OUR PLAN
IN ACTION
Annual Report 2015
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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 41.6 million square feet of gross leasable
area and consists of 519 properties focused on shopping centres anchored
by supermarkets and drugstores as well as stand-alone supermarkets
and drugstores. 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.
GEOGRAPHIC DISTRIBUTION
RETAIL
WAREHOUSE
LAND
INDUSTRIAL
OFFICE
1
YUKON TERRITORY
RETAIL
1
NORTHWEST
TERRITORIES
RETAIL
BRITISH
COLUMBIA
RETAIL
28
SURREY, BC
LAND 1
SURREY, BC
WAREHOUSE 1
CALGARY, AB
WAREHOUSE 1
53
ALBERTA
RETAIL
SASKATCHEWAN
RETAIL
MANITOBA
RETAIL
15
14
207
ONTARIO
RETAIL
1
REGINA, SK
WAREHOUSE
ONTARIO
INDUSTRIAL 1
4
ONTARIO
WAREHOUSE 2
1
BRAMPTON, ON
OFFICE
ONTARIO
LAND
98.6%(1)
OCCUPIED
PRINCE EDWARD ISLAND
RETAIL
105
QUEBEC
RETAIL
NEWFOUNDLAND
& LABRADOR
RETAIL
9
27
4
3
37
1
ST. JOHN’S, NL
WAREHOUSE
NOVA SCOTIA
RETAIL
NEW BRUNSWICK
WAREHOUSE
QUEBEC
WAREHOUSE 2
NEW BRUNSWICK
RETAIL
(1) As of December 31, 2015.
ADJUSTED FUNDS FROM OPERATIONS
(AFFO) (per unit)
AFFO PAYOUT RATIO
(per unit)
0.25
0.20
0.15
0.10
0.05
0
5
8
1
0
$
.
Q1
2014
4
8
1
0
$
.
Q2
2014
9
8
1
0
$
.
Q3
2014
8
8
1
0
$
.
Q4
2014
1
9
1
0
$
.
Q1
2015
1
9
1
0
$
.
Q2
2015
4
9
1
0
$
.
Q3
2015
1
0
2
.
0
$
Q4
2015
100
80
60
40
20
0
%
8
7
8
.
Q1
2014
%
3
.
8
8
Q2
2014
%
0
.
6
8
Q3
2014
%
4
.
6
8
Q4
2014
%
1
5
8
.
Q1
2015
%
1
5
8
.
Q2
2015
%
8
.
3
8
Q3
2015
%
8
.
0
8
Q4
2015
It’s an exciting time in the evolution of
Choice Properties. There is action on all
fronts as we work with our development
partners and a growing roster of tenants on
exciting development projects that leverage
our retail real estate expertise and provide
us with opportunities to increase value.
519(1)
PROPERTIES
(1) As of December 31, 2015.
(1)
$8.6B
FAIR VALUE
41.6M
(1)
SQUARE FEET (OF GLA)
CHOICE PROPERTIES REIT ANNUAL REPORT 2015
1
“ It’s people that put a Plan in Action.
In 2015, we executed our plan,
acquiring, developing and managing
our properties. With the experience,
passion and focus of our people, we
created value for our Unitholders –
that’s our Plan in Action.”
FELLOW UNITHOLDERS
The past year was highly productive for Choice Properties
REIT (“Choice Properties”). We saw our Plan in Action deliver
on many different fronts to achieve our targeted results.
We kicked off the year on solid footing, leveraging our new
enterprise resource planning system to provide our team
of real estate professionals with the information they
needed to grow our business. This momentum allowed
us to deliver positive results for our tenants, partners,
employees and Unitholders.
Progress took hold in each of the three pillars of our
strategic plan – acquisitions, development and active
management. We acquired 47 additional properties,
constructed 124,000 square feet of new gross leasable
area (“GLA”) on our existing properties and improved
overall occupancy rates. We made significant progress
on new development projects that we expect to complete
in 2016 and beyond. Our acquisition, development,
leasing and property management teams collaborated
to accomplish these results. A number of the teams’
key achievements are highlighted in this Annual Report.
We also improved financial flexibility by raising a total of
$450 million in senior unsecured debentures, which
reduced our overall weighted average interest rate. From
marketing to leasing, building plans to city permits,
community consultation
to construction plans, and
financing to investments in our assets, each project
we pursued during the year demanded a high degree
of real estate expertise and helped us establish and
strengthen our relationships and reputation.
2
CHOICE PROPERTIES REIT ANNUAL REPORT 2015
Our 2015 financial results reflect our Plan in Action, with four
consecutive quarters of growth and improvement in our key
performance metrics. As of December 31, 2015, the fair
value of our assets was $8.6 billion, a 7.8% increase over the
prior year. Funds from operations for the year were $0.966
per unit on a fully diluted basis, a 5.9% increase, and annual
rental revenue was $743.1 million, up 8.8% over 2014, as a
result of our ambitious acquisition activity during the year.
Looking ahead to 2016, we will continue to raise the bar
and drive forward, delivering the results needed to further
our growth strategy. We will accelerate our growth and
value creation by doing more of what we did well in 2015 –
creating places where Canadians want to shop. We are
currently on track to grow our grocery- and drug-anchored
real estate holdings through development, where we
expect to construct an additional 651,000 square feet of
new GLA in 2016. Our leasing team is already hard at work
securing tenants for existing and future sites, our property
management team is improving operations in order to
increase consumer traffic to our existing retail footprints,
and our acquisition and development teams are focused
on driving our growth with accelerated intensification and
green field projects.
In the year ahead, we will continue our emphasis on
community consultation associated with some of our large
development projects, such as our West Block project
at Lake Shore Boulevard West and Bathurst Street in
Toronto, where we are restoring a local landmark into
an urban mixed-use development. We recognize our city-
building responsibilities to municipalities and citizens.
Our urban-redevelopment programs will create attractive,
functional and convenient places for residents to live, work
and shop.
Since the launch of Choice Properties in 2013, we have
focused on a clear and straightforward growth strategy
to create value and enhance the long-term value of our
properties. Today, Choice Properties owns and manages
519 properties, representing nearly 42 million square feet of
GLA across Canada. We are executing our strategic plan.
Our development pipeline continues to grow, while our
existing portfolio maintains one of the highest occupancy
rates in the industry, anchored by some of the most
recognizable retail brands in the country.
It’s an exciting time in the evolution of Choice Properties.
There is action on all fronts as we work with our
development partners and a growing roster of tenants
on exciting development projects that leverage our retail
real estate expertise and provide us with opportunities
to increase value. I am proud of what we’ve accomplished.
People are the most important aspect of our business.
Each member of our team has played an important role
in improving our portfolio, in developing properties that fi t
the needs of Canadian retailers and in driving the positive
fi nancial results that have made Choice Properties a
dependable investment for our Unitholders.
Seeing the results of our Plan in Action is rewarding for all
of us, but there is much more to come. We look forward to
sharing our continued success with you in 2016.
John R. Morrison
President and Chief Executive Offi cer
EXECUTIVE TEAM
John R. Morrison
President and Chief Executive Offi cer
Bart Munn
Executive Vice President and
Chief Financial Offi cer
Lesley Gibson
Vice President, Financial Reporting
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
CHOICE PROPERTIES REIT ANNUAL REPORT 2015
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)
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(i)
Net Operating Income(1)
Net income (loss)
Net income (loss) per unit diluted
Funds from Operations(1) per unit diluted(ii)
Funds from Operations(1) payout ratio(ii)
Adjusted Funds from Operations(1) per unit diluted
Adjusted Funds from Operations(1) payout ratio
Distribution declared per unit
Weighted average Units outstanding – diluted
Total assets
Long-term debt and Class C LP Units
Debt to total assets(iii)
Debt service coverage(iii)
Debt to EBITDAFV(1) (iii)
Indebtedness(iv) – weighted average term to maturity
Indebtedness(iv) – weighted average coupon rate
2015
519
41.6
2014
472
38.9
2013
(v)
435
36.3
11.6 years
11.7 years
12.7 years
$
$
$
$
$
$
$
$
$
$
$
12.80
98.6%
743,100
520,642
514,265
(155,276)
(0.386)
0.966
67.3%
0.777
83.7%
0.650004
402,582,183
8,905,889
3,881,390
44.5%
3.6x
7.3x
4.7 years
3.50%
$
$
$
$
$
$
$
$
$
$
$
13.14
98.1%
682,923
476,368
475,739
199,614
0.522
0.912
71.3%
0.745
87.2%
0.650004
382,636,320
8,192,438
3,436,621
44.0%
3.5x
7.3x
5.3 years
3.58%
$
$
$
$
$
$
$
$
$
$
$
13.41
97.7%
318,507
288,181
222,267
67,148
0.185
0.444
71.8%
0.360
88.6%
0.318917
363,767,339
7,447,742
3,376,167
47.0%
3.4x
7.4x
5.0 years
3.40%
(i) Cash flows from operating activities excludes interest paid.
(ii)
FFO(1) per unit and payout ratio, for the year ended December 31, 2014, were calculated using FFO(1) (excluding other adjustments). See Section 17, “Non-GAAP Financial Measures”,
of the Management’s Discussion and Analysis of the 2015 Annual Report for details.
(iii) 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.
(iv) Indebtedness reflects senior unsecured debentures only.
(v) 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 31 to 34 of the Management’s Discussion and Analysis of the 2015 Annual Report – Financial Review. Other risks and uncertainties
not currently 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 2015
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 2015
2015 ACHIEVEMENTS
ACQUISITIONS
The fi rst two Shoppers
Drug Mart sites for
Choice Properties’
portfolio.
47
PROPERTIES
ACQUIRED
~$24M
~$369M
(1)
IN STABILIZED NOI
IN VALUE
MAINTAINING A STRONG FOUNDATION THROUGH SOUND FINANCIAL MANAGEMENT
Choice Properties announced a 3.1% increase (2) in
annual distributions supported by growing cash fl ows,
fi nancial fl exibility and a strong balance sheet.
$450M
RAISED IN SENIOR
UNSECURED DEBENTURES
44.5%
DEBT TO
TOTAL ASSETS
3.6X
DEBT SERVICE
COVERAGE RATIO
(1) Excluding fair-value adjustment to reflect the difference between fair value of the Exchangeable Units on the closing date compared to the volume-weighted
average value of the units referenced in the purchase and sale agreement.
(2) Effective for the January 29, 2016 distribution payable on February 16, 2016.
CHOICE PROPERTIES REIT ANNUAL REPORT 2015
5
DEVELOPMENT
West Block – a cornerstone
for neighbouring communities
in our fi rst urban mixed-use
redevelopment.
CONSTRUCTED
124,000(1)
SQUARE FEET OF
NEW GLA
CREATED
29
NEW RETAIL
SPACES
ACHIEVED
~9%(2)
RETURN
(1) Includes GLA for projects targeted for 2016 completion.
(2) Weighted average yield of completed development on eight existing properties completed in 2015.
6
CHOICE PROPERTIES REIT ANNUAL REPORT 2015
ACTIVE
MANAGEMENT
High-quality tenants
that complement our
food and drug anchors,
improving occupancy of
ancillary GLA to 87.5%.
INVESTED
$32.5M
IN MAINTAINING OUR
QUALITY ASSETS
ENTERED/SIGNED
LEASES TOTALLING
987,000
SQUARE FEET OF GLA
INCREASED RENEWAL
RENTAL RATES BY
12%
CHOICE PROPERTIES REIT ANNUAL REPORT 2015
7
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. She is currently an
adjunct professor there.
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 Corporation, 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 a member of the Building Owners and
Managers Association of Canada’s National
Advisory Council.
John R. Morrison
Mr. Morrison
the President and Chief
is
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.
Mr. Morrison is a Trustee of Automotive Properties
REIT and former Vice Chairman of the Urban
Land Institute Toronto District Council, former
Trustee for the International Council of Shopping
Centers, where he served on the Executive
Committee, and is now Divisional Vice President
for Canada.
BOARD OF TRUSTEES
Kerry D. Adams
Ms. Adams currently serves as President of
K. Adams & Associates Limited. She is the
Chair of the Bank of Nova Scotia’s AURION Real
Estate Committee.
Ms. Adams is a Fellow Chartered Accountant and
a Fellow Chartered Professional Accountant,
and she 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,
former
Chief Executive Officer and senior partner of
PricewaterhouseCoopers LLP. Prior to being
elected as its CEO, Mr. Clark was a National
Managing Partner and a member of the firm’s
Executive Committee from 2001 to 2005.
is
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, Air Canada, Hydro One Inc. and
Hydro One Limited. In addition to his public
company board memberships, Mr. Clark is
Chair of the Finance Committee of Alpine
Canada and a member of the Advisory Council
of the Stephen J.R. Smith School of Business
at Queen’s University.
Graeme M. Eadie
Mr. Eadie is the Senior Managing Director and
Global Head of Real Estate Investments for
the 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
in 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 2015
Daniel F. Sullivan
Mr. Sullivan, a corporate director, held the
in
position of Consul General for Canada
New York City from 2006 to 2011. Prior to
Mr. Sullivan’s appointment as Consul General,
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 an M.B.A., and he also holds
an M.B.A. from the University of Toronto.
Mr. Sullivan is a Trustee of Allied Properties
Real Estate Investment Trust and Crius Energy
Trust, and is a director of 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 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.
m
o
c
.
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 a director of Soulpepper
Theatre Company and past Chairman of Toronto
Rehab Foundation.
Galen G. Weston
is Executive Chairman and
Mr. Weston
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.
is a director of Wittington
Mr. Weston
Investments, Limited and a chair of President’s
Choice Brands.
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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 traded 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 26, 2016 at 11:00 a.m.
St. Andrew’s Club and Conference Centre
Garden Suite
150 King Street West, 16th 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?
41.6M square feet of well-located retail
properties across Canada
Canada’s leading food retailer is the
principal tenant and anchor, providing
regular consumer traffi c as well as
stable and secure income from
long-term leases
Existing development potential in
current portfolio comprising excess
land for intensifi cation, redevelopment
and green fi eld 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
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(This page has been left blank intentionally.)
OUR PLAN
IN ACTION
Annual Report 2015
Financial Review
(This page has been left blank intentionally.)
Management’s Discussion and Analysis
1.
2.
3.
4.
5.
6.
7.
8.
Forward-Looking Statements
Overview
Objectives and Strategy
3.1 Annual Highlights
Key Performance Indicators and Selected Financial Information
Investment Properties
5.1 Valuation Method
5.2 Acquisition of Investment Properties
5.3 Development Activities
5.4 Active Management
Consolidated Results of Operations
Other Measures of Performance
Liquidity and Capital Resources
8.1 Major Cash Flow Components
8.2 Liquidity and Capital Structure
8.3 Credit Ratings
8.4 Unit Equity
8.5 Contractual Obligations
9.
Quarterly Results of Operations
9.1 Results by Quarter
9.2 Fourth Quarter Results
9.3 Other Measures of Fourth Quarter Performance
10.
11.
12.
13.
14.
15.
16.
17.
Disclosure Controls and Procedures
Internal Control over Financial Reporting
Enterprise Risks and Risk Management
12.1 Operating Risks and Risk Management
12.2 Financial Risks and Risk Management
Related Party Transactions
Critical Accounting Estimates and Judgments
Accounting Standards
Outlook
Non-GAAP Financial Measures
17.1 Net Operating Income
17.2 Funds from Operations
17.3 Adjusted Funds from Operations
17.4 Earnings Before Interest, Taxes, Depreciation, Amortization and Fair Value
18.
Additional Information
Footnotes
(1)
(2)
See Section 17, “Non-GAAP Financial Measures”, of this MD&A.
To be read in conjunction with Section 1, “Forward-Looking Statements”, of this MD&A.
2
3
3
4
5
6
7
8
10
11
14
18
19
19
20
22
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Choice Properties REIT 2015 Annual Report 1
Management’s Discussion and Analysis
The following Management’s Discussion and Analysis (“MD&A”) for Choice Properties Real Estate Investment Trust (“Choice Properties” or
the “Trust”) should be read in conjunction with the Trust’s consolidated financial statements and the accompanying notes in this Annual Report
for the years ended December 31, 2015 and December 31, 2014. In addition, the MD&A should be read in conjunction with the Trust’s “Forward-
Looking Statements” in Section 1, of this MD&A.
Choice Properties' consolidated financial statements and the accompanying notes for the three months and year ended December 31, 2015
have been prepared in accordance with International Financial Reporting Standards (“IFRS” or “GAAP”). These consolidated financial
statements include the accounts of the Trust and other entities that the Trust controls and are reported in thousands of Canadian dollars,
except where otherwise noted. A glossary of terms and ratios used throughout this Annual Report can be found beginning on page 81.
Choice Properties reports non-GAAP financial measures, including Net Operating Income(1) (“NOI”), Funds from Operations(1) (“FFO”), and
Adjusted Funds from Operations(1) (“AFFO”), 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. The measures do not have any standardized definitions
prescribed by IFRS and are, therefore, unlikely to be comparable to similar measures presented by other reporting insurers.
This information in this MD&A is current to February 17, 2016, unless otherwise noted.
1.
FORWARD-LOOKING STATEMENTS
This Annual Report, including this MD&A, contains forward-looking statements about Choice Properties’ objectives, outlook, 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
Strategy”, Section 5 “Investment Properties”, Section 6 “Consolidated Results of Operations”, Section 7 “Other Measures of Performance”,
Section 8 “Liquidity and Capital Resources”, Section 9 “Quarterly Results of Operations” and Section 16 “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, outlook 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 the Trust’s actual results to differ materially from those expressed, implied or projected in the
forward-looking statements, including those described in Section 12, “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 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,
redevelopment, or intensification;
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.
2 Choice Properties REIT 2015 Annual Report
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 2015 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.
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 519 properties with a total Gross Leasable Area (“GLA”) of 41.6 million
square feet as at December 31, 2015. Choice Properties’ portfolio includes 501 retail properties, 11 warehouse properties, one office complex,
one industrial site and five undeveloped parcels of land. The retail properties are made up of: (i) 324 properties with a stand-alone retail store
operating under a Loblaw banner; (ii) 172 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.
The parent company of Choice Properties is Loblaw, which held an 83.0% effective interest in Choice Properties as at December 31, 2015.
Loblaw’s controlling shareholder is George Weston Limited (“GWL”), which also held a 5.6% direct interest in Choice Properties as at
December 31, 2015.
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.
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 properties. 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.
Choice Properties REIT 2015 Annual Report 3
Management’s Discussion and Analysis
3.1
Annual Highlights
During 2015, Choice Properties:
•
•
•
•
•
Reported FFO(1) per unit diluted of $0.966, an increase of $0.054 or 5.9% compared with $0.912 in the year ended 2014;
Reported rental revenue of $743.1 million, an increase of $60.2 million or 8.8% compared with $682.9 million in the year ended 2014;
Added 47 properties to the portfolio including two parcels of land for future development;
Developed 124,000 square feet of GLA creating 29 new retail spaces during 2015;
Launched the West Block project at Lake Shore Boulevard and Bathurst Street in Toronto to redevelop the property as an urban multi-
use site in a joint venture partnership with Wittington Properties Limited (“Wittington”), the parent company of GWL;
Completed internalization of development, leasing, property management and support functions;
Grew same property, same GLA, NOI by 1.9% to $470,593 from $461,677 due to higher ancillary occupancy rates, higher average base
rent on new ancillary leases, and rent steps in Loblaw leases;
Increased occupancy rate to 98.6% from 98.1% as at December 31, 2014;
Issued senior unsecured debentures totaling $450,000 reducing the Trust’s weighted average coupon rate from 3.58% to 3.50%; and
Announced a 3.1% increase in monthly distributions effective as of January 29, 2016 and payable on February 16, 2016.
•
•
•
•
•
4 Choice Properties REIT 2015 Annual Report
4.
KEY PERFORMANCE INDICATORS AND SELECTED ANNUAL FINANCIAL INFORMATION
Choice Properties has identified specific key financial and operating performance indicators that were derived from, and should be read in
conjunction with, the annual consolidated financial statements of the Trust dated December 31, 2015 and 2014. The analysis of the indicators
focuses on trends and significant events affecting the financial condition and results of operations of the Trust.
As at or for the years ended December 31
($ thousands except where otherwise indicated)
(unaudited)
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(i)
Net operating income(1)
Net income (loss)
Net income (loss) per unit diluted
FFO(1) per unit diluted(ii)
FFO(1) payout ratio(ii)
AFFO(1) per unit diluted
AFFO(1) payout ratio
Distribution declared per unit
Weighted average Units outstanding – diluted
Total assets
Long term debt and Class C LP Units
Debt to total assets(iii)
Debt service coverage(iii)
Debt to EBITDAFV(1)(iii)
Indebtedness(iv) – weighted average term to maturity
Indebtedness(iv) – weighted average coupon rate
2015
519
41.6
2014
472
38.9
2013(v)
435
36.3
11.6 years
11.7 years
12.7 years
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
12.80
98.6%
743,100
520,642
514,265
(155,276)
(0.386)
0.966
67.3%
0.777
83.7%
0.650004
402,582,183
8,905,889
3,881,390
44.5%
3.6x
7.3x
4.7 years
3.50%
$
$
$
$
$
$
$
$
$
$
$
13.14
98.1%
682,923
476,368
475,739
199,614
0.522
0.912
71.3%
0.745
87.2%
0.650004
382,636,320
8,192,438
3,436,621
44.0%
3.5x
7.3x
5.3 years
3.58%
13.41
97.7%
318,507
288,181
222,267
67,148
0.185
0.444
71.8%
0.360
88.6%
0.318917
363,767,339
7,447,742
3,376,167
47.0%
3.4x
7.4x
5.0 years
3.40%
(i)
(ii)
Cash flows from operating activities excludes interest paid.
FFO(1) per unit and payout ratio, for the years ended December 31, 2014 and 2013, were calculated using FFO(1) (excluding other adjustments). See Section 17, “Non-
GAAP Financial Measures”,and Section 9.1, “Results by Quarter “, respectively, of this MD&A for details.
(iii) Debt ratios include Class C LP Units, but exclude Exchangeable Units, see Section 8, “Liquidity and Capital Resources”. The ratios are non-GAAP financial measures
calculated based on the trust indentures as supplemented.
(iv)
Indebtedness reflects senior unsecured debentures only.
(v) Based on operations for the period from July 5, 2013 to December 31, 2013.
Consolidated results for the last three fiscal years were primarily impacted by growth. The Trust began operations on July 5, 2013 with 425
investment properties and 35.3 million square feet of GLA. Since that time, Choice Properties has acquired 94 net new properties representing
approximately 6.3 million net square feet of GLA and added approximately 175,000 square feet of GLA through development activities.
The Trust has maintained strong balance sheet indicators that are well within Choice Properties’ Declaration of Trust covenants. Since
December 31, 2013, the Trust has raised $900,000 through the issuance of senior unsecured debentures at interest rates ranging from 2.297%
to 4.293% with maturity dates complementary to existing debt.
FFO(1) for the year ended December 31, 2014 was adjusted for internalization costs of $2,568 and non-cash finance charges of $48,911. The
non-cash finance charges were the result of accelerated amortization of net debt discounts due to replacement of notes issued to Loblaw in
connection with the initial public offering (“IPO”) in 2013.
FFO(1) for the year ended December 31, 2013 was adjusted for start-up costs of $2,524.
Choice Properties REIT 2015 Annual Report 5
Management’s Discussion and Analysis
5.
INVESTMENT PROPERTIES
Choice Properties is the owner, manager and developer of well-located retail and commercial properties across Canada. The following is a
continuity schedule for the Trust’s investment properties for the periods ended as indicated:
($ thousands)
Income
producing
properties
Properties
under
development
Balance, beginning of year
$
7,849,461
$
56,517
Year ended
Year ended
December 31, 2015
7,905,978
$
December 31, 2014
7,287,759
$
Adjustment to fair value of investment properties
Acquisitions of investment properties(i)
Capital expenditures(ii)
Leasing capital expenditures
Dispositions
Amortization of straight-line rent and tenant
improvement allowances
Balance, end of year
71,981
363,517
136,452
7,884
—
36,405
—
11,783
27,000
—
—
—
71,981
375,300
163,452
7,884
—
36,405
$
8,465,700
$
95,300
$
8,561,000
$
81,931
457,003
55,802
2,785
(13,480)
34,178
7,905,978
Includes acquisition costs and an adjustment to record Exchangeable Units at closing date fair value.
(i)
(ii) Capital expenditures include building improvements, property capital, development capital and capitalized interest.
The Trust’s properties are well located and well suited within their respective markets. The portfolio is diversified between large, medium and
small urban markets across Canada, with the majority of its base rent generated from large and medium urban markets, often in close proximity
to major commercial arteries with easy highway access and high visibility. As at December 31, 2015, the Trust’s property portfolio demographics
by market size and within the top six markets are summarized below:
(i)
(ii)
Base rent for the year ended December 31, 2015, including straight-line rent.
Based on the definitions of Census Metropolitan Area (CMA) from Statistics Canada published in 2014.
Approximately 63.0% of the base rent for the year ended December 31, 2015 was derived from large and medium urban markets. Approximately
47.9% of the portfolio’s base rent was generated from large urban markets with a particular concentration in Toronto, Montreal and Vancouver.
6 Choice Properties REIT 2015 Annual Report
5.1
Valuation Method
Investment properties were measured at fair value, primarily determined using the discounted cash flow method. Under this 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. Choice Properties’ valuation inputs, including capitalization rates, are supported
by quarterly reports from independent appraisers. Below are the key rates used in the modeling process for both internal and independent
appraisals:
Discount rate
Terminal capitalization rate
Overall capitalization rate
As at
As at
December 31, 2015
December 31, 2014
Range Weighted average
7.08%
5.75% - 11.25%
Range
6.00% - 10.25%
Weighted average
7.09%
5.25% - 10.50%
5.00% - 10.50%
6.50%
6.17%
5.50% - 9.50%
5.00% - 9.00%
6.50%
6.18%
For the year ended December 31, 2015, Choice Properties recorded a gross fair value increase of $279,722 on income producing properties
and properties under development, excluding acquisitions, which was offset by capital expenditures of $171,336 and amortization of straight-
line rent and tenant improvement allowances of $36,405, for a net adjustment to fair value of $71,981.
Included in certain investment properties acquired from Loblaw is excess land with development potential. Choice Properties will compensate
Loblaw, over time, with intensification fees determined by a site intensification payment grid as outlined in the Strategic Alliance Agreement
(see Section 13, “Related Party Transactions”, of this MD&A), should Choice Properties pursue activity resulting in the intensification of such
excess land. The fair value of this excess land has been recorded in the financial statements.
Choice Properties REIT 2015 Annual Report 7
Management’s Discussion and Analysis
5.2
Acquisition of Investment Properties
The following table summarizes the investment properties acquired in the year ended December 31, 2015. For a detailed list of all properties
acquired in 2015 and 2014, refer to Section 18 “Additional Information”, of this MD&A.
($ thousands except where otherwise indicated)
(unaudited)
Number of
properties
GLA
(in square feet)
Purchase
price(i)
Debt
assumed
Exchangeable
Units
issued
Ownership
interest
Cash
Acquisitions from Loblaw:
Development land in Barrie, Ontario
Warehouse in Pickering, Ontario
Portfolio of retail properties(ii)
Retail in Midland & Courtice, Ontario
Portfolio of retail properties(iii)(iv)
Total Acquisitions from Loblaw
Acquisitions from third-parties:
Development land in Kanata, Ontario
Retail in Porter’s Lake, Nova Scotia(v)
Retail in Mississauga, Ontario(v)
Total Acquisitions from third-parties
Total Acquisitions
1
1
38
2
4
46
1
—
—
1
47
— $
9,567
$
— $
2,808
$
6,759
921,256
81,200
1,466,885
201,346
48,638
161,018
18,150
45,635
2,597,797
355,898
—
54,569
12,023
66,592
1,938
5,200
5,600
12,738
—
—
—
—
—
—
—
2,123
2,123
—
102,200
3,200
15,159
81,200
99,146
14,950
30,476
123,367
232,531
—
—
—
—
1,938
5,200
3,477
10,615
2,664,389
$ 368,636
$
2,123
$
123,367
$ 243,146
100%
100%
100%
100%
100%
50%
100%
100%
(i)
(ii)
Purchase price excludes acquisition costs.
Purchase price and Exchangeable Units values both excluded an adjustment of $1,349 to reflect the increase of the fair value of the Exchangeable Units on the closing
date compared to the volume weighted average value of the units referenced in the purchase and sale agreement.
(iii) Purchase price and Exchangeable Units values both excluded an adjustment of ($555) to reflect the decrease of the fair value of the Exchangeable Units on the closing
date compared to the volume weighted average value of the units referenced in the purchase and sale agreement.
(iv) One of the properties in the acquired portfolio was combined with the adjacent Choice Properties owned site.
(v)
The property was combined with the adjacent Choice Properties owned site.
Acquisitions in the Fourth Quarter of 2015
On November 17, 2015, Choice Properties acquired a 161,018 square foot portfolio with properties in Ontario and Nova Scotia at a purchase
price of $45,635, excluding acquisition costs and an adjustment of $555 for the difference between the fair value of the Exchangeable Units
on closing compared to the volume weighted average value determined in accordance with the purchase and sale agreement. The acquired
portfolio includes approximately 30,000 square feet of development potential at the River Road site in Ottawa, Ontario, of which 15,000 square
feet will be developed as a Shoppers Drug Mart store in the near-term(2). In addition, the portfolio includes a gas bar property adjacent to an
existing Choice Properties owned site in Yarmouth, Nova Scotia. Upon acquisition, this property was combined with the adjacent Choice
Properties owned site. The property in Aurora, Ontario is 100% leased to ancillary tenants and is shadow anchored by an adjacent Choice
Properties stand-alone Loblaw bannered food store. Upon completion of the Shoppers Drug Mart development in Ottawa, Ontario, the implied
capitalization rate of the acquired portfolio is expected to be 5.85%.(2)
Additional Acquisitions in 2015
On January 9, 2015, Choice Properties acquired a 16-acre site in Barrie, Ontario from Loblaw at a purchase price of $9,567, 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, at fair value, the PenEquity parcel pursuant to a mezzanine loan agreement between Choice Properties
and PenEquity.
8 Choice Properties REIT 2015 Annual Report
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 $3,875, with Choice Properties’ proportionate share being 50%, or
$1,938, excluding acquisition costs. Choice Properties funded its partners’ collective 50% interest through a 5-year mezzanine loan at an
interest rate of 8% per annum. 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, at fair value, the remaining
50% interest in the property.
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 was immediately accretive, with an estimated stabilized NOI(1) of $5,300 representing
a capitalization rate of 6.50%. This modern ambient temperature warehouse was constructed in 2005 and further expanded in 2012 and is
well-located, just east of Toronto, 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 was immediately accretive, with an estimated stabilized NOI(1) of
approximately $494 representing a capitalization rate of 9.50%. The shopping centre is currently 85% occupied by 20 tenants, including a
number of national retailers, with lease maturities ranging up to 2022. The shopping centre is anchored by a 47,000 square foot Loblaw stand-
alone grocery store on an adjacent property that Choice Properties owns.
On June 1, 2015, Choice Properties acquired a portfolio of 38 investment properties from Loblaw. The acquisition added 1,466,885 square
feet of GLA across Canada at a purchase price of $201,346, excluding acquisition costs and an adjustment of $1,349 for the difference between
the fair value of the Exchangeable Units on closing compared to the volume weighted average value determined in accordance with the
purchase and sale agreement. The acquisition was immediately accretive, with an estimated stabilized NOI(1) of $14,500, representing a
capitalization rate of 7.19%. At acquisition, the occupancy rate of the acquired portfolio was over 99%.
On August 11, 2015, Choice Properties acquired a 12,023 square foot, fully-occupied, retail building adjacent to an existing Choice
Properties owned site located in Mississauga, Ontario. The total purchase price was $5,600 excluding acquisition costs. The acquisition was
immediately accretive, with an estimated stabilized NOI(1) of $337, representing a capitalization rate of 6.07%. Upon acquisition, the property
was combined with the adjacent Choice Properties owned site and together re-categorized as one multi-tenant property.
On August 20, 2015, Choice Properties acquired two stand-alone pharmacies located in Midland and Courtice, Ontario from Loblaw with total
GLA of 48,638 square feet for a purchase price of $18,150, excluding acquisition costs. The acquisition was immediately accretive, with an
estimated stabilized NOI(1) of $1,118, representing a capitalization rate of 6.16%. Both properties are occupied by Shoppers Drug Mart, each
with a 20-year initial lease term and five five-year renewal options.
Choice Properties REIT 2015 Annual Report 9
Management’s Discussion and Analysis
5.3
Development Activities
During the year ended December 31, 2015, Choice Properties made progress on its development program as illustrated below:
($ thousands except where otherwise
indicated)
(unaudited)
2015 projects completed(i)
Intensification
Projects to be completed in 2016
Intensification
Redevelopment
Greenfield
Projects to be completed in 2017
Intensification
Redevelopment
Greenfield
Projects to be completed in 2018
Development projects(ii)
Expected
total
development
GLA
(in square feet)
Development
GLA completed
in 2015(iii)
(in square feet)
Remaining
development
GLA expected
to be completed
(in square feet)
Expected
project
yield
Expected
total
project
spend(iv)
Life-to-date
project
spend(iv)
Expected
cost to
complete
Committed
future
project
spend
43,000
43,000
500,000
15,000
217,000
732,000
299,000
5,000
164,000
468,000
350,000
350,000
43,000
43,000
78,000
3,000
—
81,000
—
—
—
—
—
—
—
—
422,000
12,000
217,000
651,000
299,000
5,000
164,000
468,000
350,000
350,000
9% $
11,632
$
11,632
$
— $
9%
11,632
11,632
—
7% - 12%
150,500
6% - 8%
6% - 7%
6,400
68,100
73,318
4,886
48,170
6% - 12%
225,000
126,374
6% - 9%
6% - 8%
7% - 8%
6% - 9%
101,700
2,100
64,700
168,500
7% - 8%
7% - 8%
108,800
108,800
1,390
—
18,786
20,176
200
200
77,182
1,514
19,930
98,626
100,310
2,100
45,914
148,324
108,600
108,600
—
—
12,800
100
5,600
18,500
—
—
900
900
—
—
Total
1,593,000
124,000
1,469,000
6% - 12% $ 513,932
$
158,382
$
355,550
$
19,400
(i)
(ii)
The yield for completed projects is presented on a weighted average basis.
2018 projects are in various stages of early development. Due to the long-term nature of these projects and on-going adjustments in expectations concerning timing,
occupancy and costs, some data points are not available.
(iii) Completed GLA is defined as GLA for which tenants have possession.
(iv) Project spend, for the purpose of calculating the expected yield, includes land acquisition costs and intensification payments to be made to Loblaw.
2015 projects completed During the fourth quarter of 2015, Choice Properties completed the intensification of five properties: Ancaster,
Vaughan and Lindsay, Ontario; Edmonton, Alberta; and Val Belair, Quebec. These intensifications added approximately 17,000 square feet
for a new Shoppers Drug Mart in Edmonton, Alberta, 8,000 square feet of new ancillary space and 6,000 square feet of Loblaw expansions.
These projects, along with the previously completed retail unit in Saint John, New Brunswick and gas bars in Toronto and Sudbury, Ontario,
added approximately 43,000 square feet in 2015 with a weighted average yield of approximately 9%.
Projects to be completed in 2016 Time-lines for development projects span many months or several years, and are often completed in
stages. During the fourth quarter of 2015, Choice Properties made further progress on its 2016 projects adding approximately 58,000 square
feet of ancillary GLA in Calgary and Edmonton, Alberta; Regina, Saskatchewan; and Stoney Creek, Ontario. Year-to-date, Choice Properties
completed 81,000 square feet for projects to be completed in 2016, which includes the previously completed 17,000 square foot Shoppers
Drug Mart in Regina, Saskatchewan and 6,000 square feet of ancillary space. The remaining GLA expected to be completed in 2016 includes
approximately 400,000 square feet of new GLA for a Loblaw food store in Surrey, British Columbia; a Loblaw food store and a Shoppers Drug
Mart store in Barrie, Ontario; and a Loblaw warehouse expansion in Boucherville, Quebec. Tenants are expected to take possession throughout
2016 as the projects are completed in stages(2).
In total, Choice Properties developed approximately 124,000 square feet of GLA creating 29 new retail spaces in 2015. The Trust compensated
Loblaw with intensification fees of $2,334 in connection with developments completed during 2015. Choice Properties’ annual development
capital expenditure spent in 2015 was $130,515, including capitalized interest and amount spent on projects expected to be completed in
future years.
Choice Properties continues to refine its development pipeline based on municipal approvals, tenant leasing, and development costs. Choice
Properties expects to invest a total of approximately $502,300 (including costs spent to date) to develop up to 1,550,000 square feet of
additional GLA by the end of 2018. Development yields are expected to be accretive upon tenant occupancy(2).
10 Choice Properties REIT 2015 Annual Report
The following table indicates the anticipated square footage to be completed in each year, and the total cumulative expected capital cost to
complete the projects, including investments made in prior years(2).
($ thousands except where otherwise indicated)
(unaudited)
Potential development GLA (in square feet)
Estimated total project capital
Expected NOI(1) yield
Estimated total capital annual spend
2016(i)
732,000
225,000
6% - 12%
222,200
$
$
$
$
2017
468,000
168,500
6% - 9%
224,300
$
$
2018
350,000
108,800
7% - 8%
239,100
Total
1,550,000
$
$
502,300
6% - 12%
685,600
(i)
As at December 31, 2015, 81,000 square feet, or 11.1%, of the potential development GLA was completed.
5.4
Active Management
Leasing Activity
Choice Properties’ leasing activities are focused on driving value by adding ancillary tenants in business sectors that complement the grocery
anchor tenant. The following table summarizes the change in occupied GLA and average base rent for the year ended December 31, 2015:
(in square feet except where otherwise indicated)
(unaudited)
Occupied, January 1, 2015
Tenant openings
Tenant openings - identified for development
Tenant closures
Acquisitions
Developments
Re-certifications
Occupied, December 31, 2015
Occupied
GLA
38,129,000
314,000
90,000
(228,000)
2,657,000
124,000
8,000
41,094,000
Occupancy (%)
98.1% $
$
$
$
$
$
98.6% $
Average base rent
(per square foot)
13.14
12.76
3.00
11.38
8.92
27.51
N/A
12.80
Choice Properties’ principal tenant, Loblaw, represents 89.1% of the Trust’s GLA (December 31, 2014 - 88.4%). The remaining GLA is
designated ancillary space for leasing to third-party tenants. As at December 31, 2015, Choice Properties’ portfolio GLA, occupied GLA, and
occupancy rates were as follows:
(in millions of square feet except where otherwise indicated)
(unaudited)
Loblaw banners
Ancillary tenants
Total
As at
December 31, 2015(i)
Occupied
GLA
37.1
Occupancy
(%)
100.0%
4.0
41.1
87.5%
98.6%
GLA(i)
37.1
4.5
41.6
As at
December 31, 2014
Occupied
GLA
34.3
3.8
38.1
Occupancy
(%)
100.0%
83.6%
98.1%
GLA
34.3
4.6
38.9
(i)
Includes a change in tenancy between Loblaw and ancillary of 0.2 million square feet.
As at December 31, 2015, Loblaw represented approximately 91.1% (December 31, 2014 - 91.4%) of annual base rent. The weighted average
lease term-to-maturity on the Loblaw leases was 12.3 years at December 31, 2015 (December 31, 2014 - 12.7 years). The first maturity of a
Loblaw lease does not occur until 2023. Loblaw leases 37.1 million square feet of GLA, with approximately 84.5%, 14.0% and 1.5% of such
GLA attributed to retail, warehouse and office space, respectively.
Choice Properties has approximately 4.5 million square feet of GLA designated to lease to ancillary tenants that benefit from the consumer
traffic that a food and drug retailer attracts to a shopping centre. As at December 31, 2015, 4.0 million square feet was leased to ancillary
tenants with a weighted average lease term to maturity of 5.7 years (December 31, 2014 - 5.2 years).
Choice Properties REIT 2015 Annual Report 11
Management’s Discussion and Analysis
The future financial performance of investment properties will be impacted by occupancy rates, trends in rental rates achieved on new leasing
or renewing space currently leased, and contractual increases in rent(2). Rental activity by quarter varies based on the mix of tenants renewing.
In the three months ended December 31, 2015, Choice Properties entered into leases totaling approximately 235,000 square feet with an
average lease term of 9.3 years. The leasing activity for the portfolio is shown below:
2015
2014
For the three months ended December 31
(in square feet except where otherwise indicated)
(unaudited)
New leasing: Previously vacant
Newly developed
Renewals
Total
GLA
104,000
89,000
42,000
235,000
Average base rent
(per square foot)
13.32
28.46
19.70
20.19
$
$
$
$
GLA
38,000
$
— $
$
$
149,000
187,000
Average base rent
(per square foot)
13.42
—
13.75
13.68
In the year ended December 31, 2015, Choice Properties entered into leases totaling approximately 987,000 square feet with an average
lease term of 8.8 years. The leasing activity for the portfolio is shown below:
2015
2014
For the years ended December 31
(in square feet except where otherwise indicated)
(unaudited)
New leasing: Previously vacant
Identified for development
Newly developed
Renewals
Total (including identified for development)
GLA
314,000
90,000
124,000
459,000
987,000
Total (excluding identified for development)
897,000
Average base rent
(per square foot)
12.76
3.00
27.51
11.48
13.13
14.14
$
$
$
$
$
$
GLA
202,000
—
51,000
384,000
637,000
637,000
Average base rent
(per square foot)
12.84
N/A
17.29
12.98
13.64
13.64
$
$
$
$
$
The details of renewals are as follows:
Three Months
Year End
For the periods ended December 31
(unaudited)
Square footage renewed (in square feet)
Average base rent per square foot
Percentage increase in average base rent per square foot
Renewal retention rate(i)
$
2015
42,000
19.70
11.3%
42.8%
$
2014
149,000
13.75
7.9%
94.2%
$
2015
459,000
11.48
12.0%
78.0%
$
2014
384,000
12.98
6.5%
84.3%
(i)
The retention rate for the year ended December 31, 2015 excluded approximately 90,000 square feet of former ancillary retail space converted to Loblaw storage space.
This site has been identified for future redevelopment. Including this space, the renewal retention rate was 67.7%.
12 Choice Properties REIT 2015 Annual Report
The lease maturity profile for ancillary tenants as at December 31, 2015 was as follows:
Ancillary
GLA
(in square feet)
209,000
333,000
422,000
479,000
346,000
619,000
1,566,000
569,000
4,543,000
Expiring ancillary
GLA as a
percentage of
ancillary GLA
4.6%
7.4%
9.3%
10.5%
7.6%
13.6%
34.5%
12.5%
100.0%
Expiring ancillary
GLA as a
percentage of
total GLA
0.5% $
0.8%
1.0%
1.1%
0.8%
1.5%
3.8%
1.4%
10.9% $
Annualized
base rent
($ thousands)
1,955
4,326
5,946
5,823
5,783
8,610
22,249
—
54,692
Average base rent
(per square foot)
9.34
12.99
14.11
12.14
16.72
13.90
14.21
—
12.04
$
$
$
$
$
$
$
$
(unaudited)
Month-to-month
2016
2017
2018
2019
2020
2021 & Beyond
Vacant
Portfolio Ancillary Total
Operating Capital Expenditures
Property Capital Capital expenditures incurred to sustain the investment properties’ existing GLA are considered to be operational and are
deducted in the calculation of AFFO(1). During the year ended December 31, 2015, Choice Properties incurred $32,466 of property capital
expenditures, which are recoverable from tenants under the terms of their leases over the useful life of the improvements (2014 - recoverable
capital improvements of $26,805 and non-recoverable structural improvements of $2,718). Recoverable capital improvements may include
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 $63,929 as at December 31, 2015 (December 31, 2014 - $34,254),
the majority of which Choice Properties expects to recover from tenants over the useful lives or life of the improvements(2).
Property capital expenditures per annum(2) are expected to be $0.90 to $0.95 per square foot.
Leasing Capital Capital expenditures for leasing activities, such as leasing commissions or tenant improvement allowances, are considered
to be operational and are also deducted in the calculation of AFFO(1). Choice Properties incurred $5,548 of tenant improvement allowances
and $2,336 of direct leasing costs during the year ended December 31, 2015 (2014 - tenant improvement allowances of $1,541 and direct
leasing costs of $1,244).
Leasing capital varies with tenant demand and the balance between new and renewal leasing, as capital expenditures relating to securing
new tenants are generally higher than the costs relating to renewing existing tenants.
Choice Properties endeavours to fund operating capital from cash flows from operations(2).
Choice Properties REIT 2015 Annual Report 13
Management’s Discussion and Analysis
6.
CONSOLIDATED RESULTS OF OPERATIONS
Choice Properties’ financial results for the years ended December 31, 2015 and December 31, 2014 are summarized below:
For the years ended December 31
($ thousands)
Rental Revenue
Base rent
Property tax and operating cost recoveries
Other revenue
Property Operating Costs
Recoverable property taxes and operating costs
Non-recoverable operating costs
Net Property Income
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 Adjustments to Fair Value
Adjustment to fair value of Exchangeable Units
Adjustment to fair value of investment properties
Net Income (Loss)
2015
2014
Variance
favourable /
(unfavourable)
$
551,114
$
514,904
$
188,936
3,050
743,100
(189,193)
(2,986)
164,975
3,044
682,923
(169,792)
(2,758)
550,921
$
510,373
$
(21,765)
(844)
(345,051)
—
(23,315)
(414)
(380,654)
(450)
183,261
$
105,540
$
(410,518)
71,981
12,143
81,931
(155,276)
$
199,614
$
$
$
$
36,210
23,961
6
60,177
(19,401)
(228)
40,548
1,550
(430)
35,603
450
77,721
(422,661)
(9,950)
(354,890)
Rental Revenue Rental revenue is comprised primarily of base rent and recoveries from tenants for property taxes, operating costs and
qualifying capital expenditures.
For the years ended December 31
($ thousands)
(unaudited)
Same Properties(i)
Acquisitions
Dispositions
Total Revenue
$
$
$
2015
678,454
64,646
—
2014
663,689
17,935
1,299
743,100
$
682,923
$
Variance
favourable /
(unfavourable)
14,765
$
46,711
(1,299)
60,177
(i)
There were 432 properties that were owned throughout both the years ended December 31, 2015 and December 31, 2014 (“Same Properties”).
During the year ended December 31, 2015, rental revenue increased by $60,177, or 8.8% compared to the same period in 2014, primarily
due to additional rental revenue of $46,711 attributable to the Acquisitions, and an increase of $13,466 in revenue from Same Properties, net
of the Dispositions.
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 year ended ended December 31, 2015, the net amount of these items positively
impacted rental revenue by $36,405 (2014 - $34,178).
14 Choice Properties REIT 2015 Annual Report
Net Operating Income(1) All Properties
For the years ended December 31
($ thousands)
(unaudited)
Rental revenue
Less: Straight-line rental revenue
Property operating costs
Net Operating Income(1) All Properties
$
$
$
2015
743,100
(36,656)
706,444
(192,179)
2014
682,923
(34,634)
648,289
(172,550)
514,265
$
475,739
$
Variance
favourable /
(unfavourable)
60,177
$
(2,022)
58,155
(19,629)
38,526
For the year ended December 31, 2015, NOI(1) increased by $38,526 or 8.1% compared to the same period in 2014, primarily driven by an
increase of $29,746 from the Acquisitions, and $8,780 from Same Properties, net of the Dispositions.
Net Operating Income(1) Same Properties
For the years ended December 31
($ thousands)
(unaudited)
Rental revenue
Less: Straight-line rental revenue
Property operating costs
Net Operating Income(1) Same Properties
Less: Net Operating Income - developed GLA
Net Operating Income(1) Same Properties - same GLA
2015
678,454
(32,694)
645,760
(173,840)
471,920
(1,327)
470,593
$
$
$
$
$
$
Variance
favourable /
(unfavourable)
14,765
956
15,721
(5,836)
9,885
(969)
8,916
2014
663,689
(33,650)
630,039
(168,004)
462,035
(358)
461,677
$
$
$
For the year ended December 31, 2015, Same Properties’ NOI(1), measured on a same GLA basis, increased by $8,916 or 1.9% compared
to the same period in 2014, primarily due to an increase of $6,142 in base rent and net recoveries, which was driven by an improvement in
ancillary occupancy and higher average rents per square foot on new ancillary leases, and rent steps in Loblaw leases. The increase was
also due to an increase of $2,691 in revenue from the recovery of capital expenditures and interest and $265 in other income, partially offset
by a $182 increase in non-recoverable operating expenses.
Choice Properties REIT 2015 Annual Report 15
Management’s Discussion and Analysis
General and Administrative Expenses
For the years ended December 31
($ thousands)
(unaudited)
Internal expenses of the Trust(i)
Investor relations and other public entity costs
Professional fees
Services Agreement expense charged by related party(ii)
Less:
Property and asset management fee charged to related party(ii)
Services Agreement fee charged to related party(iii)
Capitalized to investment properties
Allocated to recoverable operating expenses
General and administrative expenses
Less:
Internalization costs(i)
Internal expenses for leasing(iv)
General and administrative expenses excluding internal expenses for
leasing and internalization costs (for use in general and administrative expense as a
percent of revenue calculation)
$
As a percentage of revenue
$
$
2015
23,142
2,058
1,900
3,141
30,241
(600)
—
(2,157)
(5,719)
2014
15,877
$
2,162
1,713
4,771
24,523
—
(350)
(858)
—
$
21,765
$
23,315
$
—
(1,771)
(2,568)
(366)
19,994
$
2.7%
20,381
$
3.0%
Variance
favourable /
(unfavourable)
(7,265)
104
(187)
1,630
(5,718)
600
(350)
1,299
5,719
1,550
(2,568)
1,405
387
0.3%
(i)
(ii)
(iii)
(iv)
The internal expenses of the Trust for the year ended December 31, 2014 include costs to internalize property and asset management functions of $2,568.
The Services Agreement and Property Management Agreement are described in section 11, “Related Party Transactions”, of this MD&A.
In July 2013, Choice Properties entered into a Services Agreement to provide administration and support services to Loblaw for a one year term ended June 30, 2014.
Internal expenses for leasing, primarily salaries, were eligible to be added back to FFO(1), based on the revision to the definition of FFO(1) in the Real Property Association
of Canada White Paper published in April 2014 that provided for an adjustment to incremental leasing expenses for the cost of salaried staff. This adjustment to FFO(1)
made results more comparable between real estate entities that expensed their internal leasing departments and those that capitalized the expenses. Choice Properties
internalized its leasing function on October 1, 2014. Therefore, there were only three months of internal expenses for leasing for the year ended December 31, 2014
compared to the full year ended December 31, 2015.
General and administrative expenses, excluding internal expenses for leasing and internalization costs, for the year ended December 31,
2015, were $387 lower than the same period in 2014.
As a result of internalization, and excluding the costs to internalize of $2,568 incurred in the year ended December 31, 2014, internal expenses
of the Trust increased by $9,833 primarily due to the addition of personnel in the current year. $5,719 of the increased costs related to operations
and were charged to the properties’ operating expenses. A further $1,405 related to an increase in internal leasing expenses, which are an
add-back to FFO(1). The increased costs were partially offset by a decrease in the services agreement expense of $1,630 and an increase of
$600 for property and asset management fees.
General and administrative expenses, excluding internal expenses for leasing and internalization costs, are flat year-over-year when expressed
as a percentage of revenue.
16 Choice Properties REIT 2015 Annual Report
Net Interest Expense and Other Financing Charges
For the years ended December 31
($ thousands)
(unaudited)
Interest on senior unsecured debentures
Interest on Transferor Notes(i)
Distributions on Class C LP Units(i)
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
Effective interest rate amortization of debt placement costs
Capitalized interest
Interest income
Net interest expense and other financing charges
(i)
Represents amounts paid to Loblaw.
$
$
$
2015
97,189
—
46,250
217
3,405
147,061
202,804
349,865
(2,632)
1,405
(1,465)
(2,122)
$
$
$
2014
72,433
18,271
46,250
49
2,965
139,968
191,267
331,235
48,891
1,127
(166)
(433)
345,051
$
380,654
$
Variance
favourable /
(unfavourable)
(24,756)
18,271
—
(168)
(440)
(7,093)
(11,537)
(18,630)
51,523
(278)
1,299
1,689
35,603
$
$
$
$
For the year ended December 31, 2015, net interest expense and other financing charges decreased by $35,603 or 9.4% compared to the
same period in 2014. The decrease was primarily due to a non-cash finance charge of $48,911 in 2014 related to the early repayment of the
transferor notes issued to Loblaw in connection with the IPO. The decrease was partially offset by higher expenses in the year ended December
31, 2015 for interest on the Series E and F senior unsecured debentures issued in the first and fourth quarter of 2015, respectively, and
distributions on the additional Exchangeable Units issued as partial consideration for properties acquired from Loblaw in 2014 and 2015.
Choice Properties REIT 2015 Annual Report 17
Management’s Discussion and Analysis
7.
OTHER MEASURES OF PERFORMANCE
Choice Properties’ FFO(1) and AFFO(1) for the years ended December 31, 2015 and December 31, 2014 are summarized below:
For the years ended December 31
($ thousands except where otherwise indicated)
(unaudited)
Funds from Operations(1)
Funds from Operations(1) (excluding other adjustments)(i)
FFO(1) per unit basic(ii)
FFO(1) per unit diluted(ii)
FFO(1) payout ratio(ii)
Adjusted Funds from Operations(1)
AFFO(1) per unit basic
AFFO(1) per unit diluted
AFFO(1) payout ratio
Distribution declared per unit
Weighted average Units outstanding - basic
Weighted average Units outstanding - diluted
Number of Units outstanding, end of period
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2015
388,975
388,975
0.967
0.966
67.3%
312,881
0.778
0.777
83.7%
0.650004
402,090,617
402,582,183
408,063,609
2014
297,488
348,967
0.913
0.912
71.3%
285,236
0.746
0.745
87.2%
$
$
$
$
$
$
$
0.650004
$
382,344,615
382,636,320
395,287,115
Variance
favourable /
(unfavourable)
91,487
40,008
0.054
0.054
4.0%
27,645
0.032
0.032
3.5%
—
19,746,002
19,945,863
12,776,494
(i)
(ii)
For the year ended December 31, 2014, internalization costs of $2,568 were added back to net income (loss) to calculate FFO(1) (excluding other adjustments). Also, for
the year ended December 31, 2014, non-cash finance charges of $48,911 were added back to net income (loss) to calculate FFO(1) (excluding other adjustments). The
non-cash finance charges were the result of accelerated amortization of net debt discounts due to replacement of notes issued to Loblaw in connection with the IPO.
The FFO(1) per unit amounts and payout ratio for the year ended December 31, 2014 were calculated using FFO(1) (excluding other adjustments). FFO(1) per unit on a
diluted basis, before adjustments, was $0.777 and the payout ratio was 83.7%.
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 17,”Non-GAAP Financial Measures”, of this MD&A).
For the year ended December 31, 2015, FFO(1) (excluding other adjustments) increased by $40,008 or 11.5% compared to the same period
in 2014. The year-over-year growth was due to an increase in net property income of $40,343 and a decrease in general and administrative
expenses of $1,866, partially offset by a $1,771 increase in interest and other financing charges and a $430 increase in amortization of other
assets.
For the year ended December 31, 2015, FFO(1) per unit on a diluted basis increased by $0.054 or 5.9% compared to the same period in 2014.
Adjusted Funds from Operations(1)
There is currently no standard industry-defined measure of AFFO(1). Please refer to Section 17, “Non-GAAP Financial Measures”, of this
MD&A, for a reconciliation of AFFO(1) to cash flows from operating activities determined in accordance GAAP.
For the year ended December 31, 2015, AFFO(1) increased by $27,645 or 9.7% compared to the same period in 2014. The year-over-year
growth was due to an increase in net property income of $38,321, and a decrease in general and administrative expenses of $1,901, partially
offset by a $8,042 increase in capital expenditures required to maintain the rental revenue stream of the growing portfolio, a $4,105 increase
in interest and other financing charges, and a $430 increase in amortization of other assets.
For the year ended December 31, 2015, AFFO(1) per unit on a diluted basis increased by $0.032 or 4.3% compared to the same period in 2014.
18 Choice Properties REIT 2015 Annual Report
8.
8.1
LIQUIDITY AND CAPITAL RESOURCES
Major Cash Flow Components
Three Months
(unaudited)
Year End
(audited)
For the periods ended December 31
($ thousands)
Cash and cash equivalents,
beginning of period
2015
2014
Source/
(Use)
2015
2014
Source/
(Use)
$
7,614
$
8,262
$
(648)
$
1,332
$
51,405
$
(50,073)
Cash flows from operating activities
Cash flows used in investing activities
Cash flows used in financing activities
172,394
(113,907)
(21,747)
200,656
(174,947)
(32,639)
(28,262)
61,040
10,892
520,642
(414,556)
(63,064)
476,368
(296,685)
(229,756)
44,274
(117,871)
166,692
Cash and cash equivalents,
end of period
Cash Flows from Operating Activities
$
44,354
$
1,332
$
43,022
$
44,354
$
1,332
$
43,022
The year-over-year decrease in cash flows from operating activities for the three months ended December 31, 2015 of $28,262 was primarily
driven by a lower contribution from working capital due to a decrease in deferred revenue as there was no prepaid rent from Loblaw in the
third quarter of 2014, partially offset by an increase in NOI(1).
The year-over-year increase in cash flows from operating activities for the year ended December 31, 2015 of $44,274 was primarily due to a
higher contribution from working capital due to an increase in deferred revenue and accrued distributions on Exchangeable Units as a result
of partial consideration for properties acquired from Loblaw in 2014 and 2015, and an increase in NOI(1).
Cash flows from operating activities are used to fund on-going operations, and expenditures for leasing capital and property capital(2).
Cash Flows used in Investing Activities
The year-over-year decrease in cash flows used in investing activities for the three months ended December 31, 2015 was $61,040, which
was primarily due to a $92,968 decrease in investment properties acquisitions compared to the same period in 2014, partially offset by
incremental capital expenditures of $61,807 for the investment properties. In addition, no notes receivable were issued to third-parties in the
fourth quarter of 2015 compared to $23,000 of notes receivable issued in the same period in 2014.
The year-over-year increase in cash flows used in investing activities for the year ended December 31, 2015 of $117,871 was primarily due
to increased capital expenditures for the investment properties of $106,351 and a $26,878 increase in investment property acquisitions
compared to the same period in 2014. Choice Properties issued $21,435 fewer notes receivable to third-parties and contributed $3,110 less
to the joint venture in 500 LS Limited Partnership in 2015 than in the prior year.
Cash Flows used in Financing Activities
The year-over-year decrease in cash flows used in financing activities was $10,892 for the three months ended December 31, 2015 compared
to the same period in 2014, primarily due to issuance of Series F senior unsecured debentures which were substantially used to repay existing
indebtedness.
The year-over-year decrease in cash flows used in financing activities was $166,692 for the year ended December 31, 2015 compared to the
same period in 2014, primarily due to the retirement of Transferor Notes in 2014, partially offset by fluctuations in the credit facility balance.
Choice Properties REIT 2015 Annual Report 19
Management’s Discussion and Analysis
8.2
Liquidity and Capital Structure
Choice Properties expects to fund its ongoing operations and finance future growth primarily through the use of: (i) existing cash; (ii) cash
flows from operations; (iii) short term financing through the credit facility; and (iv) the issuance of unsecured debentures and equity (including
LP Units), subject to market conditions. Given reasonable access to capital markets, Choice Properties does not foresee any impediments
in obtaining financing to satisfy its short and long term financial obligations, including its capital investment commitments(2).
($ thousands)
Cash and cash equivalents
Unused portion of the Credit Facility
Liquidity
Credit Facility
As at
As at
December 31, 2015
44,354
500,000
544,354
$
$
December 31, 2014
1,332
378,000
379,332
$
$
Variance
favourable /
(unfavourable)
43,022
122,000
165,022
$
$
Choice Properties has a $500,000 (December 31, 2014 - $500,000) senior unsecured committed revolving credit facility (the “Credit Facility”)
provided by a syndicate of lenders that contains certain financial and non-financial covenants consistent with a credit facility of this nature.
The 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 of either: prime plus 0.45% or bankers’ acceptance rate plus 1.45%. This
pricing is contingent on Choice Properties’ credit ratings from DBRS Limited (“DBRS”) and Standard & Poor’s (“S&P”) remaining at “BBB”.
The Credit Facility matures July 5, 2020.
As at December 31, 2015, no amount was drawn under the Credit Facility (December 31, 2014 - $122,000).
Base Shelf Prospectus
On October 14, 2015, Choice Properties filed a new base shelf 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. The new prospectus is effective for a 25-month
period from the date of issuance. On November 24, 2015, Choice Properties issued $200,000 of senior unsecured debentures under this
prospectus.
Long Term Debt and Class C LP Units
The following are the continuities of Choice Properties’ outstanding long term debt and Class C LP Units for the year ended December 31,
2015:
For the year ended December 31, 2015
($ thousands)
Principal balance outstanding, beginning of year
$
Issuance:
Series E
Series F
Mortgage assumed
Repayment:
Mortgages
Senior
unsecured
debentures
2,550,000
250,000
200,000
—
—
Mortgages
3,107
$
$
Class
C LP Units
925,000
$
—
—
2,072
(1,040)
—
—
—
Total long
term debt
and Class
C LP Units
3,478,107
250,000
200,000
2,072
(1,040)
Principal balance outstanding, end of year
$
3,000,000
$
4,139
$
925,000
$
3,929,139
Weighted
average
coupon rate
3.96%
2.30%
4.06%
3.15%
7.36%
3.65%
Senior Unsecured Debentures
On February 5, 2015, Choice Properties issued $250,000 principal amount of Series E senior unsecured debentures under the base shelf
prospectus dated September 3, 2013, with a coupon rate of 2.297% per annum that mature on September 14, 2020.
On November 24, 2015, Choice Properties issued $200,000 principal amount of Series F senior unsecured debentures under the base shelf
prospectus dated October 14, 2015, with a coupon rate of 4.055% per annum that mature on November 24, 2025.
Subsequent to December 31, 2015, Choice Properties entered into certain bond forward contracts with a notional value of $300,000.
20 Choice Properties REIT 2015 Annual Report
On February 4, 2016, Choice Properties issued a notice for a March 7, 2016 early redemption, at par, of the $300,000 Series 5 senior
unsecured debentures with an original maturity date of April 20, 2016.
Mortgage
In connection with a property acquired from a third-party on August 11, 2015, Choice Properties assumed a mortgage that is secured by the
property. The mortgage bears interest at a fixed rate of 3.15% per annum, matures in 2019 and has an effective interest rate of 2.45% per
annum.
Class C LP Units (authorized - unlimited)
As at December 31, 2015, Loblaw holds all of the 92,500,000 outstanding Class C LP Units (December 31, 2014 - 92,500,000 Units), which
are redeemable at Loblaw’s option, beginning in 2027. Choice Properties has the option to settle the redemption payment with cash,
Exchangeable Units, or any combination thereof.
Maturities of Long Term Debt and Class C LP Units
As at December 31, 2015
($ thousands)
2016
2017
2018
2019
2020
Thereafter
$
Senior
unsecured
debentures
300,000
200,000
400,000
200,000
550,000
1,350,000
Mortgage
1,212
$
$
Class
C LP Units
— $
1,192
152
1,583
—
—
—
—
—
—
925,000
Total principal balance outstanding
$
3,000,000
$
4,139
$
925,000
$
Total
301,212
201,192
400,152
201,583
550,000
2,275,000
3,929,139
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.
Financial Covenants
Choice Properties is subject to certain financial and non-financial covenants in its senior unsecured debentures and the Credit Facility that
include maintaining certain leverage and debt service ratios. These ratios are monitored by management on an ongoing basis to ensure
compliance. Choice Properties was in compliance with all of these covenants as at December 31, 2015 and December 31, 2014.
The Trust’s compliance with leverage and coverage ratios, as they relate to its debentures, are shown below:
(unaudited)
Debt to Total Assets Ratio(i)
Limit: Maximum including Class C LP Units and convertible debt is 65.0%
Debt Service Coverage Ratio(i)
Limit: Minimum 1.5x
As at
As at
December 31, 2015
44.5%
December 31, 2014
44.0%
3.6x
3.5x
(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.
Choice Properties REIT 2015 Annual Report 21
Management’s Discussion and Analysis
8.3
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
Issuer rating
Senior unsecured debentures
8.4
Unit Equity
BBB
BBB
DBRS
S&P
Trend
Stable
Stable
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. The following is a continuity of Choice Properties’ outstanding equity from Units:
Number of Units, beginning of year
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
Distribution Reinvestment Plan
Year ended
Year ended
December 31, 2015
395,287,115
December 31, 2014
371,688,983
1,668,346
30,461
11,077,687
408,063,609
1,522,472
118,309
21,957,351
395,287,115
Choice Properties has a Distribution Reinvestment Plan (“DRIP”) which enables eligible Unitholders to elect to automatically reinvest
their regular monthly cash distributions in additional Units and to receive a bonus distribution in Units equivalent to 3% of each distribution.
In the year ended December 31, 2015, Choice Properties issued 1,668,346 Units under the DRIP (2014 - 1,522,472 Units). In the year ended
December 31, 2015, the Trust issued 1,317,405 Units to GWL under the DRIP (2014 - 1,306,847 Units). On average, 12.6% of Unitholders
other than Loblaw and GWL participated in the DRIP in the year ended December 31, 2015.
Distributions
In the year ended December 31, 2015, Choice Properties declared $261,424 in distributions (2014 - $248,754), including distributions to
holders of Exchangeable Units, which are reported as interest expense, and non-cash distributions provided under the DRIP.
For the periods ended December 31
($ thousands)
(unaudited)
Distributions declared
Less: Distributions reinvested through
Three Months
Year End
2015
$ 66,221
2014
$ 64,211
Variance
favourable /
(unfavourable)
2,010
$
2015
$ 261,424
2014
$ 248,754
Variance
favourable /
(unfavourable)
12,670
$
the DRIP
(4,319)
(4,063)
(256)
(18,118)
(15,682)
Net distributions declared
$ 61,902
$ 60,148
$
1,754
$ 243,306
$ 233,072
$
(2,436)
10,234
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 assess the stability of cash and non-cash distributions.
22 Choice Properties REIT 2015 Annual Report
44,274
(36,115)
8,159
(10,234)
27,645
(10,234)
The tables below summarize the excess or shortfall of certain GAAP and non-GAAP measures over net distributions declared:
For the periods ended December 31
($ thousands)
(unaudited)
Three Months
Year End
2015
2014
Variance
favourable /
(unfavourable)
2015
2014
Variance
favourable /
(unfavourable)
Cash flows from operating activities
$ 172,394
$ 200,656
$
(28,262)
$ 520,642
$ 476,368
$
Interest paid on financing activities
Less:
Cash flows from operating activities
less interest paid
Less: Net distributions declared
Excess of cash flows provided by operating
activities less interest paid over net
distributions declared
(13,713)
(14,809)
1,096
(144,528)
(108,413)
$ 158,681
$ 185,847
$
(27,166)
$ 376,114
$ 367,955
$
(61,902)
(60,148)
(1,754)
(243,306)
(233,072)
$
96,779
$ 125,699
$
(28,920)
$ 132,808
$ 134,883
$
(2,075)
For the periods ended December 31
($ thousands)
(unaudited)
Three Months
Year End
2015
2014
Variance
favourable /
(unfavourable)
2015
2014
Variance
favourable /
(unfavourable)
Adjusted Funds from Operations(1)
$
81,987
$
74,096
$
7,891
$ 312,881
$ 285,236
$
(61,902)
(60,148)
(1,754)
(243,306)
(233,072)
Less: Net distributions declared
Excess of cash provided by AFFO(1) over
net distributions declared
For the periods ended December 31
($ thousands)
(unaudited)
Net Income (Loss)
Add:
Distributions on Exchangeable Units
included in net interest expense and
other financing charges
Net income (loss) adjusted for distributions on
Exchangeable Units
Less: Net distributions declared
Excess (shortfall) of adjusted net income
(loss) over net distributions declared
$
20,085
$
13,948
$
6,137
$
69,575
$
52,164
$
17,411
Three Months
Year End
2015
2014
Variance
favourable /
(unfavourable)
2015
2014
Variance
favourable /
(unfavourable)
$
40,401
$
87,017
$
(46,616)
$ (155,276)
$ 199,614
$
(354,890)
51,461
49,730
1,731
202,804
191,267
11,537
$
91,862
$ 136,747
$
(44,885)
$
47,528
$ 390,881
$
(343,353)
(61,902)
(60,148)
(1,754)
(243,306)
(233,072)
(10,234)
$
29,960
$
76,599
$
(46,639)
$ (195,778)
$ 157,809
$
(353,587)
The excess of cash flows provided by operating activities less interest paid over net distributions declared for the three months ended December
31, 2015 includes seasonal fluctuations in non-cash working capital and timing of semi-annual debenture installments. While cash flows from
operating activities are generally sufficient to cover distribution requirements, timing of cash outflows may result in shortfalls during particular
quarters of the Trust’s fiscal year. These seasonal or short-term fluctuations could be funded from other sources, such as the Credit Facility.
The cash flows provided by operating activities for the year ended December 31, 2015 were in excess of net distributions declared.
AFFO(1) excludes the impact of short-term fluctuations in non-cash working capital, such as property tax installments, and the timing of semi-
annual debenture interest payments. AFFO(1) also considers the cash flow required for capital expenditures to maintain productive capacity
of the investment properties. As such, management includes this non-GAAP measure in its assessment of cash flow available for distributions.
A reconciliation of AFFO(1) to cash flows from operating activities is in Section 17, “Non-GAAP Financial Measures”, of this MD&A.
Management anticipates that distributions declared will, in the foreseeable future(2), continue to vary from net income (or net loss) as this
GAAP measure includes adjustments to fair value and other non-cash items. If net income (loss) adjusted for distributions on Exchangeable
Units were to be calculated excluding the adjustments to fair value, there would have been an excess of adjusted net income (loss) over net
distributions declared.
Choice Properties REIT 2015 Annual Report 23
Management’s Discussion and Analysis
At its meeting on November 10, 2015, the Board of Trustees reviewed and approved an increase of distributions to $0.67 per unit per annum
(an increase of 3.1%). The increase was effective for Unitholders of record on January 29, 2016. Based on current facts and assumptions,
management does not anticipate cash distributions will be reduced or suspended in the foreseeable future(2).
The carrying value of the Trust’s investment properties exceeds their tax base. Choice Properties’ historic tax treatment of distributions has
been as follows:
For the years ended December 31
(unaudited)
Return of Capital
Income
Capital Gain
2015
9.4%
90.5%
0.1%
2014
17.1%
81.8%
1.1%
2013
22.7%
77.3%
—%
100.0%
100.0%
100.0%
The composition may change over time, thus affecting the after-tax return to Unitholders.
8.5 Contractual Obligations
The undiscounted future principal and interest payments on Choice Properties’ debt instruments, distribution and redemption payments on
Class C LP Units, and other contractual obligations as at December 31, 2015 were as follows:
($ thousands)
2017
(unaudited)
Senior unsecured debentures
Mortgage
Class C LP Units
Other(i)
Total
2016
Thereafter
$ 400,505 $ 293,005 $ 490,005 $ 275,789 $ 614,390 $ 1,483,193
2020
2019
2018
1,393
46,250
22,155
1,294
46,250
266
204
46,250
266
1,628
46,250
295
—
—
46,250
1,273,558
295
1,421
Total
3,556,887
$
4,519
1,504,808
24,698
$ 470,303 $ 340,815 $ 536,725 $ 323,962 $ 660,935 $ 2,758,172
$
5,090,912
(i)
As at December 31, 2015, Choice Properties had commitments of approximately $24,698 for future capital expenditures related to on-going development and sustainable
capital projects, and other contractual obligations such as operating rents.
24 Choice Properties REIT 2015 Annual Report
9.
9.1
QUARTERLY RESULTS OF OPERATIONS
Results by Quarter
The following is a summary of selected consolidated financial information for each of the eight most recently completed quarters.
Selected Quarterly Information
($ thousands except where otherwise
indicated)
(unaudited)
Number of properties
Fourth
Quarter
2015
519
Gross Leasable Area
Third
Quarter
2015
515
41.4
98.5%
Second
Quarter
2015
513
41.3
98.5%
First
Quarter
2015
475
39.9
98.3%
Fourth
Quarter
2014
472
38.9
98.1%
$
$
$
$
$
$
$
187,285
129,986
$
$
183,084
126,861
(173,362) $
188,735
$
$
$
$
143,492
0.241
0.241
0.194
83.8%
105,025
0.240
0.240
0.191
85.1%
$
$
$
$
$
$
$
181,674
125,285
$
$
175,246
123,175
(211,050) $
87,017
$
$
$
$
99,731
0.238
0.238
0.191
85.1%
200,656
0.230
0.230
0.188
86.4%
$
$
$
$
$
$
$
Third
Quarter
2014
454
37.6
97.9%
170,293
118,551
122,306
119,994
0.223
0.229
0.189
86.0%
Second
Quarter
2014
456
37.6
97.7%
First
Quarter
2014
436
36.4
97.7%
$
$
$
$
$
$
$
170,339
118,681
$
$
167,045
115,332
(1,538) $
(8,171)
$
$
$
$
86,692
0.091
0.228
0.184
88.3%
69,026
0.233
0.224
0.185
87.8%
41.6
98.6%
191,057
132,133
40,401
172,394
0.247
0.247
0.201
80.8%
0.162501
$ 0.162501
$ 0.162501
$ 0.162501
$ 0.162501
$ 0.162501
$ 0.162501
$ 0.162501
408,063,609
406,379,516
405,659,341
395,976,907
395,287,115
384,073,936
383,670,554
372,029,705
8,906
$
8,603
$
8,465
$
8,159
$
8,192
$
7,774
$
7,719
$
44.5%
3.6x
44.9%
3.6x
45.1%
3.5x
45.8%
3.5x
44.0%
3.5x
45.7%
3.4x
46.3%
3.4x
7,407
46.9%
3.5x
(in millions of square feet)
Occupancy
Rental revenue
Net Operating Income(1)
Net income (loss)
Cash flows from operating activities(i)
FFO(1) per unit - diluted
FFO(1) per unit - diluted (excluding other
adjustments)(ii)
AFFO(1) per unit diluted
AFFO(1) payout ratio
Distribution declared per unit
Number of Units outstanding
Total assets (in millions)
Debt to total assets(iii)
Debt service coverage(iii)
$
$
$
$
$
$
$
$
$
(i)
(ii)
Cash flows from operating activities are presented before deducting interest paid.
The first and second quarters of 2014, were adjusted for a non-cash finance gain of $3,342 and a non-cash finance charge of $52,253, respectively. The third and fourth
quarters of 2014 were adjusted for internalization costs of $2,372 and $196, respectively. There were no adjustments to the calculations of FFO(1) for the quarters of 2015.
(iii) Debt ratios include Class C LP Units but exclude Exchangeable Units. The ratios are non-GAAP financial measures calculated based on the trust indentures as supplemented.
Acquisitions, since Choice Properties’ IPO, have positively impacted quarterly results. In addition, net income (or net loss) is impacted by
fluctuations in adjustments to fair value of Exchangeable Units and investment properties and therefore is often not comparable from quarter
to quarter.
Choice Properties REIT 2015 Annual Report 25
Management’s Discussion and Analysis
9.2
Fourth Quarter Results
Choice Properties’ financial results for the three months ended December 31, 2015 and December 31, 2014 are summarized below:
For the three months ended December 31
($ thousands)
(unaudited)
Rental Revenue
Base rent
Property tax and operating cost recoveries
Other revenue
Property Operating Costs
Recoverable property taxes and operating costs
Non-recoverable operating costs
Net Property Income
Other Expenses
General and administrative expenses
Amortization of other assets
Net interest expense and other financing charges
Net Income before Adjustments to Fair Value
Adjustment to fair value of Exchangeable Units
Adjustment to fair value of investment properties
Net Income
2015
2014
Variance
favourable /
(unfavourable)
$
140,319
$
132,704
$
50,149
589
191,057
(49,072)
(731)
41,961
581
175,246
(42,713)
(575)
141,254
$
131,958
$
(5,148)
(279)
(87,910)
(6,213)
(87)
(85,030)
47,917
$
40,628
$
(95,418)
87,902
40,401
(51,063)
97,452
$
87,017
$
$
$
$
7,615
8,188
8
15,811
(6,359)
(156)
9,296
1,065
(192)
(2,880)
7,289
(44,355)
(9,550)
(46,616)
Rental Revenue Rental revenue is comprised primarily of base rent and recoveries from tenants for property taxes, operating costs and
qualifying capital expenditures.
For the three months ended December 31
($ thousands)
(unaudited)
Same Properties(i)
Acquisitions
Dispositions
Total Revenue
$
$
$
2015
176,669
14,388
—
$
2014
170,812
4,440
(6)
191,057
$
175,246
$
Variance
favourable /
(unfavourable)
5,857
9,948
6
15,811
(i)
There were 453 properties that were owned throughout both the three months ended December 31, 2015 and December 31, 2014 (“Same Properties”).
During the three months ended December 31, 2015, rental revenue increased by $15,811, or 9.0% compared to the same period in 2014,
primarily due to additional rental revenue of $9,948 attributable to properties acquired in both 2014 and 2015 (“Acquisitions”), and an increase
of $5,863 in revenue from Same Properties, net of two properties disposed in 2014 (“Dispositions”).
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 three months ended December 31, 2015, the net amount of these items positively
impacted rental revenue by $9,020 (2014 - $8,781).
26 Choice Properties REIT 2015 Annual Report
Net Operating Income(1) All Properties
For the three months ended December 31
($ thousands)
(unaudited)
Rental revenue
Less: Straight-line rental revenue
Property operating costs
Net Operating Income(1) All Properties
$
$
$
2015
191,057
(9,121)
181,936
(49,803)
2014
175,246
(8,783)
166,463
(43,288)
132,133
$
123,175
$
Variance
favourable /
(unfavourable)
15,811
$
(338)
15,473
(6,515)
8,958
For the three months ended December 31, 2015, NOI(1) increased by $8,958 or 7.3% compared to the same period in 2014, primarily driven
by an increase of $6,394 from the Acquisitions, and $2,564 from Same Properties.
Net Operating Income(1) Same Properties
For the three months ended December 31
($ thousands)
(unaudited)
Rental revenue
Less: Straight-line rental revenue
Property operating costs
Net Operating Income(1) Same Properties
Less: Net Operating Income - developed GLA
Net Operating Income(1) Same Properties - same GLA
$
$
$
2015
176,669
(8,078)
168,591
(45,940)
122,651
(474)
122,177
$
$
$
Variance
favourable /
(unfavourable)
5,857
490
6,347
(3,783)
2,564
(172)
2,392
2014
170,812
(8,568)
162,244
(42,157)
120,087
(302)
119,785
$
$
$
For the three months ended December 31, 2015, Same Properties’ NOI(1), measured on a same GLA basis, increased by $2,392 or 2.0%
compared to the same period in 2014, primarily due to an increase of $1,632 in base rent and net recoveries, which was driven by an
improvement in ancillary occupancy and higher average rents per square foot on new ancillary leases, and rent steps in Loblaw leases. The
increase was also due to an increase of $937 in revenue from the recovery of capital expenditures and interest, partially offset by a $140
increase in non-recoverable operating expenses and a $37 decrease in other revenue.
Choice Properties REIT 2015 Annual Report 27
Management’s Discussion and Analysis
General and Administrative Expenses
For the three months ended December 31
($ thousands)
(unaudited)
Internal expenses of the Trust(i)
Investor relations and other public entity costs
Professional fees
Services Agreement expense charged by related party(ii)
$
Less:
Property and asset management fee charged to related party(ii)
Capitalized to investment properties
Allocated to recoverable operating expenses
General and administrative expenses
Less:
Internalization costs(i)
Internal expenses for leasing(iii)
General and administrative expenses excluding internal expenses for
leasing and internalization costs (for use in general and administrative expense as a
percent of revenue calculation)
$
As a percentage of revenue
Variance
favourable /
(unfavourable)
(1,811)
2014
4,424
$
$
2015
6,235
277
687
785
7,984
(150)
(703)
(1,983)
605
691
786
6,506
—
(293)
—
$
5,148
$
6,213
$
—
(666)
(196)
(366)
4,482
$
2.3%
5,651
$
3.2%
328
4
1
(1,478)
150
410
1,983
1,065
(196)
300
1,169
0.9%
(i)
(ii)
(iii)
The internal expenses of the Trust for the three months ended December 31, 2014 include costs to internalize property and asset management functions of $196.
The Services Agreement and Property Management Agreement are described in section 13, “Related Party Transactions”, of this MD&A.
Internal expenses for leasing, primarily salaries, were eligible to be added back to FFO(1), based on the revision to the definition of FFO(1) in the Real Property Association
of Canada White Paper published in April 2014 that provided for an adjustment to incremental leasing expenses for the cost of salaried staff. This adjustment to FFO(1)
made results more comparable between real estate entities that expensed their internal leasing departments and those that capitalized the expenses. Choice Properties
internalized its leasing function on October 1, 2014 and continued to develop the department during the year ended December 31, 2015. Therefore, the internal expenses
for leasing for the three months ended December 31, 2015 were higher compared to the three months ended December 31, 2014.
General and administrative expenses, excluding internal expenses for leasing and internalization costs, for the three months ended December
31, 2015, were $1,169 lower than the same period in 2014.
Choice Properties internalized its property management functions to become a fully internally managed REIT as of January 1, 2015. As a
result, and excluding the costs to internalize of $196 incurred in the three months ended December 31, 2014, the internal expenses of the
Trust increased by $2,007 primarily due to the addition of personnel in the current year. $1,983 of the increased costs related to operations
and was charged to the properties’ operating expenses. A further $300 related to an increase in the internal leasing expenses, which are an
add-back to FFO(1).
28 Choice Properties REIT 2015 Annual Report
Net Interest Expense and Other Financing Charges
For the three months ended December 31
($ thousands)
(unaudited)
Interest on senior unsecured debentures
Distributions on Class C LP Units(i)
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
Effective interest rate amortization of debt placement costs
Capitalized interest
Interest income
Net interest expense and other financing charges
(i)
Represents amounts paid to Loblaw.
$
$
$
2015
25,267
11,562
59
888
37,776
51,461
89,237
(667)
353
(465)
(548)
Variance
favourable /
(unfavourable)
(2,291)
—
(10)
300
(2,001)
(1,731)
(3,732)
(6)
(55)
437
476
2014
22,976
11,562
49
1,188
35,775
49,730
85,505
$
$
$
(673)
298
(28)
(72)
87,910
$
85,030
$
(2,880)
$
$
$
$
For the three months ended December 31, 2015, net interest expense and other financing charges increased by $2,880 or 3.4% compared
to the same period in 2014. The increase was due to higher expenses in the three months ended December 31, 2015 for interest on the
Series E and F senior unsecured debentures issued in the first and fourth quarter of 2015, respectively, and distributions on the additional
Exchangeable Units issued as partial consideration for properties acquired from Loblaw in 2015.
Choice Properties REIT 2015 Annual Report 29
Management’s Discussion and Analysis
9.3
Other Measures of Fourth Quarter Performance
Choice Properties’ FFO(1) and AFFO(1) for the three months ended December 31, 2015 and December 31, 2014 are summarized below:
For the three months ended December 31
($ thousands except where otherwise indicated)
(unaudited)
Funds from Operations(1)
Funds from Operations(1) (excluding other adjustments)(i)
FFO(1) per unit basic(ii)
FFO(1) per unit diluted(ii)
FFO(1) payout ratio(ii)
Adjusted Funds from Operations(1)
AFFO(1) per unit basic
AFFO(1) per unit diluted
AFFO(1) payout ratio
Distribution declared per unit
Weighted average Units outstanding - basic
Weighted average Units outstanding - diluted
Number of Units outstanding, end of period
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2015
100,524
100,524
0.247
0.247
65.8%
81,987
0.202
0.201
80.8%
0.162501
406,594,295
407,098,288
408,063,609
2014
90,685
90,881
0.231
0.230
70.7%
74,096
0.188
0.188
86.4%
$
$
$
$
$
$
$
0.162501
$
394,237,610
394,578,356
395,287,115
Variance
favourable /
(unfavourable)
9,839
9,643
0.016
0.017
4.9%
7,891
0.014
0.013
5.6%
—
12,356,685
12,519,932
12,776,494
(i)
(ii)
For the three months ended December 31, 2014, internalization costs of $196 and were added back to net income (loss) to calculate FFO(1) (excluding other adjustments).
The FFO(1) per unit amounts and payout ratio for the three months ended December 31, 2014 were calculated using FFO(1) (excluding other adjustments). FFO(1) per unit
on a diluted basis, before adjustments, was $0.230 and the payout ratio was 70.7%.
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 17,”Non-GAAP Financial Measures”, of this MD&A).
For the three months ended December 31, 2015, FFO(1) (excluding other adjustments) increased by $9,643 or 10.6% compared to the same
period in 2014. The year-over-year increase was due to an increase in net property income of $9,395 and a decrease in general and
administrative expenses of $1,589, partially offset by a $1,149 increase in interest and other financing charges,and a $192 increase in
amortization of other assets.
For the three months ended December 31, 2015, FFO(1) per unit on a diluted basis increased by $0.017 or 7.4% compared to the same period
in 2014.
Adjusted Funds from Operations(1)
There is currently no standard industry-defined measure of AFFO(1). Please refer to Section 17, “Non-GAAP Financial Measures”, of this
MD&A, for a reconciliation of AFFO(1) to cash flows from operating activities determined in accordance GAAP.
For the three months ended December 31, 2015, AFFO(1) increased by $7,891 or 10.6% compared to the same period in 2014. The year-
over-year increase was due to an increase in net property income of $9,057 and a decrease in general and administrative expenses of $1,793,
partially offset by a $1,679 increase in capital expenditures required to maintain the rental revenue stream of the portfolio, a $1,088 increase
in interest and other financing charges and a $192 increase in amortization of other assets.
For the three months ended December 31, 2015, AFFO(1) per unit on a diluted basis increased by $0.013 or 6.9% compared to the same period
in 2014. The results for AFFO(1) reflect property capital expenditures occurring evenly over the year. If AFFO(1) were to be calculated deducting
only the incurred capital expenditures of $28,437, AFFO(1) would have been $63,295 or $0.155 per unit on a diluted basis (2014 - $70,426
or $0.178).
30 Choice Properties REIT 2015 Annual Report
10.
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” (“NI 52-109”), 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, 2015.
11.
INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is 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 consolidated financial statements for external purposes in accordance
with IFRS.
As required by NI 52-109, 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 (COSO Framework)’ (2013)
published by The Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, they have
concluded that the design and operation of the Trust’s internal controls over financial reporting were effective as at December 31, 2015.
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 Control over Financial Reporting There were no changes in the Trust’s internal controls over financial reporting in
the fourth quarter of 2015 that materially affected, or are reasonably likely to materially affect the Trust’s internal control over financial reporting.
12.
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.
Choice Properties REIT 2015 Annual Report 31
Management’s Discussion and Analysis
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.
The following risks are a subset of the key risks identified through the ERM program. They should be read in conjunction with the full set of
risks inherent in the Trust’s business, as included in the Trust’s Annual Information Form for the year ended December 31, 2015, which is
hereby incorporated by reference.
12.1
Operating Risks and Risk Management
The following discussion of risks identifies significant factors that may adversely affect the Trust’s business, operations and financial condition
or future performance. This information should be read in conjunction with the MD&A and the Trust’s consolidated financial statements and
related notes. The following discussion of risks is not all inclusive but is designed to highlight the key risks inherent in the Trust’s business:
Property Development, Redevelopment and Renovation Risks
Vendor Management, Partnerships and Third-Party Service
Providers
Strategic Execution and Capabilities
Current Economic Environment
Property Development, Redevelopment and Renovation Risks Choice Properties engages in development, redevelopment and major
renovation activities with respect to certain Properties. It is subject to certain risks, including: (a) the availability and pricing of financing on
satisfactory terms or availability 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 are not completed; (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 flows 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 availability at all.
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 accompanying risks) with
contractors, subcontractors, suppliers, partners and others. Any failure by Choice Properties to effectively manage all development,
redevelopment and renovation initiatives may negatively impact the reputation and financial performance of the Trust.
32 Choice Properties REIT 2015 Annual Report
Strategic Execution and Capabilities Choice Properties is a Trust which was formed on July 5, 2013, and as such has 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.
Vendor Management, Partnerships 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 joint venture arrangements or for contract tendering, drafting, review, approval and monitoring 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. In addition, co-
owners or joint venture partners may fail to fund their share of capital, may not comply with the terms of any governing agreements or may
incur reputational damage which could negatively impact the Trust. Inefficient, ineffective or incomplete vendor management / partnership
strategies, policies and procedures could impact the Trust’s reputation, operations and/or financial performance.
Current Economic Environment Continued concerns about the uncertainty over whether the economy will be adversely affected by inflation,
deflation or stagflation, and the systemic impact of unemployment, volatile energy costs, geopolitical issues and the availability and cost of
credit have contributed to increased market volatility and weakened business and consumer confidence. This difficult operating environment
could adversely affect Choice Properties’ ability to generate revenues, thereby reducing its operating income and earnings. It could also have
a material adverse effect on the ability of Choice Properties’ operators to maintain occupancy rates in the Properties, which could harm Choice
Properties’ financial condition. If these economic conditions continue, Choice Properties' tenants may be unable to meet their rental payments
and other obligations due to Choice Properties, which could have a material adverse effect on Choice Properties.
12.2
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 assets. 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.
Choice Properties REIT 2015 Annual Report 33
Management’s Discussion and Analysis
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 reviews its interest rate risk, including its options to manage interest rate risk and analyzes the impact of rising and falling
interest rates on operating results and financial condition on a regular basis.
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 and joint venture
partners, 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.
13.
RELATED PARTY TRANSACTIONS
Choice Properties’ parent corporation is Loblaw, which held an 83.0% effective interest in the Trust through ownership of 21,500,000 Units
and all of the Exchangeable Units as at December 31, 2015 (December 31, 2014 - 82.9% and 21,500,000 Units respectively). Loblaw’s
controlling shareholder, GWL, held an approximate 46% ownership of Loblaw’s outstanding common shares and a 5.6% direct interest in
Choice Properties, through ownership of 22,732,062 Units as at December 31, 2015 (December 31, 2014 - 5.4% and 21,414,657 Units
respectively).
Loblaw is also Choice Properties’ largest tenant, representing approximately 91.1% of Choice Properties’ annual base rent and 89.1% of its
GLA as at December 31, 2015 (December 31, 2014 - 91.4% and 88.4% respectively).
In 2015, the Trust acquired 46 investment properties from Loblaw. The acquisition added approximately 2.6 million square feet of GLA across
Canada at a purchase price of $355,898, excluding acquisition costs and adjustments for the difference between the fair value of the
Exchangeable Units on closing compared to the volume weighted average value determined in accordance with the purchase and sale
agreement. The acquisitions from Loblaw are disclosed in Section 5.2, “Acquisition of Investment Properties”, of this MD&A.
34 Choice Properties REIT 2015 Annual Report
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 through 500 LS Limited Partnership. Wittington’s parent company is Wittington Investments, Limited, which
holds a 63% interest in GWL. Choice Properties made contributions of $3,120 to the joint venture during the year ended December 31, 2015
(year ended December 31, 2014 - $6,230).
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.
Included in certain investment properties acquired from Loblaw is excess land with development potential. Choice Properties will compensate
Loblaw, over time, with intensification fees, as Choice Properties pursues development, intensification or redevelopment of such excess land.
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 expiring agreement was for an 18-month term from July 5, 2014 to December 31, 2015. The
scope of the services provided in the 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. In 2016,
Choice entered into a new services agreement with a one-year term, expiring December 31, 2016.
Property Management Agreement
On January 1, 2015, Choice Properties agreed to provide Loblaw with property and asset management services for Loblaw’s properties with
third-party tenancies on a fee for service basis of approximately $600 per annum for a two-year term.
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 21 to the consolidated financial statements for the years ended December 31, 2015 and December 31,
2014.
14.
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.
Choice Properties REIT 2015 Annual Report 35
Management’s Discussion and Analysis
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.
15.
ACCOUNTING STANDARDS
Future Accounting Standards
In 2014, the IASB issued IFRS 15, “Revenue from Contracts with Customers” (“IFRS 15”) replacing IAS 18, “Revenue”, IAS 11, “Construction
Contracts”, and related interpretations. 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, 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 2014, the IASB issued IFRS 9, “Financial Instruments” 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 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.
In 2016, the IASB issued IFRS 16, “Leases (“IFRS 16”), replacing IAS 17, “Leases” and related interpretations. The standard introduces a
single on-balance sheet recognition and measurement model for lessees, eliminating the distinction between operating and finance leases.
Lessors continue to classify leases as finance and operating leases. IFRS 16 becomes effective for annual periods beginning on or after
January 1, 2019, and is to be applied retrospectively. Early adoption is permitted if IFRS 15 has been adopted. The Trust is currently assessing
the impact of the new standard on its consolidated financial statements.
36 Choice Properties REIT 2015 Annual Report
16.
OUTLOOK (2)
Choice Properties believes it is well-positioned to execute on its growth opportunities. The Trust has a sizable asset base that is geographically
diverse across Canada; long-term leases and a strategic alliance with Loblaw; and an accessible development pipeline. As such, Choice
Properties expects to leverage stable and reliable cash flows from an anchor tenant with a strong covenant and the potential to create value
through development. Combined with its solid balance sheet and investment grade credit ratings, Choice Properties expects to continue to
meet its ongoing obligations, provide its Unitholders with monthly distributions and have the capacity to invest in future growth.
The vast majority of Choice Properties’ sites are anchored by Loblaw, Canada’s leading food and drug retailer. The Trust’s leasing strategy
is to attract tenants that complement Loblaw’s food and drug offerings and that are well suited to consumers’ weekly shopping patterns. With
a tenant base that offers products and services considered to be essential, Choice Properties believes its portfolio of properties is less sensitive
to the cyclical nature of discretionary retailing and the broader economy. This is underscored by continued demand and interest for Choice
Properties’ retail space in Western Canada, including Alberta where the economic conditions have been the most impacted by the downturn
in the resource sector. The Trust remains focused on properties that are well-positioned to respond to changing consumers’ preferences and
plans to continue to attract and retain tenants at its existing sites and to develop new space for tenants.
The Canadian economy has been in a protracted low interest rate environment. In the event of rising interest rates, the long term, fixed-rate
nature of Choice Properties’ debt instruments should temper the negative impact of higher interest rates. Given the present relatively low
interest rate environment, the Trust believes that capitalization rates will remain range-bound particularly for quality retail real estate which is
currently scarce in supply.
Choice Properties REIT 2015 Annual Report 37
Management’s Discussion and Analysis
17.
NON-GAAP FINANCIAL MEASURES
17.1
Net Operating Income
NOI is a key performance indicator as it evaluates the results of the portfolio and represents a measure over which management has control.
It is also a key input in determining the fair value of the portfolio. 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” and Section 9 “Quarterly
Results of Operations”, of this MD&A, for a discussion on this non-GAAP measure. The following table reconciles net income (loss) to NOI
for the periods ended as indicated:
For the periods ended December 31
($ thousands)
(unaudited)
Net income (loss)
Add (deduct) impact of the following:
Straight-line rental revenue
General and administrative
Amortization of other assets
Net interest expense and other
financing charges
Adjustment to fair value of
Exchangeable Units
Adjustment to fair value of
investment properties
Loss on disposal of investment
properties
Three Months
Year End
2015
40,401
$
2014
87,017
$
Variance
favourable /
(unfavourable)
(46,616)
$
2015
(155,276)
$
$
2014
199,614
Variance
favourable /
(unfavourable)
(354,890)
$
(9,121)
5,148
279
(8,783)
6,213
87
(338)
(1,065)
192
(36,656)
21,765
844
(34,634)
23,315
414
(2,022)
(1,550)
430
87,910
85,030
2,880
345,051
380,654
(35,603)
95,418
51,063
44,355
410,518
(12,143)
422,661
(87,902)
(97,452)
9,550
(71,981)
(81,931)
9,950
—
—
—
—
450
(450)
Net Operating Income
$
132,133
$
123,175
$
8,958
$
514,265
$
475,739
$
38,526
38 Choice Properties REIT 2015 Annual Report
17.2
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. 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. Choice Properties considers FFO to be a useful measure of operating
performance as it adjusts for items included in net income (or net loss) that do not necessarily provide an accurate depiction of the Trust’s
past or recurring performance, such as adjustments to fair value of Exchangeable Units, investment properties and unit-based compensation.
See Section 7, “Other Measures of Performance” and Section 9.3 “Other Measures of Fourth Quarter Performance”, of this MD&A, for a
discussion on this non-GAAP measure. The following table reconciles net income (loss) to FFO for the periods ended as indicated:
For the periods ended December 31
($ thousands)
(unaudited)
Net income (loss)
Add (deduct) impact of the
following:
Adjustment to fair value of
Exchangeable Units
Adjustment to fair value of
investment properties
Adjustment to fair value of
unit-based compensation
Loss on disposal of
investment properties
Exchangeable Units
distributions
Amortization of tenant
improvement allowances
Internal expenses for leasing(i)
Funds from Operations
Add impact of other
adjustments:
Finance charge(ii)
Internalization costs
Funds from Operations
(excluding other
adjustments)
FFO per unit - diluted
FFO payout ratio
FFO per unit - diluted
(excluding other
adjustments)
FFO payout ratio (excluding
other adjustments)
Distribution declared per unit
Weighted average Units
outstanding - diluted
$
$
$
$
Three Months
Year End
2015
40,401
$
2014
87,017
$
Variance
favourable /
(unfavourable)
$
(46,616)
2015
(155,276)
$
$
2014
199,614
Variance
favourable /
(unfavourable)
$
(354,890)
95,418
51,063
44,355
410,518
(12,143)
422,661
(87,902)
(97,452)
9,550
(71,981)
(81,931)
379
—
(41)
—
51,461
49,730
101
666
100,524
—
—
100,524
0.247
65.8%
$
$
$
2
366
90,685
$
—
196
$
$
90,881
0.230
70.7%
420
—
1,731
99
300
9,839
—
(196)
9,643
0.017
4.9%
888
—
(591)
450
202,804
191,267
11,537
251
1,771
388,975
—
—
388,975
0.966
67.3%
456
366
297,488
48,911
2,568
348,967
0.777
83.7%
$
$
$
$
$
$
$
$
$
0.247
$
0.230
$
0.017
$
0.966
$
0.912
$
65.8%
70.7%
4.9%
67.3%
71.3%
$
0.162501
$
0.162501
$
— $
0.650004
$
0.650004
$
407,098,288
394,578,356
12,519,932
402,582,183
382,636,320
19,945,863
9,950
1,479
(450)
(205)
1,405
91,487
(48,911)
(2,568)
40,008
0.189
16.4%
0.054
4.0%
—
(i)
(ii)
Internal expenses for leasing, primarily salaries, of $666 and $1,771 were incurred in the three months and year ended December 31, 2015 respectively (2014 - nil and
$366), and were eligible to be added back to FFO based on the revision to the definition of FFO, in the Real Property Association of Canada White Paper published in
April 2014 that provided for an adjustment to incremental leasing expenses for the cost of salaried staff. This adjustment to FFO made results more comparable between
real estate entities that expensed their internal leasing departments and those that capitalized the expenses. Choice Properties internalized its leasing function on
October 1, 2014. Therefore, there were only three months of internal expenses for leasing for the year ended December 31, 2014 compared to the full year for the year
ended December 31, 2015.
For the three months and year ended December 31, 2014, internalization costs of $196 and $2,568, respectively, were added back to net income (loss) to calculate FFO
(1) (excluding other adjustments). Also, for the year ended December 31, 2014, non-cash finance charges of $48,911 were added back to net income (loss) to calculate
FFO(1) (excluding other adjustments). The non-cash finance charges were the result of accelerated amortization of net debt discounts due to replacement of notes issued
to Loblaw in connection with the IPO.
Choice Properties REIT 2015 Annual Report 39
Management’s Discussion and Analysis
17.3
Adjusted Funds from Operations
Choice Properties views AFFO as an alternative measure of cash generated from operations and considers AFFO generated as one of its
inputs in determining the appropriate level of distribution to Unitholders. See Section 7, “Other Measures of Performance” and Section 9.3
“Other Measures of Fourth Quarter Performance”, of this MD&A, for a discussion on this non-GAAP measure. The following table reconciles
FFO to AFFO for the periods ended as indicated:
For the periods ended December 31
($ thousands)
(unaudited)
Funds from Operations
Add (deduct) impact of the
following:
Internalization 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
AFFO per unit - diluted
AFFO payout ratio
Distribution declared per unit
Weighted average Units
outstanding - diluted
Three Months
Year End
2015
100,524
$
$
2014
90,685
Variance
favourable /
(unfavourable)
9,839
$
2015
388,975
$
2014
297,488
$
Variance
favourable /
(unfavourable)
91,487
$
—
(9,121)
196
(8,783)
(314)
643
(375)
439
(196)
(338)
61
204
—
(36,656)
2,568
(34,634)
(2,568)
(2,022)
(1,227)
50,018
(51,245)
2,139
2,104
35
(24,653)
(11,247)
(13,406)
(32,466)
(29,523)
(2,943)
18,692
3,670
15,022
—
—
—
(3,784)
(489)
(3,295)
(7,884)
(2,785)
(5,099)
$
$
$
81,987
0.201
80.8%
0.162501
$
$
$
74,096
0.188
86.4%
0.162501
$
$
$
$
$
7,891
0.013
5.6%
— $
312,881
0.777
83.7%
0.650004
$
$
$
285,236
0.745
87.2%
0.650004
$
$
$
27,645
0.032
(3.5)%
—
407,098,288
394,578,356
12,519,932
402,582,183
382,636,320
19,945,863
(i)
Seasonality impacts the timing of capital expenditures. The AFFO calculations for the three months ended December 31, 2015 and December 31, 2014 were adjusted for
this factor to make the quarters more comparable(2).
40 Choice Properties REIT 2015 Annual Report
The following table reconciles AFFO to cash flows from operating activities for the periods ended as indicated:
For the periods ended December 31
($ thousands)
(unaudited)
Cash Flows from operating activities
Interest paid
Adjusted cash flows from operating
Three Months
Year End
$
2015
172,394
(13,713)
$
2014
200,656
(14,809)
Variance
favourable /
(unfavourable)
(28,262)
$
1,096
$
2015
520,642
(144,528)
$
2014
476,368
(108,413)
Variance
favourable /
(unfavourable)
44,274
$
(36,115)
activities
$
158,681
$
185,847
$
(27,166)
$
376,114
$
367,955
$
8,159
Add (deduct) impact of the following:
Net change in non-cash operating
working capital
Amortization of other assets
Property capital expenditures
- incurred
Property and leasing
(48,050)
(279)
(83,751)
(87)
35,701
(192)
(32,649)
(844)
(24,367)
(414)
(8,282)
(430)
(24,653)
(11,247)
(13,406)
(32,466)
(29,523)
(2,943)
capital expenditures - normalized(i)
18,692
Internalization costs
Internal expenses for leasing
Excess (shortfall) of interest paid
over interest accrued
Adjusted Funds from Operations
$
—
666
3,670
196
366
15,022
(196)
300
—
—
1,771
—
2,568
366
—
(2,568)
1,405
(23,070)
81,987
$
(20,898)
74,096
$
(2,172)
7,891
955
312,881
$
(31,349)
285,236
$
$
32,304
27,645
(i)
Seasonality impacts the timing of capital expenditures. AFFO calculation was adjusted for this factor to make the quarters more comparable(2).
Choice Properties REIT 2015 Annual Report 41
Management’s Discussion and Analysis
17.4
Earnings Before Interest, Taxes, Depreciation, Amortization and Fair Value
Choice Properties believes EBITDAFV is useful in assessing the Trust’s ability to service its debt, finance capital expenditures and provide
for distributions to its Unitholders. In addition, EBITDAFV removes the non-cash impact of the adjustments to fair value. The following table
reconciles net income (loss) to EBITDAFV for the periods ended as indicated:
For the periods ended December 31
($ thousands)
(unaudited)
Net income (loss)
Add (deduct) impact of the following:
Adjustment to fair value of
Exchangeable Units
Adjustment to fair value of
investment properties
Adjustment to fair value of unit-
based compensation
Interest expense(i)
Amortization of other assets
Earnings Before Interest, Taxes,
Depreciation, Amortization
and Fair Value
Add impact of other adjustments:
Finance charge(ii)
Adjusted Earnings Before Interest,
Taxes, Depreciation,
Amortization and Fair Value
Three Months
Year End
2015
40,401
$
2014
87,017
$
Variance
favourable /
(unfavourable)
(46,616)
$
2015
$ (155,276)
2014
199,614
$
Variance
favourable /
(unfavourable)
(354,890)
$
95,418
51,063
44,355
410,518
(12,143)
422,661
(87,902)
(97,452)
9,550
(71,981)
(81,931)
9,950
379
89,237
279
(41)
85,505
87
420
3,732
192
888
(591)
349,865
331,235
844
414
1,479
18,630
430
$
137,812
$
126,179
$
11,633
$
534,858
$
436,598
$
98,260
—
—
—
—
48,911
(48,911)
$
137,812
$
126,179
$
11,633
$
534,858
$
485,509
$
49,349
(i)
As calculated in Section 6, “Results of Operations” and Section 9.2 “Fourth Quarter Results”, of this MD&A.
(ii) Non-cash finance charges of $48,911 were added back to EBITDAFV to calculate the adjusted EBITDAFV for the year ended December 31, 2014. The charges were the
result of accelerated amortization of net debt discounts due to replacement of notes issued to Loblaw in connection with the IPO.
42 Choice Properties REIT 2015 Annual Report
18.
ADDITIONAL INFORMATION
Additional information about Choice Properties 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 during the year end ended December 31, 2015 as discussed in Section 5.2, “Acquisition of Investment
Properties”, of this MD&A:
Location
Acquisition Date
Property Type
GLA (in square feet)
Occupancy
Acquisitions from Loblaw
Duckworth/Cundles, Barrie, ON
1400 Church St. S., Pickering, ON
419 Main St., Doaktown, NB
7000 Route 125, Chertsey, QC
11 Redway Rd., Toronto, ON
449 Parliament St., Toronto, ON
66 Fourth Ave., Englehart, ON
519 Main St., Powassan, ON
1120 Second Ave. E, Owen Sound, ON
24 - 65 Regional Road, Lively, ON
31-1 Hwy. #11 W, Cochrane, ON
15 McChesney Ave., Kirkland Lake, ON
55 Brunetville Rd., Kapuskasing, ON
40 Meredith St. E, Little Current, ON
726 Principale St., Casselman, ON
512 St. Phillippe St., Alfred, ON
1012 Main St., Geraldton, ON
127 Hastings St. N, Bancroft, ON
654 Algonquin Blvd. E, Timmins, ON
186 Mission Rd., Wawa, ON
40 Meredith St., Gore Bay, ON
175 Cargill Rd., Winkler, MB
1200 Main St. E, Swan River, MB
206 Broadway St. E, Yorkton, SK
30 Kenderdine Rd., Saskatoon, SK
315 Herold Rd., Saskatoon, SK
10851 - 100th St., Westlock, AB
10527 - 101st Ave., Lac La Biche, AB
5007 - 52nd St., Athabasca, AB
5701 - 47th Ave., Stettler, AB
4524 Feeney Ave., Terrace, BC
221 Highway 16, Burns Lake, BC
1501 Cook St., Creston, BC
2110 Ryley Ave., Vanderhoof, BC
1792 - 9th Ave., Fernie, BC
7000 - 27th St., Grand Forks, BC
2335 Maple Dr. E, Quesnel, BC
5001 Anderson Way, Vernon, BC
31 - 35 Broadway St., Kensington, PE
75-85 - 105 Causley St., Blind River, ON
9186 Highway 93 South, Midland, ON
1428 Highway 2 West, Courtice, ON
296 Bank St., Ottawa, ON
671 River Rd., Ottawa, ON
15900 Bayview Ave., Aurora, ON
985 Woodbine Ave., Toronto, ON
Acquisitions from Third-Party
Near Fernbank community, Kanata, ON
5228 Highway 7, Porter’s Lake, NS
3020 Elm Creek Rd., Mississauga, ON
Land
January 9, 2015
Warehouse
January 30, 2015
Stand-alone retail
June 1, 2015
Stand-alone retail
June 1, 2015
Stand-alone retail
June 1, 2015
Stand-alone retail
June 1, 2015
Stand-alone retail
June 1, 2015
Stand-alone retail
June 1, 2015
Stand-alone retail
June 1, 2015
Stand-alone retail
June 1, 2015
Stand-alone retail
June 1, 2015
Stand-alone retail
June 1, 2015
Stand-alone retail
June 1, 2015
Stand-alone retail
June 1, 2015
Stand-alone retail
June 1, 2015
Stand-alone retail
June 1, 2015
Stand-alone retail
June 1, 2015
Stand-alone retail
June 1, 2015
Stand-alone retail
June 1, 2015
Stand-alone retail
June 1, 2015
Stand-alone retail
June 1, 2015
Stand-alone retail
June 1, 2015
Stand-alone retail
June 1, 2015
Stand-alone retail
June 1, 2015
Stand-alone retail
June 1, 2015
Stand-alone retail
June 1, 2015
Stand-alone retail
June 1, 2015
Stand-alone retail
June 1, 2015
Stand-alone retail
June 1, 2015
Stand-alone retail
June 1, 2015
Stand-alone retail
June 1, 2015
Stand-alone retail
June 1, 2015
Stand-alone retail
June 1, 2015
Stand-alone retail
June 1, 2015
Stand-alone retail
June 1, 2015
Stand-alone retail
June 1, 2015
Stand-alone retail
June 1, 2015
Stand-alone retail
June 1, 2015
Multi-tenant retail
June 1, 2015
Multi-tenant retail
June 1, 2015
Stand-alone retail
August 20, 2015
August 20, 2015
Stand-alone retail
November 17, 2015 Stand-alone retail
November 17, 2015 Stand-alone retail
November 17, 2015 Multi-tenant retail
November 17, 2015 Multi-tenant retail
January 30, 2015
February 19, 2015 Multi-tenant retail
Multi-tenant retail
August 11, 2015
Land
N/A
921,256
10,500
24,661
60,950
14,414
7,968
14,222
14,900
30,768
19,953
45,157
41,585
10,726
17,954
17,507
25,744
25,338
50,020
15,224
9,486
110,253
38,056
101,733
38,966
42,568
39,922
39,922
40,136
37,562
53,904
51,241
38,798
38,049
39,922
40,374
58,224
154,717
18,918
26,543
18,329
30,309
43,286
69,761
19,199
28,772
N/A
54,569
12,023
2,664,389
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%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
82%
95%
100%
100%
100%
100%
100%
99%
N/A
86%
100%
93%
Choice Properties REIT 2015 Annual Report 43
Management’s Discussion and Analysis
The following details the acquisitions for the year ended December 31, 2014:
Location
Acquisition Date
Property Type
GLA (in square feet)
Occupancy
Acquisitions from Third-Parties:
Secretariat Court, Mississauga, ON
Mayfield/Chinguacousy, Brampton, ON
Acquisitions from Loblaw:
Chemin du Tremblay, Boucherville, QC
Boul. Louis-XIV, Charlesbourg, QC
Boul. Saint - Laurent, Montreal, QC
Lower Jarvis St., Toronto, ON
Highway 11, Hearst, ON
George St. N, Peterborough, ON
Highway #108 N, Elliot Lake, ON
Queen St. E, St. Mary's, ON
Hamilton Rd., London, ON
Main St., Delhi, ON
Main St. S, Hagersville, ON
Regent Ave. W, Winnipeg, MB
55th St., Cold Lake, AB
104th Ave., Surrey, BC
Ferry Ave., Prince George, BC
Main St., Sackville, NB
Jacques-Cartier Sud, Sherbrooke, QC
Boul. Sainte-Anne, Ste-Anne-Des-Plaines, QC
King St. S, Alliston, ON
Clair Rd. E, Guelph, ON
Wanuskewin Rd., Saskatoon, SK
Superior St., Devon, AB
100th Ave., Peace River, AB
Gladwin Rd., Abbotsford, BC
Old Airport Rd., Yellowknife, NT
2nd Ave., Whitehorse, YT
Bathurst/Lake Shore, Toronto, ON
Prince Rupert St., Stephenville, NL
Scott St., New Liskeard, ON
Ellice Ave., Winnipeg, MB
99 St. NW, Edmonton, AB
Columbia Ave., Castlegar, BC
Alaska Ave., Dawson Creek, BC
Carlaw Ave., Toronto, ON
Bloor St. W, Toronto, ON
Broadview Ave., Toronto, ON
Portage Ave., Winnipeg, MB
February 28, 2014
November 7, 2014
Industrial
Land
October 8, 2014
May 6, 2014
May 6, 2014
May 6, 2014
May 6, 2014
May 6, 2014
May 6, 2014
May 6, 2014
May 6, 2014
May 6, 2014
May 6, 2014
May 6, 2014
May 6, 2014
May 6, 2014
May 6, 2014
October 8, 2014
October 8, 2014
October 8, 2014
October 8, 2014
October 8, 2014
October 8, 2014
October 8, 2014
October 8, 2014
October 8, 2014
October 8, 2014
October 8, 2014
December 9, 2014
May 6, 2014
May 6, 2014
May 6, 2014
May 6, 2014
May 6, 2014
May 6, 2014
October 8, 2014
October 8, 2014
October 8, 2014
October 8, 2014
Warehouse
Stand-alone retail
Stand-alone retail
Stand-alone retail
Stand-alone retail
Stand-alone retail
Stand-alone retail
Stand-alone retail
Stand-alone retail
Stand-alone retail
Stand-alone retail
Stand-alone retail
Stand-alone retail
Stand-alone retail
Stand-alone retail
Stand-alone retail
Stand-alone retail
Stand-alone retail
Stand-alone retail
Stand-alone retail
Stand-alone retail
Stand-alone retail
Stand-alone retail
Stand-alone retail
Stand-alone retail
Stand-alone retail
Land
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
148,245
N/A
315,961
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
141,487
60,970
90,211
N/A
45,673
56,642
74,011
112,378
57,036
39,923
125,771
15,778
33,163
147,458
2,595,378
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
100%
100%
100%
100%
75%
74%
98%
100%
100%
85%
98%
44 Choice Properties REIT 2015 Annual Report
Consolidated Financial Statements
Management’s Statement of Responsibility for Financial Reporting
Independent Auditor’s Report
Consolidated Balance Sheets
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
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
Acquisitions
Investment Properties
Interests in Other Entities
Accounts Receivable and Other Assets
Notes Receivable
Note 10.
Long Term Debt and Class C LP Units
Note 11. Unit Equity
Note 12. Trade Payables and Other Liabilities
Note 13. Unit-Based Compensation
Note 14. Rental Revenue
Note 15. Net Interest Expense and Other Financing Charges
Note 16. Employee Costs
Note 17. Capital Management
Note 18. Fair Value Measurements
Note 19. Financial Risk Management
Note 20. Contingent Liabilities and Financial Guarantees
Note 21. Related Party Transactions
Note 22. Supplementary Information
46
47
48
49
50
51
52
52
52
57
58
58
59
61
62
63
64
66
68
69
71
72
72
72
73
73
75
75
78
Choice Properties REIT 2015 Annual Report 45
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 17, 2016
[signed]
John R. Morrison
President and Chief Executive Officer
[signed]
Bart Munn, CPA, CA
Executive Vice President, Chief Financial Officer
46 Choice Properties REIT 2015 Annual Report
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, 2015
and December 31, 2014, the consolidated statements of income (loss) and comprehensive income
(loss), changes in equity and cash flows for the years then ended, and notes, comprising a summary
of significant accounting policies and other explanatory information.
Management's Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with International Financial Reporting Standards, and for such internal
control as management determines is necessary to enable the preparation of consolidated financial
statements that are free from material misstatement, whether due to fraud or error.
Auditors' Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our
audits. We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we comply with ethical requirements and plan and perform
the audit to obtain reasonable assurance about whether the consolidated financial statements are
free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures
in the consolidated financial statements. The procedures selected depend on our judgment, including
the assessment of the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error. In making those risk assessments, we consider internal control
relevant to the entity's preparation and fair presentation of the consolidated financial statements in
order to design audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the entity's internal control. An audit also includes
evaluating the appropriateness of accounting policies used and the reasonableness of accounting
estimates made by management, as well as evaluating the overall presentation of the consolidated
financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to
provide a basis for our audit opinion.
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,
2015 and December 31, 2014, and its consolidated financial performance and its consolidated cash
flows for the years then ended in accordance with International Financial Reporting Standards.
Chartered Professional Accountants, Licensed Public Accountants
February 17, 2016
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 6)
Equity accounted investments (note 7)
Accounts receivable and other assets (note 8)
Notes receivable (note 9)
Current Assets
Accounts receivable and other assets (note 8)
Notes receivable (note 9)
Cash and cash equivalents
Total Assets
Liabilities and Equity
Non-current Liabilities
Long term debt and Class C LP Units (note 10)
Credit facility (note 10)
Exchangeable Units (note 11)
Trade payables and other liabilities (note 12)
Current Liabilities
Long term debt due within one year (note 10)
Trade payables and other liabilities (note 12)
Total Liabilities
Equity
Unitholders’ equity
Non-controlling interests (note 7)
Total Equity
Total Liabilities and Equity
Contingent Liabilities and Financial Guarantees (note 20).
Subsequent Events (notes 9 and 10).
See accompanying notes to the consolidated financial statements.
Approved on behalf of the Board of Trustees
[signed]
Galen G. Weston
Board of Trustees Chairman
48 Choice Properties REIT 2015 Annual Report
As at
As at
December 31, 2015
December 31, 2014
$
8,561,000
$
7,905,978
9,350
9,874
2,179
6,230
10,057
22,539
8,582,403
7,944,804
6,240
272,892
44,354
323,486
9,473
236,829
1,332
247,634
8,905,889
$
8,192,438
$
$
3,579,202
$
—
3,741,895
1,354
7,322,451
302,188
438,177
740,365
8,062,816
835,317
7,756
843,073
3,435,628
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
$
8,905,889
$
[signed]
Paul R. Weiss
Audit Committee Chairman
Choice Properties Real Estate Investment Trust
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
(in thousands of Canadian dollars)
Net Property Income
Year ended
December 31, 2015
Year ended
December 31, 2014
Rental revenue from investment properties (note 14)
$
743,100
$
Property operating costs (note 22)
Other Expenses
General and administrative expenses (note 22)
Amortization of other assets
Net interest expense and other financing charges (note 15)
Loss on disposal of investment properties
Adjustment to fair value of Exchangeable Units (note 11)
Adjustment to fair value of investment properties (note 6)
Net Income (Loss) and Comprehensive Income (Loss)
Net Income (Loss) and Comprehensive Income (Loss) attributable to:
Choice Properties’ Unitholders
Non-controlling interests (note 7)
See accompanying notes to the consolidated financial statements.
$
$
$
(192,179)
550,921
(21,765)
(844)
(345,051)
—
(410,518)
71,981
(155,276)
$
682,923
(172,550)
510,373
(23,315)
(414)
(380,654)
(450)
12,143
81,931
199,614
(155,276)
—
(155,276)
$
$
199,614
—
199,614
Choice Properties REIT 2015 Annual Report 49
Choice Properties Real Estate Investment Trust
Consolidated Statements of Changes in Equity
(in thousands of Canadian dollars)
Equity, December 31, 2014
Net loss
Distributions
Issuance of Units under the Distribution
—
—
Reinvestment Plan (note 11)
18,118
Issuance of Units under unit-based
compensation arrangement (note 11)
Contribution from non-controlling
interests (note 7)
394
—
Attributable to Choice Properties Unitholders
Trust
Units
849,337
$
Cumulative
net income
(loss)
266,762
$
Cumulative
distributions
to Unitholders
$
Total
Unitholders’
equity
(85,398) $ 1,030,701
Non-
controlling
interests
7,696
$
Total
equity
$ 1,038,397
(155,276)
—
—
—
—
—
(58,620)
(155,276)
(58,620)
—
—
—
18,118
394
—
—
—
—
—
60
(155,276)
(58,620)
18,118
394
60
Equity, December 31, 2015
$
867,849
$
111,486
$
(144,018) $
835,317
$
7,756
$
843,073
Non-
controlling
interests
$
— $
Total
equity
871,652
199,614
(57,487)
15,682
1,240
7,696
$ 1,038,397
—
—
—
—
7,696
7,696
Attributable to Choice Properties Unitholders
(in thousands of Canadian dollars)
Equity, December 31, 2013
Net income
Distributions
Issuance of Units, under the Distribution
Reinvestment Plan (note 11)
Issuance of Units, under unit-based
compensation arrangement (note 11)
Contribution from non-controlling
interests (note 7)
Trust
Units
832,415
$
$
—
—
15,682
1,240
—
Cumulative
net income
67,148
199,614
—
—
—
—
Cumulative
distributions to
Unitholders
$
(27,911) $
—
(57,487)
Total
Unitholders’
equity
871,652
199,614
(57,487)
—
—
—
15,682
1,240
—
Equity, December 31, 2014
$
849,337
$
266,762
$
(85,398) $ 1,030,701
$
See accompanying notes to the consolidated financial statements.
50 Choice Properties REIT 2015 Annual Report
Choice Properties Real Estate Investment Trust
Consolidated Statements of Cash Flows
(in thousands of Canadian dollars)
Operating Activities
Net income (loss)
Straight-line rental revenue
Amortization of tenant improvement allowances
Amortization of other assets
Net interest expense and other financing charges (note 15)
Value of unit-based compensation granted (note 13)
Adjustment to fair value of Exchangeable Units
Adjustment to fair value of investment properties
Loss on disposal of investment property
Leasing capital expenditures (note 6)
Interest received
Net change in non-cash operating working capital (note 22)
Cash Flows from Operating Activities
Investing Activities
Acquisitions of investment properties (note 5)
Additions to investment properties (note 6)
Additions to fixtures and equipment
Notes receivable issued to third-party (note 9)
Equity investment (note 7)
Proceeds of disposition
Cash Flows used in Investing Activities
Financing Activities
Long term debt
Issued - Senior unsecured debentures, net of debt placement costs (note 10)
Retired - Transferor Notes (note 10)
Principal repayments - Mortgage (note 10)
Credit facility
Net advancements (repayments) (note 10)
Debt placement costs (note 10)
Change in bank indebtedness
Notes receivable
Issued to related party (note 9)
Repaid by related party (note 9)
Cash received on exercise of options
Interest paid
Distributions paid on Exchangeable Units
Distributions paid to Unitholders
Contribution from non-controlling interest (note 7)
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
Year ended
December 31, 2015
Year ended
December 31, 2014
$
$
(155,276)
(36,656)
251
844
345,051
3,027
410,518
(71,981)
—
(7,884)
99
32,649
520,642
(247,404)
(161,987)
(480)
(1,565)
(3,120)
—
(414,556)
447,038
—
(1,040)
(122,000)
(292)
—
(248,463)
236,328
321
(144,528)
(190,078)
(40,410)
60
(63,064)
43,022
1,332
44,354
$
$
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)
—
122,000
(315)
—
(236,328)
92,057
1,188
(108,413)
(73,219)
(41,716)
7,696
(229,756)
(50,073)
51,405
1,332
Supplemental disclosure of non-cash operating, investing and financing activities (note 22).
See accompanying notes to the consolidated financial statements.
Choice Properties REIT 2015 Annual Report 51
Notes to the Consolidated Financial Statements
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’ trust units (“Trust Units” or “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 (the “IPO”)
and completed the acquisition of 425 properties from Loblaw Companies Limited and its subsidiaries (“Loblaw”).
The parent of Choice Properties is Loblaw, which held an 83.0% effective interest in Choice Properties as at December 31, 2015. Loblaw’s
controlling shareholder is George Weston Limited (“GWL”), which held an approximate 46% ownership of Loblaw’s outstanding common
shares and a 5.6% direct interest in Choice Properties as at December 31, 2015.
The active subsidiaries of the Trust included in Choice Properties’ consolidated financial statements are Choice Properties Limited Partnership
(the “Partnership”), Choice Properties GP Inc. (the “General Partner”) and Choice Properties PRC Brampton Limited Partnership.
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” or “GAAP”) 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 17, 2016.
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 6;
Class B LP Units (the “Exchangeable Units”) which are exchangeable for Trust Units at the option of the holder as described in note 11;
and
liabilities for unit-based compensation arrangements as described in note 13.
The consolidated financial statements are presented in 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.
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.
52 Choice Properties REIT 2015 Annual Report
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.
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.
Choice Properties REIT 2015 Annual Report 53
Notes to the Consolidated Financial Statements
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:
Senior unsecured debentures
Class C LP Units
Mortgages
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 The Trust’s subsidiary, the Partnership, 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.
54 Choice Properties REIT 2015 Annual Report
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:
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 portfolio 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.
Choice Properties REIT 2015 Annual Report 55
Notes to the Consolidated Financial Statements
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.
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. Any income
retained in the Trust would be taxed at the highest marginal tax rate applicable to individuals in the calendar year.
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.
56 Choice Properties REIT 2015 Annual Report
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 2015 Annual Report 57
Notes to the Consolidated Financial Statements
Note 4.
Future Accounting Standards
In 2014, the IASB issued IFRS 15, “Revenue from Contracts with Customers” (“IFRS 15”) replacing IAS 18, “Revenue”, IAS 11, “Construction
Contracts”, and related interpretations. 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, 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 2014, the IASB issued IFRS 9, “Financial Instruments” 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 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.
In 2016, the IASB issued IFRS 16, “Leases (“IFRS 16”), replacing IAS 17, “Leases” and related interpretations. The standard introduces a
single on-balance sheet recognition and measurement model for lessees, eliminating the distinction between operating and finance leases.
Lessors continue to classify leases as finance and operating leases. IFRS 16 becomes effective for annual periods beginning on or after
January 1, 2019, and is to be applied retrospectively. Early adoption is permitted if IFRS 15 has been adopted. The Trust is currently assessing
the impact of the new standard on its consolidated financial statements.
Note 5.
Acquisitions
During the year ended December 31, 2015, Choice Properties completed the following acquisitions from Loblaw (unless otherwise noted):
($ thousands)
Location
Barrie, ON
Date of
acquisition
Property
type
Investment
properties
Other
assets
Other
liabilities
Net
assets
acquired
Debt
assumed
Exchangeable
Units issued
Cash
Acquisition
costs
included in
investment
properties
January 9
Land
$
9,758 $
— $
— $
9,758 $
— $
2,808 $
6,950 $
191
Consideration
Kanata, ON(i)(ii)
January 30
Land
2,025
Pickering, ON
January 30 Warehouse
81,450
Porter's Lake, NS(i)
February 19
Retail
5,304
Various(iii) (38 properties)
June 1
Retail
206,690
Mississauga, ON(i)
August 11
Retail
5,782
Midland & Courtice, ON
August 20
Retail
18,415
Various(iv) (4 properties) November 17
Retail
45,876
—
—
19
2
—
29
9
—
2,025
— 81,450
(28)
5,295
(1,325) 205,367
—
—
—
—
—
—
—
2,025
81,450
5,295
87
250
104
103,549
101,818
3,995
(31)
5,751
2,123
—
3,628
(9)
18,435
—
3,200
15,235
(278)
45,607
14,604
31,003
182
265
796
Total Acquisitions
$ 375,300 $
59 $ (1,671) $373,688 $
2,123 $
124,161 $ 247,404 $
5,870
(i)
Acquired from a third-party vendor.
(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 (note 7).
(iii)
(iv)
Investment properties and Exchangeable Units values both included an adjustment of $1,349 to reflect the increase of the fair value of the Exchangeable Units on the
closing date compared to the volume weighted average value of the units referenced in the purchase and sale agreement.
Investment properties and Exchangeable Units values both included an adjustment of ($555) to reflect the decrease of the fair value of the Exchangeable Units on the
closing date compared to the volume weighted average value of the units referenced in the purchase and sale agreement.
58 Choice Properties REIT 2015 Annual Report
During the year ended December 31, 2014, Choice Properties completed the following acquisitions from Loblaw (unless otherwise noted):
($ thousands)
Consideration
Location
Date of
acquisition
Property
type
Investment
properties
Other
assets
Other
liabilities
Net
assets
acquired
Debt
assumed
Exchangeable
Units issued
Cash
Acquisition
costs
included in
investment
properties
Mississauga, ON(i)
February 28
Industrial
$
15,739 $
— $
— $ 15,739 $
— $
— $ 15,739 $
239
Various (20 properties)
May 6
Retail
201,630
7
(1,189) 200,448
—
119,632
80,816
2,935
Boucherville, QC
October 8 Warehouse
39,432
Various (15 properties)
October 8
Retail
174,549
Brampton, ON(i)
November 7
Land
25,653
—
204
—
(187)
39,245
3,603
(817) 173,936
— 25,653
—
—
18,198
93,062
17,444
80,874
183
2,776
—
25,653
—
Total Acquisitions
$ 457,003 $
211 $ (2,193) $455,021 $
3,603 $
230,892 $ 220,526 $
6,133
(i)
Acquired from a third-party vendor.
Note 6.
Investment Properties
($ thousands)
Balance, beginning of year
Acquisitions of investment properties - including
acquisition costs of $5,870 (2014 - $6,133) (note 5)
Capital expenditures(i):
Building improvements
Property capital - including recoverable capital(ii)
Development capital(iii)
Capitalized interest(iv) (note 15)
Leasing capital expenditures:
Tenant improvement allowances
Direct leasing costs
Dispositions
Adjustment to fair value of investment properties
Amortization of straight-line rent and tenant
improvement allowances - included in revenue
Balance, end of year
Income
producing
properties
Properties
under
development
$
7,849,461
$
363,517
12,254
32,466
91,306
426
5,548
2,336
—
71,981
56,517
11,783
—
—
25,961
1,039
—
—
—
—
Year ended
Year ended
December 31, 2015
7,905,978
$
December 31, 2014
7,287,759
$
375,300
457,003
12,254
32,466
117,267
1,465
5,548
2,336
—
71,981
4,814
29,523
21,299
166
1,541
1,244
(13,480)
81,931
36,405
8,465,700
$
$
—
95,300
$
36,405
8,561,000
$
34,178
7,905,978
(i)
(ii)
Capital expenditures includes $102 of construction fees (note 21) paid to Loblaw (December 31, 2014 - $3,067).
Property capital expenditures include $32,466 of recoverable capital (note 22) and nil non-recoverable capital (December 31, 2014 - $26,805 and $2,718, respectively).
(iii) Development capital includes $2,334 of site intensification fees (note 21) paid to Loblaw (December 31, 2014 - $993).
(iv)
Interest was capitalized to qualifying development projects based on a weighted average interest rate of 3.27% (December 31, 2014 - 3.44%).
Included in certain investment properties acquired from Loblaw is excess land with development potential. Choice Properties will compensate
Loblaw, over time, with intensification fees determined by a site intensification payment grid as outlined in the Strategic Alliance Agreement
(note 21), should Choice Properties pursue activity resulting in the intensification of such excess land. The fair value of this excess land has
been recorded in the financial statements.
Independent Appraisals
As part of the IPO, all 425 acquired properties were appraised by independent nationally-recognized appraisers. In addition to the table below,
all the properties acquired since the IPO were also independently appraised at the time of acquisition. Choice Properties has engaged
Choice Properties REIT 2015 Annual Report 59
Notes to the Consolidated Financial Statements
independent nationally-recognized valuation firms to appraise the investment properties such that substantially all of the portfolio will be
independently appraised at least once over a five-year period.
A breakdown of the aggregate fair value of investment properties independently appraised each quarter, in accordance with the Trust’s policy,
is as follows:
($ thousands except where otherwise indicated)
March 31
June 30
September 30
December 31
Total
Internal Appraisals
Number of properties
20
22
21
26
89
2015
Fair value
588,510
Number of properties
21
511,100
477,620
687,610
2,264,840
21
22
21
85
$
$
2014
Fair value
397,110
403,870
546,970
397,780
1,745,730
$
$
The 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 investment 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 nationally-recognized appraisers. Below are the key rates used in the valuation models for both internal
and independent appraisals.
Discount rate
Terminal capitalization rate
Overall capitalization rate
Fair Value Sensitivity
Weighted average
As at
As at
December 31, 2015
7.08%
December 31, 2014
7.09%
6.50%
6.17%
6.50%
6.18%
The following table summarizes capitalization rate sensitivity for income producing properties:
Capitalization rate sensitivity
increase/(decrease)
($ thousands)
Weighted
average overall
capitalization rate
(0.75)%
(0.50)%
(0.25)%
December 31, 2015
0.25%
0.50%
0.75%
5.42% $
5.67% $
5.92% $
6.17% $
6.42% $
6.67% $
6.92% $
Fair value of
investment
properties
9,636,700
9,211,700
8,822,700
8,465,700
8,135,700
7,830,700
7,548,700
$
$
$
$
$
$
$
Fair
value
variance
1,171,000
746,000
357,000
—
(330,000)
(635,000)
(917,000)
% change
14 %
9 %
4 %
— %
(4)%
(8)%
(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.
60 Choice Properties REIT 2015 Annual Report
Note 7.
Interests in Other Entities
Joint Venture
On December 9, 2014, Choice Properties and its joint venture partner, Wittington Properties Limited (”Wittington”), the parent company of
GWL, completed the acquisition of the West Block project at Lake Shore Boulevard and Bathurst Street (“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
500 LS Limited Partnership
Country of
Formation
Canada
Location
500 Lake Shore Blvd. West, Toronto, ON
Ownership Interest as at
December 31, 2015 and 2014
40%
Choice Properties made contributions of $3,120 to the joint venture during the year ended December 31, 2015 (year ended December 31,
2014 - $6,230). There was no operating activity during the year ended December 31, 2015 or during 2014. Summarized financial information
for Choice Properties’ share of the equity accounted investment is set out below:
($ thousands)
Current assets
Non-current assets
Current liabilities
Net assets at 100%
Choice Properties’ investment in equity accounted joint venture at 40%
Subsidiary
As at
As at
December 31, 2015
3,130
$
December 31, 2014
26
$
20,603
(358)
23,375
9,350
$
$
15,550
—
15,576
6,230
$
$
On November 7, 2014, Choice Properties established 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 the results of this subsidiary
and recognized a 30% non-controlling interest for the interests of PL Ventures Ltd., a subsidiary of PenEquity Realty Corporation (“PenEquity”).
Limited Partnership
Choice Properties PRC Brampton
Limited Partnership
Country of
Formation
Location
Ownership Interest as at
December 31, 2015 and 2014
Canada
Mayfield/Chinguacousy, Brampton, ON
70%
There was no operating activity during the year ended December 31, 2015 or during 2014. The following is included in Choice Properties’
consolidated financial statements relating to the subsidiary:
($ thousands)
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Net assets at 100%
Non-controlling interests at 30%
As at
As at
December 31, 2015
111
$
December 31, 2014
—
$
25,767
(12)
(13)
25,853
7,756
$
$
25,653
—
—
25,653
7,696
$
$
Choice Properties REIT 2015 Annual Report 61
Notes to the Consolidated Financial Statements
Joint Operation
On January 30, 2015, Choice Properties entered into a co-ownership agreement with PFC Fernbank Corp., a subsidiary of PenEquity and
Phoenix Fernbank Inc. (“Phoenix”) to acquire a parcel of land in Kanata, Ontario (note 5). This is a longer-term development project with the
construction of a grocery anchored retail centre anticipated to commence in the second half of 2017.
Choice Properties recognized its 50% proportionate share of the assets held jointly in the co-ownership, of the parcel of land, and funded its
partners’ collective 50% interest of the purchase price through a mezzanine loan (note 9).
There was no operating activity during the year ended December 31, 2015. Summarized financial information for Choice Properties’
proportionate share of the property is set out below:
($ thousands)
Current assets
Non-current assets
Current liabilities
Net assets at 100%
Choice Properties’ proportionate share at 50%
Note 8.
Accounts Receivable and Other Assets
($ thousands)
Net rent receivable - net of allowance for doubtful accounts of $852 (2014 - $453)
Fixtures and equipment - net of accumulated amortization of $1,730 (2014 - $886)
Prepaid property taxes
Prepaid other
Accounts receivable and other assets
Classified as:
Non-current
Current
As at
December 31, 2015
16
$
4,075
(41)
4,050
2,025
$
$
As at
As at
December 31, 2015
888
$
December 31, 2014
3,419
$
5,944
2,133
7,149
16,114
$
6,308
2,791
7,012
19,530
9,874
6,240
16,114
$
$
10,057
9,473
19,530
$
$
$
62 Choice Properties REIT 2015 Annual Report
Note 9.
Notes Receivable
($ thousands)
Notes receivable from related party
Notes receivable from third-party
Notes receivable
Classified as:
Non-current
Current
As at
As at
December 31, 2015
248,463
$
December 31, 2014
236,328
$
26,608
275,071
$
23,040
259,368
2,179
272,892
275,071
$
$
22,539
236,829
259,368
$
$
$
Notes receivable from related party Non-interest bearing short term notes totaling $236,328 were repaid by Loblaw in January 2015. During
2015, non-interest bearing short term notes totaling $248,463 were issued to Loblaw and repaid in January 2016 (note 21).
Notes receivable from third-party On December 24, 2014, Choice Properties provided mezzanine financing to Penady (Barrie) Ltd., a
subsidiary of PenEquity and its partner in the form of a two-year mortgage of $22,500 at an interest rate of 8% per annum, with an option to
extend. The balance as at December 31, 2015 includes accrued interest of $1,909 payable on maturity (December 31, 2014 - $39) and
financing costs of $40, less amortization of $20 (December 31, 2014 - nil and nil). On December 24, 2014, Choice Properties provided short-
term bridge financing of $500 to Penady (Barrie) Ltd. which was repaid with interest calculated at 6% per annum on July 10, 2015 (December 31,
2014 - accrued interest of $1).
On January 30, 2015, Choice Properties also provided a five-year mezzanine loan of $2,025 at an interest rate of 8% per annum to PFC
Fernbank Corp., a subsidiary of PenEquity and Phoenix. The balance as at December 31, 2015 includes accrued interest of $154 payable
on maturity.
Choice Properties REIT 2015 Annual Report 63
Notes to the Consolidated Financial Statements
Note 10.
Long Term Debt and Class C LP Units
($ thousands)
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 E 2.297%, due 2020, effective interest 2.297%
Series F 4.055%, due 2025, effective interest 4.055%
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%
Debt discounts and premiums - net of accumulated amortization of ($8,175) (2014 - ($3,312))
Debt placement costs - net of accumulated amortization of $1,807 (2014 - $867)
Mortgage (interest monthly)
7.42%, due 2017, effective interest 2.80%
3.15%, due 2019, effective interest 2.45%
Debt discount - net of accumulated amortization of ($101) (2014 - ($18))
Class C LP Units(i) (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 premium - net of accumulated amortization of $5,533 (2014 - $3,219)
Other
Credit facility debt placement costs - net of accumulated amortization of $1,122 (2014 - nil)(ii)
Long term debt and Class C LP Units
Classified as:
Non-current
Current
As at
As at
December 31, 2015
December 31, 2014
$
400,000
$
200,000
250,000
200,000
250,000
200,000
300,000
200,000
200,000
300,000
200,000
300,000
3,481
(6,565)
2,113
2,026
200
300,000
300,000
325,000
(43,205)
(1,660)
400,000
200,000
250,000
200,000
—
—
300,000
200,000
200,000
300,000
200,000
300,000
8,344
(4,543)
3,107
—
232
300,000
300,000
325,000
(45,519)
—
$
$
$
3,881,390
$
3,436,621
3,579,202
302,188
3,881,390
$
$
3,435,628
993
3,436,621
(i)
Represents amounts due to Loblaw.
(ii) Debt placement costs of $1,813 (net of accumulated amortization of $677) were included with the Credit Facility balance in 2014.
64 Choice Properties REIT 2015 Annual Report
Senior Unsecured Debentures On February 5, 2015, Choice Properties issued $250,000 aggregate principal amount of Series E senior
unsecured debentures due September 14, 2020. These debentures bear interest at a rate of 2.297% per annum, with semi-annual installments
of interest due on March 14 and September 14 in each year, commencing on March 14, 2015. The net proceeds, net of debt placement costs
of $1,514, were used by the Trust to repay existing indebtedness and for general business purposes.
On November 24, 2015, Choice Properties issued $200,000 aggregate principal amount of Series F senior unsecured debentures due
November 24, 2025. These debentures bear interest at a rate of 4.055% per annum, with semi-annual installments of interest due on May 24
and November 24 in each year, commencing on May 24, 2016. The net proceeds, net of debt placement costs of $1,448, were used by the
Trust to repay existing indebtedness and for general business purposes.
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 of interest due on February 8 and
August 8 in each year, commencing on August 8, 2014.
Both offerings in February 2014 and February 2015 were made under Choice Properties’ Short Form Base Shelf Prospectus dated
September 3, 2013, and the offering in November 2015 was made under the Short Form Base Shelf Prospectus dated October 14, 2015
(note 17). Debt placement costs incurred were recorded against the principal owing and amortized using the effective interest method and
recorded to net interest expense and other financing charges (note 15).
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
and issued at the time of IPO. The new Series 5 through Series 10 senior unsecured 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. The new Series 5 through Series 10 senior unsecured 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 new Series 5 through Series 10 senior unsecured debentures are amortized using the effective interest method and recorded
to net interest expense and other financing charges (note 15).
At December 31, 2015, the senior unsecured debentures had a weighted average effective interest rate of 3.33% (December 31, 2014 -
3.38%). Senior unsecured debentures Series A through Series F were issued by the Trust and Series 5 through Series 10 were issued by the
Partnership.
Subsequent to December 31, 2015, Choice Properties entered into certain bond forward contracts with a notional value of $300,000.
On February 4, 2016, Choice Properties issued a notice for a March 7, 2016 early redemption, at par, of the $300,000 Series 5 senior unsecured
debentures with an original maturity date of April 20, 2016.
Mortgage In connection with the property acquired from a third-party on August 11, 2015, Choice Properties assumed a mortgage which is
secured by the acquired property. The mortgage bears interest at a fixed rate of 3.15% per annum, matures in 2019 and has an effective
interest rate of 2.45% 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 15).
In connection with the portfolio acquired from Loblaw on October 8, 2014, Choice Properties assumed a mortgage which is secured by one
of the acquired properties. 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 15).
Choice Properties REIT 2015 Annual Report 65
Notes to the Consolidated Financial Statements
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.
Credit Facility Choice Properties has a $500,000 senior unsecured committed revolving credit facility provided by a syndicate of lenders
maturing July 5, 2020. The credit facility bears interest at variable rates of either: 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, 2015, the Trust was in compliance with all of its financial covenants
(note 17) and no amount was drawn on the credit facility (December 31, 2014 - $122,000 drawn less unamortized debt placement costs of
$1,813). As at December 31, 2015, the balance of the unamortized debt placement costs was $1,660.
Schedule of Repayments The schedule of principal repayment of long term debt and Class C LP Units, based on maturity and redemption
rights is as follows:
($ thousands)
Senior unsecured debentures
$
2016
300,000 $
2017
200,000 $
2018
400,000 $
2019
200,000 $
2020
Thereafter
550,000 $ 1,350,000
Total
$ 3,000,000
Mortgage
Class C LP Units
Total
1,212
—
1,192
—
152
—
1,583
—
—
—
—
925,000
4,139
925,000
$
301,212 $
201,192 $
400,152 $
201,583 $
550,000 $ 2,275,000
$ 3,929,139
Note 11. 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 issuable by the Partnership 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.
66 Choice Properties REIT 2015 Annual Report
Units Outstanding
($ thousands except where otherwise indicated)
Units, beginning of year
Issuance of Units under the Distribution Reinvestment Plan
Units issued under unit-based compensation arrangement
Units, end of year
Exchangeable Units, beginning of year
Exchangeable Units issued
May 6, 2014 (note 5)
October 8, 2014 (note 5)
January 9, 2015 (note 5)
June 1, 2015 (note 5)
August 20, 2015 (note 5)
November 17, 2015 (note 5)
Adjustment to fair value of Exchangeable Units
As at
As at
December 31, 2015
December 31, 2014
Units
89,255,010
1,668,346
30,461
90,953,817
306,032,105
$
$
$
Amount
849,337
18,118
394
Units
87,614,229
1,522,472
118,309
867,849
89,255,010
3,207,216
284,074,754
$
$
$
—
—
265,665
9,237,166
280,155
1,294,701
—
—
—
2,808
103,549
3,200
14,604
410,518
11,259,208
10,698,143
—
—
—
—
Amount
832,415
15,682
1,240
849,337
2,988,466
119,632
111,260
—
—
—
(12,142)
Exchangeable Units, end of year
317,109,792
$
3,741,895
306,032,105
$
3,207,216
Total Units and Exchangeable Units, end of year
408,063,609
395,287,115
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 (Canada) for the year ending December 31, 2015. The Trust declared distributions of $0.65 per unit in the year ended
December 31, 2015 (year ended December 31, 2014 - $0.65). In November 2015, Choice Properties announced an increase in the annual
distribution by 3.1% to $0.67 per unit. The increase will be effective for Unitholders of record January 29, 2016. In the year ended December
31, 2015, Choice Properties declared $261,424 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 (year ended December 31, 2014 -
$248,754). Distributions declared to Unitholders of record at the close of business on the last business day of a month are paid on or about
the 15th day of the following month.
The holders of Exchangeable Units and Class C LP Units may elect to defer receipt of all or a portion of distributions declared by the Partnership
until the first date following the end of the fiscal year. If the holder elects to defer, the Partnership will loan the holder the amount equal to the
deferred distribution without interest, and the loan will be due and payable in full on the first business day following the end of the fiscal year
the loan was advanced. Loblaw has elected to defer the distributions in full on both the Exchangeable Units and Class C LP Units.
Distribution Reinvestment Plan Choice Properties has a DRIP that allows Unitholders to use the monthly cash distributions paid on their
existing Units to purchase additional Units directly from the Trust. Unitholders who elect to participate in the DRIP receive a further distribution,
payable in Units, equal in value to 3% of each cash distribution. In the year ended December 31, 2015, Choice Properties issued 1,668,346
Units under the DRIP (year ended December 31, 2014 - 1,522,472 Units).
Choice Properties REIT 2015 Annual Report 67
Notes to the Consolidated Financial Statements
Note 12. Trade Payables and Other Liabilities
($ thousands)
Trade accounts payable
Accrued liabilities
Accrued interest expense
Due to related party(i)
Unit-based compensation
Distributions payable(ii)
Tenant deposits
Deferred revenue(iii)
Trade payables and other liabilities
Classified as:
Non-current
Current
As at
As at
December 31, 2015
14,554
$
December 31, 2014
2,735
$
46,767
33,250
277,169
5,240
4,927
2,014
55,610
439,531
$
37,989
30,717
259,473
2,286
4,835
1,622
50,360
390,017
1,354
438,177
439,531
$
$
1,020
388,997
390,017
$
$
$
(i)
Includes distributions accruing on Exchangeable Units of $219,381 (December 31, 2014 - $206,655) and Class C LP Units of $50,104 (December 31, 2014 - $50,104)
(note 22), and other liabilities due to Loblaw of $7,684 (December 31, 2014 - $2,714).
(ii)
Includes $1,165 payable to Loblaw and $1,231 payable to GWL (December 31, 2014 - $1,165 and $1,160 respectively).
(iii)
Includes $54,061 of rent from Loblaw and $122 of rent from GWL received in advance (December 31, 2014 - $49,407 and nil, respectively).
68 Choice Properties REIT 2015 Annual Report
Note 13. Unit-Based Compensation
Choice Properties’ unit-based compensation expense recognized in general and administrative expenses was:
($ thousands)
Unit Option plan
Restricted Unit plan
Deferred Unit plan
Unit-based compensation expense
Adjustment to fair value included in the above
Year ended
December 31, 2015
1,236
$
Year ended
December 31, 2014
208
$
957
834
3,027
888
$
$
600
705
1,513
(591)
$
$
As at December 31, 2015, the carrying value of total unit-based compensation was $5,240 (December 31, 2014 - $2,286) (note 12).
Unit Option Plan Choice Properties maintains a Unit Option plan for certain employees. Under this plan, Choice Properties may grant Unit
Options totaling up to 19,744,697 Units, as approved at the annual and special meeting of Unitholders on April 29, 2015 (December 31, 2014
- 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:
Outstanding Unit Options, beginning of year
Granted
Cancelled
Exercised
Outstanding Unit Options, end of year
Unit Options exercisable, end of year
Year ended December 31, 2015
Year ended December 31, 2014
Number of awards
1,682,510
Weighted average
exercise price/unit
10.48
$
Number of awards
1,196,866
2,127,532
(279,925)
(30,461)
3,499,656
533,796
$
$
$
$
$
11.49
11.00
10.54
11.05
10.36
1,247,247
(643,294)
(118,309)
1,682,510
157,167
Weighted average
exercise price/unit
10.04
10.80
10.35
10.05
10.48
10.05
$
$
$
$
$
$
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
As at
December 31, 2015
5.51%
December 31, 2014
6.20%
15.41% - 17.38%
14.22% - 18.87%
0.48% - 0.77%
1.04% - 1.35%
1.5 to 5.4 Years
2.5 to 5.4 Years
Estimated forfeiture rates are incorporated into the measurement of the Unit Option expense. The forfeiture rate applied as at December 31,
2015 was nil (December 31, 2014 - nil).
Choice Properties REIT 2015 Annual Report 69
Notes to the Consolidated Financial Statements
As at December 31, 2015, the following options were outstanding:
Exercise Price
$10.05
$10.81
$10.61
$10.72
$11.51
$11.28
$10.05 to $11.51
Number of
Unit Options
outstanding
628,671
810,286
43,519
24,038
1,777,624
215,518
3,499,656
Remaining
weighted
average
life (in years)
4.5
5.2
5.3
5.9
6.2
6.9
5.7
Restricted Unit Plan Restricted Units (“RU”) 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 Trust Unit at the balance sheet date.
The following is a summary of Choice Properties’ RU plan activity:
(Number of awards)
Outstanding Restricted Units, beginning of year
Granted
Reinvested
Cancelled
Settled
Outstanding Restricted Units, end of year
Year ended
December 31, 2015
184,154
Year ended
December 31, 2014
108,746
90,813
14,140
(15,953)
(5,433)
267,721
100,523
10,804
(35,919)
—
184,154
RUs usually vest over a period of three years. There were no RUs vested as at December 31, 2015 (December 31, 2014 - 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 Deferred Units (“DU”) 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 DU plan activity is as follows:
(Number of awards)
Outstanding Trustee Deferred Units, beginning of year
Granted
Reinvested
Outstanding Trustee Deferred Units, end of year
Year ended
December 31, 2015
99,230
Year ended
December 31, 2014
31,936
52,736
6,812
158,778
64,150
3,144
99,230
All DUs vest when issued, however, they cannot be exercised while Trustees are members of the Board.
70 Choice Properties REIT 2015 Annual Report
Note 14. Rental Revenue
Rental revenue is comprised of the following:
($ thousands)
Base rent
Property tax recoveries
Operating cost recoveries
Other revenue
Rental revenue
$
$
667,657
$
75,443
$
Loblaw
502,323
140,616
24,427
291
Loblaw
470,895
122,530
19,101
1,152
Year ended
Ancillary(i)
48,791
December 31, 2015
551,114
$
$
13,966
9,927
2,759
13,026
10,318
1,892
154,582
34,354
3,050
743,100
135,556
29,419
3,044
682,923
Year ended
Ancillary(i)
44,009
December 31, 2014
514,904
$
$
(i)
Ancillary income includes $1,681 received from leases to subsidiaries of GWL for the year end ended December 31, 2015.
($ thousands)
Base rent
Property tax recoveries
Operating cost recoveries
Other revenue
Rental revenue
$
$
613,678
$
69,245
$
(i)
Ancillary income includes $1,484 received from leases to subsidiaries of GWL for the year end ended December 31, 2014.
Choice Properties enters into long-term lease contracts with tenants for space in its properties. Initial lease terms are generally between
three and ten years for commercial units and longer terms for grocery anchor stores. Leases generally provide for the tenant to pay
Choice Properties base rent, with provisions for contractual increases in base rent over the term of the lease, plus operating cost and property
tax recoveries. Many of the leases with Loblaw are for stand-alone retail sites. Loblaw is directly responsible for the operating costs on such
sites.
Future base rent revenue for the years ended December 31 is as follows:
($ thousands)
2016
2017
2018
2019
2020
Thereafter
Total
$
$
530,061
530,504
530,160
533,633
534,803
3,890,700
6,549,861
Choice Properties REIT 2015 Annual Report 71
Notes to the Consolidated Financial Statements
Note 15. Net Interest Expense and Other Financing Charges
($ thousands)
Interest on senior unsecured debentures
Interest on Transferor Notes(i)
Distributions on Class C LP Units(i)
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(iii)
Year ended
December 31, 2015
97,189
$
Year ended
December 31, 2014
72,433
$
—
46,250
217
3,405
(2,632)
1,405
202,804
348,638
(2,122)
346,516
(1,465)
18,271
46,250
49
2,965
48,891
1,127
191,267
381,253
(433)
380,820
(166)
380,654
Net interest expense and other financing charges
$
345,051
$
(i)
(ii)
(iii)
Represents amounts on account of indebtedness to Loblaw.
The year ended December 31, 2014 includes non-cash finance charges of $48,911. The charges were the result of accelerated amortization of net debt discounts due to
replacement of notes issued to Loblaw in connection with the IPO.
Interest was capitalized to qualifying development projects based on an annual weighted average interest rate of 3.27% (December 31, 2014 - 3.44%).
Note 16. Employee Costs
The following amounts were expensed in relation to Choice Properties’ employees:
($ thousands)
Salaries, wages and benefits, net
Post-employment benefits
Unit-based compensation
Employee costs
Note 17. Capital Management
Year ended
December 31, 2015
13,310
Year ended
December 31, 2014
9,969
$
403
2,193
15,906
$
238
808
11,015
$
$
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 October 14, 2015, Choice Properties filed a new base shelf 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. The new prospectus is effective for a 25-month
period from the date of issuance. On November 24, 2015, Choice Properties issued $200,000 of senior unsecured debentures under this
prospectus (note 10).
72 Choice Properties REIT 2015 Annual Report
Choice Properties has certain key covenants in its debentures and committed credit facility. The key financial covenants include debt service
ratios and leverage ratios, as defined in the respective agreements. These ratios are measured by the Trust on an ongoing basis to ensure
compliance with the agreements. Choice Properties was in compliance with each of the key financial covenants under these agreements as
at December 31, 2015 and December 31, 2014.
Note 18. Fair Value Measurements
The following table presents the fair value hierarchy of assets and liabilities:
($ thousands)
Assets:
As at
December 31, 2015
As at
December 31, 2014
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
Investment properties (note 6)
$
— $
— $ 8,561,000
$ 8,561,000
$
— $
— $ 7,905,978
$ 7,905,978
Accounts receivable (note 8)
Notes receivable (note 9)
Cash and cash equivalents
Liabilities:
Long term debt and Class C LP Units
Credit facility (note 10)
—
—
44,354
—
—
Exchangeable Units (note 11)
3,741,895
Unit-based compensation (note 12)
Trade payables and other
liabilities(i) (note 12)
—
—
888
275,071
—
4,036,140
—
—
5,240
434,291
—
—
—
—
—
—
—
—
888
275,071
44,354
4,036,140
—
—
—
1,332
3,419
259,368
—
—
—
3,582,560
122,000
3,741,895
3,207,216
5,240
434,291
—
—
—
2,286
387,731
—
—
—
—
—
—
—
—
3,419
259,368
1,332
3,582,560
122,000
3,207,216
2,286
387,731
(i)
Excluding unit-based compensation liabilities.
The carrying value of the Trust’s financial assets and liabilities approximates the fair value except for long term debt and Class C LP Units.
There were no transfers between levels of the fair value hierarchy during the periods.
Note 19. Financial Risk Management
As a result of holding and issuing financial instruments, Choice Properties is exposed to credit risk, market risk and liquidity risk and capital
availability 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 and joint venture
partners, 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.
Choice Properties REIT 2015 Annual Report 73
Notes to the Consolidated Financial Statements
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 analyzes its interest rate risk and the impact of rising and falling interest rates on operating results and financial condition
on a regular basis.
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 $5,000 (assuming fully drawn credit facility).
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 $317,110 (2014 - $306,032); and
Unit-based compensation liabilities $1,410 (2014 - $566).
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:
($ thousands)
Senior unsecured debentures
$
Mortgage
Class C LP Units
Total
$
2016
400,505 $
1,393
46,250
448,148 $
2017
293,005 $
1,294
46,250
340,549 $
2018
490,005 $
2019
275,789 $
2020
Thereafter
614,390 $ 1,483,193
Total
$ 3,556,887
204
46,250
1,628
46,250
—
—
4,519
46,250
1,273,558
1,504,808
536,459 $
323,667 $
660,640 $ 2,756,751
$ 5,066,214
74 Choice Properties REIT 2015 Annual Report
Note 20. 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.
Choice Properties received notices of assessment from the Ontario Ministry of Finance for approximately $10,319 (penalties and interest
included) with respect to land transfer tax on the acquisition of properties from Loblaw in the IPO. The Trust believes it is not liable for the tax
under the applicable legislation, therefore, no liability was recognized in these consolidated financial statements. Notices of objection to these
assessments have been filed. Choice Properties is fully indemnified by Loblaw for tax assessed on the IPO properties if the appeal is
unsuccessful.
Guarantees Choice Properties issues letters of credit to support guarantees related to its investment properties including maintenance and
development obligations to municipal authorities. As at December 31, 2015, the aggregate gross potential liability related to these letters of
credit totaled $28,246, including $7,324 posted by Loblaw in 2015 with the province of Ontario on behalf of Choice Properties related to
deferral of land transfer tax on properties acquired from Loblaw subsequent to the IPO (note 21) (December 31, 2014 - $23,226).
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 and sustainable capital projects and has other contractual
obligations such as operating rents. The Trust is committed to future payments of approximately $24,698 as at December 31, 2015
(December 31, 2014 - $7,304).
Note 21. Related Party Transactions
Choice Properties’ parent corporation is Loblaw, which held an 83.0% effective interest in the Trust through ownership of 21,500,000 Units
and all of the Exchangeable Units as at December 31, 2015 (December 31, 2014 - 82.9% and 21,500,000 Units respectively). Loblaw’s
controlling shareholder, GWL, held an approximate 46% ownership of Loblaw’s outstanding common shares and a 5.6% direct interest in
Choice Properties, through ownership of 22,732,062 Units as at December 31, 2015 (December 31, 2014 - 5.4% and 21,414,657 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 2015, Choice Properties acquired 46 properties from Loblaw as described in note 5.
On January 9, 2015, Choice Properties acquired a 16-acre site in Barrie, Ontario from Loblaw for a purchase price of $9,567, excluding
acquisition costs. The acquisition was funded through the issuance of 265,665 Exchangeable Units, which had a value of $2,808 as at
January 9, 2015, with the balance paid in cash.
On January 30, 2015, Choice Properties acquired a warehouse in Pickering, Ontario from Loblaw for a purchase price of $81,200, excluding
acquisition costs. This acquisition was funded entirely with cash.
On June 1, 2015, Choice Properties acquired 38 properties from Loblaw for a purchase price of $202,695, excluding acquisition costs.
The acquisition was funded through the issuance of 9,237,166 Exchangeable Units, which had a value of $103,549 as at June 1, 2015, with
the balance paid in cash.
On August 20, 2015, Choice Properties acquired two Shoppers Drug Mart properties from Loblaw for a purchase price of $18,150, excluding
acquisition costs. The acquisition was funded through the issuance of 280,155 Exchangeable Units, which had a value of $3,200 as at August
20, 2015, with the balance paid in cash.
Choice Properties REIT 2015 Annual Report 75
Notes to the Consolidated Financial Statements
On November 17, 2015, Choice Properties acquired four properties from Loblaw for a purchase price of $45,080, excluding acquisition costs.
The acquisition was funded through the issuance of 1,294,701 Exchangeable Units, which had a value of $14,604 as at November 17, 2015,
with the balance paid in cash.
In 2014, Choice Properties acquired investment properties from Loblaw with a fair value of $409,717, excluding acquisition costs (note 5) and
a 40% interest in land purchased from Loblaw through 500 LS Limited Partnership (note 7).
Site Intensification Fee Included in certain investment properties acquired from Loblaw is excess land with development potential. Choice
Properties will compensate Loblaw, over time, with intensification fees, as Choice Properties pursues development, intensification or
redevelopment of such excess lands. The payments to Loblaw are 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 $2,334 in connection with retail developments completed during 2015
(December 31, 2014 - $993).
Construction Fees During 2015, Choice Properties paid $102 in construction fees to Loblaw towards the development of specific properties
(December 31, 2014 - $3,067).
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 agreement for these services
was renewed until December 31, 2015 at an annual rate of $3,141 (note 22). On January 1, 2016, the agreement was renewed for a one-
year term at an annual rate of $2,932.
Property Management Agreement On January 1, 2015, Choice Properties agreed to provide Loblaw for a two-year term with property and
asset management services for Loblaw’s properties with third-party tenancies on a fee for service basis of approximately $600 per annum
(note 22).
Letters of Credit During 2015, Loblaw posted letters of credit of $7,324 with the province of Ontario on behalf of Choice Properties related
to deferral of land transfer tax on properties acquired from Loblaw subsequent to the IPO.
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 business 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, 2015,
distributions totaling $249,054 were declared, $269,485 were payable, and a note receivable of $248,463 was outstanding from Loblaw
(December 31, 2014 - $237,517, $256,759 and $236,328 respectively). On the first business day of 2016, distributions payable for
Exchangeable Units of $202,213 and Class C LP Units of $46,250 were paid and the notes receivable from Loblaw were cancelled (January
2015 - paid $190,078 and $46,250, respectively, and the notes receivable from Loblaw were cancelled).
Trust Unit Distributions In the year ended December 31, 2015, Choice Properties declared distributions of $13,975 on the Units held by
Loblaw (December 31, 2014 - $13,975).
76 Choice Properties REIT 2015 Annual Report
Transaction Summary as Reflected in the Consolidated Financial Statements Loblaw is also Choice Properties’ largest tenant,
representing approximately 91.1% of Choice Properties’ annual base rent and 89.1% of its gross leasable area as at December 31, 2015
(December 31, 2014 - 91.4% and 88.4% respectively). Transactions with Loblaw recorded in the statements of income (loss) and
comprehensive income (loss) were comprised as follows:
($ thousands)
Rental revenue (note 14)
Property and asset management fee (note 22)
Services Agreement fee (note 22)
Services Agreement expense (note 22)
Office rent expense
Interest expense and other financing charges (note 15)
The balances due from (to) Loblaw were as follows:
($ thousands)
Notes receivable (note 9)
Class C LP Units (note 10)
Exchangeable Units (note 11)
Accounts payable and other liabilities (note 12)
Net due to Loblaw
Transactions with GWL and Other Related Parties
Year ended
December 31, 2015
667,657
$
Year ended
December 31, 2014
613,678
$
600
—
(3,141)
—
(249,054)
—
350
(4,771)
(107)
(255,788)
As at
As at
December 31, 2015
248,463
$
December 31, 2014
236,328
$
(925,000)
(3,741,895)
(332,395)
(925,000)
(3,207,216)
(310,045)
$
(4,750,827)
$
(4,205,933)
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 7). 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. Choice Properties made contributions
of $3,120 to the joint venture during the year ended December 31, 2015 (year ended December 31, 2014 - $6,230).
Operating Lease Choice Properties 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 term of the lease.
Trust Unit Distributions In the year ended December 31, 2015, Choice Properties declared distributions of $14,383 on the Units held by
GWL (December 31, 2014 - $13,526). GWL participates in the DRIP (note 11). In the year ended December 31, 2015, the Trust issued
1,317,405 Units to GWL under the DRIP (December 31, 2014 - 1,306,847 Units).
Choice Properties REIT 2015 Annual Report 77
Notes to the Consolidated Financial Statements
Transaction Summary as Reflected in the Consolidated Financial Statements Transactions with GWL and other related parties
recorded in the statements of income (loss) and comprehensive income (loss) were comprised as follows:
($ thousands)
Rental revenue (note 14)
Office rent expense
The balance due to GWL was as follows:
($ thousands)
Accounts payable and other liabilities (note 12)
Transactions with Key Personnel
Year ended
December 31, 2015
1,681
$
Year ended
December 31, 2014
1,484
$
(468)
(109)
As at
As at
December 31, 2015
(1,353)
$
December 31, 2014
(1,160)
$
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:
($ thousands)
Salaries, trustee fees, incentives and short-term employee benefits
Unit-based compensation
Compensation of key personnel
Year ended
December 31, 2015
2,190
$
$
2,384
4,574
$
$
Year ended
December 31, 2014
4,157
1,359
5,516
Note 22. Supplementary Information
Property Operating Costs
($ thousands)
Property taxes
Recoverable operating costs
Non-recoverable operating costs
Property operating costs
Year ended
December 31, 2015
158,954
$
Year ended
December 31, 2014
139,651
$
30,239
2,986
$
192,179
$
30,141
2,758
172,550
78 Choice Properties REIT 2015 Annual Report
General and Administrative Expenses
($ thousands)
Salaries, benefits and employee costs
Investor relations and other public entity costs
Professional fees
Other
Services Agreement expense charged by related party
Total general and administrative expenses
Less:
Property and asset management fee charged to related party
Services Agreement fee charged to related party(i)
Capitalized to investment properties
Allocated to recoverable operating expenses
General and administrative expenses
Year ended
December 31, 2015
19,414
$
Year ended
December 31, 2014
12,567
$
2,058
1,900
3,728
3,141
30,241
(600)
—
(2,157)
(5,719)
2,162
1,713
3,310
4,771
24,523
—
(350)
(858)
—
$
21,765
$
23,315
(i)
In July 2013, Choice Properties entered into a Services Agreement to provide administration and support services to Loblaw for a one year term ended June 30, 2014.
Change in Non-Cash Operating Working Capital
($ thousands)
Net change in Accounts receivable and other assets
Add back (deduct): Fixtures and equipment
Credit facility finance fees
Amounts from acquired properties (note 5)
Net change in Trades payable and other liabilities
Add back (deduct): Distributions payable
Unit-based compensation
Net change to accrued interest expense
Amounts from acquired properties (note 5)
Year ended
December 31, 2015
3,416
$
Year ended
December 31, 2014
(3,009)
$
(364)
—
59
49,514
(92)
(2,954)
(15,259)
(1,671)
3,909
(1,958)
211
178,560
(89)
(1,461)
(149,603)
(2,193)
24,367
Change in non-cash operating working capital
$
32,649
$
Choice Properties REIT 2015 Annual Report 79
Notes to the Consolidated Financial Statements
Supplemental Disclosure of Non-cash Operating, Investing and Financing Activities
($ thousands)
Year ended
December 31, 2015
Year ended
December 31, 2014
Value of Units issued under distribution reinvestment plan (note 11)
$
18,118
$
73
124,161
2,123
—
—
15,682
52
230,892
3,603
(1,500,000)
1,500,000
Year ended
December 31, 2015
34,254
$
Year ended
December 31, 2014
8,430
$
32,466
(2,791)
$
63,929
$
26,805
(981)
34,254
Value of Units issued under unit-based compensation plan
Issuance of Exchangeable Units (note 5)
Debt assumed on acquisition of investment properties (note 5)
De-recognition of Transferor Notes (note 10)
Recognition of senior unsecured debentures (note 10)
Recoverable Capital Improvements
($ thousands)
Balance yet to be recovered, beginning of the year
Add: Recoverable expenditures during the year (note 6)
Less: Recoverable during the year
Balance yet to be recovered, end of the year
80 Choice Properties REIT 2015 Annual Report
Glossary of Terms
Term
Definition
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 17, “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 17,
“Non-GAAP Financial Measures”, of the
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
17, “Non-GAAP Financial Measures”, of
Management’s Discussion and Analysis).
Greenfield
Development on vacant land.
Debt to Total
Assets
Debt Service
Coverage
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.
Earnings Before Interest, Taxes, Depreciation,
Amortization, and adjustments to Fair Value 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.
Intensification
Development of income producing properties with
excess density.
Net Operating
Income
Rental revenue less straight-line rental revenue
and property operating costs (see Section 17,
“Non-GAAP Financial Measures”, of Management’s
Discussion and Analysis).
Debt to
EBITDAFV
Debt divided by Earnings Before Interest, Taxes,
Depreciation, Amortization, and adjustments to Fair
Value. Debt includes Class C LP Units but excludes
Exchangeable Units.
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.
Earnings Before
Interest, Taxes,
Depreciation,
Amortization and
Fair Value
Net income plus, where applicable, income taxes,
interest expense, amortization expense,
depreciation expense, and adjustments to fair value
(see Section 17, “Non-GAAP Financial Measures”,
of Management’s Discussion and Analysis).
Same Properties -
Same GLA
The same properties owned by Choice Properties
during the current period and the comparative
period, excluding any re-development of the same
properties which increased gross leasable area.
Funds From
Operations
Net income adjusted for items that do not arise from
operating activities, such as adjustments to fair
value, 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 17, “Non-GAAP Financial
Measures”, of Management’s Discussion and
Analysis).
Redevelopment
Reset and renovation of existing income producing
properties.
Choice Properties REIT 2015 Annual Report 81
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 41.6 million square feet of gross leasable area and consists of 519 properties primarily
focused on supermarket and drug store anchored shopping centres, stand-alone supermarkets and drug stores, 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 18, 2016 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: 18882180. 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
Michael P. Kitt1,2
Executive Vice President, Canada for
Oxford Properties Group
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
Daniel F. Sullivan2
Corporate Director
Kerry D. Adams1,2
President, K. Adams & Associates Limited
Michelle Felman2
Corporate Director
Paul R. Weiss1
Corporate Director
1 Audit Committee.
2 Governance, Compensation and Nominating Committee.
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