2016 Annual Report
Progress inDevelopmentA ChoiceInvestmentDevelopmentin Progress Progress inDevelopmentProgress inDevelopmentDevelopmentin Progress Progress inDevelopmentProgress inDevelopmentDevelopmentin Progress Progress inDevelopmentDevelopmentin Progress Developmentin Progress Developmentin Progress Developmentin Progress Progress inDevelopmentDevelopmentin Progress Developmentin Progress Progress inDevelopmentDevelopmentin Progress FINANCIAL AND OPERATIONAL HIGHLIGHTS
TOTAL OCCUPANCY
ANCILLARY OCCUPANCY
99.0
98.5
98.0
97.5
97.0
96.5
%
9
.
8
9
%
6
.
8
9
%
1
8
9
.
%
7
7
9
.
%
0
.
0
9
%
5
7
8
.
90.0
87.0
84.0
81.0
78.0
75.0
%
6
.
3
8
%
1
0
8
.
2013 (1)
2014
2015
2016
2013 (1)
2014
2015
2016
REVENUE
(in millions)
$ 800
$750
$700
$650
$600
$550
3
8
6
$
4
8
7
$
3
4
7
$
NET OPERATING INCOME
(in millions)
7
4
5
$
4
1
5
$
$550
$525
$500
$475
$450
$425
6
7
4
$
2014
2015
2016
2014
2015
2016
6
6
9
.
0
0
0
0
.
1
2
1
9
.
0
FFO (2)
(per unit)(3)
1.00
0.90
0.80
0.70
0.60
0.50
AFFO (2)
(per unit)
1.00
0.90
0.80
0.70
0.60
0.50
5
4
7
.
0
7
7
7
.
0
5
0
8
.
0
2014
2015
2016
2014
2015
2016
(1) Based on operations for the period from July 5, 2013 to December 31, 2013.
(2) Cash flows from operating activities excludes interest paid. Presentation of the prior years has been updated to exclude leasing capital expenditures.
(3) FFO per unit 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 in 2013. Including these charges, FFO per unit diluted
was $0.777.
Front cover photos (top to bottom): 4450 Rochdale Blvd., Regina, SK; 5031 44th St., Lloydminster, AB; 124 Clair Rd. E., Guelph, ON; 100 Country Village Rd. N.E., Calgary, AB;
180 Chemin du Tremblay, Boucherville, QC; 607 Cundles Rd. E., Barrie, ON; 5031 44th St., Lloydminster, AB; 180 Holiday Inn Dr., Cambridge, ON
$800,000
$750,000
$700,000
$650,000
$600,000
$550,000
2
3
9
,
2
8
6
$
2014
0
0
1
,
3
4
7
$
2015
4
7
5
,
3
8
7
$
2016
1
YUKON TERRITORY
RETAIL
1
NORTHWEST
TERRITORIES
RETAIL
57
ALBERTA
RETAIL
SASKATCHEWAN
RETAIL
MANITOBA
RETAIL
15
15
BRITISH
COLUMBIA
RETAIL
32
PRINCE EDWARD ISLAND
RETAIL
105
QUEBEC
RETAIL
NEWFOUNDLAND
& LABRADOR
RETAIL
9
27
4
4
37
1
NEWFOUNDLAND
& LABRADOR
INDUSTRIAL
NOVA SCOTIA
RETAIL
NEW BRUNSWICK
INDUSTRIAL
QUEBEC
INDUSTRIAL 2
NEW BRUNSWICK
RETAIL
1
SASKATCHEWAN
INDUSTRIAL
214
ONTARIO
RETAIL
3
ONTARIO
INDUSTRIAL 3
1
ONTARIO
OFFICE
ONTARIO
LAND
BRITISH
COLUMBIA
INDUSTRIAL
2
ALBERTA
INDUSTRIAL 1
RETAIL
INDUSTRIAL
OFFICE
LAND
OCCUPANCY RATE OF
98.9%
(AS AT DECEMBER 31, 2016)
Our portfolio of grocery and drug anchored
real estate is well located from coast to
coast, attracting top-quality tenants and
offering stable, secure returns with a rich
pipeline of opportunity for value creation.
Choice Properties is driving growth and
progress through acquisitions, development
and active management.
Choice Properties Real Estate Investment Trust is an owner, manager and
developer of well-located retail and commercial real estate across Canada.
Choice Properties’ portfolio spans approximately 43.6 million square feet of
gross leasable area (“GLA”) and consists of 535 properties primarily focused
on supermarket anchored shopping centres and stand-alone supermarkets.
Our strategy is to create value by enhancing and optimizing our portfolio
through accretive acquisitions, strategic development and active management.
Choice Properties’ principal tenant and largest Unitholder is Loblaw Companies
Limited (“Loblaw”), Canada’s largest retailer. Our strong alliance with Loblaw
positions us well for future growth.
Choice Properties REIT 2016 Annual Report i
T
N
E
M
P
O
L
E
V
E
D
6
1
0
2
:
E
D
U
L
C
N
I
I
S
T
H
G
L
H
G
H
I
CONSTRUCTED
807,000(1)
SQUARE FEET OF
NEW GLA
21
DEVELOPMENT
PROJECTS
COMPLETED
Focused on execution, the Choice Properties
team made significant progress in 2016.
While we continued to acquire quality assets
and actively manage our portfolio, it was a
pivotal year for our development program,
which gained considerable momentum with
value created from new GLA constructed and
a foundation for future growth established.
UNENCUMBERED PORTFOLIO
OF INVESTMENT PROPERTIES
WITH A FAIR VALUE OF
$8.6B
INCREASE IN ANNUALIZED
DISTRIBUTIONS OF
9.2%
(1) Includes GLA for projects targeted for 2017 completion.
ii Choice Properties REIT 2016 Annual Report
GENERATING STABILIZED
NOI OF
$18.2M(2)
YIELDING A RETURN ON
INVESTMENT OF
~8%(2)
(ON A WEIGHTED AVERAGE BASIS)
ACQUISITIONS
PROPERTY LEASING
FINANCIAL MANAGEMENT
Acquired 16 properties with
1.2 million square feet of GLA for
$192 million, adding $11.7 million
in incremental NOI
Improved leasing metrics with
ancillary occupancy at 90.0% and
total occupancy at 98.9%; executed
leases totalling approximately
1.5 million square feet with a 7.7%
increase in rental rates on renewals
Strengthened our capacity to
invest in future growth and meet
ongoing obligations through sound
financial management and a solid
balance sheet, with a debt to
service coverage ratio of 3.5x and a
weighted average term to maturity
of 5.2 years
Photos above: (page 2) 2332 160th St., South Surrey, BC; 9711 23rd Ave., Edmonton, AB; 124 Clair Rd. E., Guelph, ON;
(page 3) 450 Erb St. W., Waterloo, ON; 4410 17th St. N.W., Edmonton, AB; 165 Main St., Moncton, NB
(2) Based on 21 projects completed in 2016 representing 763,000 square feet of new GLA.
Choice Properties REIT 2016 Annual Report iii
FELLOW UNITHOLDERS,
I am pleased to report on another successful year for
Choice Properties REIT – a year in which we remained
focused on our plan and our three key drivers of
growth: accretive acquisitions of new properties;
strategic development of existing properties; and active
management of our portfolio of properties and tenant
relationships. All three contributed to our progress and
growth in 2016 and will continue as we embark on the
many new and exciting projects that are currently in
progress and on the horizon.
This year, we continued to acquire high-quality assets.
We acquired 16 new properties totalling 1.2 million
square feet of GLA and valued at $192 million, with an
accretive cap rate of 6.2%(1) on a weighted average basis.
We also constructed 807,000 square feet of new GLA
for tenant possession, contributing to the completion
of 21 projects, including intensification, redevelopment
and greenfield projects. Leasing activity led to increased
occupancy during the year while we continued to improve
the quality of our real estate assets. At the same time, we
were successful in raising $350 million in senior unsecured
debentures, including $100 million at 30 years – the first
for a Canadian REIT. These achievements represent true,
measurable progress against our strategic growth plan.
Our 2016 financial performance also delivered results.
While investing in multiple development projects during
the year, we twice increased our distribution payout
to Unitholders, for a total increase of 9.2%. Our year-
over-year growth in funds from operations (“FFO”) per unit
was 3.5%, representing consistent year-over-year growth
since our initial public offering in July 2013.
In the year ahead, we will continue our progress with
plans to acquire quality assets accretively from Loblaw
as well as strategic sites from third parties. Over the next
three years, we plan to continue to capitalize on our
pipeline of development opportunities to construct more
than 1.3 million square feet of new space to intensify our
existing properties, and create mixed-used communities
by redeveloping our properties or building on greenfield
land. With our solid reputation in leasing and property
management, we will also work to attract new tenants
that look to Choice Properties to build and manage retail
space to suit their needs.
Today, Choice Properties owns and manages 535
properties, representing more than 43.6 million square
feet of GLA across Canada. Our retail-focused properties
are leased to some of the best-known retailers in food,
drug and everyday consumer staples. We are building
our brand and establishing our presence across Canada
by working with neighbourhoods and communities as
we improve existing properties and build new mixed-use
spaces that deliver convenience for shoppers, commuters
and today’s urban lifestyles.
With our solid business platform, a strategic alliance
with Loblaw, and a team of talented and committed
people, Choice Properties is well positioned for growth
and on its way to becoming one of the most recognized
and successful real estate investment trusts in Canada.
I am extremely proud of the progress the team delivered in
2016 and the value that we have created for our Unitholders.
On behalf of the Choice Properties management team,
I want to thank our Board of Trustees for its continuing
support and guidance.
The progress we have made is shaping the future of
Choice Properties. And there is still much more to come.
John R. Morrison
President and Chief Executive Officer
(1) The weighted average cap rate calculation for acquisitions excludes the $3 million of land purchased in Edmonton for development.
iv Choice Properties REIT 2016 Annual Report
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2016 Annual Report
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 Quarterly 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.
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3
4
4
5
6
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9
10
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46
Choice Properties REIT 2016 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, 2016 and December 31, 2015. 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 year ended December 31, 2016 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 84.
Choice Properties reports non-GAAP financial measures, including, but not limited to, Net Operating Income(1) (“NOI”), Funds from Operations(1)
(“FFO”), Adjusted Funds from Operations(1) (“AFFO”), and Earnings before Interest, Taxes, Depreciation, Amortization and Fair Value(1)
(“EBITDAFV”), which are widely used for evaluating the performance of Canadian real estate investment trusts (“REITs”). Choice Properties
believes these non-GAAP financial measures provide useful information to both management and investors in measuring the financial
performance and financial condition of Choice Properties. 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. Refer to Section 17, “Non-GAAP Financial
Measures”, of this MD&A, for definitions and reconciliations to GAAP financial measures.
The information in this MD&A is current to February 15, 2017, 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;
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;
2 Choice Properties REIT 2016 Annual Report
•
•
•
changes in Choice Properties’ degree of financial leverage;
changes in laws or regulatory regimes, which may affect Choice Properties, including changes in the tax treatment of the Trust and its
distributions to Unitholders or the inability of the Trust to continue to qualify as a “mutual fund trust” and as a “real estate investment
trust”, as such terms are defined in the Income Tax Act (Canada); and
changes in Choice Properties’ competitiveness in the real estate market or the unavailability of desirable commercial real estate assets.
This is not an exhaustive list of the factors that may affect Choice Properties’ forward-looking statements. Other risks and uncertainties not
presently known to Choice Properties could also cause actual results or events to differ materially from those expressed in its forward-looking
statements. Additional risks and uncertainties are discussed in Choice Properties’ materials filed with the Canadian securities regulatory
authorities from time to time, including the Trust’s 2016 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 other commercial properties across Canada. Choice Properties
is one of Canada’s largest retail REITs, with a portfolio comprised of 535 properties with a total Gross Leasable Area (“GLA”) of 43.6 million
square feet as at December 31, 2016. Choice Properties’ portfolio includes 517 retail properties, 14 industrial properties, one office complex,
and three 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) 186 properties anchored by a retail store operating under a Loblaw banner that also contain one or more ancillary tenants;
and (iii) seven properties containing only ancillary tenants.
The parent company of Choice Properties is Loblaw, which held an 82.7% effective interest in Choice Properties as at December 31, 2016.
Loblaw’s majority shareholder is George Weston Limited (“GWL”), which also held a 5.8% direct interest in Choice Properties as at
December 31, 2016.
Choice Properties REIT 2016 Annual Report 3
Management’s Discussion and Analysis
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 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.
3.1
Annual Highlights
During 2016, Choice Properties:
•
•
Reported rental revenue of $783,574, an increase of $40,474, or 5.4%, compared with $743,100 in the year ended December 31, 2015;
Reported net loss of $223,072, a decrease of $67,796 compared with a net loss of $155,276 in 2015. The year ended 2016 included a
fair value adjustment loss of $406,906 (2015 - $338,537);
Reported FFO(1) per unit diluted of $1.000, an increase of $0.034, or 3.5%, compared with $0.966 in 2015;
Added 16 properties to the portfolio, including three investment properties adjacent to existing Choice Properties owned sites with future
redevelopment potential;
Constructed 807,000 square feet of new GLA for tenants’ possession that contributed to the completion of 21 projects spanning 763,000
square feet and generating a weighted average yield of approximately 8%;
Improved ancillary occupancy and increased organic NOI(1) for the year by 1.8% to $507,709 from $498,836 in 2015;
Issued $350 million of senior unsecured debentures to refinance the redemption of $300 million Series 5 Debentures, locking in attractive
rates and extending Choice Properties’ weighted average term to maturity of its debt instruments, and entered into an additional $250
million senior unsecured committed revolving credit facility, lowering refinancing risk and increasing financial flexibility and liquidity; and
Increased annual distributions from $0.65 per unit to $0.67 per unit effective as of January 29, 2016 and further increased distributions
to $0.71 per unit per annum effective as of July 29, 2016 for a total increase of 9.2%. Distributions per unit declared in the year ended
December 31, 2016 totalled $0.69, a $0.04 or 6.2% increase over the year ended December 31, 2015.
•
•
•
•
•
•
4 Choice Properties REIT 2016 Annual Report
4.
KEY PERFORMANCE INDICATORS AND SELECTED FINANCIAL INFORMATION
Choice Properties has identified key financial and operating performance indicators that were derived from, and should be read in conjunction
with, the Annual Reports of the Trust dated December 31, 2016 and 2015. The analysis of the indicators focuses on trends and significant
events affecting the financial condition and results of operations of the Trust.
As at or for the years ended December 31
($ thousands except where otherwise indicated)
(unaudited)
Number of properties
Gross leasable area ("GLA") (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
$
$
$
$
$
$
$
$
$
$
$
2016
535
43.6
10.7 years
13.21
98.9%
783,574
530,622
546,752
(223,072)
(0.544)
1.000
69.0%
0.805
85.7%
0.6900
410,034,555
9,435,322
3,928,714
44.5%
3.5x
7.2x
5.2 years
3.58%
2015
519
41.6
11.6 years
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
12.90
98.6%
743,100
528,526
514,265
(155,276)
(0.386)
0.966
67.3%
0.777
83.7%
0.6500
402,582,183
8,905,889
3,881,390
44.5%
3.6x
7.3x
4.7 years
3.50%
2014
472
38.9
11.7 years
13.14
98.1%
682,923
479,153
475,739
199,614
0.522
0.912
71.3%
0.745
87.2%
0.6500
382,636,320
8,192,438
3,436,621
44.0%
3.5x
7.3x
5.3 years
3.58%
(i)
(ii)
Cash flows from operating activities excludes interest paid. Presentation for prior years has been updated to exclude leasing capital expenditures.
FFO(1) per unit diluted and FFO(1) payout ratio for the year ended December 31, 2014 were 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 Trust’s initial public offering in 2013. Including these charges FFO(1) per unit diluted for the year ended December 31, 2014 was $0.777 and the FFO(1) payout ratio
was 83.7%.
(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.
Consolidated results for the last three fiscal years were primarily impacted by growth. Accretive acquisitions added approximately 1.2 million,
2.7 million and 2.6 million square feet of GLA in the fiscal years ended 2016, 2015 and 2014, respectively. These acquisitions were key drivers
of increases in rental revenue, cash flows from operating activities and NOI(1). Additionally, development activities added approximately 1.0
million square feet of GLA in the combined three year period, primarily in the year ended December 31, 2016, which will contribute to growth
in the future(2).
The Trust maintained strong balance sheet indicators that were well within the covenants contained in Choice Properties’ Declaration of Trust.
Since December 31, 2013 the Trust has raised $1,250,000 through the issuance of senior unsecured debentures at interest rates ranging
from 2.297% to 5.268% with maturity dates complementary to existing debt, including the issuance of 30-year debt. In 2016, the Trust also
entered into an additional $250,000 senior unsecured committed revolving credit facility.
Choice Properties REIT 2016 Annual Report 5
Management’s Discussion and Analysis
5.
INVESTMENT PROPERTIES
Choice Properties is the owner, manager and developer of well-located retail and other commercial properties across Canada. The
following is a continuity schedule for the Trust’s investment properties for the years ended as indicated:
($ thousands)
Income
producing
properties
Properties
under
development
Balance, beginning of year
$
8,465,700
$
Acquisitions of investment properties(i)
Capital expenditures(ii)
Operating capital expenditures
Amortization of straight-line rent and tenant
improvement allowances
Adjustment to fair value of investment properties
Transfers from properties under development
192,220
106,711
47,576
36,010
100,185
83,201
95,300
3,056
42,382
—
—
8,860
(83,201)
Year ended
Year ended
December 31, 2016
8,561,000
$
December 31, 2015
7,905,978
$
195,276
149,093
47,576
36,010
109,045
—
375,300
130,986
40,350
36,405
71,981
—
Balance, end of year
$
9,031,603
$
66,397
$
9,098,000
$
8,561,000
Includes acquisition costs.
(i)
(ii) Capital expenditures include capitalized interest.
6 Choice Properties REIT 2016 Annual Report
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, 2016, 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, 2016, including straight-line rent.
Based on the definitions of Census Metropolitan Area (CMA) from Statistics Canada published in 2015.
Approximately 63.0% of the portfolio’s base rent for the year ended December 31, 2016 was derived from large and medium urban markets.
Approximately 47.8% of the portfolio’s base rent was generated from large urban markets, with a particular concentration in Toronto, Montreal
and Vancouver.
Choice Properties REIT 2016 Annual Report 7
Management’s Discussion and Analysis
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. 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.
Valuations are most sensitive to changes in capitalization rates. Choice Properties’ valuation inputs, including capitalization rates, are supported
by quarterly reports from independent nationally-recognized valuation firms. 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
December 31, 2016
Range Weighted average
7.05%
5.75% - 11.25%
5.00% - 10.50%
4.75% - 10.50%
6.43%
6.12%
Range
5.75% - 11.25%
5.25% - 10.50%
5.00% - 10.50%
As at
December 31, 2015
Weighted average
7.08%
6.50%
6.17%
For the year ended December 31, 2016, Choice Properties recorded a gross fair value increase of $537,000 on income producing properties
and properties under development, comprised of acquisitions of $195,276, capital and operating expenditures of $196,669 and amortization
of straight-line rent and tenant improvement allowances of $36,010, and a net upward adjustment to fair value of $109,045 due to changes
in underlying cash flows and adjustments to underlying assumptions in valuation models.
Included in certain investment properties acquired from Loblaw is excess land with development potential. Choice Properties will compensate
Loblaw, over time, with intensification payments determined by a site intensification payment grid as outlined in the Strategic Alliance Agreement
(see Section 13, “Related Party Transactions”, of this MD&A), should Choice Properties pursue activity resulting in the intensification of such
excess land. The fair value of this excess land has been recorded in the financial statements.
8 Choice Properties REIT 2016 Annual Report
5.2
Acquisition of Investment Properties
The following table summarizes the investment properties acquired in the year ended December 31, 2016. For a detailed list of all properties
acquired in 2016 and 2015, refer to Section 18, “Additional Information”, of this MD&A.
($ thousands except where otherwise indicated)
(unaudited)
Acquisitions from Loblaw:
Second Quarter of 2016:
Portfolio of retail properties
Industrial property in Pitt Meadows, British Columbia
Fourth Quarter of 2016:
Portfolio of retail properties(ii)
Industrial property in Moncton, New Brunswick(ii)
Land for development in Edmonton, Alberta(ii)
Total Acquisitions from Loblaw
Acquisitions from third-parties:
Third Quarter of 2016:
Retail property in Edmonton, Alberta(iii)
Fourth Quarter of 2016:
Retail property in Courtenay, British Columbia(iv)(v)
Retail property in Beaverton, Ontario(v)
Total Acquisitions from third-parties
Total Acquisitions
Number of
properties
GLA
(in square
feet)
Purchase
price(i)
Exchangeable
Units
issued
Capitalization
Rates
Cash
9
1
3
1
1
15
1
—
—
1
16
325,851
355,316
$
71,390
45,750
$
— $
—
71,390
45,750
168,044
225,990
—
1,075,201
18,440
19,480
3,000
158,060
2,093
9,684
223
12,000
16,347
9,796
2,777
146,060
67,181
20,000
—
20,000
32,652
3,891
103,724
1,178,925
12,824
788
33,612
$ 191,672
$
—
—
—
12,000
12,824
788
33,612
$ 179,672
6.4%
5.3%
5.8%
7.3%
N/A
6.1%
6.4%
6.5%
8.4%
6.5%
6.2%
(i)
(ii)
Purchase price excludes acquisition costs.
Purchase price and Exchangeable Unit values both excluded adjustments totaling ($182) 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.
(iii) Purchase price includes a receivable of $334 related to a monthly rental guarantee negotiated in the purchase and sale agreement.
(iv) Purchase price includes a receivable of $255 related to a monthly rental guarantee negotiated in the purchase and sale agreement.
(v)
The property was combined with the adjacent Choice Properties owned site.
Acquisitions in the Fourth Quarter of 2016
On October 26, 2016, Choice Properties acquired a portfolio of five properties from Loblaw. The aggregate purchase price of $40,920,
excluding acquisition costs, was settled through the issuance of 878,713 Exchangeable Units and cash. The new portfolio was immediately
accretive with an estimated stabilized NOI(1) of approximately $2,600, representing an implied capitalization rate of 6.5%. The acquired
properties expanded the portfolio by 394,034 square feet with an occupancy rate of 99.7% when acquired. The acquisition offered opportunities
to develop up to 344,000 square feet of incremental GLA, including the development of a new 29,000 square foot Loblaw food store on a
parcel of land in Edmonton, Alberta, which opened in December 2016.
On December 22, 2016, Choice Properties acquired retail properties in Courtenay, British Columbia and Beaverton, Ontario, from third-party
vendors, at a combined purchase price of $13,612, excluding acquisition costs. The acquisition added 36,543 square feet of ancillary GLA in
sites adjacent to existing Choice Properties owned sites which are anchored by a Loblaw food store. The acquired properties in Courtenay
and Beaverton were immediately accretive with capitalization rates of 6.5% and 8.4%, respectively. Upon acquisition, the properties were
combined with adjacent Choice Properties owned sites and re-categorized as multi-tenant properties.
Additional Acquisitions in 2016
On August 17, 2016, Choice Properties acquired a retail property in Edmonton, Alberta, from a third-party vendor, adjacent to an existing
Choice Properties owned site which is anchored by a Loblaw food store. The acquisition added 67,181 square feet at a purchase price of
$20,000, excluding acquisition costs. The property was immediately accretive with an estimated stabilized NOI(1) of approximately $1,270
representing a capitalization rate of 6.4%.
On May 12, 2016, Choice Properties acquired 10 properties across Canada, from Loblaw, at a purchase price of $117,140, excluding acquisition
costs. The acquisition added 681,167 square feet to the portfolio, including an industrial property and four Shoppers Drug Mart properties.
The properties were immediately accretive with an estimated stabilized NOI(1) of approximately $7,000, representing an implied capitalization
rate of approximately 6.0% (6.4% excluding the industrial property) with the potential to develop up to approximately 7,000 square feet across
two of the properties in Ontario. At acquisition, the occupancy rate of the acquired portfolio was 96.5%.
Choice Properties REIT 2016 Annual Report 9
Management’s Discussion and Analysis
5.3
Development Activities
During the year ended December 31, 2016, Choice Properties made progress on its development program as illustrated below:
($ thousands except where
otherwise indicated)
(unaudited)
Expected total
development
GLA to be
completed
(in square feet)
Development
GLA
constructed in
2015(ii)
(in square feet)
Development
GLA
constructed in
2016(ii)
(in square feet)
Remaining
development
GLA expected
to be
completed
(in square feet)
Actual or
Expected
expected
total
range of
project
project
spend(iv)
yields(iii)
Life-to-date
project
spend(iv)
Expected
cost to
complete
2016 projects completed or substantially completed
Intensification
Redevelopment
Greenfield
Projects to be completed in 2017
Intensification
Greenfield
Projects to be completed in 2018
Intensification
Redevelopment
Greenfield
Projects to be completed in 2019
Development projects(i)
546,000
15,000
202,000
763,000
135,000
202,000
337,000
304,000
149,000
36,000
489,000
500,000
500,000
78,000
3,000
—
81,000
—
—
—
—
—
—
—
—
—
447,000
12,000
202,000
661,000
53,000
93,000
146,000
—
—
—
—
—
—
21,000
—
—
21,000
9%
7%
7%
8%
$ 158,500
$
145,500
$
13,000
6,000
62,600
5,600
62,600
400
—
227,100
213,700
13,400
82,000
6% - 9%
109,000
7% - 8%
40,400
78,600
191,000
6% - 9%
119,000
304,000
6% - 9%
149,000
6% - 8%
36,000
6% - 8%
92,900
33,300
11,200
489,000
6% - 9%
137,400
500,000
7% - 10%
130,800
500,000
7% - 10%
130,800
10,700
57,700
68,400
2,800
600
4,200
7,600
19,200
19,200
29,700
20,900
50,600
90,100
32,700
7,000
129,800
111,600
111,600
Total
2,089,000
81,000
807,000
1,201,000
6% - 10% $ 614,300
$
308,900
$
305,400
(i)
2019 projects are in various stages of early development. Due to the long-term nature of these projects and ongoing adjustments in expectations concerning timing,
occupancy and costs, some data points are not available.
(ii) GLA is defined as constructed when it is ready for tenant’s possession, which can be earlier than the project’s completion date.
(iii) The yields for completed or substantially completed projects are presented on a weighted average basis.
(iv) For the purpose of calculating the expected yield, project spend includes land acquisition costs and intensification payments to be made to Loblaw.
During the fourth quarter, Choice Properties constructed 232,000 square feet of development GLA; 95,000 square feet for 2016 projects
substantially completed or completed; and 137,000 square feet towards projects to be completed in 2017, which included construction of a
29,000 square foot Loblaw food store on newly acquired land in Edmonton, Alberta.
During the year ended December 31, 2016, Choice Properties constructed 807,000 square feet of development GLA including 498,000 square
feet of related party construction, and 309,000 square feet of retail space for 100 new third-party tenants. Related party construction included
212,000 square feet for three new Loblaw food stores, 35,000 square feet for two new Shoppers Drug Mart stores, 201,000 square feet for
a Loblaw warehouse expansion, 50,000 square foot expansion of a GWL bakery. Choice Properties’ 2016 annual development capital
expenditures were $140,053, including capitalized interest, intensification payments, the Edmonton land purchase and amounts spent on
projects expected to be completed in future years. The Trust compensated Loblaw with intensification payments of $6,582 in respect of
completed GLA for which tenants have taken possession during 2016.
2016 Projects Completed The 95,000 square feet constructed in the fourth quarter of 2016 delivered an additional 32 new retail spaces to
third-party ancillary tenants in Edmonton and Lloydminster, Alberta; Regina, Saskatchewan; and across five major cities in southern Ontario,
as part of ongoing intensification projects.
The projects completed, or substantially completed, in 2016 totalled 763,000 square feet of development GLA including 183,000 square feet
for two new Loblaw food stores, 52,000 square feet for three new Shoppers Drug Mart stores, and 201,000 square feet for a Loblaw warehouse
expansion. Additionally, 306,000 square feet of GLA, representing 101 new retail spaces were turned over to third-party ancillary tenants
primarily in British Columbia, Alberta, Saskatchewan and Ontario. The remaining 21,000 square feet of development GLA is leased to four
tenants in Ontario, Alberta and Saskatchewan and are expected to be open for business in 2017. Yields for projects completed, or substantially
completed, in 2016 achieved a 8% return on a weighted average basis, based on a stabilized NOI(1) of approximately $18,200.
10 Choice Properties REIT 2016 Annual Report
Projects to be Completed in 2017 In addition, the Trust has commenced construction for projects scheduled for completion in 2017, including
the 50,000 square foot expansion of a bakery owned by GWL, a 29,000 square foot Loblaw food store and 67,000 square feet of retail units
for 19 third-party tenants. Time-lines for development projects span many months, or in some cases several years, and tenants are expected
to take possession when individual units are developed(2).
Choice Properties continues to refine its development pipeline based in part on municipal approvals, tenant leasing, and development costs.
Choice Properties expects to invest a total of approximately $387,200 (including costs spent to date) to develop up to 1,326,000 square feet
of GLA by the end of 2019. Development yields are expected to be accretive upon tenant occupancy(2).
The following table indicates the anticipated square footage to be completed in each year, and the total cumulative expected capital cost to
complete the projects, including investments made in prior years(2).
($ 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
5.4
Active Management
Leasing Activity
2017
337,000
119,000
6% - 9%
192,100
$
$
2018
489,000
137,400
6% - 9%
239,100
$
$
2019
500,000
130,800
7% - 10%
230,000
Total
1,326,000
$
$
387,200
6% - 10%
661,200
$
$
Choice Properties’ leasing activities are focused on driving value by adding ancillary tenants in business sectors that complement the food
and drug store anchor tenants. The following table summarizes the change in occupied GLA and average base rent for the year ended
December 31, 2016:
(in square feet except where otherwise indicated)
(unaudited)
Occupied, January 1, 2016
Tenant openings
Short term tenant openings in space identified for redevelopment
Tenant closures
Tenant expiries
Tenant renewals
Developments
GLA taken off-line
Acquisitions
Occupied, December 31, 2016
Occupied
GLA
41,094,000
234,000
20,000
(196,000)
(446,000)
446,000
785,000
(46,000)
1,150,000
43,041,000
Occupancy
98.6% $
$
$
$
$
$
$
$
$
98.9% $
Average base rent
(per square foot)
12.90
15.27
3.43
11.97
14.27
15.43
20.09
6.71
10.43
13.21
Choice Properties’ principal tenant, Loblaw, represents 88.3% of the Trust’s GLA (December 31, 2015 - 89.1%). The remaining GLA is
designated ancillary space for leasing to third-party tenants. As at December 31, 2016, 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, 2016
Occupied
GLA
38.5
Occupancy
(%)
100.0%
4.5
43.0
90.0%
98.9%
GLA
38.5
5.1
43.6
As at
December 31, 2015
Occupied
GLA
37.1
4.0
41.1
Occupancy
(%)
100.0%
87.5%
98.6%
GLA
37.1
4.5
41.6
Choice Properties REIT 2016 Annual Report 11
Management’s Discussion and Analysis
As at December 31, 2016, Loblaw represented approximately 90.0% (December 31, 2015 - 91.1%) of annual base rent. The weighted average
lease term-to-maturity on the Loblaw leases was 11.2 years at December 31, 2016 (December 31, 2015 - 12.3 years). The first maturity of a
Loblaw lease does not occur until 2023. Loblaw leases 38.5 million square feet of GLA, with approximately 80.9%, 17.5% and 1.6% of such
GLA attributed to retail, industrial and office space, respectively.
Choice Properties has approximately 5.1 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, 2016, 4.5 million square feet was leased to ancillary
tenants with a weighted average lease term to maturity of 5.8 years (December 31, 2015 - 5.7 years).
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, 2016, Choice Properties entered into leases totaling approximately 416,000 square feet with an
average lease term of 9.3 years. The leasing activity for the portfolio is shown below:
For the three months ended December 31
(in square feet except where otherwise indicated)
(unaudited)
New leasing: Previously vacant
Held for redevelopment
Newly developed
Renewals
Total
2016
Average base rent
(per square foot)
19.28
3.43
23.40
13.50
19.09
GLA
69,000
20,000
215,000
112,000
416,000
$
$
$
$
$
2015
Average base rent
(per square foot)
13.32
—
28.46
19.70
20.19
GLA
104,000
$
— $
89,000
42,000
235,000
$
$
$
In the year ended December 31, 2016, Choice Properties entered into leases totaling approximately 1,485,000 square feet with an average
lease term of 11.1 years. The leasing activity for the portfolio is shown below:
For the year ended December 31
(in square feet except where otherwise indicated)
(unaudited)
New leasing: Previously vacant
Held for redevelopment
Newly developed
Renewals
Total
The details of renewals are as follows:
For the periods ended December 31
(in square feet except where otherwise indicated)
(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)
2016
Average base rent
(per square foot)
15.27
3.43
20.09
15.43
17.71
GLA
234,000
20,000
785,000
446,000
1,485,000
$
$
$
$
$
2015
Average base rent
(per square foot)
12.76
3.00
27.51
11.48
13.13
GLA
314,000
90,000
124,000
459,000
987,000
$
$
$
$
$
Three Months
Year End
$
2016
112,000
13.50
7.0%
65.4%
$
$
2015
42,000
19.70
11.3%
42.8%
2016
446,000
15.43
7.7%
69.5%
2015
459,000
11.48
$
12.0%
78.0%
(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 2016 Annual Report
The lease maturity profile for ancillary tenants as at December 31, 2016 was as follows:
Ancillary
GLA
(in square feet)
118,000
374,000
541,000
345,000
645,000
512,000
2,048,000
500,000
5,083,000
Expiring ancillary
GLA as a
percentage of
ancillary GLA
2.3%
7.4%
10.6%
6.8%
12.7%
10.1%
40.3%
9.8%
100.0%
Expiring ancillary
GLA as a
percentage of
total GLA
0.3% $
0.9%
1.2%
0.8%
1.5%
1.2%
4.7%
1.1%
11.7% $
Annualized
base rent
($ thousands)
1,323
4,735
7,088
5,612
9,777
6,709
36,065
—
71,309
Average base rent
(per square foot)
11.19
12.66
13.09
16.28
15.17
13.09
17.61
—
14.03
$
$
$
$
$
$
$
$
(unaudited)
Month-to-month
2017
2018
2019
2020
2021
2022 & Beyond
Vacant
Portfolio Ancillary Total
Operating Capital Expenditures
Property Capital Property 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, 2016, Choice Properties incurred $42,192 of property
capital expenditures, which are recoverable from tenants under the terms of their leases over the useful life of the improvements (2015 -
recoverable capital improvements of $32,466). 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 $100,683 as at December 31, 2016 (December 31, 2015 - $63,929), the majority of which Choice Properties expects
to recover from tenants over the useful life of the improvements(2).
Property capital expenditures per annum are expected to be approximately $1.00 per square foot(2).
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 $2,307 of tenant improvement allowances
and $3,077 of direct leasing costs during the year ended December 31, 2016 (2015 - tenant improvement allowances of $5,548 and direct
leasing costs of $2,336).
Leasing capital varies with tenant demand and the balance between new and renewal leasing, as capital expenditures relating to securing
new tenants are generally higher than the costs relating to renewing existing tenants.
Choice Properties endeavours to fund operating capital from cash flows from operations(2).
Choice Properties REIT 2016 Annual Report 13
Management’s Discussion and Analysis
6.
CONSOLIDATED RESULTS OF OPERATIONS
Choice Properties’ financial results for the years ended December 31, 2016 and December 31, 2015 are summarized below:
For the years ended December 31
($ 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
Share of income from joint venture
Net Income before Adjustments to Fair Value
Adjustment to fair value of Exchangeable Units
Adjustment to fair value of investment properties
Adjustment to fair value of investment property held in equity
accounted joint venture
Net Loss
2016
2015
Variance
favourable /
(unfavourable)
$
578,188
$
551,114
$
202,368
3,018
783,574
(198,865)
(1,375)
188,936
3,050
743,100
(189,193)
(2,986)
583,334
$
550,921
$
(28,117)
(930)
(370,533)
80
(21,765)
(844)
(345,051)
—
183,834
$
183,261
$
(529,591)
109,045
13,640
(410,518)
71,981
—
(223,072)
$
(155,276) $
$
$
$
27,074
13,432
(32)
40,474
(9,672)
1,611
32,413
(6,352)
(86)
(25,482)
80
573
(119,073)
37,064
13,640
(67,796)
Net Loss For the year ended December 31, 2016, net loss of $223,072, was greater by $67,796, compared to the net loss of $155,276 for
the same period in 2015, primarily due to an unfavourable change of $119,073 in the adjustment to the fair value of Exchangeable Units
partially offset by a favourable change of $37,064 in the adjustment to the fair value of investment properties and a favourable change of
$13,640 in the adjustment to fair value of investment properties from equity accounted joint venture. Adjustments to fair value can vary widely
from year to year as they are impacted by market factors such as the Trust’s Unit price and market capitalization rates.
Excluding the adjustments to fair value, net income for the year ended December 31, 2016 was $573 higher than the same period in 2015
due to a $32,413 increase in net property income, partially offset by a $25,482 increase in net interest and other financing charges and a
$6,352 increase to general and administrative expenses (which includes an unfavourable change of $3,421 in the adjustment to the fair value
of unit-based compensation).
14 Choice Properties REIT 2016 Annual Report
Rental Revenue Rental revenue is comprised primarily of base rent and recoveries from tenants for property taxes, operating costs and
qualifying capital expenditures. Growth in rental revenue is materially impacted by newly acquired assets. To better measure certain key
performance factors, management further analyzes rental revenue for income producing properties owned by the Trust throughout the current
and comparative reporting periods, (“Same Properties”), to remove the impact of recently acquired properties (“Acquisitions”).
For the years ended December 31
($ thousands)
(unaudited)
Same Properties(i)
Acquisitions(ii)
Total Revenue
$
$
2016
738,407
45,167
783,574
$
$
Variance
favourable /
(unfavourable)
17,762
22,712
40,474
2015
720,645
22,455
743,100
$
$
(i)
(ii)
There were 470 income producing properties that were owned throughout both the years ended December 31, 2016 and December 31, 2015 (“Same Properties”).
Acquisitions includes properties purchased subsequent to December 31, 2014.
During the year ended December 31, 2016, rental revenue increased by $40,474, or 5.4% compared to the same period in 2015, attributable
to an increase of $17,762 in revenue from Same Properties and additional rental revenue of $22,712 attributable to the properties acquired
in 2015 and 2016. The increase in revenue from Same Properties is attributable to an increase of $6,266 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. The annual
increase also included higher revenue generated from the recovery of capital expenditures of $4,043 and base rent on newly developed GLA
of $7,491, partially offset by a $38 decline in other revenues.
In addition, total revenue for the year ended December 31, 2016 included $721 (2015 - nil) of lease surrender revenue.
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 December 31, 2016, the net amount of these items positively impacted
rental revenue by $36,010 (2015 - $36,405).
Property Operating Costs Property operating costs are comprised primarily of expenses to manage and maintain the properties for the
benefit of the tenants, including realty taxes, that are recoverable under the leases of most tenants. Non-recoverable operating costs include
expenses that do not directly benefit the tenants.
For the years ended December 31
($ thousands)
(unaudited)
Same Properties
Acquisitions
Total Property Operating Costs
$
$
2016
188,723
11,517
200,240
$
$
Variance
Favourable /
(Unfavourable)
(2,361)
(5,700)
(8,061)
2015
186,362
5,817
192,179
$
$
During the year ended December 31, 2016, property operating costs increased by $8,061 or 4.2% compared to the same period in 2015,
attributable to an increase of $2,361 from Same Properties, and $5,700 from the properties acquired in 2015 and 2016. The increase in total
property operating costs from Same Properties is attributable to an increase of $4,032 in recoverable operating costs, partially offset by a
decrease of $1,671 of non-recoverable operating costs. Non-recoverable operating costs can include non-recurring expenditures and vary
by year.
Choice Properties REIT 2016 Annual Report 15
Management’s Discussion and Analysis
General and Administrative Expenses
For the years ended December 31
($ thousands)
(unaudited)
Internal expenses of the Trust
Investor relations and other public entity costs
Professional fees
Services Agreement expense charged by related party(i)
Less:
Property and asset management fee charged to related party(i)
Capitalized to investment properties
Allocated to recoverable operating expenses
General and administrative expenses
Less:
Adjustment to fair value of unit-based compensation(ii)
Internal expenses for leasing(iii)
General and administrative expenses excluding internal expenses for
leasing and adjustment to fair value of unit-based compensation (for use in
calculation of general and administrative expense as a percent of revenue)
As a percentage of revenue
$
$
$
Variance favourable /
(unfavourable)
(8,114)
$
$
2016
31,256
2,185
2,310
2,932
38,683
(740)
(2,635)
(7,191)
2015
23,142
2,058
1,900
3,141
30,241
(600)
(2,157)
(5,719)
28,117
$
21,765
$
(4,309)
(2,135)
(888)
(1,771)
(127)
(410)
334
(8,317)
140
353
1,472
(6,352)
3,421
364
21,673
$
2.8%
19,106
$
2.6%
(2,567)
(0.2)%
(i)
The Services Agreement and Property Management Agreement are described in Section 13, “Related Party Transactions”, of this MD&A.
(ii) General and administrative expenses includes the cost of unit-based compensation which was recorded at the fair value of the underlying Trust Units. The adjustment to
the fair value of unit-based compensation was eligible to be added back to FFO(1), in accordance with the Real Property Association of Canada White Paper on Funds
from Operations for IFRS issued in April 2014.
(iii)
Internal expenses for leasing, primarily compensation, were eligible to be added back to FFO(1), based on 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) makes
results more comparable between real estate entities that expensed their internal leasing departments and those that capitalized the expenses.
General and administrative expenses, excluding adjustment to fair value of unit-based compensation and internal expenses for leasing, for
the year ended December 31, 2016, increased $2,567, or 0.2% when expressed as a percentage of revenue, over the same period in 2015.
The increase was driven by employee costs.
16 Choice Properties REIT 2016 Annual Report
Net Interest Expense and Other Financing Charges
For the years ended December 31
($ thousands)
(unaudited)
Interest on senior unsecured debentures
Distributions on Class C LP Units(i)
Interest on mortgage
Interest on credit facilities
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
Gain on settlement of bond forward contracts
$
$
$
$
$
$
2016
108,788
46,250
181
3,776
158,995
218,961
377,956
(522)
1,639
(3,549)
(2,309)
(2,682)
Variance
favourable /
(unfavourable)
(11,599)
—
36
(371)
(11,934)
(16,157)
(28,091)
(2,110)
(234)
2,084
187
2,682
2015
97,189
46,250
217
3,405
147,061
202,804
349,865
$
$
$
(2,632)
1,405
(1,465)
(2,122)
—
Net interest expense and other financing charges
$
370,533
$
345,051
$
(25,482)
(i)
Represents interest on indebtedness due to Loblaw.
For the year ended December 31, 2016, net interest expense and other financing charges increased by $25,482 or 7.4% compared to the
same period in 2015. The increase was due to distributions on the Exchangeable Units as a result of a higher distribution rate and additional
Exchangeable Units issued as partial consideration for properties acquired from Loblaw in 2015 and 2016, and interest incurred on senior
unsecured debentures as a result of net issuances in 2015 and 2016 at higher weighted average interest rates, partially offset by the gain on
the settlement of bond forward contracts and capitalized interest.
Choice Properties REIT 2016 Annual Report 17
Management’s Discussion and Analysis
7.
OTHER MEASURES OF PERFORMANCE
In addition to the GAAP measures already described, Choice Properties’ management utilizes non-GAAP measures to analyze performance.
See Section 17, “Non-GAAP Financial Measures”, of this MD&A, for details on how these measures are defined, calculated and reconciled
to GAAP financial measures and why management analyzes these measures. NOI(1), FFO(1) and AFFO(1) for the years ended December 31,
2016 and December 31, 2015 are summarized below:
For the years ended December 31
($ thousands except where otherwise indicated)
(unaudited)
Net Operating Income(1)
NOI(1) for Same Properties, with the same GLA
Funds from Operations(1)
FFO(1) per unit basic
FFO(1) per unit diluted
FFO(1) payout ratio - diluted
Adjusted Funds from Operations(1)
AFFO(1) per unit basic
AFFO(1) per unit diluted
AFFO(1) payout ratio - diluted
Distribution declared per unit
Weighted average Units outstanding - basic
Weighted average Units outstanding - diluted
Number of Units outstanding, end of year
Net Operating Income(1)
$
$
$
$
$
$
$
$
$
2016
546,752
507,709
410,135
1.003
1.000
69.0%
330,246
0.807
0.805
85.7%
0.6900
$
$
$
$
$
$
$
$
$
409,023,586
410,034,555
410,557,333
2015
514,265
498,836
388,975
0.967
0.966
67.3%
312,881
0.778
0.777
83.7%
$
$
$
$
$
$
$
$
Variance
Favourable /
(Unfavourable)
32,487
8,873
21,160
0.036
0.034
(1.7)%
17,365
0.029
0.028
(2.0)%
0.6500
$
402,090,617
402,582,183
408,063,609
0.0400
6,932,969
7,452,372
2,493,724
There is no industry-defined definition of NOI(1). Refer to Section 17, “Non-GAAP Financial Measures”, of this MD&A, for a definition of NOI
(1) and a reconciliation to net income (loss).
Net Operating Income(1) For the year ended December 31, 2016, NOI(1) increased $32,487, or 6.3%, compared to the same period in 2015,
driven by an increase of $16,364 from Same Properties, and $16,123 from the properties acquired in 2015 and 2016.
Net Operating Income(1) for Same Properties, with the same GLA To better measure certain key performance factors, management further
analyzes NOI(1) for the income producing properties owned by the Trust throughout the current and comparative reporting periods, Same
Properties, to remove the impact from recently acquired properties. Management further refines the analysis to exclude any NOI(1) from
developments which increased GLA in the comparative periods.
For the year ended December 31, 2016, NOI(1) for Same Properties, measured with the same GLA, increased by $8,873, or 1.8%, compared
to the same period in 2015, primarily due to an increase of $3,197 in base rent and net recoveries, which was driven by an improvement in
ancillary occupancy, higher average rents per square foot on new ancillary leases and rent steps in Loblaw leases. The increase was also
due to higher revenue generated from the recovery of capital expenditures of $4,043 and a decrease of $1,671 in non-recoverable operating
expenses, partially offset by a decrease of $38 in other revenues.
18 Choice Properties REIT 2016 Annual Report
Funds from Operations(1)
Choice Properties calculates its FFO(1) in accordance with the Real Property Association of Canada White Paper on Funds from Operations(1)
for IFRS issued in April 2014. Refer to Section 17,”Non-GAAP Financial Measures”, of this MD&A, for a reconciliation of FFO(1) to net income
(loss) determined in accordance with GAAP.
For the year ended December 31, 2016, FFO(1) increased by $21,160 or 5.4% compared to the same period in 2015. The year-over-year
growth was due to an increase in net property income of $32,734 and $80 from the share of income from joint venture, partially offset by a
$9,001 increase in interest and other financing charges, a $2,567 increase in general and administrative expenses, and a $86 increase in
amortization of other assets. The increase to interest and other financing charges of $9,001 is net of a gain from the settlement of bond forward
contracts of $2,682.
For the year ended December 31, 2016, FFO(1) per unit on a diluted basis increased by $0.034 or 3.5% compared to the same period in 2015.
FFO(1) for the year ended December 31, 2016 includes a gain from the settlement of bond forward contracts of $2,682 or $0.006 per diluted
unit.
Adjusted Funds from Operations(1)
There is currently no standard industry-defined measure of AFFO(1). 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 with GAAP.
For the year ended December 31, 2016, AFFO(1) increased by $17,365 or 5.6% compared to the same period in 2015. The year-over-year
growth was due to an increase in net property income of $32,808 and $80 from the share of income from joint venture, partially offset by a
$7,226 increase in capital expenditures required to maintain the rental revenue stream of the growing portfolio, a $6,657 increase in interest
and other financing charges, a $1,554 increase in general and administrative expenses and a $86 increase in amortization of other assets.
The increase to interest and other financing charges of $6,657 is net of a gain from the settlement of bond forward contracts of $2,682.
For the year ended December 31, 2016, AFFO(1) per unit on a diluted basis increased by $0.028 or 3.6% compared to the same period in 2015.
AFFO(1) for the year ended December 31, 2016 includes a gain from the settlement of bond forward contracts of $2,682 or $0.006 per diluted
unit.
Choice Properties REIT 2016 Annual Report 19
Management’s Discussion and Analysis
8.
8.1
LIQUIDITY AND CAPITAL RESOURCES
Major Cash Flow Components
Three Months
(unaudited)
Year End
(audited)
For the periods ended December 31
($ thousands)
Cash and cash equivalents,
beginning of period
Cash flows from operating
activities
Cash flows used in investing
activities
Cash flows used in financing
activities
Cash and cash equivalents, end
2016
2015
Source/
(Use)
2016
2015
Source/
(Use)
$
1,784
$
7,614
$
(5,830)
$
44,354
$
1,332
$
43,022
233,900
176,178
57,722
530,622
528,526
2,096
(106,441)
(117,691)
11,250
(373,192)
(422,440)
49,248
(124,130)
(21,747)
(102,383)
(196,671)
(63,064)
(133,607)
of period
$
5,113
$
44,354
$
(39,241)
$
5,113
$
44,354
$
(39,241)
Cash Flows from Operating Activities
The year-over-year increase in cash flows from operating activities for the three months ended December 31, 2016 of $57,722 was primarily
due to a higher contribution from working capital and an increase in NOI.
The increase in cash flows from operating activities for the year ended December 31, 2016 of $2,096 was primarily due to an increase in NOI,
partially offset by the decline in working capital.
Cash flows from operating activities are used to fund ongoing 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, 2016 of $11,250 was primarily
due to decreased capital expenditures to sustain or improve investment properties compared to the same period in 2015, partially offset by
an increase in investment property acquisition activity.
The decrease in cash flows used in investing activities for the year ended December 31, 2016 of $49,248 was primarily due to decreased
investment property acquisition activity compared to 2015, partially offset by increased capital expenditures to improve investment properties.
Cash Flows used in Financing Activities
The year-over-year increase in cash flows used in financing activities for the three months ended December 31, 2016 of $102,383 was primarily
due to the issuance of Series F senior unsecured debentures in 2015, partially offset by higher credit facility repayments in the fourth quarter
of 2015.
The increase in cash flows used in financing activities for the year ended December 31, 2016 of $133,607 was primarily due to the redemption
of Series 5 debentures in the current year, partially offset by a larger draw on the credit facilities.
20 Choice Properties REIT 2016 Annual Report
8.2
Liquidity and Capital Structure
Choice Properties expects to fund its ongoing operations and finance future growth primarily through the use of: (i) existing cash; (ii) cash
flows from operations; (iii) short term financing through the credit facilities; and (iv) the issuance of unsecured debentures and equity (including
Exchangeable Units), subject to market conditions. Given reasonable access to capital markets, Choice Properties does not foresee any
impediments in obtaining financing to satisfy its short and long term financial obligations, including its capital investment commitments(2).
($ thousands)
Cash and cash equivalents
Unused portion of the credit facilities
Liquidity
Credit Facilities
As at
As at
December 31, 2016
5,113
578,000
583,113
$
$
December 31, 2015
44,354
500,000
544,354
$
$
$
$
Variance
favourable /
(unfavourable)
(39,241)
78,000
38,759
Choice Properties has a $500,000 senior unsecured committed revolving credit facility provided by a syndicate of lenders maturing July 5,
2021. The credit facility bears interest at variable rates of either: Prime plus 0.45% or Bankers’ Acceptance rate plus 1.45%. Certain conditions
of the credit facility are contingent on Choice Properties’ credit rating remaining at “BBB”.
On December 23, 2016, Choice Properties entered into a new bi-lateral $250,000 senior unsecured committed revolving credit facility with a
major Canadian financial institution maturing December 21, 2018. The credit facility bears interest at variable rates of either: Prime plus 0.25%
or Bankers’ Acceptance rate plus 1.25%. Certain conditions of the credit facility are contingent on Choice Properties’ credit rating remaining
at “BBB”. Should certain conditions not be met, the credit facility would become secured against select properties.
As at December 31, 2016, $172,000 was drawn under the syndicated credit facility (December 31, 2015 - nil) and no amount was drawn
under the new bi-lateral credit facility.
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 $2,000,000. The new prospectus is effective for a 25-month
period from the date of issuance. On November 24, 2015 and March 7, 2016, Choice Properties issued $200,000 and $350,000, respectively,
of senior unsecured debentures under this base shelf prospectus.
Long Term Debt and Class C LP Units
The following outlines the changes to Choice Properties’ outstanding long term debt and Class C LP Units in the year ended December 31,
2016:
For the year ended December 31, 2016
($ thousands)
Principal balance outstanding, beginning of year
$
Issuance:
Series G
Series H
Repayment:
Series 5
Mortgages
Senior
unsecured
debentures
3,000,000
250,000
100,000
(300,000)
—
Mortgages
4,139
$
$
Class
C LP Units
925,000
$
—
—
—
(1,212)
—
—
—
—
Total long
term debt
and Class
C LP Units
3,929,139
250,000
100,000
(300,000)
(1,212)
Principal balance outstanding, end of year
$
3,050,000
$
2,927
$
925,000
$
3,977,927
Weighted
average
coupon rate
3.86%
3.20%
5.27%
3.00%
6.91%
3.91%
Choice Properties REIT 2016 Annual Report 21
Management’s Discussion and Analysis
Senior Unsecured Debentures
On March 7, 2016, Choice Properties redeemed, at par, $300,000 Series 5 senior unsecured debentures with an original maturity date of
April 20, 2016.
Also, on March 7, 2016, Choice Properties issued $250,000 and $100,000 of Series G and H senior unsecured debentures due March 7,
2023 and March 7, 2046, respectively, under the base shelf prospectus. The Series G senior unsecured debentures bear interest at a rate of
3.196% per annum and the Series H senior unsecured debentures bear interest rate at 5.268%.
At December 31, 2016 the weighted average coupon rate and the weighted average term to maturity on Choice Properties’ senior unsecured
debentures was 3.58% (December 31, 2015 - 3.50%) and 5.2 years (December 31, 2015 - 4.7 years), respectively.
On January 23, 2017, Choice Properties redeemed, at par, $200,000 Series 6 senior unsecured debentures with an original maturity date
of April 20, 2017.
Financial Derivative Instruments
The Trust may use derivative instruments from time to time to offset certain of its financial risks. On January 20, 2016, Choice Properties
entered into certain bond forward contracts with a notional value of $300,000. The contracts were settled on March 4, 2016, resulting in a
gain of $2,682. The Trust has not entered into any other derivative instruments during the years ended December 31, 2016 or 2015.
Class C LP Units (authorized - unlimited)
As at December 31, 2016, Loblaw holds all of the 92,500,000 outstanding Class C LP Units (December 31, 2015 - 92,500,000 Units), which
are redeemable at Loblaw’s option, beginning in 2027. Choice Properties has the option to settle the redemption payment with cash,
Exchangeable Units, or any combination thereof.
Maturities of Long Term Debt and Class C LP Units
As at December 31, 2016
($ thousands)
2017
2018
2019
2020
2021
Thereafter
$
Senior
unsecured
debentures
200,000
400,000
200,000
550,000
450,000
1,250,000
Mortgages
1,192
$
$
Class
C LP Units
— $
152
1,583
—
—
—
—
—
—
—
925,000
Total principal balance outstanding
$
3,050,000
$
2,927
$
925,000
$
Total
201,192
400,152
201,583
550,000
450,000
2,175,000
3,977,927
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 its credit facilities 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, 2016 and December 31, 2015.
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, 2016
44.5%
December 31, 2015
44.5%
3.5x
3.6x
(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.
22 Choice Properties REIT 2016 Annual Report
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 relationship between the Trust and Loblaw.
Choice Properties has maintained its BBB credit rating with both S&P and DBRS. On March 11, 2016, DBRS confirmed the rating at BBB and
changed the trend from stable to positive. On May 12, 2016, S&P confirmed the rating at BBB with a stable outlook.
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
Positive
Positive
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 and Exchangeable Units:
Number of Units and Exchangeable 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 and Exchangeable Units, end of year
Year ended
Year ended
December 31, 2016
408,063,609
December 31, 2015
395,287,115
1,549,693
65,318
878,713
410,557,333
1,668,346
30,461
11,077,687
408,063,609
Distribution Reinvestment Plan
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, 2016, Choice Properties issued 1,549,693 Units under the DRIP (year ended December 31, 2015 - 1,668,346
Units) including 1,265,160 Units to GWL (year ended December 31, 2015 - 1,317,405 Units). On average, 11.2% of Unitholders other than
Loblaw and GWL participated in the DRIP in the year ended December 31, 2016 (December 31, 2015 - 12.6%).
Distributions
In the year ended December 31, 2016, Choice Properties declared $282,320 in distributions (2015 - $261,424), including distributions to
holders of Exchangeable Units, which are reported as interest expense, and non-cash distributions provided under the DRIP. Non-cash
distributions have the effect of increasing the number of units outstanding and therefore increase the aggregate dollar amount of distributions
over time, assuming a stable cash component of distributions on a per unit basis.
Choice Properties increased annual distributions from $0.65 per unit to $0.67 per unit effective as of January 29, 2016 and further increased
distribution to $0.71 per unit per annum effective as of July 29, 2016 for a total increase of 9.2%. Distribution declared in the year ended
December 31, 2016 totalled $0.69 a $0.04 or 6.2% increase over the year ended December 31, 2015.
Choice Properties REIT 2016 Annual Report 23
Management’s Discussion and Analysis
For the periods ended December 31
($ thousands) (unaudited)
Total distributions declared
Less: Distributions reinvested through
Three Months
Year End
2016
$ 72,848
2015
$ 66,221
Variance
favourable /
(unfavourable)
$
6,627
2016
$ 282,320
2015
$ 261,424
Variance
favourable /
(unfavourable)
$
20,896
the DRIP
(5,532)
(4,319)
(1,213)
(19,587)
(18,118)
Net distributions declared
$ 67,316
$ 61,902
$
5,414
$ 262,733
$ 243,306
$
(1,469)
19,427
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.
The tables below summarize the excess or shortfall of certain GAAP and non-GAAP measures over total distributions declared:
For the periods ended December 31
($ thousands)
(unaudited)
Cash flows from operating activities
Less:
Interest paid on financing activities
Cash flows from operating activities less interest
paid
Less: Total distributions declared
Excess of cash flows provided by operating
activities less interest paid over total
distributions declared
Three Months
Year End
2016
$ 233,900
(13,893)
2015
$ 176,178
(13,713)
$ 220,007
(72,848)
$ 162,465
(66,221)
$
$
Variance
favourable /
(unfavourable)
57,722
2016
$ 530,622
2015
$ 528,526
Variance
favourable /
(unfavourable)
2,096
$
(180)
(156,297)
(144,528)
(11,769)
57,542
$ 374,325
$ 383,998
$
(6,627)
(282,320)
(261,424)
(9,673)
(20,896)
$ 147,159
$ 96,244
$
50,915
$ 92,005
$ 122,574
$
(30,569)
For the periods ended December 31
($ thousands)
(unaudited)
Adjusted Funds from Operations(1)
Less: Total distributions declared
Excess of cash provided by AFFO(1) over
total distributions declared
Three Months
Year End
2016
$ 81,816
(72,848)
2015
$ 81,987
(66,221)
Variance
favourable /
(unfavourable)
$
(171)
2016
$ 330,246
2015
$ 312,881
Variance
favourable /
(unfavourable)
17,365
$
(6,627)
(282,320)
(261,424)
(20,896)
$
8,968
$ 15,766
$
(6,798)
$ 47,926
$ 51,457
$
(3,531)
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: Total distributions declared
Excess (shortfall) of adjusted net income
(loss) over total distributions declared
Three Months
Year End
2016
$ 255,574
2015
$ 40,401
Variance
favourable /
(unfavourable)
$
215,173
2016
$(223,072)
2015
$(155,276) $
Variance
favourable /
(unfavourable)
(67,796)
56,444
51,461
4,983
218,961
202,804
16,157
$ 312,018
(72,848)
$ 91,862
(66,221)
$
220,156
$
(4,111)
$ 47,528
$
(6,627)
(282,320)
(261,424)
(51,639)
(20,896)
$ 239,170
$ 25,641
$
213,529
$(286,431)
$(213,896) $
(72,535)
24 Choice Properties REIT 2016 Annual Report
The excess of cash flows provided by operating activities less interest paid over total distributions declared for the three months ended
December 31, 2016 includes seasonal fluctuations in non-cash working capital, 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
facilities. The cash flows provided by operating activities for the year ended December 31, 2016, were in excess of total 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 installments. 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, continue to vary from net income (loss) as this GAAP
measure includes adjustments to fair value and other non-cash items(2). If net income before adjustments to fair value were to be used in the
calculation, there would have been an excess of adjusted net income over total distributions declared for the years ended December 31, 2016
and 2015.
At its most recent meeting on February 15, 2017, the Board of Trustees reviewed and approved the current rate of distributions of $0.71 per
unit per annum. Based on current facts and assumptions, management does not anticipate cash distributions will be reduced or suspended
in the foreseeable future(2).
Tax Treatment The carrying value of the Trust’s investment properties exceeds their tax base. Choice Properties’ historic tax treatment of
distributions has been as follows:
For the years ended December 31
(unaudited)
Return of Capital
Income
Capital Gain
8.5 Contractual Obligations
2016
3.1%
92.9%
4.0%
2015
9.4%
90.5%
0.1%
2014
17.1%
81.8%
1.1%
2013
22.7%
77.3%
—%
100.0%
100.0%
100.0%
100.0%
The undiscounted future principal and interest payments on Choice Properties’ debt instruments, distribution and redemption payments on
Class C LP Units, and other contractual obligations as at December 31, 2016 were as follows:
($ thousands)
2018
(unaudited)
Senior unsecured debentures
Mortgages
Credit facilities(i)
Class C LP Units
Other(ii)
Total
2017
Thereafter
$ 304,821 $ 503,263 $ 289,047 $ 627,648 $ 512,133 $ 1,475,368
2021
2019
2020
1,294
—
46,250
35,950
204
—
1,628
—
—
—
—
172,000
—
—
46,250
46,250
46,250
46,250
1,227,308
875
890
891
899
4,035
Total
3,712,280
$
3,126
172,000
1,458,558
43,540
$ 388,315 $ 550,592 $ 337,815 $ 674,789 $ 731,282 $ 2,706,711
$
5,389,504
(i)
(ii)
Excludes interest on the revolving credit facilities.
As at December 31, 2016, Choice Properties had commitments of approximately $43,540 for future capital expenditures related to ongoing development and sustainable
capital projects, and other contractual obligations such as operating rents.
Choice Properties REIT 2016 Annual Report 25
Management’s Discussion and Analysis
9.
9.1
QUARTERLY RESULTS OF OPERATIONS
Results by Quarter
The following is a summary of selected consolidated financial information for each of the eight most recently completed quarters.
Selected Quarterly Information
($ thousands except where otherwise
indicated)
(unaudited)
Number of properties
Fourth
Quarter
2016
535
Gross Leasable Area
Third
Quarter
2016
530
42.9
98.8%
196,275
137,835
213,718
0.522
0.521
156,782
0.248
0.200
88.8%
0.1775
13.81
Second
Quarter
2016
529
42.5
98.8%
First
Quarter
2016
519
41.6
98.7%
Fourth
Quarter
2015
519
41.6
98.6%
Third
Quarter
2015
515
41.4
98.5%
Second
Quarter
2015
513
41.3
98.5%
$
$
$
$
$
$
$
$
$
$
197,348
136,727
$
$
192,238
132,445
$
$
191,057
132,133
(559,709) $
(132,655) $
40,401
(1.369) $
(0.325) $
(1.366) $
(0.324) $
108,527
0.249
0.204
82.3%
0.1675
14.20
$
$
$
$
$
30,053
0.251
0.203
82.7%
0.1675
12.37
$
$
$
$
$
0.099
0.099
176,178
0.247
0.201
80.8%
0.1625
11.80
$
$
$
$
$
$
$
$
$
$
187,285
129,986
$
$
183,084
126,861
(173,362) $
188,735
(0.427) $
(0.426) $
145,895
0.241
0.194
83.8%
0.1625
11.50
$
$
$
$
$
0.465
0.472
106,484
0.240
0.191
85.1%
0.1625
10.80
$
$
$
$
$
$
$
$
$
$
First
Quarter
2015
475
39.9
98.3%
181,674
125,285
(211,050)
(0.533)
(0.533)
99,969
0.238
0.191
85.1%
0.1625
11.31
43.6
98.9%
197,713
139,745
255,574
0.623
0.621
233,900
0.251
0.199
89.2%
0.1775
13.47
$
$
$
$
$
$
$
$
$
$
410,557,333
409,244,667
408,860,283
408,459,152
408,063,609
406,379,516
405,659,341
395,976,907
9,435
$
9,156
$
8,950
$
8,730
$
8,906
$
8,603
$
8,465
$
8,159
3,928,714
$ 3,928,649
$ 3,928,664
$ 3,929,021
$ 3,881,390
$ 3,683,372
$ 3,682,198
$ 3,683,129
44.5%
3.5x
45.9%
3.6x
46.5%
3.6x
45.9%
3.6x
44.5%
3.6x
44.9%
3.6x
45.1%
3.5x
45.8%
3.5x
(in millions of square feet)
Occupancy
Rental revenue
Net Operating Income(1)
Net income (loss)
Net income (loss) per unit
Net income (loss) per unit diluted
Cash flows from operating activities(i)
FFO(1) per unit - diluted
AFFO(1) per unit diluted
AFFO(1) payout ratio
Distribution declared per unit
Market price per Unit - closing
Number of Units outstanding
Total assets (in millions)
Long term debt and Class C LP Units
Debt to total assets(ii)
Debt service coverage(1)(ii)
$
$
$
$
$
$
$
$
$
$
$
$
(i)
Cash flows from operating activities are presented before deducting interest paid. Presentation has been updated to exclude leasing capital expenditures.
(ii) 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’ quarterly results were positively impacted by regular acquisition activity and development of additional GLA. In addition,
net income (or net loss) is impacted by fluctuations in adjustments to fair value of Exchangeable Units, investment properties, and unit-based
compensation and therefore is often not comparable from quarter to quarter.
26 Choice Properties REIT 2016 Annual Report
9.2.
Fourth Quarter Results
Choice Properties’ financial results for the three months ended December 31, 2016 and December 31, 2015 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
Share of profit from joint venture
Net Income before Adjustments to Fair Value
Adjustment to fair value of Exchangeable Units
Adjustment to fair value of investment properties
Adjustment to fair value of investment property held in equity
accounted joint venture
Net Income
$
$
$
2016
2015
Variance
favourable /
(unfavourable)
$
148,343
$
140,319
$
48,819
551
197,713
(48,121)
(688)
50,149
589
191,057
(49,072)
(731)
148,904
$
141,254
$
(6,196)
(233)
(96,442)
80
(5,148)
(279)
(87,910)
—
46,113
$
47,917
$
(95,418)
87,902
107,800
101,661
—
8,024
(1,330)
(38)
6,656
951
43
7,650
(1,048)
46
(8,532)
80
(1,804)
203,218
13,759
255,574
$
40,401
$
215,173
—
—
Net Income For the three months ended December 31, 2016, net income was $255,574, an increase of $215,173 compared to the net
income of $40,401 for the same period in 2015, primarily due to favourable changes of $203,218 and $13,759 in the adjustment to the fair
value of Exchangeable Units and the adjustment to the fair value of investment properties, respectively. Adjustments to fair value can vary
widely from quarter to quarter as they are impacted by market factors such as the Trust’s Unit price and market capitalization rates.
Excluding the adjustments to fair value, net income for the three months ended December 31, 2016 was $1,804 lower than the same period
in 2015 primarily because the increase in net interest expense and other financing charges of $8,532 was greater than the $7,650 increase
in net property income. Net interest expense and other financing charges was impacted by the increase to the Trust’s distribution rate as
distributions to Exchangeable Units are treated as expense to the Trust.
Choice Properties REIT 2016 Annual Report 27
Management’s Discussion and Analysis
Rental Revenue Rental revenue is comprised primarily of base rent and recoveries from tenants for property taxes, operating costs and
qualifying capital expenditures. Growth in rental revenue is materially impacted by newly acquired assets. To better measure certain key
performance factors, management further analyzes rental revenue for income producing properties owned by the Trust throughout the current
and comparative reporting periods (“Same Properties”), to remove the impact of recently acquired properties (“Acquisitions”).
For the three months ended December 31,
($ thousands)
(unaudited)
Same Properties(i)
Acquisitions(ii)
Total Revenue
$
$
2016
192,640
5,073
197,713
$
$
2015
190,462
595
191,057
$
$
Variance favourable /
(unfavourable)
2,178
4,478
6,656
(i)
(ii)
There were 512 income producing properties that were owned throughout the three months ended December 31, 2016 and December 31, 2015 (“Same Properties”).
Acquisitions includes properties purchased subsequent to September 30, 2015.
During the three months ended December 31, 2016, rental revenue increased by $6,656, or 3.5% compared to the same period in 2015,
attributable to an increase of $2,178 in revenue from Same Properties and additional rental revenue of $4,478 attributable to properties
acquired subsequent to September 30, 2015. The increase in revenue from Same Properties is attributable to higher revenue generated from
the recovery of capital expenditures of $1,257 and base rent on newly developed GLA of $3,489, partially offset by a decrease of $2,525 in
base rent and net recoveries, which was driven primarily by a decline in property tax recovery revenues due to lower expenses, and a $43
decline in other revenues.
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, 2016, the net amount of these items positively
impacted rental revenue by $8,952 (2015 - $9,020).
Property Operating Costs Property operating costs are comprised primarily of expenses to manage and maintain the properties for the
benefit of the tenants, including realty taxes, that are recoverable under the leases of most tenants. Non-recoverable operating costs include
expenses that do not directly benefit the tenants.
For the three months ended December 31,
($ thousands)
(unaudited)
Same Properties
Acquisitions
Total Property Operating Costs
$
$
2016
47,070
1,739
48,809
$
$
Variance
Favourable /
(Unfavourable)
2,669
(1,675)
994
2015
49,739
64
49,803
$
$
For the three months ended December 31, 2016, property operating costs decreased by $994 or 2.0% compared to the same period in 2015,
attributable to a decrease of $2,669 from Same Properties, and an increase $1,675 from the properties acquired subsequent to September
30, 2015. The decrease in total property operating costs from Same Properties is attributable to a decrease of $2,619 in recoverable operating
costs and a decrease of $50 of non-recoverable operating costs. The decrease of recoverable operating costs was driven by favourable
property tax assessments received in the quarter and timing of other expenses such as repairs and snow removal.
28 Choice Properties REIT 2016 Annual Report
General and Administrative Expenses
For the three months ended December 31,
($ thousands)
(unaudited)
Internal expenses of the Trust
Investor relations and other public entity costs
Professional fees
Services Agreement expense charged by related party(i)
Less:
Property and asset management fee charged to related party(i)
Capitalized to investment properties
Allocated to recoverable operating expenses
General and administrative expenses
Less:
Adjustment to fair value of unit-based compensation(ii)
Internal expenses for leasing(ii)
General and administrative expenses excluding internal expenses for
leasing and adjustment to fair value of unit-based compensation (for use in
calculation of general and administrative expense as a percent of revenue)
As a percentage of revenue
$
$
$
$
2015
6,235
$
Variance
favourable /
(unfavourable)
(1,360)
277
687
785
7,984
(150)
(703)
(1,983)
(69)
44
52
(1,333)
41
16
228
2016
7,595
346
643
733
9,317
(191)
(719)
(2,211)
6,196
$
5,148
$
(1,048)
225
(518)
(379)
(666)
(604)
(148)
5,903
$
3.0%
4,103
$
2.1%
(1,800)
(0.9)%
(i)
The Services Agreement and Property Management Agreement are described in Section 13, “Related Party Transactions”, of this MD&A.
(ii) General and administrative expenses includes the cost of unit-based compensation which was recorded at the fair value of the underlying Trust Units. The adjustment to
the fair value of unit-based compensation was eligible to be added back to FFO(1), in accordance with the Real Property Association of Canada White Paper on Funds
from Operations for IFRS issued in April 2014.
(iii)
Internal expenses for leasing, primarily salaries, were eligible to be added back to FFO(1), based on 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.
General and administrative expenses, excluding adjustment to fair value of unit-based compensation and internal expenses for leasing, for
the three months ended December 31, 2016, increased $1,800, or 0.9% when expressed as a percentage of revenue, over the same period
in 2015. The increase was driven by employee costs.
Choice Properties REIT 2016 Annual Report 29
Management’s Discussion and Analysis
Net Interest Expense and Other Financing Charges
For the three months ended December 31,
($ thousands)
(unaudited)
Interest on senior unsecured debentures
Distributions on Class C LP Units(i)
Interest on mortgage
Interest on credit facilities
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 interest on indebtedness due to Loblaw.
$
$
$
2016
27,540
11,562
36
1,405
40,543
56,444
96,987
97
424
(480)
(586)
Variance
favourable /
(unfavourable)
(2,273)
—
23
(517)
(2,767)
(4,983)
(7,750)
(764)
(71)
15
38
2015
25,267
11,562
59
888
37,776
51,461
89,237
$
$
$
(667)
353
(465)
(548)
96,442
$
87,910
$
(8,532)
$
$
$
$
For the three months ended December 31, 2016, net interest expense and other financing charges increased by $8,532 or 9.7% compared
to the same period in 2015. The increase was due to distributions on the Exchangeable Units as a result of a higher distribution rate and
additional Exchangeable Units issued as partial consideration for properties acquired from Loblaw in 2015 and 2016, and interest incurred
on senior unsecured debentures as a result of net issuances in 2015 and 2016 at higher weighted average interest rates.
30 Choice Properties REIT 2016 Annual Report
9.3
Other Measures of Fourth Quarter Performance
Choice Properties’ FFO(1) and AFFO(1) for the three months ended December 31, 2016 and December 31, 2015 are summarized below:
For the three months ended December 31
($ thousands except where otherwise indicated)
(unaudited)
Net Operating Income(1)
NOI(1) for Same Properties, with the same GLA
Funds from Operations(1)
FFO(1) per unit basic
FFO(1) per unit diluted
FFO(1) payout ratio - diluted
Adjusted Funds from Operations(1)
AFFO(1) per unit basic
AFFO(1) per unit diluted
AFFO(1) payout ratio- diluted
Distribution declared per unit
Weighted average Units outstanding - basic
Weighted average Units outstanding - diluted
Number of Units outstanding, end of period
Net Operating Income(1)
$
$
$
$
$
$
$
$
$
2016
139,745
132,959
103,141
0.251
0.251
70.8%
81,816
0.200
0.199
89.2%
0.1775
$
$
$
$
$
$
$
$
$
410,104,744
411,272,728
410,557,333
Variance
favourable /
(unfavourable)
7,612
1,360
2,617
0.004
0.004
(5.0)%
(171)
(0.002)
(0.002)
(8.4)%
2015
132,133
131,599
100,524
0.247
0.247
65.8%
81,987
0.202
0.201
80.8%
$
$
$
$
$
$
$
$
0.1625
$
407,210,616
407,774,742
408,063,609
0.0150
2,894,128
3,497,986
2,493,724
There is no industry-defined measure of NOI(1). Refer to Section 17, “Non-GAAP Financial Measures”, of this MD&A, for a definition of NOI
(1) and a reconciliation to net income (loss).
Net Operating Income(1) For the three months ended December 31, 2016, NOI(1) increased $7,612, or 5.8%, compared to the same period
in 2015, driven by an increase of $4,849 from Same Properties, and $2,763 from the properties acquired subsequent to September 30, 2015.
Net Operating Income(1) for Same Properties, with the same GLA To better measure certain key performance factors, management further
analyzes NOI(1) for the income producing properties owned by the Trust throughout the current and comparative reporting periods, Same
Properties, to remove the impact from recently acquired properties. Management further refines the analysis to exclude any NOI(1) from
developments which increased GLA in the comparative periods.
For the three months ended December 31, 2016, NOI(1) for Same Properties, measured with the same GLA, increased $1,360,or 1.0%,
compared to the same period in 2015, primarily due to higher revenue generated from capital recoveries of $1,257,and a decrease of $50 in
non-recoverable operating expenses, partially offset by a decrease of $43 in additional other revenue. The quarter-to-date increase was also
due to an increase of $96 in base rent and net recoveries, which was driven by an improvement in ancillary occupancy, higher average rents
per square foot on new ancillary leases and rent steps in Loblaw leases.
Funds from Operations(1)
Choice Properties calculates its FFO(1) in accordance with the Real Property Association of Canada White Paper on Funds from Operations(1)
for IFRS issued in April 2014. Refer to Section 17,”Non-GAAP Financial Measures”, of this MD&A, for a reconciliation of FFO(1) to net income
(loss) determined in accordance with GAAP.
For the three months ended December 31, 2016, FFO(1) increased by $2,617 or 2.6% compared to the same period in 2015. The year-over-
year growth was due to a $7,756 increase in net property income, $80 from the share of income from joint venture and a $46 decrease in
amortization of other assets, partially offset by a $3,465 increase in interest and other financing charges, and a $1,800 increase in general
and administrative expenses.
For the three months ended December 31, 2016, FFO(1) per unit on a diluted basis increased by $0.004 or 1.6% compared to the same period
in 2015.
Choice Properties REIT 2016 Annual Report 31
Management’s Discussion and Analysis
Adjusted Funds from Operations(1)
There is currently no standard industry-defined measure of AFFO(1). 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 with GAAP.
For the three months ended December 31, 2016, AFFO(1) decreased by $171 or 0.2% compared to the same period in 2015. The year-over-
year decrease was due to a $3,801 increase in capital expenditures required to maintain the rental revenue stream of the growing portfolio,
a $2,630 increase in interest and other financing charges,and a $1,584 increase in general and administrative expenses, partially offset by a
$7,718 increase in net property income, $80 from the share of income from joint venture and a $46 decrease in amortization of other assets.
For the three months ended December 31, 2016, AFFO(1) per unit on a diluted basis decreased by $0.002 or 1.0% compared to the same period
in 2015. 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 $17,697 AFFO(1) would have been $77,665 or $0.189 per unit on a diluted basis (2015 - $63,295 or
$0.155).
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, 2016.
11.
INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is also responsible for establishing and maintaining adequate internal controls over financial reporting to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial reports for external purposes in accordance with IFRS.
As required by NI 52-109, the President and 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,
2016.
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. 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 2016 that materially affected, or are reasonably likely to materially affect, the Trust’s internal control over financial reporting.
32 Choice Properties REIT 2016 Annual Report
12.
ENTERPRISE RISKS AND RISK MANAGEMENT
Choice Properties is committed to maintaining a framework that ensures risk management is an integral part of its activities. To ensure the
continued growth and success of the Trust, risks are identified and managed through the Trust’s Enterprise Risk Management (“ERM”) program.
The ERM program assists all areas of the business in managing risks within appropriate levels of tolerance by bringing a systematic approach
and methodology 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 mitigation activities and develop a risk-based internal audit plan.
Risks are not eliminated through the ERM program, but rather, are identified and managed in line with the Trust’s risk appetite and within
understood risk tolerances. The ERM program is designed to:
•
•
•
•
•
•
facilitate effective corporate governance by providing a consolidated view of risks across the Trust;
enable the Trust to focus on key risks that could impact its strategic objectives in order to reduce harm to financial performance
through responsible risk management;
ensure that the Trust’s risk appetite and tolerances are defined and understood;
promote a culture of awareness of risk management and compliance within Choice Properties;
assist in developing consistent risk management methodologies and tools across the Trust including methodologies for the
identification, assessment, measurement and monitoring of risks; and
anticipate and provide early warnings of risks through key risk indicators.
The Board of Trustees oversee the ERM program, including a review of the Trust’s risks and risk prioritization, annual approval of the ERM
policy and risk appetite framework. The risk appetite framework articulates key aspects of the Trust, values, and brands and provides directional
guidance on risk taking. Key risk indicators are used to monitor and report on risk performance and whether Choice Properties is operating
within its risk appetite. Risk owners are assigned relevant risks by the Board and are responsible for managing risk and implementing risk
mitigation strategies.
Risk identification and assessments are important elements of the Trust’s ERM process and framework. An annual ERM assessment is
completed to assist in the update and identification of internal and external risks. This assessment is carried out in parallel with strategic
planning through interviews, surveys and facilitated workshops with management and the Board of Trustees to align stakeholder views. 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 on its strategies and achieve its objectives.
At least semi-annually, management provides an update to the Board of Trustees (or a Committee of the Board) on the status of the key 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 (three year) risk level is assessed to monitor potential long term risk impacts, which may assist in risk mitigation planning
activities.
Any of these risks has the potential to negatively affect the Trust and its financial performance. Choice Properties has risk management
strategies in place for key risks. However, there can be no assurance that the risks will be mitigated or will not materialize or that events or
circumstances will not occur that could adversely affect the reputation, operations or financial condition or performance of the Trust.
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, 2016, 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
Current Economic Environment
Choice Properties REIT 2016 Annual Report 33
Management’s Discussion and Analysis
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, occupancy, land use and other regulatory and government
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) occupancy
rates and rents of a completed project may not be sufficient to make the project profitable; (k) 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 (l) 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
development activities or the completion of development activities once undertaken. In addition, development 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 major renovation initiatives may negatively impact the reputation and financial performance of the Trust.
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.
Choice Properties may not be able to negotiate contract 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
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
owing 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
Interest Rate Risk
Liquidity of Real Property
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 flows generated by the properties is devoted to servicing such outstanding debt, there can
be no assurance that Choice Properties will continue to generate sufficient cash flows from operations to meet interest and principal payment
obligations upon an applicable maturity date. If Choice Properties is unable to meet interest or principal payment 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 existing credit facilities, 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
34 Choice Properties REIT 2016 Annual Report
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.
Interest Rate Risk Choice Properties requires extensive financial resources to complete the implementation of its investment and growth
strategy. Successful implementation of Choice Properties’ long-term strategy will require cost effective access to additional funding. There is
a risk that interest rates may increase which could impact long-term borrowing costs and negatively impact financial performance.
The majority of Choice Properties’ debt is financed at fixed rates with maturities staggered over 30 years, thereby mitigating the exposure to
near term changes in interest rates. To the extent that Choice Properties incurs variable rate indebtedness (such as borrowings under the
credit facilities), 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 the amount of cash available for distribution
to Unitholders would be decreased.
Choice Properties’ credit facilities 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.
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.
Liquidity of Real Property An investment in real estate is relatively illiquid. Such illiquidity will tend to limit Choice Properties’ ability to vary
its portfolio promptly in response to changing economic or investment conditions. In recessionary times, it may be difficult to dispose of certain
types of real estate. The costs of holding real estate are considerable and during an economic recession Choice Properties may be faced
with ongoing expenditures with a declining prospect of incoming receipts. In such circumstances, it may be necessary for Choice Properties
to dispose of properties at lower prices in order to generate sufficient cash for operations and for making distributions to Unitholders.
Unit Price Risk Choice Properties is exposed to Unit price risk as a result of the issuance of the Class B LP Units, which are economically
equivalent to and exchangeable for Units, as well as the issuance of unit-based compensation. The Class B LP Units and unit-based
compensation liabilities are recorded at their fair value based on market trading prices. The Class B LP 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, derivatives and notes receivable.
Choice Properties mitigates the risk of credit loss related to rent receivables by evaluating the creditworthiness of new tenants, obtaining
security deposits wherever permitted by legislation, ensuring its tenant mix is diversified and by limiting its exposure to any one tenant (except
Loblaw). Choice Properties establishes an allowance for doubtful accounts that represents the estimated losses with respect to rent receivables.
The allowance is determined on a tenant-by-tenant basis based on the specific factors related to the tenant.
The risk related to cash and cash equivalents, short term investments, security deposits, derivatives 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 flows 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 flows, the trading price
of the Units, distributions to Unitholders and its ability to satisfy principal and interest obligations on its outstanding debt.
Choice Properties REIT 2016 Annual Report 35
Management’s Discussion and Analysis
13.
RELATED PARTY TRANSACTIONS
Choice Properties’ parent corporation is Loblaw, which held an 82.7% effective interest in the Trust through ownership of 21,500,000 Units
and all of the Exchangeable Units as at December 31, 2016 (December 31, 2015 - 83.0% and 21,500,000 Units respectively). Loblaw’s
majority shareholder, GWL, held approximately 47% ownership of Loblaw’s outstanding common shares and a 5.8% direct interest in Choice
Properties, through ownership of 23,997,222 Units as at December 31, 2016 (December 31, 2015 - 5.6% and 22,732,062 Units respectively).
Loblaw is also Choice Properties’ largest tenant, representing approximately 90.0% of Choice Properties’ annual base rent and 88.3% of its
GLA as at December 31, 2016 (December 31, 2015 - 91.1% and 89.1% respectively).
In 2016, the Trust acquired 15 investment properties from Loblaw. The acquisition added approximately 1.1 million square feet of GLA across
Canada at a purchase price of $158,060, excluding acquisition costs and other adjustments. The acquisitions from Loblaw are disclosed in
Section 5.2, “Acquisition of Investment Properties”, of this MD&A.
In December 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
majority interest in GWL. Choice Properties did not make any contributions to the joint venture during the year ended December 31, 2016,
but did receive a distribution from the joint venture of $4,000 (year ended December 31, 2015 - contributions $3,120 and distributions nil).
Operating activities have not begun at the property, however the joint venture did earn interest income in the year ended December 31, 2016
(December 31, 2015 - nil).
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 initial public offering, and will
continue until the earlier of 20 years from the initial public offering 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. In accordance with the Strategic
Alliance Agreement, Choice Properties will compensate Loblaw, over time, with intensification payments, 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 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 one-year term expiring December 31, 2016 and the parties have
agreed to extend the agreement until December 31, 2017.
Property Management Agreement
Choice Properties provides Loblaw with property and asset management services for Loblaw’s properties with third-party tenancies on a fee
for service basis, in accordance with the Property Management Agreement, subject to automatic one-year renewals.
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, 2016 and 2015.
36 Choice Properties REIT 2016 Annual Report
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.
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 2016 Annual Report 37
Management’s Discussion and Analysis
15.
ACCOUNTING STANDARDS
Accounting Standards Implemented in 2016
In 2014, the IASB issued amendments to IAS 1, “Presentation of Financial Statements”. The Trust implemented these amendments
prospectively in the first quarter of 2016. There was no impact on the Trust’s consolidated financial statements as a result of the implementation
of this amendment.
Future Accounting Standards
IFRS 15 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.
The Trust intends to adopt IFRS 15 and the clarifications in its financial statements for the annual period beginning on January 1, 2018. The
Trust does not expect the standard to have a material impact on the financial statements.
IFRS 9 In 2014, the IASB issued IFRS 9, “Financial Instruments” (“IFRS 9”), replacing IAS 39, “Financial Instruments: Recognition and
Measurement” (“IAS 39”). 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.
Classification and Measurement IFRS 9 contains a new classification and measurement approach for financial assets that reflects the
business model in which assets are managed and their cash flow characteristics. IFRS 9 largely retains the existing requirements in IAS 39
for the classification of financial liabilities.
Impairment IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with a forward-looking ‘expected credit loss’ model. The new impairment
model will apply to financial assets measured at amortized cost or those measured at fair value through other comprehensive income, except
for investments in equity instruments and contract assets.
General Hedging IFRS 9 will require the Trust to ensure that hedge accounting relationships are aligned with the Trust’s risk management
objectives and strategy and to apply a more qualitative and forward-looking approach to assessing hedge effectiveness.
The Trust intends to adopt IFRS 9 in its financial statements for the annual period beginning on January 1, 2018. The Trust does not expect
the standard to have a material impact on the financial statements.
IFRS 16 In January 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. For leases where the Trust is the lessee, the option exists of adopting a full
retrospective approach or a modified retrospective approach on transition to IFRS 16. While early adoption is permitted, if IFRS 15 has already
been adopted, the Trust will not early adopt IFRS 16.
The Trust intends to adopt IFRS 16 in its financial statements for the annual period beginning on January 1, 2019. It is expected that IFRS
16 will affect the Trust in its capacity as lessee of office space. The Trust will recognize a liability for the present value of future lease liabilities
and record a corresponding asset on the balance sheet. The nature and timing of the related expenses will change as IFRS 16 replaces the
straight-line operating lease expense with a depreciation charge for right-of-use assets and interest expense on lease liabilities. The Trust is
currently assessing the impact of the standard on the financial statements.
38 Choice Properties REIT 2016 Annual Report
16.
OUTLOOK (2)
Choice Properties continues to drive value creation through accretive acquisitions, strategic development and active management of its
portfolio of properties. This strategy supports the Trust’s goal to expand its asset base and increase monthly distributions to unitholders.
Choice Properties is well positioned to meet its current obligations and to invest for future growth. The Trust’s competitive advantages include:
a sizable asset base that is geographically diverse across Canada; long-term leases and a strategic alliance with Loblaw; and an existing
development pipeline, supported by sound financial management focused on maintaining a solid balance sheet and its investment grade
credit ratings.
In 2017, Choice Properties expects to:
•
•
•
Acquire additional properties from Loblaw and third-party vendors on an accretive basis when opportunities arise;
Invest approximately $192,100 in development projects expected to be completed in 2017 and future ongoing projects;
Complete the development of approximately 337,000 square feet of GLA with an expected yield ranging from 6% to 9%;
• Maintain a total occupancy rate of approximately 98%, with the occupancy rate for ancillary GLA in the 90% range; and
•
Continue to align growth in distributions with stable, growing cash flows.
Choice Properties REIT 2016 Annual Report 39
Management’s Discussion and Analysis
17.
NON-GAAP FINANCIAL MEASURES
Choice Properties reports non-GAAP financial measures, including, but not limited to, Net Operating Income (“NOI”), Funds from Operations
(“FFO”), Adjusted Funds from Operations (“AFFO”), and Earnings before Interest, Taxes, Depreciation, Amortization and Fair Value
(“EBITDAFV”). The Trust believes these non-GAAP financial measures provide useful information to both management and investors in
measuring the financial performance and financial condition of the Trust.
Management uses these and other non-GAAP financial measures to exclude the impact of certain expenses and income that must be
recognized under IFRS when analyzing operating performance, as the excluded items are not necessarily reflective of Choice Properties’
underlying operating performance or impact the comparability of financial performance between periods.
These measures do not have a standardized meaning prescribed by IFRS and therefore they may not be comparable to similarly titled
measures presented by other publicly traded REITs, and should not be construed as an alternative to other financial measures determined
in accordance with IFRS.
17.1
Net Operating Income
NOI is defined as rental revenue, excluding straight-line rent, from investment properties less property operating costs. 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 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
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
expenses
Amortization of other assets
Net interest expense and other
financing charges
Share of income from joint venture
Adjustment to fair value of
Exchangeable Units
Adjustment to fair value of
investment properties
Adjustment to fair value of
investment property held in equity
accounted joint venture
Three Months
Year End
2016
255,574
$
$
2015
40,401
Variance
Favourable /
(Unfavourable)
215,173
$
2016
$ (223,072)
2015
$ (155,276) $
Variance
Favourable /
(Unfavourable)
(67,796)
(9,159)
(9,121)
(38)
(36,582)
(36,656)
6,196
233
96,442
(80)
5,148
279
87,910
—
1,048
(46)
8,532
(80)
28,117
930
21,765
844
370,533
345,051
(80)
—
74
6,352
86
25,482
(80)
(107,800)
95,418
(203,218)
529,591
410,518
119,073
(101,661)
(87,902)
(13,759)
(109,045)
(71,981)
(37,064)
—
—
—
(13,640)
—
(13,640)
Net Operating Income
$
139,745
$
132,133
$
7,612
$
546,752
$
514,265
$
32,487
40 Choice Properties REIT 2016 Annual Report
To better measure certain key performance factors, management further analyzes NOI for the income producing properties owned by the
Trust throughout the current and comparative reporting periods, Same Properties, to remove the impact of recently acquired properties,
Acquisitions. Management further refines the analysis to exclude any NOI from developments, which increased GLA in the comparative
periods. The number of Same Properties was 512 and 470 for the three months and years ended December 31, 2016 and December 31,
2015, respectively. The following table analyzes the components of NOI:
2016
2015
For the three months ended December 31
($ thousands)
(unaudited)
Rental revenue
Less: Straight-line rental revenue
Property operating costs
Net Operating Income
Less: NOI from developed GLA
NOI for Same Properties, with
the same GLA
$
$
$
Same
Properties
192,640
(8,897)
183,743
(47,070)
Acquisitions(i)
5,073
$
All Properties
197,713
$
$
(262)
4,811
(1,739)
(9,159)
188,554
(48,809)
Same
Properties
190,462
(8,899)
181,563
(49,739)
Acquisitions(i)
595
$
All Properties
191,057
$
(222)
373
(64)
(9,121)
181,936
(49,803)
136,673
$
3,072
$
139,745
$
131,824
$
309
$
132,133
(3,714)
(64)
(3,778)
(225)
—
(225)
132,959
$
3,008
$
135,967
$
131,599
$
309
$
131,908
(i)
Properties acquired subsequent to September 30, 2015 (see Section 18 Additional Information).
2016
2015
For the years ended December 31
($ thousands)
(unaudited)
Rental revenue
Less: Straight-line rental revenue
Property operating costs
Same
Properties
738,407
$
(34,078)
704,329
(188,723)
Acquisitions(i)
45,167
$
All Properties
783,574
$
$
(2,504)
42,663
(11,517)
(36,582)
746,992
(200,240)
Same
Properties
720,645
(35,041)
685,604
(186,362)
Acquisitions(i)
22,455
$
All Properties
743,100
$
(1,615)
20,840
(5,817)
(36,656)
706,444
(192,179)
Net Operating Income
$
515,606
$
31,146
$
546,752
$
499,242
$
15,023
$
514,265
Less: NOI from developed GLA
(7,897)
(851)
(8,748)
(406)
—
(406)
NOI for Same Properties, with
the same GLA
$
507,709
$
30,295
$
538,004
$
498,836
$
15,023
$
513,859
(i)
Properties acquired subsequent to December 31, 2014 (see Section 18 Additional Information).
Choice Properties REIT 2016 Annual Report 41
Management’s Discussion and Analysis
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. An advantage of the FFO measure is improved comparability between
Canadian and foreign real estate investment trusts.
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 arise from operating activities or 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
Adjustment to fair value of
investment property held in
equity accounted joint
venture
Interest otherwise capitalized
for development in equity
accounted joint venture(i)
Exchangeable Units
distributions
Amortization of tenant
improvement allowances
Internal expenses for leasing
Funds from Operations
FFO per unit - diluted
FFO payout ratio - diluted(ii)
Distribution declared per unit
Weighted average Units
outstanding - diluted
Three Months
2016
255,574
$
$
2015
40,401
Variance
Favourable /
(Unfavourable)
215,173
$
2016
(223,072)
$
$
Year End
Variance
Favourable /
(Unfavourable)
(67,796)
2015
(155,276) $
(107,800)
95,418
(203,218)
529,591
410,518
119,073
(101,661)
(87,902)
(13,759)
(109,045)
(71,981)
(37,064)
(225)
379
(604)
4,309
888
3,421
—
84
—
—
—
84
(13,640)
324
—
—
(13,640)
324
56,444
51,461
4,983
218,961
202,804
16,157
207
518
103,141
0.251
70.8%
0.1775
$
$
$
101
666
100,524
0.247
65.8%
$
$
0.1625
$
$
$
$
106
(148)
2,617
0.004
(5.0)%
0.0150
572
2,135
410,135
1.000
69.0%
0.6900
$
$
$
251
1,771
388,975
0.966
67.3%
$
$
0.6500
$
$
$
$
321
364
21,160
0.034
(1.7)%
0.0400
411,272,728
407,774,742
3,497,986
410,034,555
402,582,183
7,452,372
(i)
Interest expensed in the Trust, relating to qualifying development projects underway in the equity accounted joint venture, was eligible to be added back to FFO in
accordance with the Real Property Association of Canada White Paper on Funds from Operations for IFRS issued in April 2014.
(ii)
Funds from Operations Payout Ratio is calculated as the distribution declared per unit divided by the FFO per unit diluted.
42 Choice Properties REIT 2016 Annual Report
17.3
Adjusted Funds from Operations
AFFO is a supplemental measure of operating performance widely used in the real estate industry. 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.
Choice Properties calculates AFFO by adjusting FFO for non-cash income and expense items such as amortization of straight-line rents and
finance charges. AFFO also includes a reduction for property capital expenditures, required for sustaining productive capacity and revenue
from real estate properties, and direct leasing costs. Property capital expenditures do not occur evenly over the fiscal year. The property
capital expenditures in the AFFO calculation are adjusted to reflect an average annual spending level.
There is currently no standard industry-defined measure of AFFO. As such, Choice Properties’ method of calculating AFFO may differ from
that of other real estate entities and, accordingly, may not be comparable to such amounts reported by other issuers.
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 calculates AFFO from FFO, as previously presented, for the periods ended as
indicated:
Three Months
Year End
2016
103,141
$
2015
100,524
$
Variance
Favourable /
(Unfavourable)
2,617
$
2016
410,135
2015
388,975
$
$
Variance
Favourable /
(Unfavourable)
21,160
$
For the periods ended December 31,
($ thousands)
(unaudited)
Funds from Operations
Add (deduct) impact of the
following:
Straight-line rental revenue
(9,159)
(9,121)
(38)
(36,582)
(36,656)
74
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 - diluted(ii)
Distribution declared per unit
Weighted average Units
outstanding - diluted
521
859
(314)
643
835
216
1,117
3,152
(1,227)
2,139
2,344
1,013
(16,343)
(24,653)
8,310
(42,192)
(32,466)
(9,726)
4,151
18,692
(14,541)
—
—
—
(1,354)
(3,784)
2,430
(5,384)
(7,884)
2,500
$
$
$
81,816
0.199
89.2%
0.1775
$
$
$
$
$
81,987
0.201
80.8%
0.1625
$
(171)
(0.002)
(8.4)%
0.0150
$
$
$
330,246
0.805
85.7%
0.6900
$
$
$
$
$
312,881
0.777
83.7%
0.6500
$
17,365
0.028
(2.0)%
0.0400
411,272,728
407,774,742
3,497,986
410,034,555
402,582,183
7,452,372
(i)
Seasonality impacts the timing of capital expenditures. The AFFO calculations for the three months ended December 31, 2016 and December 31, 2015 were adjusted for
this factor to make the quarters more comparable(2).
(i)
Adjusted Funds from Operations Payout Ratio is calculated as the distribution declared per unit divided by the AFFO per unit diluted.
Choice Properties REIT 2016 Annual Report 43
Management’s Discussion and Analysis
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
2016
2015
Variance
Favourable /
(Unfavourable)
2016
2015
Variance
Favourable /
(Unfavourable)
$
233,900
$
176,178
$
57,722
$
530,622
$
528,526
$
(13,893)
(13,713)
(180)
(156,297)
(144,528)
2,096
(11,769)
activities
$
220,007
$
162,465
$
57,542
$
374,325
$
383,998
$
(9,673)
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
(99,497)
(233)
(48,050)
(279)
(51,447)
46
(3,852)
(930)
(32,649)
(844)
28,797
(86)
(16,343)
(24,653)
8,310
(42,192)
(32,466)
(9,726)
capital expenditures - normalized(i)
4,151
18,692
(14,541)
—
—
Leasing capital expenditures -
incurred
Internal expenses for leasing
Interest otherwise capitalized for
development in equity accounted
joint venture(ii)
Gain on settlement of bond forward
contracts
Share of income from joint venture
Excess of interest paid over interest
(1,354)
518
(3,784)
666
2,430
(148)
(5,384)
2,135
(7,884)
1,771
84
—
80
—
—
—
84
—
80
324
2,682
80
—
—
—
accrued
(25,597)
(23,070)
(2,527)
3,058
955
Adjusted Funds from Operations
$
81,816
$
81,987
$
(171)
$
330,246
$
312,881
$
—
2,500
364
324
2,682
80
2,103
17,365
(i)
(ii)
Seasonality impacts the timing of capital expenditures. The AFFO calculations for the three months ended December 31, 2016 and December 31, 2015 were adjusted
for this factor to make the quarters more comparable(2).
Interest expensed in the Trust, relating to qualifying development projects underway in the equity accounted joint venture, was eligible to be added back to FFO in
accordance with the Real Property Association of Canada White Paper on Funds from Operations for IFRS issued in April 2014.
44 Choice Properties REIT 2016 Annual Report
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
Adjustment to fair value of
investment property held in equity
accounted joint venture
Interest expense(i)
Amortization of other assets
Earnings Before Interest, Taxes,
Depreciation, Amortization
and Fair Value
Three Months
2016
255,574
$
$
2015
40,401
Variance
Favourable /
(Unfavourable)
215,173
$
2016
$ (223,072)
Year End
2015
$ (155,276) $
Variance
Favourable /
(Unfavourable)
(67,796)
(107,800)
95,418
(203,218)
529,591
410,518
119,073
(101,661)
(87,902)
(13,759)
(109,045)
(71,981)
(37,064)
(225)
379
(604)
4,309
888
3,421
—
96,987
233
—
89,237
279
—
7,750
(46)
(13,640)
377,956
930
—
349,865
844
(13,640)
28,091
86
$
143,108
$
137,812
$
5,296
$
567,029
$
534,858
$
32,171
(i)
As calculated in Section 6, “Results of Operations” and Section 9.2 “Fourth Quarter Results” of this MD&A.
Choice Properties REIT 2016 Annual Report 45
Management’s Discussion and Analysis
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 ended December 31, 2016 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
69 King St., Harrow, ON
971 Carrick St., Thunder Bay, ON
18765 Fraser Hwy., Surrey, BC
1460 East Hastings St., Vancouver, BC
8121 - 118 Avenue NW, Edmonton, AB
100 Westpark Blvd., Fort Saskatchewan, AB
600 Notre Dame Ave., Winnipeg, MB
3 Philip Place, Kincardine, ON
9970 Main St., Lake Country, BC
18800 Lougheed Hwy., Pitt Meadows, BC
1400 Neilson Rd., Toronto, ON
3-12 Huron Walk, Manitouwadge, ON
1250 South Service Rd., Mississauga, ON
10 DeWare Dr., Moncton, NB
167 Ave & McConachie Way, Edmonton, AB
Acquistions from Third-Parties
4211 - 139 Avenue NW, Edmonton, AB
789 - 795 Ryan Road, Courtenay, BC
20 Beaver Avenue, Beaverton, ON
May 12, 2016
May 12, 2016
May 12, 2016
May 12, 2016
May 12, 2016
May 12, 2016
May 12, 2016
May 12, 2016
May 12, 2016
May 12, 2016
October 26, 2016
October 26, 2016
October 26, 2016
October 26, 2016
October 26, 2016
Stand-alone retail
Stand-alone retail
Stand-alone retail
Stand-alone retail
Stand-alone retail
Stand-alone retail
Stand-alone retail
Multi-tenant retail
Multi-tenant retail
Industrial
Stand-alone retail
Multi-tenant retail
Multi-tenant retail
Industrial
Land
August 17, 2016
Multi-tenant retail
December 22, 2016 Multi-tenant retail
December 22, 2016 Multi-tenant retail
10,671
140,181
41,029
21,060
10,482
17,237
25,346
46,221
13,624
355,316
17,065
21,598
129,381
225,990
N/A
67,181
32,652
3,891
1,178,925
100%
100%
100%
100%
100%
100%
100%
56%
75%
100%
100%
95%
100%
100%
N/A
93%
88%
100%
97%
46 Choice Properties REIT 2016 Annual Report
The following details the acquisitions for the year ended December 31, 2015:
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
Industrial
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 2016 Annual Report 47
49
50
51
52
53
54
55
55
55
60
61
62
63
65
67
67
68
70
71
72
74
75
75
75
76
77
78
79
82
Consolidated Financial Statements
Management’s Statement of Responsibility for Financial Reporting
Independent Auditor’s Report
Consolidated Balance Sheets
Consolidated Statements of Loss and Comprehensive 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
48 Choice Properties REIT 2016 Annual Report
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 Review (“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 as issued by the International Accounting Standards Board. 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 15, 2017
[signed]
John R. Morrison
President and Chief Executive Officer
[signed]
Bart Munn, CPA, CA
Executive Vice President, Chief Financial Officer
Choice Properties REIT 2016 Annual Report 49
KPMG LLP
Bay Adelaide Centre
333 Bay Street, Suite 4600
Toronto ON M5H 2S5
Canada
Tel 416-777-8500
Fax 416-777-8818
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, 2016 and December 31,
2015, the consolidated statements of loss and comprehensive 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, 2016 and December 31,
2015, 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 15, 2017
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 joint venture (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 facilities (note 10)
Exchangeable Units (note 11)
Trade payables and other liabilities (note 12)
Current Liabilities
Long term debt and Class C LP Units (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 9,10 and 17).
See accompanying notes to the consolidated financial statements.
Approved on behalf of the Board of Trustees
[signed]
Galen G. Weston
Board of Trustees Chairman
As at
As at
December 31, 2016
December 31, 2015
$
9,098,000
$
8,561,000
19,070
5,888
2,360
9,350
9,874
2,179
9,125,318
8,582,403
14,882
290,009
5,113
310,004
6,240
272,892
44,354
323,486
9,435,322
$
8,905,889
3,726,991
$
3,579,202
$
$
172,000
4,283,304
1,397
8,183,692
201,723
472,762
674,485
8,858,177
569,374
7,771
577,145
—
3,741,895
1,354
7,322,451
302,188
438,177
740,365
8,062,816
835,317
7,756
843,073
$
9,435,322
$
8,905,889
[signed]
Paul R. Weiss
Audit Committee Chairman
Choice Properties REIT 2016 Annual Report 51
Choice Properties Real Estate Investment Trust
Consolidated Statements of Loss and Comprehensive Loss
(in thousands of Canadian dollars)
Net Property Income
Year ended
December 31, 2016
Year ended
December 31, 2015
Rental revenue from investment properties (note 14)
$
783,574
$
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)
Share of income from joint venture (note 7)
Adjustment to fair value of Exchangeable Units (note 11)
Adjustment to fair value of investment properties (note 6)
Net Loss and Comprehensive Loss
Net Loss and Comprehensive Loss attributable to:
Choice Properties’ Unitholders
Non-controlling interests (note 7)
See accompanying notes to the consolidated financial statements.
(200,240)
583,334
(28,117)
(930)
(370,533)
13,720
(529,591)
109,045
(223,072)
$
(223,072)
—
(223,072)
$
$
$
$
$
743,100
(192,179)
550,921
(21,765)
(844)
(345,051)
—
(410,518)
71,981
(155,276)
(155,276)
—
(155,276)
52 Choice Properties REIT 2016 Annual Report
Choice Properties Real Estate Investment Trust
Consolidated Statements of Changes in Equity
For the year end ended December 31, 2016
(in thousands of Canadian dollars)
Equity, December 31, 2015
Net loss
Distributions
Issuance of Units under the Distribution
Reinvestment Plan (note 11)
19,587
Issuance of Units under unit-based
compensation arrangement (note 11)
Contribution from non-controlling
interest (note 7)
901
—
Attributable to Choice Properties Unitholders
Trust
Units
867,849
$
Cumulative
net income
(loss)
111,486
$
Cumulative
distributions
to Unitholders
$
(144,018) $
Total
Unitholders’
equity
835,317
Non-
controlling
interests
7,756
$
$
—
—
(223,072)
—
—
—
—
—
(63,359)
(223,072)
(63,359)
—
—
—
19,587
901
—
—
—
—
—
15
Total
equity
843,073
(223,072)
(63,359)
19,587
901
15
Equity, December 31, 2016
$
888,337
$
(111,586) $
(207,377) $
569,374
$
7,771
$
577,145
Attributable to Choice Properties Unitholders
For the year end ended December 31, 2015
(in thousands of Canadian dollars)
Equity, December 31, 2014
Trust
Units
849,337
$
$
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
394
—
Cumulative
net income
(loss)
266,762
(155,276)
—
—
—
—
Cumulative
distributions to
Unitholders
Total
Unitholders’
equity
(85,398) $ 1,030,701
$
—
(58,620)
(155,276)
(58,620)
—
—
—
18,118
394
—
Non-
controlling
interests
7,696
$
—
—
—
—
60
Total
equity
$ 1,038,397
(155,276)
(58,620)
18,118
394
60
Equity, December 31, 2015
$
867,849
$
111,486
$
(144,018) $
835,317
$
7,756
$
843,073
See accompanying notes to the consolidated financial statements.
Choice Properties REIT 2016 Annual Report 53
Choice Properties Real Estate Investment Trust
Consolidated Statements of Cash Flows
(in thousands of Canadian dollars)
Operating Activities
Net loss
Straight-line rental revenue
Amortization of tenant improvement allowances
Amortization of other assets
Net interest expense and other financing charges (note 15)
Unit-based compensation expense (note 13)
Share of income from joint venture (note 7)
Adjustment to fair value of Exchangeable Units (note 11)
Adjustment to fair value of investment properties (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 distribution (contribution) (note 7)
Cash Flows used in Investing Activities
Financing Activities
Long term debt
Issued - Senior unsecured debentures, net of debt placement costs (note 10)
Principal repayments - Senior unsecured debentures (note 10)
Principal repayments - Mortgage (note 10)
Gain on settlement of bond forward contracts (note 15)
Credit facilities
Net advancements (repayments) (note 10)
Debt placement costs (note 10)
Notes receivable
Issued to related party (note 9)
Repaid by related party (note 9)
Cash received on exercise of options
Cash paid on vesting of restricted units
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
Supplemental disclosure of non-cash operating, investing and financing activities (note 22).
See accompanying notes to the consolidated financial statements.
54 Choice Properties REIT 2016 Annual Report
Year ended
December 31, 2016
Year ended
December 31, 2015
$
$
(223,072)
(36,582)
572
930
370,533
7,461
(13,720)
529,591
(109,045)
102
3,852
530,622
(183,688)
(193,120)
(384)
—
4,000
(373,192)
347,714
(300,000)
(1,212)
2,682
172,000
(275)
(263,574)
248,463
732
(1,493)
(156,297)
(202,204)
(43,222)
15
(196,671)
(39,241)
44,354
5,113
$
$
(155,276)
(36,656)
251
844
345,051
3,027
—
410,518
(71,981)
99
32,649
528,526
(247,404)
(169,871)
(480)
(1,565)
(3,120)
(422,440)
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
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 is an owner, manager and developer of well-located retail and other commercial real estate across 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 82.7% effective interest in Choice Properties as at December 31, 2016. Loblaw’s
majority shareholder is George Weston Limited (“GWL”), which owns approximately 47% of Loblaw’s outstanding common shares and a 5.8%
direct interest in Choice Properties as at December 31, 2016.
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 15, 2017.
Basis of Preparation The consolidated financial statements were prepared on a historical cost basis except for the following items which
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.
Choice Properties REIT 2016 Annual Report 55
Notes to the Consolidated Financial Statements
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 the
Trust to earn rental income or for capital appreciation or both.
Acquired investment properties are initially measured at cost, including directly attributable acquisition costs, when the transactions are deemed
to be asset acquisitions.
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 discounted cash flow projections or recent transaction
prices in less active markets. 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.
Properties under development are transferred to income producing properties, at their fair value, upon practical completion of a development.
The Trust considers practical completion to have occurred when the property is capable of operating in the manner intended by management.
Generally this occurs upon completion of construction and receipt of all necessary occupancy and other material permits. Where the Trust
has pre-leased space under development and the lease requires the Trust to construct tenant improvements which enhance the value of the
property, practical completion is considered to occur on completion of such improvements.
Investment properties that are expected to be recovered primarily through sale rather than through continued use are classified as held for
sale. For this purpose, a sale is highly probable if management is committed to a plan to achieve the sale; there is an active program to find
a buyer; the investment property is being actively marketed at a reasonable price; the sale is anticipated to be completed within one year from
the date of classification; and it is unlikely there will be changes to the plan.
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.
Subsequent 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.
Capital Expenditures Capital expenditures include development capital and building improvements.
Development capital includes costs from expansion or redevelopment projects on existing income producing properties and development
projects on properties under development. These projects result in additional gross leasable area and improved productive capacity. Costs
capitalized in development capital include:
•
•
•
Permits, architect fees, hard construction costs;
Payments to tenants under lease obligations when the payment is reimbursement for construction which Choice Properties will receive
benefit after the tenant vacates; and
Site intensification payments, project management fees, professional fees, and property taxes.
Building improvements include costs capitalized due to structural changes to income producing properties, not directly associated with
expansion, redevelopment or development projects, such as permit fees, architect fees and hard construction costs.
Capitalized Interest 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.
56 Choice Properties REIT 2016 Annual Report
Operating Capital Expenditures Operating capital expenditures incurred to sustain the income producing properties’ productive capacity
include:
•
•
•
property capital expenditures, such as parking lot resurfacing and roof replacement, which are recoverable from tenants under the terms
of their leases over the useful life of the improvements;
initial direct leasing costs incurred by Choice Properties with third-parties in negotiating and arranging tenant leases; and
payments to tenants under lease obligations.
Payments to tenants based on lease obligations are characterized either as tenant improvements, or tenant inducements. 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.
Cash and Cash Equivalents Cash and cash equivalents consists of unrestricted cash on hand and marketable investments with an original
maturity date of 90 days or less from the date of acquisition.
Financial Instruments Financial assets and liabilities are recognized when Choice Properties becomes a party to the contractual provision
of the financial instrument. Financial instruments, upon initial recognition, are measured at fair value and classified as either financial assets
or financial liabilities at fair value through profit or loss, held-to-maturity investments, loans and receivables, or other financial liabilities. Financial
instruments are included on the consolidated balance sheet and measured after initial recognition at fair value, except for loans and receivables,
held-to-maturity financial assets, and other financial liabilities, which are measured at amortized cost.
Classification The following summarizes the classification and measurement of financial assets and liabilities:
Classification
Measurement
Financial assets
Accounts receivable
Notes receivable
Cash and cash equivalents
Financial liabilities
Long term debt and Class C LP Units:
Senior unsecured debentures
Class C LP Units
Mortgages
Credit facilities
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).
Choice Properties REIT 2016 Annual Report 57
Notes to the Consolidated Financial Statements
Determination of fair value and the resulting hierarchy requires the use of observable market data whenever available. The classification of
a financial instrument in the hierarchy is based upon the lowest level of input that is significant to the measurement of fair value.
Acquisition costs, other than those related to financial instruments classified as fair value through profit or loss which are expensed as incurred,
are capitalized to the carrying amount of the instrument and amortized using the effective interest method.
Gains and losses on fair value through profit or loss financial assets and financial liabilities are recognized in net income.
Valuation process The determination of the fair value of financial instruments is performed by Choice Properties’ treasury and financial
reporting departments on a quarterly basis. The following table describes the valuation techniques used in the determination of the fair values
of financial instruments:
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, Performance 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.
58 Choice Properties REIT 2016 Annual Report
Revenue Recognition Choice Properties has retained substantially all of the risks and benefits of ownership of its investment properties
and, therefore, accounts for its leases with tenants as operating leases.
Rental revenue includes base rents earned from tenants under lease agreements, realty tax and operating cost recoveries and other incidental
income. Base rent revenue, including predetermined rent adjustments in lease agreements, is recognized as revenue on a straight-line basis
over the term of the underlying leases. Other revenue is recognized as the service is provided and when collection is reasonably assured.
Property tax and operating cost recoveries are recognized in the period that recoverable costs are chargeable to tenants. Percentage
participation rents are recognized when tenants’ specified sales targets have been met as set out in the lease agreements.
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 defined contribution pension plans sponsored by Loblaw. 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”), Performance Units (“PUs”), 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 a 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.
PUs entitle certain employees to receive the value of the PU award in cash or Units at the end of the applicable performance period, which
is usually three years in length, based on the Trust achieving certain performance conditions. The PU plan provides for the crediting of additional
PUs in respect of distributions paid on Units for the period when a PU is outstanding. The fair value of each PU 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 and Trustees 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
Choice Properties REIT 2016 Annual Report 59
Notes to the Consolidated Financial Statements
distributions at a rate that is substantially equivalent to the general tax rate applicable to Canadian corporations. However, distributions paid
by a SIFT as return of capital should generally not be subject to tax.
Under the SIFT rules, the taxation regime will not apply to a real estate investment trust (“REIT”) that meets prescribed conditions relating to
the nature of its assets and revenue (the “REIT Conditions”). Choice Properties has reviewed the SIFT rules and has assessed its interpretation
and application to the REIT's assets and revenue. While there are uncertainties in the interpretation and application of the SIFT rules, Choice
Properties has determined that it meets the REIT Conditions and accordingly, no net current income tax expense or deferred income tax
assets or liabilities have been recorded in the consolidated financial statements.
Accounting Standards Implemented in 2016
In 2014, the IASB issued amendments to IAS 1, “Presentation of Financial Statements”. The Trust implemented these amendments
prospectively in the first quarter of 2016. There was no impact on the Trust’s consolidated financial statements as a result of the implementation
of this amendment.
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.
60 Choice Properties REIT 2016 Annual Report
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.
Note 4.
Future Accounting Standards
IFRS 15 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.
The Trust intends to adopt IFRS 15 and the clarifications in its financial statements for the annual period beginning on January 1, 2018. The
Trust does not expect the standard to have a material impact on the financial statements.
IFRS 9 In 2014, the IASB issued IFRS 9, “Financial Instruments” (“IFRS 9”), replacing IAS 39, “Financial Instruments: Recognition and
Measurement” (“IAS 39”). 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.
Classification and Measurement IFRS 9 contains a new classification and measurement approach for financial assets that reflects the
business model in which assets are managed and their cash flow characteristics. IFRS 9 largely retains the existing requirements in IAS 39
for the classification of financial liabilities.
Impairment IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with a forward-looking ‘expected credit loss’ model. The new impairment
model will apply to financial assets measured at amortized cost or those measured at fair value through other comprehensive income, except
for investments in equity instruments and contract assets.
General Hedging IFRS 9 will require the Trust to ensure that hedge accounting relationships are aligned with the Trust’s risk management
objectives and strategy and to apply a more qualitative and forward-looking approach to assessing hedge effectiveness.
The Trust intends to adopt IFRS 9 in its financial statements for the annual period beginning on January 1, 2018. The Trust does not expect
the standard to have a material impact on the financial statements.
IFRS 16 In January 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. For leases where the Trust is the lessee, the option exists of adopting a full
retrospective approach or a modified retrospective approach on transition to IFRS 16. While early adoption is permitted, if IFRS 15 has already
been adopted, the Trust will not early adopt IFRS 16.
The Trust intends to adopt IFRS 16 in its financial statements for the annual period beginning on January 1, 2019. It is expected that IFRS
16 will affect the Trust in its capacity as lessee of office space. The Trust will recognize a liability for the present value of future lease liabilities
and record a corresponding asset on the balance sheet. The nature and timing of the related expenses will change as IFRS 16 replaces the
straight-line operating lease expense with a depreciation charge for right-of-use assets and interest expense on lease liabilities. The Trust is
currently assessing the impact of the standard on the financial statements.
Choice Properties REIT 2016 Annual Report 61
Notes to the Consolidated Financial Statements
Note 5.
Acquisitions
During the year ended December 31, 2016, 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
Retail
$
72,836 $
83 $
(257) $ 72,662 $
— $
— $ 72,662 $
Various (9 properties)
Pitt Meadows, BC
May 12
May 12
Edmonton, AB(i)
August 17
Various(ii) (3 properties)
October 26
Industrial
Retail
Retail
Moncton, New
Brunswick(ii)
Edmonton, AB(ii)
Courtenay, BC(i)
Beaverton, ON(i)
October 26
Industrial
October 26
December 22
December 22
Land
Retail
Retail
47,369
19,686
18,834
19,715
3,056
12,957
823
—
343
60
—
—
397
2
(136)
(109)
47,233
19,920
(94)
18,800
(24)
19,691
—
3,056
(26)
13,328
(9)
816
—
—
—
—
—
—
—
—
—
2,062
47,233
19,920
16,738
9,537
10,154
219
—
—
2,837
13,328
816
1,446
1,619
20
426
382
59
388
35
Total Acquisitions
$ 195,276 $
885 $
(655) $ 195,506 $
— $
11,818 $ 183,688 $
4,375
(i)
(ii)
Acquired from a third-party vendor.
Investment properties and Exchangeable Units values both included adjustments totaling ($182) to reflect the decrease of the fair value of the Exchangeable Units on
the closing date compared to the volume weighted average value of the units referenced in the purchase and sale agreement.
During the year ended December 31, 2015, Choice Properties completed the following acquisitions from Loblaw (unless otherwise noted):
($ thousands)
Location
Barrie, ON
Kanata, ON(i)(ii)
Pickering, ON
Date of
acquisition
January 9
January 30
Land
Land
January 30
Industrial
Property
type
Investment
properties
Other
assets
Other
liabilities
Net
assets
acquired
Debt
assumed
Exchangeable
Units issued
Cash
Acquisition
costs
included in
investment
properties
Consideration
$
9,758 $
— $
— $
9,758 $
— $
2,808 $
6,950 $
—
—
—
2,025
81,450
5,295
191
87
250
104
—
2,025
— 81,450
(28)
5,295
(1,325) 205,367
—
—
—
—
2,025
81,450
5,304
206,690
5,782
18,415
45,876
—
—
19
2
—
29
9
103,549
101,818
3,995
(31)
5,751
2,123
(9)
18,435
(278)
45,607
—
—
—
3,200
14,604
3,628
15,235
31,003
182
265
796
Porter's Lake, NS(i)
February 19
Retail
Various(iii) (38
properties)
June 1
Mississauga, ON(i)
August 11
Midland & Courtice, ON
August 20
Various(iv) (4 properties) November 17
Retail
Retail
Retail
Retail
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 ($555) to reflect the decrease of the fair value of the Exchangeable Units on the
closing date compared to the volume weighted average value of the units referenced in the purchase and sale agreement.
62 Choice Properties REIT 2016 Annual Report
Note 6.
Investment Properties
($ thousands)
Balance, beginning of year
Acquisitions of investment properties - including
acquisition costs of $4,375 (2015 - $5,870) (note 5)
Capital expenditures:
Development capital(i)
Building improvements
Capitalized interest(ii) (note 15)
Operating capital expenditures:
Property capital (note 22)
Direct leasing costs
Tenant improvement allowances
Amortization of straight-line rent and tenant
improvement allowances - included in revenue
Adjustment to fair value of investment properties
Transfers from properties under development
Income
producing
properties
Properties
under
development
$
8,465,700
$
95,300
Year ended
Year ended
December 31, 2016
8,561,000
$
December 31, 2015
7,905,978
$
192,220
93,022
12,096
1,593
42,192
3,077
2,307
36,010
100,185
83,201
3,056
40,426
—
1,956
—
—
—
—
8,860
(83,201)
195,276
375,300
133,448
12,096
3,549
42,192
3,077
2,307
36,010
109,045
—
117,267
12,254
1,465
32,466
2,336
5,548
36,405
71,981
—
Balance, end of year
$
9,031,603
$
66,397
$
9,098,000
$
8,561,000
(i)
Development capital includes $6,582 of site intensification payments (note 21) paid to Loblaw (December 31, 2015 - $2,334) and nil construction fees (note 21) paid to
Loblaw (December 31, 2015 - $102).
(ii)
Interest was capitalized to qualifying development projects based on a weighted average interest rate of 3.45% (December 31, 2015 - 3.27%).
Included in certain investment properties acquired from Loblaw is excess land with development potential. Choice Properties will compensate
Loblaw, over time, with intensification payments determined by a site intensification payment grid as outlined in the Strategic Alliance Agreement
(note 21), should Choice Properties pursue activity resulting in the intensification of such excess land.
Independent Appraisals
All properties were independently appraised at the time of acquisition. In addition, Choice Properties has engaged independent nationally-
recognized valuation firms to appraise the investment properties such that substantially all of the portfolio will be independently appraised at
least once over a five-year period.
The properties independently appraised each year represent a subset of the property types and geographic distribution of the overall portfolio.
A breakdown of the aggregate fair value of investment properties independently appraised each quarter, in accordance with the Trust’s policy,
is as follows:
($ thousands except where otherwise indicated)
March 31
June 30
September 30
December 31
Total
Number of properties
24
22
19
31
96
2016
Fair value
477,272
Number of properties
20
624,030
401,435
704,580
2,207,317
22
21
26
89
$
$
2015
Fair value
588,510
511,100
477,620
687,610
2,264,840
$
$
Choice Properties REIT 2016 Annual Report 63
Notes to the Consolidated Financial Statements
Internal Appraisals
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.
The Trust has an internal valuation team. On a quarterly basis, for properties that are not independently appraised that quarter, the valuation
team reviews and updates, as deemed necessary, the valuation models to reflect current market data. Updates may be made to capitalization
rates, discount rates, market rents, as well as current leasing and/or development activity, renewal probability, downtime on lease expiry,
vacancy allowances, and expected maintenance costs.
The capitalization rates and discount rates, used by the internal valuation team, are based on location, size and quality of the properties and
are obtained through 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, 2016
7.05%
December 31, 2015
7.08%
6.43%
6.12%
6.50%
6.17%
The following table summarizes fair value sensitivity for the portion of the Trust’s investment properties which is most sensitive to changes
in capitalization rates:
Capitalization rate sensitivity
increase/(decrease)
($ thousands)
Weighted
average overall
capitalization rate
(0.75)%
(0.50)%
(0.25)%
December 31, 2016
0.25%
0.50%
0.75%
5.37% $
5.62% $
5.87% $
6.12% $
6.37% $
6.62% $
6.87% $
Fair value of
investment
properties
10,293,123
9,835,205
9,416,292
9,031,603
8,677,109
8,349,389
8,045,521
$
$
$
$
$
$
$
Fair
value
variance
1,261,520
803,602
384,689
—
(354,494)
(682,214)
(986,082)
% 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.
64 Choice Properties REIT 2016 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, 2016 and
December 31, 2015
40%
Choice Properties did not make any contributions to the joint venture during the year ended December 31, 2016, but did receive a distribution
from the joint venture of $4,000 (year ended December 31, 2015 - contributions $3,120 and distributions nil). Operating activities have not
begun at the property, however the joint venture did earn interest income in the year ended December 31, 2016 (December 31, 2015 - nil).
In the first quarter of 2016, the fair value of property increased as certain zoning approvals were obtained related to achieving additional
developmental density at the site.
Summarized financial information for Choice Properties’ share of the equity accounted investment is set out below:
($ thousands)
Current assets
Non-current assets
Current liabilities
Net assets at 100%
Choice Properties’ investment in equity accounted joint venture at 40%
($ thousands)
Interest income
Adjustment to fair value of investment property
Net income and comprehensive income at 100%
Choice Properties’ share of income in equity accounted joint venture at 40%
As at
As at
December 31, 2016
24,439
$
64,244
(41,007)
47,676
19,070
Year ended
December 31, 2016
200
34,100
34,300
13,720
$
$
$
$
$
December 31, 2015
3,130
20,603
(358)
23,375
9,350
Year ended
December 31, 2015
—
—
—
—
$
$
$
$
$
$
Choice Properties REIT 2016 Annual Report 65
Notes to the Consolidated Financial Statements
Subsidiary
On November 7, 2014, Choice Properties acquired 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, 2016 and
December 31, 2015
Canada
Mayfield/Chinguacousy, Brampton, ON
70%
There was no operating activity during the years ended December 31, 2016 or 2015. 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%
Joint Operation
As at
As at
December 31, 2016
98
$
December 31, 2015
111
$
25,844
(16)
(23)
25,903
7,771
$
$
25,767
(12)
(13)
25,853
7,756
$
$
On January 30, 2015, Choice Properties entered into a co-ownership agreement with PFC Fernbank Corp. (“Fernbank”), a subsidiary of
PenEquity and Phoenix Fernbank Inc., to acquire a parcel of land in Kanata, Ontario. This is a longer-term development project with the
construction of a food store anchored retail centre anticipated to commence in the future.
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 years ended December 31, 2016 or 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%
As at
As at
December 31, 2016
$
— $
December 31, 2015
16
4,176
(126)
4,050
2,025
$
$
4,075
(41)
4,050
2,025
$
$
66 Choice Properties REIT 2016 Annual Report
Note 8.
Accounts Receivable and Other Assets
($ thousands)
Net rent receivable - net of allowance for doubtful accounts of $1,312 (2015 - $852)
Construction inventory
Fixtures and equipment - net of accumulated amortization of $2,660 (2015 - $1,730)
Prepaid property taxes
Prepaid other
As at
As at
December 31, 2016
5,304
$
December 31, 2015
888
$
2,856
5,398
4,040
3,172
—
5,944
2,133
7,149
16,114
Accounts receivable and other assets
$
20,770
$
Classified as:
Non-current
Current
Note 9.
Notes Receivable
($ thousands)
Notes receivable from related party
Notes receivable from third-party
Notes receivable
Classified as:
Non-current
Current
$
$
5,888
14,882
20,770
$
$
9,874
6,240
16,114
As at
As at
December 31, 2016
263,574
$
December 31, 2015
248,463
$
28,795
292,369
$
26,608
275,071
2,360
290,009
292,369
$
$
2,179
272,892
275,071
$
$
$
Notes receivable from related party Non-interest bearing short term notes totaling $248,463 were repaid by Loblaw in January 2016. During
2016, non-interest bearing short term notes totaling $263,574 were issued to Loblaw and repaid in January 2017 (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. On October 20, 2016, Choice Properties issued an extension to September 29, 2017 at an interest rate of 9% per annum. The balance
as at December 31, 2016 includes accrued interest of $3,935, payable on maturity, and unamortized financing costs of nil (December 31,
2015 - $1,909 and $20).
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 Fernbank
with respect to the co-ownership in Kanata, Ontario (note 7). The balance as at December 31, 2016 includes accrued interest of $335 payable
on maturity (December 31, 2015 - $154).
On December 24, 2014, Choice Properties provided short-term bridge financing of $500 to Penady (Barrie) Ltd. which was repaid with interest
calculated at 6% per annum on July 10, 2015.
Choice Properties REIT 2016 Annual Report 67
Notes to the Consolidated Financial Statements
Note 10.
Long Term Debt and Class C LP Units
($ 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 G 3.196%, due 2023, effective interest 3.196%
Series H 5.268%, due 2046, effective interest 5.268%
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 ($11,058) (2015 - ($8,175))
Debt placement costs - net of accumulated amortization of $3,032 (2015 - $1,807)
Mortgages (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 ($185) (2015 - ($101))
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 $7,978 (2015 - $5,533)
Other
As at
As at
December 31, 2016
December 31, 2015
$
400,000
$
200,000
250,000
200,000
250,000
200,000
250,000
100,000
—
200,000
200,000
300,000
200,000
300,000
598
(7,626)
1,044
1,883
116
300,000
300,000
325,000
(40,760)
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)
Credit facilities’ debt placement costs - net of accumulated amortization of $1,516 (2015 - $1,122)
(1,541)
(1,660)
$
$
$
3,928,714
$
3,881,390
3,726,991
201,723
3,928,714
$
$
3,579,202
302,188
3,881,390
Long term debt and Class C LP Units
Classified as:
Non-current
Current
(i)
Represents amounts due to Loblaw.
68 Choice Properties REIT 2016 Annual Report
Senior Unsecured Debentures On January 23, 2017, Choice Properties redeemed, at par, $200,000 Series 6 senior unsecured debentures
with an original maturity date of April 20, 2017.
As at December 31, 2016, the senior unsecured debentures had a weighted average effective interest rate of 3.52% (December 31, 2015 -
3.33%). Senior unsecured debentures Series A through Series H were issued by the Trust and Series 6 through Series 10 were issued by
the Partnership.
On March 7, 2016, Choice Properties redeemed, at par, $300,000 Series 5 senior unsecured debentures with an original maturity date of
April 20, 2016.
On March 7, 2016, Choice Properties issued $250,000 and $100,000 aggregate principal amount of Series G and H senior unsecured
debentures due March 7, 2023 and March 7, 2046, respectively. The Series G senior unsecured debentures bear interest at a rate of 3.196%
per annum and the Series H senior unsecured debentures bear interest at a rate of 5.268% per annum, with semi-annual installments of
interest due on March 7 and September 7 in each year, commencing in September 2016. Debt placement costs of $2,286 are amortized using
the effective interest method and recorded to net interest expense and other financing charges (note 15).
On January 20, 2016, Choice Properties entered into certain bond forward contracts with a notional value of $300,000. The contracts were
settled on March 4, 2016, resulting in a gain of $2,682 (note 15).
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. Debt placement costs of $1,448 are amortized using the effective interest
method and recorded to net interest expense and other financing charges (note 15).
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. Debt placement costs of $1,514 are amortized using the effective interest method
and recorded to net interest expense and other financing charges (note 15).
The offering in February 2015 was made under Choice Properties’ Short Form Base Shelf Prospectus dated September 3, 2013, and the
offerings in November 2015 and March 2016 were 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 are amortized using the effective interest method and recorded
to net interest expense and other financing charges (note 15).
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 Facilities Choice Properties has a $500,000 senior unsecured committed revolving credit facility provided by a syndicate of lenders
maturing July 5, 2021. The credit facility bears interest at variable rates of either: Prime plus 0.45% or Bankers’ Acceptance rate plus 1.45%.
Certain conditions of the credit facility are contingent on Choice Properties’ credit rating remaining at “BBB”.
On December 23, 2016, Choice Properties entered into a new bi-lateral $250,000 senior unsecured committed revolving credit facility with a
major Canadian financial institution maturing December 21, 2018. The credit facility bears interest at variable rates of either: Prime plus 0.25%
or Bankers’ Acceptance rate plus 1.25%. Certain conditions of the credit facility are contingent on Choice Properties’ credit rating remaining
at “BBB”. Should certain conditions not be met, the credit facility would become secured against select properties.
As at December 31, 2016, $172,000 was drawn on the syndicated credit facility (December 31, 2015 - nil) and no amount was drawn under
the new bi-lateral credit facility. As at December 31, 2016, the balance of the unamortized debt placement costs was $1,541 (December 31,
2015 - $1,660).
The credit facilities contain certain financial covenants. As at December 31, 2016, the Trust was in compliance with all of its financial covenants
(note 17).
Choice Properties REIT 2016 Annual Report 69
Notes to the Consolidated Financial Statements
Schedule of Repayments The schedule of principal repayment of long term debt and Class C LP Units, based on maturity and redemption
rights is as follows:
($ thousands)
Senior unsecured debentures
$
2017
200,000 $
2018
400,000 $
2019
200,000 $
2020
550,000 $
2021
Thereafter
450,000 $ 1,250,000
Total
$ 3,050,000
Mortgages
Class C LP Units
Total
1,192
—
152
—
1,583
—
—
—
—
—
—
925,000
2,927
925,000
$
201,192 $
400,152 $
201,583 $
550,000 $
450,000 $ 2,175,000
$ 3,977,927
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, a Unitholder has the right to require Choice Properties to redeem its Units on
demand. Upon receipt of a 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.
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
January 9, 2015
June 1, 2015
August 20, 2015
November 17, 2015
October 26, 2016
Adjustment to fair value of Exchangeable Units
As at
As at
December 31, 2016
December 31, 2015
Units
90,953,817
1,549,693
65,318
92,568,828
317,109,792
$
$
$
Amount
867,849
19,587
901
Units
89,255,010
1,668,346
30,461
888,337
90,953,817
3,741,895
306,032,105
Amount
849,337
18,118
394
867,849
3,207,216
$
$
$
—
—
—
—
—
—
—
—
878,713
—
11,818
529,591
265,665
9,237,166
280,155
1,294,701
—
—
2,808
103,549
3,200
14,604
—
410,518
Exchangeable Units, end of year
317,988,505
$
4,283,304
317,109,792
$
3,741,895
Total Units and Exchangeable Units, end of year
410,557,333
408,063,609
70 Choice Properties REIT 2016 Annual Report
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 ended December 31, 2016. In the year ended December 31, 2016, Choice Properties declared
distributions of $0.69 per unit (year ended December 31, 2015 - $0.65), or $282,320 in aggregate, 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, 2015 - $261,424). Distributions declared to Unitholders of record at the close of business on the last business day
of a month are paid on or about the 15th day of the following month.
The holders of Exchangeable Units and Class C LP Units may elect to defer receipt of all or a portion of distributions declared by the Partnership
until the first date following the end of the fiscal year. If the holder elects to defer, the Partnership will loan the holder the amount equal to the
deferred distribution without interest, and the loan will be due and payable in full on the first business day following the end of the fiscal year
the loan was advanced. Loblaw has elected to defer the distributions in full on both the Exchangeable Units and Class C LP Units.
Distribution Reinvestment Plan Choice Properties has a DRIP that allows Unitholders to use the monthly cash distributions paid on their
existing Units to purchase additional Units directly from the Trust. Unitholders who elect to participate in the DRIP receive a further distribution,
payable in Units, equal in value to 3% of each cash distribution. In the year ended December 31, 2016, Choice Properties issued 1,549,693
Units under the DRIP (year ended December 31, 2015 - 1,668,346 Units).
Note 12. Trade Payables and Other Liabilities
($ 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, 2016
9,159
$
December 31, 2015
14,554
$
50,801
35,948
301,072
11,039
5,477
532
60,131
474,159
$
46,767
33,250
277,169
5,240
4,927
2,014
55,610
439,531
1,397
472,762
474,159
$
$
1,354
438,177
439,531
$
$
$
(i)
Includes distributions accruing on Exchangeable Units of $236,138 (December 31, 2015 - $219,381) and Class C LP Units of $50,104 (December 31, 2015 - $50,104),
and other liabilities due to Loblaw of $14,830 (December 31, 2015 - $7,684).
(ii)
Includes $1,272 payable to Loblaw and $1,420 payable to GWL (December 31, 2015 - $1,165 and $1,231, respectively).
(iii)
Includes $57,135 rent from Loblaw and nil from GWL received in advance (December 31, 2015 - $54,061 and $122, respectively).
Choice Properties REIT 2016 Annual Report 71
Notes to the Consolidated Financial Statements
Note 13. Unit-Based Compensation
Choice Properties’ unit-based compensation expense recognized in general and administrative expenses was:
($ thousands)
Unit Option plan
Restricted Unit plan
Performance Unit plan
Deferred Unit plan
Unit-based compensation expense
Adjustment to fair value included in the above
Year ended
December 31, 2016
4,173
1,773
346
1,169
7,461
4,309
$
$
$
Year ended
December 31, 2015
1,236
957
—
834
3,027
888
$
$
$
As at December 31, 2016, the carrying value of total unit-based compensation was $11,039 (December 31, 2015 - $5,240) (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. 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
Exercised
Cancelled
Outstanding Unit Options, end of year
Unit Options exercisable, end of year
Year ended December 31, 2016
Year ended December 31, 2015
Number of awards
3,499,656
Weighted average
exercise price/unit
11.05
$
Number of awards
1,682,510
655,266
(65,318)
(99,373)
3,990,231
1,764,241
$
$
$
$
$
12.38
11.21
11.76
11.25
10.95
2,127,532
(30,461)
(279,925)
3,499,656
533,796
Weighted average
exercise price/unit
10.48
11.49
10.54
11.00
11.05
10.36
$
$
$
$
$
$
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, 2016
5.27%
December 31, 2015
5.51%
16.30% - 19.16%
15.41% - 17.38%
0.49% - 1.06%
0.48% - 0.77%
0.5 to 4.7 Years
1.5 to 5.4 Years
72 Choice Properties REIT 2016 Annual Report
The following table details the Unit Options outstanding as at December 31, 2016:
Exercise Price
$10.04
$10.81
$10.61
$10.72
$11.51
$11.28
$12.38
$12.79
$10.04 to $12.79
Number of
Unit Options
outstanding as at
December 31, 2016
628,671
Remaining weighted
average
life (in years)
3.5
810,286
21,759
24,038
1,663,393
215,518
621,669
4,897
3,990,231
4.2
4.3
4.9
5.2
5.9
6.2
6.9
4.9
Restricted Unit Plan RUs entitle certain employees to receive the value of the RU award in cash or Units at the end of the applicable vesting
period, which is usually three years in length. The RU plan provides for the crediting of additional RUs in respect of distributions paid on Units
for the period when an RU is outstanding. The fair value of each RU granted is measured based on the market value of a Trust Unit at the
balance sheet date. There were no RUs vested as at December 31, 2016 (December 31, 2015 - nil).
The following is a summary of Choice Properties’ RU plan activity:
(Number of awards)
Outstanding Restricted Units, beginning of year
Granted
Reinvested
Settled
Cancelled
Outstanding Restricted Units, end of year
Year ended
December 31, 2016
267,721
Year ended
December 31, 2015
184,154
93,561
15,927
(106,370)
(6,148)
264,691
90,813
14,140
(5,433)
(15,953)
267,721
Performance Unit Plan PUs entitle certain employees to receive the value of the PU award in cash or Units at the end of the applicable
performance period, which is usually three years in length, based on the Trust achieving certain performance conditions. The PU plan provides
for the crediting of additional PUs in respect of distributions paid on Units for the period when an PU is outstanding. The fair value of each
PU granted is measured based on the market value of a Trust Unit at the balance sheet date. There were no PUs vested as at December 31,
2016.
The following is a summary of Choice Properties’ PU plan activity:
(Number of awards)
Outstanding Performance Units, beginning of year
Granted
Reinvested
Cancelled
Outstanding Performance Units, end of year
Year ended
December 31, 2016
—
39,772
1,678
(1,754)
39,696
Choice Properties REIT 2016 Annual Report 73
Notes to the Consolidated Financial Statements
Trustee Deferred Unit Plan Members of the Choice Properties’ Board of Trustees, who are not management of Choice Properties, are
required to receive a portion of their annual retainer in the form of DUs and may also elect to receive up to 100% of their remaining fees in
DUs. Distributions paid earn fractional DUs, which are treated as additional awards. The fair value of each DU granted is measured based
on the market value of a Unit at the balance sheet date. All DUs vest when granted, however, they cannot be exercised while Trustees are
members of the Board.
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
Note 14. Rental Revenue
Rental revenue is comprised of the following:
Year ended
December 31, 2016
158,778
Year ended
December 31, 2015
99,230
50,844
9,370
218,992
52,736
6,812
158,778
Year ended
Year ended
($ thousands)
Base rent
Property tax recoveries
Operating cost recoveries
Other revenue
Rental revenue
Loblaw
$ 520,180
Ancillary(i)
$ 58,008
December 31, 2016
578,188
$
Loblaw
$ 502,323
Ancillary(ii)
$ 48,791
December 31, 2015
551,114
$
141,943
31,736
723
16,489
12,200
2,295
158,432
43,936
3,018
140,616
24,427
291
13,966
9,927
2,759
$ 694,582
$ 88,992
$
783,574
$ 667,657
$ 75,443
$
154,582
34,354
3,050
743,100
(i)
(ii)
Ancillary income includes $1,799 received from leases to subsidiaries of GWL for the year ended December 31, 2016.
Ancillary income includes $1,681 received from leases to subsidiaries of GWL for the year ended December 31, 2015.
Choice Properties enters into long-term lease contracts with tenants for space in its properties. Initial lease terms are generally between
three and ten years for commercial units and longer terms for food store anchors. Leases generally provide for the tenant to pay
Choice Properties base rent, with provisions for contractual increases in base rent over the term of the lease, plus operating cost and property
tax recoveries. Many of the leases with Loblaw are for stand-alone retail sites. Loblaw is directly responsible for the operating costs on such
sites.
Future base rent revenue for the years ended December 31 is as follows:
($ thousands)
2017
2018
2019
2020
2021
Thereafter
Total
74 Choice Properties REIT 2016 Annual Report
$
$
566,479
567,000
569,931
571,009
571,148
3,680,441
6,526,008
Note 15. Net Interest Expense and Other Financing Charges
($ thousands)
Interest on senior unsecured debentures
Distributions on Class C LP Units(i)
Interest on mortgage
Interest on credit facilities
Effective interest rate amortization of debt discounts and premiums
Effective interest rate amortization of debt placement costs
Distributions on Exchangeable Units(i)
Interest income
Gain on settlement of bond forward contracts (note 10)
Capitalized interest(ii)
Year ended
December 31, 2016
108,788
$
Year ended
December 31, 2015
97,189
$
46,250
181
3,776
(522)
1,639
218,961
379,073
(2,309)
(2,682)
374,082
(3,549)
46,250
217
3,405
(2,632)
1,405
202,804
348,638
(2,122)
—
346,516
(1,465)
345,051
Net interest expense and other financing charges
$
370,533
$
(i)
(ii)
Represents interest on indebtedness due to Loblaw.
Interest was capitalized to qualifying development projects based on an annual weighted average interest rate of 3.45% (December 31, 2015 - 3.27%).
Note 16. Employee Costs
The following amounts were expensed in relation to Choice Properties’ employees:
($ thousands)
Salaries, wages and benefits
Post-employment benefits
Unit-based compensation
Employee costs(i)
(i)
Before considering amounts capitalized to investment properties.
Note 17. Capital Management
Year ended
December 31, 2016
19,103
Year ended
December 31, 2015
15,360
$
407
6,292
25,802
$
403
2,193
17,956
$
$
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 growth and 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 $2,000,000. This prospectus is effective for a 25-month
period from the date of issuance. On November 24, 2015 and March 7, 2016, Choice Properties issued $200,000 and $350,000, respectively,
of senior unsecured debentures under this base shelf prospectus (note 10).
Choice Properties REIT 2016 Annual Report 75
Notes to the Consolidated Financial Statements
On December 23, 2016, Choice Properties entered into a new bi-lateral $250,000 senior unsecured committed revolving credit facility with a
lender maturing December 21, 2018 (note 10).
On January 23, 2017, Choice Properties redeemed, at par, $200,000 Series 6 senior unsecured debentures with an original maturity date of
April 20, 2017.
Choice Properties has certain key covenants in its debentures and its committed credit facilities. The key financial covenants include debt
service ratios and leverage ratios, as defined in the respective agreements. These ratios are measured by the Trust on an ongoing basis to
ensure compliance with the agreements. Choice Properties was in compliance with each of the key financial covenants under these agreements
as at December 31, 2016 and December 31, 2015.
The following schedule details the capitalization of Choice Properties:
($ thousands)
Liabilities
As at
December 31, 2016
As at
December 31, 2015
Senior unsecured debentures (note 10)
$
3,050,000
$
3,000,000
Mortgages (note 10)
Class C LP Units (note 10)
Credit facilities (note 10)
Equity
Unitholders’ equity
Non-controlling interests (note 7)
Total
Note 18. Fair Value Measurements
2,927
925,000
172,000
569,374
7,771
4,139
925,000
—
835,317
7,756
$
4,727,072
$
4,772,212
The following table presents the fair value hierarchy of assets and liabilities measured at fair value in the statement of financial position after
initial recognition and assets and liabilite not measured at fair value in the statement of financial position but for which the fair vlaue is disclosed
in the notes to the financial statements:
($ thousands)
Assets:
As at
December 31, 2016
As at
December 31, 2015
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
Investment properties (note 6)
$
— $
— $ 9,098,000
$ 9,098,000
$
— $
— $ 8,561,000
$ 8,561,000
Cash and cash equivalents
5,113
—
Liabilities:
Long term debt and Class C LP Units
—
4,129,035
Exchangeable Units (note 11)
4,283,304
—
Unit-based compensation (note 12)
—
11,039
—
—
—
—
5,113
44,354
—
4,129,035
—
4,036,140
4,283,304
3,741,895
11,039
—
—
5,240
—
—
—
—
44,354
4,036,140
3,741,895
5,240
The carrying value of the Trust’s assets and liabilities approximated fair value except for long term debt and Class C LP Units. The fair value
of Choice Properties’ senior unsecured debentures was calculated using market trading prices. Whereas, the fair values for the mortgages
and the Class C LP Units were calculated by discounting future cash flows using appropriate discount rates.
There were no transfers between levels of the fair value hierarchy during the periods.
76 Choice Properties REIT 2016 Annual Report
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 (note 8).
The risk related to cash and cash equivalents, short term investments, security deposits and notes receivable is reduced by policies and
guidelines that require Choice Properties to enter into transactions only with Canadian financial and government institutions that have a minimum
short term rating of “A-2” and a long term credit rating of “A-“ from S&P or an equivalent credit rating from another recognized credit rating
agency and by placing minimum and maximum limits for exposures to specific counterparties and instruments.
Despite such mitigation efforts, if Choice Properties’ counterparties default, it could have a material adverse impact on Choice Properties’
financial condition or results of operations and its ability to make distributions to Unitholders.
Market Risk Choice Properties is exposed to market risk as a result of changes in factors such as interest rates and the market price of the
Trust’s Units.
Interest Rate Risk The majority of Choice Properties’ debt is financed at fixed rates with maturities staggered over 30 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 facilities), 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 facilities 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 facilities’ interest rates would result in an increase to liabilities and a
decrease in net income of $7,500 (assuming fully drawn credit facilities).
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 $317,989 (2015 - $317,110); and
Unit-based compensation liabilities $2,649 (2015 - $1,410).
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.
Choice Properties REIT 2016 Annual Report 77
Notes to the Consolidated Financial Statements
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 credit facilities, 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
Credit facilities(i)
Class C LP Units
Total
2017
304,821 $
1,294
2018
503,263 $
204
—
—
46,250
352,365 $
46,250
549,717 $
$
2019
289,047 $
2020
627,648 $
2021
Thereafter
512,133 $ 1,475,368
Total
$ 3,712,280
1,628
—
46,250
—
—
—
172,000
—
—
3,126
172,000
46,250
46,250
1,227,308
1,458,558
336,925 $
673,898 $
730,383 $ 2,702,676
$ 5,345,964
(i)
Excludes interest on the revolving credit facilities at a floating interest rate.
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.
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, 2016, the aggregate gross potential liability related to these letters of
credit totalled $31,205 including $6,465 posted by Loblaw 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, 2015 - $28,246 and $7,324).
Choice Properties’ credit facilities and senior unsecured 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 $43,540 as at December 31, 2016
(December 31, 2015 - $24,698).
78 Choice Properties REIT 2016 Annual Report
Note 21. Related Party Transactions
Choice Properties’ parent corporation is Loblaw, which held an 82.7% effective interest in the Trust through ownership of 21,500,000 Units
and 100% of the Exchangeable Units as at December 31, 2016 (December 31, 2015 - 83.0% effective interest, 21,500,000 Units and 100%
Exchangeable Units, respectively). Loblaw’s majority shareholder, GWL, owns approximately 47% of Loblaw’s outstanding common shares
and a 5.8% direct interest in Choice Properties, through ownership of 23,997,222 Units as at December 31, 2016 (December 31, 2015 - 5.6%
and 22,732,062 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 On May 12, 2016, Choice Properties acquired 10 properties from Loblaw for a purchase price of $117,140, excluding acquisition
costs. The acquisition was funded entirely with cash (note 5).
On October 26, 2016, Choice Properties acquired a portfolio of five investment properties from Loblaw for a purchase price of $40,738,
excluding acquisition costs, which was settled through the issuance of 878,713 Exchangeable Units, which had a value of $11,818 as at
October 26, 2016, and cash (note 5).
In 2015, Choice Properties acquired 46 investment properties from Loblaw with a fair value of $356,692, excluding acquisition costs (note 5).
Site Intensification Payments Included in certain investment properties acquired from Loblaw is excess land with development potential.
Choice Properties will compensate Loblaw, over time, with intensification payments, 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 payments of $6,582 in connection with completed gross leasable area for which
tenants have taken possession during the year ended December 31, 2016 (year ended December 31, 2015 - $2,334).
Construction Fees During the year ended December 31, 2016, Choice Properties did not pay any construction fees to Loblaw towards the
development of specific properties (year ended December 31, 2015 - $102).
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. In 2016, Choice Properties paid
Loblaw $2,932 for these services (2015 - $3,141) (note 22). The parties have agreed to extend the agreement until December 31, 2017.
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 for an initial two-year term with automatic one-year
renewals (note 22).
Letters of Credit As at December 31, 2016, letters of credit totaling $6,465 were posted by Loblaw 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 (December 31, 2015 -
$7,324) (note 20).
Land Transfer Tax Assessment The Ontario Ministry of Finance assessed the Trust $10,421 for land transfer tax, penalties and interest on
the acquisition of properties from Loblaw in the initial public offering. Choice Properties was fully indemnified by Loblaw. During the year
Loblaw made a payment to the Ministry of Finance for the full amount of the assessment, pending the result of the appeal.
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 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, 2016, distributions totaling $265,211
were declared, $286,242 were payable, and a note receivable of $263,574 was outstanding from Loblaw (December 31, 2015 - $249,054,
$269,485 and $248,463 respectively). On the first business day of 2017, distributions payable for Exchangeable Units of $217,324 and Class
C LP Units of $46,250 were paid and the notes receivable from Loblaw were cancelled (January 2016 - paid $202,204 and $46,250, respectively,
and the notes receivable from Loblaw were cancelled).
Choice Properties REIT 2016 Annual Report 79
Notes to the Consolidated Financial Statements
Trust Unit Distributions In the year ended December 31, 2016, Choice Properties declared distributions of $14,835 on the Units held by
Loblaw (December 31, 2015 - $13,975).
Transaction Summary as Reflected in the Consolidated Financial Statements Loblaw is also Choice Properties’ largest tenant,
representing approximately 90.0% of Choice Properties’ annual base rent and 88.3% of its gross leasable area as at December 31, 2016
(December 31, 2015 - 91.1% and 89.1% respectively). Transactions with Loblaw recorded in the statements of loss and comprehensive loss
were comprised as follows:
($ thousands)
Rental revenue (note 14)
Property and asset management fee (note 22)
Services Agreement expense (note 22)
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, 2016
694,582
$
Year ended
December 31, 2015
667,657
$
740
(2,932)
(265,211)
600
(3,141)
(249,054)
As at
As at
December 31, 2016
263,574
$
December 31, 2015
248,463
$
(925,000)
(4,283,304)
(359,479)
$
(5,304,209)
$
(925,000)
(3,741,895)
(332,395)
(4,750,827)
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 majority interest in GWL. Choice Properties did not make any
contributions to the joint venture during the year ended December 31, 2016, but did receive a distribution from the joint venture of $4,000
(year ended December 31, 2015 - contributions $3,120 and distributions nil). Operating activities have not begun at the property, however
the joint venture did earn interest income in the year ended December 31, 2016 (December 31, 2015 - nil).
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, 2016, Choice Properties declared distributions of $16,164 on the Units held by
GWL (December 31, 2015 - $14,383). GWL participates in the DRIP (note 11). In the year ended December 31, 2016, the Trust issued
1,265,160 Units to GWL under the DRIP (December 31, 2015 - 1,317,405 Units).
80 Choice Properties REIT 2016 Annual Report
Transaction Summary as Reflected in the Consolidated Financial Statements Transactions with GWL and other related parties
recorded in the statements of loss and comprehensive loss were comprised as follows:
($ 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, 2016
1,799
$
Year ended
December 31, 2015
1,681
$
(269)
(208)
As at
As at
December 31, 2016
(1,420)
$
December 31, 2015
(1,353)
$
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, 2016
4,396
5,610
10,006
$
$
$
$
Year ended
December 31, 2015
2,190
2,384
4,574
Choice Properties REIT 2016 Annual Report 81
Notes to the Consolidated Financial Statements
Note 22. Supplementary Information
Property Operating Costs
($ thousands)
Property taxes
Recoverable operating costs
Non-recoverable operating costs
Property operating costs
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
Capitalized to investment properties
Allocated to recoverable operating expenses
General and administrative expenses
Change in Non-Cash Operating Working Capital
($ thousands)
Net change in accounts receivable and other assets
Add back (deduct): Net change in fixtures and equipment
Amounts from acquired properties (note 5)
Net change in trades payable and other liabilities
Add back (deduct): Net change in distributions payable
Net change in unit-based compensation liability
Net change to accrued interest expense
Amounts from acquired properties (note 5)
Year ended
December 31, 2016
162,690
Year ended December
31, 2015
158,954
$
36,175
1,375
200,240
$
30,239
2,986
192,179
$
$
Year ended
December 31, 2016
27,667
$
Year ended
December 31, 2015
19,414
$
2,185
2,310
3,589
2,932
38,683
(740)
(2,635)
(7,191)
$
28,117
$
2,058
1,900
3,728
3,141
30,241
(600)
(2,157)
(5,719)
21,765
Year ended
December 31, 2016
(4,656)
$
Year ended
December 31, 2015
3,416
$
(546)
885
34,628
(550)
(5,799)
(19,455)
(655)
(364)
59
49,514
(92)
(2,954)
(15,259)
(1,671)
32,649
Change in non-cash operating working capital
$
3,852
$
82 Choice Properties REIT 2016 Annual Report
Supplemental Disclosure of Non-cash Operating, Investing and Financing Activities
($ thousands)
Value of Units issued under distribution reinvestment plan (note 11)
Value of options underlying Units issued under unit-based compensation plan
Issuance of Exchangeable Units (note 5)
Debt assumed on acquisition of investment properties (note 5)
Year ended
December 31, 2016
19,587
$
Year ended
December 31, 2015
18,118
$
169
11,818
—
73
124,161
2,123
Recoverable Property Capital
($ 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
Year ended
December 31, 2016
63,929
Year ended
December 31, 2015
34,254
$
42,192
(5,438)
100,683
$
32,466
(2,791)
63,929
$
$
Choice Properties REIT 2016 Annual Report 83
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).
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).
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.
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).
Greenfield
Development on vacant land.
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 development activities 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 development activities of the
same properties which increased gross leasable
area.
Redevelopment
Reset and renovation of existing income producing
properties.
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).
84 Choice Properties REIT 2016 Annual Report
Board of Trustees
Kerry D. Adams1,2
Ms. Adams currently serves as President of K. Adams & Associates
Limited. She is the Chair of Scotia Institutional Real Estate Inc. Advisory
Committee. Ms. Adams is a Fellow Chartered Accountant and a Fellow
Chartered Professional Accountant, and holds a B.A. (Honours
Economics) from Queen’s University. Ms. Adams is an Institute-certified
Director of the Institute of Corporate Directors. In addition to her public
board experience, Ms. Adams serves as a member of Fidelity
Investments Canada ULC’s Independent Review Committee. She also
served as a Commissioner and Director of the Ontario Securities
Commission, and Chair of its Investor Education Fund, and was a member
of the IIROC board and governance committee. 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.
Graeme M. Eadie1
Mr. Eadie is the Senior Managing Director and Global Head of Real Assets
for the Canada Pension Plan Investment Board. 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.
Michael P. Kitt1,2
Mr. Kitt is the Executive Vice President and Chief Financial Officer of
Oxford Properties Group. Previously, Mr. Kitt held the positions of
Executive Vice President, Canada and Executive Vice President, Global
Development at Oxford Properties. 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.
Daniel F. Sullivan2
Mr. Sullivan, a corporate director, held the position of Consul General for
Canada in New York City from 2006 to 2011. Prior to Mr. Sullivan’s
appointment as Consul General, he spent a majority of his career in the
financial services sector, with a focus on real estate, 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.
1 Audit Committee.
2 Governance, Compensation and Nominating Committee.
Christie J.B. Clark2
Mr. Clark, a corporate director, is 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. 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 a member of the Board of the
Canadian Olympic Committee and a member of the Advisory Council of
the Stephen J.R. Smith School of Business at Queen’s University.
Michelle Felman2
Ms. Felman, a corporate director, is a former Executive Vice President,
Acquisitions, of Vornado Realty Trust. Prior to joining Vornado, Ms.
Felman held the positions of Managing Director, Portfolio Acquisitions
and Business Ventures, and Managing Director, Business Development,
at GE Capital, Real Estate Division. Ms. Felman graduated from the
University of California, Berkeley, with a B.A. (Honours) and from The
Wharton School at the University of Pennsylvania with an M.B.A., where
she was an adjunct professor for four years. She is currently an adjunct
professor at Columbia University. 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 currently a trustee of The Partners
Group, a global private equity firm based in Zug, Switzerland, and serves
as Chair of its investment oversight committee.
John R. Morrison
Mr. Morrison is the President and Chief Executive Officer of Choice
Properties. Prior to joining Choice Properties, Mr. Morrison was President
and Chief Executive Officer of Primaris Real Estate Investment Trust.
Prior to serving in that role, he was President, Real Estate Management,
at Oxford Properties Group. In 2014, Mr. Morrison earned the Institute-
certified Director designation. Mr. Morrison is a Trustee of Automotive
Properties REIT and former Trustee of the International Council of
Shopping Centers, where he served on the Executive Committee, and is
now Divisional Vice President for Canada.
Paul R. Weiss1
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. Mr. Weiss is a director of Bell Canada, BCE
Inc. and Torstar Corporation. Mr. Weiss is a former director of Bell Alliant
Inc., ING Bank of Canada and Empire Life Insurance Company. Mr. Weiss
is past Chairman of Soulpepper Theatre Company and past Chairman
of Toronto Rehab Foundation.
Galen G. Weston
Mr. Weston is Chairman and Chief Executive Officer of Loblaw and
George Weston Limited. Prior to his assuming his current role at Loblaw
and Weston, he held the position of Executive Chairman and President.
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. In addition to his directorship at Loblaw and Weston, Mr. Weston
is a director of Wittington Investments, Limited and the Chair of
President’s Choice Bank.
Choice Properties REIT 2016 Annual Report 85
Corporate Profile
Choice Properties Real Estate Investment Trust is an owner, manager and developer of well-located retail and other commercial real estate
across Canada. Choice Properties’ portfolio spans approximately 43.6 million square feet of gross leasable area and consists of 535 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 16, 2017 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: 48533502. 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
(SEDAR),
Electronic Document Analysis
www.sedar.com. Choice Properties holds a conference call shortly
following the release of its quarterly results. These calls are archived
in
the Trust’s website,
www.choicereit.ca.
Investor Relations section of
and Retrieval
the
Ce rapport est disponible en français.
Annual General Meeting
April 25, 2017 at 11:00 am
St. Andrew’s Club and Conference Centre
Garden Suite
150 King Street West, 16th Floor
Toronto, Ontario Canada
86 Choice Properties REIT 2016 Annual Report
EXECUTIVE TEAM
From left to right:
Kim Lee
Vice President, Investor Relations
and Business Intelligence
Adam Walsh
Vice President, General Counsel
and Secretary
Bart Munn
Executive Vice President and
Chief Financial Officer
Lesley Gibson
Vice President, Financial Reporting
John R. Morrison
President and Chief Executive Officer
Kristine Hill
Vice President, Human Resources
Dallas Wingerak
Vice President, Real Estate and Operations,
Western Canada
Robert Yamamoto
Vice President, Development
Evan Williams
Vice President, Real Estate and Operations,
Eastern Canada
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Back cover images (top to bottom): 1880 Eglinton Ave., Scarborough, ON; 2280 Dundas St. W., Toronto, ON; 190 Richmond St., Ottawa, ON;
173 Lakeshore Rd. W., Oakville, ON; 123 Pioneer Park, Kitchener, ON
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43.6m square feet of well-located retail
properties across Canada
Canada’s leading food and drug retailer is the
principal tenant and anchor, providing regular
consumer traffic as well as stable, secure and
growing income from long-term leases
An attractive development pipeline comprising
excess density for intensification, sites
for redevelopment and land for greenfield
construction throughout our portfolio
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 a passion for successfully developing and
managing retail real estate
choicereit.ca
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