C LP UNITS
The following are the changes in Choice Properties’ outstanding long term debt and Class C LP Units for the year ended December 31,
2014:
For the period ended December 31, 2014
(in thousands of Canadian dollars)
Principal balance outstanding as at
December 31, 2013
Senior
Unsecured
Debentures
Mortgage
Class C LP
Units
Transferor
Notes
Total Long Term
Debt and Class
C LP Units
Weighted
Average
Coupon
Rate
$
600,000 $
— $
925,000 $
1,940,000 $
3,465,000
3.85%
Issuance:
Series C
Series D
Repayment:
Series 3
Series 4
Replacement:
Series 5
Series 6
Series 7
Series 8
Series 9
Series 10
Mortgage
Principal balance outstanding as
at December 31, 2014
250,000
200,000
—
—
300,000
200,000
200,000
300,000
200,000
300,000
—
—
—
—
—
—
—
—
—
—
—
3,107
—
—
—
—
—
—
—
—
—
—
—
—
—
(90,000)
(350,000)
(300,000)
(200,000)
(200,000)
(300,000)
(200,000)
(300,000)
250,000
200,000
(90,000)
(350,000)
—
—
—
—
—
—
—
3,107
3.50%
4.29%
3.00%
3.00%
3.00%
3.00%
3.00%
3.60%
3.60%
3.60%
7.42%
$
2,550,000 $
3,107 $
925,000 $
— $
3,478,107
3.96%
Senior Unsecured Debentures In 2014, Choice Properties issued $250,000 principal amount of Series C senior unsecured debentures with
a seven-year term and bear interest at a rate of 3.498% per annum and $200,000 principal amount of Series D senior unsecured debentures
with a 10-year term and bear interest at a rate of 4.293% per annum. These senior unsecured debentures were used by the Trust to repay
existing indebtedness and for general business purposes.
On April 21, 2014 and May 12, 2014, Loblaw sold Replacement Debentures Series 5 through Series 6, and Series 7 through Series 10
(collectively “Replacement Debentures”), respectively, to third-parties. The Replacement Debentures have a face value of $1,500,000, mature
between 2016 and 2022, and have a weighted average interest rate of 3.32%.
As at December 31, 2014, the senior unsecured debentures totaled $2,550,000 (December 31, 2013 - $600,000) with a weighted average
maturity of 5.3 years (December 31, 2013 - 6.2 years) and weighted average effective interest rate of 3.38% (December 31, 2013 - 4.00%).
Senior unsecured debentures Series A through Series D were issued by the Trust and Series 5 through Series 10 were issued by a subsidiary
of the Trust.
As described in Section 10.2, “Sources of Liquidity”, of this MD&A, Choice Properties filed a Short Form Base Shelf Prospectus (“Prospectus”)
allowing for the issuance, from time to time, of units and debt securities, or any combination thereof, having an aggregate offering price of up
to $2 billion. This document is valid for a 25-month period from September 3, 2013.
Subsequent to the end of 2014, Choice Properties issued $250,000 principal amount of Series E senior unsecured debentures under the
Prospectus, as supplemented, with a 5.6-year term and a coupon rate of 2.297% per annum.
Mortgage In connection with the portfolio acquired from Loblaw on October 8, 2014, Choice Properties assumed a mortgage of $3,603 that
is secured by one of the properties acquired in the portfolio. The mortgage bears interest at a fixed rate of 7.42% per annum, matures in
2017 and has an effective interest rate of 2.80% per annum.
Class C LP Units (authorized - unlimited) As at December 31, 2014, Loblaw holds all of the 92,500,000 (December 31, 2013 - 92,500,000)
outstanding Class C LP Units, which are redeemable at Loblaw’s option, beginning in 2027. Choice Properties has the option to settle the
redemption payment with cash, Exchangeable Units, or any combination thereof.
Choice Properties REIT 2014 Annual Report 20
Transferor Notes In connection with the acquisition of the IPO portfolio of 425 properties (the “Initial Properties”), Choice Properties issued
a series of notes to Loblaw (the “Transferor Notes”). In 2014, Choice Properties repaid the outstanding balances of the Series 3 and Series
4 Transferor Notes totaling $440,000. No penalty charges were incurred as a result of the early repayment. In connection with the transaction,
Choice Properties recorded a non-cash finance gain of $3,342 from the accelerated amortization of the associated debt premiums.
In the second quarter of 2014, Choice Properties entered into a Master Trust Indenture with Computershare Trust Company of Canada and
created separate supplemental indentures to facilitate the replacement of the Series 5 through Series 10 Transferor Notes held by Loblaw,
which had a total principal amount of $1,500,000. The new Series 5 through Series 10 senior unsecured Replacement Debentures issued to
Loblaw contain the same principal amounts, interest rates and maturity dates as the original Transferor Notes. Choice Properties incurred a
non-cash finance charge of $52,253 as a result of the accelerated amortization of the net debt discounts associated with the replacement of
the Transferor Notes. In the second quarter of 2014, Loblaw sold the Replacement Debentures to third-parties in two separate offerings, as
described above.
The net non-cash finance charge related to the Transferor Note transactions was $48,911, for the year ended December 31, 2014.
Maturities of Long Term Debt and Class C LP Units
As of December 31, 2014
(in thousands of Canadian dollars)
2015
2016
2017
2018
2019
Thereafter
Total
Senior
Unsecured
Debentures
Mortgage
Class C LP
Units
$
— $
993 $
— $
300,000
200,000
400,000
200,000
1,450,000
1,069
1,045
—
—
—
—
—
—
—
925,000
$
2,550,000 $
3,107 $
925,000
$
Total
993
301,069
201,045
400,000
200,000
2,375,000
3,478,107
In order to reduce refinancing risk, Choice Properties attempts to stagger debt maturities and future financing obligations to ensure no large
maturities or financing needs occur in any one year. The issuance of senior unsecured debentures to replace the Series 3 and Series 4
Transferor Notes in 2014 enabled the Trust to extend the weighted average term-to-maturity of its long term debt.
Credit Facility Choice Properties has a $500,000 senior unsecured committed revolving credit facility (the “Credit Facility”) provided by a
syndicate of lenders that contains certain financial and other covenants consistent with a credit facility of this nature. This Credit Facility is
available for general business purposes, including property acquisitions and development activities, and the refinancing of indebtedness. The
credit facility bears interest at variable rates: prime plus 0.45% or bankers’ acceptance rate plus 1.45%. The current pricing is contingent on
Choice Properties’ credit ratings from DBRS Limited (“DBRS”) and Standard & Poor’s (“S&P”) remaining at “BBB”.
As at December 31, 2014, $122,000 was drawn under the Credit Facility (December 31, 2013 - nil).
Choice Properties REIT 2014 Annual Report 21
9.1 Financial Covenants
Choice Properties is subject to certain financial and non-financial covenants in its senior unsecured debentures and Credit Facility that include
maintaining certain leverage and debt service ratios. These ratios are monitored by the Trust on an ongoing basis to ensure compliance.
Choice Properties was in compliance with all of these covenants throughout the year and as at December 31, 2014.
For the purposes of calculating the debt to total assets ratio (the leverage covenant) under the trust indentures, as supplemented, Choice
Properties determines the fair value of its investment properties using a capitalization factor equal to the simple average of the rolling eight
quarter weighted average capitalization rates used by the Trust to calculate the fair value of its investment properties for financial statement
reporting purposes. For the first seven fiscal quarters following the IPO, the average will be calculated on a rolling-up basis until eight fiscal
quarters have been completed. For the purposes of these calculations, the Trust is deemed to have completed four fiscal quarters prior to
the IPO, with the weighted average capitalization rates for each of these four quarters equal to 6.16%.
The Trust’s compliance with leverage and coverage ratios, as they relate to its debentures, are shown below:
Debt to Total Assets Ratio(i)
Limit: Maximum including Class C LP Units and convertible debt (of nil) is 65.0%
Debt Service Coverage Ratio(i)
Limit: Minimum 1.5x
As at December 31,
2014
As at December 31,
2013
44.0%
3.5x
47.0%
3.4x
(i) Debt ratios include Class C LP Units but exclude Exchangeable Units. The ratios are non-GAAP financial measures calculated based on the trust indentures as supplemented.
After giving effect to the debt issuance and property acquisitions subsequent to the end of 2014, the Trust’s leverage ratio is not materially
changed.
Choice Properties REIT 2014 Annual Report 22
10. LIQUIDITY AND CAPITAL RESOURCES
10.1 Major Cash Flow Components
For the periods ended December 31
(in thousands of Canadian dollars)
Cash flows from operating activities(ii)
Cash flows used in investing activities
Cash flows used in financing activities(ii)
Three Months
(unaudited)
Year End
(audited)
2014
200,656
(174,947)
(32,639)
$
2013
135,573
(83,356)
(83,350)
$
2014
476,368
(296,685)
(229,756)
2013(i)
288,181
(111,882)
(124,894)
Decrease in cash and cash equivalents
$
(6,930)
$
(31,133)
$
(50,073)
$
51,405
(i)
(ii)
Based on operations for the period from July 5, 2013 to December 31, 2013.
2013 amounts have been adjusted to conform with the current year presentation.
Cash Flows from Operating Activities During the three months and annual periods ended December 31, 2014, the positive cash flows
from operating activities, of $200,656 and $476,368, respectively, were primarily driven by cash from property operating results. The cash
flows for operating activities in the three months ended December 31, 2014 were higher than those for the comparative period due to a higher
contribution from non-cash working capital and NOI(1) from Acquisitions. Cash flows from operating activities will be used to fund on-going
operations, and expenditures for leasing capital and property capital(2).
Cash Flows used in Investing Activities During the year ended December 31, 2014, cash flows used in investing activities included $220,526
for acquisitions, $59,959 of capital expenditures, $23,000 of notes receivable issued to a third-party, and $6,230 related to an investment in
a joint venture, less the proceeds of dispositions of $13,030 from the sale of two properties. During the fourth quarter of 2014, investing
activities included $123,971 of outflows associated with the acquisition of 16 investment properties from Loblaw in October 2014 and a parcel
of land in November 2014, $23,000 of notes receivable issued to a third-party, $21,746 of capital expenditures, and $6,230 related to an
investment in a joint venture in December 2014. For the fourth quarter of 2014, the cash flows used in investing activities increased $91,591
compared to the fourth quarter of 2013. The primary driver of the increase was the relative size of the acquisition in the fourth quarter of 2014
compared to a smaller acquisition in the fourth quarter of 2013.
Cash Flows used in Financing Activities Financing activities for the year ended December 31, 2014 included
cash inflows from:
•
•
•
issuance of senior unsecured debentures for net proceeds of $447,540;
net advances from the Credit Facility of $121,685;
collection of Loblaw notes receivable of $92,057; and
cash outflows used for the:
•
•
•
•
•
repayment of Transferor Notes held by Loblaw of $440,000;
issuance of notes receivable from Loblaw of $236,328;
payment of interest of $108,413;
payment of distributions on Exchangeable Units to Loblaw of $73,219; and
payment of distributions to Unitholders of $41,716.
During the the fourth quarter of 2014, cash flows used for financing activities decreased $50,711 compared to the fourth quarter of 2013
primarily due to a drawn down of the Credit Facility in the fourth quarter of 2014.
Choice Properties REIT 2014 Annual Report 23
10.2 Sources of Liquidity
Choice Properties expects to fund its ongoing operations and finance future growth primarily through the use of: (i) existing cash; (ii) cash
flows from operations; (iii) short term financing through the Credit Facility; and (iv) the issuance of unsecured debentures and equity (including
LP Units), subject to market conditions. Given reasonable access to capital markets, Choice Properties does not foresee any impediments
in obtaining financing to satisfy its short and long term financial obligations, including its capital investment commitments2.
(in thousands of Canadian dollars)
(audited)
Cash and cash equivalents
Unused portion of the Credit Facility
Liquidity
As at December 31,
2014
1,332
$
378,000
379,332
$
$
$
As at December 31,
2013
51,405
500,000
551,405
Base Shelf Prospectus On September 3, 2013, Choice Properties filed the Prospectus allowing for the issuance, from time to time, of units
and debt securities, or any combination thereof, having an aggregate offering price of up to $2 billion. This document is valid for a 25-month
period from September 3, 2013. On February 6, 2014, Choice Properties issued $450,000 of debt securities under the Prospectus, as
supplemented. Subsequent to the end of 2014, Choice Properties issued a further $250,000 of debt securities under the Prospectus, as
supplemented.
10.3 Credit Ratings
Choice Properties’ debt securities are rated by two independent credit rating agencies: DBRS and S&P. Choice Properties’ ratings are linked
to and equivalent to those of Loblaw, largely because of Loblaw’s significant ownership position in the Trust, Loblaw’s position as Choice
Properties’ most significant tenant for the foreseeable future, and the strategic integration between the Trust and Loblaw. The following table
sets out the current credit ratings of Choice Properties:
Credit Ratings (Canadian Standards)
Credit Rating
DBRS
Issuer Rating
Senior Unsecured Debentures
10.4 Unit Equity
BBB
BBB
Trend
Stable
Stable
S&P
Credit Rating
BBB
BBB
Outlook
Stable
N/A
Equity, for the purposes of this MD&A, includes both units and Exchangeable Units, which are economically equivalent to units and receive
equal distributions.
(in thousands of Canadian dollars)
(audited)
Number of units, beginning of year
Units issued
Units issued in connection with the Distribution Reinvestment Plan
Units issued under unit-based compensation arrangement
Exchangeable Units issued in connection with investment properties acquired from Loblaw
Number of Units, end of year
As at December 31,
2014
371,688,983
As at December 31,
2013
—
—
1,522,472
118,309
21,957,351
395,287,115
87,500,000
114,229
—
284,074,754
371,688,983
Distribution Reinvestment Plan Choice Properties has a Distribution Reinvestment Plan (“DRIP”) which enables eligible Unitholders to
elect to have their cash distributions used to purchase units and receive a bonus distribution of units equal in value to 3% of each distribution.
During 2014, Choice Properties issued 1,522,472 units under the DRIP (December 31, 2013 - 114,229). During the fourth quarter of 2014,
Unitholders other than Loblaw and GWL, representing approximately 8.2% of units outstanding, elected to participate in the DRIP, with 10.3%
electing to participate for the month of December 2014.
Choice Properties REIT 2014 Annual Report 24
Distributions
For the periods ended December 31
(in thousands of Canadian dollars)
(unaudited)
Distributions (including distributions on Exchangeable Units)
Distributions reinvested through the DRIP
Net distributions
Net Income (loss)
Add back: Distributions on Exchangeable Units included in net
interest expense and other financing charges
Net income adjusted for distributions on Exchangeable Units
Cash flows provided by operating activities
Less: Interest paid on financing activities
Cash flows provided by operating activities adjusted for
interest paid
AFFO(1)
Excess (shortfall) of adjusted net income over net distributions
declared
Excess of adjusted cash flows provided by operating activities
over net distributions declared
Excess of cash provided by AFFO(1) over net distributions
declared
(i) Based on operations for the period from July 5, 2013 to December 31, 2013.
Three Months
Year End
2014
64,211
(4,063)
60,148
87,017
49,730
136,747
200,656
(14,809)
185,847
74,096
76,599
125,699
13,948
$
$
$
$
$
$
$
$
$
2013
60,209
—
60,209
(6,478)
45,984
39,506
135,573
(12,154)
123,419
64,680
(20,703)
63,210
4,471
$
$
$
$
$
$
$
$
$
$
2014
248,754
(15,682)
233,072
199,614
191,267
390,881
476,368
(108,413)
367,955
285,236
157,809
134,883
52,164
$
$
$
$
$
$
$
$
$
$
2013(i)
116,518
(1,148)
115,370
67,148
88,607
155,755
288,181
(17,141)
271,040
130,939
40,385
155,670
15,569
$
$
$
$
$
$
$
$
$
During 2014, Choice Properties declared $248,754 in distributions (December 31, 2013 - $116,518), including distributions to holders of
Exchangeable Units, which are reported as interest expense, and non-cash distributions of $15,682 provided under the DRIP (December 31,
2013 - $1,148).
In determining the amount of distributions to be made to Unitholders, Choice Properties’ Board of Trustees consider many factors, including
provisions in its Declaration of Trust, macro-economic and industry specific environments, the overall financial condition of the Trust, future
capital requirements, debt covenants, and taxable income. In accordance with Choice Properties’ Distribution Policy, Management and the
Board of Trustees regularly review Choice Properties’ rate of distributions to ensure an appropriate level of cash and non-cash distributions.
Management anticipates that distributions declared will, in the foreseeable future(2), continue to vary from net income as net income includes
fair value adjustments and other non-cash items.
While cash flows from operating activities are generally sufficient to cover distribution requirements, timing of expenses and seasonal
fluctuations in non-cash working capital may result in a shortfall. These seasonal or short-term fluctuations shall be funded, if necessary, by
the Credit Facility. As such, the cash distributions are not an economic return of capital, but a distribution of sustainable cash flow from
operations. Based on current facts and assumptions, management does not anticipate cash distributions will be reduced or suspended in the
foreseeable future(2).
Subsequent to the end of 2014, at its most recent meeting on February 24, 2015, the Board of Trustees reviewed and approved the current
rate of distributions of $0.65 per unit per annum.
The carrying value of the Trust’s investment properties exceeds their tax base. Choice Properties’ tax treatment of distributions (based on
2014 distributions) was: 17.1% return of capital, 81.8% income and 1.1% capital gain (based on 2013 distributions, was 22.7% return of
capital, 77.3% income and 0% capital gain). That composition may change over time, thus affecting the after-tax return to Unitholders.
Choice Properties REIT 2014 Annual Report 25
10.5 Contractual Obligations
The undiscounted future principal and interest payments on Choice Properties’ debt instruments, distribution and redemption payments on
Class C LP Units, and other contractual obligations as at December 31, 2014 were as follows:
2018
(in thousands of Canadian dollars)
2015
2016
2017
91,153 $ 386,653 $ 279,153
2019
Thereafter
476,153 $ 261,937 $ 1,593,179
Senior unsecured debentures
$
1,189
—
46,250
7,570
1,189
—
1,090
—
—
—
—
122,000
—
—
46,250
46,250
46,250
46,250
1,319,808
266
266
266
295
1,676
$ 146,162 $ 434,358 $ 326,759 $ 522,669 $ 430,482 $ 2,914,663
$
4,775,093
Total
3,088,228
$
3,468
122,000
1,551,058
10,339
Mortgage
Credit Facility(i)
Class C LP Units
Other(ii)
Total
(i)
(ii)
Excludes interest on the revolving Credit Facility at a floating interest rate.
As at December 31, 2014, Choice Properties had commitments of $7,304 for future capital expenditures related to on-going development projects.
11. DISCLOSURE CONTROLS AND PROCEDURES
Management is responsible for establishing and maintaining a system of disclosure controls and procedures to provide reasonable
assurance that all material information relating to Choice Properties is gathered and reported to senior management on a timely basis so
that appropriate decisions can be made regarding public disclosure.
As required by National Instrument 52-109 (Certification of Disclosure in Issuers’ Annual and Interim Filings), the Chief Executive Officer
and the Chief Financial Officer have caused the effectiveness of the disclosure controls and procedures to be evaluated. Based on that
evaluation, they have concluded that the design and operation of the system of disclosure controls and procedures were effective as at
December 31, 2014.
12. INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is also responsible for establishing and maintaining adequate internal controls over financial reporting to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial reports for external purposes in accordance with IFRS.
As required by National Instrument 52-109 - Certification of Disclosure in Issuers’ Annual and Interim Filings, the Chief Executive Officer and
the Chief Financial Officer have caused the effectiveness of the internal controls over financial reporting to be evaluated using the framework
established in “Internal Control - Integrated Framework” (2013) published by The Committee of Sponsoring Organizations of the Treadway
Commission (COSO Framework). Based on that evaluation, they have concluded that the design and operation of the Company’s internal
controls over financial reporting were effective as at December 31, 2014.
In designing such controls, it should be recognized that due to inherent limitations, any controls, no matter how well designed and operated,
can provide only reasonable assurance of achieving the desired control objectives and may not prevent or detect misstatements. Projections
of any evaluations of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate. Additionally, management is required to use
judgment in evaluating controls and procedures.
Changes in Internal Controls over Financial Reporting There were no changes in Choice Properties’ internal control over financial reporting
during the fourth quarter of 2014 that have materially affected, or are reasonably likely to materially affect, internal control over financial
reporting.
Choice Properties REIT 2014 Annual Report 26
13. ENTERPRISE RISKS AND RISK MANAGEMENT
Choice Properties is committed to establishing a framework that ensures risk management is an integral part of its activities. To ensure its
continued growth and success, risks are identified and managed through Choice Properties’ Enterprise Risk Management (“ERM”) program.
The Choice Properties Board of Trustees has approved an ERM policy and will oversee the ERM program through approval of the Trust’s
risks and risk prioritization. The ERM program assists all areas of the business in managing appropriate levels of risk tolerance by bringing
a systematic approach, methodology and tools for evaluating, measuring and monitoring key risks. The results of the ERM program and other
business planning processes are used to identify emerging risks to the Trust, prioritize risk management activities and develop a risk-based
internal audit plan.
Risks are not eliminated through the ERM program. Risks are identified and managed within understood risk tolerances. The ERM program
is designed to:
•
•
•
•
promote a culture of awareness of risk management and compliance within Choice Properties;
facilitate corporate governance by providing a consolidated view of risks across Choice Properties and insight into the methodologies
for identification, assessment, measurement and monitoring of the risks;
assist in developing consistent risk management methodologies and tools across the organization; and
enable Choice Properties to focus on its key risks in the business planning process and reduce harm to financial performance through
responsible risk management.
Risk identification and assessments are important elements of the Trust’s ERM framework. An annual ERM assessment will be completed to
assist in the update and identification of internal and external risks, which are both strategic and operational in nature. Key risks affecting the
Trust are prioritized under four categories: financial; operational; reputational and compliance risks. The annual ERM assessment will be
carried out through interviews, surveys and/or facilitated workshops with management and the Choice Properties Board of Trustees. Risks
are assessed and evaluated based on the Trust’s vulnerability to the risk and the potential impact that the underlying risks would have on the
Trust’s ability to execute its strategies and achieve its objectives. Risk owners are assigned relevant risks and key risk indicators are developed.
At least semi-annually, management will provide an update to the Audit Committee on the status of the top risks based on significant changes
from the prior update, anticipated impacts in future quarters and significant changes in key risk indicators. In addition, the long term risk level
will be assessed to monitor potential long term risk impacts, which may assist in risk mitigation planning activities.
Accountability for oversight of the management of each risk is allocated by the Choice Properties Board of Trustees either to the full Board
of Trustees or to Committees of the Board of Trustees.
The operating and financial risks and risk management strategies are discussed below. Any of these risks has the potential to negatively affect
Choice Properties and its financial performance. The Trust has risk management strategies, including insurance programs, controls and
contractual arrangements that are intended to mitigate the potential impact of these risks. However, these strategies do not guarantee that
the associated risks will be mitigated or will not materialize or that events or circumstances will not occur that could negatively affect the
reputation, operations or financial condition or performance of the Trust. Choice Properties faces a variety of significant and diverse risks,
many of which are inherent in the business conducted by Choice Properties and the tenants of the properties. Described below are certain
risks that could materially adversely affect Choice Properties. Other risks and uncertainties that Choice Properties does not presently consider
to be material, or of which Choice Properties is not presently aware, may become important factors that affect Choice Properties’ future
financial condition and results of operations. The occurrence of any of the risks discussed below could materially and adversely affect the
business, prospects, financial condition, results of operations or cash flows of Choice Properties. Prospective purchasers of securities of
Choice Properties should carefully consider these risks before investing in any such securities.
A detailed description of the operating and financial risks is included in the Risk Factor Section of the Trust’s 2014 Annual Information Form,
which section is hereby incorporated by reference. The following descriptions detail risks that could potentially impact financial results.
Choice Properties REIT 2014 Annual Report 27
13.1 Operating Risks and Risk Management
Choice Properties is exposed to a number of business risks, which have the potential to affect its operating and financial performance. The
following is a summary of Choice Properties’ industry and business related risks:
Tenant Concentration
Property Development, Redevelopment and Renovation Risks
Acquisitions and Associated Undisclosed Defects and Obligations
Vendor Management and Third-Party Service Providers
IT Systems Implementation
Information Integrity and Reliability
Security of Information Technology
Strategic Execution and Capabilities
Property Management
Top Talent Attraction, Retention & Succession Planning
Competition
Environmental Matters
Property Valuations
Regulatory
Tenant Concentration Investment properties generate income through rent payments made by tenants, and particularly rent payments made
by Loblaw as Choice Properties’ largest tenant. Upon the expiry of any lease, there can be no assurance that the lease will be renewed or
the tenant replaced for a number of reasons. Furthermore, the terms of any subsequent lease may be less favourable than the existing lease,
including the addition of restrictive covenants. In addition, historical occupancy rates and rents are not necessarily an accurate prediction of
future occupancy rates. Choice Properties’ cash flows and financial position would be adversely affected if its tenants (and especially Loblaw)
were to become unable to meet their obligations under their leases or if a significant amount of available space in the properties was not able
to be leased on economically favourable lease terms. In the event of default by a tenant, Choice Properties may experience delays or limitations
in enforcing its rights as lessor and incur substantial costs in protecting its investment. In addition, restrictive covenants and the terms of the
Strategic Alliance Agreement may narrow the field of potential tenants at a property and could contribute to difficulties in leasing space to new
tenants. Furthermore, at any time, a tenant may seek the protection of bankruptcy, insolvency or similar laws which could result in the rejection
and termination of the lease of the tenant and thereby cause a reduction in Choice Properties’ cash flows, financial condition or results of
operations and its ability to make distributions to Unitholders.
Choice Properties’ net income could also be adversely affected in the event of a downturn in the business, or the bankruptcy or insolvency,
of Loblaw, as the largest tenant. Choice Properties derives the large majority of its annual base minimum rent from Loblaw. Consequently,
revenues are dependent on the ability of Loblaw to meet its rent obligations and Choice Properties’ ability to collect rent from Loblaw. If Loblaw
were to terminate its tenancies, default on or cease to satisfy its payment obligations, it would have a material adverse effect on Choice
Properties’ financial condition or results of operations and its ability to make distributions to Unitholders.
The closing of an anchor store at a property could also have a material adverse effect on the value of that property. Vacated anchor tenant
space also tends to adversely affect the entire property because of the loss of the departed anchor tenant's power to draw customers to the
property, which in turn may cause other tenants’ operations to suffer and adversely affect such other tenants’ ability to pay rent or perform
any other obligations under their leases. No assurance can be given that Choice Properties will be able to quickly re-lease space vacated by
an anchor tenant on favourable terms, if at all. In addition, certain leases contain a provision requiring tenants to maintain continuous occupancy
of leased premises, and there can be no assurance that such tenants will continue to occupy such premises. The loss of an anchor tenant at
any leasable area could cause a reduction in Choice Properties’ cash flows, financial condition or results of operations and its ability to make
distributions to Unitholders.
Property Development, Redevelopment and Renovation Risks Choice Properties may engage in development, redevelopment or major
renovation activities with respect to certain properties. If it does so, it will be subject to certain risks, including: (a) the availability and pricing
of financing on satisfactory terms or at all; (b) the availability and timely receipt of zoning and other regulatory approvals; (c) the ability to
achieve an acceptable level of occupancy upon completion; (d) the potential that Choice Properties may fail to recover expenses already
incurred if it abandons redevelopment opportunities after commencing to explore them; (e) the potential that Choice Properties may expend
funds on and devote management time to projects which it does not complete; (f) construction or redevelopment costs of a project, including
certain fees payable to Loblaw under the Strategic Alliance Agreement, may exceed original estimates, possibly making the project less
profitable than originally estimated, or unprofitable; (g) the time required to complete the construction or redevelopment of a project or to
lease-up the completed project may be greater than originally anticipated, thereby adversely affecting Choice Properties’ cash flow and liquidity;
(h) the cost and timely completion of construction (including risks beyond Choice Properties’ control, such as weather, labour conditions or
material shortages); (i) contractor and subcontractor disputes, strikes, labour disputes or supply disruptions; (j) delays with respect to obtaining,
or the inability to obtain, necessary zoning, occupancy, land use and other governmental permits, and changes in zoning and land use laws;
(k) occupancy rates and rents of a completed project may not be sufficient to make the project profitable; (l) Choice Properties’ ability to
dispose of properties redeveloped with the intent to sell could be impacted by the ability of prospective buyers to obtain financing given the
current state of the credit markets; and (m) the availability and pricing of financing to fund Choice Properties’ development activities on
favourable terms or at all.
Choice Properties REIT 2014 Annual Report 28
The above risks could result in substantial unanticipated delays or expenses and, under certain circumstances, could prevent the initiation of
redevelopment activities or the completion of redevelopment activities once undertaken. In addition, redevelopment projects entail risks that
investments may not perform in accordance with expectations and can carry an increased risk of litigation (and its attendant risks) with
contractors, subcontractors, suppliers, partners and others.
IT Systems Implementation Failure to successfully migrate from legacy systems to the new IT system could negatively affect Choice
Properties’ ability to operate effectively. Failure to adopt the new IT system or disruption during the post-implementation period could result
in a lack of relevant and reliable information to enable management to effectively achieve its strategic plan or manage the day to day operations
of the Trust. In addition, failure to implement appropriate processes and training to support the new IT system could result in inefficiencies
and duplication in current processes. Any migration failure, disruption or duplication of processes could have an adverse effect on the operations
of Choice Properties and could negatively affect the reputation, operations and financial performance of Choice Properties.
Information Integrity and Reliability Management depends on relevant and reliable information for decision making purposes, including
key performance indicators and financial reporting. A lack of relevant and reliable information that enables management to effectively manage
the business could preclude the Trust from optimizing its overall performance. Any significant loss of data or failure to maintain reliable data
could adversely affect the reputation, operations and financial performance of the Trust.
Security of Information Technology Choice Properties requires segregation and protection of company information, including security over
tenant lease details, colleague information, financial records and operational data. Any failure in data security or any system vulnerability
(internal or external) could result in harm to the reputation or competitive position of the Trust.
Strategic Execution and Capabilities Choice Properties is a newly formed Trust with limited operating history. There is a risk that key
operational capabilities, including resources, processes and technology, may not be adequately suited or developed for the needs of Choice
Properties’ current state or for its growth strategy. Furthermore, Choice Properties’ growth strategy must be understood and appropriately
executed to deliver long term growth for the Trust. If Choice Properties is not successful in implementing operational capabilities required for
current state and future growth, as well as executing on its growth strategy, the reputation and financial performance of the Trust may be
negatively impacted.
Property Management Certain significant expenditures, including property taxes, maintenance costs, debt service payments, insurance
costs and related charges, must be made throughout the period of ownership of real property, regardless of whether the property is producing
sufficient income to pay such expenses. In order to retain desirable rentable space and to generate adequate revenue over the long-term,
Choice Properties must maintain or, in some cases, improve each property's condition to meet market demand. Choice Properties is currently
internalizing the property management function. Property management services, including lease processing and facility repairs and
maintenance must be executed in a timely and cost effective manner. Maintaining a rental property in accordance with market standards can
entail significant costs, which Choice Properties may not be able to recover from its tenants. All of the Loblaw leases contain exclusions on
certain operating costs and/or tax recoveries. In addition, property tax reassessments based on updated appraised values may occur, which
Choice Properties may not be able to recover from its tenants. As a result, Choice Properties may bear the economic cost of such operating
costs and/or taxes which may adversely impact financial condition and results of operations and decrease the amount of cash available for
distribution to Unitholders. Numerous factors, including the age of the relevant building, the materials used at the time of construction or
currently unknown building code violations could result in substantial unbudgeted costs for refurbishment or modernization. In addition, the
timing and amount of capital expenditures may indirectly affect the amount of cash available for distribution to Unitholders. Distributions may
be reduced, or even eliminated, at times when Choice Properties deems it necessary to make significant capital or other expenditures.
If the actual costs of maintaining or upgrading a property exceed Choice Properties’ estimates, or if hidden defects are discovered during
maintenance or upgrading which are not covered by insurance or contractual warranties, additional and unexpected costs will be incurred. If
similar properties located in the vicinity of one of Choice Properties’ properties are substantially refurbished and Choice Properties’ properties
are not, the net operating income derived from, and the value of, Choice Properties’ property could be reduced. Any failure by Choice Properties
to undertake appropriate maintenance and refurbishment work in response to the factors described above could adversely affect the rental
income that is earned from such properties. Any such event could have a material adverse effect on Choice Properties’ cash flows, financial
condition or results of operations and its ability to make distributions to Unitholders.
Acquisitions and Associated Undisclosed Defects and Obligations Choice Properties intends to make acquisitions and dispositions of
properties in accordance with its growth strategy. If Choice Properties is unable to manage its growth effectively, it could adversely impact
Choice Properties’ financial position and results of operations and decrease or eliminate the amount of cash available for distribution to
Unitholders. There can be no assurance as to the pace of growth through property acquisitions or that Choice Properties will be able to acquire
assets on an accretive basis and, as such, there can be no assurance that distributions to Unitholders will be maintained or increased in the
future.
Choice Properties REIT 2014 Annual Report 29
Acquired properties may be subject to unknown, unexpected or undisclosed liabilities which could have a material adverse impact on the
operations and financial results of Choice Properties. Representations and warranties given by third-parties to Choice Properties may not
adequately protect against these liabilities and any recourse against third-parties may be limited by the financial capacity of such third-parties.
Furthermore, it is not always possible to obtain from the seller the records and documents that are required in order to fully verify that the
buildings to be acquired are constructed in accordance, and that their use complies, with planning laws and building code requirements.
Accordingly, in the course of acquiring a property, specific risks might not be or might not have been recognized or correctly evaluated. These
circumstances could lead to additional costs and could have a material adverse effect on rental income of the relevant properties or the sale
prices of such properties upon a disposition of such properties.
Choice Properties’ ability to acquire properties on satisfactory terms and successfully integrate and operate them is subject to the following
additional risks: (a) Choice Properties may be unable to acquire desired properties because of (i) constraints imposed by the terms of the
Strategic Alliance Agreement, or (ii) competition from other real estate investors with more capital, including other real estate operating
companies, REITs and investment funds; (b) Choice Properties may acquire properties that are not accretive to results upon acquisition, and
Choice Properties may not successfully manage and lease those properties to meet its expectations; (c) competition from other potential
acquirers may significantly increase the purchase price of a desired property; (d) Choice Properties may be unable to generate sufficient cash
from operations, or obtain the necessary debt or equity financing to consummate an acquisition or, if obtainable, financing may not be on
satisfactory terms; (e) Choice Properties may need to spend more than budgeted amounts to make necessary improvements or renovations
to acquired properties; (f) agreements for the acquisition of properties are typically subject to customary conditions to closing, including
satisfactory completion of due diligence investigations, and Choice Properties may spend significant time and money on potential acquisitions
that Choice Properties does not consummate; (g) the process of acquiring or pursuing the acquisition of a new property may divert the attention
of Choice Properties’ senior management team from existing business operations; (h) Choice Properties may be unable to quickly and efficiently
integrate new acquisitions, particularly acquisitions of portfolios of properties, into existing operations; (i) market conditions may result in
higher than expected vacancy rates and lower than expected rental rates; and (j) Choice Properties may acquire properties without any
recourse, or with only limited recourse, for liabilities, whether known or unknown, such as clean-up of environmental contamination, claims
by tenants, vendors or other persons against the former owners of the properties and claims for indemnification by general partners, directors,
officers and others indemnified by the former owners of the properties.
In addition, after the acquisition of a property, the market in which the acquired property is located may experience unexpected changes that
adversely affect the property’s value. The occupancy of properties that are acquired may decline during Choice Properties' ownership, and
rents that are in effect at the time a property is acquired may decline thereafter.
If Choice Properties cannot complete property acquisitions on favourable terms, or operate acquired properties to meet Choice Properties’
goals or expectations, Choice Properties’ business, financial condition, results of operations and cash flow, the per unit trading price and its
ability to satisfy debt service obligations and to make distributions to Unitholders could be materially and adversely affected.
Vendor Management and Third-Party Service Providers Choice Properties currently relies on third-party vendors, developers, co-owners
and strategic partners to provide the Trust with various services or to complete projects. The lack of an effective process for developing
partnership agreements or for contract tendering, drafting, review and approval may pose a risk for the Trust. Contracts must be negotiated
according to policy with terms, services levels and rates that are optimal for Choice Properties. Inefficient, ineffective or incomplete vendor
management / partnership / co-ownership strategies, policies and procedures could impact the Trust’s reputation, operations and/or financial
performance.
Top Talent Attraction, Retention & Succession Planning Effective succession planning for senior management and the ability to attract
and retain key personnel are essential to sustaining the growth and success of Choice Properties. The degree to which Choice Properties is
not effective in attracting talented, experienced colleagues, developing its colleagues, and managing performance could lead to a lack of
requisite knowledge, skills and experience. In addition, failure to retain senior management can be a significant risk to the Trust’s business
strategy. If Choice Properties is not effective in establishing appropriate succession planning processes and retention strategies, it could lead
to a lack of requisite knowledge, skills and experience on the part of management. This, in turn, could adversely affect the Trust’s ability to
execute its strategies, and could adversely affect its reputation, operations and financial performance.
Competition Choice Properties will compete with other investors, managers, and owners of properties in seeking tenants for the purchase
and development of desirable real estate properties. Competitors may have newer or better located properties, greater financial or other
resources, or greater operating flexibility than Choice Properties. An increase in the availability of funds for investment or an increase in
interest in real estate property investments may increase the competition for real estate property investments, thereby increasing purchase
prices and reducing the yield on the investment. Increased competition to lease properties could adversely impact Choice Properties’ ability
to find suitable tenants at the appropriate rent and may negatively impact the financial performance of the Trust.
Choice Properties REIT 2014 Annual Report 30
Environmental Matters Choice Properties is responsible to comply with various environmental standards and regulations. Choice Properties
could be held liable for environmental damages resulting from the existence or release of hazardous, toxic or other harmful substances into
the environment, and could be responsible for costs to remove or cleanse the harmful materials and contamination. The existence or suspicion
of ground contamination, hazardous materials or other residual pollution could also cause reputational damage and adversely affect the value
of property and the Trust’s ability to lease or sell such property.
Property Valuation Choice Properties retained an independent professional appraiser to provide estimates of the fair market value range in
respect of each of the investment properties. Caution should be exercised in the evaluation and use of appraisal results, which are estimates
of market value at a specific point in time. In general, appraisals represent only the analysis and opinion of qualified experts as of the effective
date of such appraisals and are not guarantees of present or future value. There is no assurance that the assumptions employed in determining
the appraised values of the investment properties are correct as of this date.
A publicly traded real estate investment trust will not necessarily trade at values determined solely by reference to the underlying value of its
real estate assets. Accordingly, the units may trade at a premium or a discount to values implied by the above-mentioned Appraisals.
Regulatory Choice Properties is subject to laws and regulations governing the ownership and leasing of real property, securities, employment
standards and other matters. Also, to retain its tax status as a real estate investment trust, Choice Properties must comply with the Specified
Investment Flow-Through (SIFT) requirements under the Tax Act at all times. Choice Properties failing to comply with the SIFT rules would
result in income earned by the Trust being taxable as the Trust would no longer be considered a flow-through entity and consequently, the
tax advantages for both Choice Properties and its unit holders would no longer available. Any non-compliance under the Tax Act or non-
compliance with other laws or regulations could negatively impact Choice Properties’ operations and financial position.
13.2 Financial Risks and Risk Management
Choice Properties is exposed to a number of financial risks, which have the potential to affect its operating and financial performance. The
following is a summary of Choice Properties’ financial risks:
Liquidity and Capital Availability Risk
Liquidity of Real Property
Interest Rate Risk
Unit Price Risk
Credit Risk
Degree of Leverage
Liquidity and Capital Availability Risk Liquidity risk is the risk that Choice Properties cannot meet a demand for cash or fund its obligations
as they come due. Although a portion of the cash flow generated by the investment properties is devoted to servicing such outstanding debt,
there can be no assurance that Choice Properties will continue to generate sufficient cash flow from operations to meet interest payments
and principal repayment obligations upon an applicable maturity date. If Choice Properties is unable to meet interest or principal repayment
obligations, it could be required to renegotiate such payments or issue additional equity or debt or obtain other financing. The failure of Choice
Properties to make or renegotiate interest or principal payments or issue additional equity or debt or obtain other financing could materially
adversely affect Choice Properties’ financial condition and results of operations and decrease or eliminate the amount of cash available for
distribution to Unitholders.
The real estate industry is highly capital intensive. Choice Properties requires access to capital to fund operating expenses, to maintain its
properties, to fund its growth strategy and certain other capital expenditures from time to time, and to refinance indebtedness. Although
Choice Properties expects to have access to the Credit Facility, there can be no assurance that it will otherwise have access to sufficient
capital or access to capital on favourable terms. Further, in certain circumstances, Choice Properties may not be able to borrow funds due
to limitations set forth in the Declaration of Trust and the trust indentures, as supplemented. Failure by Choice Properties to access required
capital could have a material adverse effect on its financial condition or results of operations and its ability to make distributions to Unitholders.
Liquidity and capital availability risks are mitigated by maintaining appropriate levels of liquidity, by diversifying the Trust's sources of funding,
by maintaining a well-diversified debt maturity profile and actively monitoring market conditions.
Liquidity of Real Property An investment in real estate is relatively illiquid. Such illiquidity will tend to limit Choice Properties' ability to vary
its portfolio promptly in response to changing economic or investment conditions. In recessionary times, it may be difficult to dispose of certain
types of real estate. The costs of holding real estate are considerable and during an economic recession Choice Properties may be faced
with ongoing expenditures with a declining prospect of incoming receipts. In such circumstances, it may be necessary for Choice Properties
to dispose of properties at lower prices in order to generate sufficient cash for operations and for making distributions to Unitholders.
Interest Rate Risk The majority of Choice Properties’ debt is financed at fixed rates with maturities staggered over 10 years, thereby mitigating
the exposure to near term changes in interest rates. To the extent that Choice Properties incurs variable rate indebtedness (such as under
the Credit Facility), this will result in fluctuations in Choice Properties’ cost of borrowing as interest rates change. If interest rates rise, Choice
Choice Properties REIT 2014 Annual Report 31
Properties' operating results and financial condition could be materially adversely affected and decrease the amount of cash available for
distribution to Unitholders.
Choice Properties analyzes its interest rate risk and the impact of rising and falling interest rates on operating results and financial condition
on a regular basis.
Borrowings under the Credit Facility are at variable rates which may result in fluctuations in Choice Properties’ cost of borrowing as interest
rates change. To the extent that interest rates rise, Choice Properties’ operating results and financial condition could be materially adversely
affected and decrease the amount of cash available for distribution to Unitholders. Choice Properties’ Credit Facility and the Debentures also
contain covenants that require it to maintain certain financial ratios on a consolidated basis. If Choice Properties does not maintain such ratios,
its ability to make distributions to Unitholders may be limited or suspended.
Unit Price Risk Choice Properties is exposed to unit price risk as a result of the issuance of Exchangeable Units, which are economically
equivalent to and exchangeable for units, as well as the issuance of unit-based compensation. Exchangeable Units and unit-based
compensation liabilities are recorded at their fair value based on market trading prices. Exchangeable Units and unit-based compensation
negatively impact operating income when the unit price rises and positively impact operating income when the unit price declines.
Credit Risk Choice Properties is exposed to credit risk resulting from the possibility that counterparties could default on their financial
obligations to Choice Properties. Exposure to credit risk relates to rent receivables, cash and cash equivalents, short term investments,
security deposits and notes receivable.
Choice Properties mitigates the risk of credit loss related to rent receivables by evaluating the creditworthiness of new tenants, obtaining
security deposits wherever permitted by legislation, ensuring its tenant mix is diversified and by limiting its exposure to any one tenant (except
Loblaw). Choice Properties establishes an allowance for doubtful accounts that represents the estimated losses with respect to rent receivables.
The allowance is determined on a tenant-by-tenant basis based on the specific factors related to the tenant.
The risk related to cash and cash equivalents, short term investments, security deposits and notes receivable is reduced by policies and
guidelines that require Choice Properties to enter into transactions only with Canadian financial and government institutions that have a
minimum short term rating of “A-2” and a long term credit rating of “A-“ from S&P or an equivalent credit rating from another recognized credit
rating agency and by placing minimum and maximum limits for exposures to specific counterparties and instruments.
Despite such mitigation efforts, if Choice Properties’ counterparties default, it could have a material adverse impact on Choice Properties’
financial condition or results of operations and its ability to make distributions to Unitholders.
Degree of Leverage Choice Properties’ degree of leverage could have important consequences to Unitholders, including: (i) Choice Properties’
ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, development or other general business
purposes, (ii) a larger portion of Choice Properties’ cash flow being dedicated to the payment of the principal of and interest on, its indebtedness,
thereby reducing the amount of funds available for distributions to Unitholders, and (iii) making Choice Properties more vulnerable to a downturn
in business or the economy in general. Under the Declaration of Trust, the maximum amount that Choice Properties can leverage is (i) 60%
excluding any convertible Indebtedness and (ii) 65% including any convertible Indebtedness plus Class C LP Units.
To reduce this risk, Choice Properties actively monitors its degree of leverage to ensure it is within acceptable levels.
Any of these risks could have an adverse effect on Choice Properties' financial condition, results of operations, cash flow, the trading price
of the units, distributions to Unitholders and its ability to satisfy principal and interest obligations on its outstanding debt.
Choice Properties REIT 2014 Annual Report 32
14. RELATED PARTY TRANSACTIONS
Choice Properties’ parent corporation is Loblaw, which held an 82.9% effective interest in the Trust through ownership of 21,500,000 units and all
of the Exchangeable Units as at December 31, 2014 (December 31, 2013 - 82.2% and 21,500,000 units respectively). Loblaw’s controlling shareholder,
GWL, held an approximate 46% ownership of Loblaw’s outstanding common shares and a 5.4% direct interest in Choice Properties, through
ownership of 21,414,657 units as at December 31, 2014 (December 31, 2013 - 5.4% and 20,107,810 Units respectively).
Loblaw is also Choice Properties’ largest tenant, representing approximately 91.4% of Choice Properties’ annual base rent and 88.4% of its GLA
as at December 31, 2014 (December 31, 2013 - 91.0% and 88.5% respectively).
In 2014, the Trust acquired 36 investment properties from Loblaw. The acquisition added approximately 2.5 million square feet of GLA across Canada
at a purchase price of $409,717, excluding acquisition costs. Also, on December 9, 2014, Choice Properties and its joint venture partner, Wittington
Properties Limited (“Wittington”), an affiliate of GWL, completed the acquisition of a parcel of land (500 Lake Shore) in Toronto for $15,576 from
Loblaw through 500 LS Limited Partnership. Wittington’s parent company is Wittington Investments, Limited, which holds a 63% interest in GWL.
Choice Properties acquired two properties from Loblaw subsequent to the end of 2014. On January 9, 2015, Choice Properties acquired a 16-acre
site in Barrie, Ontario from Loblaw for a purchase price of approximately $11,500, excluding acquisition costs. The acquisition was funded through
the issuance of 265,665 Exchangeable Units, which had a value of approximately $2,808 as at January 9, 2015, an assumption of a $1,933 obligation,
and paid the balance in cash. The Exchangeable Units issued to Loblaw did not materially impact Loblaw's effective ownership percentage. On
January 30, 2015, Choice Properties completed the acquisition of a warehouse from Loblaw for a purchase price of approximately $81,200, excluding
acquisition costs. This acquisition was entirely funded with cash. The warehouse is fully occupied by Loblaw as the single tenant.
In addition to leases and purchase agreements, other agreements between Choice Properties and Loblaw include:
Strategic Alliance Agreement
The Strategic Alliance Agreement creates a series of rights and obligations between Choice Properties and Loblaw intended to establish a preferential
and mutually beneficial business and operating relationship. Its initial term is for ten-years from the IPO, and will continue until the earlier of 20
years from the IPO and the date, if any, on which Loblaw ceases to own a majority interest, on a fully-diluted basis in the Trust. The Strategic Alliance
Agreement provides Choice Properties with important rights that are expected to meaningfully contribute to the Trust’s growth. Subject to certain
exceptions, rights include:
•
•
•
Choice Properties will have the right of first offer to purchase any property in Canada that Loblaw seeks to sell;
Loblaw will be generally required to present shopping centre property acquisitions in Canada to Choice Properties to allow the Trust a
right of first opportunity to acquire the property itself; and
Choice Properties has the right to participate in future shopping centre developments involving Loblaw.
Certain investment properties acquired from Loblaw include excess land with development potential. No value was attributed to this land at the
time of acquisition such that Choice Properties did not pay Loblaw for this excess land. Choice Properties will compensate Loblaw with intensification
fees, should Choice Properties pursue development, intensification or redevelopment of these properties. The payments to Loblaw will be calculated
in accordance with a payment grid set out in the agreement that takes into account the region, market ranking and type of use for the property.
Services Agreement
Loblaw provides Choice Properties with administrative and other support services, such as internal audit, tax, legal and other services as may be
reasonably required from time to time. The current agreement is for an 18-month term from July 5, 2014 to December 31, 2015. The scope of the
services provided in the current agreement decreased from the initial one-year agreement as Choice Properties now performs more services
internally. The decrease in the Services Agreement fees resulted in a corresponding increase in internal costs of the Trust.
Property Management Agreement
Subsequent to the end of 2014, on January 1, 2015, Choice Properties agreed to manage Loblaw’s third-party properties on a fee for service basis.
Choice Properties’ policy is to conduct all transactions and settle all balances with related parties on market terms and conditions. The related party
transactions are disclosed in Note 23 to the consolidated financial statements for the year ended December 31, 2014, and the period from May 21,
2013 to December 31, 2013.
Choice Properties REIT 2014 Annual Report 33
15. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
The preparation of the consolidated financial statements requires management to make judgments and estimates in applying Choice Properties’
accounting policies that affect the reported amounts and disclosures made in the consolidated financial statements and accompanying notes.
Within the context of these consolidated financial statements, a judgment is a decision made by management in respect of the application of
an accounting policy, a recognized or unrecognized financial statement amount and/or note disclosure, following an analysis of relevant
information that may include estimates and assumptions. Estimates and assumptions are used mainly in determining the measurement of
balances recognized or disclosed in the consolidated financial statements and are based on a set of underlying data that may include
management’s historical experience, knowledge of current events and conditions and other factors that are believed to be reasonable under
the circumstances. Management continually evaluates the estimates and judgments it uses.
The following are the accounting policies subject to judgments and key sources of estimation uncertainty that Choice Properties believes
could have the most significant impact on the amounts recognized in the consolidated financial statements.
Investment Properties
Judgments Made in Relation to Accounting Policies Applied Judgment is applied in determining whether certain costs are additions to
the carrying value of investment properties, identifying the point at which substantial completion of the property occurs, and identifying the
directly attributable borrowing costs to be included in the carrying value of the development property.
Choice Properties also applies judgment in determining whether the properties it acquires are considered to be asset acquisitions or business
combinations. Choice Properties considers all the properties it has acquired to date to be asset acquisitions.
Key Sources of Estimation The fair value of investment properties is dependent on available comparable transactions, future cash flows
over the holding period and discount rates and capitalization rates applicable to those assets. The review of anticipated cash flows involves
assumptions relating to occupancy, rental rates and residual value. In addition to reviewing anticipated cash flows, management assesses
changes in the business climate and other factors, which may affect the ultimate value of the property. These assumptions may not ultimately
be achieved.
Joint Arrangements
Judgments Made in Relation to Accounting Policies Applied Judgment is applied in determining whether the Trust has joint control and
whether the arrangements are joint operations or joint ventures. In assessing whether the joint arrangements are joint operations or joint
ventures, management applies judgment to determine the Trust’s rights and obligations in the arrangement based on factors such as the
structure, legal form and contractual terms of the arrangement.
Leases
Judgments Made in Relation to Accounting Policies Applied Choice Properties is required to make judgments in determining whether
certain leases are operating or finance leases, in particular long-term leases. All tenant leases where Choice Properties is the lessor have
been determined to be operating leases.
Income Taxes
Judgments Made in Relation to Accounting Policies Applied Choice Properties is a mutual fund trust and a REIT as defined in the Income
Tax Act (Canada). Choice Properties is not liable to pay Canadian income taxes provided that its taxable income is fully distributed to Unitholders
each year. Choice Properties is a REIT if it meets the prescribed conditions under the Income Tax Act (Canada) relating to the REIT Conditions.
Choice Properties uses judgment in reviewing the REIT Conditions and assessing its interpretation and application to the REIT’s assets and
revenue, and it has determined that it qualifies as a REIT for the current period.
Choice Properties expects to continue to qualify as a REIT under the Income Tax Act (Canada), however, should it no longer qualify, it would
not be able to flow through its taxable income to Unitholders and would therefore be subject to tax.
Choice Properties REIT 2014 Annual Report 34
16. ACCOUNTING STANDARDS IMPLEMENTED IN 2014 AND FUTURE ACCOUNTING STANDARDS
Accounting Standards Implemented in 2014
In 2011, amendments were issued to IAS 32, “Financial Instruments: Presentation”. These amendments are required to be applied for periods
beginning on or after January 1, 2014. Choice Properties implemented these amendments prospectively in the first quarter of 2014.
In 2013, the IASB issued International Financial Reporting Interpretations Committee (“IFRIC” 21), “Levies”. The IFRIC addresses accounting
for a liability to pay a levy within the scope of IAS 37, “Provisions, Contingent Liabilities and Contingent Assets”. A levy is an outflow of resources
embodying economic benefits that is imposed by governments on entities in accordance with legislation, other than income taxes within the
scope of IAS 12, “Income Taxes” and fines or other penalties imposed for breaches of the legislation. This interpretation became effective for
annual periods beginning on or after January 1, 2014, and is to be applied retrospectively. Choice Properties implemented IFRIC 21
retrospectively in the first quarter of 2014.
The Trust has assessed the impact of the above and concluded there were no significant impacts on the Trust’s consolidated financial
statements.
Future Accounting Standards
In May 2014, the IASB issued IFRS 15, “Revenue from Contracts with Customers” (“IFRS 15”). The new standard provides a comprehensive
framework for recognition, measurement and disclosure of revenue from contracts with customers, excluding contracts within the scope of
the standard on leases, insurance contracts and financial instruments. IFRS 15 becomes effective for annual periods beginning on or after
January 1, 2017, and is to be applied retrospectively. Early adoption is permitted. The Trust is currently assessing the impact of the new
standard on its consolidated financial statements.
In July 2014, the IASB issued IFRS 9, “Financial Instruments” (“IFRS 9”) replacing IAS 39, “Financial Instruments: Recognition and
Measurement.” The project had three main phases: classification and measurement, impairment, and general hedging. The standard becomes
effective for annual periods beginning on or after January 1, 2018 and is to be applied retrospectively. Early adoption is permitted. The Trust
is currently assessing the impact of the new standard on its consolidated financial statements.
In December 2014, the IASB issued amendments to IAS 1, “Presentation of Financial Statements”. The amendments are effective for annual
periods beginning on or after January 1, 2016 with early adoption permitted. The Trust intends to adopt these amendments in its financial
statements for the annual period beginning January 1, 2016, but does not expect the amendments to have a material impact on its consolidated
financial statements.
17. OUTLOOK
While the Canadian economy presents uncertainty given volatility in commodity pricing, in particular, oil and gas prices, the Canadian dollar
exchange rate and interest rates, Choice Properties believes that the fundamentals of the retail real estate market remain stable. Even though
the Canadian retail landscape continues to be ever evolving, underscored by recent notable exits and anticipated new entrants, Choice
Properties’ grocery anchored real estate focus and its stable and reliable cash flows from long-term leases position it well to execute on
potential opportunities to drive growth. With consistent cash flow from operations and a strong balance sheet, Choice Properties expects to
meet its ongoing obligations, including providing its Unitholders with monthly distributions and to invest in growth. In 2015, Choice Properties
intends to focus on:
•
•
•
•
Acquiring accretive assets that meet its investment criteria and that are strategically aligned with its current portfolio;
Leveraging the excess density within its portfolio for at-grade intensification;
Accelerating greenfield and mixed-used development programs; and
Enhancing internally managed operations to strengthen relationships with tenants and to optimize cash flows and profitability within
its portfolio.
Choice Properties REIT 2014 Annual Report 35
18. NON-GAAP FINANCIAL MEASURES
Choice Properties uses the following non-GAAP financial measures: FFO, AFFO, NOI and EBITDAFV. The Trust believes these non-GAAP
financial measures provide useful information to both management and investors in measuring the financial performance and financial condition
of the Trust for the reasons outlined below.
Management uses these and other non-GAAP financial measures to exclude the impact of certain expenses and income that must be
recognized under GAAP when analyzing underlying operating performance, as the excluded items are not necessarily reflective of Choice
Properties’ underlying operating performance or impact the comparability of financial performance between periods. From time to time, the
Trust may exclude additional items if it believes doing so would result in a more effective analysis of underlying operating performance. The
exclusion of certain items does not imply that they are non-recurring.
These measures do not have a standardized meaning prescribed by GAAP and therefore they may not be comparable to similarly titled
measures presented by other publicly traded REITs, and should not be construed as an alternative to other financial measures determined
in accordance with GAAP.
Same Properties Properties that were owned throughout both the current and comparative periods are grouped as Same Properties for
comparative calculations.
Net Operating Income NOI is defined as cash rental revenue from investment properties less property operating costs. NOI is used as a
key indicator of performance as it represents a measure over which management has control. The Trust evaluates performance of management
by comparing the performance of the portfolio adjusted for the effects of certain items and current year acquisitions. The Trust’s method of
calculating NOI may differ from other issuers’ methods and, accordingly, may not be comparable to NOI reported by other issuers.
See Section 6, “Results of Operations”, of this MD&A, for a reconciliation of NOI to property revenue and expenses, which are GAAP measures.
Funds from Operations FFO is not a term defined under IFRS and may not be comparable to similar measures used by other real estate
entities. Except as otherwise noted, Choice Properties calculates its FFO in accordance with the Real Property Association of Canada White
Paper on Funds from Operations for IFRS issued in April 2014. The purpose of the White Paper was to provide reporting issuers and investors
with greater guidance on the definition of FFO and to help promote more consistent disclosure from reporting issuers.
An advantage of the FFO measure is improved comparability between Canadian and foreign REITs. FFO adds back to net income items that
do not arise from operating activities, such as fair value adjustments. FFO, however, still includes non-cash revenues related to accounting
for straight-line rent and makes no deduction for the recurring capital expenditures necessary to sustain the existing earnings stream.
See Section 7, “Other Measures of Performance”, of this MD&A, for a reconciliation of FFO to net income, which is a GAAP measure.
Funds from Operations Payout Ratio FFO payout ratio is calculated as the distribution declared per unit divided by the FFO per unit diluted.
Adjusted Funds from Operations AFFO is a supplemental measure of operating performance widely used in the real estate industry. Choice
Properties calculates AFFO by adjusting FFO for non-cash income and expense items such as amortization of straight-line rents and finance
charges. AFFO includes a reduction for capital expenditures for maintaining productive capacity required for sustaining property infrastructure
and revenue from real estate properties and direct leasing costs. Property capital expenditures do not occur evenly over the fiscal year. The
property capital expenditures in the AFFO calculation are adjusted to reflect an average annual spending level.
There is currently no standard industry-defined measure of AFFO. As such, Choice Properties’ method of calculating AFFO may differ from
that of other real estate entities and, accordingly, may not be comparable to such amounts reported by other issuers.
Choice Properties REIT 2014 Annual Report 36
For the periods ended December 31, 2014 and 2013, the reconciliations of AFFO to cash flows from operating activities are as follows:
For the periods ended December 31
(unaudited)
(in thousands of Canadian dollars)
Cash Flows from Operating Activities
Interest paid
Adjusted cash flows provided by operating activities
Net change in non-cash working capital
Amortization of other assets
Property capital expenditures - incurred
Property and leasing capital expenditures - normalized(i)
Internalization costs
Start-up costs
Direct leasing costs
Three Months
Year End
2014
200,656
(14,809)
185,847
(83,751)
(87)
(11,247)
3,670
196
—
366
$
2013
135,573
(12,154)
123,419
(26,746)
(188)
(7,769)
(1,877)
—
(450)
—
$
2014
476,368
(108,413)
367,955
(24,367)
(414)
(29,523)
—
2,568
—
366
Excess of interest accrued over interest paid
(20,898)
(21,709)
(31,349)
AFFO
$
74,096
$
64,680
$
285,236
$
2013(ii)
288,181
(17,141)
271,040
(78,445)
(472)
(8,934)
(5,712)
—
2,524
—
(49,062)
130,939
(i)
(ii)
Seasonality impacts the timing of capital expenditures. AFFO was adjusted for this factor to make the quarters more comparable.
Based on operations for the period from July 5, 2013 to December 31, 2013.
Adjusted Funds from Operations Payout Ratio As an alternate measure of cash flows from operations, AFFO is indicative of the Trust’s
ability to pay distributions to Unitholders. AFFO payout ratio is calculated as the distribution declared per unit divided by AFFO per unit diluted.
Earnings Before Interest, Taxes, Depreciation, Amortization and Fair Value EBITDAFV is calculated as net income plus, where applicable,
income taxes, interest expense, amortization expense, depreciation expense, and fair value adjustments. This metric is calculated below and
used in some of the Trust’s debt metrics in place of net income because it excludes fair value adjustments with respect to investment property
and financial instruments, and interest expense. For the periods ended December 31, 2014 and 2013, EBITDAFV is as follows:
For the periods ended December 31
(unaudited)
(in thousands of Canadian dollars)
Net Income
Fair value adjustment on Exchangeable Units
Fair value adjustment on investment properties
Fair value adjustment on unit-based compensation
Interest expense(i)
Amortization of other assets
Earnings Before Interest, Taxes, Depreciation,
Amortization and Fair Value
Non-cash finance charge(ii)
Adjusted Earnings Before Interest, Taxes, Depreciation,
Amortization and Fair Value
Three Months
Year End
2014
87,017
51,063
(97,452)
(41)
85,505
87
126,179
—
126,179
$
$
$
2013
(6,478)
111,976
(68,750)
24
80,051
188
117,011
—
117,011
$
$
$
2014
199,614
(12,143)
(81,931)
(591)
331,235
414
436,598
48,911
485,509
$
$
$
2013(iii)
67,148
147,401
(144,289)
17
155,014
472
225,763
—
225,763
$
$
$
As calculated in Section 7, “Results of Operations”, of this MD&A.
(i)
(ii) Described in Section 9, “Long Term Debt and Class C LP Units”, of this MD&A.
(iii) Based on operations for the period from July 5, 2013 to December 31, 2013.
Choice Properties REIT 2014 Annual Report 37
19. ADDITIONAL INFORMATION
Additional information about Choice Properties, including the Trust’s Annual Information Form, has been filed electronically with the Canadian
securities regulatory authorities through the System for Electronic Document Analysis and Retrieval (SEDAR) and is available online at
www.sedar.com. The Trust is listed on the Toronto Stock Exchange (“TSX”) under the symbol CHP.UN.
The following details the acquisitions in 2014 as discussed in Section 5, “Investment Properties”, of this MD&A:
Location
Acquisition Date
Banner
Property Type
(in square feet) Occupancy
GLA
Acquisition from Third-Parties:
Secretariat Court, Mississauga, ON
February 28, 2014 N/A
Mayfield/Chinguacousy, Brampton, ON
November 7, 2014 N/A
Industrial
Land
148,245
N/A
Acquisitions from Loblaw:
Chemin du Tremblay, Boucherville, QC
October 8, 2014
Loblaw
Warehouse
315,961
Stand-alone retail
Stand-alone retail
Stand-alone retail
Boul Louis-XIV, Charlesbourg, QC
May 6, 2014
Maxi
Boul. Saint - Laurent, Montreal, QC
Lower Jarvis St. Toronto, ON
Highway 11, Hearst, ON
May 6, 2014
May 6, 2014
Provigo
Loblaws
May 6, 2014
Your Independent Grocer
Stand-alone retail
George Street N. Peterborough, ON
Highway #108 N., Elliot Lake, ON
May 6, 2014
May 6, 2014
no frills
no frills
Stand-alone retail
Stand-alone retail
Queen Street E., St. Mary's, ON
May 6, 2014
Your Independent Grocer
Stand-alone retail
Hamilton Road, London, ON
May 6, 2014
no frills
Stand-alone retail
Main Street, Delhi, ON
May 6, 2014
Your Independent Grocer
Stand-alone retail
Main Street S. Hagersville, ON
May 6, 2014
no frills
Stand-alone retail
Regent Avenue, W. Winnipeg, MB
May 6, 2014
Real Canadian Superstore
Stand-alone retail
55th Street, Cold Lake, AB
104th Avenue, Surrey, BC
May 6, 2014
no frills
Stand-alone retail
May 6, 2014
Real Canadian Superstore
Stand-alone retail
Ferry Avenue, Prince George, BC
May 6, 2014
Real Canadian Superstore
Stand-alone retail
Main St., Sackville, NB
October 8, 2014
Save Easy
Jacques-Cartier Sud, Sherbrooke, QC
October 8, 2014
Boul. Sainte-Anne, Ste-Anne-Des-Plaines, QC October 8, 2014
King St. South, Alliston, ON
Clair Rd. East, Guelph, ON
October 8, 2014
October 8, 2014
Provigo
Provigo
Zehrs
Zehrs
Wanuskewin Rd., Saskatoon, SK
October 8, 2014
Extra Foods
Superior St., Devon, AB
100th Ave., Peace River, AB
Gladwin Rd., Abbotsford, BC
October 8, 2014
Extra Foods
October 8, 2014
no frills
Stand-alone retail
Stand-alone retail
Stand-alone retail
Stand-alone retail
Stand-alone retail
Stand-alone retail
Stand-alone retail
Stand-alone retail
36,422
17,841
78,425
50,369
35,325
32,644
38,759
20,260
18,344
12,213
139,695
28,561
147,420
139,265
14,512
43,000
27,516
72,247
39,956
48,754
30,918
58,225
October 8, 2014
Real Canadian Superstore
Stand-alone retail
141,487
Old Airport Rd., Yellowknife, NT
October 8, 2014
Extra Foods
Stand-alone retail
2nd Ave., Whitehorse, YT
October 8, 2014
Real Canadian Superstore
Stand-alone retail
Bathurst/Lake Shore, Toronto, ON
December 9, 2014 N/A
Land
60,970
90,211
N/A
100%
N/A
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
N/A
Continued...
Choice Properties REIT 2014 Annual Report 38
Location
Acquisition Date
Banner
Property Type
(in square feet) Occupancy
GLA
Acquisitions from Loblaw (continued):
Prince Rupert Street, Stephenville, NL
Scott Street, New Liskeard, ON
Ellice Avenue, Winnipeg, MB
99 Street NW, Edmonton, AB
Columbia Avenue, Castlegar, BC
Alaska Avenue, Dawson Creek, BC
Carlaw Ave., Toronto, ON
Bloor St. W, Toronto, ON
May 6, 2014
May 6, 2014
May 6, 2014
May 6, 2014
May 6, 2014
May 6, 2014
October 8, 2014
October 8, 2014
no frills
no frills
no frills
no frills
Dominion
Multi-tenant retail
Your Independent Grocer
Multi-tenant retail
Real Canadian Wholesale Club Multi-tenant retail
Real Canadian Wholesale Club Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Broadview Ave., Toronto, ON
October 8, 2014
Loblaws
Portage Ave., Winnipeg, MB
October 8, 2014
Real Canadian Superstore Multi-tenant retail
The following details the acquisitions in 2013:
100%
100%
100%
100%
75%
74%
98%
100%
100%
85%
98%
45,673
56,642
74,011
112,378
57,036
39,923
125,771
15,778
33,163
147,458
2,595,378
GLA
Location
Acquisition Date
Banner
Property Type
(in square feet) Occupancy
Acquisitions from Loblaw
160th Street, Surrey, BC
December 19, 2013 N/A
SE Marine Drive, Vancouver, BC
October 22, 2013
Real Canadian Superstore
Hurontario Street, Collingwood, ON
October 22, 2013
Loblaws
Yonge Street, Toronto, ON
Avenue Road, Toronto, ON
October 22, 2013
Loblaws
October 22, 2013
no frills
Lakeshore Boulevard, Toronto, ON
October 22, 2013
no frills
Land
Stand-alone retail
and warehouse
Stand-alone retail
Stand-alone retail
Stand-alone retail
Stand-alone retail
Highway 7, Porter’s Lake, NS
October 22, 2013
Atlantic Superstore
Multi-tenant retail
Main Street, Salisbury, NB
October 22, 2013
Save Easy
Bullock Drive, Markham, ON
October 22, 2013
N/A
Highway 8, Stoney Creek, ON
October 22, 2013
Fortinos
Wilson Avenue, Toronto, ON
December 19, 2013 no frills
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Acquisition from Third-Party
Oxford Street, London, ON
October 28, 2013
N/A
Multi-tenant retail
N/A
621,177
57,795
33,700
13,299
32,011
54,300
17,291
12,102
92,546
47,344
5,538
987,103
N/A
100%
100%
100%
100%
100%
100%
97%
100%
100%
100%
100%
100%
Choice Properties REIT 2014 Annual Report 39
Financial Results
Management’s Statement of Responsibility for Financial Reporting
Independent Auditor’s Report
Consolidated Balance Sheets
Consolidated Statements of Income and Comprehensive Income
Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
Note 1.
Note 2.
Note 3.
Note 4.
Note 5.
Note 6.
Note 7.
Note 8.
Note 9.
Nature and Description of the Trust
Significant Accounting Policies
Critical Accounting Judgments and Estimates
Future Accounting Standards
Public Offerings and Acquisition of Initial Properties
Acquisitions
Investment Properties
Interests in Other Entities
Accounts Receivable and Other Assets
Note 10. Notes Receivable
Note 11.
Long Term Debt and Class C LP Units
Note 12. Credit Facility
Note 13. Trade Payables and Other Liabilities
Note 14. Unit Equity
Note 15. Unit-Based Compensation
Note 16. Rental Revenue
Note 17. Net Interest Expense and Other Financing Charges
Note 18. Employee Costs
Note 19. Capital Management
Note 20. Fair Value Measurements
Note 21. Financial Risk Management
Note 22. Contingent Liabilities and Financial Guarantees
Note 23. Related Party Transactions
Note 24. Subsequent Events
Note 25. Supplementary Information
41
42
43
44
45
46
47
47
47
52
53
53
55
56
58
59
59
60
62
62
63
64
66
67
67
67
68
69
71
71
74
75
Choice Properties REIT 2014 Annual Report 40
Management’s Statement of Responsibility for Financial Reporting
The management of Choice Properties Real Estate Investment Trust (the “Trust”) is responsible for the preparation, presentation and integrity
of the accompanying consolidated financial statements, Management’s Discussion and Analysis and all other information in the Annual Report
- Financial Results (“Annual Report”). This responsibility includes the selection and consistent application of appropriate accounting principles
and methods in addition to making the judgments and estimates necessary to prepare the consolidated financial statements in accordance
with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). It also includes
ensuring that the financial information presented elsewhere in the Annual Report is consistent with that in the consolidated financial statements.
Management is also responsible to provide reasonable assurance that assets are safeguarded and that relevant and reliable financial
information is produced. Management is required to design a system of internal controls and certify as to the design and operating effectiveness
of internal controls over financial reporting. A dedicated control compliance team reviews and evaluates internal controls, the results of which
are shared with management on a quarterly basis. KPMG LLP, whose report follows, are the independent auditors engaged to audit the
consolidated financial statements of the Trust.
The Board of Trustees, acting through an Audit Committee comprised solely of directors who are independent, is responsible for determining
that management fulfills its responsibilities in the preparation of the consolidated financial statements and the financial control of operations.
The Audit Committee recommends the independent auditors for appointment by the Unitholders. The Audit Committee meets regularly with
senior and financial management and the independent auditors to discuss internal controls, auditing activities and financial reporting matters.
The independent auditors and internal auditors have unrestricted access to the Audit Committee. These consolidated financial statements
and Management’s Discussion and Analysis have been approved by the Board of Trustees for inclusion in the Annual Report based on the
review and recommendation of the Audit Committee.
Toronto, Canada
February 24, 2015
[signed]
John R. Morrison
President and Chief Executive Officer
[signed]
Bart Munn, CPA, CA
Executive Vice President, Chief Financial Officer
Choice Properties REIT 2014 Annual Report 41
KPMG LLP
Bay Adelaide Centre
333 Bay Street Suite 4600
Toronto ON M5H 2S5
Canada
Telephone
Fax
Internet
(416) 777-8500
(416) 777-8818
www.kpmg.ca
INDEPENDENT AUDITORS' REPORT
To the Unitholders of Choice Properties Real Estate Investment Trust
We have audited the accompanying consolidated financial statements of Choice Properties Real
Estate Investment Trust, which comprise the consolidated balance sheets as at December 31, 2014
and December 31, 2013, the consolidated statements of income and comprehensive income,
changes in equity and cash flows for the year ended December 31, 2014 and for the period
from May 21, 2013 to December 31, 2013, and notes, comprising a summary of significant
accounting policies and other explanatory information.
Management's Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with International Financial Reporting Standards, and for such internal
control as management determines is necessary to enable the preparation of consolidated financial
statements that are free from material misstatement, whether due to fraud or error.
Auditors' Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our
audits. We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we comply with ethical requirements and plan and perform
the audit to obtain reasonable assurance about whether the consolidated financial statements are
free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures
in the consolidated financial statements. The procedures selected depend on our judgment, including
the assessment of the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error. In making those risk assessments, we consider internal control
relevant to the entity's preparation and fair presentation of the consolidated financial statements in
order to design audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the entity's internal control. An audit also includes
evaluating the appropriateness of accounting policies used and the reasonableness of accounting
estimates made by management, as well as evaluating
the
consolidated financial statements.
the overall presentation of
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to
provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the
consolidated financial position of Choice Properties Real Estate Investment Trust as at December 31,
2014 and December 31, 2013, and its consolidated financial performance and its consolidated
cash flows for the year ended December 31, 2014 and for the period from May 21, 2013 to
December 31, 2013 in accordance with International Financial Reporting Standards.
Chartered Professional Accountants, Licensed Public Accountants
February 24, 2015
Toronto, Canada
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.
Choice Properties Real Estate Investment Trust
Consolidated Balance Sheets
(in thousands of Canadian dollars)
Assets
Non-current Assets
Investment properties (note 7)
Equity accounted investments (note 8)
Accounts receivable and other assets (note 9)
Notes receivable (note 10)
Current Assets
Accounts receivable and other assets (note 9)
Notes receivable (note 10)
Cash and cash equivalents
Total Assets
Liabilities and Equity
Non-current Liabilities
Long term debt and Class C LP Units (note 11)
Credit facility (note 12)
Exchangeable Units (note 14)
Trade payables and other liabilities (note 13)
Current Liabilities
Long term debt due within one year (note 11)
Trade payables and other liabilities (note 13)
Total Liabilities
Equity
Unitholders’ equity
Non-controlling interests (note 8)
Total Equity
Total Liabilities and Equity
Contingent Liabilities and Financial Guarantees (note 22)
Subsequent Events (notes 23 and 24)
See accompanying notes to the consolidated financial statements.
Approved on behalf of the Board of Trustees
[signed]
Galen G. Weston
Board of Trustees Chairman
As at
December 31, 2014
As at
December 31, 2013
$
7,905,978
$
7,287,759
6,230
10,057
22,539
—
7,693
—
7,944,804
7,295,452
9,473
236,829
1,332
247,634
8,192,438
$
8,828
92,057
51,405
152,290
7,447,742
3,435,628
$
3,286,442
120,187
3,207,216
1,020
6,764,051
993
388,997
389,990
7,154,041
1,030,701
7,696
1,038,397
8,192,438
$
$
—
2,988,466
379
6,275,287
89,725
211,078
300,803
6,576,090
871,652
—
871,652
7,447,742
$
$
$
[signed]
Paul R. Weiss
Audit Committee Chairman
Choice Properties REIT 2014 Annual Report 43
Choice Properties Real Estate Investment Trust
Consolidated Statements of Income and Comprehensive Income
For the year ended December 31, 2014, and the period from May 21, 2013 to December 31, 2013
(in thousands of Canadian dollars)
2014
2013
Net Property Income
Rental revenue from investment properties (note 16)
$
682,923
$
Property operating costs (note 25)
Net Property Income
Other Expenses
General and administrative expenses (note 25)
Amortization of other assets
Net interest expense and other financing charges (note 17)
Fair value adjustment on Exchangeable Units (note 14)
Fair value adjustment on investment properties (note 7)
Loss on disposal of investment properties (note 7)
Net Income and Comprehensive Income
Net Income and Comprehensive Income attributable to:
Choice Properties Unitholders
Non-controlling interests (note 8)
See accompanying notes to the consolidated financial statements.
$
$
$
(172,550)
510,373
(23,315)
(414)
(380,654)
12,143
81,931
(450)
199,614
$
318,507
(79,756)
238,751
(12,234)
(472)
(155,785)
(147,401)
144,289
—
67,148
199,614
—
199,614
$
$
67,148
—
67,148
Choice Properties REIT 2014 Annual Report 44
Choice Properties Real Estate Investment Trust
Consolidated Statements of Changes in Equity
Attributable to Choice Properties Unitholders
Cumulative
Distributions
to
Unitholders
Total
Unitholders’
Equity
871,652
Non-
controlling
interests
$
(27,911) $
$
— $
For the year ended December 31, 2014
(in thousands of Canadian dollars)
Equity, December 31, 2013
Trust Units
832,415
$
Net Income
Distributions
Issuance of Units under the Distribution
Reinvestment Plan (note 14)
Issuance of Units under unit-based
compensation arrangement (note 14)
Contribution from non-controlling interest
(note 8)
—
—
15,682
1,240
—
Cumulative
Net Income
67,148
$
199,614
—
—
—
—
—
(57,487)
199,614
(57,487)
—
—
—
15,682
1,240
—
Equity, December 31, 2014
$
849,337
$
266,762
$
(85,398) $ 1,030,701
$
Total Equity
871,652
—
—
—
—
7,696
7,696
199,614
(57,487)
15,682
1,240
7,696
$ 1,038,397
For the period from May 21, 2013 to December 31,
2013
(in thousands of Canadian dollars)
Cumulative
Net Income
Cumulative
Distributions
to Unitholders
Total
Unitholders’
Equity
Non-
Controlling
Interests
Trust Units
Attributable to Choice Properties Unitholders
Equity, May 21, 2013
$
— $
— $
67,148
—
—
—
(27,911)
— $
—
— $
— $
67,148
(27,911)
—
—
Total Equity
—
67,148
(27,911)
1,148
831,267
832,415
$
$
—
—
67,148
$
—
—
(27,911) $
1,148
831,267
871,652
$
—
—
— $
1,148
831,267
871,652
Net Income
Distributions
Issuance of Units, under the Distribution
Reinvestment Plan (note 14)
Issuance of Units, net of costs (note 14)
Equity, December 31, 2013
See accompanying notes to the consolidated financial statements.
Choice Properties REIT 2014 Annual Report 45
Choice Properties Real Estate Investment Trust
Consolidated Statements of Cash Flows
For the year ended December 31, 2014, and the period from May 21, 2013 to December 31, 2013
(in thousands of Canadian dollars)
Operating Activities
2014
2013
Net Income
Amortization of straight-line rent
Amortization of tenant improvement allowances
Amortization of other assets
Net interest expense and other financing charges (note 17)
Value of unit-based compensation granted (note 15)
Fair value adjustment on Exchangeable Units
Fair value adjustment on investment properties
Loss on disposal of investment property
Leasing capital expenditures (note 7)
Interest received
Net change in non-cash working capital (note 25)
Cash Flows from Operating Activities
Investing Activities
Acquisition of initial properties (note 6)
Acquisitions of investment properties (note 6)
Additions to investment properties (note 7)
Additions to fixtures and equipment
Notes receivable issued to third-party (note 10)
Equity investment (note 8)
Proceeds of disposition (note 7)
Cash Flows used in Investing Activities
Financing Activities
Long term debt
Issued - Senior unsecured debentures, net of debt placement costs (note 11)
Retired - Transferor Notes (note 11)
Retired - Class A LP Notes (note 5)
Principal repayments - Mortgage
Credit facility, net of debt placement costs (note 12)
Notes receivable
Issued to related party (note 10)
Repaid by related party (note 10)
Issuance of Trust Units
Trust Unit issue costs
Cash received on exercise of options
Interest paid
Distributions paid on Exchangeable Units
Distributions paid to Unitholders
Contribution from non-controlling interest (note 8)
Cash Flows used in Financing Activities
Change in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and Cash Equivalents, end of year
$
199,614
$
(34,634)
456
414
380,654
1,513
(12,143)
(81,931)
450
(2,785)
393
24,367
476,368
—
(220,526)
(55,636)
(4,323)
(23,000)
(6,230)
13,030
(296,685)
447,540
(440,000)
—
(246)
121,685
(236,328)
92,057
—
—
1,188
(108,413)
(73,219)
(41,716)
7,696
(229,756)
(50,073)
51,405
$
1,332
$
67,148
(16,484)
8
472
155,785
825
147,401
(144,289)
—
(1,250)
324
78,241
288,181
(23,910)
(73,316)
(11,785)
(2,871)
—
—
—
(111,882)
597,050
(660,000)
(544,821)
—
(2,175)
(92,057)
—
660,000
(43,733)
—
(17,141)
—
(22,017)
—
(124,894)
51,405
—
51,405
Supplemental disclosure of non-cash operating, investing and financing activities (note 25). See accompanying notes to the consolidated financial statements.
Choice Properties REIT 2014 Annual Report 46
Choice Properties Real Estate Investment Trust
Notes to the Consolidated Financial Statements
For the year ended December 31, 2014, and the period from May 21, 2013 to December 31, 2013 (in thousands of Canadian dollars except where otherwise indicated)
Note 1. Nature and Description of the Trust
Choice Properties Real Estate Investment Trust (“Choice Properties” or the “Trust”) is an unincorporated, open-ended mutual fund trust
governed by the laws of the Province of Ontario and established pursuant to a declaration of trust (the “Declaration of Trust”) dated May 21,
2013. Choice Properties owns income-producing commercial properties located in Canada. The principal, registered, and head office of Choice
Properties is located at 22 St. Clair Avenue East, Suite 500, Toronto, Ontario, M4T 2S5. Choice Properties’ Units are listed on the Toronto
Stock Exchange and are traded under the symbol “CHP.UN”.
Choice Properties commenced operations on July 5, 2013 when it issued units and debt for cash pursuant to an initial public offering and
completed the acquisition of 425 properties from Loblaw Companies Limited and its subsidiaries (“Loblaw”). From May 21, 2013 to July 5,
2013, Choice Properties had no operations or activity other than holding ten dollars in cash and an equivalent amount of equity, and as such,
the disclosure for the period ended December 31, 2013 only includes operations from July 5, 2013 to December 31 2013.
The parent of Choice Properties is Loblaw, which held an 82.9% effective interest in Choice Properties as at December 31, 2014. Loblaw’s
controlling shareholder is George Weston Limited (“GWL”), which held an approximate 46% ownership of Loblaw’s outstanding common
shares and a 5.4% direct interest in Choice Properties as at December 31, 2014.
The active subsidiaries of the Trust included in Choice Properties’ consolidated financial statements are Choice Properties Limited Partnership
(the “Partnership”) and Choice Properties GP Inc.
Note 2. Significant Accounting Policies
Statement of Compliance The consolidated financial statements of Choice Properties are prepared in accordance with International Financial
Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and using the accounting policies described
herein.
These consolidated financial statements were authorized for issuance by Choice Properties' Board of Trustees (“Board”) on February 24,
2015.
Basis of Preparation The consolidated financial statements were prepared on a historical cost basis except for the following items that were
measured at fair value:
•
•
•
investment properties as described in note 7;
liabilities for unit-based compensation arrangements as described in note 15; and
Class B LP Units (the “Exchangeable Units”) which are exchangeable for Trust Units (“Units”) at the option of the holder as described in
note 14.
The consolidated financial statements are presented in thousands of Canadian dollars, which is the Trust’s functional currency.
Basis of Consolidation The consolidated financial statements include the accounts of Choice Properties and other entities that the Trust
controls. Subsidiaries are entities over which the Trust has control. Choice Properties controls an entity when the Trust has power over the
entity, has exposure, or rights, to variable returns from its involvement with the entity, and has the ability to use its power to affect its returns.
Choice Properties reassesses control on an ongoing basis.
When Choice Properties does not own all of the equity in a subsidiary, the non-controlling equity interest is disclosed in the consolidated
balance sheet as a separate component of total equity. Transactions with non-controlling interests are treated as transactions with equity
owners of the Trust. Changes in the Trust’s ownership interest in its subsidiaries are accounted for as equity transactions. Transactions and
balances between the Trust and its subsidiaries have been eliminated on consolidation.
Joint Arrangements Joint arrangements are arrangements of which two or more parties have joint control. Joint control is the contractual
sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties
sharing control. Joint arrangements are classified as either joint operations or joint ventures depending on the Trust’s rights and obligations
in the arrangement based on factors such as the structure, legal form and contractual terms of the arrangement.
Choice Properties REIT 2014 Annual Report 47
Joint Ventures A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net
assets of the joint arrangement.
The Trust’s investment in a joint venture is recorded using the equity method and is initially recognized in the consolidated balance sheet at
cost and adjusted thereafter to recognize the Trust’s share of the profit or loss and other comprehensive income of the joint venture. The
Trust’s share of the joint venture’s profit or loss is recognized in the Trust’s consolidated statements of income and comprehensive income.
The financial statements of the equity-accounted investment are prepared for the same reporting period as the Trust. Where necessary,
adjustments are made to bring the accounting policies in line with those of the Trust.
A joint venture is considered to be impaired if there is objective evidence of impairment, as a result of one or more events that occurred after
initial recognition of the joint venture, and that event has a negative impact on the future cash flows of the joint venture that can be reliably
estimated.
Joint Operations A joint operation is a joint arrangement whereby the parties that have joint control have rights to the assets and obligations
for the liabilities relating to the arrangement.
The financial statements of the joint operations are prepared for the same reporting period as the Trust. Where necessary, adjustments are
made to bring the accounting policies in line with those of the Trust.
The Trust recognizes its proportionate share of assets, liabilities, revenues and expenses of joint operations.
Investment Properties Investment properties include income producing properties and properties under development that are held by Choice
Properties to earn rental income or for capital appreciation or both.
Acquired investment properties are initially measured at cost, including directly attributable acquisition costs, if the transaction is deemed to
be an asset acquisition.
Subsequent capital expenditures are recorded to investment properties only when it is probable that future economic benefits of the expenditure
will flow to Choice Properties and the cost can be measured reliably. All other repair and maintenance costs are expensed when incurred.
Costs capitalized to income properties include:
•
Costs capitalized, due to construction or development, include site intensification fees, project management fees, borrowing costs,
professional fees and property taxes;
Initial direct leasing costs, incurred by Choice Properties in negotiating and arranging tenant leases; and
Payments to tenants under lease obligations which are characterized either as tenant improvements, tenant inducements or building
cost. The obligation is determined to be a building cost, and not a leasing cost, when the payment is for construction from which Choice
Properties will receive benefit after the tenant vacates. The obligation is determined to be a tenant improvement when the payment to
the tenant was spent on leasehold improvements. Otherwise, the obligations under the lease are treated as tenant inducements. Both
tenant improvements and tenant inducements are amortized on a straight-line basis over the term of the lease as a reduction of revenue.
•
•
Costs capitalized to properties under development include:
•
Costs capitalized, due to construction or development, include site intensification fees, project management fees, borrowing costs,
professional fees and property taxes.
Directly attributable borrowing costs associated with acquiring or constructing a qualifying investment property are capitalized. Capitalization
of borrowing costs commences when the activities necessary to prepare an asset for development or redevelopment begin, and ceases once
the asset is substantially complete, or suspended if the development of the asset is suspended. The amount of borrowing costs capitalized
is determined first by reference to borrowings specific to the project, where relevant, and otherwise by applying a weighted average cost of
borrowings to eligible expenditures after adjusting for borrowings associated with other specific developments.
Subsequent to initial recognition, investment properties are measured at fair value, determined based on available market evidence. If market
evidence is not available, Choice Properties uses alternative valuation methods such as recent transaction prices in less active markets or
discounted cash flow projections. The portfolio is internally appraised and external valuations are also performed each quarter for a portion
of the portfolio. Substantially all properties will be subject to an external valuation at least once over a 5-year period. The fair value of investment
properties reflects, among other things, rental income from current leases and assumptions about rental income from future leases in light of
current market conditions. Related fair value gains and losses are recognized in net income in the year in which they arise.
Related fair value gains and losses are recorded in net income in the period in which they arise.
Gains or losses from the disposal of investment properties are determined as the difference between the net disposal proceeds and the
carrying amount and are recognized in net income in the year of disposal.
Choice Properties REIT 2014 Annual Report 48
Cash and Cash Equivalents Cash and cash equivalents consists of unrestricted cash on hand and marketable investments with an original
maturity date of 90 days or less from the date of acquisition.
Financial Instruments Financial assets and liabilities are recognized when Choice Properties becomes a party to the contractual provision
of the financial instrument. Financial instruments, upon initial recognition, are measured at fair value and classified as either financial assets
or financial liabilities at fair value through profit or loss, held-to-maturity investments, loans and receivables, or other financial liabilities. Financial
instruments are included on the consolidated balance sheet and measured after initial recognition at fair value, except for loans and receivables,
held-to-maturity financial assets, and other financial liabilities, which are measured at amortized cost.
Classification The following summarizes the classification and measurement of financial assets and liabilities:
Classification
Measurement
Financial assets
Accounts receivable
Notes receivable
Cash and cash equivalents
Financial liabilities
Long term debt and Class C LP Units:
Transferor Notes
Senior Unsecured Debentures
Class C LP Units
Credit Facility
Trade payable and other liabilities
Exchangeable Units
Loans and receivables
Loans and receivables
Fair value through profit or loss
Other financial liabilities
Other financial liabilities
Other financial liabilities
Other financial liabilities
Other financial liabilities
Fair value through profit or loss
Amortized cost
Amortized cost
Fair value
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Fair value
The Trust has not classified any assets as held to maturity.
Exchangeable Units The Class B LP Units of Choice Properties’ subsidiary are exchangeable into Trust Units at the option of the holder.
Loblaw holds all of the Exchangeable Units. These Exchangeable Units are considered puttable instruments and are required to be classified
as financial liabilities at fair value through profit or loss. The distributions paid on the Exchangeable Units are accounted for as interest expense.
Class C LP Units The Class C LP Units held by Loblaw provide for fixed cumulative monthly distributions from the Partnership to the holder
of the Class C LP Units to be paid in priority, subject to certain restrictions. These Class C LP Units are redeemable at Loblaw’s option and
the Trust has the option to settle the redemption payment in cash, Exchangeable Units, or any combination thereof. The Class C LP Units
have been classified as financial liabilities and are carried at amortized cost. Distributions on the Class C LP Units are accounted for as interest
expense.
Fair Value Choice Properties measures financial assets and financial liabilities under the following fair value hierarchy. The different levels
have been defined as follows:
•
•
•
Fair Value Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;
Fair Value Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly
(i.e. as prices) or indirectly (i.e. derived from prices); and
Fair Value Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).
Determination of fair value and the resulting hierarchy requires the use of observable market data whenever available. The classification of
a financial instrument in the hierarchy is based upon the lowest level of input that is significant to the measurement of fair value.
Acquisition costs, other than those related to financial instruments classified as fair value through profit or loss which are expensed as incurred,
are capitalized to the carrying amount of the instrument and amortized using the effective interest method.
Gains and losses on fair value through profit or loss financial assets and financial liabilities are recognized in net income.
Valuation process The determination of the fair value of financial instruments is performed by Choice Properties’ treasury and financial
reporting departments on a quarterly basis. The following table describes the valuation techniques used in the determination of the fair values
of financial instruments:
Choice Properties REIT 2014 Annual Report 49
Type
Valuation approach
Accounts receivable, notes receivable, cash and
cash equivalents, and accounts payable
The carrying amount approximates fair value due to the short term maturity of
these instruments.
Unit Options
Restricted Units and Trustee Deferred Units
Exchangeable Units
Long term debt and Class C LP Units
Fair value of each tranche is valued separately using a Black-Scholes option
pricing model.
Fair value is based on the closing market trading prices of Choice Properties’
Units.
Fair value is based on the closing market trading prices of Choice Properties’
Units.
Fair value is based on the present value of contractual cash flows, discounted at
Choice Properties’ current incremental borrowing rate for similar types of
borrowing arrangements or, where applicable, quoted market prices.
De-recognition of Financial Instruments Financial assets are derecognized when the contractual rights to receive cash flows and benefits
from the financial asset expire, or if Choice Properties transfers the control or substantially all the risks and rewards of ownership of the
financial asset to another party. The difference between the assets carrying amount and the sum of the consideration received and receivable
is recognized in net income.
Financial liabilities are derecognized when obligations under the contract expire, are discharged or cancelled. The difference between the
carrying amount of the financial liability derecognized and the consideration paid and payable is recognized in net income.
Impairment of Financial Assets An assessment of whether there is objective evidence that the Trust’s assets or a group of financial assets
is impaired is performed at each balance sheet date. A financial asset or group of financial assets is considered to be impaired if one or more
loss events that have an impact on the estimated future cash flows occur after their initial recognition and the loss can be reliably measured.
If such objective evidence has occurred, the loss is based on the difference between the carrying amount of the financial asset, or portfolio
of financial assets, and the respective estimated future cash flows discounted at the financial assets’ original effective interest rate. Impairment
losses are recorded in net income with the carrying amount of the financial assets or group of financial assets reduced through the use of
impairment allowance accounts.
In periods subsequent to the impairment where the impairment loss has decreased, and such decrease can be related objectively to an event
occurring after the impairment was initially recognized, the previously recognized impairment loss is reversed through net income. The
impairment reversal is limited to the lesser of the decrease in impairment or the extent that the carrying amount of the financial asset at the
date the impairment is reversed does not exceed what the amortized cost would have been had the impairment not been recognized, after
the reversal.
Trust Units With certain restrictions, Choice Properties’ Units are redeemable at the option of the holder, and, therefore, are considered
puttable instruments in accordance with IAS 32, “Financial Instruments - Presentation” (“IAS 32”). Puttable instruments are required to be
accounted for as financial liabilities, except where certain conditions are met in accordance with IAS 32, in which case, the puttable instruments
may be presented as equity.
To be presented as equity, a puttable instrument must meet all of the following conditions: (i) it must entitle the holder to a pro-rata share of
the entity’s net assets in the event of the entity’s dissolution; (ii) it must be in the class of instruments that is subordinate to all other instruments;
(iii) all instruments in the class in (ii) above must have identical features; (iv) other than the redemption feature, there can be no other contractual
obligations that meet the definition of a liability; and (v) the expected cash flows for the instrument must be based substantially on the profit
or loss of the entity or change in fair value of the instrument.
The Trust Units meet the conditions of IAS 32 and accordingly are presented as equity in the consolidated financial statements.
Revenue Recognition Choice Properties has retained substantially all of the risks and benefits of ownership of its investment properties
and, therefore, accounts for its leases with tenants as operating leases.
Rental revenue includes base rents earned from tenants under lease agreements, realty tax and operating cost recoveries and other incidental
income. Base rent revenue, including predetermined rent adjustments in lease agreements, is recognized as revenue on a straight-line basis
over the term of the underlying leases. Other revenue is recognized as the service is provided and when collection is reasonably assured.
Property tax and operating cost recoveries are recognized in the period that recoverable costs are chargeable to tenants. Percentage
participation rents are recognized when tenants’ specified sales targets have been met as set out in the lease agreements.
Choice Properties REIT 2014 Annual Report 50
Short Term Employee Benefits Short term employee benefits include wages, salaries, compensated absences, profit-sharing and bonuses.
Short term employee benefit obligations are measured on an undiscounted basis and are recognized in net income as the related service is
provided. A liability is recognized for the amount expected to be paid under short term cash bonus or profit-sharing plans if Choice Properties
has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can
be estimated reliably.
Post Employment Benefits Choice Properties participates in certain Loblaw defined contribution pension plans. Choice Properties’ obligation
to Loblaw is limited to the annual contributions to the plan. Accordingly, the contributions are accounted for based on Choice Properties'
proportionate share of contributions due.
Cash-Settled Unit-Based Compensation Unit Options, Restricted Units (“RUs”) and Trustee Deferred Units (“DUs”) issued by Choice
Properties are accounted for as cash-settled awards.
Choice Properties’ Unit Options have a five to ten year term, vest 25% cumulatively on each anniversary date of the grant and are exercisable
at the designated Unit price, which is based on the greater of the volume weighted average trading price of a Unit for the five trading days
prior to the date of grant or the trading day immediately preceding the grant date. The fair value of each tranche is valued separately using a
Black-Scholes option pricing model, and includes the following assumptions:
•
•
•
•
The expected distribution yield is estimated based on the expected annual distribution prior to the balance sheet date and the closing
share price as at the balance sheet date;
The expected Unit price volatility is estimated based on the average volatility of investment grade entities in the Standard & Poor’s/
TSX REIT Index over a period consistent with the expected life of the options;
The risk-free interest rate is estimated based on the Government of Canada bond yield in effect at the balance sheet date for a term
to maturity equal to the expected life of the options; and
The effect of expected exercise of options prior to expiry is incorporated into the weighted average expected life of the options,
which is based on expectations of option holder behaviour.
RUs entitle certain employees to receive the value of the RU award in cash or Units at the end of the applicable vesting period, which is
usually three years in length. The RU plan provides for the crediting of additional RUs in respect of distributions paid on Units for the period
when an RU is outstanding. The fair value of each RU granted is measured based on the market value of a Unit at the balance sheet date.
Members of the Choice Properties’ Board of Trustees, who are not management of Choice Properties, are required to receive a portion of
their annual retainer in the form of DUs and may also elect to receive up to 100% of their remaining fees in DUs. Distributions paid earn
fractional DUs, which are treated as additional awards. DUs vest upon grant. The fair value of each DU granted is measured based on the
market value of a Unit at the balance sheet date.
The fair value of the amount payable to employees in respect of these cash settled awards plan is re-measured at each balance sheet date,
and a compensation expense is recognized in general and administrative expenses over the vesting period for each tranche with a
corresponding change in the liability.
Income Taxes Choice Properties qualifies as a “mutual fund trust” under the Income Tax Act (Canada). The Trustees intend to annually
distribute all taxable income directly earned by the Trust to Unitholders and to deduct such distributions for income tax purposes.
Legislation relating to the federal income taxation of Specified Investment Flow Through trusts or partnerships ("SIFT") provide that certain
distributions from a SIFT will not be deductible in computing the SIFT’s taxable income and that the SIFT will be subject to tax on such
distributions at a rate that is substantially equivalent to the general tax rate applicable to Canadian corporations. However, distributions paid
by a SIFT as return of capital should generally not be subject to tax.
Under the SIFT rules, the taxation regime will not apply to a real estate investment trust (“REIT”) that meets prescribed conditions relating to
the nature of its assets and revenue (the “REIT Conditions”). Choice Properties has reviewed the SIFT rules and has assessed its interpretation
and application to the REIT's assets and revenue. While there are uncertainties in the interpretation and application of the SIFT rules, Choice
Properties has determined that it meets the REIT Conditions and accordingly, no net current income tax expense or deferred income tax
assets or liabilities have been recorded in the consolidated financial statements.
Accounting Standards Implemented in 2014
In 2011, amendments were issued to IAS 32, “Financial Instruments: Presentation”. These amendments are required to be applied for periods
beginning on or after January 1, 2014. Choice Properties implemented these amendments prospectively in the first quarter of 2014.
In 2013, the IASB issued International Financial Reporting Interpretations Committee (“IFRIC” 21), “Levies”. The IFRIC addresses accounting
for a liability to pay a levy within the scope of IAS 37, “Provisions, Contingent Liabilities and Contingent Assets”. A levy is an outflow of resources
Choice Properties REIT 2014 Annual Report 51
embodying economic benefits that is imposed by governments on entities in accordance with legislation, other than income taxes within the
scope of IAS 12, “Income Taxes” and fines or other penalties imposed for breaches of the legislation. This interpretation became effective for
annual periods beginning on or after January 1, 2014, and is to be applied retrospectively. Choice Properties implemented IFRIC 21
retrospectively in the first quarter of 2014.
The Trust has assessed the impact of the above and concluded there were no significant impacts on the Trust’s consolidated financial
statements.
Note 3. Critical Accounting Judgments and Estimates
The preparation of the consolidated financial statements requires management to make judgments and estimates in applying Choice Properties’
accounting policies that affect the reported amounts and disclosures made in the consolidated financial statements and accompanying notes.
Within the context of these consolidated financial statements, a judgment is a decision made by management in respect of the application of
an accounting policy, a recognized or unrecognized financial statement amount and/or note disclosure, following an analysis of relevant
information that may include estimates and assumptions. Estimates and assumptions are used mainly in determining the measurement of
balances recognized or disclosed in the consolidated financial statements and are based on a set of underlying data that may include
management’s historical experience, knowledge of current events and conditions and other factors that are believed to be reasonable under
the circumstances. Management continually evaluates the estimates and judgments it uses.
The following are the accounting policies subject to judgments and key sources of estimation uncertainty that Choice Properties believes
could have the most significant impact on the amounts recognized in the consolidated financial statements. Choice Properties’ significant
accounting policies are disclosed in note 2.
Investment Properties
Judgments Made in Relation to Accounting Policies Applied Judgment is applied in determining whether certain costs are additions to
the carrying value of investment properties, identifying the point at which substantial completion of the property occurs, and identifying the
directly attributable borrowing costs to be included in the carrying value of the development property.
Choice Properties also applies judgment in determining whether the properties it acquires are considered to be asset acquisitions or business
combinations. Choice Properties considers all the properties it has acquired to date to be asset acquisitions.
Key Sources of Estimation The fair value of investment properties is dependent on available comparable transactions, future cash flows
over the holding period and discount rates and capitalization rates applicable to those assets. The review of anticipated cash flows involves
assumptions relating to occupancy, rental rates and residual value. In addition to reviewing anticipated cash flows, management assesses
changes in the business climate and other factors, which may affect the ultimate value of the property. These assumptions may not ultimately
be achieved.
Joint Arrangements
Judgments Made in Relation to Accounting Policies Applied Judgment is applied in determining whether the Trust has joint control and
whether the arrangements are joint operations or joint ventures. In assessing whether the joint arrangements are joint operations or joint
ventures, management applies judgment to determine the Trust’s rights and obligations in the arrangement based on factors such as the
structure, legal form and contractual terms of the arrangement.
Leases
Judgments Made in Relation to Accounting Policies Applied Choice Properties is required to make judgments in determining whether
certain leases are operating or finance leases, in particular long-term leases. All tenant leases where Choice Properties is the lessor have
been determined to be operating leases.
Income Taxes
Judgments Made in Relation to Accounting Policies Applied Choice Properties is a mutual fund trust and a REIT as defined in the Income
Tax Act (Canada). Choice Properties is not liable to pay Canadian income taxes provided that its taxable income is fully distributed to Unitholders
each year. Choice Properties is a REIT if it meets the prescribed conditions under the Income Tax Act (Canada) relating to the REIT Conditions.
Choice Properties uses judgment in reviewing the REIT Conditions and assessing its interpretation and application to the REIT’s assets and
revenue, and it has determined that it qualifies as a REIT for the current period.
Choice Properties expects to continue to qualify as a REIT under the Income Tax Act (Canada), however, should it no longer qualify, it would
not be able to flow through its taxable income to Unitholders and would therefore be subject to tax.
Choice Properties REIT 2014 Annual Report 52
Note 4. Future Accounting Standards
In May 2014, the IASB issued IFRS 15, “Revenue from Contracts with Customers” (“IFRS 15”). The new standard provides a comprehensive
framework for recognition, measurement and disclosure of revenue from contracts with customers, excluding contracts within the scope of
the standard on leases, insurance contracts and financial instruments. IFRS 15 becomes effective for annual periods beginning on or after
January 1, 2017, and is to be applied retrospectively. Early adoption is permitted. The Trust is currently assessing the impact of the new
standard on its consolidated financial statements.
In July 2014, the IASB issued IFRS 9, “Financial Instruments” (“IFRS 9”) replacing IAS 39, “Financial Instruments: Recognition and
Measurement.” The project had three main phases: classification and measurement, impairment, and general hedging. The standard becomes
effective for annual periods beginning on or after January 1, 2018 and is to be applied retrospectively. Early adoption is permitted. The Trust
is currently assessing the impact of the new standard on its consolidated financial statements.
In December 2014, the IASB issued amendments to IAS 1, “Presentation of Financial Statements”. The amendments are effective for annual
periods beginning on or after January 1, 2016 with early adoption permitted. The Trust intends to adopt these amendments in its financial
statements for the annual period beginning January 1, 2016, but does not expect the amendments to have a material impact on its consolidated
financial statements.
Note 5. Public Offerings and Acquisition of Initial Properties
On July 5, 2013 (the “Closing Date”), Choice Properties completed public offerings of equity and debt. Choice Properties also acquired a
portfolio of investment properties on the Closing Date.
Initial Public Offering
Choice Properties completed an initial public offering (the “IPO”) of Units, which closed July 5, 2013. Choice Properties raised gross proceeds
of $400,000 through the issuance of 40,000,000 Units at a price of $10.00 per Trust Unit (the “IPO Price”). Costs relating to the IPO were
approximately $40,661 and were applied against the gross proceeds of the IPO and charged against Unitholders’ Equity.
Concurrently with the IPO, subsidiaries of GWL (other than Loblaw and its subsidiaries) purchased 20,000,000 Units from Choice Properties
at the IPO Price for a total subscription price of $200,000.
On July 17, 2013, pursuant to the exercise of the over-allotment option granted to the underwriters in connection with the IPO, Choice Properties
issued a further 6,000,000 Units, resulting in net proceeds, after payment of the underwriters’ fees, of $57,000.
Issuance of Senior Unsecured Debentures
Choice Properties issued $600,000 in public debentures by way of $400,000 five-year Series A senior unsecured debentures (the “Series A
Debentures”) with a coupon rate of 3.554% and 10-year $200,000 Series B senior unsecured debentures (the “Series B Debentures”) with a
coupon rate of 4.903% (collectively the “IPO Debentures”).The IPO Debentures had a weighted average maturity of 6.7 years and a weighted
average interest rate of 4.0%. Costs relating to the issuance of the IPO Debentures were $2,950 and were applied against the gross proceeds
thereof.
Acquisition of Initial Properties
In connection with the IPO, Choice Properties acquired from subsidiaries of Loblaw (collectively, the “Transferors”), through an investment in
the newly created Partnership, a portfolio of 425 properties (the “Initial Properties”), comprising of 415 retail properties, one office complex
and nine warehouse properties. The retail properties are made up of: (i) 267 properties with a stand-alone retail store operating under a
Loblaw-owned banner; (ii) 143 properties anchored by a retail store operating under a
banner that also contain one or more
ancillary tenants; and (iii) five properties containing only ancillary tenants. The office complex consists of two office buildings and the warehouse
properties include two properties that host two and three warehouses respectively.
In connection with the closing of the IPO, the Partnership acquired from a trust established for the benefit of the Transferors (the “Transferor
Trust”), $2.6 billion aggregate principal amount of interest bearing notes issued by the Transferors to the Transferor Trust (the “Transferor
Trust Notes”) in exchange for the issuance of $2.6 billion aggregate principal amount of interest bearing notes payable to the Transferor Trust
(the “Transferor Notes”).
In exchange for the Initial Properties, Choice Properties issued, or assigned, as the case may be: (i) Exchangeable Units of the Partnership
(accompanied by an equivalent number of Special Voting Units); (ii) Class C LP Units of the Partnership; (iii) Class A LP Notes of the Partnership;
(iv) Class B LP Notes of the Partnership; and (v) the Transferor Notes. The purchase price allocated to the Initial Properties was $6,923,039
before acquisition costs of $1,600. The purchase of the Initial Properties has been accounted for as an asset acquisition.
Choice Properties REIT 2014 Annual Report 53
The fair value of the initial consideration has been allocated, to the identifiable assets acquired and liabilities assumed based on their fair
values, at the date of acquisition, as follows:
(in thousands of Canadian dollars)
Investment properties (including acquisition costs of $1,600)
Accounts receivable and other assets
Other liabilities
Net assets acquired
Consideration provided for the acquisition and related acquisition costs was as follows:
(in thousands of Canadian dollars)
Class A LP Notes(i)
Transferor Notes(ii)
Class C LP Units(iii)
Exchangeable Units
Class B LP Notes(iv)
Non-cash consideration
Cash consideration
Total cost of the acquisitions
$
$
$
6,924,639
63,093
(40,783)
6,946,949
544,821
2,561,976
876,263
2,724,979
215,000
6,923,039
23,910
$
6,946,949
(i)
On the Closing Date, Choice Properties redeemed all of the outstanding Class A LP Notes for $544,821 of cash from the net proceeds of the issuance of 60,000,000 Units.
(ii) On closing, the Transferor Notes of $2,600,000 were recorded net of a fair value adjustment of $38,024. Also on the Closing Date, Choice Properties used the proceeds
of the issuance of the IPO Debentures (see note 11) to repay $600,000 of the Transferor Notes, reducing the aggregate principal amount of Transferor Notes outstanding
from $2,600,000 to $2,000,000.
(iii) On closing, the Trust’s subsidiary issued 92,500,000 Class C LP Units, which were recorded as $925,000 less a fair value adjustment of $48,737.
(iv) On the Closing Date, Loblaw exchanged all of the Class B LP Notes for 21,500,000 Units.
The Initial Properties also includes excess land as described in note 7. Accordingly, no value for the excess land is included in the purchase
price above.
Debt and Equity Transactions
On July 5, 2013, Choice Properties used cash proceeds of the IPO Debentures and the Units issued upon completion of the IPO to repay
$600,000 of Transferor Notes and $544,821 of Class A LP Notes, and acquired and immediately canceled $215,000 of Class B LP Notes in
consideration for the issuance of 21,500,000 Units to certain Transferors.
On July 17, 2013, proceeds of the issuance of Trust Units upon exercise of the over-allotment option, and cash, were used to repay $60,000
of the Transferor Notes.
Choice Properties REIT 2014 Annual Report 54
Note 6. Acquisitions
During the year ended December, 2014, Choice Properties completed the following acquisitions from Loblaw (unless otherwise noted):
(in thousands of Canadian dollars)
Consideration
Location
Date of
Acquisition
Property
Type
Investment
Properties
Other
Assets
Other
Liabilities
Net Assets
Acquired
Exchangeable
Units Issued
Debt
Assumed
Cash
Acquisition
Costs
included in
Investment
Properties
Mississauga, ON(i)
February 28
Industrial
$
15,739 $ — $
— $
15,739 $
— $
— $ 15,739 $
239
Various
May 6
Retail
201,630
7
(1,189)
200,448
119,632
—
80,816
2,935
Boucherville, QC
October 8 Warehouse
39,432
Various
October 8
Retail
174,549
—
204
(187)
(817)
39,245
173,936
18,198
93,062
Brampton, ON(i)
November 7
Land
25,653
—
—
25,653
—
3,603
—
—
17,444
80,874
183
2,776
25,653
—
Total Acquisitions
(i) Acquired from a third-party vendor.
$ 457,003 $ 211 $ (2,193) $
455,021 $
230,892 $
3,603 $ 220,526 $
6,133
The table below summarizes the acquisitions made in 2013 beginning with the IPO:
(in thousands of Canadian dollars)
Consideration
Date of
Acquisition
Property
Type
Investment
Properties
Other
Assets
Other
Liabilities
Net Assets
Acquired
Non-cash(i)
Cash
Acquisition
Costs
included in
Investment
Properties
Initial Properties
July 5
Various
$ 6,924,639 $ 63,093 $ (40,783) $
6,946,949 $ 6,923,039 $
23,910 $
1,600
Subsequent acquisitions
4th quarter 2013
Various
$
189,320 $
487 $
(405) $
189,402 $
116,086 $
73,316 $
3,364
(i)
Non-cash consideration on the 425 Initial Properties consisted of Exchangeable Units valued at $2,724,979, plus certain other instruments (note 5). Non-cash consideration
on the subsequent acquisitions consisted of Exchangeable Units.
Choice Properties REIT 2014 Annual Report 55
Note 7. Investment Properties
(in thousands of Canadian dollars)
Balance, beginning of year
Acquisition of Initial Properties - including acquisition costs of
nil (2013 - $1,600) (note 6)
Acquisitions of investment properties - including acquisition costs of
$6,133 (2013 - $3,364) (note 6)
Capital expenditures:
Building improvements
Property capital - including recoverable capital(i)
Development capital(ii)
Leasing capital expenditures:
Tenant improvement allowances
Direct leasing costs
Dispositions
Capitalized interest (note 17)
Fair value adjustment on investment properties
Amortization of straight-line rent and tenant improvement
allowances - included in revenue
Income
Properties
Properties
Under
Development
$ 7,262,049 $
25,710
As at December 31,
2014
7,287,759
$
As at December 31,
2013
—
$
—
—
—
6,924,639
431,350
25,653
457,003
189,320
4,814
29,523
16,311
1,541
1,244
(13,480)
—
81,931
34,178
—
—
4,988
—
—
—
166
—
—
4,814
29,523
21,299
1,541
1,244
(13,480)
166
81,931
34,178
—
8,934
2,851
834
416
—
—
144,289
16,476
Balance, end of year
$ 7,849,461 $
56,517
$
7,905,978
$
7,287,759
Property capital expenditures include $26,805 of recoverable capital (note 25) and $2,718 of non-recoverable capital.
(i)
(ii) Development capital includes $993 of site intensification fees paid to Loblaw (note 23).
On August 30, 2014, Choice Properties disposed of two investment properties with a fair value of $13,480 for cash proceeds of $13,030. These
properties were previously identified for divestiture by the Competition Bureau in relation to Loblaw’s acquisition of all the outstanding shares
of Shoppers Drug Mart Corporation. In connection with the dispositions, Choice Properties received $450 of lease surrender revenue from
Loblaw.
Included in certain investment properties acquired from Loblaw is excess land with development potential. No value was attributed to this land
at the time of acquisition or in the fair value of the Trust’s investment properties as at December 31, 2014. As a result, Choice Properties has
not paid Loblaw for this excess land. Choice Properties will compensate Loblaw, over time, with intensification fees determined by a site
intensification payment grid as outlined in the Strategic Alliance Agreement, should Choice Properties pursue activity resulting in the
intensification of such excess land.
External Appraisals
As part of the IPO, all 425 acquired properties were externally valued by independent nationally-recognized appraisers. In addition to the table
below, all the properties acquired since the IPO were also externally valued. A breakdown of the aggregate fair value of properties externally
appraised each quarter, in accordance with the Trust’s policy, is as follows:
(in thousands of Canadian dollars)
March 31
June 30
September 30
December 31
Total
2014
2013
Number of properties
21
$
Fair value
397,110
21
22
21
85
403,870
546,970
397,780
$ 1,745,730
Number of properties
N/A
N/A
17
19
36
Fair value
—
$
—
336,703
450,860
$
787,563
Choice Properties has engaged independent nationally-recognized valuation firms to appraise the investment properties such that substantially
all of the portfolio will be externally appraised at least once over a five-year period.
Choice Properties REIT 2014 Annual Report 56
Internal Appraisals
Investment properties were measured at fair value, which was primarily determined by using the discounted cash flow method. Under the
discounted cash flow methodology, discount rates were applied to the projected annual operating cash flows, generally over a minimum term
of ten years, including a terminal value of the properties based on a capitalization rate applied to the estimated net operating income, a non-
GAAP measure, in the terminal year.
Valuations are most sensitive to changes in capitalization rates. Choice Properties’ valuation inputs such as capitalization rates are supported
by quarterly reports from independent external appraisers. Below are the key rates used in the valuation models for both internal and external
appraisals.
Discount rate
Terminal capitalization rate
Overall capitalization rate
Fair Value Sensitivity
The following table summarizes capitalization rate sensitivity:
Capitalization rate sensitivity
increase/(decrease)
(in thousands of Canadian dollars)
(0.75)%
Weighted
average overall
capitalization
5.43%
(0.50)%
(0.25)%
December 31, 2014
0.25%
0.50%
0.75%
5.68%
5.93%
6.18%
6.43%
6.68%
6.93%
Weighted average
As at December 31,
2014
7.09%
As at December 31,
2013
7.08%
6.50%
6.18%
6.50%
6.18%
Fair value of
investment
properties
8,997,255
8,601,501
8,239,095
7,905,978
7,598,779
7,314,547
7,050,812
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Fair value
variance
1,091,277
695,523
333,117
—
(307,199)
(591,431)
(855,166)
% change
14 %
9 %
4 %
— %
(4)%
(7)%
(11)%
The key assumptions and inputs used in the valuation techniques to estimate the fair value of investment properties are classified as Level 3
in the fair value hierarchy as certain inputs for the valuation are not based on observable market data points.
Choice Properties REIT 2014 Annual Report 57
Note 8. Interests in Other Entities
Joint Venture
On December 9, 2014, Choice Properties and its joint venture partner, Wittington Properties Limited (”Wittington”), an affiliate of GWL,
completed the acquisition of 500 Lake Shore Boulevard West (“500 Lake Shore”) in Toronto, Ontario for $15,576 from Loblaw via 500 LS
Limited Partnership. The joint venture partners intend to develop 500 Lake Shore into a mixed-used property.
Limited Partnership
Country of
Incorporation
Location
Ownership as at
December 31, 2014
500 LS Limited Partnership
Canada
500 Lake Shore Blvd. West, Toronto, ON
40%
There was no operating activity during 2014. Summarized financial information for Choice Properties’ share of equity accounted investment
is set out below:
(in thousands of Canadian dollars)
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Net assets at 100%
Choice Properties’ investment in equity accounted joint venture at 40%
Subsidiary
As at December 31,
2014
26
15,550
—
—
15,576
6,230
$
$
$
On November 7, 2014, Choice Properties entered into a 70% controlling interest in Choice Properties PRC Brampton Limited Partnership, a
subsidiary which holds land intended for future retail development. As a result, Choice Properties consolidated this subsidiary as at December
31, 2014 and recognized a 30% non-controlling interest for the interests of PL Ventures Ltd., a subsidiary of PenEquity Realty Corporation
(“PenEquity”).
Limited Partnership
Country of
Incorporation
Location
Ownership Interest as at
December 31, 2014
Choice Properties PRC Brampton Limited
Partnership
Canada
Mayfield/Chinguacousy, Brampton, ON
70%
There was no operating activity during 2014. The following is included in the Choice Properties’ consolidated financial statements relating to
the subsidiary:
(in thousands of Canadian dollars)
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Net assets at 100%
Non-controlling interests
As at December 31,
2014
—
25,653
—
—
25,653
7,696
$
$
$
Choice Properties REIT 2014 Annual Report 58
Note 9. Accounts Receivable and Other Assets
(in thousands of Canadian dollars)
Net rent receivable - net of allowance for doubtful accounts of $453 (2013 - $117)
Due from related party(i)
Fixtures and equipment - net of accumulated amortization of $886 (2013 - $472)
Prepaid property taxes
Credit facility finance fees - net of accumulated amortization of nil (2013 - $217)(ii)
Prepaid other
Accounts receivable and other assets
Classified as:
Non-current
Current
(i)
(ii)
Net rent receivable from Loblaw.
The finance fees have been offset with the outstanding balance of the credit facility (note 12).
Note 10. Notes Receivable
(in thousands of Canadian dollars)
Notes receivable from related party
Notes receivable from third-party
Notes receivable
Classified as:
Non-current
Current
As at December 31,
2014
3,419
$
As at December 31,
2013
2,383
$
—
6,308
2,791
—
7,012
19,530
10,057
9,473
19,530
$
$
$
1,334
2,399
563
1,958
7,884
16,521
7,693
8,828
16,521
$
$
$
As at December 31,
2014
236,328
As at December 31,
2013
92,057
23,040
259,368
$
—
92,057
22,539
236,829
259,368
$
$
—
92,057
92,057
$
$
$
Notes receivable from related party Non-interest bearing short term notes totaling $92,057 were repaid by Loblaw in January 2014. During
2014, non-interest bearing short term notes totaling $236,328 were issued to Loblaw and repaid in January 2015 (note 23).
Notes receivable from third-party Choice Properties provided mezzanine and bridge financing to Penady (Barrie) Ltd., a subsidiary of
PenEquity and its partner, which consists of a non-current and current portion. Non-current portion represents a two-year mortgage of $22,500
at an interest rate of 8% per annum, with an option to extend, plus accrued interest of $39 payable on maturity (December 31, 2013 - nil).
Current portion represents a six-month loan of $500 at an interest rate of 6% per annum, plus accrued interest of $1 payable on maturity
(December 31, 2013 - nil).
Choice Properties REIT 2014 Annual Report 59
Note 11. Long Term Debt and Class C LP Units
(in thousands of Canadian dollars)
Transferor Notes (i) (interest semi-annually)
Series 3 3.00%, due 2014, effective interest 1.92%
Series 4 3.00%, due 2015, effective interest 2.27%
Series 5 3.00%, due 2016, effective interest 2.57%
Series 6 3.00%, due 2017, effective interest 2.99%
Series 7 3.00%, due 2019, effective interest 3.79%
Series 8 3.60%, due 2020, effective interest 3.94%
Series 9 3.60%, due 2021, effective interest 4.33%
Series 10 3.60%, due 2022, effective interest 4.61%
Senior Unsecured Debentures (interest semi-annually)
Series A 3.554%, due 2018, effective interest 3.554%
Series B 4.903%, due 2023, effective interest 4.903%
Series C 3.498%, due 2021, effective interest 3.498%
Series D 4.293%, due 2024, effective interest 4.293%
Series 5 3.00%, due 2016, effective interest 2.00%
Series 6 3.00%, due 2017, effective interest 2.23%
Series 7 3.00%, due 2019, effective interest 3.04%
Series 8 3.60%, due 2020, effective interest 3.20%
Series 9 3.60%, due 2021, effective interest 3.57%
Series 10 3.60%, due 2022, effective interest 3.84%
Mortgage (interest monthly)
7.42%, due 2017, effective interest 2.80%
Class C LP Units(1) (distributions monthly)
Tranche 1 5.00%, redemption rights beginning 2027, effective interest 5.46%
Tranche 2 5.00%, redemption rights beginning 2028, effective interest 5.51%
Tranche 3 5.00%, redemption rights beginning 2029, effective interest 5.57%
Debt discounts and premiums
Transferor Notes - net of accumulated amortization of nil (2013 - ($361))
Senior Unsecured Debentures - net of accumulated amortization of ($3,312) (2013 - nil)
Mortgage - net of accumulated amortization of ($18) (2013 - nil)
Class C LP Units - net of accumulated amortization of $3,219 (2013 - $1,039)
Debt placement costs - net of accumulated amortization of $867 (2013 - $200)
Long term debt and Class C LP Units
Classified as:
Non-current
Current
(i)
Due to Loblaw.
As at December 31,
2014
As at December 31,
2013
$
$
$
$
—
—
—
—
—
—
—
—
400,000
200,000
250,000
200,000
300,000
200,000
200,000
300,000
200,000
300,000
3,107
300,000
300,000
325,000
3,478,107
—
8,344
232
(45,519)
(4,543)
3,436,621
3,435,628
993
3,436,621
$
$
$
$
90,000
350,000
300,000
200,000
200,000
300,000
200,000
300,000
400,000
200,000
—
—
—
—
—
—
—
—
—
300,000
300,000
325,000
3,465,000
(38,384)
—
—
(47,699)
(2,750)
3,376,167
3,286,442
89,725
3,376,167
Choice Properties REIT 2014 Annual Report 60
As at December 31, 2014, the weighted average effective interest rate for the long term debt is 3.38% (December 31, 2013 - 3.51%).
Senior Unsecured Debentures Under the Short Form Base Shelf Prospectus (“Prospectus” as described in note 19), on February 6, 2014,
Choice Properties issued $250,000 of 3.498% Series C senior unsecured debentures due February 8, 2021 and $200,000 of 4.293% Series
D senior unsecured debentures due February 8, 2024 with semi-annual installments due on February 8 and August 8 in each year commencing
on August 8, 2014. Debt placement costs of $2,460 were incurred and recorded against the principal owing. These costs are amortized using
the effective interest method and recorded to net interest expense and other financing charges (note 17).
On April 21, 2014 and May 12, 2014, Loblaw sold Replacement Debentures Series 5 through Series 6, and Series 7 through Series 10,
respectively, to third-parties. The Replacement Debentures have a face value of $1,500,000, mature between 2016 and 2022, and have an
effective weighted average interest rate of 2.99%. Interest is paid in semi-annual installments. Debt premiums and discounts on the
Replacement Debentures are amortized using the effective interest method and recorded to net interest expense and other financing charges
(note 17).
At December 31, 2014, the senior unsecured debentures have a weighted average effective interest rate of 3.38% (December 31, 2013 -
4.00%). Senior unsecured debentures Series A through Series D were issued by the Trust and Series 5 through Series 10 were issued by
the Partnership.
Mortgage In connection with the portfolio acquired from Loblaw on October 8, 2014, Choice Properties assumed a mortgage which is secured
by one of the properties acquired in the portfolio. The mortgage bears interest at a fixed rate of 7.42% per annum, matures in 2017 and has
an effective interest rate of 2.80% per annum. The debt premium on the mortgage is amortized using the effective interest method and is
recorded to net interest expense and other financing charges (note 17).
Class C LP Units (authorized - unlimited) Loblaw holds all of the outstanding Class C LP Units, which are redeemable, at Loblaw’s option,
based on the following schedule:
Class C LP Unit redemption periods
July 5, 2027 and thereafter
July 5, 2028 and thereafter
July 5, 2029 and thereafter
Numbers of Class C LP Units eligible for redemption
30,000,000
30,000,000
32,500,000
The Trust has the option to settle the redemption payment with cash, Exchangeable Units, or any combination thereof.
Schedule of Repayments The schedule of repayment of long term debt and Class C LP Units, based on maturity and redemption rights
is as follows:
(in thousands of Canadian dollars)
Senior unsecured debentures
$
2015
— $
2016
300,000 $
2017
200,000 $
2018
400,000 $
2019
Thereafter
200,000 $ 1,450,000
Total
$ 2,550,000
Mortgage
Class C LP Units
Total
993
—
1,069
—
1,045
—
—
—
—
—
—
925,000
3,107
925,000
$
993 $
301,069 $
201,045 $
400,000 $
200,000 $ 2,375,000
$ 3,478,107
Transferor Notes On February 6, 2014, Choice Properties repaid the outstanding balances of the Series 3 and 4 Notes totaling $440,000.
This early repayment triggered the accelerated amortization of the associated debt premiums resulting in a gain of $3,342 (note 17).
On April 21, 2014, Choice Properties entered into a Master Trust Indenture agreement with Computershare Trust Company of Canada.
Supplemental indentures were created in order to facilitate the replacement of the Series 5 through Series 10 Transferor Notes, held by
Loblaw. The new Series 5 through Series 10 senior unsecured debentures (“Replacement Debentures”) contain the same principal amounts,
interest rates, and maturity dates as the original Transferor Notes that they replaced. The remaining terms and conditions are substantially
similar to the original notes.
During the second quarter of 2014, Loblaw sold the Replacement Debentures to third-parties in two separate offerings. Choice Properties
incurred a finance charge of $52,253 from the accelerated amortization of the associated net debt discounts (note 17).
The net finance charge from the Transferor Note transactions, for the year ended December 31, 2014, was $48,911 (note 17).
During 2013, Choice Properties repaid all of Series 1 and 2 Transferor Notes totaling $600,000, plus $60,000 of Series 3 Transferor Note.
Choice Properties REIT 2014 Annual Report 61
Note 12. Credit Facility
Choice Properties has a $500,000 senior unsecured committed revolving credit facility provided by a syndicate of lenders, which matures
July 5, 2019. The credit facility bears interest at variable rates: Prime plus 0.45% or Bankers’ Acceptance rate plus 1.45%. Pricing is contingent
on Choice Properties’ credit rating remaining at “BBB”.
The credit facility contains certain financial covenants. As at December 31, 2014, the Trust was in compliance with all of its financial covenants
(note 19).
(in thousands of Canadian dollars)
Credit facility
Debt placement costs - net of accumulated amortization of $677 (2013 - $nil)(i)
Credit facility
As at December 31,
2014
122,000
$
(1,813)
120,187
$
$
$
As at December 31,
2013
—
—
—
(i)
During 2014, the Trust incurred debt placement costs of $315 to extend the term of the credit facility (2013 - incurred costs of $2,175 before amortization of $217). Debt
placement costs were included in accounts receivable and other assets (note 9) in 2013 when nil was drawn on the credit facility.
Note 13. Trade Payables and Other Liabilities
(in thousands of Canadian dollars)
Trade accounts payable
Accrued liabilities
Accrued interest expense
Due to related party(i)
Unit-based compensation (note 15)
Distributions payable(ii)
Tenant deposits
Deferred revenue(iii)
Trade payables and other liabilities
Classified as:
Non-current
Current
As at December 31,
2014
2,735
$
As at December 31,
2013
2,934
$
37,989
30,717
259,473
2,286
4,835
1,622
50,360
390,017
1,020
388,997
390,017
$
$
$
19,005
12,231
126,717
825
4,746
1,590
43,409
211,457
379
211,078
211,457
$
$
$
(i)
(ii)
(iii)
Includes distributions accruing on Exchangeable Units of $206,655 (2013 - $88,607) and Class C LP Units of $50,104 (2013 - $22,692) (note 23), interest payable on
Transferor Notes of nil (2013 - $14,343), and other liabilities due to Loblaw of $2,714 (2013 - $1,075).
Includes $1,165 payable to Loblaw and $1,160 payable to GWL (December 31, 2013 - $1,165 and $1,089 respectively).
Includes $49,407 of rent from Loblaw received in advance (December 31, 2013 - $42,951).
Choice Properties REIT 2014 Annual Report 62
Note 14. Unit Equity
Trust Units (authorized - unlimited) Each Unit represents a single vote at any meeting of Unitholders and entitles the Unitholder to receive
a pro-rata share of all distributions. With certain restrictions, the Unitholders have the right to require Choice Properties to redeem its Units
on demand. Upon receipt of the redemption notice by Choice Properties, all rights to and under the Units tendered for redemption shall be
surrendered and the holder thereof shall be entitled to receive a price per unit as determined by a market formula and shall be paid in
accordance with the conditions provided for in the Declaration of Trust.
Exchangeable Units (authorized - unlimited) Exchangeable Units are economically equivalent to Units, receive distributions equal to the
distributions paid on the Units and are exchangeable at the holder’s option to Units.
Special Voting Units Each Exchangeable Unit is accompanied by one Special Voting Unit which provides the holder thereof with a right to
vote on matters respecting the Trust equal to the number of Units that may be obtained upon the exchange of the Exchangeable Units for
which each Special Voting Unit is attached.
Units Outstanding
(in thousands of Canadian dollars)
Units, beginning of year
Issuance of Units under the Distribution Reinvestment Plan
Units issued under unit-based compensation arrangement
Units issued, net of costs
July 5, 2013
July 17, 2013
Units, end of year
As at December 31, 2014
As December 31, 2013
Units
87,614,229 $
1,522,472
118,309
Amount
832,415
15,682
1,240
Units
— $
114,229
—
—
—
—
—
81,500,000
6,000,000
89,255,010 $
849,337
87,614,229 $
Amount
—
1,148
—
774,267
57,000
832,415
Exchangeable Units, beginning of year
284,074,754 $
2,988,466
— $
—
Exchangeable Units issued
July 5, 2013
October 22, 2013
December 19, 2013
May 6, 2014
October 8, 2014
Fair value adjustment
Exchangeable Units, end of year
—
—
—
11,259,208
10,698,143
—
—
—
—
119,632
111,260
(12,142)
272,497,871
2,724,979
9,925,671
1,651,212
—
—
—
98,909
17,177
—
—
147,401
306,032,105 $
3,207,216
284,074,754 $
2,988,466
Total Units and Exchangeable Units, end of year
395,287,115
371,688,983
Distributions Choice Properties’ Board of Trustees retains full discretion with respect to the timing and quantum of distributions, however
the total income distributed will not be less than the amount necessary to ensure the Trust will not be liable to pay income taxes under Part I
of the Income Tax Act for the year ended December 31, 2014. The Trust declared distributions of $0.65 per unit per annum (December 31,
2013 - $0.65). During 2014, Choice Properties declared $248,754 in distributions, including non-cash distributions provided under the
Distribution Reinvestment Plan (“DRIP”) and distributions to holders of Exchangeable Units, which are reported as interest expense (December
31, 2013 - $116,518). Distributions declared to Unitholders of record at the close of business on the last business day of a month are paid
on or about the 15th day of the following month.
The holders of Exchangeable Units and Class C LP Units may elect to defer receipt of all or a portion of distributions declared by the Partnership
until the first date following the end of the fiscal year. If the holder elects to defer, the Partnership will loan the holder the amount equal to the
deferred distribution without interest, and the loan will be due and payable in full on the first business day following the end of the fiscal year
the loan was advanced. Loblaw has elected to defer the distributions in full on both the Exchangeable Units and Class C LP Units.
Distribution Reinvestment Plan Choice Properties has a DRIP that allows Unitholders to use the monthly cash distributions paid on their
existing units to purchase additional units directly from the Trust. Unitholders who elect to participate in the DRIP receive a further distribution,
payable in Units, equal in value to 3% of each cash distribution. During the year ended December 31, 2014, Choice Properties issued
1,522,472 Units under the DRIP (December 31, 2013 - 114,229).
Choice Properties REIT 2014 Annual Report 63
Note 15. Unit-Based Compensation
Choice Properties’ unit-based compensation expense recognized in general and administrative expenses was:
(in thousands of Canadian dollars)
Unit Option plan
Restricted Unit plan
Deferred Unit plan
Unit-based compensation expense
Fair value adjustments included in the above
$
$
$
2014
208
600
705
1,513
(591)
$
$
$
2013
295
195
335
825
17
As at December 31, 2014, the carrying value of total unit-based compensation was $2,286 (December 31, 2013 - $825) (note 13).
Unit Option Plan Choice Properties maintains a Unit Option plan for certain employees. Under this plan, Choice Properties may grant Options
totaling up to 4,075,000 Units. The Unit Options vest in tranches over a period of four years. The following is a summary of Choice Properties’
Unit Option plan activity:
Number of awards
2014
Weighted average
exercise price/unit
Number of awards
2013
Weighted average
exercise price/unit
Outstanding Unit Options, beginning of year
Granted
Cancelled
Exercised
Outstanding Unit Options, end of year
Unit Options exercisable, end of year
1,196,866
1,247,247
$
$
(643,294) $
(118,309) $
1,682,510
$
— $
10.04
10.80
10.35
10.05
10.48
—
— $
1,196,866
$
— $
— $
1,196,866
$
— $
—
10.04
—
—
10.04
—
The assumptions used to measure the fair value of the Unit Options under the Black-Scholes model (level 2) were as follows:
Expected average distribution yield
Expected average Unit price volatility
Average risk-free interest rate
Expected average life of options
As at December 31,
2014
6.20%
As at December 31,
2013
6.18%
14.22% - 18.87%
19.05% - 30.18%
1.04% - 1.35%
1.63% - 1.99%
2.5 to 5.4 Years
4.0 to 5.5 Years
Estimated forfeiture rates are incorporated into the measurement of the Unit Option expense. The forfeiture rate applied as at December
31, 2014 was nil (December 31, 2013 - nil).
Restricted Unit Plan RUs entitle certain employees to receive the value of the RU award in cash or Units at the end of the applicable
vesting period, which is usually three years in length. The RU plan provides for the crediting of additional RUs in respect of distributions
paid on Units for the period when an RU is outstanding. The fair value of each RU granted is measured based on the market value of a
Unit at the balance sheet date.
Choice Properties REIT 2014 Annual Report 64
The following is a summary of Choice Properties’ Restricted Unit (“RU”) plan activity:
(Number of awards)
Outstanding Restricted Units, beginning of year
Granted
Reinvested
Cancelled
Outstanding Restricted Units, end of year
2014
108,746
100,523
10,804
(35,919)
184,154
2013
—
105,948
2,798
—
108,746
RUs vest over a period of three years. There were no RUs vested as at December 31, 2014 (December 31, 2013 - nil).
Trustee Deferred Unit Plan Members of the Choice Properties’ Board of Trustees, who are not management of Choice Properties, are
required to receive a portion of their annual retainer in the form of DUs and may also elect to receive up to 100% of their remaining fees in
DUs. Distributions paid earn fractional DUs, which are treated as additional awards. DUs vest upon grant. The fair value of each DU
granted is measured based on the market value of a Unit at the balance sheet date. A summary of the Deferred Unit plan activity is as
follows:
(Number of awards)
Outstanding Trustee Deferred Units, beginning of year
Granted
Reinvested
Outstanding Trustee Deferred Units, end of year
2014
31,936
64,150
3,144
99,230
2013
—
31,758
178
31,936
All the Deferred Units vest when issued, however, they cannot be exercised while Trustees are members of the Board.
Choice Properties REIT 2014 Annual Report 65
Note 16. Rental Revenue
Rental revenue is comprised of the following:
(in thousands of Canadian dollars)
Base rent
Property tax recoveries
Operating cost recoveries
Other revenue
Rental revenue
Loblaw
470,895 $
Ancillary(i)
44,009
$
$
122,530
19,101
1,152
13,026
10,318
1,892
$
613,678 $
69,245
$
(i) Ancillary income includes $1,484 received from leases to a subsidiary of GWL for the year ended December 31, 2014.
(in thousands of Canadian dollars)
Base rent
Property tax recoveries
Operating cost recoveries
Other revenue
Rental revenue
Loblaw
221,263
$
Ancillary(i)
21,809
$
57,765
7,474
151
5,969
3,887
189
$
286,653
31,854
$
2014
514,904
135,556
29,419
3,044
682,923
2013
243,072
63,734
11,361
340
318,507
(i) Ancillary income includes $46 received from leases to subsidiaries of GWL for the period ended December 31, 2013.
Choice Properties enters into long-term lease contracts with tenants for space in its properties. Initial lease terms are generally between
three and ten years for commercial units and longer terms for grocery anchor stores. Leases generally provide for the tenant to pay
Choice Properties base rent, with provisions for contractual increases in base rent over the term of the lease, plus operating cost and property
tax recoveries. Many of the leases with Loblaw are for stand-alone retail sites. Loblaw is directly responsible for the operating costs on such
sites.
Future base rent revenue for the years ended December 31 is as follows:
(in thousands of Canadian dollars)
2015
2016
2017
2018
2019
Thereafter
Total
$
$
496,153
494,017
493,382
493,380
498,162
4,069,972
6,545,066
Choice Properties REIT 2014 Annual Report 66
Note 17. Net Interest Expense and Other Financing Charges
(in thousands of Canadian dollars)
Transferor Notes(i)
Distributions on Class C LP Units(i)
Senior Unsecured Debentures
Interest on mortgage
Interest on credit facility
Effective interest rate amortization of debt discounts and premiums(ii)
Effective interest rate amortization of debt placement costs
Distributions on Exchangeable Units(i)
Interest income
Capitalized interest
Net interest expense and other financing charges
2014
18,271
46,250
72,433
49
2,965
48,891
1,127
191,267
381,253
(433)
380,820
(166)
380,654
$
$
$
$
2013
31,128
22,692
11,846
—
741
678
417
88,607
156,109
(324)
155,785
—
155,785
$
$
$
$
(i)
(ii)
Related party amounts.
Includes a finance charge of $48,911 for the year ended December 31, 2014, related to the accelerated amortization of net debt discounts on Transferor Note transactions
(note 11).
Note 18. Employee Costs
The following amounts were expensed in relation to Choice Properties’ employees:
(in thousands of Canadian dollars)
Salaries, wages and benefits, net
Post-employment benefits
Unit-based compensation
Employee costs
Note 19. Capital Management
$
$
2014
9,969
238
808
11,015
$
$
2013
3,684
64
490
4,238
In order to maintain or adjust its capital structure, Choice Properties may increase or decrease the amount of distributions paid to Unitholders,
issue new Units and debt, or repay debt. Choice Properties manages its capital structure with the objective of:
complying with the guidelines set out in its Declaration of Trust;
complying with debt covenants;
•
•
• maintaining credit rating metrics consistent with those of investment grade REITs;
•
• maintaining financial capacity and flexibility through access to capital to support future development; and
• minimizing its cost of capital while taking into consideration current and future industry, market and economic risks and conditions.
ensuring sufficient liquidity is available to support its financial obligations and to execute its operating and strategic plans;
On September 3, 2013, Choice Properties filed a Prospectus allowing for the issuance, from time to time, of Units and debt securities, or any
combination thereof, having an aggregate offering price of up to $2 billion. This document is valid for a 25-month period. On February 6, 2014,
Choice Properties issued $450,000 of debt securities under the Prospectus.
Choice Properties has certain key covenants in its debentures, and committed credit facility. The key financial covenants include debt service
ratios and leverage ratios, as defined in the respective agreements. These ratios are measured by the Trust on an ongoing basis to ensure
compliance with the agreements. Choice Properties was in compliance with each of the key financial covenants under these agreements as
at December 31, 2014 and December 31, 2013.
Choice Properties REIT 2014 Annual Report 67
Note 20. Fair Value Measurements
The following table provides a comparison of the carrying and fair values for each classification of assets and liabilities, measured at their
fair value:
(in thousands of Canadian dollars)
Assets designated as fair value through profit or loss:
Cash and cash equivalents
Loans and receivables (amortized cost):
Accounts receivable (note 9)
Notes receivable (note 10)
As at
December 31, 2014
Total
fair
value
Total
carrying
amount
As at
December 31, 2013
Total
fair
value
Total
carrying
amount
$
1,332
$
1,332
$
51,405
$
51,405
3,419
259,368
3,419
259,368
3,717
92,057
3,717
92,057
Assets elected to be classified as fair value through profit or loss:
Investment properties (note 7)
Total measured assets
7,905,978
7,905,978
7,287,759
7,287,759
$ 8,170,097
$ 8,170,097
$ 7,434,938
$ 7,434,938
(in thousands of Canadian dollars)
Liabilities required to be classified as fair value through profit or loss:
Exchangeable Units (note 14)
Unit-based compensation (note 13)
Other liabilities (amortized cost):
Trade payables and other liabilities(i) (note 13)
Credit facility (note 12)
Long term debt and Class C LP Units (note 11)
Total measured liabilities
(i) Excluding unit-based compensation liabilities.
As at
December 31, 2014
Total
fair
value
Total
carrying
amount
As at
December 31, 2013
Total
fair
value
Total
carrying
amount
$ 3,207,216
$ 3,207,216
$ 2,988,466
$ 2,988,466
2,286
2,286
825
825
387,731
120,187
387,731
122,000
210,632
210,632
—
—
3,436,621
3,582,560
3,376,167
3,358,935
$ 7,154,041
$ 7,301,793
$ 6,576,090
$ 6,558,858
Choice Properties REIT 2014 Annual Report 68
The following table presents the fair value hierarchy of the assets and liabilities measured above:
(in thousands of Canadian dollars)
Level 1
Assets
Designated as fair value through profit or loss
Liabilities
Classified as fair value through profit or loss
Level 2
Assets
Designated as fair value through profit or loss
Loans and receivables (amortized cost)
Liabilities
Classified as fair value through profit or loss
Other financial liabilities (amortized cost)
Level 3
Assets
As at
December 31, 2014
As at
December 31, 2013
$
$
1,332
$
4,424
3,207,216
2,988,466
— $
262,787
2,286
4,092,291
46,981
95,774
825
3,569,567
Classified as fair value through profit or loss
$
7,905,978
$
7,287,759
There were no transfers between levels of the fair value hierarchy during the periods.
Note 21. Financial Risk Management
As a result of holding and issuing financial instruments, Choice Properties is exposed to credit risk, market risk and financial risk. The following
is a description of those risks and how the exposures are managed:
Credit Risk Choice Properties is exposed to credit risk resulting from the possibility that counterparties could default on their financial
obligations to Choice Properties. Exposure to credit risk relates to rent receivables, cash and cash equivalents, short term investments,
security deposits and notes receivable.
Choice Properties mitigates the risk of credit loss related to rent receivables by evaluating the creditworthiness of new tenants, obtaining
security deposits wherever permitted by legislation, ensuring its tenant mix is diversified and by limiting its exposure to any one tenant (except
Loblaw). Choice Properties establishes an allowance for doubtful accounts that represents the estimated losses with respect to rent receivables.
The allowance is determined on a tenant-by-tenant basis based on the specific factors related to the tenant.
The risk related to cash and cash equivalents, short term investments, security deposits and notes receivable is reduced by policies and
guidelines that require Choice Properties to enter into transactions only with Canadian financial and government institutions that have a
minimum short term rating of “A-2” and a long term credit rating of “A-“ from S&P or an equivalent credit rating from another recognized credit
rating agency and by placing minimum and maximum limits for exposures to specific counterparties and instruments.
Despite such mitigation efforts, if Choice Properties’ counterparties default, it could have a material adverse impact on Choice Properties’
financial condition or results of operations and its ability to make distributions to Unitholders.
Market Risk Choice Properties is exposed to market risk as a result of changes in factors such as interest rates and the market price of the
Trust’s Units.
Interest Rate Risk The majority of Choice Properties’ debt is financed at fixed rates with maturities staggered over 10 years, thereby mitigating
the exposure to near term changes in interest rates. To the extent that Choice Properties incurs variable rate indebtedness (such as under
the credit facility), this will result in fluctuations in Choice Properties’ cost of borrowing as interest rates change. If interest rates rise, Choice
Properties’ operating results and financial condition could be materially adversely affected and decrease the amount of cash available for
distribution to Unitholders.
Choice Properties REIT 2014 Annual Report 69
Choice Properties analyzes its interest rate risk and the impact of rising and falling interest rates on operating results and financial condition
on a regular basis.
Borrowings under the credit facility are at variable rates which may result in fluctuations in Choice Properties’ cost of borrowing as interest
rates change. To the extent that interest rates rise, Choice Properties’ operating results and financial condition could be materially adversely
affected and decrease the amount of cash available for distribution to Unitholders. Choice Properties’ credit facility and the Debentures also
contain covenants that require it to maintain certain financial ratios on a consolidated basis. If Choice Properties does not maintain such ratios,
its ability to make distributions to Unitholders may be limited or suspended. An increase of 1.0% per annum in the variable component of the
credit facility interest rate would result in an increase to liabilities and a decrease in net income of $1,220.
Unit Price Risk Choice Properties is exposed to unit price risk as a result of the issuance of Exchangeable Units, which are economically
equivalent to and exchangeable for units, as well as the issuance of unit-based compensation. Exchangeable Units and unit-based
compensation liabilities are recorded at their fair value based on market trading prices. Exchangeable Units and unit-based compensation
negatively impact operating income when the unit price rises and positively impact operating income when the unit price declines. An increase
of $1.00 in the underlying price of Choice Properties’ Units would result in an increase to liabilities, and decrease in net income as follows:
•
Exchangeable Units $306,032 (2013 - $284,075); and
• Unit-based compensation liabilities $566 (2013 - $173).
Liquidity Risk and Capital Availability Risk Liquidity risk is the risk that Choice Properties cannot meet a demand for cash or fund its
obligations as they come due. Although a portion of the cash flow generated by the investment properties is devoted to servicing such
outstanding debt, there can be no assurance that Choice Properties will continue to generate sufficient cash flow from operations to meet
interest payments and principal repayment obligations upon an applicable maturity date. If Choice Properties is unable to meet interest or
principal repayment obligations, it could be required to renegotiate such payments or issue additional equity or debt or obtain other financing.
The failure of Choice Properties to make or renegotiate interest or principal payments or issue additional equity or debt or obtain other
financing could materially adversely affect Choice Properties’ financial condition and results of operations and decrease or eliminate the
amount of cash available for distribution to Unitholders.
The real estate industry is highly capital intensive. Choice Properties requires access to capital to fund operating expenses, to maintain its
properties, to fund its growth strategy and certain other capital expenditures from time to time, and to refinance indebtedness. Although
Choice Properties expects to have access to the credit facility, there can be no assurance that it will otherwise have access to sufficient capital
or access to capital on favourable terms. Further, in certain circumstances, Choice Properties may not be able to borrow funds due to limitations
set forth in the Declaration of Trust and the trust indentures, as supplemented. Failure by Choice Properties to access required capital could
have a material adverse effect on its financial condition or results of operations and its ability to make distributions to Unitholders.
Liquidity and capital availability risks are mitigated by maintaining appropriate levels of liquidity, by diversifying the Trust's sources of funding,
by maintaining a well-diversified debt maturity profile and actively monitoring market conditions.
Maturity Analysis The undiscounted future principal and interest payments on Choice Properties’ debt instruments, and distribution and
redemption payments on Class C LP Units are as follows:
(in thousands of Canadian dollars)
Senior unsecured debentures
$
2015
91,153 $
2016
386,653 $
2017
279,153 $
2018
476,153 $
2019
Thereafter
Total
261,937 $ 1,593,179 $ 3,088,228
Mortgage
Credit facility(i)
Class C LP Units
Total
1,189
—
46,250
1,189
—
46,250
1,090
—
46,250
—
—
—
122,000
—
—
3,468
122,000
46,250
46,250
1,319,808
1,551,058
$
138,592 $
434,092 $
326,493 $
522,403 $
430,187 $ 2,912,987 $ 4,764,754
(i) Excludes interest on the revolving credit facility at a floating interest rate.
Choice Properties REIT 2014 Annual Report 70
Note 22. Contingent Liabilities and Financial Guarantees
Choice Properties is involved in and potentially subject to various claims by third-parties arising from the normal course of conduct of its
business including regulatory, property and environmental claims. In addition, Choice Properties is potentially subject to regular audits from
federal and provincial tax authorities, and as a result of these audits may receive assessments and reassessments. Although such matters
cannot be predicted with certainty, management currently considers Choice Properties’ exposure to such claims and litigation, to the extent
not covered by Choice Properties’ insurance policies or otherwise provided for, not to be material to the consolidated financial statements,
but they may have a material impact in future periods.
Legal Proceedings Choice Properties is potentially the subject of various legal proceedings and claims that arise in the ordinary course of
business. The outcome of all these proceedings and claims is uncertain. Based on information currently available, any proceedings and claims,
individually and in the aggregate, are not expected to have a material impact on Choice Properties.
Guarantees Choice Properties issues letters of credit to support performance guarantees related to its investment properties including
maintenance and development obligations to municipal authorities. As at December 31, 2014, the aggregate gross potential liability related
to these letters of credit totaled $23,226 (December 31, 2013 - $20,029).
Choice Properties’ credit facility and debentures are guaranteed by each of the General Partner, the Partnership and any other person that
becomes a subsidiary of Choice Properties (with certain exceptions). In the case of default by the Trust, the Indenture Trustee will be entitled
to seek redress from the Guarantors for the guaranteed obligations in the same manner and upon the same terms that it may seek to enforce
the obligations of the Trust. These guarantees are intended to eliminate structural subordination, which would otherwise arise as a consequence
of Choice Properties’ assets being primarily held in various subsidiaries of the Trust.
Commitments Choice Properties has entered into contracts for development projects and has obligations for $7,304 of future payments
($7,673 - December 31, 2013).
Note 23. Related Party Transactions
Choice Properties’ parent corporation is Loblaw, which held an 82.9% effective interest in the Trust through ownership of 21,500,000 Units and
all of the Exchangeable Units as at December 31, 2014 (December 31, 2013 - 82.2% and 21,500,000 Units respectively). Loblaw’s controlling
shareholder, GWL, held an approximate 46% ownership of Loblaw’s outstanding common shares and a 5.4% direct interest in Choice Properties,
through ownership of 21,414,657 Units as at December 31, 2014 (December 31, 2013 - 5.4% and 20,107,810 Units respectively).
Choice Properties’ policy is to conduct all transactions and settle all balances with related parties on market terms and conditions.
Transactions and Agreements with Loblaw
Acquisitions In 2014, Choice Properties acquired investment properties from Loblaw with a fair value of $409,717, excluding acquisition costs
(note 6) and a 40% interest in land purchased from Loblaw through 500 LS Limited Partnership (note 8).
Subsequent to the end of 2014, Choice Properties acquired two properties from Loblaw as described in note 24. On January 9, 2015, Choice
Properties acquired a 16-acre site in Barrie, Ontario from Loblaw for a purchase price of approximately $11,500, excluding acquisition costs.
The acquisition was funded through the issuance of 265,665 Exchangeable Units, which had a value of approximately $2,808 as at January
9, 2015, an assumption of a $1,933 obligation, and paid the balance in cash. The Exchangeable Units issued to Loblaw did not materially
impact Loblaw's effective ownership percentage. On January 30, 2015, Choice Properties acquired a 921,256 square foot warehouse in
Pickering, Ontario from Loblaw for a purchase price of approximately $81,200, excluding acquisition costs. This acquisition was funded entirely
with cash.
Dispositions Total proceeds from disposition were $13,030 of which Choice Properties received $290 from Loblaw for the internal conveyance
of gas bar assets related to the investment properties disposed in accordance with the agreement with the Competition Bureau (note 7).
Site Intensification Fee Certain investment properties acquired from Loblaw include excess land with development potential. No value was
attributed to this land at the time of acquisition such that Choice Properties did not pay Loblaw for this excess land. Choice Properties will
compensate Loblaw with intensification fees, should Choice Properties pursue development, intensification or redevelopment of these properties.
The payments to Loblaw will be calculated in accordance with a payment grid, set out in the strategic alliance agreement, that takes into account
the region, market ranking and type of use for the property.
Choice Properties compensated Loblaw with intensification fees of $993 in connection with a retail development completed during 2014.
Construction Fees During 2014, Choice Properties paid $3,067 in construction fees to Loblaw for the development of specific properties.
Choice Properties REIT 2014 Annual Report 71
Strategic Alliance Agreement The Strategic Alliance Agreement creates a series of rights and obligations between Choice Properties and
Loblaw intended to establish a preferential and mutually beneficial business and operating relationship. Its initial term is for ten-years from the
IPO, and will continue until the earlier of 20 years from the IPO and the date, if any, on which Loblaw ceases to own a majority interest, on a
fully-diluted basis in the Trust. The Strategic Alliance Agreement provides Choice Properties with important rights that are expected to
meaningfully contribute to the Trust’s growth.
Services Agreement Loblaw provides Choice Properties with administrative and other support services. The fee for these services was
$6,400 for the period from July 2013 to June 2014. The Service Agreement was renewed until December 31, 2015 at a revised annual rate
of $3,141. The service agreement expense decreased to reflect the functions that the Trust assumed directly as a result of internalization of
the leasing and property management functions.
On July 5, 2013, Choice Properties and Loblaw entered into a second services agreement with a one year term. This agreement provided
Loblaw with administration and support services, such as leasing, analysis, valuation and development, on an as needed basis for a fee of
$700.
Property Management Agreement Subsequent to the end of 2014, on January 1, 2015, Choice Properties agreed to manage Loblaw’s third-
party properties on a fee for service basis.
Distributions on LP Units and Notes Receivable Loblaw holds all of the Exchangeable Units and Class C LP Units Issued by the Partnership.
Loblaw has elected to defer receipt of all distributions from the Partnership until the first day following the end of the fiscal year. Distributions
declared and accrued on the last business day of a month become payable on or about the 15th day of the following month. On this day in lieu
of paying distributions, the Partnership loans the holder an amount equal to the deferred distribution without interest, and the loan is due and
payable in full on the first business day following the end of the fiscal year the loan was advanced. As at December 31, 2014, distributions
totaling $237,517 were declared and accrued, and a note receivable of $236,328 was outstanding from Loblaw (December 31, 2013 - $111,299
and $92,057 respectively). On the first business day of 2015, distributions payable for Exchangeable Units of $190,078 and Class C LP Units
of $46,250 were paid and the notes receivable from Loblaw were cancelled (January 2014 - paid $73,219 and $18,838, respectively, and the
notes receivable from Loblaw were cancelled).
Trust Unit Distributions During the year, Choice Properties declared distributions of $13,975 on the Units held by Loblaw (2013 - $6,857).
Transaction Summary as Reflected in the Consolidated Financial Statements Loblaw is also Choice Properties’ largest tenant, representing
approximately 91.4% of Choice Properties’ annual base rent and 88.4% of its GLA as at December 31, 2014 (December 31, 2013 - 91.0% and
88.5% respectively). Transactions with Loblaw recorded in the statements of net income were comprised as follows:
(in thousands of Canadian dollars)
Rental revenue(i) (note 16)
Net services agreements expense (note 25)
Office rent expense
Interest expense and other financing charges (note 17)
(i) Includes $450 lease surrender revenue from the dispositions (note 7).
The net balance due to Loblaw was as follows:
(in thousands of Canadian dollars)
Accounts receivable and other assets (note 9)
Notes receivable (note 10)
Long term debt and Class C LP Units (note 11) (i)
Accounts payable and other liabilities (note 13)
Net due to Loblaw
2014
613,678
4,421
107
255,788
$
$
$
$
2013
286,653
2,850
54
142,427
$
$
$
$
As at December 31,
2014
As at December 31,
2013
$
$
—
$
236,328
(925,000)
(310,045)
1,334
92,057
(2,865,000)
(170,833)
(998,717)
$
(2,942,442)
(i) As outlined in note 11, Choice Properties repaid $440,000 of related party debt on February 6, 2014. Also, on April 21, 2014 and May 12, 2014, Loblaw sold related party
debt totaling $500,000 and $1,000,000, respectively. As at December 31, 2014, only Class C LP Units remained outstanding with Loblaw.
Choice Properties REIT 2014 Annual Report 72
Transactions with GWL and Other Related Parties
Joint Venture On December 9, 2014, Choice Properties and its joint venture partner, Wittington, completed the acquisition of 500 Lake Shore
in Toronto, Ontario for $15,576 from Loblaw (note 8). Wittington is the development and construction manager for the commercial space.
Wittington’s parent company is Wittington Investments, Limited, which holds a 63% interest in GWL.
Operating Lease Choice Properties also entered into a ten-year lease at market rates for office space with GWL’s parent company that
commenced in 2014. Lease payments will total $2,664 over the life of the lease. Although the lease payments to the related party in 2014
were nil, as a result of the free rent periods included in the lease, net income was reduced by straight-line rent expense.
Trust Unit Distributions During the year, Choice Properties declared distributions of $13,526 on the Units held by GWL (2013 - $6,384).
GWL participates in the DRIP. During the year, the Trust issued 1,306,847 Units to GWL under the DRIP (December 31, 2013 - 107,810
beginning with the first issuance of Units on December 16, 2013) (note 14).
Transaction Summary as Reflected in the Consolidated Financial Statements Transactions with GWL recorded in the statements of
income were comprised as follows:
(in thousands of Canadian dollars)
Rental revenue(i) (note 16)
Office rent expense
The balance due to GWL was as follows:
(in thousands of Canadian dollars)
Accounts payable and other liabilities (note 13)
Due to GWL
Transactions with Key Personnel
$
$
2014
1,484
109
$
$
2013
46
—
As at December 31,
2014
As at December 31,
2013
$
(1,160)
(1,160)
$
(1,089)
(1,089)
Choice Properties’ key personnel are comprised of Trustees and certain members of the executive team of Choice Properties. Compensation
of key personnel was as follows:
(in thousands of Canadian dollars)
Salaries, trustee fees, incentives and short-term employee benefits
Unit-based compensation
Compensation of key personnel
$
$
2014
4,157
1,359
5,516
$
$
2013
2,009
766
2,775
Choice Properties REIT 2014 Annual Report 73
Note 24. Subsequent Events
On January 1, 2015, Choice Properties agreed to manage Loblaw’s third-party properties on a fee for service basis (note 23).
On January 9, 2015, Choice Properties acquired a 16-acre site in Barrie, Ontario from Loblaw for a purchase price of approximately $11,500,
excluding acquisition costs. The acquisition was funded through the issuance of 265,665 Exchangeable Units, which had a value of
approximately $2,808 as at January 9, 2015, an assumption of a $1,933 obligation, and paid the balance in cash. The Exchangeable Units
issued to Loblaw did not materially impact Loblaw's effective ownership percentage. Choice Properties intends to co-develop the property
with PenEquity, which holds an adjacent 21-acre parcel of land, to construct an integrated retail centre that spans a total of 37 acres. PenEquity
and its subsidiaries are the development, construction and property managers of this development project.
On January 30, 2015, Choice Properties entered into a co-ownership agreement, with PFC Fernbank Corp., a subsidiary of PenEquity and
Phoenix Fernbank Inc. to acquire a nine-acre parcel of land in Kanata, Ontario for retail development. Choice Properties recognized its
proportionate share of the assets held jointly in the co-ownership, which is $2,025, or 50% of the $4,050 purchase price of the parcel of land.
Choice Properties funded its partners’ collective 50% interest through a 5-year mezzanine loan of $2,025 at a rate of 8% per annum. PenEquity
is the development, construction and property manager of this development project.
On January 30, 2015, Choice Properties completed the acquisition of a warehouse from Loblaw for a purchase price of approximately $81,200,
excluding acquisition costs. This acquisition was entirely funded with cash. The warehouse is fully occupied by Loblaw as the single tenant.
On February 5, 2015, Choice Properties issued $250,000 aggregate principal amount of Series E senior unsecured debentures. These
debentures bear interest at a rate of 2.297% per annum and mature on September 14, 2020. The net proceeds were used by the Trust to
repay existing indebtedness and for general business purposes. The offering was made under Choice Properties’ Prospectus dated September
3, 2013 (note 19).
On February 19, 2015, Choice Properties acquired a 54,569 square foot shopping centre in Porter’s Lake, Nova Scotia from a third-party, for
a purchase price of $5,200, excluding acquisition costs. The shopping centre is currently 85% occupied by 20 tenants, including a number
of national retailers, with lease maturities ranging from 2015 to 2022. The shopping centre is anchored by the 47,000 square foot grocery
store on an adjacent property that Choice Properties owns.
Choice Properties REIT 2014 Annual Report 74
Note 25. Supplementary Information
Property Operating Costs
(in thousands of Canadian dollars)
Property taxes
Recoverable operating costs
Non-recoverable operating costs
Property operating costs
General and Administrative Expenses
(in thousands of Canadian dollars)
Salaries, benefits and employee costs
Investor relations and other public entity costs
Professional fees
Other
Services Agreement with related party(i)
Total general and administrative expenses
Less: Salaries capitalized
Less: Legal costs capitalized to acquisitions
Less: Services Agreement charged to related parties(i)
General and administrative expenses
(i) Net services agreement with related party is $4,421 (2013 - $2,850).
Change in Non-Cash Operating Working Capital
$
$
$
$
2014
139,651
30,141
2,758
172,550
$
$
2014
12,567
2,162
1,713
3,310
4,771
24,523
(658)
(200)
(350)
$
23,315
$
(in thousands of Canadian dollars)
Net change in Accounts receivable and other assets
$
Less: Fixtures and equipment
Less: Credit facility finance fees
Add back: Amounts from acquired properties (note 6)
Net change in Trades payable and other liabilities
Less: Distributions payable
Less: Unit-based compensation
Less: Net change to accrued interest
Less: Amounts from acquired properties (note 6)
Change in non-cash working capital
$
2014
(3,009)
3,909
(1,958)
211
178,560
(89)
(1,461)
(149,603)
(2,193)
$
24,367
$
2013
65,821
12,731
1,204
79,756
2013
4,766
892
3,077
649
3,200
12,584
—
—
(350)
12,234
2013
(16,521)
2,399
1,958
63,580
211,457
(4,746)
(825)
(137,873)
(41,188)
78,241
Choice Properties REIT 2014 Annual Report 75
Supplemental Disclosure of Non-cash Operating, Investing and Financing Activities
(in thousands of Canadian dollars)
2014
Value of Units issued under distribution reinvestment plan (note 14)
$
15,682
$
Value of Units issued under unit-based compensation plan
De-recognition of Transferor Notes (note 11)
Recognition of senior unsecured debentures (note 11)
Debt assumed on acquisition of investment properties (note 6)
Issuance of Class A LP Notes (note 5)
Transferor Notes, net of fair value adjustment (note 5)
Issuance of Exchangeable Units (note 14)
Class C LP Units, net of fair value adjustment (note 5)
Issuance of Trust Units (note 5)
Recoverable Capital Improvements
(in thousands of Canadian dollars)
Balance yet to be recovered, beginning of the year
Add: Recoverable expenditures during the year (note 7)
Less: Recoverable during the year
Balance yet to be recovered, end of the year
2013
1,148
—
—
—
—
544,821
2,561,976
2,841,065
876,263
215,000
52
(1,500,000)
1,500,000
3,603
—
—
230,892
—
—
$
$
$
2014
8,430
26,805
(981)
34,254
$
2013
—
8,451
(21)
8,430
Choice Properties REIT 2014 Annual Report 76
Glossary of Terms
Term
Definition
Adjusted Funds
from Operations
Funds from Operations adjusted for non-cash income and
expense items such as amortization of straight-line rents,
unit-based compensation expenses, and finance charges.
Also, includes a reduction for normalized productive
capacity maintenance expenditures and leasing capital
expenditures (see Section 18, “Non-GAAP Financial
Measures”, of Management’s Discussion and Analysis).
Term
Funds From
Operations
Definition
Net income adjusted for items that do not arise from
operating activities, such as fair value adjustments,
depreciation and amortization, and adjustments for non-
controlling interests, as defined by the Real Property
Association of Canada White Paper on Funds from
Operations for IFRS issued in April 2014 (see Section 19,
“Non-GAAP Financial Measures”, of Management’s
Discussion and Analysis).
Adjusted Funds
from Operations
Payout Ratio
Distribution declared per unit, divided by Adjusted Funds
from Operations per unit diluted (see Section 19, “Non-
GAAP Financial Measures”, of Management’s Discussion
and Analysis).
Funds From
Operations Payout
Ratio
Distribution declared per unit divided by the Funds from
Operations per unit diluted (see Section 18, “Non-GAAP
Financial Measures”, of the Management’s Discussion
and Analysis).
Debt to Total Assets Debt divided by total assets. Debt includes Class C LP
Units but excludes Exchangeable Units. This ratio is a
non-GAAP financial measure calculated based on the
trust indentures, as supplemented.
Net Operating
Income
Rental revenue less straight-line rental revenue and
property operating costs (see Section 18, “Non-GAAP
Financial Measures”, of Management’s Discussion and
Analysis).
Same Properties
The same properties owned by Choice Properties during
the current period and the comparative period, including
any re-development of the same properties.
Debt Service
Coverage
Debt to EBITDAFV
Earnings Before Interest, Taxes, Depreciation,
Amortization, and Fair Value adjustments divided by
interest expense on long-term debt and distributions on
Class C LP Units and all regularly scheduled principal
payments made with respect to indebtedness during such
period (other than any balloon, bullet or similar principal
payable at maturity or which repays such indebtedness in
full). This ratio is a non-GAAP financial measure
calculated based on the trust indentures, as
supplemented.
Debt divided by Earnings Before Interest, Taxes,
Depreciation, Amortization, and Fair Value adjustments.
Debt includes Class C LP Units but excludes
Exchangeable Units.
Earnings Before
Interest, Taxes,
Depreciation,
Amortization and
Fair Value
Net income plus, where applicable, income taxes, interest
expense, amortization expense, depreciation expense,
and fair value adjustments (see Section 18, “Non-GAAP
Financial Measures”, of Management’s Discussion and
Analysis).
Choice Properties REIT 2014 Annual Report 77
Corporate Information
Corporate Profile
Choice Properties Real Estate Investment Trust is an owner, manager and developer of well-located commercial real estate across Canada.
Choice Properties’ portfolio spans approximately 39.9 million square feet of gross leasable area and consists of 475 properties primarily
focused on supermarket-anchored shopping centres, stand-alone supermarkets and other retail properties. Choice Properties’ strategy is to
create value by enhancing and optimizing its property portfolio, which was built over thirty years by Loblaw, the Trust’s principal tenant, and
largest Unitholder. Choice Properties’ strong alliance with Loblaw positions it well for future growth.
Conference Call and Webcast
Senior management will host a conference call to discuss the results on February 25, 2015 at 10:00AM (ET). To access via teleconference,
please dial (647) 427-7450. A playback will be made available two hours after the event at (416) 849-0833, access code: 61460503. To
access the conference call via webcast, a link is available at www.choicereit.ca in the “Events and Webcast” section under “News and Events”.
Head Office
Choice Properties Real Estate Investment Trust
22 St. Clair Avenue East, Suite 500
Toronto, Ontario M4T 2S5
Tel: 416-960-6990
Toll free:1-855-322-2122
Fax: 905-861-2326
Stock Exchange Listing and Symbol
The Trust’s Units are listed on the Toronto Stock Exchange and
trade under the symbol “CHP.UN”
Distribution Policy
Choice Properties’ Board retains full discretion with respect to the
timing and quantum of distributions. Declared distributions are paid
to Unitholders of record at the close of business on the last
business day of a month on or about the 15th day of the following
month.
Independent Auditors
KPMG LLP
Chartered Professional Accountants
Toronto, Canada
Registrar and Transfer Agent
Canadian Stock Transfer Company Inc.
P.O. Box 700, Station B
Montreal, QC, H3B 3K3
Tel: (416) 682-3860
Toll free: 1-800-387-0825 (Canada and US)
Fax: 1 (888) 249-6189
E-Mail: inquiries@canstockta.com
Website: www.canstockta.com
Investor Relations
Tel: 416-960-6990
Toll free: 1-855-322-2122
Email: investor@choicereit.ca
Website: www.choicereit.ca
Additional financial information has been filed electronically with
various securities regulators in Canada through the System for
Electronic Document Analysis and Retrieval (SEDAR),
www.sedar.com. Choice Properties holds a conference call shortly
following the release of its quarterly results. These calls are
archived in the Investor Relations section of the Trust’s website,
www.choicereit.ca
Trustees
Galen G. Weston
Executive Chairman and President, Loblaw
Christie J.B. Clark2
Corporate Director
John Morrison
President and Chief Executive Officer,
Choice Properties REIT
Graeme Eadie1
Senior Vice President, Head of Real Estate
Investments for Canada Pension Plan
Investment Board
Kerry D. Adams1,2
President, K. Adams & Associates Limited
Michelle Felman2
Corporate Director
1 Audit Committee.
2 Governance, Compensation and Nominating Committee.
Michael P. Kitt1,2
Executive Vice President, Canada for
Oxford Properties Group
Daniel F. Sullivan2
Corporate Director
Paul R. Weiss1
Corporate Director
Ce rapport est disponible en français.
Choice Properties REIT 2014 Annual Report 78
Ce rapport est disponible en français.
www.choicereit.ca