Choice Properties REIT
Annual Report 2017

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Shaping the Future 2017 ANNUAL REPORT C H O I C E P R O P E R T I E S R E I T 2 0 1 7 A N N U A L R E P O R T Choice Properties Real Estate Investment Trust is an owner, manager and developer of well-located retail and commercial real estate across Canada. Our portfolio spans approximately 44.1 million square feet of gross leasable area (“GLA”) and consists of 546 properties focused on shopping centres anchored by supermarkets and drug stores as well as stand-alone supermarkets and drug stores. Choice Properties’ strategy is to create value by enhancing and optimizing our portfolio through accretive acquisitions, strategic development and active management. Our principal tenant and largest Unitholder is Loblaw Companies Limited (“Loblaw”), Canada’s largest retailer. Choice Properties’ strong alliance with Loblaw positions it well for future growth. OCCUPANCY RATE OF 98.9% (AS AT DECEMBER 31, 2017) FINANCIAL AND OPERATIONAL HIGHLIGHTS ANCILLARY OCCUPANCY RENTAL REVENUE (1) (in millions) NET OPERATING INCOME (in millions) 95.0% 90.0% 85.0% 80.0% 75.0% % 0 . 0 9 % 1 . 1 9 % 5 . 7 8 0 3 8 $ 4 8 7 $ 3 4 7 $ $ 850 $775 $700 $625 $550 $600 $550 $500 $450 $400 5 8 5 $ 7 4 5 $ 4 1 5 $ 2015 2016 2017 2015 2016 2017 2015 2016 2017 TOTAL OCCUPANCY FUNDS FROM OPERATIONS (per unit) DISTRIBUTIONS (per unit) 99.0% 98.0% 97.0% 96.0% 95.0% % 6 . 8 9 % 9 . 8 9 % 9 . 8 9 2015 2016 2017 $1.10 $1.05 $1.00 $0.95 $0.90 6 6 9 . 0 $ 2015 2 7 0 1 $ . 0 0 0 1 $ . $0.75 $0.70 $0.65 $0.60 $0.55 . 3 7 0 $ 9 6 . 0 $ 5 6 . 0 $ 2016 2017 2015 2016 2017 (1) GAAP measure of rental revenue for the year ended December 31, 2017 includes $1 million attributable to non-controlling interests. With properties in hundreds of communities across Canada, Choice Properties is expanding its development expertise to leverage its robust pipeline of mixed-use opportunities and unlock the potential of its real estate with complete communities for the future. FRONT COVER WEST BLOCK, 500 LAKE SHORE BLVD. W., TORONTO, ONTARIO ABOVE GOLDEN MILE, 1880 EGLINTON AVE. E., TORONTO, ONTARIO A historical landmark reimagined as an urban community, combining residences and commerce with the local culture and vibrancy of one of Toronto’s most prominent intersections at Lake Shore and Bathurst The modernization of a traditional suburban shopping centre into a transit-oriented mixed-use community that benefits from government investment in building Toronto’s Eglinton Crosstown LRT Choice Properties is at a pivotal moment of growth and opportunity. As we expand our business into mixed-use development, we must expand our role as an integrated part of communities across Canada. We approach this responsibility with pride, commitment and thoughtful vision. ABOVE CARIBOO MALL, 435–455 NORTH RD., COQUITLAM, BRITISH COLUMBIA BACK COVER BLOOR AND DUNDAS WEST, 2280 DUNDAS ST. W., TORONTO, ONTARIO The creation of a livable, dynamic community that revitalizes this shopping centre to include residences with convenient access to the Metro Vancouver Skytrain The development of a complete community in an established transit hub, providing a vibrant place to live, work, play and shop with an integrated connection to Union–Pearson Express, West Toronto Railpath, TTC subway and easy access to streetcars and buses 2017 HIGHLIGHTS ACQUISITIONS 12 properties (1) 517,000 square feet of GLA 3 parcels of land for future development $126M in value (2) $7.0M in NOI with an implied capitalization rate of 6.5%(3) DEVELOPMENT ACTIVE MANAGEMENT Completed 347,000 square feet of new GLA Signed leases for 589,000 square feet of GLA Delivered GLA to 81 new spaces at 16 sites Generated a return on investment of ~8% Ongoing progress with mixed-use projects Increased rent by 8.1% for renewing leases Invested $45M to maintain portfolio quality High total occupancy of 98.9% $9.6B FAIR VALUE OF ESSENTIALLY UNENCUMBERED INVESTMENT PORTFOLIO 2332 160th Street, Surrey, British Columbia 92 Cardinal Léger, Pincourt, Quebec 124 Clair Road East, Guelph, Ontario 509 Main Street, Montague, Prince Edward Island FINANCIAL MANAGEMENT DEBT TO TOTAL ASSETS(4) 44.3% DEBT SERVICE COVERAGE(4) WEIGHTED AVERAGE INTEREST RATE(5) WEIGHTED AVERAGE TERM TO MATURITY(5) 3.7x 3.62% 4.5 years (1) Net of four properties that were combined with existing adjacent Choice Properties–owned sites on acquisition. (2) Excludes acquisition costs. (3) Represents the NOI and capitalization rate for income-producing properties only. (4) Debt ratios include Class C LP Units but exclude Exchangeable Units – see Section 8, “Liquidity and Capital Resources”, of this MD&A. The ratios are non-GAAP financial measures calculated based on the trust indentures as supplemented. (5) Indebtedness reflects senior unsecured debentures only. Choice Properties REIT 2017 Annual Report iii Since day one, we have been laying the groundwork for our expansion into building complete communities through mixed-use development projects. In 2017, we moved from the important and necessary planning phase to concrete action and a new level of engagement with our community partners and stakeholders. This year, we opened our first Community Idea Centre to connect with neighbours at our site in the heart of the Bloor-Dundas West transit hub; we continued to make significant progress on the construction of our landmark West Block property in downtown Toronto; we started the pre-planning process to launch our mixed-use project in Coquitlam, British Columbia; and we filed an official plan amendment to transform our Golden Mile site into a transit-oriented, mixed-use community. In addition, we took steps to assemble the right collection of properties as we plan for building complete communities that will meet the needs of the future. Looking ahead to 2018, we expect to launch more mixed- use projects while continuing to focus on growth through acquisition and on generating solid, stable and secure cash flows. We entered the year with a successful debt offering, raising $650 million in senior unsecured debentures, improving our financial flexibility while reducing our refinancing risk. With our clear strategy, deep management experience in the real estate sector, and our strategic alliance with Loblaw, we are committed to building new and relevant communities for Canadians. John R. Morrison President and Chief Executive Officer FELLOW UNITHOLDERS, Choice Properties is well-positioned in the Canadian REIT landscape. Our unmatched pipeline of retail and mixed-use development opportunities, combined with the stability of a portfolio of long-term leases, gives us the flexibility and capacity to invest in the right projects at the right time. This has led to stable, predictable value creation for our Unitholders and I am pleased to report that we have once again delivered strong performance in 2017. In 2017, we achieved important goals in each of our core growth drivers – acquisition, development and active management – delivering positive operational and financial results for the year. We further expanded our portfolio with acquisitions totaling $126 million in value, including three parcels of land for future development. In addition, we met our target to complete 347,000 square feet of new GLA, which delivered a return on investment of approximately 8%. We also continued to successfully retain existing key tenants and attract new ones maintaining our impressive occupancy rate of approximately 99% across the total portfolio. Our 2017 financial performance mirrored this operational success with year-over-year growth of 5.9% and 6.9% in rental revenue and net operating income, respectively. Year-over year growth in funds from operations (FFO) per unit was 7.2%. These results are underscored by a 5.8% increase in declared distributions, compared to 2016. This strong performance in 2017 was aided by the support and guidance of our Board of Trustees. On behalf of the entire Choice Properties team, I want to thank our Board members for their ongoing commitment. Today, we are at a pivotal point in our evolution. The retail landscape in Canada is changing, and we are changing with it. With the completion of over a million square feet of new retail space across Canada in just four years, we are building on our successes to shape the future of Canadian communities and neighbourhoods. Owning, developing and managing properties that are everyday destinations for millions of shoppers have provided us with valuable insight into how Canadians move through their daily lives. As brick and mortar retail continues to adapt to new technology and constantly changing consumer preferences, retail real estate will also change. Choice Properties is committed to being at the forefront of change. iv Choice Properties REIT 2017 Annual Report Shaping the Future 2017 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 Annual Highlights Key Performance Indicators and Selected Financial Information Investment Properties 5.1 Valuation Method 5.2 Acquisition of Investment Properties 5.3 Development Activities 5.4 Active Management 5.5 Dispositions of Investment Properties 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 Cash Flow 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. 3 4 4 5 6 7 8 9 10 11 13 14 18 19 19 20 23 23 26 27 27 28 32 33 33 33 34 35 37 38 39 40 40 41 43 44 48 49 Choice Properties REIT 2017 Annual Report 2 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, 2017 and December 31, 2016. 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, 2017 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 89. Choice Properties reports non-GAAP financial measures, including, but not limited to, Net Operating Income(1) (“NOI”), Funds from Operations(1) (“FFO”), Adjusted Cash Flow from Operations(1) (“ACFO”) 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 13, 2018, 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, opportunities, and legal and regulatory matters. Specific statements with respect to anticipated future results can be found in various sections of this MD&A, including 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, tax laws, economic conditions and competition. 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 the “Enterprise Risks and Risk Management” section of this MD&A and the Trust’s Annual Information Form (“AIF”) for the year ended December 31, 2017, which is hereby incorporated by reference. Such risks and uncertainties include: • • • • • • • • • • changes in timing to obtain municipal approvals, development costs, and tenant leasing and occupancy of properties under development, redevelopment, or intensification; failure to manage its growth effectively in accordance with its growth strategy or acquire assets on an accretive basis; changes in economic conditions, including changes in interest rates and the rate of inflation; shifting consumer preferences toward electronic commerce may result in a decrease in demand for physical space by retail tenants; failure to realize benefits from investments in Choice Properties’ new Information Technology (“IT”) systems, the inability of Choice Properties’ IT infrastructure to support the requirements of Choice Properties’ business; changes in Choice Properties’ competitiveness in the real estate market or the unavailability of desirable commercial real estate assets; failure of third-party vendors, developers, co-owners or strategic partners to provide adequate services at optimal rates, complete projects or fulfill contractual obligations; the inability of Choice Properties Limited Partnership to make distributions or other payments or advances; the inability of Choice Properties to obtain financing; 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; 3 Choice Properties REIT 2017 Annual Report • • • • 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; 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); changes in Choice Properties’ capital expenditure and fixed cost requirements; and changes in Choice Properties’ degree of financial leverage. 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 2017 AIF. 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 546 properties with a total Gross Leasable Area (“GLA”) of 44.1 million square feet as at December 31, 2017. Choice Properties’ portfolio includes 525 retail properties, 14 industrial properties, one office complex, and six undeveloped parcels of land. The retail properties are made up of: (i) 318 properties with a stand-alone Loblaw-bannered retail store; (ii) 199 properties anchored by a retail store operating under a Loblaw banner that also contain one or more ancillary tenants; and (iii) eight properties containing only ancillary tenants. The parent company of Choice Properties is Loblaw, which held an 82.4% direct effective interest in Choice Properties as at December 31, 2017. Loblaw’s majority shareholder is George Weston Limited (“GWL”), which also held a 6.1% direct effective interest in Choice Properties as at December 31, 2017. 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 FFO(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 to 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 key markets for mixed-use, and (iii) greenfield retail or mixed-use developments. Active Management Choice Properties is an internally managed trust that employs experienced and regionally focused staff to actively manage its properties. Choice Properties expects to increase cash flow and the value of its portfolio through initiatives to enhance operating performance, including leasing and merchandising strategies and effective capital investment in its properties. Choice Properties REIT 2017 Annual Report 4 Management’s Discussion and Analysis 3.1 Annual Highlights During 2017, Choice Properties: • • Reported rental revenue of $829,834, an increase of $46,260, or 5.9%, compared with $783,574 in the year ended December 31, 2016; Reported net income of $405,345 an increase of $628,417 compared with a net loss of $223,072 in 2016. The year ended 2017 included a fair value adjustment gain of $197,721 (2016 - loss of $406,906); Reported FFO(1) per unit diluted of $1.072, an increase of $0.072, or 7.2%, compared with $1.000 in 2016; Acquired 12 properties including three parcels of land with future development potential. The retail properties added approximately 517,000 square feet of GLA, at a weighted average capitalization rate of approximately 6.2%; Constructed 267,000 square feet of new GLA, that included 66,000 square feet for projects targeted for completion in 2018 and contributed to the completion of all 2017 projects, which totaled 347,000 square feet and yielded approximately 8%; • • • • Maintained ancillary occupancy and increased organic NOI(1) for the year by 3.2% to $545,190 from $528,320 in 2016; and • Increased annual distributions from $0.71 per unit to $0.74 per unit effective as of May 31, 2017, for a monthly increase of 4.2% or $0.0025 per unit. 5 Choice Properties REIT 2017 Annual Report 4. KEY PERFORMANCE INDICATORS AND SELECTED FINANCIAL INFORMATION Choice Properties has identified key financial and operating performance indicators that were derived from, and should be read in conjunction with, the consolidated financial statements of the Trust dated December 31, 2017 and 2016. The analysis of the indicators focuses on trends and significant events affecting the financial condition and results of operations of the Trust. As at or for the years ended December 31 ($ 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(i) Cash flows from operating activities(ii) Net operating income(1) Net income (loss)(i) Net income (loss) per unit diluted(i) FFO(1) per unit diluted FFO(1) payout ratio ACFO(1) ACFO(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 2017 546 44.1 10.0 years 2016 535 43.6 10.7 years $ $ $ $ $ $ $ $ $ $ $ 13.51 98.9% 829,834 504,314 584,690 405,345 0.981 1.072 68.1% 363,119 82.7% 0.7300 413,208,961 9,923,511 3,737,030 44.3% 3.7x 7.1x 4.5 years 3.62% $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 13.21 98.9% 783,574 530,622 546,752 (223,072) (0.544) 1.000 69.0% 339,152 83.2% 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% 312,582 83.6% 0.6500 402,582,183 8,905,889 3,881,390 44.5% 3.6x 7.3x 4.7 years 3.50% (i) GAAP measures of rental revenue and net income (loss), for the year ended December 31, 2017, include $930 attributable to non-controlling interests (2016 and 2015 - nil and nil, respectively). (ii) Cash flows from operating activities excludes interest paid. (iii) Debt ratios include Class C LP Units but exclude Exchangeable Units, see Section 8, “Liquidity and Capital Resources”, of this MD&A. 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 0.5 million, 1.2 million, and 2.7 million square feet of GLA in the fiscal years ended 2017, 2016 and 2015, respectively. These acquisitions were key drivers of increases in rental revenue, cash flows from operating activities and NOI(1). Additionally, development activities added approximately 1.2 million square feet of GLA in the combined three year period, which will contribute to growth in the future(2). The Trust maintained strong balance sheet metrics that were well within the covenants contained in Choice Properties’ Declaration of Trust and Choice Properties’ Trust Indentures, as supplemented. 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% and maturity dates ranging from 5 to 28 years. Subsequent to December 31, 2017, the Trust raised an additional $650,000 through the issuance of senior unsecured debentures which extended the weighted average term to maturity from 4.5 years to 4.7 years and reduced the weighted average coupon rate from 3.62% to 3.56%. Choice Properties REIT 2017 Annual Report 6 Management’s Discussion and Analysis 5. INVESTMENT PROPERTIES Choice Properties is the owner, manager and developer of well-located retail and other commercial properties across Canada. The following is a continuity schedule for the Trust’s investment properties for the years ended as indicated: ($ thousands) Income producing properties Properties under development Balance, beginning of year $ 9,031,603 $ Acquisitions of investment properties(i) Capital expenditures(ii) Operating capital expenditures Dispositions Amortization of straight-line rent and tenant improvement allowances Transfers from properties under development Adjustment to fair value of investment properties 119,874 100,094 49,378 (38,179) 33,944 68,087 144,639 Balance, end of year $ 9,509,440 $ 66,397 8,480 19,155 — — — (68,087) 15,615 41,560 Year ended Year ended December 31, 2017 9,098,000 $ December 31, 2016 8,561,000 $ 128,354 119,249 49,378 (38,179) 33,944 — 160,254 $ 9,551,000 $ 195,276 149,093 47,576 — 36,010 — 109,045 9,098,000 Includes acquisition costs. (i) (ii) Capital expenditures include capitalized interest. The Trust’s properties are well located and well suited within their respective markets. The portfolio is diversified between large, medium and small urban markets across Canada, with the majority of its base rent generated from large and medium urban markets, often in close proximity to major commercial arteries with easy highway access and high visibility. As at December 31, 2017, 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, 2017, including straight-line rent. Based on the definitions of Census Metropolitan Area (CMA) from Statistics Canada published in 2016. Approximately 64.0% of the portfolio’s base rent for the year ended December 31, 2017 was derived from large and medium urban markets. Approximately 48.5% of the portfolio’s base rent was generated from large urban markets, with a particular concentration in Toronto, Montreal and Vancouver. 7 Choice Properties REIT 2017 Annual Report 5.1 Valuation Method Investment properties were measured at fair value, primarily determined using the discounted cash flow method. Under this methodology, discount rates were applied to the projected annual operating cash flows, generally over a minimum term of ten years, including a terminal value based on a capitalization rate applied to the estimated NOI(1) in the terminal year. 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 valuation process for both internal and independent appraisals: Discount rate Terminal capitalization rate Overall capitalization rate As at December 31, 2017 Range Weighted average 7.02% 5.50% - 11.25% 4.75% - 10.50% 4.50% - 10.50% 6.39% 6.07% Range 5.75% - 11.25% 5.00% - 10.50% 4.75% - 10.50% As at December 31, 2016 Weighted average 7.05% 6.43% 6.12% For the year ended December 31, 2017, Choice Properties recorded a gross fair value increase of $453,000 on income producing properties and properties under development, comprised of acquisitions of $128,354, capital and operating expenditures of $168,627 and amortization of straight-line rent and tenant improvement allowances of $33,944, and a net upward adjustment to fair value of $160,254 due to changes in underlying cash flows and adjustments to underlying assumptions in valuation models, partially offset by proceeds of $38,179 for dispositions of capital assets. Included in certain investment properties acquired from Loblaw is excess land with development potential. Choice Properties will compensate Loblaw, over time, with intensification payments determined by a site intensification payment grid as outlined in the Strategic Alliance Agreement (see Section 13, “Related Party Transactions”, of this MD&A), should Choice Properties pursue activity resulting in the intensification of such excess land. The fair value of this excess land has been recorded in the consolidated financial statements. Choice Properties REIT 2017 Annual Report 8 Management’s Discussion and Analysis 5.2 Acquisition of Investment Properties The following table summarizes the investment properties acquired in the year ended December 31, 2017. For a detailed list of all properties acquired in 2017 and 2016, refer to Section 18, “Additional Information”, of this MD&A. ($ thousands except where otherwise indicated) (unaudited) Acquisitions from Loblaw: Fourth Quarter of 2017: Portfolio of retail properties Land for development in Toronto, Ontario Land for development in Hamilton, Ontario Total Acquisitions from Loblaw Acquisitions from third-parties: Fourth Quarter of 2017: Retail property in Mont-Saint Hilaire, Quebec Retail property in Marieville, Quebec Third Quarter of 2017: Retail property in St-Raymond-de-Portneuf, Quebec Land for development in Spruce Grove, Alberta Retail property in Uxbridge, Ontario Land in Ancienne Lorette, Quebec(ii) Land in Toronto, Ontario(ii)(iii) Land in Toronto, Ontario(ii) Second Quarter of 2017: Retail property in Brooks, Alberta First Quarter of 2017: Retail property in Winkler, Manitoba(ii) Retail property in Selkirk, Manitoba Total Acquisitions from third-parties Total Acquisitions Number of properties GLA (in square feet) Purchase price(i) Debt assumed Exchangeable Units issued Cash 3 1 1 5 1 1 1 1 1 — — — 1 — 1 7 12 $ 243,594 — — 243,594 $ 56,550 2,800 2,350 61,700 — $ — — — $ 11,840 2,651 141 14,632 44,710 149 2,209 47,068 57,482 20,000 25,000 — 40,097 — 3,152 — 35,635 15,400 2,900 6,601 — 3,850 3,200 9,435 910 5,026 5,500 8,402 — — — — — — — — — — — — — — — — 8,799 2,900 3,850 3,200 9,435 910 5,026 5,500 8,402 11,647 80,411 273,424 517,018 $ 2,747 7,100 64,470 126,170 $ — — 6,601 6,601 $ — — — 14,632 $ 2,747 7,100 57,869 104,937 Purchase price excludes acquisition costs. The property acquired was combined with the adjacent Choice Properties owned site. (i) (ii) (iii) While purchased for the value of the land, some ancillary commercial space was acquired as part of the transaction. Acquisitions in the Fourth Quarter of 2017 In the fourth quarter, Choice Properties acquired two retail properties, in Mont-Saint Hilaire, and Marieville, Quebec from third-party vendors for a combined purchase price of $18,300, excluding acquisition costs. The acquisitions added 77,482 square feet of GLA including a Loblaw lease of 20,000 square feet. The acquired properties were accretive, with a weighted average capitalization rate of approximately 6.2%. On December 5, 2017, Choice Properties acquired a portfolio of five properties from Loblaw, including three stand-alone retail properties and two parcels of land. The aggregate purchase price of $61,700, excluding acquisition costs, was settled through the issuance of 1,092,052 Exchangeable Units and cash. The acquired income producing properties were immediately accretive, with a weighted average capitalization rate of approximately 6.4%. The acquisition added three Loblaw leases with GLA of 243,594 square feet and opportunities to develop up to 80,000 square feet, including two new Loblaw food stores, totaling approximately 59,000 square feet. Additional Acquisitions in 2017 In the first quarter, Choice Properties acquired retail properties in Winkler and Selkirk, Manitoba from third-party vendors, for a combined purchase price of $9,847, excluding acquisition costs. The acquisitions added 92,058 square feet of GLA, including a 23,620 square foot Loblaw food store on the Selkirk site. The acquired properties were accretive, with a weighted average capitalization rate of approximately 7.6%. The Selkirk site is expected to be redeveloped, with an expected capitalization rate of approximately 9.0% upon completion(2). In the second quarter, Choice Properties acquired a retail property in Brooks, Alberta from a third-party vendor, for a purchase price of $8,402, excluding acquisition costs. The acquisition added 35,635 square feet of GLA including a 25,134 square foot Loblaw food store. The acquired property was accretive, with a capitalization rate of approximately 6.5%. 9 Choice Properties REIT 2017 Annual Report In the third quarter, Choice Properties acquired two retail properties, in St-Raymond, Quebec and Uxbridge, Ontario, from third-party vendors for a combined purchase price of $13,285, excluding acquisition costs. The acquisitions added 65,097 square feet of GLA including two Loblaw leases totaling 49,292 square feet. The acquired properties were accretive, with a weighted average capitalization rate of approximately 6.9%. Choice Properties also acquired parcels of land in Ancienne Lorette, Quebec, Spruce Grove, Alberta, and two parcels of land in Toronto, Ontario, from third-party vendors, for a combined purchase price of $14,636, excluding acquisition costs. These parcels of land provide opportunities for future development. 5.3 Development Activities During the year ended December 31, 2017, Choice Properties made progress on its development program as illustrated below: ($ thousands except where otherwise indicated) (unaudited) Expected total development GLA to be completed (in square feet) Development GLA constructed prior to 2017(ii) (in square feet) Development GLA constructed in 2017(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 Expected cost to complete 2017 projects completed or substantially completed Intensification Greenfield Projects to be completed in 2018 Intensification Redevelopment Greenfield Projects to be completed in 2019 Intensification Redevelopment Greenfield 145,000 202,000 347,000 256,000 44,000 66,000 366,000 167,000 162,000 38,000 367,000 Projects to be completed in 2020 Development projects(i) 296,000 — — — — — — — — — 53,000 93,000 146,000 92,000 109,000 201,000 — — — 9% 7% 8% $ 30,600 $ 29,700 $ 80,000 110,600 79,200 108,900 900 800 1,700 64,300 5,500 7,800 77,600 64,100 28,200 6,600 98,900 24,600 4,400 15,000 44,000 2,600 9,700 2,400 66,000 190,000 6% - 9% — — 44,000 66,000 6% - 8% 7% - 8% 88,900 9,900 22,800 66,000 300,000 6% - 9% 121,600 — — — — — 167,000 7% - 9% 162,000 6% - 9% 38,000 6% - 7% 66,700 37,900 9,000 367,000 6% - 9% 113,600 14,700 296,000 6% - 9% 118,100 8,000 110,100 Total 1,376,000 146,000 267,000 963,000 6% - 9% $ 463,900 $ 175,600 $ 288,300 (i) 2020 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. Activity in the quarter Choice Properties constructed 63,000 square feet for projects expected to be completed in 2018, delivering 19 new retail spaces for third-party tenants, primarily at intensification sites in Ontario. Activity in the year to date Choice Properties constructed 267,000 square feet, delivering 80 new retail spaces towards its 2017 and 2018 projects. 2017 Projects Completed Including construction initiated in prior quarters, Choice Properties substantially completed all 347,000 square feet of the development projects targeted for completion in 2017. The projects include the intensification of existing properties and greenfield development. Intensification projects completed comprised a 50,000 square foot expansion of a bakery leased to a subsidiary of George Weston Limited (“GWL”) in Mississauga, Ontario and 95,000 square feet for 22 retail spaces, including a new Loblaw liquor store. Completed greenfield projects comprised a 17,000 square foot Shoppers Drug Mart and 106,000 square feet for 34 retail spaces in Surrey, British Columbia; a 29,000 square foot Loblaw food store in Edmonton, Alberta; 32,000 square feet for 16 retail spaces in Guelph, Ontario; and 18,000 square feet for 7 retail spaces in Barrie, Ontario. The weighted average yields for projects substantially completed in 2017 was 8%. In the year ended December 31, 2017, the Trust compensated Loblaw with intensification payments of $5,793 in respect of completed GLA for which tenants have taken possession during 2017. Choice Properties REIT 2017 Annual Report 10 Management’s Discussion and Analysis 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. 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 $353,300 (including costs spent to date) to develop up to 1,029,000 square feet of GLA by the end of 2020. Development yields are expected to be accretive upon tenant occupancy(2). The following table indicates the anticipated square footage to be completed in each year, and the total cumulative expected capital cost to complete the projects, including investments made in prior years(2): ($ 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 2018 366,000 121,600 6% - 9% 198,000 $ $ 2019 367,000 113,600 6% - 9% 204,000 $ $ $ 2020 296,000 118,100 6% - 9% 250,000 $ $ Total 1,029,000 353,300 6% - 9% 652,000 $ $ 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, 2017: (in square feet except where otherwise indicated) (unaudited) Occupied, December 31, 2016 Tenant openings Tenant closures Tenant expiries Tenant renewals Developments GLA taken off-line Acquisitions Dispositions Re-certifications Occupied GLA 43,041,000 175,000 (56,000) (262,000) 178,000 236,000 (137,000) 488,000 (37,000) (5,000) Occupancy 98.9% $ $ $ $ $ $ $ $ Occupied, December 31, 2017 43,621,000 98.9% $ Average base rent (per square foot) 13.21 19.37 13.20 15.13 19.40 28.17 N/A 14.36 13.32 N/A 13.51 Choice Properties’ principal tenant, Loblaw, represents 87.6% of the Trust’s GLA (December 31, 2016 - 88.3%). The remaining GLA is designated ancillary space for leasing primarily to third-party tenants. As at December 31, 2017, Choice Properties’ portfolio GLA, occupied GLA, and occupancy rates were as follows: As at December 31, 2017 As at December 31, 2016 Portfolio GLA 38.7 Occupied GLA 38.7 Occupancy (%) 100.0% 5.4 44.1 4.9 43.6 91.1% 98.9% Portfolio GLA 38.5 5.1 43.6 Occupied GLA 38.5 4.5 43.0 Occupancy (%) 100.0% 90.0% 98.9% (in millions of square feet except where otherwise indicated) (unaudited) Loblaw banners Ancillary tenants Total 11 Choice Properties REIT 2017 Annual Report As at December 31, 2017, Loblaw represented approximately 88.2% (December 31, 2016 - 90.0%) of annual base rent. The weighted average lease term-to-maturity on the Loblaw leases was 10.3 years at December 31, 2017 (December 31, 2016 - 11.2 years). The first maturity of a Loblaw lease does not occur until 2019. Loblaw leases 38.7 million square feet of GLA, with approximately 82.8%, 15.8% and 1.4% of such GLA attributed to retail, industrial and office space, respectively. Choice Properties has approximately 5.4 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, 2017, 4.9 million square feet was leased to ancillary tenants with an average base rent per square foot of $15.48 and a weighted average lease term to maturity of 5.7 years (December 31, 2016 - $14.03 and 5.8 years, respectively). 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, 2017, Choice Properties entered into leases totaling approximately 140,000 square feet with an average lease term of 8.8 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) Tenant openings Held for redevelopment Tenant renewals Same Property Developments Total 2017 Average base rent (per square foot) 18.10 — 13.58 15.84 27.96 20.69 2016 Average base rent (per square foot) 19.28 3.43 13.50 14.48 23.40 19.09 $ $ $ $ $ $ GLA 69,000 20,000 112,000 201,000 215,000 416,000 GLA 42,000 $ — $ $ $ $ $ 42,000 84,000 56,000 140,000 In the year end ended December 31, 2017, Choice Properties entered into leases totaling approximately 589,000 square feet with an average lease term of 8.6 years. The leasing activity for the portfolio is shown below: For the year ended December 31 (in square feet except where otherwise indicated) (unaudited) Tenant openings Held for redevelopment Tenant renewals Same Property Developments 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 2017 Average base rent (per square foot) 19.37 — 19.40 19.39 28.17 22.91 2016 Average base rent (per square foot) 15.27 3.43 15.43 15.03 20.09 17.71 $ $ $ $ $ $ GLA 234,000 20,000 446,000 700,000 785,000 1,485,000 GLA 175,000 $ — $ $ $ $ $ 178,000 353,000 236,000 589,000 Three Months Year End 2017 42,000 13.58 $ 2016 112,000 13.50 $ $ 12.7% 58.2% 7.0% 65.4% 2017 178,000 19.40 8.1% 67.9% 2016 446,000 15.43 $ 7.7% 69.5% Choice Properties REIT 2017 Annual Report 12 Management’s Discussion and Analysis The lease maturity profile for ancillary tenants as at December 31, 2017 was as follows: Ancillary GLA (in square feet) 137,000 535,000 345,000 740,000 496,000 550,000 2,156,000 485,000 5,444,000 Expiring ancillary GLA as a percentage of ancillary GLA 2.5% 9.8% 6.3% 13.6% 9.1% 10.1% 39.7% 8.9% 100.0% Expiring ancillary GLA as a percentage of total GLA 0.3% $ 1.2% 0.8% 1.7% 1.1% 1.3% 4.9% 1.1% 12.4% $ (unaudited) Month-to-month 2018 2019 2020 2021 2022 2023 & Beyond Vacant Portfolio Ancillary Total Operating Capital Expenditures Annualized base rent ($ thousands) 1,891 6,807 5,620 10,816 6,463 8,902 43,888 $ $ $ $ $ $ $ — $ $ 84,387 Average base rent (per square foot) 13.80 12.69 16.22 14.61 13.03 16.18 20.30 — 15.48 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 ACFO(1). During the year ended December 31, 2017, Choice Properties incurred $44,962 of property capital expenditures, which are recoverable from tenants under the terms of their leases over the useful life of the improvements (2016 - $42,192). 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 $137,961 as at December 31, 2017 (December 31, 2016 - $100,683), the majority of which Choice Properties expects to recover from tenants over the useful life of the improvements(2). Management expects annual property capital expenditures to be approximately $1.00 per square foot based on the GLA anticipated to be owned at the end of the fiscal year. This GLA includes estimates management made at the beginning of the fiscal year for anticipated acquisition and development activities during the year(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 ACFO(1). Choice Properties incurred $1,927 of tenant improvement allowances and $2,489 of direct leasing costs during the year ended December 31, 2017 (2016 - $2,307 and $3,077, respectively). 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). 5.5 Dispositions of Investment Properties On November 28, 2017, a retail property in Quebec, with a fair value of $3,434, was sold for cash consideration. Other Transactions On July 17, 2017, the Trust sold certain gas bar capital assets with a fair value of $34,745 to Loblaw, for cash, in order to facilitate the sale of substantially all of Loblaw’s gas bar operations to Brookfield Business Partners L.P. The gas bar capital assets were leased to Loblaw as part of the respective tenant leases between the Trust and Loblaw. The tenant leases between the Trust and Loblaw related to these investment properties remained substantially unchanged. 13 Choice Properties REIT 2017 Annual Report 6. CONSOLIDATED RESULTS OF OPERATIONS Choice Properties’ financial results for the years ended December 31, 2017 and December 31, 2016 are summarized below: For the years ended December 31 ($ 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 2017 2016 Variance favourable / (unfavourable) $ 604,228 $ 578,188 $ 217,093 8,513 829,834 (208,854) (620) 202,368 3,018 783,574 (198,865) (1,375) $ 620,360 $ 583,334 $ 26,040 14,725 5,495 46,260 (9,989) 755 37,026 General and administrative expenses (23,329) (28,857) 5,528 Property management and other administration fees charged to related party Amortization of other assets Net interest expense and other financing charges Interest and other income 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 Income (Loss) 1,270 (934) (394,826) 4,829 254 740 (930) (372,842) 2,309 80 $ $ 207,624 $ 183,834 $ 38,212 160,254 (529,591) 109,045 (745) 13,640 405,345 $ (223,072) $ 530 (4) (21,984) 2,520 174 23,790 567,803 51,209 (14,385) 628,417 Net Income (Loss) For the year ended December 31, 2017, net income of $405,345, was greater by $628,417, compared to the net loss of $223,072 in 2016, primarily due to favourable changes of $567,803 and $51,209 in the adjustment to the fair value of Exchangeable Units and the adjustment to the fair value of investment properties, respectively, partially offset by an unfavourable change of $14,385 in the adjustment to the fair value of investment property held in an 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, 2017 was $23,790 higher than 2016 due to a $37,026 increase in net property income, a $5,528 decrease to general and administrative expenses (which includes a favourable change of $3,841 in the adjustment to the fair value of unit-based compensation), and a $2,520 increase in interest and other income (which includes a $2,000 transactional fee), partially offset by a $21,984 increase in net interest and other financing charges. Net property income increased due to acquisitions of income producing properties and development of additional GLA. 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 an expense to the Trust. Net income for the year ended December 31, 2017 also included $930 attributable to non-controlling interests (2016 - nil). Choice Properties REIT 2017 Annual Report 14 Management’s Discussion and Analysis Rental Revenue Rental revenue is comprised primarily of base rent and recoveries from tenants for property taxes, operating costs and qualifying capital expenditures. Growth in rental revenue is materially impacted by newly acquired assets. To better measure certain key performance factors, management further analyzes rental revenue for income producing properties owned by the Trust throughout the current and comparative reporting periods, (“Same Properties”), to remove the impact of recent property acquisition and disposition transactions. For the years ended December 31 ($ thousands) (unaudited) Same Properties(i) Acquisitions net of disposition(ii) Total Revenue $ $ 2017 805,630 24,204 829,834 $ $ Variance favourable / (unfavourable) 38,904 7,356 46,260 2016 766,726 16,848 783,574 $ $ (i) (ii) There were 515 income producing properties that were owned throughout both the years ended December 31, 2017 and December 31, 2016 (“Same Properties”). Properties acquired subsequent to December 31, 2015 (see Section 18, “Additional Information”) net of disposition in November 2017 (see Section 5.5, “Dispositions of Investment Properties”). During the year ended December 31, 2017, rental revenue increased by $46,260, or 5.9% compared to 2016. The growth was attributable to an increase of $38,904 in revenue from Same Properties and additional rental revenue of $7,356 attributable to the net properties acquired in 2016 and 2017. The growth in revenue from Same Properties was attributable to an increase of $23,011 in base rent, an increase of $8,231 in recovery of operating expenses, a $4,807 increase in revenue generated from the recovery of capital expenditures, and a $2,855 increase in other revenues. The $23,011 increase in base rent from Same Properties included revenue from newly developed GLA of $13,094 and increases from higher average rents per square foot on ancillary leases. In addition, total revenue for the year ended December 31, 2017 included $5,620 (2016 - $721) of lease surrender revenue received from Loblaw. Lease surrender revenue of $2,520 was earned in connection with the disposition and $3,100 was related to a development included in Same Properties, of which, $930 was attributable to the non-controlling interests. 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, 2017, the net amount of these items positively impacted rental revenue by $33,944 (2016 - $36,010). Property Operating Costs Property operating costs are comprised primarily of expenses to manage and maintain the properties for the benefit of the tenants, including realty taxes, that are recoverable under the leases of most tenants. Non-recoverable operating costs include expenses that do not directly benefit the tenants. For the years ended December 31 ($ thousands) (unaudited) Same Properties(i) Acquisitions net of disposition(ii) Total Property Operating Costs $ $ 2017 203,520 5,954 209,474 $ $ Variance Favourable / (Unfavourable) (7,851) (1,383) (9,234) 2016 195,669 4,571 200,240 $ $ (i) (ii) There were 515 income producing properties that were owned throughout both the years ended December 31, 2017 and December 31, 2016 (“Same Properties”). Properties acquired subsequent to December 31, 2015 (see Section 18, “Additional Information”) net of disposition in November 2017 (see Section 5.5, “Dispositions of Investment Properties”). During the year ended December 31, 2017, property operating costs increased by $9,234 or 4.6% compared to 2016, which was attributable to an increase of $7,851 from Same Properties, and $1,383 from the net properties acquired in 2016 and 2017. The increase in total property operating costs from Same Properties was attributable to an increase of $8,610 in recoverable operating costs, partially offset by a decrease of $759 of non-recoverable operating costs due to the partial reversal of the allowance for bad debts. Non-recoverable operating costs include expenditures that can vary by year. 15 Choice Properties REIT 2017 Annual Report General and Administrative Expenses For the years ended December 31 ($ 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: Capitalized to investment properties Allocated to recoverable operating expenses General and administrative expenses Less: Adjustment to fair value of unit-based compensation(ii) Property management and other administration fees charged to related party(i)(ii) Internal expenses for leasing(ii) Adjusted general and administrative expenses(ii) As a percentage of revenue $ $ $ $ 2017 27,782 1,892 1,515 2,580 33,769 (3,035) (7,405) 2016 31,256 2,185 2,310 2,932 38,683 (2,635) (7,191) 23,329 $ 28,857 $ (468) (1,270) (2,336) 19,255 $ 2.3% (4,309) (740) (2,135) 21,673 $ 2.8% Variance favourable / (unfavourable) 3,474 $ 293 795 352 4,914 400 214 5,528 (3,841) 530 201 2,418 0.5% (i) (ii) The Services Agreement, Property Management Agreement and Sublease Administration Agreement are described in section 13, “Related Party Transactions”, of this MD&A. Adjusted general and administrative expenses, used in the calculation of general and administrative expenses as a percent of revenue excludes: a. b. c. fair value adjustments for unit-based compensation, which fluctuates with Unit prices; the property management fee and sublease administration fee charged to a related party, which compensate Choice Properties for additional costs incurred; and internal expenses for leasing, to increase comparability between real estate entities that capitalize the expenses. Adjusted general and administrative expenses, for the year ended December 31, 2017, of $19,255, or 2.3% when expressed as a percentage of revenue, decreased $2,418, or 0.5% when expressed as a percentage of revenue, compared to 2016. General and administrative expenses, are impacted by transactions that can vary by year and the timing of when expenses are incurred. On an annual basis, the fluctuations, due to the timing of expenses, are minimized and adjusted general and administrative expenses expressed as a percentage of revenue becomes comparable year-over-year. Choice Properties targets general and administrative expense spending to be approximately 2.5% of total revenue(2). Choice Properties REIT 2017 Annual Report 16 Management’s Discussion and Analysis Net Interest Expense and Other Financing Charges For the years ended December 31 ($ 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 Gain on settlement of bond forward contracts Net interest expense and other financing charges (i) Represents interest on indebtedness due to Loblaw. $ $ $ 2017 103,625 46,250 110 11,799 161,784 232,199 393,983 1,560 1,638 (2,355) — 2016 108,788 46,250 181 3,776 158,995 218,961 377,956 $ $ $ (522) 1,639 (3,549) (2,682) 394,826 $ 372,842 $ Variance favourable / (unfavourable) 5,163 — 71 (8,023) (2,789) (13,238) (16,027) (2,082) 1 (1,194) (2,682) (21,984) $ $ $ $ For the year ended December 31, 2017, net interest expense and other financing charges increased by $21,984 or 5.9% compared to 2016. 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 2016 and 2017, and interest incurred on credit facilities as a result of larger average drawn balances, partially offset by the decline in interest on senior unsecured debentures due to the repayment in 2017. Net interest expense and other financing charges also included a gain on the settlement of bond forward contracts of $2,682 in the year ended December 31, 2016. 17 Choice Properties REIT 2017 Annual Report 7. OTHER MEASURES OF PERFORMANCE In addition to the GAAP measures already described, Choice Properties’ management utilizes non-GAAP measures to analyze performance. See Section 17, “Non-GAAP Financial Measures”, of this MD&A, for details on how these measures are defined, calculated and reconciled to GAAP financial measures and why management analyzes these measures. NOI(1) and FFO(1) for the years ended December 31, 2017 and December 31, 2016 are summarized below: For the years ended December 31 ($ 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 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) $ $ $ $ $ $ 2017 584,690 545,190 442,935 1.076 1.072 68.1% 0.7300 $ $ $ $ $ $ 411,490,052 413,208,961 413,381,522 2016 546,752 528,320 410,135 1.003 1.000 69.0% $ $ $ $ $ 0.6900 $ 409,023,586 410,034,555 410,557,333 Variance Favourable / (Unfavourable) 37,938 16,870 32,800 0.073 0.072 0.9% 0.0400 2,466,466 3,174,406 2,824,189 There is no industry-defined definition of NOI(1). Refer to Section 17.1, “Net Operating Income”, of this MD&A, for a definition of NOI(1) and a reconciliation to net income (loss) determined in accordance with GAAP. Net Operating Income(1) For the year ended December 31, 2017, NOI(1) increased $37,938, or 6.9%, compared to 2016, driven by an increase of $32,134 from Same Properties, and $5,804 from the net properties acquired in 2016 and 2017. 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 of recent property acquisition and disposition transactions. 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, 2017, NOI(1) for Same Properties, measured with the same GLA, increased by $16,870 or 3.2%, compared to 2016, primarily due to an increase of $11,549 in base rent and net recoveries, which was driven by rent steps in Loblaw leases and higher average rents per square foot on ancillary leases. The increase was also due to higher revenue generated from the recovery of capital expenditures of $4,807 and a decrease of $759 in non-recoverable operating expenses, partially offset by a decrease of $245 in other revenues. Funds from Operations(1) Choice Properties calculates its FFO(1) in accordance with the Real Property Association of Canada’s White Paper on Funds from Operations & Adjusted Funds from Operations for IFRS issued in February 2017. Refer to Section 17.2, ”Funds from Operations”, 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, 2017, FFO(1) increased by $32,800 or 8.0% compared to 2016. The year-over-year growth was due to an increase in net property income of $36,320 (which included lease surrender revenue, net of the portion attributable to non-controlling interests, of $4,690), an increase in interest and other income of $2,520 (which includes a $2,000 transactional fee), a decrease in general and administrative expenses of $1,888, an increase in the fees charged to related party of $530, and $174 from the share of income from joint venture. These increases to FFO(1) were partially offset by a $8,628 increase in interest and other financing charges, and a $4 increase in amortization of other assets. The increase to interest and other financing charges of $8,628 included the impact of a gain from the settlement of bond forward contracts of $2,682 in the first quarter of 2016 (2017 - nil). For the year ended December 31, 2017, FFO(1) per unit on a diluted basis increased by $0.072 or 7.2% compared to 2016. Choice Properties REIT 2017 Annual Report 18 Management’s Discussion and Analysis 8. 8.1 LIQUIDITY AND CAPITAL RESOURCES Major Cash Flow Components Three Months (unaudited) Year End (audited) 2017 2016 Source/ (Use) 2017 2016 Source/ (Use) $ — $ 1,784 $ (1,784) $ 5,113 $ 44,354 $ (39,241) 194,777 233,767 (38,990) 504,314 530,622 (26,308) (134,069) (106,441) (27,628) (249,504) (373,192) 123,688 (54,301) (123,997) 69,696 (253,516) (196,671) (56,845) 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 of period $ 6,407 $ 5,113 $ 1,294 $ 6,407 $ 5,113 $ 1,294 Cash Flows from Operating Activities The year-over-year quarterly decrease in cash flows from operating activities for the three months ended December 31, 2017 of $38,990 was primarily due to the decrease in non-cash working capital, driven by a reduction in the ending balance of trade payables and other liabilities. The year-over-year decrease in cash flows from operating activities for the year ended December 31, 2017 of $26,308 was primarily due to the decrease in non-cash working capital, driven by a reduction in the ending balance of trade payables and other liabilities. 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 quarterly increase in cash flows used in investing activities for the three months ended December 31, 2017 of $27,628 was primarily due to the increases in acquisitions of and additions to investment properties in the current quarter compared to the same period in the prior year plus contributions to equity investment. The year-over-year decrease in cash flows used in investing activities for the year ended December 31, 2017 of $123,688 was primarily due to decreases in acquisitions of and additions to investment properties in 2017 compared to 2016, plus the proceeds received from dispositions. Cash Flows used in Financing Activities The year-over-year quarterly decrease in cash flows used in financing activities for the three months ended December 31, 2017 of $69,696 was primarily due to a net increase in advances on the credit facilities in the current quarter compared to the same period in the prior year. The year-over-year increase in cash flows used in financing activities for the year ended December 31, 2017 of $56,845 was primarily due to a lower amount of new debt issued in 2017 than in 2016. 19 Choice Properties REIT 2017 Annual Report 8.2 Liquidity and Capital Structure Choice Properties expects to fund its ongoing operations and finance future growth primarily through the use of: (i) existing cash; (ii) cash flows from operations; (iii) short term financing through the credit facilities; and (iv) the issuance of unsecured debentures and equity (including Exchangeable Units), subject to market conditions. Given reasonable access to capital markets, Choice Properties does not foresee any impediments in obtaining financing to satisfy its short and long term financial obligations, including its capital investment commitments(2). ($ thousands) Cash and cash equivalents Unused portion of the credit facilities Liquidity Credit Facilities As at As at December 31, 2017 6,407 189,000 195,407 $ $ December 31, 2016 5,113 578,000 583,113 $ $ $ $ Variance favourable / (unfavourable) 1,294 (389,000) (387,706) Choice Properties has a $500,000 senior unsecured committed revolving credit facility provided by a syndicate of lenders. On August 9, 2017, the Trust extended the maturity of the credit facility to July 5, 2022. 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”. At December 31, 2017, Choice Properties also had a bi-lateral $250,000 senior unsecured committed revolving credit facility with a major Canadian financial institution maturing December 21, 2018. The interest on the credit facility was at variable rates of either: Prime plus 0.25% or Bankers’ Acceptance rate plus 1.25%. Certain conditions of the credit facility were contingent on Choice Properties’ credit rating remaining at “BBB”. Should certain conditions not have been met, the credit facility would have become secured against select properties. Subsequent to December 31, 2017, the Trust repaid and cancelled this credit facility. As at December 31, 2017, $311,000 was drawn under the syndicated credit facility and $250,000 was drawn under the bi-lateral credit facility (December 31, 2016 - $172,000 and nil, respectively). Base Shelf Prospectus On January 9, 2018, 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 January 12, 2018, Choice Properties issued $650,000 of senior unsecured debentures under this prospectus. Long Term Debt and Class C LP Units The following outlines the changes to Choice Properties’ outstanding long term debt and Class C LP Units in the year ended December 31, 2017: For the year ended December 31, 2017 ($ thousands) Principal balance outstanding, beginning of year $ Senior unsecured debentures 3,050,000 Mortgages 2,927 $ $ Class C LP Units 925,000 $ Total long term debt and Class C LP Units 3,977,927 Weighted average coupon rate 3.91% Issuance: Mortgage assumed Repayment: — 6,601 Series 6 senior unsecured debentures Mortgages (200,000) — — (1,208) — — — Principal balance outstanding, end of year $ 2,850,000 $ 8,320 $ 925,000 $ 3,783,320 6,601 2.58% (200,000) (1,208) 3.00% 6.83% 3.96% Choice Properties REIT 2017 Annual Report 20 Management’s Discussion and Analysis Senior Unsecured Debentures On January 12, 2018, Choice Properties issued $300,000 and $350,000 aggregate principal amount of Series I and J senior unsecured debentures due March 21, 2022 and January 10, 2025, respectively. The Series I unsecured debentures bear interest at a rate of 3.010% per annum, with semi-annual installments of interest due on March 21 and September 21 in each year, commencing March 21, 2018. The Series J unsecured debentures bear interest at a rate of 3.546% per annum, with semi-annual installments of interest due on January 10 and July 10 of each year, commencing July 10, 2018. The offering in January 2018 was made under the Short Form Base Shelf Prospectus dated January 9, 2018. On February 12, 2018, Choice Properties completed the early retirement of Series A senior unsecured debentures at a redemption price equal to $1,007.200 per $1,000 principal amount of Series A debentures, together with accrued and unpaid interest. At December 31, 2017 the weighted average coupon rate and the weighted average term to maturity on Choice Properties’ senior unsecured debentures was 3.62% (December 31, 2016 - 3.58%) and 4.5 years (December 31, 2016 - 5.2 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. The redemption was funded by a draw on the credit facilities. 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 of Series G and H senior unsecured debentures due March 7, 2023 and March 7, 2046, respectively, under the Short Form Base Shelf Prospectus dated October 14, 2015. 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%. 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, 2017 or 2016. Off-Balance Sheet Arrangements 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, 2017, the aggregate gross potential liability related to these letters of credit totaled $33,352 including $5,231 posted by Loblaw with the province of Ontario and City of Toronto on behalf of Choice Properties related to deferral of land transfer tax on properties acquired from Loblaw subsequent to the initial public offering (December 31, 2016 - $31,205 including $6,465 posted by Loblaw). Class C LP Units (authorized - unlimited) As at December 31, 2017, Loblaw holds all of the 92,500,000 outstanding Class C LP Units (December 31, 2016 - 92,500,000 Units), which are redeemable at Loblaw’s option, beginning in 2027. Choice Properties has the option to settle the redemption payment with cash, Exchangeable Units, or any combination thereof. Maturities of Long Term Debt and Class C LP Units As at December 31, 2017 ($ thousands) 2018 2019 2020 2021 2022 Thereafter $ Senior unsecured debentures 400,000 200,000 550,000 450,000 300,000 950,000 Mortgages 383 $ $ Class C LP Units — $ 1,803 6,134 — — — — — — — 925,000 Total principal balance outstanding $ 2,850,000 $ 8,320 $ 925,000 $ Total 400,383 201,803 556,134 450,000 300,000 1,875,000 3,783,320 21 Choice Properties REIT 2017 Annual Report 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, 2017 and December 31, 2016. 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, 2017 44.3% December 31, 2016 44.5% 3.7x 3.5x (i) Debt ratios include Class C LP Units but exclude Exchangeable Units. The ratios are non-GAAP financial measures calculated based on the Trust Indentures, as supplemented. Choice Properties REIT 2017 Annual Report 22 Management’s Discussion and Analysis 8.3 Credit Ratings Choice Properties’ debt securities are rated by two independent credit rating agencies: DBRS and S&P. Choice Properties’ ratings are linked to and equivalent to those of Loblaw, largely because of Loblaw’s significant ownership position in the Trust, Loblaw’s position as Choice Properties’ most significant tenant for the foreseeable future, and the strategic relationship between the Trust and Loblaw. Choice Properties has maintained its BBB credit rating with both S&P and DBRS. On November 17, 2017, DBRS confirmed the rating at BBB with a positive trend. On June 30, 2017, S&P confirmed the rating at BBB with a stable outlook. A credit rating of BBB- or higher is an investment grade rating. 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, 2017 410,557,333 December 31, 2016 408,063,609 1,694,763 37,374 1,092,052 413,381,522 1,549,693 65,318 878,713 410,557,333 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, 2017, Choice Properties issued 1,694,763 Units under the DRIP (year ended December 31, 2016 - 1,549,693 Units) including 1,359,193 Units to GWL (year ended December 31, 2016 - 1,265,160 Units). As of December 31, 2017, GWL is no longer participating in the DRIP. On average, 12.9% of Unitholders other than Loblaw and GWL participated in the DRIP in the year ended December 31, 2017 (year ended December 31, 2016 - 11.2%). Distributions In the year ended December 31, 2017, Choice Properties declared $300,452 in distributions (2016 - $282,320), 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. In 2016, 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%. In 2017, Choice Properties increased annual distributions from $0.71 per unit to $0.74 per unit (an increase of 4.2% or $0.0025 per unit monthly) effective as of May 31, 2017. At its most recent meeting on February 13, 2018, the Board of Trustees reviewed and approved the current rate of distributions of $0.74 per unit per annum. 23 Choice Properties REIT 2017 Annual Report The distributions declared for the periods ended December 31, 2017 and December 31, 2016 were as follows: For the periods ended December 31 ($ thousands) (unaudited) Total distributions declared Less: Distributions reinvested through Three Months Year End 2017 $ 76,312 2016 $ 72,848 Variance favourable / (unfavourable) $ 3,464 2017 $ 300,452 2016 $ 282,320 Variance favourable / (unfavourable) $ 18,132 the DRIP (5,539) (5,532) (7) (22,383) (19,587) Net distributions declared $ 70,773 $ 67,316 $ 3,457 $ 278,069 $ 262,733 $ (2,796) 15,336 In determining the amount of distributions to be made to Unitholders, Choice Properties’ Board of Trustees considers 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: Three Months Year End For the periods ended December 31 ($ thousands) (unaudited) Cash flows from operating activities 2017 $ 194,777 2016 $ 233,767 Less: Interest paid on financing activities (12,737) (13,893) Variance favourable / (unfavourable) (38,990) 2017 $ 504,314 2016 $ 530,622 1,156 (163,237) (156,297) (37,834) $ 341,077 $ 374,325 $ $ Variance favourable / (unfavourable) (26,308) (6,940) (33,248) (18,132) $ $ $ 182,040 $ 219,874 (76,312) (72,848) (3,464) (300,452) (282,320) 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 For the periods ended December 31 ($ thousands) (unaudited) Net income (loss) Less: Net income attributable to non- controlling interests Add: Distributions on Exchangeable Units included in net interest expense and other financing charges Net income (loss) attributable to Unitholders excluding distributions on Exchangeable Units $ 105,728 $ 147,026 $ (41,298) $ 40,625 $ 92,005 $ (51,380) Three Months Year End 2017 $ 36,533 2016 $ 255,574 Variance favourable / (unfavourable) $ (219,041) 2017 $ 405,345 2016 $ (223,072) $ Variance favourable / (unfavourable) 628,417 (930) — (930) (930) — (930) 58,895 56,444 2,451 232,199 218,961 13,238 $ 94,498 $ 312,018 $ (217,520) $ 636,614 $ (4,111) $ 640,725 Less: Total distributions declared (76,312) (72,848) (3,464) (300,452) (282,320) (18,132) Excess (shortfall) of net income (loss) attributable to Unitholders, less distributions on Exchangeable Units, over total distributions declared $ 18,186 $ 239,170 $ (220,984) $ 336,162 $ (286,431) $ 622,593 Choice Properties REIT 2017 Annual Report 24 Management’s Discussion and Analysis Three Months Year End For the periods ended December 31 ($ thousands) (unaudited) Adjusted Cash Flow from Operations(1) Less: Total distributions declared Excess of cash provided by ACFO(1) over 2017 $ 102,565 2016 92,369 $ (76,312) (72,848) total distributions declared $ 26,253 $ 19,521 Variance favourable / (unfavourable) 10,196 2017 $ 363,119 2016 $ 339,152 Variance favourable / (unfavourable) 23,967 $ (3,464) (300,452) (282,320) (18,132) 6,732 $ 62,667 $ 56,832 $ 5,835 $ $ The excess of cash flows provided by operating activities less interest paid over total distributions declared for the three months ended December 31, 2017 includes seasonal fluctuations in non-cash working capital, such as the 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, 2017, were in excess of total distributions declared. 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). ACFO(1) excludes most of the short-term fluctuations in non-cash working capital, such as property tax installments, and the timing of semi- annual debenture installments, although some fluctuations between quarters for operational cash flows still exist. ACFO(1) also adjusts cash flows from operating activities for the working capital 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. The table below calculates the ACFO(1) payout ratio: Three Months Year End For the periods ended December 31 ($ thousands) (unaudited) Total distributions declared $ Adjusted Cash Flow from 2017 76,312 Operations(1) $ 102,565 ACFO(1) payout ratio 74.4% $ $ 2016 72,848 92,369 78.9% $ $ Variance favourable / (unfavourable) 3,464 2017 $ 300,452 10,196 $ 363,119 4.5% 82.7% Variance favourable / (unfavourable) 18,132 23,967 0.5% $ $ 2016 282,320 339,152 83.2% $ $ Choice Properties calculates its ACFO(1) in accordance with the Real Property Association of Canada’s White Paper on Adjusted Cashflow from Operations (ACFO) for IFRS issued in February 2017. Refer to Section 17.3, “Adjusted Cash Flow from Operations”, of this MD&A, for a reconciliation of ACFO(1) to cash flows from operating activities, as determined in accordance with GAAP. For the three months ended December 31, 2017, ACFO(1) increased by $10,196 compared to the same period in 2016. The primary drivers for the year-over-year increase were a $13,086 increase in net property income and a $2,158 increase in interest and other income, partially offset by a $6,141 unfavourable fluctuation from operating working capital (see Section 17.3, “Adjusted Cash Flow from Operations”), such as changes to net rent receivable from tenants, trade accounts payable and accrued liabilities. For the three months ended December 31, 2017, the ACFO(1) payout ratio was 74.4% compared to 78.9% for the same period in 2016. The decrease was primarily driven by the growth in net property income, which included lease surrender revenue, net of the portion attributable to non-controlling interests, of $4,690 and an increase in interest and other income driven by a $2,000 transactional fee. 25 Choice Properties REIT 2017 Annual Report For the year ended December 31, 2017, ACFO(1) increased by $23,967 compared to 2016. The primary drivers for the year-over-year increase were a $38,162 increase in net property income, a $2,520 increase in interest and other income and a $2,328 decrease in general and administrative expenses. These increase were partially offset by a $12,099 unfavourable fluctuation from operating working capital (see Section 17.3, “Adjusted Cash Flow from Operations”), such as changes to net rent receivable from tenants, trade accounts payable and accrued liabilities, a $5,946 increase in interest and other financing charges (net of the impact of the gain on settlement in 2016) and an increase in operating capital expenditures of $1,802. For the year ended December 31, 2017, the ACFO(1) payout ratio was 82.7% compared to 83.2% in 2016. The decrease was primarily driven by the increase in net property income. Management anticipates the annual ACFO(1) payout ratio to be approximately 85%(2). Based on current facts and assumptions, management does not anticipate cash distributions will be reduced or suspended in the foreseeable future(2). Tax Treatment The carrying value of the Trust’s investment properties exceeds their tax base. Choice Properties’ historic tax treatment of distributions has been as follows: For the years ended December 31 (unaudited) Return of Capital Income Capital Gain 8.5 Contractual Obligations 2017 2.9% 96.4% 0.7% 2016 3.1% 92.9% 4.0% 2015 9.4% 90.5% 0.1% 2014 17.1% 81.8% 1.1% 2013 22.7% 77.3% —% 100.0% 100.0% 100.0% 100.0% 100.0% The undiscounted future principal and interest payments on Choice Properties’ debt instruments, distribution and redemption payments on Class C LP Units, and other contractual obligations as at December 31, 2017 were as follows: ($ thousands) 2019 (unaudited) Senior unsecured debentures Mortgages Credit facilities(i) Class C LP Units Other(ii) Total 2018 Thereafter $ 503,263 $ 289,047 $ 627,648 $ 512,133 $ 350,560 $ 1,124,808 2020 2021 2022 584 250,000 46,250 99,607 2,008 — 46,250 1,030 6,238 — 46,250 1,033 — — — 311,000 — — 46,250 1,051 46,250 1,181,058 1,043 3,270 Total 3,407,459 $ 8,830 561,000 1,412,308 107,034 $ 899,704 $ 338,335 $ 681,169 $ 559,434 $ 708,853 $ 2,309,136 $ 5,496,631 (i) (ii) Excludes interest on the revolving credit facilities. As at December 31, 2017, Choice Properties had commitments of approximately $72,777 for future capital expenditures related to ongoing development and sustainable capital projects, and other contractual obligations such as operating rents. The Trust was also committed to future payments of approximately $34,257 in relation to its interests in other entities. Choice Properties REIT 2017 Annual Report 26 Management’s Discussion and Analysis 9. 9.1 QUARTERLY RESULTS OF OPERATIONS Results by Quarter The following is a summary of selected consolidated financial information for each of the eight most recently completed quarters. Selected Quarterly Information ($ thousands except where otherwise indicated) (unaudited) Number of properties Gross Leasable Area (in millions of square feet) Occupancy Rental revenue(i) Net Operating Income(1) Net income (loss)(i) Net income (loss) per unit(i) Net income (loss) per unit diluted(i) Cash flows from operating activities(ii) FFO(1) per unit - diluted ACFO(1) ACFO(1) payout ratio Distribution declared per unit Market price per Unit - closing Number of Units outstanding Total assets Long term debt and Class C LP Units Debt to total assets(iii) Debt service coverage(iii) $ $ $ $ $ $ $ $ $ $ $ $ Fourth Quarter 2017 546 44.1 98.9% 211,025 152,832 36,533 0.088 0.088 194,777 0.282 102,565 74.4% 0.1850 13.35 Third Quarter 2017 540 43.8 98.9% 206,750 145,422 303,095 0.736 0.733 164,042 0.263 81,940 92.9% 0.1850 13.29 $ $ $ $ $ $ $ $ $ $ Second Quarter 2017 537 43.8 98.9% 208,626 144,012 41,467 0.101 0.100 107,541 0.262 87,838 85.4% 0.1825 13.84 $ $ $ $ $ $ $ $ $ $ First Quarter 2017 536 43.7 98.8% 203,433 142,424 24,250 0.059 0.059 37,954 0.264 90,776 80.3% 0.1775 13.84 $ $ $ $ $ $ $ $ $ $ Fourth Quarter 2016 535 43.6 98.9% 197,713 139,745 255,574 0.623 0.621 233,767 0.251 92,369 78.9% 0.1775 13.47 $ $ $ $ $ $ $ $ $ $ Third Quarter 2016 530 Second Quarter 2016 529 First Quarter 2016 519 42.9 98.8% 42.5 98.8% 41.6 98.7% 196,275 137,835 $ $ 197,348 136,727 $ $ 192,238 132,445 213,718 $ (559,709) $ (132,655) 0.522 0.521 158,275 0.248 88,369 82.2% 0.1775 13.81 $ $ $ $ $ $ $ (1.369) $ (0.325) (1.366) $ (0.324) 108,527 0.249 80,060 85.5% 0.1675 14.20 $ $ $ $ $ 30,053 0.251 78,354 87.3% 0.1675 12.37 $ $ $ $ $ $ $ $ $ $ 413,381,522 411,842,153 411,385,591 410,957,673 410,557,333 409,244,667 408,860,283 408,459,152 9,923,511 $ 9,702,006 $ 9,512,207 $ 9,380,140 $ 9,435,322 $ 9,155,648 $ 8,949,641 $ 8,729,848 3,737,030 $ 3,729,733 $ 3,729,417 $ 3,728,836 $ 3,928,714 $ 3,928,649 $ 3,928,664 $ 3,929,021 44.3% 3.7x 44.6% 3.6x 45.8% 3.6x 46.3% 3.6x 44.5% 3.5x 45.9% 3.6x 46.5% 3.6x 45.9% 3.6x (i) GAAP measures of rental revenue and net income (loss), for the fourth quarter of 2017, include $930 attributable to non-controlling interests. (ii) Cash flows from operating activities are presented before deducting interest paid. Presentation of the prior periods has been updated to exclude leasing capital expenditures. (ii) Debt ratios include Class C LP Units but exclude Exchangeable Units. The ratios are non-GAAP financial measures calculated based on the Trust Indentures, as supplemented. Choice Properties’ quarterly results were positively impacted by regular acquisition activity and development of additional GLA. In addition, net income (loss) was impacted by fluctuations in adjustments to fair value of Exchangeable Units, investment properties, and unit-based compensation and therefore was often not comparable from quarter to quarter. 27 Choice Properties REIT 2017 Annual Report 9.2 Fourth Quarter Results Choice Properties’ financial results for the three months ended December 31, 2017 and December 31, 2016 are summarized below: For the three months ended December 31, ($ 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 Income and Expenses General and administrative expenses Property management fee charged to related party Amortization of other assets Net interest expense and other financing charges Interest and other Income 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 Income 2017 2016 Variance favourable / (unfavourable) $ 152,723 $ 148,343 $ 51,831 6,471 211,025 (49,337) 166 48,819 551 197,713 (48,121) (688) $ 161,854 $ 148,904 $ (6,744) 267 (235) (100,397) 2,744 69 (6,387) 191 (233) (97,028) 586 80 57,558 $ 46,113 $ 4,380 3,012 5,920 13,312 (1,216) 854 12,950 (357) 76 (2) (3,369) 2,158 (11) 11,445 $ $ (19,026) (2,504) 505 107,800 101,661 (126,826) (104,165) — 505 36,533 $ 255,574 $ (219,041) Net Income For the three months ended December 31, 2017, net income was $36,533, a decrease of $219,041 compared to the net income of $255,574 for the same period in 2016. The decrease was primarily due to unfavourable changes of $126,826 and $104,165 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, 2017 was $11,445 higher than the same period in 2016 primarily because the increase in net property income of $12,950 and the increase in interest and other income of $2,158 (which includes a $2,000 transactional fee) were greater than the $3,396 increase in net interest expense and other financing charges. Net property income increased due to acquisitions of income producing properties and development of additional GLA. 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 an expense to the Trust. Net income for the three months ended December 31, 2017 also included $930 attributable to non-controlling interests (2016 - nil). Choice Properties REIT 2017 Annual Report 28 Management’s Discussion and Analysis Rental Revenue Rental revenue is comprised primarily of base rent and recoveries from tenants for property taxes, operating costs and qualifying capital expenditures. Growth in rental revenue is materially impacted by newly acquired assets. To better measure certain key performance factors, management further analyzes rental revenue for income producing properties owned by the Trust throughout the current and comparative reporting periods (“Same Properties”), to remove the impact of recent property acquisition and disposition transactions. For the three months ended December 31, ($ thousands) (unaudited) Same Properties(i) Acquisitions net of disposition(ii) Total Revenue $ $ 2017 204,455 6,570 211,025 $ $ 2016 196,716 997 197,713 $ $ Variance favourable / (unfavourable) 7,739 5,573 13,312 (i) (ii) There were 526 income producing properties that were owned throughout the three months ended December 31, 2017 and December 31, 2016, the Same Properties. Properties acquired subsequent to September 30, 2016 (see Section 18, “Additional Information”) net of disposition in November 2017 (see Section 5.5, “Dispositions of Investment Properties”). During the three months ended December 31, 2017, rental revenue increased by $13,312, or 6.7% compared to the same period in 2016. The growth was attributable to an increase of $7,739 in revenue from Same Properties and additional rental revenue of $5,573 attributable to the net properties acquired subsequent to September 30, 2016. The growth in revenue from Same Properties was attributable to an increase of $3,284 in other revenues, an increase of $2,805 in base rent, a $1,205 increase in revenue generated from the recovery of capital expenditures, and a $445 increase in recovery of operating expenses. The $2,805 increase in base rent from Same Properties included an increase from newly developed GLA of $1,910 and increases from higher average rents per square foot on ancillary leases. In addition, total revenue for the three months ended December 31, 2017 included $5,620 (2016 - nil) of lease surrender revenue received from Loblaw. Lease surrender revenue of $2,520 was earned in connection with the disposition and $3,100 was related to a development included in Same Properties, of which, $930 was attributable to the non-controlling interests. 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, 2017, the net amount of these items positively impacted rental revenue by $7,886 (2016 - $8,952). Property Operating Costs Property operating costs are comprised primarily of expenses to manage and maintain the properties for the benefit of the tenants, including realty taxes, that are recoverable under the leases of most tenants. Non-recoverable operating costs include expenses that do not directly benefit the tenants. For the three months ended December 31, ($ thousands) (unaudited) Same Properties(i) Acquisitions net of disposition(ii) Total Property Operating Costs $ $ 2017 47,521 1,650 49,171 $ $ Variance Favourable / (Unfavourable) 779 (1,141) (362) 2016 48,300 509 48,809 $ $ (i) (ii) There were 526 income producing properties that were owned throughout the three months ended December 31, 2017 and December 31, 2016, the Same Properties. Properties acquired subsequent to September 30, 2016 (see Section 18, “Additional Information”) net of disposition in November 2017 (see Section 5.5, “Dispositions of Investment Properties”). For the three months ended December 31, 2017, property operating costs increased by $362 or 0.7% compared to the same period in 2016, attributable to a decrease of $779 from Same Properties, and an increase $1,141 from the net acquisitions. The decrease in total property operating costs from Same Properties was attributable a decrease of $851 in non-recoverable operating costs, partially offset by an increase of $72 in recoverable operating costs. Non-recoverable operating costs include expenditures that can vary by year. The fourth quarter of 2017 included the partial reversal of the allowance for bad debts. 29 Choice Properties REIT 2017 Annual Report General and Administrative Expenses For the three months ended December 31, ($ 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: Capitalized to investment properties Allocated to recoverable operating expenses General and administrative expenses Less: Adjustment to fair value of unit-based compensation(ii) Property management fee and other administration fees charged to related party(i)(ii) Internal expenses for leasing(ii) Adjusted general and administrative expenses(ii) As a percentage of revenue $ $ $ $ 2016 7,595 $ Variance favourable / (unfavourable) (851) 2017 8,446 433 282 645 9,806 (1,004) (2,058) 346 643 733 9,317 (719) (2,211) 6,744 $ 6,387 $ (267) (267) (709) 5,501 $ 2.6% 225 (191) (518) 5,903 $ 3.0% (87) 361 88 (489) 285 (153) (357) 492 (76) 191 402 0.4% (i) The Services Agreement, Property Management Agreement and Sublease Administration Agreement are described in section 13, “Related Party Transactions”, of this MD&A. (ii) Adjusted general and administrative expenses, used in the calculation of general and administrative expenses as a percent of revenue excludes: a. b. c. fair value adjustments for unit-based compensation, which fluctuates with Unit prices; the property management fee charged to related party, which compensates Choice Properties for additional costs incurred; and internal expenses for leasing, to increase comparability between real estate entities that capitalize the expenses. Adjusted general and administrative expenses, for the three months ended December 31, 2017, decreased $402, or 0.4% when expressed as a percentage of revenue, over the same period in 2016. The decreases were driven by timing of expenses and growth in revenues for the quarter. On an annual basis, the fluctuations, due to the timing of expenses, are minimized and adjusted general and administrative expenses expressed as a percentage of revenue becomes comparable year-over-year. Choice Properties REIT 2017 Annual Report 30 Management’s Discussion and Analysis Net Interest Expense and Other Financing Charges For the three months ended December 31, ($ 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 Net interest expense and other financing charges (i) Represents interest on indebtedness due to Loblaw. $ $ $ 2017 26,028 11,562 30 3,551 41,171 58,895 100,066 525 415 (609) Variance favourable / (unfavourable) 1,512 — 6 (2,146) (628) (2,451) (3,079) (428) 9 129 $ $ $ 2016 27,540 11,562 36 1,405 40,543 56,444 96,987 97 424 (480) 100,397 $ 97,028 $ (3,369) $ $ $ $ For the three months ended December 31, 2017, net interest expense and other financing charges increased by $3,369 or 3.5% compared to the same period in 2016. The increase was primarily due to distributions on the Exchangeable Units as a result of a higher distribution rate and additional Exchangeable Units issued as partial consideration for properties acquired from Loblaw subsequent to September 30, 2016, and interest incurred on credit facilities as a result of greater draws, partially offset by the decline in interest on senior unsecured debentures due to the repayment in 2017. 31 Choice Properties REIT 2017 Annual Report 9.3 Other Measures of Fourth Quarter Performance In addition to the GAAP measures already described, Choice Properties’ management utilizes non-GAAP measures to analyze performance. See Section 17, “Non-GAAP Financial Measures”, of this MD&A, for details on how these measures are defined, calculated and reconciled to GAAP financial measures and why management analyzes these measures. NOI(1) and FFO(1) for the three months ended December 31, 2017 and December 31, 2016 are summarized below: For the three months ended December 31 ($ 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 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) $ $ $ $ $ $ 2017 152,832 140,103 116,843 0.283 0.282 65.6% 0.1850 $ $ $ $ $ $ 412,388,639 414,285,762 413,381,522 2016 139,745 135,445 103,141 0.251 0.251 70.8% $ $ $ $ $ 0.1775 $ 410,104,744 411,272,728 410,557,333 Variance favourable / (unfavourable) 13,087 4,658 13,702 0.032 0.031 5.2% 0.0075 2,283,895 3,013,034 2,824,189 There is no industry-defined definition of NOI(1). Refer to Section 17.1, “Net Operating Income”, of this MD&A, for a definition of NOI(1) and a reconciliation to net income (loss) determined in accordance with GAAP. Net Operating Income(1) For the three months ended December 31, 2017, NOI(1) increased $13,087, or 9.4%, compared to the same period in 2016, driven by an increase of $8,738 from Same Properties, and $4,349 from the net properties acquired subsequent to September 30, 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 of recent property acquisition and disposition transactions. 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, 2017, NOI(1) for Same Properties, measured with the same GLA, increased $4,658,or 3.4%, compared to the same period in 2016, primarily due to an increase of $2,418 in base rent and net recoveries, which was driven by rent steps in Loblaw leases and higher average rents per square foot on ancillary leases. The increase was also due to higher revenue generated from the recovery of capital expenditures of $1,205, an increase of $184 in other revenues and a decrease of $851 in non-recoverable operating expenses. Funds from Operations(1) Choice Properties calculates its FFO(1) in accordance with the Real Property Association of Canada’s White Paper on Funds from Operations & Adjusted Funds from Operations for IFRS issued in February 2017. Refer to Section 17.2, “Funds from Operations”, 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, 2017, FFO(1) increased by $13,702 or 13.3% compared to the same period in 2016. The year- over-year growth was due to an increase in net property income of $12,019 (which included lease surrender revenue, net of the portion attributable to non-controlling interests, of $4,690), an increase in interest and other income of $2,158 (which includes a $2,000 transactional fee), a decrease in general and administrative expenses of $326, and an increase in the fees charged to related party of $76. These increases to FFO(1) were partially offset by a $864 increase in interest and other financing charges, a $11 decrease from the share of income from joint venture and a $2 increase in amortization of other assets. For the three months ended December 31, 2017, FFO(1) per unit on a diluted basis increased by $0.031 or 12.4% compared to the same period in 2016. Choice Properties REIT 2017 Annual Report 32 Management’s Discussion and Analysis 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, 2017. 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, 2017. 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 2017 that materially affected, or are reasonably likely to materially affect, the Trust’s internal control over financial reporting. 12. ENTERPRISE RISKS AND RISK MANAGEMENT Choice Properties is committed to 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. 33 Choice Properties REIT 2017 Annual Report 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 AIF for the year ended December 31, 2017, 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 Competition Strategic Execution, Capabilities and Growth Vendor Management, Partnerships and Third-Party Service Providers Shift of Retailers from Brick and Mortar Stores Current Economic Environment Information Technology Implementations and Data Management 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 governmental 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. Strategic Execution, Capabilities and Growth There is a risk that key operational capabilities, including resources, processes and technology, may not be adequately suited or developed for the needs of Choice Properties’ current state or for its growth strategy. Furthermore, Choice Properties’ growth strategy must be appropriately executed to deliver long term growth for the Trust. If Choice Properties is not successful in implementing operational capabilities and ensuring scalability of operations for future growth, the reputation and financial performance of the Trust may be negatively impacted. Shift of Retailers from Bricks and Mortar Stores Shifting consumer preferences toward e-commerce may result in a decrease in the demand for physical space by retail tenants. The failure of Choice Properties to adapt to changes in the retail landscape, including finding new tenants to replace any lost income stream from existing tenants that reduce the amount of physical space they rent from Choice Properties, could adversely affect Choice Properties’ financial performance. Choice Properties REIT 2017 Annual Report 34 Management’s Discussion and Analysis IT Systems Implementations and Data Management Management depends on relevant and reliable information for decision making and financial reporting. As the volume of data being generated and reported by the Trust increases and evolves, Choice Properties continues to undertake investments in IT systems to store, process and leverage such data. The failure to successfully migrate to new IT systems, or disruptions which may arise as a result of the transition to new IT systems, could result in a lack of relevant and reliable information to enable management to effectively achieve its strategic plan or manage the operations of the Trust, which could negatively affect the reputation, operations and financial performance of the Trust. In addition, any significant loss of data or failure to maintain reliable data could negatively affect the reputation, operations and financial performance of the Trust because management depends on relevant and reliable information for decision making purposes. 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: Interest Rate Risk Liquidity and Capital Availability Risk Liquidity of Real Property Unit Price Risk Credit Risk Degree of Leverage 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 28 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 revolving credit facility), this will result in fluctuations in Choice Properties’ cost of borrowing as interest rates change. If interest rates rise, Choice Properties’ operating results and financial condition could be materially adversely affected and the amount of cash available for distribution to Unitholders would be decreased. Choice Properties’ revolving credit facility and the debentures also contain covenants that require it to maintain certain financial ratios on a consolidated basis. If Choice Properties does not maintain such ratios, its ability to make distributions to Unitholders may be limited or suspended. 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 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 payments and principal repayment obligations upon an applicable maturity date. If Choice Properties is unable to meet interest payments 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. 35 Choice Properties REIT 2017 Annual Report 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 revolving credit facility, there can be no assurance that it will otherwise have access to sufficient capital or access to capital on favourable terms. Further, in certain circumstances, Choice Properties may not be able to borrow funds due to limitations set forth in the Declaration of Trust and the Trust Indentures, as supplemented. Failure by Choice Properties to access required capital could have a material adverse effect on its financial condition or results of operations and its ability to make distributions to Unitholders. Liquidity and capital availability risks are mitigated by maintaining appropriate levels of liquidity, by diversifying the Trust’s sources of funding, by maintaining a well-diversified debt maturity profile and actively monitoring market conditions. Liquidity of Real Property An investment in real estate is relatively illiquid. Such illiquidity will tend to limit Choice Properties’ ability to vary its portfolio promptly in response to changing economic or investment conditions. In recessionary times, it may be difficult to dispose of certain types of real estate. The costs of holding real estate are considerable and during an economic recession Choice Properties may be faced with ongoing expenditures with a declining prospect of incoming receipts. In such circumstances, it may be necessary for Choice Properties to dispose of properties at lower prices in order to generate sufficient cash for operations and for making distributions to Unitholders. 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 2017 Annual Report 36 Management’s Discussion and Analysis 13. RELATED PARTY TRANSACTIONS Choice Properties’ parent corporation is Loblaw, which held an 82.4% effective interest in the Trust through ownership of 21,500,000 Units and all of the Exchangeable Units as at December 31, 2017 (December 31, 2016 - 82.7% and 21,500,000 Units respectively). Loblaw’s controlling shareholder, GWL, held approximately 48.7% ownership of Loblaw’s outstanding common shares and a 6.1% direct interest in Choice Properties, through ownership of 25,356,415 Units as at December 31, 2017 (December 31, 2016 - 5.8% and 23,997,222 Units respectively). Loblaw is also Choice Properties’ largest tenant, representing approximately 88.2% of Choice Properties’ annual base rent and 87.6% of its GLA as at December 31, 2017 (December 31, 2016 - 90.0% and 88.3% respectively). In 2017, Choice Properties acquired 5 investment properties from Loblaw. The acquisitions added approximately 244,000 square feet of GLA at a purchase price of $61,700, excluding acquisition costs. The acquisitions from Loblaw are disclosed in Section 5.2, “Acquisition of Investment Properties”, of this MD&A. In 2016, Choice Properties acquired 15 investment properties from Loblaw. The acquisitions added approximately 1,075,000 square feet of GLA at a purchase price of $158,060, excluding acquisition costs and other adjustments. For a detailed list of all properties acquired from Loblaw in 2017 and 2016, refer to Section 18, “Additional Information”, of this MD&A. On December 9, 2014, Choice Properties and its joint venture partner, Wittington Properties Limited (”Wittington”) completed the acquisition of the West Block project at Lake Shore Boulevard and Bathurst Street in Toronto, Ontario for $15,576 from Loblaw via 500 LS Limited Partnership. Wittington’s parent company is Wittington Investments, Limited, which holds a majority interest in GWL. The joint venture partners intend to develop the West Block project into a mixed-used property. Choice Properties contributed $13,760 to the joint venture and did not receive any distributions during the year ended December 31, 2017 (year ended December 31, 2016 - contributions nil and distributions $4,000). Operating activities have not begun at the property, however the joint venture did earn interest income during the years ended December 31, 2017 and 2016. 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. Property Management Agreement Choice Properties agreed to provide Loblaw with property 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. Sublease Administration Agreement On July 17, 2017, in connection with Loblaw’s sale of substantially all of its gas bar operations, Choice Properties agreed to provide Loblaw with certain administrative services in respect of the subleases to Brookfield on a fee for service basis for an initial five-year term with 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, 2017 and 2016. 37 Choice Properties REIT 2017 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 2017 Annual Report 38 Management’s Discussion and Analysis 15. ACCOUNTING STANDARDS Accounting Standards Implemented in 2017 The Trust implemented the amendments to IAS 7, “Statement of Cash Flows”, in the first quarter of 2017 to provide disclosures on changes in liabilities arising from financing activities, including both cash and non-cash flow changes. 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 with cumulative effects of initial application recorded in opening retained earnings on January 1, 2017 and with restatement of the comparative period. IFRS 15 contains a single, control-based model that applies to contracts with customers and two approaches to recognizing revenue: at a point in time or over time. The model features a contract-based five-step analysis of transactions to determine whether, how much and when revenue is recognized. IFRS 15 also includes additional disclosure requirements for revenue accounted for under the standard. The Trust will adopt IFRS 15, and the related interpretations, in its consolidated financial statements for the annual period beginning on January 1, 2018. The Trust is completing its evaluation of IFRS 15, including an assessment of the transition method that will be used on the adoption of the standard. Management does not expect that IFRS 15 will have a material impact on the amount and timing of revenue recognized. However, additional disclosure requirements may result in separate disclosure of revenue for service components that are part of a lease, such as a non-lease component. IFRS 9 In 2014, the IASB issued IFRS 9, “Financial Instruments” (“IFRS 9”), replacing IAS 39, “Financial Instruments: Recognition and Measurement” (“IAS 39”) and related interpretations. IFRS 9 includes revised guidance on the classification and measurement of financial assets, including impairment and a new general hedge model. The standard becomes effective for annual periods beginning on or after January 1, 2018 and is to be applied retrospectively with the cumulative effects of initial application recorded in opening retained earnings as a January 1, 2018, with no restatement of the comparative period. The Trust will adopt IFRS 9 in its consolidated financial statements for the annual period beginning on January 1, 2018 and is completing its evaluation of the impact of this standard on each of its financial instruments. Based upon the Trust’s existing financial instruments and related accounting policies at December 31, 2017, the principal areas impacted are: classification and measurement of financial assets, presentation of fair value changes for certain financial liabilities designated at fair value through profit or loss, and impairment of financial assets. IFRS 9 also requires new disclosures. 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 contains three principal classification categories for financial assets: measured at amortized cost, fair value through other comprehensive income, and fair value through profit or loss; and IFRS 9 eliminates the existing IAS 39 categories of held to maturity, loans and receivables, and available for sale. IFRS 9 largely retains the existing requirements in IAS 39 for the classification of financial liabilities. However, under IAS 39 all fair value changes of liabilities designated as fair value through profit or loss are recognized in profit or loss; whereas under IFRS 9 the amount of change in fair value attributable to changes in the credit risk of the liability is presented in other comprehensive income, and the remaining amount of change in fair value is presented in profit or loss. The Trust is still assessing the potential impact on non-substantial modifications made to financial instruments measured at amortized cost. Under IFRS 9, the amortized cost is recalculated on modifications which result in the recognition of a gain or loss, whereas under IAS 39 no gain or loss is recorded. Exchangeable Units will continue to be classified as financial liabilities at fair value through profit or loss and there will be no material impact on adoption of IFRS 9 related to these financial liabilities. IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with a forward-looking expected credit loss (“ECL”) model. Applying the ECL model will require considerable judgment, including consideration of how changes in economic factors affect ECLs, which will be determined on a probability-weighted basis. 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. Upon adoption of IFRS 9, the Trust will change the models used to measure impairment of financial assets, such as rents and notes receivable. 39 Choice Properties REIT 2017 Annual Report IFRS 9 also includes a new general hedge accounting standard which aligns hedge accounting more closely with risk management objectives and strategy and applies a more qualitative and forward-looking approach to assessing hedge effectiveness. The Trust does not currently apply hedge accounting in its consolidated financial statements. Based on its assessment, the Trust does not expect the standard will have a material impact on the consolidated 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 consolidated 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 consolidated financial statements. In particular, the Trust is assessing how the new standard may impact the identification of lease and non-lease components, including the allocation of consideration to each lease and non-lease component. The standard requires this allocation to be completed in accordance with the guidance in IFRS 15, that is, on the basis of relative stand-alone selling prices. 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. With these key differentiators, Choice Properties believes that it is well positioned to achieve its strategic goals within a potentially rising interest rate environment and despite an increasingly competitive landscape, underscored by ever changing square footage requirements in the retail industry. For 2018, Choice Properties expects to: • • Acquire additional properties from Loblaw and third-party vendors on an accretive basis when opportunities arise; Invest approximately $198 million to complete developments coming online in 2018 and toward development projects, including mixed-use projects, targeted for completion in future years; • 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. 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 Cash Flow from Operations (“ACFO”), 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 do not necessarily 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. Choice Properties REIT 2017 Annual Report 40 Management’s Discussion and Analysis 17.1 Net Operating Income NOI is a supplemental measure of operating performance widely used in the real estate industry. Choice Properties calculates NOI 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. There is currently no standard industry-defined measure of NOI. As such, Choice Properties’ 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), as determined in accordance with GAAP, to NOI for the periods ended as indicated: Three Months Year End 2017 36,533 2016 255,574 $ $ Variance Favourable / (Unfavourable) (219,041) $ 2017 405,345 2016 (223,072) $ $ $ Variance Favourable / (Unfavourable) 628,417 (930) (8,092) — (9,159) (930) 1,067 (930) (34,740) — (36,582) (930) 1,842 6,744 6,387 357 23,329 28,857 (5,528) (267) 235 100,397 (2,744) (69) (191) 233 97,028 (586) (80) (76) 2 3,369 (2,158) 11 (1,270) 934 (740) 930 394,826 372,842 (4,829) (254) (2,309) (80) (530) 4 21,984 (2,520) (174) 19,026 (107,800) 126,826 (38,212) 529,591 (567,803) 2,504 (101,661) 104,165 (160,254) (109,045) (51,209) For the periods ended December 31 ($ thousands) (unaudited) Net income (loss) Add (deduct) impact of the following: Net income attributable to non- controlling interests Straight-line rental revenue General and administrative expenses Property management and other administration fees charged to related party Amortization of other assets Net interest expense and other financing charges Interest and other income 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 14,385 37,938 (505) — (505) 745 (13,640) Net Operating Income $ 152,832 $ 139,745 $ 13,087 $ 584,690 $ 546,752 $ 41 Choice Properties REIT 2017 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 recent property acquisition and disposition transactions. Management further refines the analysis to exclude any NOI from developments, which increased GLA in the comparative periods. The number of Same Properties were 526 and 515 for the three months and years ended, respectively, December 31, 2017 and December 31, 2016. The following table analyzes the components of NOI: For the three months ended December 31 ($ thousands) (unaudited) Rental revenue Revenue attributable to non- controlling interests(ii) Less: Straight-line rental revenue Property operating costs Net Operating Income 2017 Acquisitions net of disposition(i) 6,570 $ Same Properties 204,455 $ All Properties 211,025 $ $ Same Properties 196,716 $ 2016 Acquisitions net of disposition(i) 997 All Properties 197,713 $ (930) (7,951) 195,574 (47,521) — (141) 6,429 (1,650) (930) (8,092) 202,003 (49,171) — (9,101) 187,615 (48,300) — (58) 939 (509) — (9,159) 188,554 (48,809) $ 148,053 $ 4,779 $ 152,832 $ 139,315 $ 430 $ 139,745 Less: NOI from developed GLA(iii) (5,780) (135) (5,915) (3,870) (65) (3,935) Less: NOI from lease surrender on property under development(ii) NOI excluding development (2,170) — (2,170) — — — activities $ 140,103 $ 4,644 $ 144,747 $ 135,445 $ 365 $ 135,810 (i) (ii) Properties acquired subsequent to September 30, 2016 (see Section 18, “Additional Information”) net of disposition in November 2017 (see Section 5.5, “Dispositions of Investment Properties”). Same Properties’ rental revenue for the three months ended December 31, 2017 included $3,100 of lease surrender revenue related to a property under development, of which, $930 was attributable to the non-controlling interests. (iii) GLA developed in the comparative periods. For the years ended December 31 ($ thousands) (unaudited) Rental revenue Revenue attributable to non- controlling interests(ii) Less: Straight-line rental revenue Property operating costs Net Operating Income 2017 Acquisitions net of disposition(i) 24,204 $ Same Properties 805,630 $ All Properties 829,834 $ $ Same Properties 766,726 $ 2016 Acquisitions net of disposition(i) 16,848 All Properties 783,574 $ (930) (33,602) 771,098 (203,520) — (1,138) 23,066 (5,954) (930) (34,740) 794,164 (209,474) — (35,613) 731,113 (195,669) — (969) 15,879 (4,571) — (36,582) 746,992 (200,240) $ 567,578 $ 17,112 $ 584,690 $ 535,444 $ 11,308 $ 546,752 Less: NOI from developed GLA(iii) (20,218) (531) (20,749) (7,124) (65) (7,189) Less: NOI from lease surrender on property under development(ii) NOI excluding development (2,170) — (2,170) — — — activities $ 545,190 $ 16,581 $ 561,771 $ 528,320 $ 11,243 $ 539,563 (i) (ii) Properties acquired subsequent to December 31, 2015 (see Section 18, “Additional Information”) net of disposition in November 2017 (see Section 5.5, “Dispositions of Investment Properties”). Same Properties’ rental revenue for the year ended December 31, 2017 included $3,100 of lease surrender revenue related to a property under development, of which, $930 was attributable to the non-controlling interests. (iii) GLA developed in the comparative years. Choice Properties REIT 2017 Annual Report 42 Management’s Discussion and Analysis 17.2 Funds from Operations FFO is not a term defined under IFRS and may not be comparable to similar measures used by other real estate entities. Choice Properties calculates its FFO in accordance with the Real Property Association of Canada’s White Paper on Funds from Operations & Adjusted Funds from Operations for IFRS issued in February 2017. The purpose of the White Paper is to provide reporting issuers and investors with greater guidance on the definitions of FFO and to help promote more consistent disclosure from reporting issuers. An advantage, of the FFO measure, is improved comparability between Canadian and foreign real estate investment trusts. FFO is intended to be used as a sustainable, economic earnings metric. Choice Properties considers FFO to be a useful measure of operating performance as it adjusts for items included in net income (or net loss) that do not arise from operating activities or do not necessarily provide an accurate depiction of the Trust’s past or recurring performance, such as adjustments to fair value of Exchangeable Units, investment properties and unit-based compensation. See Section 7, “Other Measures of Performance” and section 9.3, “Other Measures of Fourth Quarter Performance”, of this MD&A, for a discussion on this non-GAAP measure. The following table reconciles net income (loss), as determined in accordance with GAAP, to FFO for the periods ended as indicated: Three Months Year End For the periods ended December 31 ($ thousands) (unaudited) Net income (loss) Add (deduct) impact of the following: Net income attributable to non- controlling interests 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 Exchangeable Units distributions Amortization of tenant improvement allowances Internal expenses for leasing Funds from Operations FFO per unit - diluted FFO payout ratio - diluted(i) Distribution declared per unit Weighted average Units outstanding - diluted 2017 36,533 2016 255,574 $ $ Variance Favourable / (Unfavourable) (219,041) $ 2017 405,345 $ Variance Favourable / (Unfavourable) 628,417 2016 $ (223,072) $ (930) — (930) (930) — (930) 19,026 (107,800) 126,826 (38,212) 529,591 (567,803) 2,504 (101,661) 104,165 (160,254) (109,045) (51,209) 267 (225) 492 468 4,309 (3,841) (505) 138 58,895 206 709 $ $ $ 116,843 0.282 65.6% 0.1850 $ $ $ — 84 56,444 207 518 103,141 0.251 70.8% 0.1775 $ $ $ (505) 745 (13,640) 14,385 54 2,451 (1) 191 13,702 0.031 5.2% 0.0075 442 324 232,199 218,961 796 2,336 442,935 1.072 68.1% 0.7300 $ $ $ 572 2,135 410,135 1.000 69.0% 0.6900 $ $ $ $ $ $ 118 13,238 224 201 32,800 0.072 0.9% 0.0400 414,285,762 411,272,728 3,013,034 413,208,961 410,034,555 3,174,406 (i) Funds from Operations payout ratio is calculated as the distribution declared per unit divided by the FFO per unit diluted. 43 Choice Properties REIT 2017 Annual Report 17.3 Adjusted Cash Flow from Operations ACFO 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 ACFO in accordance with the Real Property Association of Canada’s White Paper on Adjusted Cashflow from Operations (ACFO) for IFRS issued in February 2017. The purpose of the White Paper is to provide reporting issuers and investors with greater guidance on the definitions of ACFO and to help promote more consistent disclosure from reporting issuers. ACFO is intended to be used as a sustainable, economic cash flow metric. Choice Properties considers ACFO an input to determining the appropriate level of distributions to Unitholders as it adjusts cash flows from operations to better measure sustainable, economic cash flows. As such, ACFO includes a number of adjustments to cash flows from operations, as calculated under GAAP, including, but not limited to, removing the effects of distributions on Exchangeable Units, deducting amounts for property capital expenditures to sustain existing GLA and for leasing capital expenditures, and eliminating seasonal and other fluctuations in working capital. The resulting ACFO will continue to include the impact of fluctuations from normal operating working capital, such as changes to net rent receivable from tenants, trade accounts payable and accrued liabilities. Prior to the issuance of the February 2017 White Paper, there was no industry standard to calculate a sustainable, economic cash flow metric. In prior quarters, Choice Properties used an internally derived measure, calculated by adjusting FFO for various non-cash items. As such, Choice Properties’ method of calculating sustainable cash flow may have differed from that of other real estate entities and, accordingly, may not have been comparable to such amounts reported by other issuers. Choice no longer reports the internally derived measure, and ACFO, as calculated using the February 2017 White Paper, is the replacement sustainable, economic cash flow metric, for the current quarter and all previous quarters. Choice Properties REIT 2017 Annual Report 44 Management’s Discussion and Analysis See Section 8.4, “Unit Equity”, of this MD&A, for a discussion on this non-GAAP measure. The following table reconciles ACFO to cash flows from operating activities, as determined in accordance with GAAP, for the periods ended as indicated: Three Months Year End For the periods ended December 31 ($ thousands) (unaudited) 2017 2016 Cash flows from operating activities $ 194,777 $ 233,767 $ Variance Favourable / (Unfavourable) (38,990) 2017 2016 $ 504,314 $ 530,622 $ Variance Favourable / (Unfavourable) (26,308) Interest paid Cash flows from operating activities less interest paid Add (deduct) impact of the following: Net income attributable to non- controlling interests Net interest expense and other financing charges in excess of interest paid(i) Distributions on Exchangeable Units included in net interest expense and other financing charges(ii) Gain on settlement of bond forward contracts Interest and other income in excess of interest received(i) Interest otherwise capitalized for development in equity accounted joint venture Share of income from joint venture Portion of internal expenses for leasing relating to development activity Property capital expenditures - incurred Property capital expenditures - normalized(iii) Leasing capital expenditures - incurred Adjustment for changes in non-cash working capital items which are not indicative of sustainable operating cash flows(iv) (12,737) (13,893) 1,156 (163,237) (156,297) (6,940) 182,040 219,874 (37,834) 341,077 374,325 (33,248) (930) — (930) (930) — (930) (87,660) (83,135) (4,525) (231,589) (216,545) (15,044) 58,895 56,444 2,451 232,199 218,961 13,238 — 64 138 69 354 — 573 84 80 259 — (509) 54 (11) 95 — 398 442 254 (2,682) 2,682 2,207 (1,809) 324 80 118 174 100 1,168 1,068 (20,661) (16,343) (4,318) (44,962) (42,192) (2,770) 9,449 (973) 4,151 (1,354) 5,298 381 — (4,416) — (5,384) — 968 (38,220) Adjusted Cash Flow from Operations $ 102,565 Total distributions declared 76,312 Excess of cash provided by ACFO over total distributions declared ACFO payout ratio(iv) $ 26,253 74.4% $ $ (88,264) 92,369 72,848 19,521 78.9% $ $ 50,044 10,196 3,464 69,478 8,990 $ 363,119 $ 339,152 300,452 282,320 6,732 $ 62,667 $ 56,832 4.5% 82.7% 83.2% $ $ 60,488 23,967 18,132 5,835 0.5% (i) (ii) The timing of the recognition of interest expense and income differs from the payment and collection. The ACFO calculations for the periods ended December 31, 2017 and December 31, 2016 were adjusted for this factor to make the quarters more comparable(2). Although the add-back of distributions on Exchangeable Units is not specifically detailed in the Real Property Association of Canada’s White Paper on Adjusted Cashflow from Operations (ACFO) for IFRS issued in February 2017, management includes the add-back because the distributions on the Exchangeable Units are included in the total distributions declared, which is consistent with the intent of the White Paper. Management considers the distributions on Exchangeable Units to be a financing activity, not an operating activity. (iii) Seasonality impacts the timing of property capital expenditures. The ACFO calculations for the three months ended December 31, 2017 and December 31, 2016 were adjusted for this factor to make the quarters more comparable based on the annual anticipated spend of approximately $1.00 per square foot (see Section 5.4, “Active Management”)(2). (iv) ACFO is adjusted each quarter for fluctuations in non-cash working capital due to the timing of transactions for realty taxes prepaid or payable, and prepaid insurance. The payments for these operating expenses tend to have quarterly, seasonal fluctuations that even out on an annual basis. Also, variability in non-cash working capital was created, in the first quarter of 2017, when rental payments for January 2017, of $57,135, plus the related sales taxes payable, of $6,334, were received in advance from Loblaw. ACFO is also adjusted each quarter to remove fluctuations in non-cash working capital due to capital expenditure accruals, which are not related to sustainable operating activities. (v) Adjusted Cash Flow from Operations payout ratio is calculated as the total distributions declared divided by the ACFO. 45 Choice Properties REIT 2017 Annual Report Based on the Real Property Association of Canada’s White Paper on Adjusted Cashflow from Operations (ACFO) for IFRS issued in February 2017, Choice Properties adjusts ACFO for amounts included in the net change in non-cash working capital, a component of cash flows from operating activities, to eliminate fluctuations that are not indicative of sustainable cash available for distribution. The resulting remaining impacts on ACFO from changes in non-cash working capital are calculated below: For the periods ended December 31 ($ thousands) (unaudited) Net change in non-cash working capital(i) Adjustment for changes in non-cash working capital items which were not indicative of sustainable operating cash flows Net non-cash working capital increase included in ACFO Three Months Year End 2017 2016 Variance Favourable / (Unfavourable) 2017 2016 Variance Favourable / (Unfavourable) $ 43,179 $ 99,364 $ (56,185) $ (68,735) $ 3,852 $ (72,587) (38,220) (88,264) 50,044 69,478 8,990 60,488 $ 4,959 $ 11,100 $ (6,141) $ 743 $ 12,842 $ (12,099) (i) As calculated under GAAP and disclosed the Trust’s consolidated financial statements and the accompanying notes in this Report to Unitholders. Choice Properties REIT 2017 Annual Report 46 Management’s Discussion and Analysis The following table reconciles ACFO to cash flows from operating activities for the prior periods in fiscal year 2016: For the periods ($ thousands) (unaudited) Cash flows from operating activities(i) Interest paid Cash flows from operating activities less interest paid Add (deduct) impact of the following: Annual 2016 $530,622 Fourth Quarter 2016 $233,767 Third Quarter 2016 $158,275 Second Quarter 2016 $108,527 (156,297) (13,893) (43,520) (13,335) 374,325 219,874 114,755 95,192 First Quarter 2016 $ 30,053 (85,549) (55,496) Net interest expense and other financing charges in excess of interest paid(ii) (216,545) (83,135) (52,775) (78,854) (1,781) Distributions on Exchangeable Units included in net interest expense and other financing charges(iii) Gain on settlement of bond forward contracts Interest income in excess of interest received(ii) Interest otherwise capitalized for development in equity accounted joint venture Share of income from joint venture Portion of internal expenses for leasing relating to development activity Property capital expenditures - incurred Property and leasing capital expenditures - normalized(iv) Leasing capital expenditures - incurred Adjustment for changes in non-cash working capital items which are not indicative of sustainable operating cash flows(v) Adjusted Cash Flow from Operations Total distributions declared 218,961 56,444 56,287 53,115 (2,682) 2,207 324 80 1,068 — 573 84 80 259 — 557 82 — 273 — 541 158 — 302 (42,192) (16,343) (24,074) — (5,384) 4,151 (1,354) 14,074 (2,395) (1,759) (8,241) (191) 53,115 (2,682) 536 — — 234 (16) (9,984) (1,444) 8,990 (88,264) (18,415) 19,797 95,872 $339,152 282,320 $ 92,369 72,848 $ 88,369 72,617 $ 80,060 68,461 $ 78,354 68,394 Excess of cash provided by ACFO over total distributions declared $ 56,832 $ 19,521 $ 15,752 $ 11,599 $ 9,960 ACFO payout ratio(vi) 83.2% 78.9% 82.2% 85.5% 87.3% Presentation of the prior periods has been updated to exclude leasing capital expenditures. (i) (iii) The timing of the recognition of interest expense and income differs from the payment and collection. The ACFO calculations were adjusted for this factor to make the quarters more comparable(2). (iii) Although the add-back of distributions on Exchangeable Units is not specifically detailed in the Real Property Association of Canada’s White Paper on Adjusted Cashflow from Operations (ACFO) for IFRS issued in February 2017, management includes the add-back because the distributions on the Exchangeable Units are included in the total distributions declared, which is consistent with the intent of the White Paper. Management considers the distributions on Exchangeable Units to be a financing activity, not an operating activity. (iv) Seasonality impacts the timing of capital expenditures. The ACFO calculations were adjusted for this factor to make the quarters more comparable(2). (v) ACFO is adjusted each quarter for fluctuations in non-cash working capital due to the timing of transactions for realty taxes prepaid or payable, and prepaid insurance. The payments for these operating expenses tend to have quarterly, seasonal fluctuations that even out on an annual basis. ACFO is also adjusted each quarter to remove fluctuations in non-cash working capital due to capital expenditure accruals, which are not related to sustainable operating activities. The variability created when rent was received in advance from Loblaw, and the related sales taxes payable, has also been removed. (vi) Adjusted Cash Flow from Operations payout ratio is calculated as the total distributions declared divided by the ACFO. The impacts on ACFO from changes in non-cash working capital, after adjustments in accordance with the Real Property Association of Canada’s White Paper on Adjusted Cashflow from Operations (ACFO) for IFRS issued in February 2017, for prior periods in fiscal year 2016 are calculated below: For the periods ($ thousands) (unaudited) Net change in non-cash working capital(i) Adjustment for changes in non-cash working capital items which were not indicative of sustainable operating cash flows Annual 2016 3,852 $ Fourth Quarter 2016 $ 99,364 Third Quarter 2016 $ 25,377 Second Quarter 2016 First Quarter 2016 $ (22,778) $ (98,111) 8,990 (88,264) (18,415) 19,797 95,872 Net non-cash working capital increase (decrease) included in ACFO $ 12,842 $ 11,100 $ 6,962 $ (2,981) $ (2,239) (i) As calculated under GAAP. The reconciliation of ACFO to cash flows from operating activities and the calculation of the ACFO payout ratio, for the year ended December 31, 2015, were included in Choice Properties’ 2017 quarter end reports available online at www.sedar.com. 47 Choice Properties REIT 2017 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), as determined in accordance with GAAP, 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: Net income attributable to non- controlling interests 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 Year End 2017 36,533 2016 255,574 $ $ Variance Favourable / (Unfavourable) (219,041) $ 2017 405,345 2016 (223,072) $ $ $ Variance Favourable / (Unfavourable) 628,417 (930) — (930) (930) — (930) 19,026 (107,800) 126,826 (38,212) 529,591 (567,803) 2,504 (101,661) 104,165 (160,254) (109,045) (51,209) 267 (225) 492 468 4,309 (3,841) (505) 100,066 235 — 96,987 233 (505) 3,079 2 745 393,983 934 (13,640) 377,956 930 14,385 16,027 4 $ 157,196 $ 143,108 $ 14,088 $ 602,079 $ 567,029 $ 35,050 (i) As calculated in Section 6, “Results of Operations” and Section 9.2 “Fourth Quarter Results”, of this MD&A. Choice Properties REIT 2017 Annual Report 48 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, 2017 as discussed in Section 5.2, “Acquisition of Investment Properties”, of this MD&A: Location Acquisitions from Loblaw Hamilton, ON Toronto, ON Guelph St., Georgetown, ON Markham Rd., Markham, ON Dundas St. West, Oakville, ON Acquisitions from Third-Parties Cargill Rd., Winkler, MB(i) Main St., Selkirk, MB Alberta St. West, Brooks, AB Rue Saint Cyrille, Saint Raymond, QC Toronto, ON(i) Ancienne Lorette, QC(i) Spruce Grove, AB Toronto, ON(i) Banff Rd., Uxbridge, ON Sir Wilfrid-Laurier Blvd., Mont-Saint Hilaire, QC Rue Ouellette, Marieville, QC Acquisition Date Property Type GLA (in square feet) Occupancy (upon acquisition) December 5, 2017 December 5, 2017 December 5, 2017 December 5, 2017 December 5, 2017 Land Land Stand-alone retail Stand-alone retail Stand-alone retail Multi-tenant retail Multi-tenant retail Multi-tenant retail Stand-alone retail Land(ii) Land Land Land February 1, 2017 March 16, 2017 June 14, 2017 July 10, 2017 July 17, 2017 July 20, 2017 July 27, 2017 July 27, 2017 September 28, 2017 Multi-tenant retail November 1, 2017 Multi-tenant retail December 18, 2017 Stand-alone retail N/A N/A 113,265 55,890 74,439 11,647 80,411 35,635 25,000 3,152 N/A N/A N/A 40,097 57,482 20,000 517,018 N/A N/A 100% 100% 100% 64% 71% 96% 100% N/A N/A N/A N/A 96% 100% 100% 94% The property acquired was combined with the adjacent Choice Properties owned site. (i) (ii) While purchased for the value of the land, some ancillary commercial space was acquired as part of the transaction. The following details the acquisitions for the year ended December 31, 2016: Location Acquisition Date Property Type GLA (in square feet) Occupancy (upon acquisition) Acquisitions from Loblaw King St., Harrow, ON Carrick St., Thunder Bay, ON Fraser Hwy., Surrey, BC East Hastings St., Vancouver, BC 118 Ave. NW, Edmonton, AB Westpark Blvd., Fort Saskatchewan, AB Notre Dame Ave., Winnipeg, MB Philip Pl., Kincardine, ON Main St., Lake Country, BC Lougheed Hwy., Pitt Meadows, BC Neilson Rd., Toronto, ON Huron Walk, Manitouwadge, ON South Service Rd., Mississauga, ON DeWare Dr., Moncton, NB Edmonton, AB Acquisitions from Third-Parties 139 Ave. NW, Edmonton, AB Ryan Rd., Courtenay, BC(i) Beaver Ave., Beaverton, ON(i) 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% (i) The property acquired was combined with the adjacent Choice Properties owned site. 49 Choice Properties REIT 2017 Annual Report Consolidated Financial Statements Management’s Statement of Responsibility for Financial Reporting Independent Auditor’s Report Consolidated Balance Sheets Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) Consolidated Statements of Changes in Equity Consolidated Statements of Cash Flows Notes to the Consolidated Financial Statements Note 1. Note 2. Note 3. Note 4. Note 5. Note 6. Note 7. Note 8. Note 9. Nature and Description of the Trust Significant Accounting Policies Critical Accounting Judgments and Estimates Future Accounting Standards Acquisitions Investment Properties Interests in Other Entities Accounts Receivable and Other Assets Notes Receivable Note 10. Long Term Debt and Class C LP Units Note 11. Unit Equity Note 12. Trade Payables and Other Liabilities Note 13. Unit-Based Compensation Note 14. Rental Revenue Note 15. Net Interest Expense and Other Financing Charges Note 16. Employee Costs Note 17. Capital Management Note 18. Fair Value Measurements Note 19. Financial Risk Management Note 20. Contingent Liabilities and Financial Guarantees Note 21. Related Party Transactions Note 22. Supplementary Information 51 52 53 54 55 56 57 57 57 62 63 64 65 67 69 70 71 74 75 76 79 80 80 81 82 82 83 84 87 Choice Properties REIT 2017 Annual Report 50 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 13, 2018 [signed] John R. Morrison President and Chief Executive Officer [signed] Bart Munn, CPA, CA Executive Vice President, Chief Financial Officer 51 Choice Properties REIT 2017 Annual Report 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, 2017 and December 31, 2016, the consolidated statements of income (loss) and comprehensive income (loss), changes in equity and cash flows for the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management's Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors' Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Choice Properties Real Estate Investment Trust as at December 31, 2017 and 2016, 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 13, 2018 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) Credit facilities (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] Anthony R. Graham Board of Trustees Chair 53 Choice Properties REIT 2017 Annual Report As at As at December 31, 2017 December 31, 2016 $ 9,551,000 $ 9,098,000 32,339 5,565 2,556 19,070 5,888 2,360 9,591,460 9,125,318 $ $ 21,419 304,225 6,407 332,051 14,882 290,009 5,113 310,004 9,923,511 $ 9,435,322 3,336,942 $ 311,000 4,259,724 2,713 7,910,379 400,088 250,000 426,063 1,076,151 8,986,530 928,280 8,701 936,981 3,726,991 172,000 4,283,304 1,397 8,183,692 201,723 — 472,762 674,485 8,858,177 569,374 7,771 577,145 $ 9,923,511 $ 9,435,322 [signed] Paul R. Weiss Audit Committee Chair Choice Properties Real Estate Investment Trust Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) (in thousands of Canadian dollars) Net Property Income Year ended December 31, 2017 Year ended December 31, 2016 Rental revenue from investment properties (note 14) $ 829,834 $ Property operating costs (note 22) Other Income and Expenses General and administrative expenses (note 22) Property management and other administration fees charged to related party (note 21) Amortization of other assets Net interest expense and other financing charges (note 15) Interest and other income Share of income (loss) and comprehensive income (loss) in equity accounted joint venture (note 7) Adjustment to fair value of Exchangeable Units (note 11) Adjustment to fair value of investment properties (note 6) Net Income (Loss) and Comprehensive Income (Loss) Net Income (Loss) and Comprehensive Income (Loss) attributable to: Choice Properties’ Unitholders Non-controlling interests (note 7) See accompanying notes to the consolidated financial statements. $ $ $ (209,474) 620,360 (23,329) 1,270 (934) (394,826) 4,829 (491) 38,212 160,254 405,345 $ 783,574 (200,240) 583,334 (28,857) 740 (930) (372,842) 2,309 13,720 (529,591) 109,045 (223,072) 404,415 930 405,345 $ $ (223,072) — (223,072) Choice Properties REIT 2017 Annual Report 54 Choice Properties Real Estate Investment Trust Consolidated Statements of Changes in Equity Attributable to Choice Properties Unitholders For the year end ended December 31, 2017 (in thousands of Canadian dollars) Equity, December 31, 2016 Trust Units 888,337 $ $ Net income Distributions Issuance of Units under the Distribution Reinvestment Plan (note 11) Issuance of Units under unit-based compensation arrangement (note 11) — — 22,383 361 404,415 — — — Cumulative net income (loss) (111,586) $ Cumulative distributions to Unitholders Total Unitholders’ equity 569,374 Non- controlling interests 7,771 $ $ 404,415 (68,253) 22,383 361 930 — — — Total equity 577,145 405,345 (68,253) 22,383 361 (207,377) $ — (68,253) — — Equity, December 31, 2017 $ 911,081 $ 292,829 $ (275,630) $ 928,280 $ 8,701 $ 936,981 Attributable to Choice Properties Unitholders For the year end ended December 31, 2016 (in thousands of Canadian dollars) Equity, December 31, 2015 Trust Units 867,849 $ $ 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 interests 901 — Cumulative net income (loss) 111,486 (223,072) — — — — Cumulative distributions to Unitholders $ (144,018) $ Total Unitholders’ equity 835,317 Non- controlling interests 7,756 $ $ — (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 See accompanying notes to the consolidated financial statements. 55 Choice Properties REIT 2017 Annual Report Choice Properties Real Estate Investment Trust Consolidated Statements of Cash Flows (in thousands of Canadian dollars) Operating Activities Net income (loss) Straight-line rental revenue Amortization of tenant improvement allowances Amortization of other assets Net interest expense and other financing charges (note 15) Interest and other income Unit-based compensation expense (note 13) Share of loss (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 and other income received Net change in non-cash working capital (note 22) Cash Flows from Operating Activities Investing Activities Acquisitions of investment properties (note 5) Additions to investment properties (notes 6) Additions to fixtures and equipment Equity investment distribution (contribution) (note 7) Proceeds of disposition (note 6) 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 advances (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 interests 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. Year ended December 31, 2017 Year ended December 31, 2016 $ $ 405,345 (34,740) 796 934 394,826 (4,829) 4,261 491 (38,212) (160,254) 4,431 (68,735) 504,314 (107,013) (166,272) (638) (13,760) 38,179 (249,504) — (200,000) (1,208) — 389,000 (275) (277,588) 263,574 235 (1,161) (163,237) (217,324) (45,532) — (253,516) 1,294 5,113 6,407 $ $ (223,072) (36,582) 572 930 372,842 (2,309) 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 Choice Properties REIT 2017 Annual Report 56 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 a 82.4% direct effective interest in Choice Properties as at December 31, 2017. Loblaw’s controlling shareholder is George Weston Limited (“GWL”), which owns approximately 48.7% of Loblaw’s outstanding common shares and a 6.1% direct effective interest in Choice Properties as at December 31, 2017. 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 13, 2018. 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. 57 Choice Properties REIT 2017 Annual Report A joint venture is considered to be impaired if there is objective evidence of impairment, as a result of one or more events that occurred after initial recognition of the joint venture, and that event has a negative impact on the future cash flows of the joint venture that can be reliably estimated. Joint Operations A joint operation is a joint arrangement whereby the parties that have joint control have rights to the assets and obligations for the liabilities relating to the arrangement. The financial statements of the joint operations are prepared for the same reporting period as the Trust. Where necessary, adjustments are made to bring the accounting policies in line with those of the Trust. The Trust recognizes its proportionate share of assets, liabilities, revenues and expenses of joint operations. Investment Properties Investment properties include income producing properties and properties under development that are held by 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. Choice Properties REIT 2017 Annual Report 58 Notes to the Consolidated Financial Statements 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). 59 Choice Properties REIT 2017 Annual Report 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. Choice Properties REIT 2017 Annual Report 60 Notes to the Consolidated Financial Statements Revenue Recognition Choice Properties has retained substantially all of the risks and benefits of ownership of its investment properties and, therefore, accounts for its leases with tenants as operating leases. Rental revenue includes base rents earned from tenants under lease agreements, realty tax and operating cost recoveries and other incidental income. Base rent revenue, including predetermined rent adjustments in lease agreements, is recognized as revenue on a straight-line basis over the term of the underlying leases. Other revenue is recognized as the service is provided and when collection is reasonably assured. Property tax and operating cost recoveries are recognized in the period that recoverable costs are chargeable to tenants. Percentage participation rents are recognized when tenants’ specified sales targets have been met as set out in the lease agreements. 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. 61 Choice Properties REIT 2017 Annual Report Income Taxes Choice Properties qualifies as a “mutual fund trust” under the Income Tax Act (Canada). The Trustees intend to annually distribute all taxable income directly earned by the Trust to Unitholders and to deduct such distributions for income tax purposes. Any income retained in the Trust would be taxed at the highest marginal tax rate applicable to individuals in the calendar year. Legislation relating to the federal income taxation of Specified Investment Flow Through trusts or partnerships (“SIFT”) provide that certain distributions from a SIFT will not be deductible in computing the SIFT’s taxable income and that the SIFT will be subject to tax on such distributions at a rate that is substantially equivalent to the general tax rate applicable to Canadian corporations. However, distributions paid by a SIFT as return of capital should generally not be subject to tax. Under the SIFT rules, the taxation regime will not apply to a real estate investment trust (“REIT”) that meets prescribed conditions relating to the nature of its assets and revenue (the “REIT Conditions”). Choice Properties has reviewed the SIFT rules and has assessed its interpretation and application to the REIT's assets and revenue. While there are uncertainties in the interpretation and application of the SIFT rules, Choice Properties has determined that it meets the REIT Conditions and accordingly, no net current income tax expense or deferred income tax assets or liabilities have been recorded in the consolidated financial statements. Accounting Standards Implemented in 2017 The Trust implemented the amendments to IAS 7, “Statement of Cash Flows”, in the first quarter of 2017 to provide disclosures on changes in liabilities arising from financing activities, including both cash and non-cash flow changes. 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. Choice Properties REIT 2017 Annual Report 62 Notes to the Consolidated Financial Statements 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 with cumulative effects of initial application recorded in opening retained earnings on January 1, 2017 and with restatement of the comparative period. IFRS 15 contains a single, control-based model that applies to contracts with customers and two approaches to recognizing revenue: at a point in time or over time. The model features a contract-based five-step analysis of transactions to determine whether, how much and when revenue is recognized. IFRS 15 also includes additional disclosure requirements for revenue accounted for under the standard. The Trust will adopt IFRS 15, and the related interpretations, in its consolidated financial statements for the annual period beginning on January 1, 2018. The Trust is completing its evaluation of IFRS 15, including an assessment of the transition method that will be used on the adoption of the standard. Management does not expect that IFRS 15 will have a material impact on the amount and timing of revenue recognized. However, additional disclosure requirements may result in separate disclosure of revenue for service components that are part of a lease, such as a non-lease component. IFRS 9 In 2014, the IASB issued IFRS 9, “Financial Instruments” (“IFRS 9”), replacing IAS 39, “Financial Instruments: Recognition and Measurement” (“IAS 39”) and related interpretations. IFRS 9 includes revised guidance on the classification and measurement of financial assets, including impairment and a new general hedge model. The standard becomes effective for annual periods beginning on or after January 1, 2018 and is to be applied retrospectively with the cumulative effects of initial application recorded in opening retained earnings as a January 1, 2018, with no restatement of the comparative period. The Trust will adopt IFRS 9 in its consolidated financial statements for the annual period beginning on January 1, 2018 and is completing its evaluation of the impact of this standard on each of its financial instruments. Based upon the Trust’s existing financial instruments and related accounting policies at December 31, 2017, the principal areas impacted are: classification and measurement of financial assets, presentation of fair value changes for certain financial liabilities designated at fair value through profit or loss, and impairment of financial assets. IFRS 9 also requires new disclosures. 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 contains three principal classification categories for financial assets: measured at amortized cost, fair value through other comprehensive income, and fair value through profit or loss; and IFRS 9 eliminates the existing IAS 39 categories of held to maturity, loans and receivables, and available for sale. IFRS 9 largely retains the existing requirements in IAS 39 for the classification of financial liabilities. However, under IAS 39 all fair value changes of liabilities designated as fair value through profit or loss are recognized in profit or loss; whereas under IFRS 9 the amount of change in fair value attributable to changes in the credit risk of the liability is presented in other comprehensive income, and the remaining amount of change in fair value is presented in profit or loss. The Trust is still assessing the potential impact on non-substantial modifications made to financial instruments measured at amortized cost. Under IFRS 9, the amortized cost is recalculated on modifications which result in the recognition of a gain or loss, whereas under IAS 39 no gain or loss is recorded. Exchangeable Units will continue to be classified as financial liabilities at fair value through profit or loss and there will be no material impact on adoption of IFRS 9 related to these financial liabilities. IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with a forward-looking expected credit loss (“ECL”) model. Applying the ECL model will require considerable judgment, including consideration of how changes in economic factors affect ECLs, which will be determined on a probability-weighted basis. The new impairment model will apply to financial assets measured at amortized cost or those measured at fair 63 Choice Properties REIT 2017 Annual Report value through other comprehensive income, except for investments in equity instruments and contract assets. Upon adoption of IFRS 9, the Trust will change the models used to measure impairment of financial assets, such as rents and notes receivable. IFRS 9 also includes a new general hedge accounting standard which aligns hedge accounting more closely with risk management objectives and strategy and applies a more qualitative and forward-looking approach to assessing hedge effectiveness. The Trust does not currently apply hedge accounting in its consolidated financial statements. Based on its assessment, the Trust does not expect the standard will have a material impact on the consolidated 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 consolidated 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 consolidated financial statements. In particular, the Trust is assessing how the new standard may impact the identification of lease and non-lease components, including the allocation of consideration to each lease and non-lease component. The standard requires this allocation to be completed in accordance with the guidance in IFRS 15, that is, on the basis of relative stand-alone selling prices. Note 5. Acquisitions During the year ended December 31, 2017, Choice Properties completed the following acquisitions: 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 Consideration $ 2,864 $ — $ — $ 2,864 $ — $ 2,651 $ 213 $ ($ thousands) Location Toronto, ON Hamilton, ON December 5 December 5 Land Land Various (3 properties) December 5 Retail Acquisitions from Loblaw Winkler, MB Selkirk, MB Brooks, AB St-Raymond-de- Portneuf, QC Toronto, ON Ancienne Lorette, QC Spruce Grove, AB Toronto, ON Uxbridge, ON February 1 March 16 June 14 July 10 July 17 July 20 July 27 July 28 September 28 Mont-Saint Hilaire, QC November 1 Marieville, QC December 18 Acquisitions from third- parties Retail Retail Retail Retail Land Land Land Land Retail Retail Retail 2,391 57,065 62,320 2,825 7,125 8,427 3,919 5,343 940 3,225 5,829 9,692 15,741 2,968 — — — — — 50 — 2 — 9 20 33 38 5 — — — (25) (91) (36) — (20) — — (9) (42) (42) — 2,391 57,065 62,320 2,800 7,034 8,441 3,919 5,325 940 3,234 5,840 9,683 — — — — — — — — — — — — 15,737 6,601 2,973 — 66,034 157 (265) 65,926 6,601 141 2,250 11,840 45,225 14,632 47,688 2,800 7,034 8,441 3,919 5,325 940 3,234 5,840 9,683 9,136 2,973 — — — — — — — — — — — — 59,325 1,564 64 41 515 620 78 25 25 69 317 30 25 329 257 341 68 Total Acquisitions $ 128,354 $ 157 $ (265) $ 128,246 $ 6,601 $ 14,632 $ 107,013 $ 2,184 Choice Properties REIT 2017 Annual Report 64 Notes to the Consolidated Financial Statements During the year ended December 31, 2016, Choice Properties completed the following acquisitions: ($ 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 Industrial Moncton, NB(i) October 26 Industrial Edmonton, AB(i) October 26 Various(i) (3 properties) October 26 Land Retail Acquisitions from Loblaw Edmonton, AB Courtenay, BC Beaverton, ON Acquisitions from third- parties August 17 December 22 December 22 Retail Retail Retail 47,369 19,715 3,056 18,834 161,810 19,686 12,957 823 33,466 — — — 60 143 343 397 2 742 (136) 47,233 (24) 19,691 — 3,056 (94) 18,800 (511) 161,442 (109) 19,920 (26) 13,328 (9) 816 (144) 34,064 — — — — — — — — — — 9,537 219 47,233 10,154 2,837 2,062 16,738 1,446 1,619 382 59 426 11,818 149,624 3,932 — — — — 19,920 13,328 816 34,064 20 388 35 443 Total Acquisitions $ 195,276 $ 885 $ (655) $ 195,506 $ — $ 11,818 $ 183,688 $ 4,375 (i) Investment properties and Exchangeable Units values both included adjustments totaling ($182) to reflect the decrease of the fair value of the Exchangeable Units on the closing date compared to the volume weighted average value of the units referenced in the purchase and sale agreement. Note 6. Investment Properties ($ thousands) Balance, beginning of year Acquisitions of investment properties - including acquisition costs of $2,184 (2016 - $4,375) (note 5) Income producing properties Properties under development $ 9,031,603 $ 66,397 Year ended Year ended December 31, 2017 9,098,000 $ December 31, 2016 8,561,000 $ 119,874 8,480 128,354 195,276 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 Dispositions Adjustment to fair value of investment properties Transfers from properties under development 93,876 5,109 1,109 44,962 2,489 1,927 33,944 (38,179) 144,639 68,087 17,909 — 1,246 — — — — — 15,615 (68,087) 111,785 5,109 2,355 44,962 2,489 1,927 33,944 (38,179) 160,254 — 133,448 12,096 3,549 42,192 3,077 2,307 36,010 — 109,045 — Balance, end of year $ 9,509,440 $ 41,560 $ 9,551,000 $ 9,098,000 (i) Development capital included $5,793 of site intensification payments (note 21) paid to Loblaw (December 31, 2016 - $6,582). Also included in development capital was a payment of $1,542 (note 21) received from Loblaw (December 31, 2016 - nil). (ii) Interest was capitalized to qualifying development projects based on a weighted average interest rate of 3.43% (December 31, 2016 - 3.45%). 65 Choice Properties REIT 2017 Annual Report On July 17, 2017, Choice Properties sold certain gas bar capital assets, with a fair value of $34,745, to Loblaw for cash consideration equivalent to the fair value of the assets. The disposition was made to facilitate the sale of substantially all of Loblaw’s gas bar operations to Brookfield Business Partners L.P. (“Brookfield”) (note 21). On November 28, 2017, a retail property in Quebec, with a fair value of $3,434, was sold for cash consideration. Prior to the sale, Choice Properties received a lease surrender payment from Loblaw of $2,520 (note 14). Included in certain investment properties acquired from Loblaw is excess land with development potential. Choice Properties will compensate Loblaw, over time, with intensification payments determined by a site intensification payment grid as outlined in the Strategic Alliance Agreement (note 21), should Choice Properties pursue activity resulting in the intensification of such excess land. The fair value of this excess land has been recorded in the consolidated financial statements. Independent Appraisals All properties were independently appraised at the time of acquisition. In addition, Choice Properties has engaged independent nationally- recognized valuation firms to appraise the investment properties such that substantially all of the portfolio will be independently appraised at least once over a five-year period. The properties independently appraised each year represent a subset of the property types and geographic distribution of the overall portfolio. A breakdown of the aggregate fair value of investment properties independently appraised each quarter, in accordance with the Trust’s policy, is as follows: ($ thousands except where otherwise indicated) March 31 June 30 September 30 December 31 Total Internal Appraisals Number of properties 25 25 27 25 102 2017 Fair value 600,000 Number of properties 24 559,000 681,000 475,000 2,315,000 22 19 31 96 $ $ 2016 Fair value 477,000 624,000 401,000 705,000 2,207,000 $ $ 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 Weighted average As at As at December 31, 2017 7.02% December 31, 2016 7.05% 6.39% 6.07% 6.43% 6.12% Choice Properties REIT 2017 Annual Report 66 Notes to the Consolidated Financial Statements Fair Value Sensitivity 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, 2017 0.25% 0.50% 0.75% 5.32% $ 5.57% $ 5.82% $ 6.07% $ 6.32% $ 6.57% $ 6.82% $ Fair value of investment properties 10,897,670 10,408,479 9,961,320 9,551,000 9,173,146 8,824,051 8,500,552 $ $ $ $ $ $ $ Fair value variance 1,346,670 857,479 410,320 — (377,854) (726,949) (1,050,448) % 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. Note 7. Interests in Other Entities Joint Venture On December 9, 2014, Choice Properties and its joint venture partner, Wittington Properties Limited (”Wittington”) 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. Wittington’s parent company is Wittington Investments, Limited, which holds a majority interest in GWL. 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, 2017 and December 31, 2016 40% Choice Properties contributed $13,760 to the joint venture and did not receive any distributions during the year ended December 31, 2017 (year ended December 31, 2016 - contributions nil and distributions $4,000). Operating activities have not begun at the property, however the joint venture did earn interest income during the years ended December 31, 2017 and 2016. In the first quarter of 2016, the fair value of property increased as certain zoning approvals were obtained related to achieving additional developmental density at the site. Summarized financial information for Choice Properties’ share of the equity accounted investment is set out below: ($ thousands) Current assets Non-current assets Current liabilities Net assets at 100% Investment in equity accounted joint venture As at As at December 31, 2017 47,021 $ 80,045 (46,219) 80,847 32,339 $ $ December 31, 2016 24,439 64,244 (41,007) 47,676 19,070 $ $ $ 67 Choice Properties REIT 2017 Annual Report ($ thousands) Interest income Adjustment to fair value of investment property Net income (loss) and comprehensive income (loss) at 100% Share of income (loss) and comprehensive income (loss) in equity accounted joint venture Subsidiary Year ended December 31, 2017 634 Year ended December 31, 2016 200 $ (1,863) (1,229) (491) $ $ 34,100 34,300 13,720 $ $ $ 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, 2017 and December 31, 2016 Canada Mayfield/Chinguacousy, Brampton, ON 70% Operating activities have not begun at the property. During the year, a lease surrender payment of $3,100 was received from Loblaw upon termination of a lease agreement scheduled to commence upon completion of development (note 14). The following is included in Choice Properties’ consolidated financial statements relating to the subsidiary: ($ thousands) Current assets Non-current assets Current liabilities Non-current liabilities Net assets at 100% Non-controlling interests at 30% ($ thousands) Other rental revenue Net income and comprehensive income at 100% Non-controlling interests at 30% As at As at December 31, 2017 3,170 $ December 31, 2016 98 $ 25,881 (25) (23) 29,003 8,701 $ $ 25,844 (16) (23) 25,903 7,771 Year ended December 31, 2017 3,100 Year ended December 31, 2016 — $ 3,100 930 $ $ — — $ $ $ $ $ Choice Properties REIT 2017 Annual Report 68 Notes to the Consolidated Financial Statements Joint Operation 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, 2017 or 2016. Summarized financial information for Choice Properties’ proportionate share of the property is set out below: As at As at December 31, 2017 $ — $ December 31, 2016 — 4,249 (199) 4,050 2,025 $ $ 4,176 (126) 4,050 2,025 $ $ As at As at December 31, 2017 3,516 $ December 31, 2016 5,304 $ 2,577 6,925 5,102 3,156 347 5,361 26,984 $ 5,565 21,419 26,984 $ $ — 2,856 5,398 4,040 403 2,769 20,770 5,888 14,882 20,770 $ $ $ ($ thousands) Current assets Non-current assets Current liabilities Net assets at 100% Choice Properties’ proportionate share at 50% Note 8. Accounts Receivable and Other Assets ($ thousands) Net rent receivable - net of allowance for doubtful accounts of $928 (2016 - $1,312)(i) Due from related party(ii) Construction inventory Fixtures and equipment - net of accumulated amortization of $3,594 (2016 - $2,660) Prepaid property taxes Prepaid insurance Prepaid other Accounts receivable and other assets Classified as: Non-current Current (i) Includes $520 net rent receivable from Loblaw (December 31, 2016 - nil). (ii) Other net receivables due from Loblaw (December 31, 2016 - nil). 69 Choice Properties REIT 2017 Annual Report Note 9. Notes Receivable ($ thousands) Notes receivable from related party Notes receivable from third-parties Notes receivable Classified as: Non-current Current As at As at December 31, 2017 277,588 $ December 31, 2016 263,574 $ 29,193 306,781 $ 28,795 292,369 2,556 304,225 306,781 $ $ 2,360 290,009 292,369 $ $ $ Notes receivable from related party Non-interest bearing short term notes totaling $263,574 were repaid by Loblaw in January 2017. During 2017, non-interest bearing short term notes totaling $277,588 were issued to Loblaw and repaid in January 2018 (note 21). Notes receivable from third-parties 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 agreement was subsequently extended a few times, with the most recent extending the maturity date to April 30, 2018, with no change in the interest rate of 9% per annum. The balance, as at December 31, 2017, included accrued interest of $4,137 (December 31, 2016 - $3,935), of which $3,935 is payable on maturity. 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, 2017, included accrued interest of $531 payable on maturity (December 31, 2016 - $335). Choice Properties REIT 2017 Annual Report 70 Notes to the Consolidated Financial Statements Note 10. Long Term Debt and Class C LP Units ($ 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 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 ($12,007) (2016 - ($11,058)) Debt placement costs - net of accumulated amortization of $4,332 (2016 - $3,032) Mortgages (interest monthly) 7.42%, due 2017, effective interest 2.80% 3.15%, due 2019, effective interest 2.45% 2.58%, due 2020, effective interest 2.58% Debt discount - net of accumulated amortization of ($260) (2016 - ($185)) 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 $10,562 (2016 - $7,978) Other As at As at December 31, 2017 December 31, 2016 $ 400,000 $ 200,000 250,000 200,000 250,000 200,000 250,000 100,000 — 200,000 300,000 200,000 300,000 (351) (6,326) — 1,736 6,584 41 300,000 300,000 325,000 (38,176) 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) Credit facilities’ debt placement costs - net of accumulated amortization of $1,854 (2016 - $1,516) (1,478) (1,541) $ $ $ 3,737,030 $ 3,928,714 3,336,942 400,088 3,737,030 $ $ 3,726,991 201,723 3,928,714 Long term debt and Class C LP Units Classified as: Non-current Current (i) Represents amounts due to Loblaw. 71 Choice Properties REIT 2017 Annual Report Senior Unsecured Debentures On January 12, 2018, Choice Properties issued $300,000 and $350,000 aggregate principal amount of Series I and J senior unsecured debentures due March 21, 2022 and January 10, 2025, respectively. The Series I unsecured debentures bear interest at a rate of 3.010% per annum, with semi-annual installments of interest due on March 21 and September 21 in each year, commencing March 21, 2018. The Series J unsecured debentures bear interest at a rate of 3.546% per annum, with semi-annual installments of interest due on January 10 and July 10 of each year, commencing July 10, 2018. The offering in January 2018 was made under the Short Form Base Shelf Prospectus dated January 9, 2018 (note 17). On February 12, 2018, Choice Properties completed the early retirement of Series A senior unsecured debentures at a redemption price equal to $1,007.200 per $1,000 principal amount of Series A debentures, together with accrued and unpaid interest. As at December 31, 2017, the senior unsecured debentures had a weighted average effective interest rate of 3.61% (December 31, 2016 - 3.52%). 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 January 23, 2017, Choice Properties redeemed, at par, $200,000 Series 6 senior unsecured debentures with an original maturity date of April 20, 2017. 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). The offering in March 2016 was made under the Short Form Base Shelf Prospectus dated October 14, 2015. 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). 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). Mortgage In connection with the property acquired from a third-party on November 1, 2017, Choice Properties assumed a mortgage which is secured by the acquired property. The mortgage bears interest at a fixed rate of 2.58% per annum and matures in 2020. 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, 2022. 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”. At December 31, 2017, Choice Properties also had a bi-lateral $250,000 senior unsecured committed revolving credit facility with a major Canadian financial institution maturing December 21, 2018. The interest on the credit facility was at variable rates of either: Prime plus 0.25% or Bankers’ Acceptance rate plus 1.25%. Certain conditions of the credit facility were contingent on Choice Properties’ credit rating remaining at “BBB”. Should certain conditions not have been met, the credit facility would have become secured against select properties. Subsequent to December 31, 2017, the Trust repaid and cancelled this credit facility. As at December 31, 2017, $311,000 was drawn on the syndicated credit facility (December 31, 2016 - $172,000) and $250,000 was drawn under the bi-lateral credit facility (December 31, 2016 - nil). As at December 31, 2017, the balance of the unamortized debt placement costs was $1,478 (December 31, 2016 - $1,541). The credit facilities contain certain financial covenants. As at December 31, 2017, the Trust was in compliance with all of its financial covenants (note 17). Choice Properties REIT 2017 Annual Report 72 Notes to the Consolidated Financial Statements Schedule of Repayments The schedule of principal repayment of long term debt and Class C LP Units, based on maturity and redemption rights is as follows: ($ thousands) Senior unsecured debentures $ 2018 400,000 $ 2019 200,000 $ 2020 550,000 $ 2021 450,000 $ 2022 300,000 $ Thereafter 950,000 Total $ 2,850,000 Mortgages Class C LP Units Total 383 — 1,803 — 6,134 — — — — — — 925,000 8,320 925,000 $ 400,383 $ 201,803 $ 556,134 $ 450,000 $ 300,000 $ 1,875,000 $ 3,783,320 The following table reconciles the changes in cash flows from financing activities for long term debt and Class C LP Units, and credit facilities: ($ thousands) Balance, beginning of year Repayment of Series 6 senior unsecured debentures Mortgage repayments Debt placement costs Net credit facility advances Total financing cash flow activities Assumption of mortgage (note 5) Amortization of debt discounts and premiums Amortization of debt placement costs Total financing non-cash activities Year ended December 31, 2017 Long-term Debt and Class C LP Units Credit Facilities $ 3,928,714 $ 172,000 (200,000) (1,208) (275) — (201,483) 6,601 1,560 1,638 9,799 — — — 389,000 389,000 — — — — Balance, end of year $ 3,737,030 $ 561,000 73 Choice Properties REIT 2017 Annual Report 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 October 26, 2016 (note 5) December 5, 2017 (note 5) Adjustment to fair value of Exchangeable Units As at As at December 31, 2017 December 31, 2016 Units 92,568,828 1,694,763 37,374 94,300,965 317,988,505 — 1,092,052 — Amount 888,337 22,383 361 Units 90,953,817 1,549,693 65,318 911,081 92,568,828 4,283,304 317,109,792 $ $ $ $ $ $ — 14,632 (38,212) 878,713 — — Amount 867,849 19,587 901 888,337 3,741,895 11,818 — 529,591 Exchangeable Units, end of year 319,080,557 $ 4,259,724 317,988,505 $ 4,283,304 Total Units and Exchangeable Units, end of year 413,381,522 410,557,333 Distributions Choice Properties’ Board of Trustees retains full discretion with respect to the timing and quantum of distributions, however the total income distributed will not be less than the amount necessary to ensure the Trust will not be liable to pay income taxes under Part I of the Income Tax Act (Canada) for the year ending December 31, 2017. In April 2017, Choice Properties announced an increase in the annual distribution by 4.2% to $0.74 per unit. The increase was effective for Unitholders of record on May 31, 2017. In the year ended December 31, 2017, Choice Properties declared distributions of $0.73 per unit (year ended December 31, 2016 - $0.69), or $300,452 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, 2016 - $282,320). Distributions declared to Unitholders of record at the close of business on the last business day of a month are paid on or about the 15th day of the following month. The holders of Exchangeable Units and Class C LP Units may elect to defer receipt of all or a portion of distributions declared by the Partnership until the first date following the end of the fiscal year. If the holder elects to defer, the Partnership will loan the holder the amount equal to the deferred distribution without interest, and the loan will be due and payable in full on the first business day following the end of the fiscal year the loan was advanced. Loblaw has elected to defer the distributions in full on both the Exchangeable Units and Class C LP Units. Distribution Reinvestment Plan Choice Properties has a DRIP that allows Unitholders to use the monthly cash distributions paid on their existing Units to purchase additional Units directly from the Trust. Unitholders who elect to participate in the DRIP receive a further distribution, payable in Units, equal in value to 3% of each cash distribution. In the year ended December 31, 2017, Choice Properties issued 1,694,763 Units under the DRIP (year ended December 31, 2016 - 1,549,693 Units). Choice Properties REIT 2017 Annual Report 74 Notes to the Consolidated Financial Statements Note 12. Trade Payables and Other Liabilities ($ thousands) Trade accounts payable Accrued liabilities Accrued interest expense Due to related party(i) Unit-based compensation Distributions payable(ii) Tenant deposits Deferred revenue(iii) Trade payables and other liabilities Classified as: Non-current Current As at As at December 31, 2017 9,737 $ December 31, 2016 9,159 $ 56,469 34,495 301,117 14,013 5,815 501 6,629 428,776 $ 50,801 35,948 301,072 11,039 5,477 532 60,131 474,159 2,713 426,063 428,776 $ $ 1,397 472,762 474,159 $ $ $ (i) Includes distributions accruing on Exchangeable Units of $251,013 (December 31, 2016 - $236,138) and Class C LP Units of $50,104 (December 31, 2016 - $50,104), and other net liabilities due to Loblaw of nil (December 31, 2016 - $14,830). (ii) Includes $1,326 payable to Loblaw and $1,563 payable to GWL (December 31, 2016 - $1,272 and $1,420, respectively). (iii) Includes nil rent from Loblaw received in advance (December 31, 2016 - $57,135). 75 Choice Properties REIT 2017 Annual Report Note 13. Unit-Based Compensation Choice Properties’ unit-based compensation expense recognized in general and administrative expenses was: ($ thousands) Unit Option plan Restricted Unit plan Performance Unit plan Trustee Deferred Unit plan Unit-based compensation expense Adjustment to fair value included in the above Year ended December 31, 2017 1,077 $ Year ended December 31, 2016 4,173 $ 1,728 711 745 4,261 468 $ $ 1,773 346 1,169 7,461 4,309 $ $ As at December 31, 2017, the carrying value of total unit-based compensation was $14,013 (December 31, 2016 - $11,039) (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, 2017 Year ended December 31, 2016 Number of awards 3,990,231 Weighted average exercise price/unit 11.25 $ Number of awards 3,499,656 451,000 (37,374) $ $ — $ 4,403,857 2,308,008 $ $ 14.20 10.24 — 11.56 10.99 655,266 (65,318) (99,373) 3,990,231 1,764,241 Weighted average exercise price/unit 11.05 12.38 11.21 11.76 11.25 10.95 $ $ $ $ $ $ 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 Year ended Year ended December 31, 2017 5.54% 10.03% - 16.88% December 31, 2016 5.27% 16.30% - 19.16% 0.01% - 1.85% 0.49% - 1.06% 0.1 - 4.8 Years 0.5 to 4.7 Years Choice Properties REIT 2017 Annual Report 76 Notes to the Consolidated Financial Statements The following table details the Unit Options outstanding as at December 31, 2017: Exercise Price $10.04 $10.81 $10.61 $10.72 $11.51 $11.28 $12.38 $12.79 $14.21 $13.93 $10.04 to $14.21 Number of Unit Options outstanding as at December 31, 2017 603,477 Remaining weighted average life (in years) 2.5 809,486 10,879 24,038 1,662,893 215,518 621,669 4,897 430,576 20,424 4,403,857 3.2 3.3 3.9 4.2 4.9 5.2 5.9 6.2 6.3 4.1 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, 2017 (December 31, 2016 - 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, 2017 264,691 Year ended December 31, 2016 267,721 160,361 17,517 (83,398) (17) 359,154 93,561 15,927 (106,370) (6,148) 264,691 77 Choice Properties REIT 2017 Annual Report 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. PUs were first granted in 2016; there were no PUs vested as at December 31, 2017 (December 31, 2016 - nil). 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, 2017 39,696 Year ended December 31, 2016 — 36,099 3,817 — 79,612 39,772 1,678 (1,754) 39,696 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 Year ended December 31, 2017 218,992 Year ended December 31, 2016 158,778 51,865 12,847 283,704 50,844 9,370 218,992 Choice Properties REIT 2017 Annual Report 78 Notes to the Consolidated Financial Statements Note 14. Rental Revenue Rental revenue is comprised of the following: Year ended Year ended ($ thousands) Base rent Property tax recoveries Operating cost recoveries Other revenue Rental revenue Loblaw(i) $ 532,647 Ancillary(ii) 71,581 $ December 31, 2017 604,228 $ Loblaw $ 520,180 Ancillary(ii) 58,008 $ December 31, 2016 578,188 $ 141,789 42,840 5,620 18,490 13,974 2,893 160,279 56,814 8,513 141,943 31,736 723 16,489 12,200 2,295 $ 722,896 $ 106,938 $ 829,834 $ 694,582 $ 88,992 $ 158,432 43,936 3,018 783,574 (i) (ii) Loblaw revenue includes lease surrender payments of $5,620 (note 21) for the year ended December 31, 2017 (2016 - nil). Included in the lease surrender revenue was $930 attributable to non-controlling interests. Ancillary revenue includes $2,154 received from leases to subsidiaries of GWL for the year ended December 31, 2017 (2016 - $1,799). Choice Properties enters into long-term lease contracts with tenants for space in its properties. Initial lease terms are generally between three and ten years for commercial units and longer terms for food store anchors. Leases generally provide for the tenant to pay Choice Properties base rent, with provisions for contractual increases in base rent over the term of the lease, plus operating cost and property tax recoveries. Many of the leases with Loblaw are for stand-alone retail sites. Loblaw is directly responsible for the operating costs on such sites. Future base rent revenue, excluding adjustments for straight-line rent, for the years ended December 31 is as follows: ($ thousands) 2018 2019 2020 2021 2022 Thereafter Total $ $ 587,812 591,384 591,943 591,848 592,222 3,227,033 6,182,242 79 Choice Properties REIT 2017 Annual Report Note 15. Net Interest Expense and Other Financing Charges ($ thousands) Interest on senior unsecured debentures Distributions on Class C LP Units(i) Interest on mortgages Interest on credit facilities Effective interest rate amortization of debt discounts and premiums (note 10) Effective interest rate amortization of debt placement costs (note 10) Distributions on Exchangeable Units(i) Gain on settlement of bond forward contracts (note 10) Capitalized interest(ii) Year ended December 31, 2017 103,625 $ Year ended December 31, 2016 108,788 $ 46,250 110 11,799 1,560 1,638 232,199 397,181 — 397,181 (2,355) 46,250 181 3,776 (522) 1,639 218,961 379,073 (2,682) 376,391 (3,549) 372,842 Net interest expense and other financing charges $ 394,826 $ (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 3.43% (2016 - 3.45%). 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) Year ended December 31, 2017 17,180 Year ended December 31, 2016 19,103 $ 422 3,516 21,118 $ 407 6,292 25,802 $ $ (i) Before considering amounts capitalized to investment properties or amounts allocated to recoverable operating expenses. Choice Properties REIT 2017 Annual Report 80 Notes to the Consolidated Financial Statements Note 17. Capital Management 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 January 9, 2018, 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 January 12, 2018, Choice Properties issued $650,000 of senior unsecured debentures under this prospectus (note 10). On January 12, 2018, Choice Properties issued $300,000 and $350,000 aggregate principal amount of Series I and J senior unsecured debentures due March 21, 2022 and January 10, 2025, respectively. The Series I unsecured debentures bear interest at a rate of 3.010% per annum and the Series J unsecured debentures bear interest at a rate of 3.546% (note 10). On February 12, 2018, Choice Properties completed the early retirement of Series A senior unsecured debentures at a redemption price equal to $1,007.200 per $1,000 principal amount of Series A debentures, together with accrued and unpaid interest (note 10). Subsequent to December 31, 2017, Choice Properties repaid and cancelled the bi-lateral $250,000 unsecured committed revolving credit facility (note 10). On January 23, 2017, Choice Properties redeemed, at par, $200,000 Series 6 senior unsecured debentures with an original maturity date of April 20, 2017. Choice Properties has certain key covenants in its debentures and its committed credit facilities. The key financial covenants include debt service ratios and leverage ratios, as defined in the respective agreements. These ratios are measured by the Trust on an ongoing basis to ensure compliance with the agreements. Choice Properties was in compliance with each of the key financial covenants under these agreements as at December 31, 2017 and December 31, 2016. The following schedule details the capitalization of Choice Properties: ($ thousands) Liabilities As at December 31, 2017 As at December 31, 2016 Senior unsecured debentures (note 10) $ 2,850,000 $ 3,050,000 Mortgages (note 10) Class C LP Units (note 10) Credit facilities (note 10) Exchangeable Units (note 11) Equity Unitholders’ equity Non-controlling interests (note 7) Total 8,320 925,000 561,000 4,259,724 930,217 8,701 2,927 925,000 172,000 4,283,304 569,374 7,771 $ 9,542,962 $ 9,010,376 81 Choice Properties REIT 2017 Annual Report Note 18. Fair Value Measurements The following table presents the fair value hierarchy of assets and liabilities measured at fair value in the consolidated balance sheet after initial recognition and assets and liabilities not measured at fair value in the consolidated balance sheet but for which the fair value is disclosed in the notes to the consolidated financial statements: ($ thousands) Assets: As at December 31, 2017 As at December 31, 2016 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Investment properties (note 6) $ — $ — $ 9,551,000 $ 9,551,000 $ — $ — $ 9,098,000 $ 9,098,000 Cash and cash equivalents 6,407 — Liabilities: Long term debt and Class C LP Units Credit facilities (note 10) — — 3,889,628 561,000 Exchangeable Units (note 11) 4,259,724 — Unit-based compensation (note 12) — 14,013 — — — — — 6,407 5,113 — 3,889,628 561,000 — — 4,129,035 172,000 4,259,724 4,283,304 — 14,013 — 11,039 — — — — — 5,113 4,129,035 172,000 4,283,304 11,039 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 for similar instruments. 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. 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 28 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 REIT 2017 Annual Report 82 Notes to the Consolidated Financial Statements 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 (2016 - $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 $319,081 (2016 - $317,989); and Unit-based compensation liabilities $3,573 (2016 - $2,649). Liquidity Risk and Capital Availability Risk Liquidity risk is the risk that Choice Properties cannot meet a demand for cash or fund its obligations as they come due. Although a portion of the cash flow generated by the investment properties is devoted to servicing such outstanding debt, there can be no assurance that Choice Properties will continue to generate sufficient cash flow from operations to meet interest payments and principal repayment obligations upon an applicable maturity date. If Choice Properties is unable to meet interest or principal repayment obligations, it could be required to renegotiate such payments or issue additional equity or debt or obtain other financing. The failure of Choice Properties to make or renegotiate interest or principal payments or issue additional equity or debt or obtain other financing could materially adversely affect Choice Properties’ financial condition and results of operations and decrease or eliminate the amount of cash available for distribution to Unitholders. The real estate industry is highly capital intensive. Choice Properties requires access to capital to fund operating expenses, to maintain its properties, to fund its growth strategy and certain other capital expenditures from time to time, and to refinance indebtedness. Although Choice Properties expects to have access to 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 $ 2018 503,263 $ 584 250,000 46,250 800,097 $ 2019 289,047 $ 2,008 — 46,250 337,305 $ 2020 627,648 $ 2021 512,133 $ 2022 Thereafter 350,560 $ 1,124,808 Total $ 3,407,459 6,238 — 46,250 — — — 311,000 — — 8,830 561,000 46,250 46,250 1,181,058 1,412,308 680,136 $ 558,383 $ 707,810 $ 2,305,866 $ 5,389,597 (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. 83 Choice Properties REIT 2017 Annual Report 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, 2017, the aggregate gross potential liability related to these letters of credit totaled $33,352 including $5,231 posted by Loblaw with the province of Ontario and City of Toronto 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, 2016 - $31,205 including $6,465 posted by Loblaw). 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 $72,777 as at December 31, 2017 (December 31, 2016 - $43,540). The Trust was also committed to future payments of approximately $34,257 in relation to its interests in other entities. Note 21. Related Party Transactions Choice Properties’ parent corporation is Loblaw, which held a 82.4% direct effective interest in the Trust through ownership of 21,500,000 Units and 100% of the Exchangeable Units as at December 31, 2017 (December 31, 2016 - 82.7% direct effective interest, 21,500,000 Units and 100% Exchangeable Units, respectively). Loblaw’s controlling shareholder, GWL, owns approximately 48.7% of Loblaw’s outstanding common shares and a 6.1% direct effective interest in Choice Properties, through ownership of 25,356,415 Units as at December 31, 2017 (December 31, 2016 - 5.8% and 23,997,222 Units respectively). In the ordinary course of business, Choice Properties’ enters into various transactions with related parties. Choice Properties’ policy is to conduct all transactions and settle all balances with related parties on market terms and conditions. Transactions and Agreements with Loblaw Acquisitions In the year ended December 31, 2017, Choice Properties acquired 5 investment properties from Loblaw with a fair value of $61,700, excluding acquisition costs. The acquisitions were settled by the issuance of 1,092,052 Exchangeable Units, which had a value of $14,632 at the time of the acquisitions, and cash (note 5). In 2016, Choice Properties acquired 15 investment properties from Loblaw with a fair value of $157,878, excluding acquisition costs. The acquisitions were funded through the issuance of 878,713 Exchangeable Units, which had a fair value of $11,818 at the time of the acquisitions, and cash (note 5). Dispositions On July 17, 2017, the Trust sold certain gas bar capital assets with a fair value of $34,745 to Loblaw, for cash, in order to facilitate the sale of substantially all of Loblaw’s gas bar operations to Brookfield. The gas bar capital assets were leased to Loblaw as part of the respective tenant leases between the Trust and Loblaw. The tenant leases between the Trust and Loblaw related to these investment properties remained substantially unchanged. Lease Surrender Payments During the year Loblaw made lease surrender payments of $5,620 (2016 - nil) (note 14). Included in the lease surrender revenue was $930 attributable to non-controlling interests. 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 $5,793 in connection with completed gross leasable area for which tenants have taken possession during the year ended December 31, 2017 (December 31, 2016 - $6,582). Development Capital Payment During the year, Loblaw reimbursed Choice Properties $1,542 towards the construction of a building for the benefit of an adjacent tenant (2016 - nil). Strategic Alliance Agreement The Strategic Alliance Agreement created a series of rights and obligations between Choice Properties and Loblaw, intended to establish a preferential and mutually beneficial business and operating relationship. The Agreement expires on July 5, 2023, ten years from the IPO, however, if Loblaw continues to own a majority interest, on a fully-diluted basis in the Trust, the Agreement will expire on July 5, 2033. If at any time after July 5, 2023 Loblaw ceases to own a majority interest in the Trust, on a fully-diluted basis, the Agreement will expire on that date. Choice Properties REIT 2017 Annual Report 84 Notes to the Consolidated Financial Statements Services Agreement Loblaw provides Choice Properties with administrative and other support services. Property Management Agreement Choice Properties agreed to provide Loblaw with property 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. Sublease Administration Agreement On July 17, 2017, in connection with Loblaw’s sale of substantially all of its gas bar operations, Choice Properties agreed to provide Loblaw with certain administrative services in respect of the subleases to Brookfield on a fee for service basis for an initial five-year term with automatic one-year renewals. Letters of Credit As at December 31, 2017, letters of credit totaling $5,231 were posted by Loblaw with the province of Ontario and City of Toronto on behalf of Choice Properties related to deferral of land transfer tax on properties acquired from Loblaw (December 31, 2016 - $6,465) (note 20). Land Transfer Tax Assessment The Ontario Ministry of Finance assessed the Trust $10,850 for land transfer tax, penalties and interest on the acquisition of properties from Loblaw in the IPO. Choice Properties was fully indemnified by Loblaw. During the year ended December 31, 2016, Loblaw made a payment to the Ministry of Finance for the full amount of the assessment, pending the result of the appeal. During the year, the assessment was settled and the appeal withdrawn. 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, 2017, distributions totaling $278,449 were declared, $301,117 were payable, and a note receivable of $277,588 was outstanding from Loblaw (December 31, 2016 - $265,211, $286,242 and $263,574 respectively). On the first business day of 2018, distributions payable for Exchangeable Units of $231,338 and Class C LP Units of $46,250 were paid and the notes receivable from Loblaw were cancelled (January 2017 - paid $217,324 and $46,250, respectively, and the notes receivable from Loblaw were cancelled). Trust Unit Distributions In the year ended December 31, 2017, Choice Properties declared distributions of $15,695 on the Units held by Loblaw (year ended December 31, 2016 - $14,835). Transaction Summary as Reflected in the Consolidated Financial Statements Loblaw is also Choice Properties’ largest tenant, representing approximately 88.2% of Choice Properties’ annual base rent and 87.6% of its gross leasable area as at December 31, 2017 (December 31, 2016 - 90.0% and 88.3% respectively). During the quarter ended March 31, 2017, Choice Properties agreed to amend certain existing leases with Loblaw which will result in increased revenues of approximately $650 per annum to Choice Properties, subject to certain conditions. Transactions with Loblaw recorded in the consolidated statements of income (loss) and comprehensive income (loss) were comprised as follows: ($ thousands) Rental revenue (note 14) Property management and other administration fees Services Agreement expense (note 22) Interest expense and other financing charges (note 15) The balances due from (to) Loblaw were as follows: ($ thousands) Rent receivable and other receivables (note 8) Notes receivable (note 9) Class C LP Units (note 10) Exchangeable Units (note 11) Distributions payable and other liabilities (note 12) Net due to Loblaw 85 Choice Properties REIT 2017 Annual Report Year ended December 31, 2017 722,896 $ Year ended December 31, 2016 694,582 $ 1,270 (2,580) (278,449) 740 (2,932) (265,211) As at As at December 31, 2017 3,097 $ December 31, 2016 — $ 277,588 (925,000) (4,259,724) (302,443) 263,574 (925,000) (4,283,304) (359,479) $ (5,206,482) $ (5,304,209) Transactions with GWL and Other Related Parties Joint Venture On December 9, 2014, Choice Properties and its joint venture partner, Wittington, completed the acquisition of 500 Lake Shore in Toronto, Ontario for $15,576 from Loblaw (note 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 contributed $13,760 to the joint venture and did not receive any distributions during the year ended December 31, 2017 (year ended December 31, 2016 - contributions nil and distributions $4,000). Operating activities have not begun at the property, however the joint venture did earn interest income during the years ended December 31, 2017 and 2016. Operating Lease Choice Properties entered into a ten-year lease at for office space with GWL’s parent company that commenced in 2014. Lease payments will total $2,664 over the term of the lease. Effective January 1, 2018, Choice Properties entered into a sub-lease for additional office space, with a subsidiary of GWL, with a term effective until the end of the existing lease in 2024. Over the term of the sub-lease, lease payments will total $1,282. Trust Unit Distributions In the year ended December 31, 2017, Choice Properties declared distributions of $18,045 on the Units held by GWL (year ended December 31, 2016 - $16,164). In the year ended December 31, 2017, the Trust issued 1,359,193 Units to GWL under the DRIP (year ended December 31, 2016 - 1,265,160 Units). As of December 31, 2017, GWL is no longer participating in the DRIP (note 11). Transaction Summary as Reflected in the Consolidated Financial Statements Transactions with GWL and other related parties recorded in the consolidated statements of income (loss) and comprehensive income (loss) were comprised as follows: ($ thousands) Rental revenue (note 14) Office rent expense The balances due to GWL and other related parties were as follows: ($ thousands) Distributions payable (note 12) Transactions with Key Personnel Year ended December 31, 2017 2,154 $ Year ended December 31, 2016 1,799 $ (616) (629) As at As at December 31, 2017 (1,563) $ December 31, 2016 (1,420) $ 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, 2017 3,859 $ $ 3,206 7,065 $ $ Year ended December 31, 2016 4,396 5,610 10,006 Choice Properties REIT 2017 Annual Report 86 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: Capitalized to investment properties Allocated to recoverable operating expenses General and administrative expenses Change in Non-Cash 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 trade payables 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, 2017 164,976 $ Year ended December 31, 2016 162,690 $ 43,878 620 $ 209,474 $ 36,175 1,375 200,240 Year ended December 31, 2017 22,907 $ Year ended December 31, 2016 27,667 $ 1,892 1,515 4,875 2,580 33,769 (3,035) (7,405) $ 23,329 $ 2,185 2,310 3,589 2,932 38,683 (2,635) (7,191) 28,857 Year ended December 31, 2017 (6,214) $ Year ended December 31, 2016 (4,656) $ (296) 157 (45,383) (338) (2,974) (13,422) (265) (546) 885 34,628 (550) (5,799) (19,455) (655) 3,852 Change in non-cash working capital $ (68,735) $ 87 Choice Properties REIT 2017 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 Debt assumed on acquisition of investment properties (note 5) Issuance of Exchangeable Units (note 5) Year ended December 31, 2017 22,383 $ Year ended December 31, 2016 19,587 $ 126 6,601 14,632 169 — 11,818 Recoverable Property Capital ($ thousands) Balance yet to be recovered, beginning of the year Add: Recoverable expenditures incurred during the year (note 6) Less: Recoverable during the year Balance yet to be recovered, end of the year Year ended December 31, 2017 100,683 $ Year ended December 31, 2016 63,929 $ 44,962 (7,684) $ 137,961 $ 42,192 (5,438) 100,683 Choice Properties REIT 2017 Annual Report 88 Glossary of Terms Term Definition Term Definition Funds From Operations Payout Ratio Distribution declared per unit divided by the Funds from Operations per unit diluted (see Section 17, “Non-GAAP the Financial Measures”, Management’s Discussion and Analysis). of Greenfield Development on vacant land. Intensification Development of income producing properties with excess density. Net Operating Income revenue straight-line rental less Rental revenue, property operating costs and amounts attributable to non-controlling interests (see Section 17, “Non-GAAP Financial Measures”, of Management’s Discussion and Analysis). Same Properties Investment properties owned by the Trust during both the current and comparative periods. Same Properties with the Same GLA Investment properties owned by the Trust during both the current and comparative periods excluding any development activities at the properties which increased GLA. Redevelopment Reset and renovation of existing income producing properties. Adjusted Cash Flow from Operations Adjusted Cash Flow from Operations Payout Ratio Debt to Total Assets Debt Service Coverage removing Cash Flows from Operations adjusted to become a better measure of sustainable, economic cash flows by the effects of distributions on Exchangeable Units, deducting amounts for property capital expenditures to sustain existing GLA and for leasing capital expenditures, and eliminating seasonal and other fluctuations in working capital (see Section 17, “Non-GAAP Financial Measures”, of Management’s Discussion and Analysis). Total distributions declared, including distributions to holders of Exchangeable Units, divided by Adjusted Cash Flow from Operations (see Section 17, “Non- GAAP Financial Measures”, of Management’s Discussion and Analysis). 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. interest expense on Interest, Taxes, Depreciation, Earnings Before Amortization, and adjustments to Fair Value divided by long-term debt and distributions on Class C LP Units and all regularly scheduled principal payments made with respect to indebtedness during such period (other than any balloon, bullet or similar principal payable at maturity or which repays such indebtedness in full). This ratio is a non-GAAP financial measure calculated based on the Trust Indentures, as supplemented. Debt 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. Earnings Before Interest, Taxes, Depreciation, Amortization and Fair Value income Net income, attributable to Unitholders, plus, where applicable, interest expense, taxes, amortization expense, depreciation expense, and adjustments to fair value (see Section 17, “Non-GAAP Financial Measures”, of Management’s Discussion and Analysis). 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). 89 Choice Properties REIT 2017 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 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. Anthony R. Graham Mr. Graham is Vice Chair and a director of Wittington Investments, Limited and also President and Chief Executive Officer of Sumarria Inc. He is a former Vice Chair and director of National Bank Financial. In addition to the public companies listed below, Mr. Graham is a director of Graymont Limited, Wittington Properties Limited, Selfridges Group Limited, and Grupo Calidra, S.A. de C.V. Mr. Graham is also a former Chair and Director of President’s Choice Bank. Mr. Graham was awarded an Honorary Doctor of Laws degree from Brock University. Mr. Graham serves as Chair of the Ontario Arts Foundation and the Shaw Festival Theatre Endowment Foundation. He also serves as Vice Chair of Business for the Arts, and as a director of the Art Gallery of Ontario, Canadian Institute for Advanced Research, Luminato Festival, St. Michael’s Hospital and the Trans Canada Trail Foundation. 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 Aliant Inc., ING Bank of Canada and Empire Life Insurance Company. Mr. Weiss is past Chair of Soulpepper Theatre Company and past Chair of Toronto Rehab Foundation. 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. 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 of 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 Chair 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 Chair and director of The Toronto Stock Exchange and former Chair 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. Choice Properties REIT 2017 Annual Report 90 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 44.1 million square feet of gross leasable area and consists of 546 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 14, 2018 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: 82552274. 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 Annual Meeting of Unitholders April 26, 2018 at 11:00am Vantage Venues (formerly St. Andrew’s Club & Conference Centre) Garden Suite 150 King Street West, 16th Floor Toronto, Ontario Canada Additional financial information has been filed electronically with various securities regulators in Canada through the System for Electronic Document Analysis and Retrieval (SEDAR), www.sedar.com. Choice Properties holds a conference call shortly following the release of its quarterly results. These calls are archived in the Investor Relations section of the Trust’s website, www.choicereit.ca. Ce rapport est disponible en français. Choice Properties REIT 2017 Annual Report 91 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 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 m o c . n g i s e d s k r o w A CHOICE INVESTMENT 44.1 million 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 I I S N O T A C N U M M O C N G S E D S K R O W E H T I i : n g s e D d n a t p e c n o C C H O I C E P R O P E R T I E S R E I T 2 0 1 7 A N N U A L R E P O R T choicereit.ca C H O I C E P R O P E R T I E S R E I T 2 0 1 7 A N N U A L R E P O R T

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