Shaping the Future
2017 ANNUAL REPORT
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Choice Properties Real Estate Investment Trust is an owner, manager
and developer of well-located retail and commercial real estate across
Canada. 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
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Management’s Discussion and Analysis
1
2
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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.
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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
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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
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