Shaping the Future
REPORT TO UNITHOLDERS
Quarter and year ended December 31, 2018
Q4
Footnotes
(1)
(2)
See Section 21, “Non-GAAP Financial Measures”, of this MD&A.
To be read in conjunction with Section 1, “Forward-Looking Statements”, of this MD&A.
Management’s Discussion and Analysis
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
Forward-Looking Statements
Overview
2.1 Portfolio Mix
Objectives and Strategy
Acquisition of Canadian Real Estate Investment Trust
Key Performance Indicators and Selected Financial Information
5.1 Fourth Quarter Highlights
5.2 Key Performance Indicators and Selected Annual Financial Information
5.3 Annual Highlights
Results of Operations
Other Measures of Performance
7.1 Net Operating Income
7.2 Other Key Performance Indicators
Reportable Operating Segments' Results of Operations
8.1 Retail Segment
8.2 Industrial Segment
8.3 Office Segment
Balance Sheet
Investment Properties
10.1 Valuation Method
10.2 Investment Property Transactions
10.3 Development Activities
10.4 Intensification
10.5 Redevelopment
10.6 Greenfield Development
10.7 Major Mixed Use Development
10.8 Residential
10.9 Completed Developments
10.10 Development Project Capital
10.11 Active Management
Liquidity and Capital Resources
11.1 Major Cash Flow Components
11.2 Liquidity and Capital Structure
11.3 Components of Total Debt
11.4 Financial Condition
11.5 Credit Ratings
11.6 Unit Equity
11.7 Off-Balance Sheet Arrangements
11.8 Contractual Obligations
Financial Instruments
Quarterly Results of Operations
13.1 Results by Quarter
Disclosure Controls and Procedures
Internal Control over Financial Reporting
Enterprise Risks and Risk Management
16.1 Operating Risks and Risk Management
16.2 Financial Risks and Risk Management
Related Party Transactions
Critical Accounting Estimates and Judgments
5
6
7
9
10
12
13
14
14
15
21
21
25
27
27
28
28
29
30
32
33
34
36
36
36
37
38
39
40
40
43
43
44
44
49
49
50
53
53
53
54
54
55
55
55
56
59
61
62
Choice Properties REIT 2018 Fourth Quarter Report 3
19
20
21
Accounting Standards
Outlook
Non-GAAP Financial Measures
21.1 Proportionate Share Compilation
21.2 Net Operating Income
21.3 Funds from Operations
21.4 Adjusted Funds from Operations
21.5 Adjusted Cash Flow from Operations
21.6 Earnings Before Interest, Taxes, Depreciation, Amortization and Fair Value
22
Additional Information
63
66
67
70
73
75
76
78
79
80
4 Choice Properties REIT 2018 Fourth Quarter Report
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 2018 Fourth
Quarter Report for the years ended December 31, 2018 and 2017. 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, 2018 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.
Choice Properties reports non-GAAP financial measures, including, but not limited to, Proportionate Share(1), Net Operating Income(1) (“NOI”),
Net Property Income(1), NOI for Same Properties excluding development activities(1), Funds from Operations(1) (“FFO”), Adjusted Funds from
Operations(1) (“AFFO”), Adjusted Cash Flow from Operations(1) (“ACFO”) Earnings before Interest, Taxes, Depreciation, Amortization and Fair
Value(1) (“EBITDAFV”), Cash Retained after Distributions(1), Total Debt(1), Debt to Total Assets(1), Debt Service Coverage(1) and Debt to
EBITDAFV(1), which are widely used for evaluating the performance of Canadian real estate investment trusts (“REITs”). Throughout this
MD&A, any references to proportionate share basis are non-GAAP measures which include amounts per Choice Properties’ consolidated
financial statements plus the proportionate share of equity accounted joint ventures. 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 under IFRS and are, therefore, unlikely to be comparable
to similar measures presented by other reporting insurers. Refer to Section 21, “Non-GAAP Financial Measures”, of this MD&A, for definitions
and reconciliations to GAAP financial measures.
On May 4, 2018, Choice Properties completed the $5.7 billion acquisition of Canadian Real Estate Investment Trust (“CREIT”), as described
in Section 4, “Acquisition of Canadian Real Estate Investment Trust” of this MD&A (the “Acquisition Transaction”). The impact of the Acquisition
Transaction on the Trust’s operating results and key performance indicators are discussed throughout this MD&A.
The information in this MD&A is current to February 13, 2019, unless otherwise noted.
1.
FORWARD-LOOKING STATEMENTS
This Fourth Quarter 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 and events can be found in various sections of this MD&A,
including but not limited to: Section 2, “Overview”; Section 4, “Acquisition of Canadian Real Estate Investment Trust”; Section 10, “Investment
Properties”; Section 6, “Results of Operations”; Section 7, “Other Measures of Performance”; Section 8, “Reportable Operating Segments'
Results of Operations”; Section 11, “Liquidity and Capital Resources”; Section 13, “Quarterly Results of Operations”; and Section 20, “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, strategic initiatives, 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 Choice Properties’ 2018
Fourth Quarter Report and the Trust’s Annual Information Form (“AIF”) for the year ended December 31, 2018, which is hereby incorporated
by reference. Such risks and uncertainties include:
•
•
•
•
•
•
failure to manage its growth effectively in accordance with its near and long-term strategies;
failure by Choice Properties to realize the strategic benefits from the Acquisition Transaction;
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; or the occurrence of any internal or external
security breaches, denial of service attacks, viruses, worms or other known or unknown cyber security or data breaches;
shifting consumer preferences toward electronic commerce may result in a decrease in demand for physical space by retail tenants;
changes in economic conditions, including changes in interest rates and the rate of inflation;
changes in Choice Properties’ competitiveness in the real estate market or the unavailability of desirable commercial real estate assets;
Choice Properties REIT 2018 Fourth Quarter Report 5
•
•
•
•
•
•
•
•
•
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 to make acquisitions and dispositions of properties in accordance with its near and long-term strategies;
the inability of Choice Properties to maintain and leverage its relationship with Loblaw Companies Limited (“Loblaw”), including in respect
of: (i) expected transactions to be entered into between Loblaw and Choice Properties (including Choice Properties’ acquisition of certain
properties held by Loblaw); and (ii) the Strategic Alliance Agreement between Choice Properties and Loblaw;
changes in Loblaw’s business, activities or circumstances which may impact Choice Properties, including Loblaw’s inability to make rent
payments or perform its obligations under its leases;
the inability of Choice Properties to make distributions or other payments or advances;
the inability of Choice Properties to obtain financing, at all or on commercially acceptable terms;
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 2018 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 Fourth Quarter 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 unincorporated, open-ended mutual fund trust governed by the laws of the Province of Ontario and established
pursuant to a declaration of trust amended and restated as of May 2, 2018, as may be amended from time to time (the “Declaration of Trust”).
Choice Properties’ Trust Units are listed on the Toronto Stock Exchange (“TSX”) and are traded under the symbol “CHP.UN”.
The Trust was created in 2013 from the owned real estate of Loblaw, the Trust’s largest Unitholder and primary tenant. The acquisition of
CREIT during the second quarter of 2018 added 209 properties and 22.7 million square feet of Gross Leasable Area (“GLA”) including retail,
industrial, office and residential properties to the portfolio and increased the property concentration in major markets across Canada. The
acquisition also expanded Choice Properties’ operational and leasing capabilities, complementing the existing in-house development platform.
On November 1, 2018, Loblaw and George Weston Limited (“GWL”) completed a reorganization under which Loblaw spun out its 61.6% direct
effective interest in Choice Properties to its majority shareholder, GWL. Immediately following the completion of the reorganization, GWL
owned a 65.4% direct effective interest in Choice Properties (which includes the 3.8% interest in Choice Properties owned by GWL prior to
the reorganization).
The reorganization will have no significant impact on the ongoing relationship between Loblaw and Choice Properties. All current agreements
and arrangements with Loblaw will remain in place and Loblaw will continue to be Choice Properties’ largest tenant.
6 Choice Properties REIT 2018 Fourth Quarter Report
2.1
Portfolio Mix
Choice Properties is the owner, manager and developer of a high quality portfolio of commercial retail, industrial, office and residential properties
across Canada. Choice Properties is one of Canada’s largest REITs with a portfolio comprised of 753 properties with a total GLA of approximately
66.8 million square feet as at December 31, 2018. Choice Properties’ portfolio includes 599 retail properties, 113 industrial properties, 16
office complexes, 3 multi-family residential buildings and 22 development properties. The retail properties are made up of: (i) 306 properties
with a stand-alone Loblaw-bannered retail store; (ii) 230 properties anchored by a retail store operating under a Loblaw banner that also
contains one or more third-party tenants; and (iii) 63 properties containing only third-party tenants. The table below outlines the portfolio owned
by Choice Properties in each asset class as at December 31, 2018:
(in thousands of square feet except where otherwise indicated)
Retail
Industrial
Office
Total commercial
Residential(iii)
Total
Income producing
properties(i)
Properties
under
development
Total Portfolio
Number of
Properties
599
113
16
728
3
731
GLA(ii)
47,018
16,457
3,153
66,628
150
66,778
Number of
Properties
Number of
Properties
13
3
—
16
6
22
612
116
16
744
9
753
GLA(ii)
47,018
16,457
3,153
66,628
150
66,778
Included in income producing properties are locations with additional development potential.
At Choice Properties’ ownership share
(i)
(ii)
(iii) Properties are included in the retail segment for reporting purposes.
The risk and reliability characteristics of each real estate asset class is different, and delivering on the Trust’s primary business goals requires:
•
•
• making quality acquisitions that are accretive in the long term.
a mix of assets that diversifies risks and rewards;
a strategy that maintains and improves the returns from the assets currently owned; and
Retail Portfolio
The retail portfolio is primarily focused on necessity-based retail tenants. Management views the retail portion of the portfolio as the foundation
for maintaining reliable cash flow. In addition to having a national footprint concentrated in Canada’s largest markets, stability is attained
through the strategic relationship and long term leases with Loblaw - Canada’s largest retailer. This strategic alliance provides Choice
Properties with access to future tenancy and related opportunities with Loblaw, Shoppers Drug Mart and other members of the Loblaw group
of companies.
Industrial Portfolio
The industrial portfolio is centered around distribution facilities, warehouses, and buildings used for light manufacturing of a size and
configuration that will readily accommodate the diverse needs of a broad range of tenants. Management’s focus in this sector is on large,
purpose-built distribution assets for Loblaw and high-quality “generic” industrial assets. The properties are located in target distribution markets
across Canada, where Choice Properties can build up critical mass to enjoy management efficiencies and to accommodate the expansion
or contraction requirements of the tenant base. The term “generic” refers to product that appeals to a wide range of potential users, so that
the leasing or re-leasing time frame is reduced.
Office Portfolio
The office portfolio is focused on large, well-located buildings in target markets, with an emphasis on the downtown core in some of Canada’s
largest cities. Management’s objective is to seek institutional partners for these assets as a means to diversify risk. As the managing partner,
Choice Properties’ overall returns are enhanced through the generation of fee income from the day-to-day management and leasing activities
at these properties.
Choice Properties REIT 2018 Fourth Quarter Report 7
Residential Portfolio
The residential portfolio is a recent addition to the Choice Properties asset mix. Rental residential real estate provides additional income
diversification and generates further investment opportunities for asset base growth. Many of these opportunities to develop residential
properties are by densifying our existing retail sites with residential buildings. The Choice Properties portfolio of residential properties is located
in Canada’s largest cities and includes both newly developed purpose built rental buildings and residential-focused mixed use communities,
many of which are in close proximity to public transportation.
Geographic Diversification
The portfolio is also diversified geographically. This geographic diversification reduces concentration risk and enhances the long-term reliability
of the revenue stream from the real estate portfolio. The Trust’s properties are well located across Canada, with a concentration in the country’s
largest markets.
As at December 31, 2018, the Trust’s property portfolio demographics by market size, and within the top six markets, are summarized below:
(i)
(ii)
Base rent for the three months ended December 31, 2018, including straight-line rent.
Based on the definitions of Census Metropolitan Area (CMA) from Statistics Canada published in 2016.
Approximately 72.3% of the portfolio’s base rent for the three months ended December 31, 2018 was derived from large and medium urban
markets. Approximately 57.5% of the portfolio’s base rent was generated from large urban markets, with a particular concentration in Toronto,
Calgary, Vancouver and Montreal.
Mezzanine Financing Program
As a means to generate acquisition and development opportunities, Choice Properties has established a program with a group of strong real
estate developers by providing mezzanine financing and/or co-owner financing for development purposes. Such financing activities generally
allow Choice Properties to participate in the development project or provide it with an option to acquire an interest in the developed income
property.
Development Activities
Development initiatives are a key component of Choice Properties’ business model, providing the opportunity to add high-quality real estate
to the portfolio at a reasonable cost. Choice Properties has internal development capabilities as well as established relationships with strong
real estate developers. With a significant amount of intensification and redevelopment opportunities and a long-term pipeline of potential
mixed-use development projects, Choice Properties is well positioned for long-term growth and value creation.
8 Choice Properties REIT 2018 Fourth Quarter Report
3.
OBJECTIVES AND STRATEGY(2)
Objectives
Choice Properties’ objectives are to:
•
•
provide Unitholders with stable, predictable and reliable cash distributions; and
enhance the value of Choice Properties’ assets in order to maximize long-term value.
Strategy
Choice Properties’ strategy is to grow its portfolio and cash flow by leveraging its sizable base of assets, its relationship with Loblaw and its
solid capital structure. The Trust is focused on driving growth through the acquisition of assets that meet or exceed the Trust’s investment
criteria, the development and redevelopment of properties to their highest and best use, and the active management of properties to maximize
their occupancy and operating income.
Management expects to achieve Choice Properties’ business goals through:
Diversification Choice Properties will to continue to accumulate and manage a portfolio of high-quality properties, diversified geographically
and by product type.
Acquisitions Choice Properties plans to grow its asset base through acquisitions, including those from Loblaw and desirable assets from
other vendors that offer geographic and tenant diversification or potential development opportunities.
Development Choice Properties believes that development and redevelopment of properties for their highest and best use is a key driver
of 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 delivering superior service to tenants, maintaining high levels of occupancy, effective capital investment in its properties
and disposing of, or redeveloping, non-core assets.
Financial Strength Choices Properties strives to maintain a solid balance sheet with ample liquidity, a staggered debt maturity profile and
a competitive cost of capital.
Choice Properties REIT 2018 Fourth Quarter Report 9
4.
ACQUISITION OF CANADIAN REAL ESTATE INVESTMENT TRUST
On May 4, 2018, Choice Properties completed its acquisition of CREIT, an unincorporated, closed-end real estate investment trust that traded
on the TSX, by acquiring all the assets and assuming all the liabilities for total consideration of $3.7 billion. The consideration was comprised
of $1.65 billion in cash with the balance funded through the issuance of 182,836,481 Units.
The Acquisition Transaction brought together two leading Canadian REITs and introduced asset class diversification to Choice Properties,
while continuing to leverage its strategic relationship with Loblaw.
The impact of the Acquisition Transaction on the Trust’s operating results and key performance indicators are discussed throughout this MD&A.
Summary Description of the Acquired Business
CREIT owned and managed a diversified real estate portfolio consisting of retail, industrial, office and residential properties (including
development properties) throughout Canada. As of May 4, 2018, the portfolio comprised 209 properties (including development properties)
that contained 28.9 million square feet of gross leasable area, with CREIT’s ownership interest at 22.7 million square feet. CREIT’s portfolio
included:
•
•
•
•
Retail portfolio: 9.3 million square feet focused on large-scale unenclosed retail centres anchored by food stores and other leading
retailers on long-term leases;
Industrial portfolio: 10.2 million square feet focused on distribution facilities, warehouses, and buildings used for light manufacturing
of a size and configuration that readily accommodates the diverse needs of a broad range of tenants;
Office portfolio: 3.0 million square feet focused on well-located, quality office buildings in major Canadian markets; and
Development portfolio: 16 retail, industrial and purpose built residential development properties with CREIT’s interest in these properties
ranging from 25% to 85%.
Sources of Funds for the Acquisition Transaction
Debt Financing In order to fund a portion of the Acquisition Transaction, Choice Properties entered into the following financing arrangements:
•
•
•
•
$550 million in aggregate principal amount of the Series K senior unsecured debentures with an interest rate of 3.556% per annum,
maturing on September 9, 2024;
$750 million in aggregate principal amount of the Series L senior unsecured debentures with an interest rate of 4.178% per annum,
maturing on March 8, 2028;
$175 million unsecured term loan maturing May 4, 2022; and
$625 million unsecured term loan maturing May 4, 2023.
Choice Properties also arranged a new $1.5 billion senior unsecured committed revolving credit facility, that was used to replace all pre-
existing credit facilities of Choice Properties and CREIT.
Units Issued As part of the consideration, 182,836,481 Units were issued at an issuance price of $11.25 per unit.
Concurrent with the closing of the Acquisition Transaction, Choice Properties converted all of its outstanding Class C LP Units, held by Loblaw,
with a face value of $925 million into 70,881,226 Exchangeable Units and cash. These Exchangeable Units were subject to an undertaking
by Loblaw, and subsequently confirmed by GWL , to the TSX that restrict its voting rights and the exercise of its exchange transfer rights to
be consistent with the terms of the converted Class C LP Units.
On November 1, 2018, Loblaw and GWL completed a reorganization under which Loblaw spun out its 61.6% effective interest in Choice
Properties to GWL, which included all the issued and outstanding Exchangeable Units, of which 70,881,226 Exchangeable Units continue to
be subject to restrictions for voting and exchange transfer rights. As at December 31, 2018, GWL held a 65.4% direct effective interest in the
Trust through ownership of 46,856,415 Units and 100% of the Exchangeable Units.
10 Choice Properties REIT 2018 Fourth Quarter Report
Purchase Price Allocation
The purchase equation is based on management’s best estimates of fair value. The actual amount allocated to certain identifiable net assets
could vary as the purchase equation is finalized. The Trust has one year to finalize the fair value of the assets acquired and the liabilities
assumed, however, the Trust does not expect significant changes from the amounts presented below:
($ thousands)
Assets
Investment properties
Equity accounted joint ventures
Intangible assets
Mortgages, loans and notes receivable
Accounts receivable and other assets
Cash and cash equivalents
Total assets
Mortgages payable
Senior unsecured debentures
Constructions loans
Credit facility
Trade payables and other liabilities
Restricted unit plan liability
Total liabilities
Total net assets acquired
GAAP Basis
Proportionate
Share Basis(1)
(unaudited)
$
4,729,687
$
5,677,490
683,289
30,000
195,597
50,645
32,419
—
30,000
195,597
60,030
39,613
5,721,637
6,002,730
1,309,677
451,853
9,583
70,000
169,421
2,674
1,493,383
451,853
96,165
70,000
180,226
2,674
2,013,208
2,294,301
$
3,708,429
$
3,708,429
In the year ended December 31, 2018, Choice Properties incurred acquisition transaction costs and other related expenses of $141.5 million.
Choice Properties REIT 2018 Fourth Quarter Report 11
5.
KEY PERFORMANCE INDICATORS AND SELECTED FINANCIAL INFORMATION
Choice Properties has identified key financial and operating performance indicators that were derived from, and should be read in conjunction
with, the consolidated financial statements of the Trust dated December 31, 2018 and 2017. The analysis of the indicators focuses on trends
and significant events affecting the financial condition and results of operations of the Trust.
As at or for the three months ended December 31
($ thousands except where otherwise indicated)
(unaudited)
Number of properties
Gross leasable area ("GLA") (in millions of square feet)
Occupancy*
Rental revenue
Cash flows from operating activities(i)
Net income
Net income per unit diluted
NOI(1) for Same Properties, excluding development activities*(ii)
FFO(1) per unit diluted*
FFO(1) payout ratio*
AFFO(1) per unit diluted*
AFFO(1) payout ratio*
ACFO(1)(iii)
ACFO(1)(iii) payout ratio
Cash retained after distributions(ii)*
Distribution declared per unit
Weighted average number of Units outstanding – diluted
Total assets - proportionate share basis(1)(ii)
Total Debt Principal
Debt to total assets(iii)*
Debt service coverage(iii)*
Debt to EBITDAFV(1)(iv)*
Indebtedness(v) – weighted average term to maturity*
Indebtedness(v) – weighted average coupon rate*
* Denotes a key performance indicator
(i)
Cash flows from operating activities excludes interest paid.
$
$
$
$
$
$
$
$
$
$
$
$
2018
753
66.8
97.7%
322,793
235,694
281,099
0.419
148,126
0.256
72.2%
0.165
112.1%
109,044
113.4%
—
0.1850
670,486,393
15,845,781
7,479,805
47.2%
3.0x
8.0x
5.5 years
3.74%
$
$
$
$
$
$
$
$
$
$
$
$
2017
546
44.1
98.9%
211,231
194,285
36,533
0.088
146,011
0.282
65.6%
0.209
88.5%
92,624
82.4%
16,312
0.1850
414,285,762
9,941,998
4,297,012
44.3%
3.7x
7.1x
4.5 years
3.62%
(ii)
Presentation of values as at or for the three months ended December 31, 2017 have been updated.
(iii) Debt ratios include Class C LP Units but exclude Exchangeable Units, see Section 11, “Liquidity and Capital Resources”, of this MD&A. The ratios are non-GAAP financial
measures calculated based on the Trust Indentures, as supplemented.
(iv) Calculated on a 12-month normalized basis, excluding lease surrender revenue from Loblaw.
(v)
Indebtedness reflects senior unsecured debentures and mortgages only.
12 Choice Properties REIT 2018 Fourth Quarter Report
5.1 Fourth Quarter Highlights
During the three months ended December 31, 2018, Choice Properties:
•
•
•
•
•
•
•
•
•
Reported rental revenue of $322,793, an increase of $111,562, or 52.8%, compared with $211,231 in the fourth quarter of 2017 and net
income of $281,099, an increase of $244,566, compared to the net income of $36,533 in the fourth quarter of 2017. Net income for the
three months ended December 31, 2018 included acquisition transaction costs and other related expenses of $11,044 and a net gain
on items measured at fair value of $195,398 (2017 - costs of nil and loss of $21,498, respectively). The increase in both rental revenue
and net income is primarily related to the acquisition of CREIT in May 2018;
Reported FFO(1) per unit diluted of $0.256, a slight increase compared to $0.253 per unit diluted reported in the third quarter of 2018.
On a year-over-year basis, FFO(1) per unit diluted decreased by $0.026, compared to the fourth quarter of 2017. The per unit decrease
was primarily attributable to changes in the capital structure arising from the CREIT acquisition;
Reported AFFO(1) per unit diluted of $0.165, reflecting a high proportion of annual maintenance capital spending in the fourth quarter;
Increased quarterly NOI(1) for Same Properties, excluding development activities, by $2,115, or 1.4%, to $148,126 compared to $146,011
in the fourth quarter of 2017;
Ended the period with overall occupancy of 97.7%, which was consistent with the third quarter of 2018. Slightly negative absorption was
offset by a net increase in occupancy arising from property transaction activity and developments coming online. At December 31, 2018,
retail occupancy was 98.0%, industrial was 97.8% and office was 92.3%;
Completed 64,000 square feet of intensification projects, 33,000 square feet of greenfield development projects and 9,000 square feet
of redevelopments during the fourth quarter and transferred these projects from properties under development to income producing
properties;
Disposed of income producing properties for total cash consideration of approximately $107,000, including one office property in Calgary.
From these proceeds, approximately $78,000 was used to fund the acquisition of income producing properties, with the remainder used
to pay down the credit facility;
Reported a net fair value loss on investment properties, on a proportionate share basis(1), of $19,788 in the quarter, primarily due to a
change in lease and capital spending assumptions for specific retail assets;
Reported a net decrease in outstanding debt, on a proportionate share basis(1), through a $62,000 net repayment on the credit facility
and mortgage repayments of $9,384, offset by $10,066 in new mortgage borrowings with a weighted average rate of 4.02% and a term
of 5.0 years and $10,623 in new constructions loan draws; and
• Maintained a strong balance sheet, with a debt to total assets(1) ratio of 47.2% at December 31, 2018, and $1.2 billion of available room
to draw on the credit facility, a debt to EBITDAFV ratio of 8.0 times, and an unencumbered asset pool of $11.8 billion.
Choice Properties REIT 2018 Fourth Quarter Report 13
5.2
Key Performance Indicators and Selected Annual Financial Information
As at or for the years ended December 31
($ thousands except where otherwise indicated)
(unaudited)
Rental revenue
Cash flows from operating activities(i)
Net income
Net income per unit diluted
NOI(1) for Same Properties, excluding development activities*(ii)
FFO(1) per unit diluted*
FFO(1) payout ratio*
AFFO(1) per unit diluted*
AFFO(1) payout ratio*
Cash retained after distributions(ii)*
Distribution declared per unit
2018
1,148,273
683,632
649,577
1.111
586,836
1.033
71.6%
0.827
89.5%
57,066
0.7400
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2017
830,630
503,676
405,345
0.981
573,308
1.072
68.1%
0.863
84.6%
62,038
0.7300
$
$
$
$
$
$
$
$
$
2016
783,574
530,622
(223,072)
(0.544)
528,320
1.000
74.0%
0.790
89.2%
56,832
0.7050
Weighted average number of Units outstanding – diluted
584,605,228
413,208,961
410,034,555
* Denotes a key performance indicator
(i)
(ii)
Cash flows from operating activities excludes interest paid.
Presentation of values as at or for years ended December 31, 2017 and December 31, 2016 have been updated.
5.3 Annual Highlights
During the year ended December 31, 2018, Choice Properties:
•
•
•
•
•
•
•
•
Completed the acquisition of CREIT on May 4, 2018;
Reported rental revenue of $1,148,273, an increase of $317,643, or 38.2%, compared with $830,630 in 2017 and net income of $649,577,
an increase of $244,232, compared to the net income of $405,345 in 2017. Net income for the year ended December 31, 2018 included
a net gain on items measured at fair value of $504,669 (2017 - gain of $196,457) offset by acquisition transaction costs and other related
expenses of $141,493 (2017 - nil). The increases in both rental revenue and net income are primarily related to the acquisition of CREIT;
Reported FFO(1) per unit diluted of $1.033, a decrease of $0.039 compared to $1.072 per unit reported in 2017. The per unit decreased
was primarily attributable to changes in the capital structure arising from the Acquisition Transaction;
Reported AFFO(1) per unit diluted of $0.827, reflecting a payout ratio of 89.5% for the year, compared to 84.6% in 2017;
Increased NOI(1) for Same Properties, excluding development activities, for the year by $13,528 or 2.4% to $586,836 from $573,308 in
2017;
Completed 307,000 square feet of intensification projects during the year and transferred these projects from properties under development
to income producing properties;
Acquired eight properties, of which six are income producing and two are properties under development, for an aggregate purchase
price of $112,239. Disposed of ten properties, as part of the capital recycling program with an aggregate sale price of $127,200; and
The Distribution Reinvestment Plan was temporarily suspended commencing with distributions declared in May 2018.
14 Choice Properties REIT 2018 Fourth Quarter Report
6.
RESULTS OF OPERATIONS
Choice Properties’ financial results, as reported under GAAP, for the three months and years ended December 31, 2018 and December 31,
2017 are summarized below:
For the periods ended December 31
($ thousands)
(unaudited)
Rental Revenue
Base rent
Property tax and operating cost
recoveries
Lease surrender and other revenue
Property Operating Costs
Recoverable property taxes, insurance
and operating costs
Non-recoverable operating costs
Net Property Income
Other Expenses
General and administrative expenses(i)
Property management and other
administration fees
Net interest expense and other
financing charges(ii)
Accelerated amortization of debt
premium
Interest and other income
Share of income from equity accounted
joint ventures(iii)
Net Income before Acquisition
Transaction Costs and Other
Related Expenses, and
Adjustments to Fair Value
Acquisition transaction costs and other
related expenses
Adjustment to fair value of unit-based
compensation
Adjustment to fair value of
Exchangeable Units
Adjustment to fair value of investment
properties
Adjustment to fair value of investment
properties held in equity accounted
joint ventures
Income before Income Taxes
Income taxes
Net Income
Three Months
Year End
2018
2017
Change
2018
2017
Change
$
222,933
$
152,929
$
70,004
$
798,940
$
605,024
$
193,916
96,216
3,644
322,793
(90,431)
(1,944)
230,418
51,831
6,471
211,231
44,385
(2,827)
328,176
21,157
111,562
1,148,273
217,093
8,513
830,630
111,083
12,644
317,643
(49,337)
166
162,060
(41,094)
(2,110)
68,358
(310,820)
(3,616)
833,837
(208,854)
(101,966)
(620)
621,156
(2,996)
212,681
(9,506)
(6,712)
(2,794)
(34,975)
(23,795)
(11,180)
1,134
267
867
3,523
1,270
2,253
(138,552)
(100,397)
(38,155)
(513,864)
(394,826)
(119,038)
—
4,095
9,356
—
2,744
69
—
1,351
9,287
(37,282)
14,224
—
4,829
(37,282)
9,395
21,476
254
21,222
96,945
58,031
38,914
286,939
208,888
78,051
(11,044)
—
(11,044)
(141,493)
—
(141,493)
707
(267)
974
4,792
(468)
5,260
214,479
(19,026)
233,505
593,706
38,212
555,494
(18,548)
(2,710)
(15,838)
(88,575)
159,458
(248,033)
(1,240)
281,299
(200)
505
36,533
—
(1,745)
244,766
(200)
(5,254)
650,115
(538)
(745)
405,345
—
(4,509)
244,770
(538)
$
281,099
$
36,533
$
244,566
$
649,577
$
405,345
$
244,232
General and administrative expenses, as presented above, excludes the adjustment to the fair value of unit-based compensation.
(i)
(ii) Net interest expense and other financing charges, as presented above, excludes the accelerated amortization of the debt premium on the Class C LP Units.
(iii) Share of income from equity accounted joint ventures, as presented above, excludes the adjustment to the fair value of investment properties held in equity accounted
joint ventures.
Choice Properties REIT 2018 Fourth Quarter Report 15
Net Income
For the three months ended December 31, 2018, the net income of $281,099 was higher by $244,566, compared to the net income of $36,533
in the same period of 2017. The increase was primarily due to a favourable change of $233,505 to the fair value of Exchangeable Units and
the $69,905 additional net property income earned as a result of the Acquisition Transaction, partially offset by the incremental net interest
expense and other financing charges of $38,155, an unfavourable change of $15,838 to the fair value of investment properties, and $11,044
for acquisition transaction costs and other related expenses. 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 income taxes, the acquisition transaction costs and other related expenses and the adjustments to fair value, net income for the
three months ended December 31, 2018 was $38,914 higher than for the fourth quarter of 2017, due to an increase of $68,358 in net property
income, a $9,287 increase in income from equity accounted joint ventures, a $1,351 increase in interest and other income, and a $867 increase
in fee revenue, partially offset by an increase of $38,155 in net interest expense and other financing charges, and an increase of $2,794 in
general and administrative expenses. The Acquisition Transaction contributed $69,905 in net property income and $8,763 in income from
equity accounted joint ventures.
For the year ended December 31, 2018, net income of $649,577, was higher by $244,232, compared to the net income of $405,345 in 2017.
The increase was primarily due to a favourable change of $555,494 to the fair value of Exchangeable Units, partially offset by an unfavourable
change of $248,033 to the fair value of investment properties, and $141,493 for acquisition transaction costs and other related expenses.
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 income taxes, the acquisition transaction costs and other related expenses and the adjustments to fair value, net income for the
year ended December 31, 2018 was $78,051 higher than for the same period in 2017 primarily due to an increase of $212,681 in net property
income, a $21,222 increase in income from equity accounted joint ventures, a $9,395 increase in interest and other income, and an increase
of $2,253 in fee revenue, partially offset by an increase of $119,038 in net interest expense and other financing charges, the accelerated
amortization of debt premium of $37,282, and an increase of $11,180 in general and administrative expenses. The Acquisition Transaction
contributed $188,579 in net property income and $20,648 in income from equity accounted joint ventures.
Rental Revenue
Rental revenue is comprised primarily of base rent, including straight-line rent, and recoveries from tenants for property taxes, insurance,
operating costs and qualifying capital expenditures. Growth in rental revenue is materially impacted by newly acquired or constructed assets.
To better measure certain key performance factors, management analyzes rental revenue for the income producing properties owned by the
Trust throughout the current and comparative reporting periods, the “Same Properties”, to remove the impact of recent property acquisition
and disposition transactions, the “Property Transactions”, and to remove the Acquisition Transaction.
For the periods ended December 31
($ thousands)
(unaudited)
Three Months
Same Properties(i)
Property Transactions(ii)
$
2018
214,610
2,562
217,172
105,621
$
$
2017
207,869
3,362
211,231
$
Change
6,741
(800)
5,941
—
105,621
Year End
$
2018
848,724
19,416
868,140
280,133
$
2017
824,053
6,577
830,630
Change
24,671
12,839
37,510
—
280,133
$
322,793
$
211,231
$
111,562
$ 1,148,273
$
830,630
$
317,643
Acquisition Transaction
Rental Revenue
(i)
(ii)
Same Properties included 538 and 533 income producing properties that were owned throughout the three months and year ended December 31, 2018 and December 31,
2017, respectively.
Property Transactions included properties acquired, net of dispositions, subsequent to September 30, 2017 and December 31, 2017, for the three months and year ended
December 31, 2018 and December 31, 2017, respectively.
During the three months ended December 31, 2018, rental revenue increased by $111,562, or 52.8%, compared to the same period of 2017,
with $105,621 attributable to the Acquisition Transaction. The growth in revenue excluding the Acquisition Transaction of $5,941, or 2.8%,
was attributable to an increase of $6,741 from Same Properties, partially offset by a decrease of $800 from Property Transactions.
The growth in revenue from Same Properties was primarily attributable to a $3,177 increase in base rent, a $5,769 increase in recovery of
property operating costs and a $981 increase in the recovery of capital expenditures, partially offset by a $3,186 decrease in other revenues.
The $3,177 increase in base rent included increases from higher average rents per square foot on third-party leases and $525 from base rent
of newly developed GLA.
16 Choice Properties REIT 2018 Fourth Quarter Report
During the year ended December 31, 2018, rental revenue increased by $317,643, or 38.2%, compared to 2017, with $280,133 attributable
to the Acquisition Transaction. The growth in revenue excluding the Acquisition Transaction of $37,510, or 4.5%, was attributable to an increase
of $24,671 from Same Properties, and an increase of $12,839 from Property Transactions, including a lease surrender payment of $6,892
from Loblaw in connection to a property that was sold.
The growth in revenue from Same Properties was attributable to an increase of $11,531 in base rent, an increase of a $8,420 in recovery of
property operating costs, a $4,706 increase in revenue generated from the recovery of capital expenditures, and a $14 increase in other
revenues. The $11,531 increase in base rent included revenue from newly developed GLA of $7,488 and increases from higher average rents
per square foot on third-party leases.
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. During the three months and year ended
December 31, 2018, non-cash amounts positively impacted rental revenue by $8,033 and $34,076, respectively (2017 - $8,092 and $34,740).
Property Operating Costs
Property operating costs are comprised primarily of expenses to manage and maintain the properties for the benefit of the tenants, including
realty taxes and insurance, that are recoverable under the leases of most tenants. Non-recoverable operating costs do not directly benefit
the tenants and include property management fees paid by the Trust for properties managed by its partners. To better measure certain key
performance factors, management analyzes property operating costs for the income producing properties owned by the Trust throughout the
current and comparative reporting periods, the “Same Properties”, to remove the impact of recent property acquisition and disposition
transactions, the “Property Transactions”, and to remove the Acquisition Transaction.
For the periods ended December 31
($ thousands)
(unaudited)
Three Months
Same Properties(i)
Property Transactions(ii)
Acquisition Transaction
Property Operating Costs
$
$
2018
56,053
$
2017
49,150
$
606
56,659
35,716
92,375
21
49,171
—
$
49,171
$
$
2018
219,526
3,356
222,882
91,554
Year End
2017
208,632
$
$
842
209,474
—
Change
10,894
2,514
13,408
91,554
$
314,436
$
209,474
$
104,962
Change
6,903
585
7,488
35,716
43,204
(i)
(ii)
Same Properties included 538 and 533 income producing properties that were owned throughout three months and year ended December 31, 2018 and December 31,
2017, respectively.
Property Transactions included properties acquired, net of dispositions, subsequent to September 30, 2017 and December 31, 2017, for the three months and year
ended December 31, 2018 and December 31, 2017, respectively.
During the three months ended December 31, 2018, property operating costs increased by $43,204 or 87.9% compared to the same period
of 2017, with $35,716 attributable to the Acquisition Transaction. Excluding the Acquisition Transaction, property operating costs increased
by $7,488, with a $6,903 increase from Same Properties and a $585 increase from Property Transactions. The increase in property operating
costs was driven by the timing of expenses, primarily due to the seasonality of when property taxes are assessed.
During the year ended December 31, 2018, property operating costs increased by $104,962 or 50.1% compared to 2017, with $91,554
attributable to the Acquisition Transaction. Excluding the Acquisition Transaction, property operating costs increased by $13,408, or 6.4%,
with a $10,894 increase from Same Properties and a $2,514 increase from Property Transactions. The increase in property operating costs
from Same Properties was primarily related to increased recoverable property operating costs. Non-recoverable property operating costs
include expenditures that can vary by year.
Choice Properties REIT 2018 Fourth Quarter Report 17
General and Administrative Expenses
General and administrative expenses reflect increases to the costs of running Choice Properties’ operational platform after the Acquisition
Transaction.
For the periods ended December 31
($ thousands)
(unaudited)
Three Months
2018
14,696
$
2017
8,179
$
Year End
Change
6,517
$
2018
48,583
$
2017
27,314
Change
$
21,269
Internal expenses of the Trust
$
Investor relations and other public
entity costs
Professional fees
Amortization of other assets
Services Agreement expense
charged by related party(i)
Less:
(169)
256
—
702
15,485
433
282
235
645
9,774
(602)
(26)
(235)
57
5,711
1,246
1,920
495
2,335
54,579
1,892
1,515
934
2,580
34,235
(646)
405
(439)
(245)
20,344
Capitalized to investment properties
(730)
(1,004)
274
(3,261)
(3,035)
(226)
Allocated to recoverable operating
expenses
General and administrative
expenses
Deduct the impact of the following:
Property management and other
administration fees(ii)
Internal expenses for leasing(ii)
Adjusted general and
(5,249)
(2,058)
(3,191)
(16,343)
(7,405)
(8,938)
9,506
6,712
2,794
34,975
23,795
11,180
(1,134)
(1,644)
(267)
(709)
(867)
(935)
(3,523)
(5,428)
(1,270)
(2,336)
(2,253)
(3,092)
administrative expenses(ii)
$
6,728
$
5,736
$
992
$
26,024
$
20,189
$
5,835
As a percentage of revenue
2.1%
2.7%
(0.6)%
2.3%
2.4%
(0.1)%
(i)
(ii)
The Services Agreement, Property Management Agreement and Sublease Administration Agreement are described in the Section 17 “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:
the property management fees and sublease administration fees which compensate Choice Properties for additional costs incurred;
a.
internal expenses for leasing, to increase comparability between real estate entities that capitalize these expenses; and
b.
amortization of other assets.
c.
Adjusted general and administrative expenses, for the three months ended December 31, 2018, of $6,728, or 2.1% when expressed as a
percentage of revenue, increased by $992, which is a reduction of 0.6% when expressed as a percentage of revenue, compared to the fourth
quarter of 2017.
Adjusted general and administrative expenses, for the year ended December 31, 2018, of $26,024, or 2.3% when expressed as a percentage
of revenue, increased by $5,835, or flat when expressed as a percentage of revenue, compared to the prior year.
General and administrative expenses are impacted by transactions that can vary by year and the timing of when expenses are incurred. On
an annual basis the fluctuations, due to the timing of expenses, are minimized and adjusted general and administrative expenses expressed
as a percentage of revenue becomes comparable year-over-year.
18 Choice Properties REIT 2018 Fourth Quarter Report
Net Interest Expense and Other Financing Charges
In 2018, Choice Properties’ capital structure was altered by the Acquisition Transaction, see Section 4, “Acquisition of Canadian Real Estate
Investment Trust” and Section 11 “Liquidity and Capital Resources”, of this MD&A. The impacts of those changes flow through net interest
expense and other financing charges as discussed below.
For the periods ended December 31
($ thousands)
(unaudited)
2018
2017
Three Months
Year End
Change
2018
2017
Change
Interest on senior unsecured
debentures
Distributions on Class C LP Units(i)
Interest on mortgages
Interest on credit facilities and term
loans
Subtotal (for use in Debt Service
Coverage(1) 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
$
43,343
$
—
13,343
26,028
11,562
30
$
17,315
$
164,010
$
103,625
$
60,385
(11,562)
13,313
15,417
35,293
46,250
110
(30,833)
35,183
11,175
3,551
7,624
29,780
11,799
17,981
67,861
41,171
26,690
244,500
161,784
82,716
72,143
58,895
13,248
271,089
232,199
38,890
140,004
100,066
39,938
515,589
393,983
121,606
(979)
525
(1,504)
(2,387)
1,560
(3,947)
1,238
(1,711)
415
(609)
823
(1,102)
5,542
(4,880)
1,638
(2,355)
3,904
(2,525)
financing charges
$
138,552
$
100,397
$
38,155
$
513,864
$
394,826
$ 119,038
(i)
Represents interest on indebtedness due to related parties.
For the three months ended December 31, 2018, net interest expense and other financing charges increased by $38,155 or 38.0% compared
to 2017. The increase in interest is primarily driven by the assumption of debt from the Acquisition Transaction, the issuance of debt to fund
the Acquisition Transaction (see Section 3, “Acquisition of Canadian Real Estate Investment Trust”, of this MD&A) and the issuance of Series
I and J senior unsecured debentures in the first quarter of 2018. The increase is also attributable to higher distributions on the Exchangeable
Units issued on the conversion of Class C LP Units which happened concurrently with the Acquisition Transaction. In addition, the interest
rates on variable rate debt was higher in the three months and year ended December 31, 2018 compared to December 31, 2017.
For the year ended December 31, 2018, net interest expense and other financing charges increased by $119,038 or 30.1% compared to
2017. The increase in interest is primarily driven by the assumption of debt from the Acquisition Transaction, the issuance of debt to fund the
Acquisition Transaction (see Section 3, “Acquisition of Canadian Real Estate Investment Trust”, of this MD&A) and the issuance of Series I
and J senior unsecured debentures in the first quarter of 2018, as well as the call premium of $2,880 for the early repayment of Series A senior
unsecured debentures in the first quarter of 2018. The increase is also attributable to higher distributions on the Exchangeable Units issued
on the conversion of Class C LP Units which happened concurrently with the Acquisition Transaction.
Accelerated Amortization of Debt Premium
Net income for the year ended December 31, 2018 was negatively impacted by the accelerated amortization of the debt premium related to
the Class C LP Units. Prior to May 4, 2018, Loblaw held all the Class C LP Units. Concurrent with the Acquisition Transaction, the Class C
LP Units were converted to Exchangeable Units. This conversion necessitated the accelerated amortization of the remaining balance of the
debt premium of $37,282.
Choice Properties REIT 2018 Fourth Quarter Report 19
Property Management and Other Administration Fees
Fees charged to third-parties include property management fees, leasing fees, project management fees relating to co-owned properties
which serves as a cash flow supplement to enhance returns from the co-owned assets. Choice Properties provides property management
services to Loblaw and also administers certain services in connection with Loblaw’s gas bar subleases (see Section 17, “Related Party
Transactions” of this MD&A).
For the periods ended December 31
($ thousands)
(unaudited)
Three Months
2018
157
$
2017
267
$
977
—
1,134
$
267
$
Year End
Change
(110)
977
867
$
$
2018
899
2,624
$
2017
1,270
—
$
Change
(371)
2,624
3,523
$
1,270
$
2,253
Fees charged to related party
Fees charged to third-parties
Property management and other
administration fees
$
$
For the three months ended December 31, 2018, property management and other administration fees increased by $867 compared to 2017.
The increase is primarily due to the new fee revenue stream added as a result of the Acquisition Transaction, partially offset by a decline in
fees charged to related party.
For the year ended December 31, 2018, property management and other administration fees increased by $2,253 compared to 2017. The
increase is primarily due to the new fee revenue stream added as a result of the Acquisition Transaction, partially offset by a decline in fees
charged to related party on account of additional fees being earned from Loblaw for the initial set-up of the gas bar subleases in the third
quarter of 2017.
Interest and Other Income
For the periods ended December 31
($ thousands)
(unaudited)
2018
2017
Three Months
Year End
Change
2018
2017
Change
Interest income on mortgages and
loans receivable
Other interest income
Other income
Interest and other income
$
$
3,336
$
2,722
$
759
—
22
—
4,095
$
2,744
$
614
256
—
870
$
$
10,691
$
4,760
$
3,461
72
69
—
5,931
2,655
72
14,224
$
4,829
$
8,658
For the three months ended December 31, 2018, interest and other income increased by $870 compared to 2017. The increase is primarily
due to interest earned from the mezzanine financing program acquired as part of the Acquisition Transaction.
For the year ended December 31, 2018, interest and other income increased by $8,658 compared to 2017. The increase is primarily due to
the additional interest income earned from the mezzanine financing program acquired as part of the Acquisition Transaction and the interest
income earned on the funds held in escrow in anticipation of the Acquisition Transaction.
Acquisition Transaction Costs and Other Related Expenses
For the three months and year ended December 31, 2018, advisory fees, personnel and other costs related to the Acquisition Transaction
totaling $11,044 and $141,493, respectively, were expensed (2017 - nil and nil, respectively).
20 Choice Properties REIT 2018 Fourth Quarter Report
7.
OTHER MEASURES OF PERFORMANCE
In addition to the GAAP measures already described, Choice Properties’ management utilizes non-GAAP measures to analyze performance.
See Section 21, “Non-GAAP Financial Measures”, of this MD&A, for details on how these measures are defined, calculated and reconciled
to GAAP financial measures and why management analyzes these measures.
When management assesses the performance of the Trust, the results of equity accounted joint ventures are disaggregated, such that Choice
Properties’ proportionate share of the results are represented throughout the compiled consolidated statement of income. Refer to Section
21.1, “Proportionate Share Compilation“, of this MD&A, for a reconciliation of net income on a proportionate share basis to net income as
determined in accordance with GAAP.
7.1
Net Operating Income (1)
NOI(1) is a supplemental measure of operating performance widely used in the real estate industry. There is no industry-defined definition of
NOI(1). Refer to Section 21.2, “Net Operating Income”, of this MD&A, for a definition of NOI(1) and a reconciliation to net income determined
in accordance with GAAP.
Choice Properties’ NOI(1), calculated on a proportionate share basis to incorporate Choice Properties’ investment in co-owned properties as
if they were owned directly, for the three months and year ended December 31, 2018 and December 31, 2017 are summarized below:
For the periods ended December 31
($ thousands)
(unaudited)
Proportionate Share(1) Rental
Revenue, on a cash basis
Base rent, excluding straight-line rent
225,013
144,837
2018
2017
$
$
Three Months
$
Year End
Change
2018
2017
Change
80,176
$
791,105
$
570,283
$
220,822
Property tax and operating cost
recoveries
Lease surrender and other revenue(i)
Proportionate Share(1) Property
Operating Costs
Recoverable property taxes,
insurance and operating costs
Non-recoverable operating costs
Net Operating Income(1)
NOI(1) for Same Properties(ii),
excluding development activities
100,758
4,011
329,782
51,831
5,541
202,209
48,927
(1,530)
339,566
21,801
127,573
1,152,472
217,094
7,583
794,960
122,472
14,218
357,512
(94,990)
(1,876)
232,916
148,126
$
$
$
$
(49,337)
166
(45,653)
(2,042)
153,038
$
79,878
146,011
$
2,115
(323,419)
(3,995)
825,058
586,836
$
$
$
$
(208,854)
(114,565)
(620)
(3,375)
585,486
$
239,572
573,308
$
13,528
(i)
Same Properties’ lease surrender revenue for the three months and year ended December 31, 2017 excludes $930 that was attributable to non-controlling interests.
(ii)
Same Properties included 538 and 533 income producing properties that were owned throughout the three months and years ended December 31, 2018 and December 31,
2017, respectively.
To better measure certain key performance factors, management analyzes NOI(1) for the income producing properties owned by the Trust
throughout the current and comparative reporting periods, the “Same Properties”, to remove the impact of recent property acquisition and
disposition transactions, the “Property Transactions”, and the Acquisition Transaction.
Choice Properties REIT 2018 Fourth Quarter Report 21
Proportionate Share(1) Rental Revenue, on a cash basis
Proportionate share(1) rental revenue, on a cash basis, is comprised primarily of base rent, excluding straight-line rent, and recoveries from
tenants for property taxes, insurance, operating costs and qualifying capital expenditures. Growth in rental revenue is materially impacted by
newly acquired or constructed assets.
For the periods ended December 31
($ thousands)
(unaudited)
Three Months
2018
208,367
2,476
210,843
118,939
$
$
2017
198,824
3,385
202,209
$
Change
9,543
(909)
8,634
—
118,939
Year End
$
2018
820,390
19,069
839,459
313,013
$
2017
788,480
6,480
794,960
Change
31,910
12,589
44,499
—
313,013
Same Properties(i)
Property Transactions(ii)
$
Acquisition Transaction
Proportionate Share(1) Rental
Revenue, on a cash basis
$
329,782
$
202,209
$
127,573
$ 1,152,472
$
794,960
$
357,512
(i)
(ii)
Same Properties included 538 and 533 income producing properties that were owned throughout the three months and years ended December 31, 2018 and December 31,
2017, respectively.
Property Transactions included properties acquired, net of dispositions, subsequent to September 30, 2017 and December 31, 2017, for the three months and years ended
December 31, 2018 and December 31, 2017, respectively.
During the three months ended December 31, 2018, proportionate share(1) rental revenue, on a cash basis, increased by $127,573, or 63.1%
compared to the same period of 2017 with $118,939, or 58.8%, attributable to the Acquisition Transaction. The growth in revenue excluding
the Acquisition Transaction of 4.3% was attributable to an increase of $9,543 in revenue from Same Properties, partially offset by a decrease
of $909 attributable to the Property Transactions. The growth in revenue from Same Properties was primarily driven by an increase of $5,049
in base rent, a $5,769 increase in recovery of property operating costs, and a $981 increase in revenue generated from the recovery of capital
expenditures, partially offset by a $2,256 decrease in other revenues. The $5,049 increase in base rent from Same Properties included revenue
from newly developed GLA of $2,695, rent steps in Loblaw leases and increases from higher average rents per square foot on third-party
leases.
During the year ended December 31, 2018, proportionate share(1) rental revenue, on a cash basis, increased by $357,512, or 45.0% compared
to 2017 with $313,013, or 39.4%, attributable to the Acquisition Transaction. The growth in revenue excluding the Acquisition Transaction of
5.6% was attributable to an increase of $31,910 in revenue from Same Properties and additional rental revenue of $12,589 attributable to the
Property Transactions. The growth in revenue from Same Properties was attributable to an increase of $17,840 in base rent, an increase of
a $8,420 in recovery of property operating costs, a $4,706 increase in revenue generated from the recovery of capital expenditures, and a
$944 increase in other revenues. The $17,840 increase in base rent from Same Properties included revenue from newly developed GLA of
7,488, rent steps in Loblaw leases and increases from higher average rents per square foot on third-party leases.
22 Choice Properties REIT 2018 Fourth Quarter Report
Proportionate Share(1) Property Operating Costs
Proportionate share(1) property operating costs are comprised primarily of expenses to manage and maintain the properties for the benefit of
the tenants, including realty taxes and insurance, that are recoverable under the leases of most tenants. Non-recoverable operating costs do
not directly benefit the tenants and include property management fees paid by the Trust for properties managed by its partners. Growth in
property operating costs is materially impacted by newly acquired or constructed assets.
For the periods ended December 31
($ thousands)
(unaudited)
Three Months
Same Properties(i)
Property Transactions(ii)
$
Acquisition Transaction
Proportionate Share(1) Property
Operating Costs
2018
56,053
$
2017
49,150
$
606
56,659
40,207
21
49,171
—
$
Change
6,903
585
7,488
40,207
2018
219,526
3,356
222,882
104,532
Year End
2017
208,632
$
$
842
209,474
Change
10,894
2,514
13,408
—
104,532
$
96,866
$
49,171
$
47,695
$
327,414
$
209,474
$
117,940
(i)
(ii)
Same Properties included 538 and 533 income producing properties that were owned throughout the three months and years ended December 31, 2018 and December 31,
2017, respectively.
Property Transactions included properties acquired, net of dispositions, subsequent to September 30, 2017 and December 31, 2017, for the three months and years ended
December 31, 2018 and December 31, 2017, respectively.
During the three months ended December 31, 2018, proportionate share(1) property operating costs increased by $47,695 or 97.0% compared
to the same period of 2017, which was attributable to an increase of $40,207, or 81.8%, from the Acquisition Transaction, an increase of
$6,903 from Same Properties primarily related to recoverable property operating costs, and an increase of $585 from the Property Transactions.
The increase in proportionate share(1) property operating costs from Same Properties was driven by timing of expenses.
During the year ended December 31, 2018, proportionate share(1) property operating costs increased by $117,940 or 56.3% compared to
2017, which was attributable to an increase of $104,532, or 49.9%, from the Acquisition Transaction, $10,894 from Same Properties, and
$2,514 from the Property Transactions. The increase in total property operating costs from Same Properties was attributable to an increase
of $10,082 in recoverable property operating costs, and an increase of $812 in non-recoverable property operating costs. Non-recoverable
property operating costs include expenditures that can vary by year.
Choice Properties REIT 2018 Fourth Quarter Report 23
Net Operating Income(1)
NOI(1) is calculated on a proportionate share basis to incorporate Choice Properties’ investment in co-owned properties as if they were owned
directly. Growth in NOI(1) is materially impacted by newly acquired or constructed assets.
For the periods ended December 31
($ thousands)
(unaudited)
Three Months
Same Properties(i)
Property Transactions(ii)
$
2018
152,314
$
2017
149,674
$
1,870
154,184
78,732
3,364
153,038
—
$
232,916
$
153,038
$
Year End
Change
2,640
(1,494)
1,146
78,732
79,878
$
$
2018
600,864
15,713
616,577
208,481
$
2017
579,848
5,638
585,486
Change
21,016
10,075
31,091
—
208,481
$
825,058
$
585,486
$
239,572
Acquisition Transaction
Net Operating Income(1)
(i)
(ii)
Same Properties included 538 and 533 income producing properties that were owned throughout the three months and years ended December 31, 2018 and December 31,
2017, respectively.
Property Transactions included properties acquired, net of dispositions, subsequent to September 30, 2017 and December 31, 2017, for the three months and years ended
December 31, 2018 and December 31, 2017, respectively.
For the three months ended December 31, 2018, NOI(1) increased $79,878, or 52.2%, compared to the same period of 2017, which was
attributable to an increase of $78,732, or 51.4%, from the Acquisition Transaction, and $2,640 from Same Properties, partially offset by $1,494
from the Property Transactions.
For the year ended December 31, 2018, NOI(1) increased $239,572, or 40.9%, compared to 2017, which was attributable to an increase of
$208,481, or 35.6%, from the Acquisition Transaction, $21,016 from Same Properties, and $10,075 from the Property Transactions.
Net Operating Income(1) for Same Properties, Excluding Development Activities
Management further refines the analysis to exclude any NOI(1) from developments which increased GLA in the comparative periods.
Three Months
For the periods ended December 31
($ thousands)
2017
(unaudited)
2018
Year End
Change
2018
2017
Change
NOI(1) for Same Properties(i),
excluding development
activities
$
148,126
$
146,011 $
2,115
$
586,836
$
573,308 $
13,528
(i)
Same Properties included 538 and 533 income producing properties that were owned throughout the three months and years ended December 31, 2018 and December 31,
2017, respectively.
For the three months ended December 31, 2018, NOI(1) for Same Properties, excluding development activities, increased by $2,115 or 1.4%,
compared to 2017. The increase was primarily due to $2,106 additional base rent and net recoveries, which was driven by rent steps in Loblaw
leases and higher average rents per square foot on third-party leases, and a $981 increase in revenue generated from the recovery of capital
expenditures, partially offset by a $886 increase in non-recoverable operating expenses, and a $86 decrease in other revenues.
For the year ended December 31, 2018, NOI(1) for Same Properties, excluding development activities, increased by $13,528 or 2.4%, compared
to 2017, primarily due to an increase of $6,518 in base rent and net recoveries, which was driven by rent steps in Loblaw leases and higher
average rents per square foot on third-party leases. The increase was also attributable to an increase of $4,706 in revenue generated from
the recovery of capital expenditures, and a $3,115 increase in other revenues, partially offset by an increase of $811 in non-recoverable
operating expenses.
24 Choice Properties REIT 2018 Fourth Quarter Report
7.2
Other Key Performance Indicators
FFO(1) and AFFO(1) are included in the Trust’s list of key performance indicators. See Section 21, “Non-GAAP Financial Measures”, of this
MD&A, for details on how these measures are defined, calculated and reconciled to GAAP financial measures and why management analyzes
these measures. FFO(1) and AFFO(1) for the three months and year ended December 31, 2018 and December 31, 2017 are summarized
below:
For the periods ended December 31
($ thousands)
(unaudited)
Three Months
Funds from Operations(1)(i)
FFO(1)(i) per unit basic
FFO(1)(i) per unit diluted
FFO(1)(i) payout ratio - diluted
Adjusted Funds from
Operations(1)(i)
AFFO(1)(i) per unit basic
AFFO(1)(i) per unit diluted
AFFO(1)(i) payout ratio - diluted
Distribution declared per unit
Weighted average Units
outstanding - basic
Weighted average Units
outstanding - diluted
Number of Units outstanding,
end of period
2018
171,872
0.257
0.256
72.2%
110,332
0.165
0.165
112.1%
0.1850
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2017
116,843
0.283
0.282
65.6%
86,408
0.210
0.209
88.5%
$
$
$
$
$
$
Change
55,029
(0.026)
(0.026)
6.6%
23,924
(0.045)
(0.044)
23.6%
$
$
$
$
$
$
2018
603,840
1.038
1.033
71.6%
483,378
0.831
0.827
89.5%
Year End
2017
442,935
1.076
1.072
68.1%
356,490
0.866
0.863
84.6%
$
$
$
$
$
$
Change
160,905
(0.038)
(0.039)
3.5%
126,888
(0.035)
(0.036)
4.9%
0.7300
$
0.0100
$
$
$
$
$
$
$
0.1850
$
— $
0.7400
667,907,648
412,388,639
255,519,009
581,978,014
411,490,052
170,487,962
670,486,393
414,285,762
256,200,631
584,605,228
413,208,961
171,396,267
668,164,342
413,381,522
254,782,820
668,164,342
413,381,522
254,782,820
(i)
FFO(1), AFFO(1) and the related per unit amounts and payout ratios were calculated excluding the accelerated amortization of debt premium of $37,282 (see Section 21,
“Non-GAAP Financial Measures”, of this MD&A).
Funds from Operations(1)
Choice Properties calculates 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 2018. From time to time the Trust may enter into transactions that materially
impact the calculation and are excluded from the calculation for management’s review purposes. Refer to Section 21.3, “Funds from Operations”,
of this MD&A, for a reconciliation of FFO(1) to net income determined in accordance with GAAP.
For the three months ended December 31, 2018, FFO(1), increased by $55,029 or 47.1% compared to 2017. The year-over-year growth was
primarily due to an increase in NOI(1) of $79,878, of which $78,732 was attributable to the Acquisition Transaction. This increase was partially
offset by a $23,905 increase in interest and other financing charges.
For the three months ended December 31, 2018, FFO(1) per unit on a diluted basis decreased by $0.026 or 9.2% compared to 2017, primarily
as a result of the units issued in relation to the Acquisition Transaction.
For the year ended December 31, 2018, FFO(1), excluding the impact of the accelerated amortization of the debt premium, increased by
$160,905 or 36.3% compared to 2017. The year-over-year growth was primarily due to an increase in NOI(1) of $239,572, of which $208,481
was attributable to the Acquisition Transaction. This increase was partially offset by a $77,488 increase in interest and other financing charges.
For the year ended December 31, 2018, FFO(1) per unit on a diluted basis decreased by $0.039 or 3.6% compared to 2017, primarily as a
result of the units issued in relation to the Acquisition Transaction.
FFO(1) for the year ended December 31, 2018 included lease surrender revenue from Loblaw of $10,204, net additional interest expense of
$5,581 in connection with the commitments to financing prior to the Acquisition Transaction, and the call premium of $2,880 for the early
repayment of Series A senior unsecured debentures. Excluding these amounts, FFO(1) would have been $602,097 or $1.030 per unit on a
diluted basis.
Choice Properties REIT 2018 Fourth Quarter Report 25
Adjusted Funds from Operations(1)
Choice Properties calculates its AFFO(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 2018. From time to time the Trust may enter into transactions that materially
impact the calculation and are eliminated from the calculation for management’s review purposes. Refer to Section 21.3, “Funds from
Operations”, of this MD&A, for a reconciliation of AFFO(1) to net income determined in accordance with GAAP.
For the three months ended December 31, 2018, AFFO(1), increased by $23,924 or 27.7% compared to 2017. The year-over-year increase
was primarily due to an increase in NOI(1) of $79,878, of which $78,732 was attributable to the Acquisition Transaction, partially offset by a
$29,897 increase in capital expenditures required to maintain the rental revenue stream of the growing portfolio and a $23,905 increase in
interest and other financing charges.
For the three months ended December 31, 2018, AFFO(1) per unit on a diluted basis decreased by $0.044 or 21.1% compared to 2017.
For the year ended December 31, 2018, AFFO(1), excluding the impact of the accelerated amortization of the debt premium, increased by
$126,888 or 35.6% compared to 2017. The year-over-year growth was primarily due to an increase in NOI(1) of $239,572, of which $208,481
was attributable to the Acquisition Transaction. This increase was partially offset by a $77,488 increase in interest and other financing charges
and a $30,601 increase in capital expenditures required to maintain the rental revenue stream of the growing portfolio.
For the year ended December 31, 2018, AFFO(1) per unit on a diluted basis decreased by $0.036 or 4.2% compared to 2017.
AFFO(1) for the year ended December 31, 2018 included lease surrender revenue from Loblaw of $10,204, net additional interest expense of
$5,581 in connection with the commitments to financing prior to the Acquisition Transaction, and the call premium of $2,880 for the early
repayment of Series A senior unsecured debentures. Excluding these amounts, AFFO(1) would have been $481,635 or $0.824 per unit on a
diluted basis.
26 Choice Properties REIT 2018 Fourth Quarter Report
8.
REPORTABLE OPERATING SEGMENTS' RESULTS OF OPERATIONS
Prior to the second quarter of 2018, Choice Properties operated one reportable segment, retail. The acquisition of CREIT on May 4, 2018,
diversified the asset base, such that the Trust manages operations in three reportable segments, with all material activity carried out in Canada:
•
•
•
Retail Segment: focused on necessity-based retail tenants on long-term leases, including a strong anchor tenant with Loblaw - Canada’s
largest retailer, the retail portfolio has a national footprint concentrated in Canada’s largest markets,
Industrial Segment: consists primarily of distribution facilities, warehouses, and buildings used for light manufacturing of a size and
configuration that will readily accommodate the diverse needs of a broad range of tenants; and
Office Segment: focuses on large, well-located buildings in target markets, with an emphasis on the downtown core in some of Canada’s
largest cities.
Management measures performance of operating segments using NOI(1) as calculated on a proportionate share basis. Refer to Section 21.1,
“Proportionate Share Compilation“, of this MD&A, for a reconciliation of NOI(1) on a proportionate share basis to net income as determined in
accordance with GAAP.
8.1
Retail Segment
Choice Properties’ NOI(1) for the retail segment, compiled on a proportionate share basis, for the three months and year ended December 31,
2018 and December 31, 2017, is summarized below:
For the periods ended December 31
($ thousands)
(unaudited)
Proportionate Share(1) Rental
Revenue, on a cash basis
Base rent, excluding straight-line rent
Three Months
179,554
144,837
2017(ii)
2018(i)
$
$
$
Year End
Change
2018(i)
2017(ii)
Change
34,717
$
647,504
$
570,284
$
77,220
Property tax and operating cost
recoveries
Lease surrender and other revenue
Proportionate Share(1) Property
Operating Costs
Recoverable property taxes,
insurance and operating costs
Non-recoverable operating costs
Retail Segment - Net Operating
74,901
1,452
255,907
51,831
5,541
202,209
23,070
(4,089)
53,698
265,266
14,921
927,691
217,093
7,583
794,960
48,173
7,338
132,731
(72,203)
(1,552)
(73,755)
(49,337)
166
(49,171)
(22,866)
(1,718)
(24,584)
(257,434)
(2,412)
(259,846)
(208,854)
(620)
(209,474)
(48,580)
(1,792)
(50,372)
Income(1)
$
182,152
$
153,038
$
29,114
$
667,845
$
585,486
$
82,359
(i)
(ii)
Retail operating results for the three months and year ended December 31, 2018, include results for three multi-family residential properties.
For the three months and year ended December 31, 2017, Choice Properties only reported a retail segment.
Choice Properties REIT 2018 Fourth Quarter Report 27
8.2
Industrial Segment
Choice Properties’ NOI(1) for the industrial segment, compiled on a proportionate share basis, for the three months and year ended December
31, 2018 and December 31, 2017 is summarized below:
For the periods ended December 31
($ thousands)
(unaudited)
Proportionate Share(1) Rental
Revenue, on a cash basis
Base rent, excluding straight-line rent
Three Months
30,186
2017(i)
2018
— $
$
$
Change
2018
2017(i)
Change
Year End
30,186
$
97,907
$
— $
97,907
Property tax and operating cost
recoveries
Lease surrender and other revenue
Proportionate Share(1) Property
Operating Costs
Recoverable property taxes,
insurance and operating costs
Non-recoverable operating costs
Industrial Segment - Net Operating
13,427
88
43,701
(11,642)
(78)
(11,720)
—
—
—
—
—
—
13,427
88
43,701
39,824
380
138,111
(11,642)
(78)
(11,720)
(34,670)
(729)
(35,399)
—
—
—
—
—
—
39,824
380
138,111
(34,670)
(729)
(35,399)
Income(1)
$
31,981
$
— $
31,981
$
102,712
$
— $
102,712
(i)
For the three months and year ended December 31, 2017, Choice Properties only reported a retail segment.
8.3
Office Segment
Choice Properties’ NOI(1) for the office segment, compiled on a proportionate share basis, for the three months and year ended December
31, 2018 and December 31, 2017 is summarized below:
For the periods ended December 31
($ thousands)
(unaudited)
Proportionate Share(1) Rental
Revenue, on a cash basis
Base rent, excluding straight-line rent
Three Months
15,273
2017(i)
2018
— $
$
$
Year End
Change
2018
2017(i)
Change
15,273
$
45,694
$
— $
45,694
Property tax and operating cost
recoveries
Lease surrender and other revenue
Proportionate Share(1) Property
Operating Costs
Recoverable property taxes,
insurance and operating costs
Non-recoverable operating costs
Office Segment - Net Operating
12,430
2,471
30,174
(11,145)
(246)
(11,391)
—
—
—
—
—
—
12,430
2,471
30,174
34,476
6,500
86,670
(11,145)
(246)
(11,391)
(31,315)
(854)
(32,169)
—
—
—
—
—
—
34,476
6,500
86,670
(31,315)
(854)
(32,169)
Income(1)
$
18,783
$
— $
18,783
$
54,501
$
— $
54,501
(i)
For the three months and year ended December 31, 2017, Choice Properties only reported a retail segment.
28 Choice Properties REIT 2018 Fourth Quarter Report
9.
BALANCE SHEET
The following table reconciles Choice Properties’ balance sheet on a GAAP basis to a proportionate share basis as at the dates indicated:
As at December 31, 2018
As at December 31, 2017
($ thousands)
(unaudited)
Assets
Non-current Assets
Investment properties
GAAP Basis Reconciliation
Proportionate
Share Basis
GAAP Basis
Reconciliation
Proportionate
Share Basis
$ 14,501,000
$
1,011,000
$ 15,512,000
$ 9,551,000
$
32,018
$ 9,583,018
Equity accounted joint ventures
734,167
(734,167)
—
32,339
(32,339)
Accounts receivable and other
assets
Mortgages, loans and notes
receivable
Intangible assets
Current Assets
Accounts receivable and other
assets
Mortgages, loans and notes
receivable
Cash and cash equivalents
—
5,565
2,556
—
1,950
88,300
30,000
—
—
—
1,950
88,300
30,000
5,565
2,556
—
—
—
—
15,355,417
276,833
15,632,250
9,591,460
(321)
9,591,139
37,975
9,653
47,628
21,419
8,965
30,384
125,110
30,713
193,798
—
10,080
19,733
125,110
40,793
213,531
304,225
6,407
332,051
7,486
2,357
18,808
311,711
8,764
350,859
Total Assets
$ 15,549,215
$
296,566
$ 15,845,781
$ 9,923,511
$
18,487
$ 9,941,998
Liabilities and Equity
Non-current Liabilities
Long term debt and Class C LP
Units
Credit facilities and term loans
Exchangeable Units
Deferred income taxes
Trade payables and other liabilities
Current Liabilities
Long term debt and Class C LP
Units
Credit facilities and term loans
Trade payables and other liabilities
Total Liabilities
Equity
Unitholders’ equity
Non-controlling interests
Total Equity
$ 5,566,915
$
187,794
$ 5,754,709
$ 3,338,420
$
— $ 3,338,420
1,114,407
4,492,359
509
6,021
—
—
—
—
1,114,407
4,492,359
509
6,021
309,522
4,259,724
—
2,713
11,180,211
187,794
11,368,005
7,910,379
496,036
90,649
586,685
—
372,982
869,018
12,049,229
3,492,185
7,801
3,499,986
—
18,123
108,772
296,566
—
391,105
977,790
12,345,795
—
—
—
3,492,185
7,801
3,499,986
400,088
250,000
426,063
1,076,151
8,986,530
928,280
8,701
936,981
—
—
—
—
—
—
—
18,487
18,487
18,487
309,522
4,259,724
—
2,713
7,910,379
400,088
250,000
444,550
1,094,638
9,005,017
—
—
—
928,280
8,701
936,981
Total Liabilities and Equity
$ 15,549,215
$
296,566
$ 15,845,781
$ 9,923,511
$
18,487
$ 9,941,998
Choice Properties REIT 2018 Fourth Quarter Report 29
The balance sheet for the year ended December 31, 2018 was materially impacted by the acquisition of CREIT. As a result of the transaction,
Choice Properties acquired a portfolio of 209 properties. This increased assets by approximately $4.7 million for the fair value of investment
properties and approximately $0.7 million for investment in equity accounted joint ventures.
The capital structure of the Trust was also materially impacted by the CREIT acquisition transaction. Choice properties assumed debt balances
of approximately $1.3 million of mortgages payable and approximately $0.5 million of senior unsecured debentures. In addition, the Trust
issued equity of approximately $2.1 million, senior unsecured debentures of $1.3 million and term debt of $800 million.
The portfolio acquired in the CREIT acquisition included 23 properties held in equity accounted joint ventures. Under IFRS, Choice Properties’
ownership interest in these properties is summarized as a net value on the balance sheet. When management assesses the Trust, it considers
the balance sheet with the proportionate share assets and liabilities of the joint ventures presented throughout.
10.
INVESTMENT PROPERTIES
To expand the portfolio and participate in development opportunities, Choice Properties owns varying interests in real estate entities which
hold investment properties. Under GAAP, many of these interests are recorded as equity accounted joint ventures and, as such, the Trust’s
portion of the investment properties of these entities is presented on the balance sheet as a summarized value, not as part of the total
investment properties. Refer to Section 21.1, “Proportionate Share Compilation”, of this MD&A, for a reconciliation of the continuity of investment
properties determined in accordance with GAAP.
The following continuity schedules present Choice Properties’ portfolio inclusive of its proportionate share ownership in equity accounted joint
ventures for the periods ended, as indicated:
As at and for the three months ended December 31, 2018
($ thousands)
(unaudited)
GAAP balance, September 30, 2018
Reclassification(i)
GAAP balance, beginning of period
Adjustments to reflect equity accounted joint ventures on a proportionate
share basis(ii)
Non-GAAP proportionate share balance, September 30, 2018
Acquisitions of investment properties(iii)
Capital expenditures
Development capital
Building improvements
Capitalized interest
Operating capital expenditures
Property capital
Direct leasing costs
Tenant improvement allowances
Amortization of straight-line rent
Transfers from properties under development
Dispositions
Foreign currency translation
Adjustment to fair value of investment properties
Income producing
properties
14,250,319
$
Properties under
development(i)
161,681
$
$
(90,312)
14,160,007
753,920
14,913,927
77,712
—
1,315
—
42,655
3,999
4,877
8,365
44,513
(103,825)
6,346
(19,268)
90,312
251,993
236,750
488,743
—
84,808
—
2,866
—
—
—
—
(44,513)
—
—
(520)
Investment
Properties
14,412,000
—
14,412,000
990,670
15,402,670
77,712
84,808
1,315
2,866
42,655
3,999
4,877
8,365
—
(103,825)
6,346
(19,788)
Non-GAAP proportionate share balance, December 31, 2018
$
14,980,616
$
531,384
$
15,512,000
(i)
The opening balance of properties under development has been adjusted to include intensifications and land assemblies that were previously recorded as part of income
producing properties.
(ii) Refer to Section 21.1, “Proportionate Share Compilation”, of this MD&A, for a a reconciliation of the continuity of investment properties determined in accordance with
GAAP.
Includes acquisition costs.
(iii)
30 Choice Properties REIT 2018 Fourth Quarter Report
As at and for the year ended December 31, 2018
($ thousands)
(unaudited)
GAAP balance, December 31, 2017
Reclassification(i)
GAAP balance, December 31, 2017
Adjustments to reflect equity accounted joint ventures on a
proportionate share basis(ii)
Non-GAAP proportionate share balance, December 31, 2017
Acquisition of CREIT
Acquisitions of investment properties(iii)
Capital expenditures
Development capital
Building improvements
Capitalized interest
Operating capital expenditures
Property capital
Direct leasing costs
Tenant improvement allowances
Amortization of straight-line rent
Transfers from properties under development
Dispositions
Foreign currency translation
Adjustment to fair value of investment properties
Income producing
properties
9,509,440
$
Properties under
development(i)
41,560
$
$
(57,547)
9,451,893
—
9,451,893
5,332,339
90,622
—
7,474
—
57,737
11,842
10,391
35,064
193,301
(123,869)
7,359
(93,537)
57,547
99,107
32,018
131,125
345,151
21,617
235,561
—
6,496
—
—
—
—
(193,301)
(14,973)
—
(292)
Investment
Properties
9,551,000
—
9,551,000
32,018
9,583,018
5,677,490
112,239
235,561
7,474
6,496
57,737
11,842
10,391
35,064
—
(138,842)
7,359
(93,829)
Non-GAAP proportionate share balance, December 31, 2018
$
14,980,616
$
531,384
$
15,512,000
(i)
The opening balance of properties under development has been adjusted to include intensifications and land assemblies that were previously recorded as part of income
producing properties.
(ii) Refer to Section 21.1, “Proportionate Share Compilation”, of this MD&A, for a a reconciliation of the continuity of investment properties determined in accordance with
GAAP.
Includes acquisition costs.
(iii)
Choice Properties REIT 2018 Fourth Quarter Report 31
10.1
Valuation Method
Investment properties are measured at fair value, primarily determined using the discounted cash flow method. Under this methodology,
discount rates are 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 valued with external appraisals
performed each quarter for a portion of the portfolio. Substantially all properties will be subject to an external appraisal at least once over a
four 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 is a summary of the key rates used in the valuation process:
Total Investment Properties
Discount rate
Terminal capitalization rate
Overall capitalization rate
Retail
Discount rate
Terminal capitalization rate
Overall capitalization rate
Industrial
Discount rate
Terminal capitalization rate
Overall capitalization rate
Office
Discount rate
Terminal capitalization rate
Overall capitalization rate
As at
December 31, 2018
Range Weighted average
6.82%
5.00% - 11.45%
4.25% - 10.95%
4.00% - 10.70%
6.15%
5.88%
Range
5.50% - 11.25%
4.75% - 10.50%
4.50% - 10.50%
5.00% - 11.45%
4.25% - 10.95%
4.00% - 10.70%
6.87%
6.22%
5.95%
5.50% - 11.25%
4.75% - 10.50%
4.50% - 10.50%
As at
December 31, 2017
Weighted average
7.02%
6.39%
6.07%
7.02%
6.39%
6.07%
5.25% - 9.00%
4.50% - 8.50%
4.25% - 8.25%
5.00% - 8.25%
4.25% - 7.50%
4.00% - 7.00%
6.91%
6.15%
5.84%
6.07%
5.33%
5.16%
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 17, “Related Party Transactions”, of the Trust’s 2018 Fourth Quarter Report), 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.
32 Choice Properties REIT 2018 Fourth Quarter Report
10.2
Investment Property Transactions
Acquisitions of Investment Properties
The following table summarizes the investment properties acquired in the year ended December 31, 2018.
($ thousands except where otherwise indicated)
(unaudited)
Acquisitions from related parties:
Third Quarter of 2018:
Sainte-Julie, QC
Fourth Quarter of 2018:
Calgary, AB
Bedford, NS
Kanata, ON
Langley, BC
Total acquisitions from related parties
Acquisitions from third-parties:
First Quarter of 2018:
Toronto, ON(i)
Riviere-du-Loup, QC
Toronto, ON(i)
Sherbrooke, QC
Toronto, ON(i)
Second Quarter of 2018:
Ottawa, ON
Fourth Quarter of 2018:
Calgary, AB(i)
Total acquisitions from third-parties
Total Acquisitions
Property
Type
Acquisition Date
Ownership
Interest
GLA
(square feet)
Purchase
Price(iii)
Occupancy
(upon
acquisition)
July 3, 2018
75%
— $
1,616
Land
Retail
Retail
Retail
November 14, 2018
November 14, 2018
November 14, 2018
Industrial
December 7, 2018
Land(ii)
Retail
Land(ii)
Retail
Retail
January 10, 2018
January 22, 2018
January 31, 2018
February 1, 2018
March 20, 2018
100%
100%
100%
100%
100%
100%
100%
100%
100%
104,773
80,103
103,152
130,563
418,591
31,780
9,084
14,758
20,866
78,104
$
1,860
19,363
1,900
22,528
45,285
2,950
2,409
2,990
4,561
17,915
Land
May 29, 2018
100%
N/A
2,086
Retail
October 1, 2018
100%
5,408
96,344
1,224
34,135
514,935
$ 112,239
N/A
100%
100%
100%
100%
100%
N/A
100%
N/A
100%
97%
N/A
100%
99%
99.7%
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.
(iii) Purchase price includes acquisition costs.
Dispositions of Investment Properties
The following table summarizes the investment properties sold in the year ended December 31, 2018.
($ thousands except where otherwise indicated)
(unaudited)
Property
Type
Disposition Date
Ownership
Interest
Number of
Properties
GLA
(square feet)
Sale Price
Dispositions:
Second Quarter of 2018:
Victoriaville, QC
Third Quarter of 2018:
Dartmouth, NS(i)
Fourth Quarter of 2018:
Ottawa, ON
Calgary, AB
Total Dispositions
(i)
Portfolio of seven properties.
Retail
June 21, 2018
100%
Industrial
August 29, 2018
100%
Office
Office
October 1, 2018
December 4, 2018
50%
50%
1
7
1
1
67,079
$
2,750
267,159
17,300
18,750
527,404
3,150
104,000
10
880,392
$ 127,200
Choice Properties REIT 2018 Fourth Quarter Report 33
10.3
Development Activities
Choice Properties believes that development of properties to their highest and best use is a key driver of incremental and accretive growth.
The Trust’s pipeline of development opportunities includes: (i) intensification of excess density within its existing portfolio (see Section 10.4,
“Intensification”), (ii) redevelopment of properties in key markets (see Section 10.5, “Redevelopment”), (iii) greenfield developments in large
markets, including retail and industrial projects (see Section 10.6, “Greenfield Development”), (iv) major mixed use development in urban
markets (see Section 10.7, “Major Mixed Use Development”) and (v) residential development (see Section 10.8, “Residential”).
Choice Properties’ development program, at the Trust’s ownership share(1), as at December 31, 2018 is summarized below:
($ thousands except where otherwise indicated)
(unaudited)
GLA
(square feet)
Total investment(i)
Currently
under
development
Future(2)
development
Total
development
To-date
Planned(2)
additional
investment
Future(2)
Total
Project type
Intensification
Retail - Active
Retail - In Planning
Subtotal intensification
Redevelopment
Retail
Subtotal redevelopment
Greenfield development
Retail
Industrial
Subtotal greenfield development
Major mixed use
Major mixed use
Subtotal major mixed use
Residential
Residential
Subtotal residential
Total development
255,000
—
255,000
42,000
42,000
231,000
705,000
936,000
—
—
791,000
791,000
44,000
331,000
375,000
299,000 $
76,366 $
26,323 $
16,270 $
118,959
331,000
630,000
6,618
82,984
—
26,323
112,137
128,407
118,755
237,714
—
—
42,000
42,000
—
—
415,000
542,000
957,000
646,000
211,313
1,247,000
98,675
1,893,000
309,988
TBD
—
—
—
TBD
—
28,639
28,639
791,000
791,000
78,081
78,081
308,254
308,254
8,437
8,437
38,119
10,727
48,846
19,482
19,482
—
—
8,437
8,437
61,394
47,749
109,143
TBD
—
—
—
310,826
157,151
467,977
48,121
48,121
386,335
386,335
2,024,000
1,332,000
3,356,000 $ 499,692 $ 411,342 $ 237,550 $ 1,148,584
(i) Compiled on a non-GAAP proportionate share basis. Investment to-date was compiled on a cash basis, excluding adjustments to fair value of on-going projects.
34 Choice Properties REIT 2018 Fourth Quarter Report
Properties Under Development Continuity
The change in the net carrying value of properties under development is as follows:
($ thousands)
(unaudited)
GAAP balance, beginning of period
Reclassification(i)
GAAP balance, beginning of period
Adjustments to reflect equity accounted joint ventures on a
proportionate share basis(ii)
Non-GAAP proportionate share balance, beginning of period
Development properties from CREIT Acquisition
Acquisitions of properties under development(iii)
Transfers to income producing properties
Dispositions
Development capital
Capitalized interest
Adjustment to fair value
Three months ended
Year ended
Year ended
$
December 31, 2018
161,681
90,312
251,993
$
December 31, 2018
41,560
57,547
99,107
December 31, 2017(i)
66,397
$
23,687
90,084
236,750
488,743
—
—
(44,513)
—
84,808
2,866
(520)
32,018
131,125
345,151
21,617
(193,301)
(14,973)
235,561
6,496
(292)
25,697
115,781
—
14,309
(134,296)
—
118,106
2,355
14,870
131,125
Non-GAAP proportionate share balance, end of period
$
531,384
$
531,384
$
(i)
(ii)
(iii)
The opening balance of properties under development, and the 2017 activity were adjusted to include intensifications and land assemblies that were previously recorded
as part of income producing properties.
Refer to Section 21.1, “Proportionate Share Compilation”, of this MD&A, for a a reconciliation of the continuity of investment properties determined in accordance with
GAAP.
Includes acquisition costs.
Choice Properties REIT 2018 Fourth Quarter Report 35
10.4
Intensification
Intensifications are focused on adding retail density within the existing portfolio. As at December 31, 2018, Choice Properties had 42 ongoing
intensification projects representing a total of 0.6 million square feet:
•
•
21 intensification projects are under active development representing 0.3 million square feet and a total investment of $119 million to
complete(2) over the next two to three years; and
21 intensification projects are in planning representing 0.3 million square feet and, if they proceed as planned will require a total investment
of $119 million to complete(2) over the next two to four years.
10.5
Redevelopment
Choice Properties’ redevelopment activities are focused on the redevelopment of existing retail centres to reposition an asset. As at December
31, 2018, Choice Properties had one redevelopment project:
•
Pioneer Park, Kitchener, Ontario is a two-phase redevelopment project currently underway, which will deliver 42,000 square feet at a
projected cost of $8.4 million upon completion(2) in 2019.
10.6
Greenfield Development
Choice Properties’ development activities include greenfield projects which are primarily focused on unenclosed retail shopping centres and
industrial parks. As at December 31, 2018, Choice Properties had 21 greenfield development projects in the pipeline. When complete, these
properties will comprise approximately 1.9 million square feet. A total of $310 million has been invested to date in the pipeline and, in total, the
Trust currently expects to invest a total of $468 million(2) in the next three to five years.
Choice Properties’ greenfield development projects, at the Trust’s ownership share(1), are summarized below:
($ thousands except where otherwise indicated)
(unaudited)
GLA (square feet)
Total investment
Project / Location
Retail
1
2
3
4
5
6
7
8
9
50th & Ellerslie (Phase I - South), Edmonton, AB
50th & Ellerslie (Phase II - North), Edmonton, AB
Erin Ridge, St. Albert, AB
Cundles & Duckworth (Phase IIIA), Barrie, ON
Upper Sherman Avenue, Hamilton ON
Oshawa Retail Lands, Oshawa, ON
Bathurst & Lakeshore, Toronto, ON
Erb Street, Waterloo, ON
Chemin du Fer-A-Cheval, Ste. Julie, QC
10 Cornerstone, Prince Albert, SK
11 Various (i)
Subtotal retail
Industrial
1
2
3
4
5
Great Plains Business Park, Calgary, AB
Horizon Business Park, Edmonton, AB
190th Street, Surrey, BC
James Snow Parkway (Phase II), Milton, ON
Peddie Road, Milton, ON
Subtotal industrial
Ownership
%
Land
area
(acres)
Currently
under
development
Future(2)
development
Total
development
To-date
Planned(2)
additional
investment
Future(2)
Total
50 %
50 %
50 %
100 %
100 %
50 %
40 %
50 %
75 %
50 %
50%-70%
50 %
50 %
100 %
85 %
85 %
6
16
4
5
5
4
1
4
6
6
275
332
11
12
17
9
19
68
8,000
—
4,000
15,000
38,000
8,000
100,000
—
54,000
4,000
—
53,000
189,000
45,000
—
16,000
37,000
—
30,000
—
45,000
TBD
61,000 $
9,888 $
1,248 $
7,831 $
18,967
189,000
15,074
1,875
27,189
49,000
15,000
54,000
45,000
7,195
6,269
2,463
7,942
527
602
6,570
527
100,000
26,512
17,014
30,000
54,000
49,000
6,649
7,129
2,570
—
119,622
111
8,072
237
1,336
44,138
11,586
6,871
14,274
11,974
43,526
11,360
15,201
11,971
3,864
—
5,241
3,505
—
4,600
—
9,164
TBD
120,958
231,000
415,000
646,000
211,313
38,119
61,394
310,826
139,000
—
—
—
566,000
705,000
120,000
259,000
—
259,000
259,000
—
17,049
10,487
61
163,000
163,000
4,234
—
566,000
66,844
2,613
301
4,293
333
3,187
14,248
24,746
TBD
8,755
—
33,910
35,534
4,354
13,322
70,031
542,000
1,247,000
98,675
10,727
47,749
157,151
Total greenfield development
400
936,000
957,000
1,893,000 $ 309,988 $
48,846 $ 109,143 $467,977
(i) Includes six greenfield projects in preliminary stages of development in Ontario and Alberta.
36 Choice Properties REIT 2018 Fourth Quarter Report
Active Greenfield Development
One advantage of greenfield developments is that they lend themselves to phased construction which creates flexibility to time developments
to take advantage of changing market conditions.
As at December 31, 2018, Choice Properties had ten greenfield properties under active development, representing 936,000 square feet.
Included in this total are:
•
•
eight retail centres representing 231,000 square feet, of which 72% have been pre-leased; and
two industrial projects representing 705,000 square feet, of which 83% have been pre-leased. In certain instances, industrial development
will commence on a speculative basis as the time to construct an industrial building is greater than the lead time required by tenants.
A total of $127 million has been invested to date in these ten developments and the Trust expects to invest an additional $41 million to complete
the developments before transferring them to income producing properties(2).
Choice Properties’ greenfield projects, at the Trust’s ownership share, that are currently under active development as at December 31, 2018
are as follows:
($ thousands except where otherwise indicated)
(unaudited)
Project / Location
Ownership
%
Committed
to lease
GLA
(square feet)
Not
committed
to lease
Total investment
Total
To-date
Planned(2)
additional
investment
Retail
1
50th & Ellerslie (Phase I - South), Edmonton, AB
2
Erin Ridge, St. Albert, AB
3 Cundles & Duckworth (Phase IIIA), Barrie, ON
4 Upper Sherman Avenue, Hamilton, ON
5 Oshawa Retail Lands, Oshawa, ON
6
Bathurst & Lakeshore, Toronto, ON
7 Chemin du Fer-A-Cheval, Ste. Julie, QC
8 Cornerstone, Prince Albert, SK
Subtotal retail
Industrial
1 Great Plains Business Park, Calgary, AB
2
Peddie Road, Milton, ON
Subtotal industrial
Total active greenfield development
10.7
Major Mixed Use Development
50%
50%
100%
100%
50%
40%
75%
50%
50%
85%
8,000 $
1,708 $
1,248 $
6,000
1,000
9,000
38,000
1,000
84,000
27,000
—
2,000
3,000
6,000
—
7,000
16,000
27,000
4,000
4,000
15,000
38,000
8,000
739
6,269
2,463
2,650
100,000
26,512
54,000
4,000
7,129
986
166,000
65,000
231,000
48,456
19,000
566,000
585,000
751,000
120,000
—
120,000
185,000
139,000
566,000
705,000
11,919
66,844
78,763
Total
2,956
1,266
6,871
9,033
3,177
43,526
15,201
1,223
83,253
14,532
70,031
84,563
527
602
6,570
527
17,014
8,072
237
34,797
2,613
3,187
5,800
936,000 $
127,219 $
40,597 $ 167,816
Choice Properties currently has a number of sites planned for major mixed use development with three of these sites in an active pre-
development stage. The three properties are located in key urban markets, including two sites in Toronto, Ontario, and one in Coquitlam,
British Columbia. These developments are residential focused, mixed use communities with close proximity to public transportation. A total
of $29 million has been invested to date on land acquisition and other initial development costs. The Trust expects to invest an additional $19
million on pre-development activities on these projects over the next two to five years before beginning construction. The projects are in
various phases of pre-development, and Choice Properties continues to work on finalizing the assembly of land parcels for the developments.
434-455 North Rd., Coquitlam, BC
The approximately 7 acre site is located in the City of Coquitlam in the Greater Vancouver Area. The site is well located and transit oriented,
in close proximity to Lougheed Town Centre Station on the Vancouver SkyTrain system. The current redevelopment plans contemplate a
mixed use project with a focus on high density residential and retail at grade.
The site was approved for a transit oriented, mixed use development through the City of Coquitlam’s Official Community Plan and Choice
Properties is currently in design discussions with the City in preparation of making a formal Development Permit Application.
Choice Properties REIT 2018 Fourth Quarter Report 37
1806-1880 Eglinton Ave E., Toronto, ON
The approximately 19 acre site is located along Eglinton Avenue in the Golden Mile district of Toronto. The current redevelopment plans
contemplate a large, mixed use master-plan community to be built in phases with a focus on high density residential and retail uses. The site
is directly adjacent to new transit stations along the first phase of the Eglinton Crosstown LRT, which is currently under construction.
The Official Plan Application was submitted to the City of Toronto and the Trust is working with the City on their Secondary Planning Study
for the Golden Mile Area.
2280 Dundas St. W., Toronto, ON
The approximately 15 acre site is located at the southeast corner of Dundas Street West and Bloor Street West in Toronto. The site is at the
intersection of several major transit corridors including a TTC subway station, a GO train station and the Union-Pearson Express train. The
current redevelopment plans contemplate a large mixed use community integrated with the surrounding transit services with a focus on high
density residential, office, retail and other community uses.
The Official Plan Application was submitted to the City of Toronto and Choice Properties is preparing a Rezoning application for submission
to the city.
10.8
Residential
Choice Properties has seven residential projects in the pipeline representing 791,000 square feet. A total of $78 million has been invested in
these projects to date and Choice Properties expects to invest an additional $308 million to complete the developments before transferring
them to income producing properties. Choice Properties' residential development projects, at the Trust’s ownership share(1), as at December
31, 2018, are as follows:
($ thousands except where otherwise indicated)
(unaudited)
Project / Location
Residential
1 Clareview Estates, Edmonton, AB
2 Centre in the Park, Strathcona County, AB
3 Bovaird West - Block 4, Brampton, ON (i)
4 Richmond Road, Ottawa, ON (i)
5 Dufferin Street, Toronto, ON
6 East Liberty Residences, Toronto, ON
7 Sheppard Ave West, Toronto, ON (i)
Total residential
(i)
Preliminary stages of development.
(ii) Choice’s share.
Ownership
%
Number
of
Units(ii)
Commercial
under
development
GLA
(square feet)
Residential
under
development Future(2)
Total
To-date
Total investment
Planned (2)
additional
investment Future(2)
Total
50 %
50 %
50 %
100 %
47 %
47 %
50 %
TBD
40
136
253
163
182
100
874
—
9,000
—
—
32,000
—
5,000
—
TBD
TBD $
4,699 $
44,000
150,000
203,000
155,000
129,000
64,000
—
—
—
—
—
—
53,000
16,332
150,000
203,000
187,000
129,000
69,000
1,288
5,705
28,786
16,619
4,652
45
107
71,881
77,861
61,877
62,297
34,186
TBD $
4,744
—
—
—
—
—
—
16,439
73,169
83,566
90,663
78,916
38,838
46,000
745,000
— 791,000 $ 78,081 $
308,254 $
— $ 386,335
38 Choice Properties REIT 2018 Fourth Quarter Report
10.9
Completed Developments
For the year ended December 31, 2018, Choice Properties transferred, at the Trust’s ownership share(1), $193 million from properties under
development to income producing properties as follows:
($ thousands except where otherwise indicated)
(unaudited)
Project / Location
Intensification
1
2
3
4
5
6
7
8
9
20th Ave. NE, Calgary, AB
Mahogany Village Market, Calgary, AB
South Edmonton Common, Edmonton, AB
Sunwapta Centre, Edmonton, AB
Baseline Rd., Sherwood Park, AB
Victoria St., Edmunston, NB
Campbell Rd. & Marr Rd., Rothesay, NB
Main St. E., Shediac, NB
Main St. S, Alexandria, ON
10 Mill St., Angus, ON
11
12
13
14
Lake Shore Blvd. W., Etobicoke, ON
20th Sideroad Rd., Innisfil, ON
Princess St., Kingston, ON
Yonge St., Richmond Hill, ON
15 Gibb St., Oshawa, ON
16 Greenbank Rd., Ottawa, ON
17
Fiesta Mall, Stoney Creek, ON
18 Weston Rd., Toronto, ON
19
20
21
22
23
24
25
26
Tecumseh Rd. E., Windsor, ON
Aut Duplessis, Anicenne-Lorette, QC
Rte. Trans-Canada, Kirkland, QC
Rue Bouvier, Lebourgneuf, QC
Boul. Saint-Jean, Pierrefond, QC
Boul Brien, Repentigny, QC
15th Street East, Prince Albert, SK
Herald Rd., Saskatoon, SK
Subtotal intensification
Redevelopment
1
Pioneer Park, Kitchener, ON
Subtotal redevelopment
Greenfield development
1
2
3
4
5
6
50th & Ellerslie (Phase I - South), Edmonton, AB
Vanderbilt Common, Spruce Grove, AB
Erin Ridge, St. Albert, AB
Oshawa Retail Lands, Oshawa, ON
Overlea Blvd., Toronto, ON
Cornerstone, Prince Albert, SK
Subtotal greenfield development
Residential
1
Walker Lakes, Edmonton, AB
Subtotal residential
Total Transferred Properties
Property type
Ownership %
Completed GLA
during the year
(square feet)
Cost of assets
transferred
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
100%
100%
50%
50%
100%
100%
100%
100%
100%
100%
100%
100%
100%
50%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Retail
100%
Retail
Retail
Retail
Retail
Retail
Retail
50%
100%
50%
50%
50%
50%
Residential
50%
16,000 $
14,000
19,000
1,000
8,000
3,000
4,000
14,000
6,000
3,000
15,000
24,000
5,000
3,000
11,000
17,000
4,000
7,000
4,000
5,000
90,000
16,000
2,000
6,000
3,000
7,000
7,144
7,348
7,433
430
3,747
1,573
2,357
4,901
2,241
2,025
5,373
11,970
2,243
704
4,604
8,116
2,104
4,080
1,720
1,776
22,424
3,700
1,164
1,584
1,301
2,732
307,000
114,794
91,000
91,000
12,000
29,000
700
400
N/A(i)
14,000
56,100
63,000
63,000
517,100 $
27,533
27,533
4,094
8,872
305
163
23,291
3,398
40,123
10,851
10,851
193,301
(i)
Development completed for 75,000 square feet. The leasing arrangement is structured as a land lease.
Choice Properties REIT 2018 Fourth Quarter Report 39
10.10
Development Project Capital
Choice Properties expects to invest a total of approximately $600 million, at the Trust’s ownership share(1), by the end of the year 2021(2).
Development yields are expected to be accretive upon tenant occupancy(2).
($ thousands)
(unaudited)
Intensification
Redevelopment
Greenfield development
Major mixed use
Residential
Estimated total capital annual spend(i)
(i) Compiled on a non-GAAP proportionate share basis.
10.11 Active Management
Commercial Leasing Activity
2019
2020
2021
Total
$
39,000
$
34,000
$
65,000
$
138,000
6,000
59,000
11,000
57,000
3,000
38,000
5,000
117,000
—
39,000
4,000
123,000
9,000
136,000
20,000
297,000
$
172,000
$
197,000
$
231,000
$
600,000
Choice Properties’ leasing activities are focused on driving value by:
focusing on property operations and striving for superior service to tenants;
•
• managing properties to maintain high levels of occupancy;
increasing rental rates when market conditions permit; and
•
by adding tenants in complementary business sectors to retail sites anchored by Loblaw food and drug stores.
•
The following tables detail the changes for in-place occupancy, by operating segment, for the three months and year ended December 31,
2018:
(in thousands of square
feet except where
otherwise indicated)
(unaudited)
Retail
Industrial
Office
Total
September 30, 2018
Leasable Occupied
45,726
15,971
3,431
65,128
46,638
16,326
3,695
66,659
Occupied
(%)
98.0%
97.8%
92.9%
97.7%
Expiries
(616)
(428)
(273)
(1,317)
New Renewals
479
100
273
153
154
75
906
328
Subtotal:
Absorption
(37)
(2)
(44)
(83)
Portfolio
changes(i)
380
131
(478)
33
December 31, 2018
Acquired/
(Disposed)
vacancy Leasable Occupied
46,069
16,100
2,909
65,078
— 47,018
— 16,457
3,153
(64)
66,628
(64)
Occupied
(%)
98.0%
97.8%
92.3%
97.7%
(i)
Represents changes in occupied square footage arising from acquisitions, dispositions, intensifications, expansions, and transfers from properties under development.
(in thousands of square
feet except where
otherwise indicated)
(unaudited)
Retail
Industrial
Office
Total
December 31, 2017(i)
Leasable Occupied
36,599
6,413
609
43,621
37,084
6,413
609
44,106
Occupied
(%)
98.7%
100.0%
100.0%
98.9%
Expiries
(1,382)
(1,017)
(421)
(2,820)
New Renewals
939
340
526
477
236
169
1,701
986
Subtotal:
Absorption
(103)
(14)
(16)
(133)
Portfolio
changes(ii)
9,573
9,701
2,316
21,590
December 31, 2018
Acquired/
(Disposed)
vacancy Leasable Occupied
46,069
47,018
16,100
16,457
3,153
2,909
65,078
66,628
361
343
228
932
Occupied
(%)
98.0%
97.8%
92.3%
97.7%
(i)
Prior reporting included all of the Trust’s properties in the retail segment.
(ii) Represents changes in occupied square footage arising from acquisitions, dispositions, intensifications, expansions, and transfers from properties under development,
including the Acquisition Transaction.
40 Choice Properties REIT 2018 Fourth Quarter Report
Choice Properties’ principal tenant, Loblaw, represents 58.9% of the Trust’s GLA (December 31, 2017 - 87.6%). As at December 31, 2018,
the weighted average lease term-to-maturity on the Loblaw leases was 9.3 years (December 31, 2017 - 10.3 years).
(in millions of square feet except where otherwise indicated)
(unaudited)
Loblaw banners
Third-party tenants
Total commercial GLA
As at
December 31, 2018
As at
December 31, 2017
Portfolio
GLA
39.3
Occupied
GLA
39.3
Occupancy
(%)
100.0%
27.3
66.6
25.8
65.1
94.3%
97.7%
Portfolio
GLA
38.7
5.4
44.1
Occupied
GLA
38.7
4.9
43.6
Occupancy
(%)
100.0%
91.1%
98.9%
The lease maturity profile for Choice Properties’ portfolio as at December 31, 2018 was as follows:
(in thousands of square feet
except where otherwise indicated)
(unaudited)
Month-to-month
2019
2020
2021
2022
2023
2024
2025 & Beyond
Vacant
Total
Third-party
GLA
181
2,374
3,328
3,475
3,099
3,355
1,755
8,242
1,550
27,359
Loblaw GLA
—
113
26
155
67
3,969
3,176
31,763
—
39,269
Total GLA
181
2,487
3,354
3,630
3,166
7,324
4,931
40,005
1,550
66,628
Expiring GLA
as a % of total
GLA
0.3%
3.7%
5.0%
5.4%
4.8%
11.0%
7.4%
60.1%
2.3%
100.0% $
Expiring annualized
base rent
($ 000’s)
2,563
32,771
40,319
47,518
49,383
103,465
68,376
622,182
Average expiring
base rent
(per square foot)
14.16
13.18
12.02
13.09
15.60
14.13
13.87
15.55
—
14.51
$
$
$
$
$
$
$
$
— $
$
966,577
(in thousands of square feet
except where otherwise indicated)
(unaudited)
Month-to-month
2019
2020
2021
2022
2023
2024
2025 & Beyond
Vacant
Total
Retail segment
Industrial segment
Office segment
Total
Expiring GLA
as a % of
total GLA
0.2%
1.8%
2.1%
3.0%
2.6%
7.7%
5.8%
45.9%
1.4%
70.6%
GLA
163
1,205
1,393
2,000
1,723
5,115
3,882
30,588
949
47,018
Expiring GLA
as a % of
total GLA
—%
1.5%
2.6%
2.0%
1.6%
2.9%
1.4%
12.1%
0.5%
24.7%
GLA
12
1,016
1,715
1,355
1,072
1,906
952
8,072
357
16,457
Expiring GLA
as a % of
total GLA
—%
0.4%
0.4%
0.4%
0.6%
0.5%
0.1%
2.0%
0.4%
4.7%
GLA
6
266
246
275
371
303
97
1,345
244
3,153
GLA
181
2,487
3,354
3,630
3,166
7,324
4,931
40,005
1,550
66,628
Choice Properties REIT 2018 Fourth Quarter Report 41
Top 10 Tenants
Choice Properties’ ten largest tenants, based upon gross rent for the three months ended December 31, 2018, represent approximately 64.9%
of gross rental revenue, as calculated on a proportionate share basis(1). The names noted below may be the names of the parent entities and
are not necessarily the covenants under the leases.
Tenants
Loblaw
Canadian Tire
TJX Companies
Dollarama
Staples
Lowe's
Sobeys
GoodLife
TD Canada Trust
1.
2.
3.
4.
5.
6.
7.
8.
9.
10. Liquor Control Board of Ontario (LCBO)
Total
% of Gross
Rental Revenue
57.1%
2.4%
1.1%
0.8%
0.7%
0.6%
0.6%
0.6%
0.5%
0.5%
64.9%
GLA
(square feet)
39,269
1,739
623
421
426
522
332
314
147
185
43,978
Operating Capital Expenditures
Choice Properties endeavours to fund operating capital from cash flows from operations.
For the periods ended December 31
($ thousands)
(unaudited)
Property capital
Leasing capital:
Direct leasing costs
Tenants improvement allowances
Total operating capital expenditures,
proportionate share basis(1)
Three Months
Year End
2018
42,655
$
2017
20,661 $
Change
21,994
$
2018
57,737
$
2017
44,960 $
Change
12,777
$
3,999
4,877
176
797
3,823
4,080
11,842
10,391
1,756
2,653
10,086
7,738
$
51,531
$
21,634 $
29,897
$
79,970
$
49,369 $
30,601
Property Capital Property capital expenditures incurred to sustain the investment properties’ existing GLA are considered to be operational
and are deducted in the calculation of AFFO(1) and ACFO(1). During the year ended December 31, 2018, Choice Properties incurred $57,737
of property capital expenditures, which may be recoverable from tenants under the terms of their leases over the useful life of the improvements
(2017 - $44,960). Recoverable capital improvements may include items such as parking lot resurfacing and roof replacements. These items
are recorded as part of investment properties and the recoveries from tenants are recorded as revenue.
Leasing Capital Capital expenditures for leasing activities, such as leasing commissions or tenant improvement allowances, are considered
to be operational and are also deducted in the calculation of AFFO(1) and ACFO(1). Choice Properties incurred $10,391 of tenant improvement
allowances and $11,842 of direct leasing costs during the year ended December 31, 2018 (2017 - $2,653 and $1,756, respectively).
Leasing capital varies with tenant demand and the balance between new and renewal leasing, as capital expenditures relating to securing
new tenants are generally higher than the costs for renewing existing tenants.
42 Choice Properties REIT 2018 Fourth Quarter Report
11.
LIQUIDITY AND CAPITAL RESOURCES
11.1
Major Cash Flow Components
For the periods ended December 31
($ thousands)
(unaudited)
2018
2017
Three Months
Year End
Source/
(Use)
2018
2017
Source/
(Use)
Cash and cash equivalents,
beginning of period
Cash flows from operating
activities
Cash flows from (used in)
investing activities
Cash flows from (used in)
financing activities
Cash and cash equivalents,
$
82,006
$
— $
82,006
$
6,407
$
5,113
$
1,294
235,694
194,285
41,409
683,632
503,676
179,956
18,381
(203,968)
222,349
(1,582,842)
(262,880)
(1,319,962)
(305,368)
16,090
(321,458)
923,516
(239,502)
1,163,018
end of period
$
30,713
$
6,407
$
24,306
$
30,713
$
6,407
$
24,306
Cash Flows from Operating Activities
The year-over-year quarterly increase in cash flows from operating activities for the three months ended December 31, 2018 of $41,409 was
primarily due to net property income attributable to the Acquisition Transaction.
The year-over-year increase in cash flows from operating activities for the year ended December 31, 2018 of $179,956 was primarily due to
net property income attributable to the Acquisition Transaction.
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 from investing activities for the three months ended December 31, 2018 of $222,349 was
primarily due to the proceeds upon disposition of investment properties of $105,719.
The year-over-year increase in cash flows used in investing activities for the year ended December 31, 2018 of $1,319,962 was primarily due
to the Acquisition Transaction.
Cash Flows from Financing Activities
The year-over-year quarterly increase in cash flows used in financing activities for the three months ended December 31, 2018 of $321,458
was primarily due was primarily due to the issuance of new debt to fund the Acquisition Transaction.
The year-over-year increase in cash flows from financing activities for the year ended December 31, 2018 of $1,163,018 was primarily due
to the issuance of new debt to fund the Acquisition Transaction.
Choice Properties REIT 2018 Fourth Quarter Report 43
11.2
Liquidity and Capital Structure
Choice Properties expects to fund its ongoing operations and finance future growth primarily through the use of: (i) existing cash; (ii) cash
flows from operations; (iii) short term financing through the committed credit facility; and (iv) the issuance of unsecured debentures and equity
(including Exchangeable Units), subject to market conditions. Given reasonable access to capital markets, Choice Properties does not foresee
any impediments in obtaining financing to satisfy its short and long term financial obligations, including its capital investment commitments(2).
($ thousands)
(unaudited)
Cash and cash equivalents - non-GAAP proportionate share basis
Unused portion of the credit facilities
Liquidity
Unencumbered assets - non-GAAP proportionate share basis
As at
As at
December 31, 2018
40,793
1,175,000
1,215,793
11,750,000
$
$
$
$
$
$
December 31, 2017
8,764
189,000
197,764
9,019,000
$
$
$
Change
32,029
986,000
1,018,029
2,731,000
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 $650,000 of senior unsecured debentures under this
prospectus.
11.3
Components of Total Debt
Choice Properties’ debt structure was as follows:
As at December 31, 2018
($ thousands)
Construction loans
Credit facility
Term loans
less: Debt placement costs
Variable rate debt
Senior unsecured debentures
Mortgages
less: Debt placement costs, discounts and premiums
Fixed rate debt
Total debt, net
GAAP Basis
21,330
$
$
325,000
800,000
(10,593)
Proportionate
Share Basis(1)
(unaudited)
119,131
325,000
800,000
(10,593)
1,135,737
1,233,538
4,725,000
1,328,280
(11,659)
6,041,621
4,725,000
1,510,674
(13,411)
6,222,263
$
7,177,358
$
7,455,801
Proportionate Share Basis(1)
(unaudited)
Weighted average
term to maturity
(years)
0.8
Weighted average
interest rate (%)
3.89%
4.3
4.1
3.9
5.1
7.1
5.6
3.76%
3.64%
3.73%
3.64%
4.07%
3.75%
44 Choice Properties REIT 2018 Fourth Quarter Report
As at December 31, 2017
($ thousands)
Credit facilities
less: Debt placement costs
Variable rate debt
Proportionate Share Basis(1)
(unaudited)
GAAP Basis
561,000
$
Proportionate
Share Basis(1)
(unaudited)
561,000
$
Weighted average
term to maturity
(years)
2.9
Weighted average
interest rate (%)
2.74%
(1,448)
559,552
(1,448)
559,552
Senior unsecured debentures
2,850,000
2,850,000
Mortgages
Class C LP Units
less: Debt placement costs, discounts and premiums
Fixed rate debt
Total debt, net
Construction Loans
8,320
925,000
(44,812)
8,320
925,000
(44,812)
3,738,508
3,738,508
$
4,298,060
$
4,298,060
2.9
4.5
2.5
10.5
6.0
2.75%
3.62%
2.70%
5.00%
3.96%
Construction loans of $96,165, as calculated on a non-GAAP proportionate share basis, were assumed as part of the Acquisition
Transaction (see Section 4, “Acquisition of Canadian Real Estate Investment Trust”, of this MD&A).
For the purpose of financing the development of certain retail, industrial and residential properties, various investments in equity accounted
joint ventures and co-ownerships have variable rate non-revolving construction facilities in which certain subsidiaries of the Trust guarantee
its own share. These construction loans, which mature throughout 2019 to 2020, have a maximum amount available to be drawn at the Trust’s
ownership interest of $145,000 (December 31, 2017 - $nil).
As at December 31, 2018, $119,131 was drawn and the construction loans had a weighted average effective interest rate of 3.89% and a
weighted average term to maturity of 0.8 years.
Credit Facilities
Choice Properties has a $1,500,000 senior unsecured committed revolving credit facility provided by a syndicate of lenders maturing May 4,
2023. 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 ratings from DBRS and S&P remaining at “BBB”. As at December 31, 2018,
$325,000 was drawn under the syndicated facility of $1,500,000.
The credit facility contains certain financial covenants. As at December 31, 2018, the Trust was in compliance with all of its financial covenants
for the credit facility.
In the first quarter of 2018, Choice Properties repaid and cancelled its bi-lateral $250,000 senior unsecured committed revolving credit facility
with a major Canadian financial institution prior to its maturity on December 21, 2018.
In the second quarter of 2018, Choice Properties repaid and cancelled its syndicated $500,000 senior unsecured committed revolving credit
facility provided by a syndicate of lenders maturing July 5, 2022, and repaid and cancelled the credit facility assumed on the acquisition of
CREIT.
Term Loans
Choice Properties has two unsecured term loans provided by a syndicate of lenders - a $175,000 term loan maturing May 4, 2022 and a
$625,000 term loan maturing May 4, 2023. The term loans bears interest at variable rates of either: Prime plus 0.45% or Bankers’ Acceptance
rate plus 1.45%. This pricing is contingent on Choice Properties’ credit ratings from DBRS and S&P remaining at “BBB”.
The term loans contain certain financial covenants. As at December 31, 2018, the Trust was in compliance with all of its financial covenants
for the term loans.
Choice Properties REIT 2018 Fourth Quarter Report 45
The following outlines the net changes to Choice Properties’ outstanding credit facilities and term loans in the three months ended December
31, 2018:
For the three months ended December 31, 2018
($ thousands)
(unaudited)
Outstanding principal balance, beginning of period
Net repayments
Outstanding principal balance, end of period
Credit
facilities
387,000
(62,000)
325,000
$
$
Term loans
800,000
—
800,000
$
$
Total credit
facilities and
term loans
1,187,000
(62,000)
1,125,000
$
$
The following outlines the net changes to Choice Properties’ outstanding credit facilities and term loans in the year ended December 31, 2018:
For the year ended December 31, 2018
($ thousands)
(unaudited)
Outstanding principal balance, beginning of year
Net issuances
Net repayments
Outstanding principal balance, end of year
Senior Unsecured Debentures
Credit
facilities
561,000
Term loans
—
$
—
800,000
(236,000)
—
Total credit
facilities and
term loans
561,000
$
800,000
(236,000)
325,000
$
800,000
$
1,125,000
$
$
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 3.01% 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 3.55% per annum, with semi-annual installments of interest due on January 10 and July 10
of each year, commencing July 10, 2018. Debt placement costs of $3,251 are amortized using the effective interest method and recorded to
net interest expense and other financing charges. The offering 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 $1,007.220 per $1,000 principal amount of Series A debentures, together with accrued and unpaid interest.
On March 8, 2018, Choice Properties issued $550,000 and $750,000 aggregate principal amount of Series K and L senior unsecured debentures
due September 9, 2024 and March 8, 2028, respectively. The Series K unsecured debentures bear interest at a rate of 3.56% per annum,
with semi-annual installments of interest due on March 9 and September 9 in each year, commencing September 9, 2018. The Series L
unsecured debentures bear interest at a rate of 4.18% per annum, with semi-annual installments of interest due on March 8 and September
8 of each year, commencing September 8, 2018. Debt placement costs of $6,609, of which $1,684 were paid from cash on hand, are amortized
using the effective interest method and recorded to net interest expense and other financing charges. The offering was conducted on a private
placement basis.
On May 4, 2018, as part of the Acquisition Transaction, Choice Properties assumed $450,000 aggregate principal amount of senior unsecured
debentures together with accrued but unpaid interest in four series:
•
•
Series A-C with $125,000 aggregate principal due July 24, 2018 bearing interest at a rate of 3.68% per annum;
Series B-C with $100,000 aggregate principal due January 15, 2021 bearing interest at a rate of 4.32% per annum, with semi-annual
installments of interest due on January 15 and July 15 in each year;
Series C-C with $100,000 aggregate principal due November 30, 2019 bearing interest at a rate of 2.56% per annum, with semi-annual
installments of interest due on May 30 and November 30 in each year; and
Series D-C with $125,000 aggregate principal due January 18, 2023 bearing interest at a rate of 2.95% per annum, with semi-annual
installments of interest due on January 18 and July 18 in each year.
•
•
On July 24, 2018, Choice Properties redeemed, at par, $125,000 Series A-C senior unsecured debentures at the original maturity date. The
redemption was funded by a draw on the credit facility.
46 Choice Properties REIT 2018 Fourth Quarter Report
The Series B-C, C-C, and D-C debentures have been guaranteed by each of the Choice Properties GP Inc., Choice Properties Limited
Partnership and certain other subsidiaries of Choice Properties. 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.
At December 31, 2018 the weighted average coupon rate and the weighted average term to maturity on the senior unsecured debentures
was 3.64% (December 31, 2017 - 3.62%) and 5.1 years (December 31, 2017 - 4.5 years), respectively.
Mortgages
Mortgages with a principal balance of $1,490,824, as calculated on a non-GAAP proportionate share basis, were assumed as part of the
Acquisition Transaction (see Section 4, “Acquisition of Canadian Real Estate Investment Trust”, of this MD&A).
In connection with the property acquired from a third-party vendor on March 20, 2018, Choice Properties assumed a mortgage which is
secured by the acquired property. The mortgage bears interest at a fixed rate of 2.86% and matures in 2020.
As at December 31, 2018, the mortgages had a weighted average effective interest rate of 4.07% and a weighted average term to maturity
of 7.1 years (December 31, 2017 - 2.70% and 2.5 years, respectively).
Class C LP Units
Concurrent with the closing of the Acquisition Transaction, Choice Properties converted all its outstanding Class C LP Units into 70,881,226
Exchangeable Units and a difference in value was paid to Loblaw in cash, see Section 4, “Acquisition of Canadian Real Estate Investment
Trust” of this MD&A .
Summary of Total Debt Activities
The following outlines the changes to Choice Properties’ outstanding long term debt and Class C LP Units on a non-GAAP proportionate
share basis in the three months ended December 31, 2018:
For the three months ended December 31, 2018
($ thousands)
(unaudited)
Principal balance outstanding, beginning of
period
Issuances
Repayments
Senior
unsecured
debentures
Mortgages
Construction
loans
Class C
LP Units
$ 4,725,000
—
—
$ 1,509,992
10,066
(9,384)
$
108,508
$
10,623
—
Principal balance outstanding, end of period
$
4,725,000
$
1,510,674
$
119,131
$
Total long
term debt and
Class C LP
Units
$
6,343,500
20,689
(9,384)
$
6,354,805
—
—
—
—
The following outlines the changes to Choice Properties’ outstanding long term debt and Class C LP Units on a non-GAAP proportionate
share basis in the year ended December 31, 2018:
For the year ended December 31, 2018
($ thousands)
(unaudited)
Senior
unsecured
debentures
Principal balance outstanding, beginning of
Mortgages
Construction
loans
Class C
LP Units
Total long
term debt and
Class C LP
Units
year
Issuances
Mortgage assumed
Debt assumed in Acquisition Transaction
Repayments
Conversion of Class C LP Units
$ 2,850,000
$
1,950,000
—
450,000
(525,000)
—
8,320
48,766
3,717
1,490,824
(40,953)
—
$
— $
925,000
$
3,783,320
22,966
—
96,165
—
—
—
—
—
—
(925,000)
2,021,732
3,717
2,036,989
(565,953)
(925,000)
Principal balance outstanding, end of year
$
4,725,000
$
1,510,674
$
119,131
$
— $
6,354,805
Choice Properties REIT 2018 Fourth Quarter Report 47
Schedules of Repayments and Cash Flow Activities
The schedule of principal repayment of total long term debt, on a non-GAAP proportionate share basis, based on maturity, is as follows:
As at December 31, 2018
($ thousands)
2019
2020
2021
2022
2023
Thereafter
Credit facility
—
Term loans
—
—
—
—
325,000
—
—
—
175,000
625,000
Senior
unsecured
debentures
300,000
550,000
550,000
600,000
575,000
—
2,150,000
Mortgages
190,701
215,917
133,989
150,451
108,220
711,396
Construction
loans
94,805
8,837
15,489
—
—
—
Total
585,506
774,754
699,478
925,451
1,633,220
2,861,396
Total debt outstanding
$
325,000
$
800,000
$
4,725,000
$
1,510,674
$
119,131
$
7,479,805
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.
48 Choice Properties REIT 2018 Fourth Quarter Report
11.4
Financial Condition
Choice Properties is subject to certain financial and non-financial covenants in its senior unsecured debentures and its credit facility and term
loans 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, 2018 and December 31, 2017.
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 excluding convertible debt is 60.0%
Debt Service Coverage Ratio(i)
Limit: Minimum 1.5x
Debt to EBITDAFV(1)
Interest Coverage Ratio(1)
As at
As at
December 31, 2018
47.2%
December 31, 2017
44.3%
3.0x
8.9x
3.4x
3.7x
7.1x
3.7x
(i)
Debt ratios exclude Exchangeable Units. The ratios are non-GAAP financial measures calculated based on the Trust Indentures, as supplemented.
The debt to EBITDAFV(1) on a 12-month normalized basis, including proforma results of CREIT and excluding lease surrender revenue from
Loblaw, would have been 8.0 times.
11.5
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 relationship with the Trust, and the contractual arrangements
and the strategic relationship between the Trust and Loblaw.
Choice Properties has maintained its BBB credit rating with both S&P and DBRS. On September 5, 2018, DBRS confirmed the rating at BBB
with a stable trend and 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 for Choice Properties:
Credit ratings (Canadian standards)
Credit rating
Issuer rating
Senior unsecured debentures
BBB
BBB
Trend
Stable
Stable
Credit rating
BBB
BBB
Outlook
Stable
N/A
DBRS
S&P
Choice Properties REIT 2018 Fourth Quarter Report 49
11.6
Unit Equity
Unit 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:
Units, beginning of year
Units issued
Issuance of Units under the Distribution Reinvestment Plan
Units issued under unit-based compensation arrangements
Units repurchased for unit-based compensation arrangement
Units, end of year
Exchangeable Units, beginning of year
Issued in conjunction with acquisition of investment properties December 5, 2017
Issued in conjunction with acquisition of CREIT May 4, 2018
Exchangeable Units, end of year
Year ended
Year ended
December 31, 2018
94,300,965
182,836,481
125,749
1,516,670
(577,306)
278,202,559
319,080,557
—
70,881,226
389,961,783
December 31, 2017
92,568,828
—
1,694,763
37,374
—
94,300,965
317,988,505
1,092,052
—
319,080,557
Total Units and Exchangeable Units, end of year
668,164,342
413,381,522
Units Repurchased for Unit-Based Compensation Arrangement
On September 18, 2018, Choice Properties received approval from the Toronto Stock Exchange to purchase up to 13,880,839 Trust Units
during the twelve-month period from September 20, 2018 to September 19, 2019, under a normal course issuer bid. During the year, the Trust
acquired Units which were then granted to certain employees and are subject to vesting conditions and disposition restrictions, in connection
with the Unit-Settled Restricted Unit Plan.
Distribution Reinvestment Plan
Choice Properties instituted a Distribution Reinvestment Plan (“DRIP”) that allowed 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, 2018, Choice Properties issued 125,749 Units under the DRIP (year ended December 31, 2017 - 1,694,763
Units, including 1,359,193 Units to GWL). As of December 31, 2017, GWL is no longer participating in the DRIP. On April 25, 2018, the Board
of Trustees temporarily suspended the DRIP commencing with the distribution declared in May 2018. Choice Properties reserves the right to
amend, suspend or terminate the DRIP at any time, but such actions will have no retroactive effect that would prejudice the interests of DRIP
participants.
Distributions
In the year ended December 31, 2018, Choice Properties declared $431,392 in distributions (2017 - $300,452), 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 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, 2019, the Board of Trustees reviewed and approved the current rate of distributions of $0.74 per
unit per annum.
50 Choice Properties REIT 2018 Fourth Quarter Report
The distributions declared for the periods ended December 31, 2018 and December 31, 2017 were as follows:
For the periods ended December 31
($ thousands)
(unaudited)
Three Months
2018
$ 123,612
2017
76,312
$
$
Total distributions declared
Less: Distributions reinvested through
Year End
Change
47,300
2018
$ 431,392
2017
$ 300,452
Change
130,940
$
the DRIP
—
(5,539)
5,539
(1,487)
(22,383)
20,896
Net distributions declared
$ 123,612
$
70,773
$
52,839
$ 429,905
$ 278,069
$
151,836
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:
For the periods ended December 31
($ thousands)
(unaudited)
Three Months
2018
$ 236,594
2017
194,285
$
Cash flows from operating activities
Year End
Change
42,309
2018
$ 683,632
2017
$ 503,676
Change
179,956
$
$
Less:
Interest paid on financing activities
(36,129)
(12,737)
(23,392)
(278,440)
(163,237)
(115,203)
Cash flows from operating activities less
interest paid
Less: Total distributions declared
Excess (shortfall) of cash flows provided
by operating activities, less interest
paid, over total distributions declared
200,465
(123,612)
181,548
(76,312)
18,917
(47,300)
405,192
340,439
64,753
(431,392)
(300,452)
(130,940)
$
76,853
$
105,236
$
(28,383)
$
(26,200)
$
39,987
$
(66,187)
For the periods ended December 31
($ thousands)
(unaudited)
Three Months
2018
$ 281,099
$
2017
36,533
Year End
Change
244,566
2018
$ 649,577
$
2017
405,345
$
Change
244,232
$
Net income
Less: Net income attributable to non-
controlling interests
Add:
Distributions on Exchangeable Units
included in net interest expense
and other financing charges
Net income attributable to Unitholders
excluding distributions on Exchangeable
Units
Less: Total distributions declared
Excess of net income attributable to
Unitholders, less distributions on
Exchangeable Units, over total
distributions declared
—
(930)
930
—
(930)
930
72,143
58,895
13,248
271,089
232,199
38,890
353,242
(123,612)
94,498
(76,312)
258,744
(47,300)
920,666
(431,392)
636,614
284,052
(300,452)
(130,940)
$ 229,630
$
18,186
$
211,444
$ 489,274
$
336,162
$
153,112
Choice Properties REIT 2018 Fourth Quarter Report 51
For the periods ended December 31
($ thousands)
(unaudited)
Three Months
Adjusted Cash Flow from Operations(1)(i)
2018
$ 109,044
$
2017
92,624
Change
16,420
2018
$ 488,458
$
Less: Total distributions declared
(123,612)
(76,312)
(47,300)
(431,392)
Excess (shortfall) of ACFO retained after
distributions(i)
$
(14,568)
$
16,312
$
(30,880)
$
57,066
Year End
2017
362,490
$
Change
125,968
(300,452)
(130,940)
62,038
$
(4,972)
$
$
(i)
The Adjusted Cash Flow from Operations(1), the ACFO(1) payout ratio and the cash retained after distributions, for the year ended December 31, 2018, have been calculated
excluding the impact of the accelerated amortization of debt premium of $37,282 (see Section 21, “Non-GAAP Financial Measures”, of this MD&A). The Adjusted Cash
Flow from Operations(1), the ACFO(1) payout ratio and the cash retained after distributions, for the year ended December 31, 2017, have been adjusted from the prior
year’s presentation to remove the impact of normalizing capital spending over the year. ACFO(1) is impacted by property capital expenditures that vary from quarter to
quarter and year to year.
Choice Properties’ shortfall of cash flows provided by operating activities less interest paid over total distributions declared for the year ended
December 31, 2018 was specifically impacted by the acquisition transaction costs and other related expenses. These expenditures were
anticipated as part of the acquisition of CREIT and, as such, changes were made to the capital structure to compensate. Management believes
the shortfall in the year ended December 31, 2018 will not result in an economic return of capital in the 2018 fiscal year.(2) Management
anticipates that distributions declared will, in the foreseeable future, continue to vary from net income as this GAAP measure includes
adjustments to fair value and other non-cash items(2).
Adjusted Cash Flow from Operations(1)
ACFO(1) excludes most of the short-term fluctuations in non-cash working capital, such as property tax installments, and the timing of semi-
annual debenture installments, although some fluctuations between quarters for operational cash flows still exist. ACFO(1) also adjusts cash
flows from operating activities for the working capital required for operating capital expenditures to maintain productive capacity of the investment
properties which adds volatility to the values due to seasonality of capital projects. Management includes this non-GAAP measure in its
assessment of cash flow available for distributions. The table below summarizes the ACFO(1) metrics:
For the periods ended December 31
($ thousands)
(unaudited)
Three Months
Adjusted Cash Flow from Operations(1)(i)
Cash retained after distributions(i)
ACFO(1) payout ratio(i)
2018
$ 109,044
$ (14,568)
113.4%
2017
$ 92,624
$ 16,312
$
$
Year End
Change
16,420
2018
$ 488,458
2017
$ 362,490
Change
$ 125,968
(30,880)
$
57,066
$ 62,038
$
(4,972)
82.4%
31.0%
88.3%
82.9%
5.4%
(i)
The Adjusted Cash Flow from Operations(1), the ACFO(1) payout ratio and the cash retained after distributions, for the year ended December 31, 2018, have been calculated
excluding the impact of the accelerated amortization of debt premium of $37,282 (see Section 21, “Non-GAAP Financial Measures”, of this MD&A). The ACFO(1), the
ACFO(1) payout ratio and the cash retained after distributions, for the year ended December 31, 2017, have been adjusted from the prior year’s presentation to remove
the impact of normalizing capital spending over the year. ACFO(1) is impacted by property capital expenditures that vary from quarter to quarter and year to year.
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 2018. From time to time the Trust may enter into transactions that materially impact the
calculation and are eliminated from the calculation for management’s review purposes. Refer to Section 21.5, “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, 2018, ACFO(1) increased by $16,420 compared to 2017. The primary driver for the quarter-over-
quarter increase was the Acquisition Transaction leading to an increase of $79,878 in NOI(1), partially offset by an increase in interest and
other financing charges, excluding distributions on Exchangeable Units, of $24,907 and increased capital spending of $29,897.
For the year ended December 31, 2018 , ACFO(1), excluding the impact of the accelerated amortization of debt premium, increased by $125,968
compared to 2017. The Acquisition Transaction was the primary driver for the increase leading to an increase of $239,572 in NOI(1), partially
offset by an increase in interest and other financing charges, excluding distributions on Exchangeable Units, of $80,148 and increased capital
spending of $30,601.
The cash retained after distributions, excluding the impact of the accelerated amortization of debt premium, for the year ended December 31,
2018, was $57,066, an increase of $(4,972) compared to the same period in 2017. For the year ended December 31, 2018, the ACFO(1),
excluding the impact of the accelerated amortization of debt premium, payout ratio was 88.3% compared to 82.9% in 2017.
52 Choice Properties REIT 2018 Fourth Quarter Report
11.7
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, 2018, the aggregate gross potential liability related to these letters of credit totaled
$38,540 including $3,248 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, 2017 - $33,352 including $5,231
posted by Loblaw).
11.8 Contractual Obligations
The undiscounted future principal and interest payments on Choice Properties’ debt instruments and other contractual obligations as at
December 31, 2018 were as follows:
($ thousands)
2020
(unaudited)
Senior unsecured debentures
Mortgages
Constructions loans
Credit facilities(i)
Term loans
Other(ii)
Total
2019
Thereafter
$ 471,957 $ 707,993 $ 690,317 $ 722,068 $ 675,914 $ 2,468,225
2021
2023
2022
247,456
265,887
175,433
184,902
139,205
829,016
94,805
8,837
15,489
—
—
—
—
—
—
—
— 175,000
—
325,000
625,000
1,160
—
—
—
4,021
306,066
1,330
1,319
1,313
$
Total
5,736,474
1,841,899
119,131
325,000
800,000
315,209
$1,120,284 $ 984,047 $ 882,558 $1,083,283 $1,766,279 $ 3,301,262
$
9,137,713
(i)
(ii)
Excludes interest on the revolving credit facilities.
As at December 31, 2018, Choice Properties had commitments of approximately $315,209 for future capital expenditures related to ongoing development and sustainable
capital projects, and other contractual obligations such as operating rents, of which $149,344 relates to equity accounted joint ventures.
12.
FINANCIAL INSTRUMENTS
Financial Derivative Instruments Designated hedging derivatives consist of interest rate swaps, which are classified as either current or
non-current and included in other assets or liabilities, as applicable. As at December 31, 2018, the Trust had entered into interest rate swaps
for original notional amounts of $321,700 (December 31, 2017 - nil) to hedge the interest rate associated with an equivalent amount of variable
rate mortgages. The fair value of the designated hedging derivatives is a net liability of approximately $585 (December 31, 2017 - nil). The
Trust also recorded, in other comprehensive income, fair value losses of $2,053 and fair value gains of $597 for the three months and year
ended December 31, 2018 (December 31, 2017 - nil and nil, respectively).
The Trust did not enter into any designated hedging derivatives during the year ended December 31, 2017.
Choice Properties REIT 2018 Fourth Quarter Report 53
13.
QUARTERLY RESULTS OF OPERATIONS
13.1
Results by Quarter
The following is a summary of selected consolidated financial information for each of the eight most recently completed quarters.
Selected Quarterly Information
($ 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)
FFO(1) per unit - diluted
AFFO(1)
AFFO(1) per unit - diluted
ACFO(1)(iii)
ACFO(1)(iii) payout ratio
Distribution declared per unit
Market price per Unit - closing
$
$
$
$
$
$
$
$
$
$
$
$
$
Fourth
Quarter
2018
753
66.8
97.7%
322,793
232,916
281,099
0.421
0.419
236,594
171,872
0.256
110,332
0.165
109,044
113.4%
0.1850
11.52
Third
Quarter
2018
751
Second
Quarter
2018
757
First
Quarter
2018
548
66.8
97.7%
67.0
97.6%
44.2
98.8%
315,584
230,236
$
$
294,648
211,902
$
$
215,027
149,783
62,620
$ (321,133) $
626,991
0.094
0.093
231,974
169,683
0.253
137,544
0.205
134,675
91.7%
0.1850
12.07
$
$
$
$
$
$
$
$
$
$
(0.481) $
(0.557) $
87,236
156,600
0.272
140,333
0.243
152,754
70.6%
0.1850
12.11
$
$
$
$
$
$
$
$
1.516
1.513
127,828
105,685
0.255
95,537
0.231
94,898
80.6%
0.1850
11.61
$
$
$
$
$
$
$
$
$
$
$
$
$
Fourth
Quarter
2017
546
44.1
98.9%
211,025
152,832
36,533
0.088
0.088
194,777
116,843
0.282
86,408
0.209
93,116
82.0%
0.1850
13.35
$
$
$
$
$
$
$
$
$
$
$
$
$
Third
Quarter
2017
540
43.8
98.9%
206,750
145,422
303,095
0.736
0.733
164,042
108,896
0.263
76,947
0.186
70,870
107.5%
0.1850
13.29
$
$
$
$
$
$
$
$
$
$
$
$
$
Second
Quarter
2017
537
43.8
98.9%
208,626
144,012
41,467
0.101
0.100
107,541
108,360
0.262
95,897
0.232
97,467
77.0%
0.1825
13.84
$
$
$
$
$
$
$
$
$
$
$
$
$
First
Quarter
2017
536
43.7
98.8%
203,433
142,424
24,250
0.059
0.059
37,954
108,836
0.264
97,229
0.236
101,666
71.7%
0.1775
13.84
$
$
$
$
$
$
$
$
$
$
$
$
$
Number of Units outstanding
668,164,342
667,847,540
667,224,978
413,459,836
413,381,522
411,842,153
411,385,591
410,957,673
Total assets - proportionate share basis(iv)
$ 15,845,781
$ 15,937,067
$15,813,137
$11,121,087 $ 9,923,511
$ 9,702,006
$ 9,512,207
$ 9,380,140
Long term debt and Class C LP Units -
proportionate share basis(1)
Debt to total assets(v)
Debt service coverage(v)
$
6,341,394
$ 6,330,614
$ 6,418,780
$ 5,281,189
$ 3,737,030
$ 3,729,733
$ 3,729,417
$ 3,728,836
47.2%
3.0x
47.2%
3.1x
48.6%
3.2x
51.9%
3.5x
44.3%
3.7x
44.6%
3.6x
45.8%
3.6x
46.3%
3.6x
(i)
GAAP measures of rental revenue and net income 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.
(iii) ACFO(1) and ACFO(1) payout ratio have been adjusted from the prior year’s presentation to remove the impact of normalizing capital spending over the year. ACFO(1) is
impacted by property capital expenditures that vary from quarter to quarter and year to year.
(iv) Prior to the second quarter of 2018, the GAAP basis was used as there was no material difference from equity accounted joint ventures.
(v) Debt ratio calculations for the fiscal 2017 and the first quarter of 2018 include Class C LP Units. The Exchangeable Units are excluded from the calculations. 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 particular,
quarterly results were impacted by the acquisition of CREIT on May 4, 2018. In addition, net income 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.
AFFO(1), ACFO(1) and the ACFO(1) payout ratio are impacted by seasonality in property capital expenditures.
54 Choice Properties REIT 2018 Fourth Quarter Report
14.
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, 2018.
15.
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 (“CEO”) and the Chief Financial Officer (“CFO”) 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, 2018.
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 2018 that materially affected, or are reasonably likely to materially affect, the Trust’s internal control over financial reporting,
except as noted below:
As permitted by the provisions of National Instrument 52-109, “Certification of Disclosures in Issuers’ Annual and Interim Filings”, management,
including the CEO and CFO, have limited the scope of their design of the Company’s disclosure controls and procedures and internal control
over financial reporting to exclude controls, policies and procedures of CREIT. Choice Properties acquired the assets and liabilities of CREIT
and its subsidiaries on May 4, 2018. The assessment on CREIT’s design effectiveness of disclosure controls and procedures and the
harmonization of the internal controls over financial reporting frameworks is expected to be completed by the first quarter of 2019.
Further details related to the acquisition of CREIT are set out in Section 4, “Acquisition of Canadian Real Estate Investment Trust” and in Note
5, “Acquisition of Canadian Real Estate Investment Trust” of the Trust’s audited annual consolidated financial statements for the year ended
December 31, 2018.
16.
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.
Choice Properties REIT 2018 Fourth Quarter Report 55
Following the acquisition of CREIT and the completion of Loblaw’s spin-out of Choice Properties, the Trust has undertaken significant work
in examining the ERM program to ensure its suitability to its changing business strategy of the Trust, and such work will continue to evolve
as management continues to refine the strategy of the Trust.
The Board of Trustees oversee the ERM program, including a review of the Trust’s risks and risk prioritization, annual approval of the ERM
policy and risk appetite framework. The risk appetite framework articulates key aspects of the Trust, values, and brands and provides directional
guidance on risk taking. Key risk indicators are used to monitor and report on risk performance and whether Choice Properties is operating
within its risk appetite. Risk owners are assigned relevant risks by the Board and are responsible for managing risk and implementing risk
mitigation strategies.
Risk identification and assessments are important elements of the Trust’s ERM process and framework. An annual ERM assessment is
completed to assist in the update and identification of internal and external risks. This assessment is carried out in parallel with strategic
planning through interviews, surveys and facilitated workshops with management and the Board of Trustees to align stakeholder views. Risks
are assessed and evaluated based on the Trust’s vulnerability to the risk and the potential impact that the underlying risks would have on the
Trust’s ability to execute on its strategies and achieve its objectives.
At least semi-annually, management provides an update to the Board of Trustees (or a Committee of the Board) on the status of the key risks
based on significant changes from the prior update, anticipated impacts in future quarters and significant changes in key risk indicators. In
addition, the long term (three year) risk level is assessed to monitor potential long term risk impacts, which may assist in risk mitigation planning
activities.
Any of these risks has the potential to negatively affect the Trust and its financial performance. Choice Properties has risk management
strategies in place for key risks. However, there can be no assurance that the risks will be mitigated or will not materialize or that events or
circumstances will not occur that could adversely affect the reputation, operations or financial condition or performance of the Trust.
The following risks are a subset of the key risks identified through the ERM program. They should be read in conjunction with the full set of
risks inherent in the Trust’s business, as included in the Trust’s AIF for the year ended December 31, 2018, which is hereby incorporated by
reference.
16.1
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 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:
Strategic Execution and Capabilities
Vendor Management, Partnerships and Third-Party Service Providers
Property Development, Redevelopment and Renovation Risks
Security of Information Technology
Information Technology Implementation and Data Management
Current Economic Environment
Demographic Changes
Competition
Acquisitions and Associated Undisclosed Defects and Obligations
Tenant Concentration
Strategic Execution and Capabilities 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, for the purpose of its integration of CREIT, and for
the desired future state of the combined businesses. Furthermore, Choice Properties’ strategy, including the integration of CREIT, 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.
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
56 Choice Properties REIT 2018 Fourth Quarter Report
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.
IT Systems Implementations and Data Management Management depends on relevant and reliable information for decision making and
financial reporting. As result of the data acquired as part of the acquisition of CREIT, 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 system and the
significant loss of data or failure to maintain reliable data 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.
Demographic Changes A large portion of Choice Properties’ existing real estate portfolio is comprised on necessity-based retail tenants.
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.
Competition Choice Properties will compete with other investors, managers and owners of properties in seeking tenants and for the purchase
and development of desirable real estate properties. Competitors may have newer or better located properties, greater financial or other
resources, or greater operating flexibility than Choice Properties. An increase in the availability of funds for investment or an increase in interest
in real estate property investments may increase the competition for real estate property investments, thereby increasing purchase prices
and reducing the yield on the investment. Increased competition to lease properties could adversely impact Choice Properties’ ability to find
suitable tenants at the appropriate rent and may negatively impact the financial performance of the Trust.
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 contracts with terms, services levels and rates that are optimal for Choice Properties. In
addition, co-owners or joint venture partners may fail to fund their share of capital, may not comply with the terms of any governing agreements
or may incur reputational damage which could negatively impact the Trust. Inefficient, ineffective or incomplete vendor management /
partnership strategies, policies and procedures could impact the Trust’s reputation, operations and/or financial performance.
Security of Information Technology Choice Properties requires segregation and protection of its information, including security over tenant
lease details, employee information, financial records and operational data (“Confidential Information”). Some of this Confidential Information
is held and managed by third-party service providers. Any failure in data security or any system vulnerability (internal or external) could result
in harm to the reputation or competitive position of the Trust. To reduce the level of vulnerability, the Trust has implemented security measures,
including monitoring and testing, maintenance of protective systems and contingency plans, to protect and to prevent unauthorized access
of Confidential Information and to reduce the likelihood of disruptions to its IT systems.
Despite these measures, all of the Trust’s information systems, including its back-up systems and any third-party service provider systems
that it employs, are vulnerable to damage, interruption, disability or failures due to a variety of reasons, including physical theft, fire, power
loss, computer and telecommunication failures or other catastrophic events, as well as from internal and external security breaches, denial
of service attacks, viruses, worms and other known or unknown disruptive events.
The Trust or its third-party service providers may be unable to anticipate, timely identify or appropriately respond to one or more of the rapidly
evolving and increasingly sophisticated means by which computer hackers, cyber terrorists and others may attempt to breach the Trust’s
security measures or those of our third-party service providers’ information systems.
As cyber threats evolve and become more difficult to detect and successfully defend against, one or more cyber threats might defeat the
Trust’s security measures or those of its third-party service providers. Moreover, employee error or malfeasance, faulty password management
or other irregularities may result in a breach of the Trust’s or its third-party service providers’ security measures, which could result in a breach
of Confidential Information.
Choice Properties REIT 2018 Fourth Quarter Report 57
If the Trust does not allocate and effectively manage the resources necessary to build and sustain a reliable IT infrastructure, fails to timely
identify or appropriately respond to cybersecurity incidents, or the Trust’s or its third-party service providers’ information systems are damaged,
destroyed, shut down, interrupted or cease to function properly, the Trust’s business could be disrupted and the Trust could, among other
things, be subject to: the loss of or failure to attract new tenants; the loss of revenue; the loss or unauthorized access to Confidential Information
or other assets; the loss of or damage to trade secrets; damage to its reputation; litigation; regulatory enforcement actions; violation of privacy,
security or other laws and regulations; and remediation costs.
Current Economic Environment Continued concerns about the uncertainty over whether the economy will be adversely affected by 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.
Acquisitions and Associated Undisclosed Defects and Obligations Acquired properties may be subject to unknown, unexpected or
undisclosed liabilities which could have a material adverse impact on the operations and financial results of Choice Properties. Representations
and warranties given by third-parties to Choice Properties may not adequately protect against these liabilities and any recourse against third-
parties may be limited by the financial capacity of such third-parties. Furthermore, it is not always possible to obtain from the seller the records
and documents that are required in order to fully verify that the buildings to be acquired are constructed in accordance, and that their use
complies, with planning laws and building code requirements. Accordingly, in the course of acquiring a property, specific risks might not be
or might not have been recognized or correctly evaluated. These circumstances could lead to additional costs and could have a material
adverse effect on rental income of the relevant properties or the sale prices of such properties upon a disposition of such properties.
Choice Properties’ ability to acquire properties on satisfactory terms and successfully integrate and operate them is subject to the following
additional risks: (a) Choice Properties may be unable to acquire desired properties because of (i) constraints imposed by the terms of the
Strategic Alliance Agreement, or (ii) competition from other real estate investors with more capital, including other real estate operating
companies, real estate investment trusts and investment funds; (b) Choice Properties may acquire properties that are not accretive to results
upon acquisition, and Choice Properties may not successfully manage and lease those properties to meet its expectations; (c) competition
from other potential acquirers may significantly increase the purchase price of a desired property; (d) Choice Properties may be unable to
generate sufficient cash from operations, or obtain the necessary debt or equity financing to consummate an acquisition or, if obtainable,
financing may not be on satisfactory terms; (e) Choice Properties may need to spend more than budgeted amounts to make necessary
improvements or renovations to acquired properties; (f) agreements for the acquisition of properties are typically subject to customary conditions
to closing, including satisfactory completion of due diligence investigations, and Choice Properties may spend significant time and money on
potential acquisitions that Choice Properties does not consummate; (g) the process of acquiring or pursuing the acquisition of a new property
may divert the attention of Choice Properties’ senior management team from existing business operations; (h) Choice Properties may be
unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of properties, into existing operations; (i)
market conditions may result in higher than expected vacancy rates and lower than expected rental rates; and (j) Choice Properties may
acquire properties without any recourse, or with only limited recourse, for liabilities, whether known or unknown, such as clean-up of
environmental contamination, claims by tenants, vendors or other persons against the former owners of the properties and claims for
indemnification by general partners, directors, officers and others indemnified by the former owners of the properties.
In addition, after the acquisition of a property, the market in which the acquired property is located may experience unexpected changes that
adversely affect the property’s value. The occupancy of properties that are acquired may decline during Choice Properties’ ownership, and
rents that are in effect at the time a property is acquired may decline thereafter.
If Choice Properties cannot complete property acquisitions on favourable terms, or operate acquired properties to meet Choice Properties’
goals or expectations, Choice Properties’ business, financial condition, results of operations and cash flows, the per Unit trading price and its
ability to satisfy debt service obligations and to make distributions to Unitholders could be materially and adversely affected.
58 Choice Properties REIT 2018 Fourth Quarter Report
Tenant Concentration Investment properties generate income through rent payments made by tenants, and particularly rent payments made
by Loblaw as Choice Properties’ largest tenant. Upon the expiry of any lease, there can be no assurance that the lease will be renewed or
the tenant replaced. Furthermore, the terms of any subsequent lease may be less favourable than the existing lease, including the addition
of restrictive covenants. In addition, historical occupancy rates and rents are not necessarily an accurate prediction of future occupancy rates.
Choice Properties’ cash flows and financial position would be adversely affected if its tenants (and especially Loblaw) were to become unable
to meet their obligations under their leases or if a significant amount of available space in the Properties was not able to be leased on
economically favourable lease terms. In the event of default by a tenant, Choice Properties may experience delays or limitations in enforcing
its rights as lessor and incur substantial costs in protecting its investment. In addition, restrictive covenants and the terms of the Strategic
Alliance Agreement may narrow the field of potential tenants at a property and could contribute to difficulties in leasing space to new tenants.
Choice Properties’ net income could also be adversely affected in the event of a downturn in the business, or the bankruptcy or insolvency,
of Loblaw, as the largest tenant. Choice Properties derives a large majority of its annual base minimum rent from Loblaw. Consequently,
revenues are dependent on the ability of Loblaw to meet its rent obligations and Choice Properties’ ability to collect rent from Loblaw. If Loblaw
were to terminate its tenancies, default on or cease to satisfy its payment obligations, it would have a material adverse effect on Choice
Properties’ financial condition or results of operations and its ability to make distributions to Unitholders.
The closing of an anchor store at a property could also have a material adverse effect on the value of that property. Vacated anchor tenant
space also tends to adversely affect the entire property because of the loss of the departed anchor tenant’s power to draw customers to the
property, which in turn may cause other tenants’ operations to suffer and adversely affect such other tenants’ ability to pay rent or perform
any other obligations under their leases. No assurance can be given that Choice Properties will be able to quickly re-lease space vacated by
an anchor tenant on favourable terms, if at all. In addition, certain leases contain a provision requiring tenants to maintain continuous occupancy
of leased premises, and there can be no assurance that such tenants will continue to occupy such premises. Furthermore, at any time, an
anchor tenant may seek the protection of bankruptcy, insolvency or similar laws which could result in the rejection and termination of the lease
of the tenant and thereby cause a reduction in Choice Properties’ cash flows, financial condition or results of operations and its ability to make
distributions to Unitholders.
16.2
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 strategy. Successful
implementation of Choice Properties’ 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.
Choice Properties REIT 2018 Fourth Quarter Report 59
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.
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.
60 Choice Properties REIT 2018 Fourth Quarter Report
17.
RELATED PARTY TRANSACTIONS
Choice Properties’ parent corporation is GWL, which held an 65.4% effective interest in the Trust through ownership of 46,856,415 Units and
all of the Exchangeable Units as at December 31, 2018. GWL is also the parent company of Loblaw, with ownership of 50.4% of Loblaw’s
outstanding common shares as at December 31, 2018.
On November 1, 2018, Loblaw and GWL completed a reorganization under which Loblaw spun out its effective interest in Choice Properties
to GWL. Prior to the reorganization, Loblaw held a 61.6% direct effective interest in the Trust through ownership of 21,500,000 Units and
100% of the Exchangeable Units as at October 31, 2018 (December 31, 2017 - 82.4% direct effective interest, 21,500,000 Units and 100%
Exchangeable Units, respectively). The reorganization will have no significant impact on the ongoing relationship between Loblaw and Choice
Properties. All current agreements and arrangements with Loblaw will remain in place and Loblaw will continue to be Choice Properties’
largest tenant.
In the ordinary course of business, Choice Properties’ enters into various transactions with related parties. These transactions are measured
at the exchange amount, which is the amount of consideration established and agreed upon by the related parties.
Loblaw is also Choice Properties’ largest tenant, representing approximately 68.0% of Choice Properties’ annual base rent and 58.9% of its
GLA as at December 31, 2018 (December 31, 2017 - 88.2% and 87.6% respectively).
In 2018, Choice Properties acquired 100% interest in three retail properties from Loblaw for a combined purchase price of $55,390, excluding
acquisition costs. Included in the investment properties acquired as part of the acquisition of CREIT were 17 properties containing a Loblaw
food or drug store, with annual rental revenue of approximately $12,841.
On December 7, 2018, Choice Properties acquired a 100% interest in an industrial property from GWL for a purchase price of $20,866,
excluding acquisition costs.
In 2017, Choice Properties acquired five investment properties from Loblaw. The acquisitions added approximately 244,000 square feet of
GLA at a purchase price of $78,104, excluding acquisition costs.
The acquisitions from related parties are disclosed in Section 10.2, “Investment Property Transactions”, 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 $7,080 to the joint venture and received
distributions of $7,200 during the year ended December 31, 2018 (year ended December 31, 2017 - contributions of $13,760 and distributions
of nil). Operating activities have not begun at the property, however the joint venture did earn interest income during the year ended December
31, 2018 of $2,070 (2017 - $634). Also, in 2018, developmental density was sold for a price equal to fair value.
Choice Properties compensated Loblaw with intensification payments of $5,858 in connection with completed gross leasable area for which
tenants have taken possession during the year ended December 31, 2018 (year ended December 31, 2017 - $5,793).
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
During 2017 and 2018, Loblaw provided Choice Properties with administrative and other support services.
Choice Properties REIT 2018 Fourth Quarter Report 61
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 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 28 to the consolidated financial statements for the years ended December 31, 2018 and 2017.
18.
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.
62 Choice Properties REIT 2018 Fourth Quarter Report
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.
19.
ACCOUNTING STANDARDS
Accounting Standards Implemented in 2018
On January 1, 2018, Choice Properties implemented IFRS 15, “Revenue from contracts with customers” (“IFRS 15”) and IFRS 9, “Financial
Instruments” (“IFRS 9”), in accordance with IAS 8, “Accounting Policies, Changes in Accounting Estimates and Errors”. The impacts from
implementation of IFRS 15 and IFRS 9 are described below.
IFRS 15 In 2014, the IASB issued IFRS 15 replacing IAS 18, “Revenue”, IAS 11, “Construction Contracts”, and related interpretations. IFRS
15 provides a comprehensive framework for the recognition, measurement and disclosure of revenue from contracts with customers, excluding
contracts within the scope of the accounting standards on leases, insurance contracts and financial instruments. IFRS 15 is effective for annual
periods beginning on or after January 1, 2018.
Choice Properties adopted the standard on January 1, 2018 and applied the requirements of the standard retrospectively. IFRS 15 permits
the use of exemptions and practical expedients. The Trust applied the practical expedient in which contracts that began and were completed
within the same annual reporting period before December 31, 2017 or are completed on January 1, 2017 do not require restatements.
The implementation of IFRS 15 did not have a significant impact on the Trust’s revenue streams. The presentation of insurance expense and
the revenue related to the recovery of insurance expense from tenants have been reclassified from operating costs to be grouped with property
taxes.
IFRS 9 In 2014, the IASB issued 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 accounting model. IFRS 9 became effective for annual periods beginning on or after January 1, 2018.
Choice Properties implemented the new requirements for classification and measurement, impairment and general hedging on December
31, 2017 by applying the requirements for classification and measurement, including impairment, retrospectively with no restatement of
comparative periods. The Trust also applied related amendments to IFRS 7, “Financial Instruments: Disclosures” (“IFRS 7”). Refer to the
accounting policy for Financial Instruments for a discussion of the application of this standard.
Classification and Measurement IFRS 9 contains a new classification and measurement approach for financial assets that reflects the business
model in which assets are managed and their cash flow characteristics. Financial assets are classified and measured based on the three
categories: amortized cost, fair value through other comprehensive income (FVOCI), and fair value through profit and loss (FVTPL). Financial
liabilities are classified and measured on two categories: amortized cost or FVTPL. Under IFRS 9, derivatives embedded in contracts where
the host is a financial asset in the scope of the standard are not separated, but the hybrid financial instrument as a whole is assessed for
classification.
Financial assets are not reclassified subsequent to their initial recognition, unless the Trust identifies changes in its business model in managing
financial assets and would reassess the classification of financial assets.
The following table summarizes the classification impacts upon adoption of IFRS 9. The adoption of the new classification requirements under
IFRS 9 did not result in significant changes in measurement or the carrying amount of financial assets and liabilities.
Asset/Liability
Accounts receivable
Mortgages, loans and notes receivable - SPPI
Mortgages, loans and notes receivable - FVTPL
Cash and cash equivalents
Long term debt and Class C LP Units:
Senior unsecured debentures
Class C LP Units
Mortgages
Construction loans
Credit facilities and term loans
Trade payable and other liabilities
Designated hedging derivatives
Exchangeable Units
Classification under IAS 39
Loans and receivables
Loans and receivables
Loans and receivables
Fair value through profit and loss
Other liabilities
Other liabilities
Other liabilities
Other liabilities
Other liabilities
Other liabilities
Fair value through profit and loss
Fair value through profit and loss
Classification under IFRS 9
Amortized cost
Amortized cost
Fair value through profit and loss
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Fair value through profit and loss
Fair value through profit and loss
Choice Properties REIT 2018 Fourth Quarter Report 63
Impairment IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with a forward-looking ‘expected credit loss’ (“ECL”) model. The ECL requires
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 is applied, at each balance sheet date, to financial assets measured at amortized cost or those
measured at fair value through other comprehensive income, except for investments in equity instruments.
Choice Properties adopted the practical expedient to determine ECL on account receivables using a provision matrix based on historical credit
loss experiences to estimate lifetime ECL. The ECL models applied to other financial assets also required judgment, assumptions and
estimations on changes in credit risks, forecasts of future economic conditions and historical information on the credit quality of the financial
asset. The provision matrix and ECL models applied did not have a material impact on account receivables of the Trust.
Impairment losses, if incurred, would be recorded in general and administrative expenses in the consolidated statement of income and
comprehensive income with the carrying amount of the financial asset 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 conditions and changes in factors occurring after the impairment was initially recognized, the previously recognized impairment
loss would be reversed through the consolidated statement of income and comprehensive income. The impairment reversal would be 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.
General Hedging IFRS 9 requires Choice Properties to ensure that hedge accounting relationships are aligned with the Trust’s risk management
objectives and strategy and to apply a more qualitative and forward-looking approach to assessing hedge effectiveness. The Trust’s risk
management strategy is disclosed in the consolidated financial statements of this Fourth Quarter Report, Note 26, Financial Risk Management.
Changes to Significant Accounting Policies
In conjunction with the acquisition of CREIT, the Trust adopted the following significant accounting policies during the year:
Business Combinations When an investment is acquired, the Trust considers the substance of the assets and activities of the acquisition
in determining whether the acquisition represents an asset acquisition or a business combination. The transaction is considered to be a
business combination if the acquired investment meets the definition of a business in accordance with IFRS 3, “Business Combinations”,
being an integrated set of activities and assets that are capable of being managed for the purposes of providing a return to Unitholders.
The acquisition of a business is accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the
consideration transferred at fair value on the date of acquisition. Identifiable assets acquired and liabilities and contingent liabilities
assumed in a business combination are generally measured initially at fair value at the acquisition date. Any contingent consideration to be
transferred by the acquirer will be recognized at fair value at the acquisition date. Acquisition transaction costs and other related expenses
are recognized in the consolidated statements of income as incurred.
Mortgages, Loans and Notes Receivable The Trust’s mortgages, loans and notes receivable are classified into two categories: (1) those
held for the purpose of collecting contractual cash flows that represent SPPI and are classified and measured at amortized cost; and (2) those
that do not meet the SPPI criteria and are classified and measured at FVTPL.
Interest income for both categories of mortgages and loans receivable is recognized using the effective interest method. At the end of each
reporting period management reviews its SPPI mortgages, loans and notes receivable to determine whether there is an event or change in
circumstance that indicates a possible impairment loss. If such indication exists, the recoverable amount of the asset is estimated in order to
measure any impairment loss.
An impairment indicator is present when there is objective evidence of impairment as a result of one or more events, such as a deterioration
in the credit quality of the borrower to the extent that there is a reasonable doubt as to the timely collection of the principal and interest. An
impairment loss is recognized if the present value of estimated future cash flows discounted at the original effective interest rate inherent in
the loan is less than its carrying value and is measured as the difference between the two amounts. When the amounts and timing of future
cash flows cannot be estimated with reasonable reliability, impairment is recognized if either (a) the fair value of the underlying security, net
of any realization costs and amounts legally required to be paid to the borrowers, or (b) the observable market price for the loan, is less than
the carrying value. The valuation of such amounts is subjective and is based upon assumptions regarding market conditions that could differ
materially from actual results in future periods.
64 Choice Properties REIT 2018 Fourth Quarter Report
Intangible Assets Indefinite life intangible assets are measured at cost less any accumulated impairment loss. At each balance sheet
date, the Trust reviews the carrying amount of its intangible assets to determine whether there is any indication of impairment. If such
indication exists, the asset is then tested for impairment by comparing its recoverable amount to its carrying value. Intangible assets are
tested for impairment at least annually. The recoverable amount of the intangible asset is the higher of its value in use and its fair value
less costs to sell. Value in use is based on the estimated future cash flows from the intangible asset discounted to their present value using
a pre-tax discount rate that reflects current market assessments of the time value of money and the risk specific to the asset. The fair value
less costs to sell is based on the best information available to reflect the amount that could be obtained from the disposal of the asset in an
arm’s length transaction between knowledgeable and willing parties, net of estimates of costs of disposal. An impairment loss is recognized
if the carrying amount exceeds the recoverable amount. Impairment losses and reversals are recognized in general and administrative
expenses.
Financial Derivative Instruments The Trust does not use derivative instruments for speculative purposes. Any embedded derivative
instruments that may be identified are separated from their host contract and recorded on the consolidated balance sheet at fair value.
Derivative instruments are recorded in current or non-current assets and liabilities based on their remaining terms to maturity. All changes
in fair values of the derivative instruments are recorded in net earnings unless the derivative qualifies and is effective as a hedging item in
a designated hedging relationship. The Trust has cash flow hedges which are used to manage exposure to fluctuations in interest rates.
The effective portion of the change in fair value of the hedging item is recorded in other comprehensive income. If the change in fair value
of the hedging item is not completely offset by the change in fair value of the hedged item, the ineffective portion of the hedging
relationship is recorded in net income. Amounts accumulated in other comprehensive income are reclassified to net earnings when the
hedged item is recognized in net income.
Foreign Currency Translation The functional currency of the Trust is the Canadian dollar.
The assets and liabilities of foreign operations that have a functional currency different from that of the Trust are translated into Canadian
dollars at the foreign currency exchange rate in effect at the balance sheet date. The resulting foreign currency exchange gains or losses are
recognized in the foreign currency translation adjustment as part of other comprehensive income. When such foreign operation is disposed
of, the related foreign currency translation reserve is recognized in net earnings as part of the gain or loss on disposal. On the partial disposal
of such foreign operation, the relevant proportion is reclassified to net income.
Asset and liabilities denominated in foreign currency held in foreign operations that have the same functional currency as the Trust are
translated into Canadian dollars at the foreign currency exchange rate in effect at the balance sheet date. The resulting foreign currency
exchange gains or losses are recognized in net income. Revenue and expenses of foreign operations are translated into Canadian dollars
at the foreign currency exchange rates that approximate the rates in effect at the dates when such items are transacted.
Unit-Settled Unit-Based Compensation Unit-Settled Restricted Units (“URUs”) are accounted for as cash-settled awards. Typically, full
vesting of the URUs would not occur until the employee had remained with Choice for three or five years from the grant date. Depending on
the nature of the grant, the URUs are subject to a six- or seven-year holding period during which the Units cannot be disposed. The fair value
of each URU granted is measured based on the market value of a Unit at the balance sheet date, less a discount to account for the vesting
and holding period restriction placed on the URUs.
Income Taxes Choice Properties qualifies as a “mutual fund trust” and a real estate investment trust (“REIT”) under the Income Tax Act
(Canada). Certain 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.
Under the SIFT rules, the taxation regime will not apply to a REIT that meets prescribed conditions relating to the nature of its assets and
revenue (the “REIT Conditions”) and distributions may be deducted against the REIT’s taxable income. Choice Properties has reviewed the
SIFT rules and has assessed its interpretation and application to its assets and revenue and has determined that it meets the REIT Conditions.
The Trustees intend to annually distribute all taxable income directly earned by Choice Properties to Unitholders and to deduct such distributions
for income tax purposes and, accordingly, no net current income tax expense or deferred income tax assets or liabilities have been recorded
in the consolidated financial statements related to its Canadian investment properties.
The Trust also consolidates certain taxable entities in Canada and in the United States for which current and deferred income taxes are
recorded. Current tax is the expected tax payable or receivable on the taxable income or loss for the period, using tax rates enacted or
substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.
Deferred tax is recognized using the asset and liability method of accounting for temporary differences arising between the financial statement
carrying values of existing assets and liabilities and their respective income tax bases. Deferred tax is measured using enacted or substantively
enacted income tax rates expected to apply in the years in which those temporary differences are expected to be recovered or settled. A
deferred tax asset is recognized for temporary differences as well as unused tax losses and credits to the extent that it is probable that future
taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced
to the extent that it is no longer probable that the related tax benefit will be realized.
Choice Properties REIT 2018 Fourth Quarter Report 65
Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets and they relate to
income taxes levied by the same taxation authority on the same taxable entity, or on different taxable entities where the Choice Properties
intends to settle its current tax assets and liabilities on a net basis.
Deferred tax is recorded on temporary differences arising on investments in subsidiaries, except where the timing of the reversal of the
temporary difference is controlled by the Trust and it is probable that the temporary difference will not reverse in the foreseeable future.
Future Accounting Standards
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.
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 in the final stages of its evaluation of the impact of the standard on the consolidated financial statements. Based on its assessment
to date, the Trust does not believe it will have a significant impact on its consolidated financial statements.
20.
OUTLOOK (2)
On May 4, 2018, Choice Properties completed its acquisition of CREIT. This transformational transaction created Canada’s premier diversified
real estate investment trust. Since closing the transaction, the integration of the two businesses has been a priority. In addition to combining
the real estate portfolios, the transaction has joined together two of Canada’s leading real estate teams.
Our business has evolved into two primary functional areas: an existing income producing property portfolio and a development business.
Our income producing property portfolio provides a solid foundation for stable cash flows. The portfolio is diversified by both geographic
location and product type including retail, industrial, office and residential assets.
•
•
•
•
The retail portfolio is focused on necessity-based tenants and is primarily anchored by long-term leases with Loblaw, Canada’s
largest retailer. Our retail assets are the foundation for maintaining a reliable cash flow.
The industrial portfolio is concentrated in Canada’s largest distribution markets. Demand for distribution centres in these markets
by both investors and tenants remains strong. Our industrial assets operate under healthy fundamentals with low vacancy rates
and increasing rents.
The office portfolio is focused on large, well-located buildings in Canada’s largest cities. Fundamentals in most of the large office
markets in Canada are healthy due to the strength in the economy and job growth. As office property fundamentals in Calgary
continue to be challenging, we have significantly reduced our exposure to this market with the recent sale of Sun Life Plaza.
The residential portfolio is a recent addition to our asset mix. Rental residential provides additional diversification to our income.
We will look to grow the residential portfolio primarily through development and are currently developing 874 units.
With a fully integrated management platform with national operating and leasing expertise, we will continue to manage the portfolio to a high
level. We will also continue to work with Loblaw and Shoppers Drug Mart to meet their tenant needs as well as explore potential acquisition
opportunities.
Our development initiatives provide the opportunity to add high quality real estate to our portfolio and contribute to growth in our net asset
value. In the near-term, our development business will focus primarily on retail intensification projects and our well located rental residential
projects at various stages of development within the GTA. Beyond our near-term development program, we have a significant pipeline of
additional intensification opportunities on existing sites we already own. These development opportunities are residential focused, mixed use
communities, many of which are in close proximity to public transportation.
Looking forward, we will continue to focus on financial and operational stability, the advancement of our retail and industrial development
projects and the expansion of our multi-residential platform.
66 Choice Properties REIT 2018 Fourth Quarter Report
21.
NON-GAAP FINANCIAL MEASURES
The financial statements for Choice Properties are prepared in accordance with IFRS. However, in this MD&A, a number of measures are
presented that are not in accordance with IFRS.
Net income prepared in accordance with IFRS is subject to varying degrees of judgment, and some meaningful differences in accounting
policies exist between publicly traded entities in Canada. Accordingly, net income as presented by Choice Properties may not be comparable
to net income presented by other real estate entities.
In addition to using performance measures determined in accordance with IFRS, Choice Properties’ management also measures its
performance using certain additional non-GAAP measures, and provides these measures in this MD&A so that investors may do the same.
Such measures and related per-unit amounts are not defined by GAAP and therefore should not be construed as alternatives to net income
or cash flow from operating activities determined in accordance with GAAP. Furthermore, the supplemental measures used by management
may not be comparable to similar measures presented by other real estate investment trusts or enterprises. These terms are defined in the
following paragraphs and are cross referenced, as applicable, to a reconciliation elsewhere in this MD&A to the most comparable IFRS
measure.
Proportionate Share
Management presents the proportionate share of its interests in certain joint arrangements that are accounted for using the equity method of
accounting in the determination of many of its key performance measures. Management views this method as relevant in demonstrating the
Trust's ability to manage the underlying economics of the related investments, including the financial performance and cash flows. This
presentation also depicts the extent to which the underlying assets are leveraged, which is an important component of risk management. The
financial information in this MD&A presents the consolidated balance sheets and consolidated statements of income on a proportionate basis,
which are all non-GAAP measures. The proportionate financial information represents the financial statements on an adjusted basis to reflect
the Trust’s equity accounted investments and its share of net income (losses) from equity accounted investments on a proportionately
consolidated basis at the Trust’s ownership percentage of the related investment. Refer to Section 9, “Balance Sheet” and Section 21.1,
“Proportionate Share Compilation” for reconciliations to the Consolidated Financial Statements as presented under IFRS to the proportionate
share basis.
Net Operating Income (“NOI”)
NOI is a supplemental measure of operating performance widely used in the real estate industry. Choice Properties calculates NOI as property
rental revenue less straight-line rental revenue, direct property operating expenses and realty taxes. Management believes that NOI is an
important measure of operating performance for the Trust’s commercial real estate assets that is used by real estate industry analysts, investors
and management, while also being a key input in determining the fair value of the Choice Properties portfolio. NOI excludes certain expenses
included in the determination of net income such as interest expense and indirect operating expenses. These items are excluded from NOI
in order to provide results that reflect the fundamentals of a property’s operations before consideration of how a property is financed or the
costs of operating the entity in which it is held. A reconciliation from net income to NOI can be found in Section 21.2, “Net Operating Income”.
Net Property Income
Net property income is defined by Choice Properties as property rental revenue less direct property operating expenses and realty taxes.
Management believes that net property income is a useful measure in understanding period-over-period changes in income from operations
due to occupancy, rental rates, operating costs and realty taxes. A reconciliation from net property income to net income can be found in
Section 21.1, “Proportionate Share Compilation”.
NOI for Same Properties, excluding development activities
To better measure certain key performance factors, management analyzes NOI for the income producing properties owned by the Trust
throughout the current and comparative reporting periods, the “Same Properties”, to remove the impact of recent property acquisition and
disposition transactions, the “Property Transactions”, and to remove the Acquisition Transaction. Management further refines the analysis to
exclude any NOI from developments, which increased GLA in the comparative periods. Management believes that NOI for Same Properties,
excluding development activities is a useful measure in understanding period-over-period changes in NOI due to occupancy, rental rates,
operating costs and realty taxes, before considering the changes in NOI that can be attributed to the Property Transactions, the Acquisition
Transaction and development activities. The number of Same Properties was 538 and 533 for the three months and year ended December 31,
2018 and December 31, 2017, respectively. A reconciliation from NOI for Same Properties, excluding development activities to total NOI by
asset class can be found in Section 21.2, “Net Operating Income”.
Choice Properties REIT 2018 Fourth Quarter Report 67
Funds from Operations (“FFO”)
FFO is a financial measure which should not be considered as an alternative to net income, cash flow from operations, or any other operating
or liquidity measure prescribed under IFRS. 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 2018. 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. From time to time the Trust
may enter into transactions that materially impact the calculation and are eliminated from the calculation for management’s review purposes.
Management uses and believes that FFO is a useful measure of the Trust’s performance that, when compared period over period, reflects
the impact on operations of trends in occupancy levels, rental rates, operating costs and realty taxes, acquisition activities and interest costs.
A reconciliation from net income to FFO can be found in Section 21.3, “Funds from Operations”.
Adjusted Funds from Operations ("AFFO")
Choice Properties calculates AFFO 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 2018. The purpose of the White Paper is to provide reporting issuers and
investors with greater guidance on the definitions of AFFO and to help promote more consistent disclosure from reporting issuers. An advantage,
of the AFFO measure, is improved comparability between Canadian and foreign real estate investment trusts. AFFO is intended to be used
as a recurring, economic earnings measure.
Choice Properties considers AFFO to be a useful measure of operating performance as it further adjusts FFO for capital expenditures that
sustain income producing properties and eliminates the impact of straight line rent. AFFO is impacted by the seasonality inherent in the timing
of executing property capital projects. From time to time the Trust may enter into transactions that materially impact the calculation and are
eliminated from the calculation for management’s review purposes.
In calculating AFFO, Choice Properties adjusts FFO by excluding straight-line rent adjustments, as well as costs incurred relating to internal
leasing activities and property capital projects. Working capital changes, viewed as short-term cash requirements or surpluses, are deemed
financing activities pursuant to the methodology and are not considered when calculating AFFO. Capital expenditures which are excluded
and not deducted in the calculation of AFFO comprise those which generate a new investment stream, such as constructing a new retail pad
during property expansion or intensification, development activities or acquisition activities. Accordingly, AFFO differs from FFO in that AFFO
excludes from its definition certain non-cash revenues and expenses recognized under IFRS, such as straight-line rent, but also includes
capital and leasing costs incurred during the period which are capitalized for IFRS purposes. A reconciliation from FFO to AFFO can be found
in Section 21.4, “Adjusted Funds from Operations”.
Adjusted Cash Flow from Operations ("ACFO")
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 2018. 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.
Management is of the view that ACFO is a useful measure of the cash generated from operations after providing for operating capital
requirements, and as a result, is also useful in evaluating the ability of Choice Properties to fund distributions to Unitholders. 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. The resulting ACFO will include the impact of the seasonality of property capital expenditures and the impact of fluctuations
from normal operating working capital, such as changes to net rent receivable from tenants, trade accounts payable and accrued liabilities.
From time to time the Trust may enter into transactions that materially impact the calculation and are eliminated from the calculation for
management’s review purposes. A reconciliation from cash flow from operating activities ACFO can be found in Section 21.5, “Adjusted Cash
Flow from Operations”.
Earnings before Interest, Taxes, Depreciation, Amortization and Fair Value (“EBITDAFV”)
EBITDAFV is defined as net income attributable to Unitholders, plus, where applicable, income taxes, interest expense, amortization expense,
depreciation expense, and adjustments to 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
68 Choice Properties REIT 2018 Fourth Quarter Report
the adjustments to fair value and other adjustments as allowed in the calculation based on the Trust Indentures, as supplemented. A
reconciliation from net income to EBITDAFV can be found on Section 21.6, “Earnings before Taxes, Depreciation, Amortization and Fair
Value”.
Cash Retained after Distributions
The cash retained after distributions represents the portion of ACFO retained within Choice Properties which can be used to invest in new
acquisitions and development properties. Refer to calculation in Section 11.6, “Unit Equity”.
Total Debt
When calculating debt to total assets, debt service coverage and debt to EBITDAFV, debt is defined as variable rate debt (construction loans,
credit facilities and term loans) and fixed rate debt (senior unsecured debentures, mortgages and Class C LP Units), as measured on a
proportionate basis. For the purpose of these calculations debt does not include the Exchangeable Units which are included as part of Unit
Equity on account of the Exchangeable Units being economically equivalent and receiving equal distributions to the Trust Units.
Total debt is also presented on a net basis to include the impact of other finance charges such as debt placement costs and discounts or
premiums
Debt to Total Assets
Debt to total assets is a useful measure to limit the financial leverage of Choice Properties. The ratio is determined by dividing total debt by
total assets as presented on a proportionate basis, expressed as a percentage, and can be interpreted as the proportion of the Trust’s assets
that are financed by debt. Management believes this ratio is useful in evaluating the Trust’s flexibility to incur additional leverage.
Debt Service Coverage
The debt service coverage ratio is useful in determining the ability of Choice Properties to service the interest requirements of its outstanding
debt. The ratio is calculated as EBITDAFV divided by interest expense on long-term debt and distributions on Class C LP Units and all regularly
scheduled principal payments made with respect to indebtedness during such period (other than any balloon, bullet or similar principal payable
at maturity or which repays such indebtedness in full). This ratio is calculated based on the Trust Indentures, as supplemented.
Debt to EBITDAFV
Debt to EBITDAFV is calculated to assess the financial leverage of Choice Properties, to measure its ability to meet financial obligations and
to provide a snapshot of its balance sheet strength. The ratio is calculated as total debt divided by EBITDAFV. Management utilizes this ratio
to measure and limit leverage.
Choice Properties REIT 2018 Fourth Quarter Report 69
21.1
Proportionate Share Compilation
Management measures and evaluates the performance of Choice Properties based on segmented income from property operations which
includes a proportionate share of the related revenue and expenses for investments in income producing properties that otherwise are
accounted for on an equity basis under GAAP. Prior to the May 4, 2018 acquisition of CREIT, Choice Properties operated in only the retail
segment and had no material equity accounted joint ventures, such that management used results as calculated under GAAP to evaluate
the performance of the Trust.
The following table reconciles net income on a proportionate share basis to net income as determined in accordance with GAAP for the three
months ended December 31, 2018:
($ thousands)
(unaudited)
Base rent, excluding straight-line
rent
Property tax and operating cost
recoveries
Lease surrender and other
revenue
Recoverable property taxes,
Retail
Industrial
Office
Proportionate
Share Basis
Consolidation
and
eliminations(i)
GAAP Basis
$ 179,554
$
30,186
$
15,273
$
225,013
$
(10,113)
$
214,900
74,901
13,427
12,430
100,758
(4,542)
96,216
1,452
88
2,471
4,011
(367)
3,644
insurance and operating costs
(72,203)
(11,642)
(11,145)
Non-recoverable operating costs
(1,552)
(78)
(246)
Net Operating Income
Straight-line rent
Net Property Income
182,152
6,492
188,644
31,981
1,326
33,307
18,783
547
19,330
General and administrative expenses
Property management and other administration fees
Net interest expense and other financing charges
Interest and other income
Share of income from joint ventures excluding fair value adjustments
Acquisition transaction costs and other related expenses
Adjustment to fair value of unit-based compensation
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 ventures
Income before income taxes
Income taxes
Net Income
(94,990)
(1,876)
232,916
8,365
241,281
(9,506)
1,134
(140,651)
4,687
—
(11,044)
707
214,479
(19,788)
—
281,299
(200)
4,559
(68)
(10,531)
(332)
(10,863)
—
—
2,099
(592)
9,356
—
—
—
1,240
(1,240)
—
—
(90,431)
(1,944)
222,385
8,033
230,418
(9,506)
1,134
(138,552)
4,095
9,356
(11,044)
707
214,479
(18,548)
(1,240)
281,299
(200)
$
281,099
$
— $
281,099
(i)
Reconciling items adjust Choice Properties’ proportionate share of joint ventures to reflect the equity method of accounting under GAAP.
70 Choice Properties REIT 2018 Fourth Quarter Report
The following table reconciles net income on a proportionate share basis to net income as determined in accordance with GAAP for the year
ended December 31, 2018:
($ thousands)
Retail
Industrial
Office
Proportionate
Share Basis
(unaudited)
Consolidation
and
eliminations(i)
GAAP Basis
(audited)
Base rent, excluding straight-line
rent
Property tax and operating cost
$ 647,504
$
97,907
$
45,694
$
791,105
$
(26,241)
$
764,864
recoveries
265,266
39,824
34,476
339,566
(11,390)
328,176
Lease surrender and other
revenue
Recoverable property taxes,
14,921
380
6,500
21,801
(644)
21,157
insurance and operating costs
(257,434)
(34,670)
(31,315)
Non-recoverable operating costs
(2,412)
(729)
(854)
Net Operating Income
Straight-line rent
Net Property Income
667,845
27,995
695,840
102,712
5,416
108,128
54,501
1,653
56,154
General and administrative expenses
Property management and other administration fees
Net interest expense and other financing charges
Accelerated amortization of debt premium
Interest and other income
Share of income from equity accounted joint ventures
Acquisition transaction costs and other related expenses
Adjustment to fair value of unit-based compensation
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 ventures
Income before income taxes
Income taxes
Net income
(323,419)
(3,995)
825,058
35,064
860,122
(34,975)
3,523
(519,505)
(37,282)
15,056
—
(141,493)
4,792
593,706
(93,829)
—
650,115
(538)
12,599
379
(25,297)
(988)
(26,285)
—
—
5,641
—
(832)
21,476
—
—
—
5,254
(5,254)
—
—
(310,820)
(3,616)
799,761
34,076
833,837
(34,975)
3,523
(513,864)
(37,282)
14,224
21,476
(141,493)
4,792
593,706
(88,575)
(5,254)
650,115
(538)
$
649,577
$
— $
649,577
(i)
Reconciling items adjust Choice Properties proportionate share of joint ventures to reflect the equity method of accounting under GAAP.
Choice Properties REIT 2018 Fourth Quarter Report 71
Investment Properties
To expand the portfolio and participate in development opportunities, Choice Properties owns varying interests in real estate entities which
hold investment properties. Under GAAP, many of these interests are recorded as equity accounted joint ventures and, as such, the Trust’s
portion of the investment properties of these entities is presented on the balance sheet as a summarized value, not as part of the total
investment properties. While the reconciliation for Choice Properties’ balance sheet on a GAAP basis to a proportionate share basis is detailed
in Section 9, “Balance Sheet“, the following continuity schedules present Choice Properties’ investment properties inclusive of its proportionate
share ownership in equity accounted joint ventures for the periods ended as indicated:
As at and for the three months ended December 31, 2018
($ thousands)
(unaudited)
Balance, as at September 30, 2018
Acquisitions of investment properties(i)
Capital expenditures
Development capital
Building improvements
Capitalized interest
Operating capital expenditures
Property capital
Direct leasing costs
Tenant improvement allowances
Amortization of straight-line rent
Dispositions
Foreign currency translation
Adjustment to fair value of investment properties
Balance, as at December 31, 2018
(i)
Includes acquisition costs.
As at and for the year ended December 31, 2018
($ thousands)
(unaudited)
Balance, as at December 31, 2017
Acquisition of CREIT
Acquisitions of investment properties(i)
Capital expenditures
Development capital
Building improvements
Capitalized interest
Operating capital expenditures
Property capital
Direct leasing costs
Tenant improvement allowances
Amortization of straight-line rent
Dispositions
Foreign currency translation
Adjustment to fair value of investment properties
Balance, as at December 31, 2018
(i)
Includes acquisition costs.
72 Choice Properties REIT 2018 Fourth Quarter Report
GAAP Basis
$ 14,412,000
Reconciliation
990,670
$
Proportionate
Share Basis
$ 15,402,670
77,712
65,543
898
1,711
42,515
3,857
4,757
8,033
(103,824)
6,346
(18,548)
—
77,712
19,265
417
1,155
140
142
120
332
(1)
—
(1,240)
84,808
1,315
2,866
42,655
3,999
4,877
8,365
(103,825)
6,346
(19,788)
$ 14,501,000
$
1,011,000
$ 15,512,000
GAAP Basis
9,551,000
$
Reconciliation
32,018
$
Proportionate
Share Basis
9,583,018
$
4,729,687
112,239
947,803
—
5,677,490
112,239
187,856
7,741
4,880
57,586
11,392
9,628
34,076
(123,869)
7,359
(88,575)
47,705
(267)
1,616
151
450
763
988
235,561
7,474
6,496
57,737
11,842
10,391
35,064
(14,973)
(138,842)
—
(5,254)
7,359
(93,829)
$ 14,501,000
$
1,011,000
$ 15,512,000
21.2
Net Operating Income
The following table reconciles net income, as determined in accordance with GAAP, to NOI for the periods ended as indicated. Refer to Section
7, “Other Measures of Performance” and Section 21, “Non-GAAP Financial Measures” of this MD&A, for further details about this non-GAAP
measure.
For the periods ended December 31
($ thousands)
(unaudited)
Net income
2018
281,099
2017
36,533
Three Months
$
$
$
Year End
Change
244,566
$
2018
649,577
$
2017
405,345
$
Change
244,232
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
Net interest expense and other
financing charges
Accelerated amortization of debt
premium
Interest and other income
Share of income from joint ventures
Acquisition transaction costs and
other related expenses
Adjustment to fair value of unit-based
compensation
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 ventures
Income taxes
Net Operating Income
Adjustments for equity accounted
joint ventures
Proportionate Share Net Operating
—
(8,033)
9,506
(930)
(8,092)
6,712
930
59
2,794
—
(34,076)
34,975
(930)
(34,740)
23,795
930
664
11,180
(1,134)
(267)
(867)
(3,523)
(1,270)
(2,253)
138,552
100,397
37,593
513,864
394,826
119,038
—
(4,095)
(9,356)
11,044
(707)
—
(2,744)
(69)
—
267
—
(1,351)
(9,287)
37,282
(14,224)
(21,476)
—
(4,829)
(254)
37,282
(9,395)
(21,222)
11,044
141,493
—
141,493
(974)
(4,792)
468
(4,286)
(214,479)
19,026
(233,505)
(593,706)
(38,212)
(555,494)
18,548
2,710
15,838
88,575
(159,458)
248,033
1,240
200
(505)
—
222,385
153,038
1,745
200
69,347
5,254
538
745
—
4,509
538
799,761
585,486
214,275
10,531
—
10,531
25,297
—
25,297
Income
$
232,916
$
153,038
$
79,878
$
825,058
$
585,486
$
239,572
Choice Properties REIT 2018 Fourth Quarter Report 73
To better measure certain key performance factors, management 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, Property Transactions and the Acquisition Transaction. Management further refines the analysis to exclude any NOI from
developments, which increased GLA in the comparative periods. Refer to Section 7, “Other Measures of Performance” and Section 21, “Non-
GAAP Financial Measures” of this MD&A, for further details about this non-GAAP measure.
For the three months ended
December 31
($ thousands)
(unaudited)
Proportionate share rental
2018
2017
Same
Properties
Acquisition
Transaction
Property
Transactions(i)
All
Properties
Same
Properties
Property
Transactions(i)
All
Properties
revenue
$ 214,610
$ 120,975
$
2,562
$ 338,147
$ 207,869
$
3,362
$ 211,231
Revenue attributable to non-
controlling interests(ii)
Less: Straight-line rent
—
—
—
—
(930)
included in rental revenue
(6,243)
(2,036)
(86)
(8,365)
(8,115)
Proportionate share rental
—
23
(930)
(8,092)
revenue, on a cash basis
208,367
118,939
2,476
329,782
198,824
3,385
202,209
Proportionate share property
operating costs
(56,053)
(40,207)
(606)
(96,866)
(49,150)
(21)
(49,171)
Net Operating Income
$ 152,314
$
78,732
$
1,870
$ 232,916
$ 149,674
$
3,364
$ 153,038
Less: NOI from developed
GLA(ii)
NOI, excluding
(4,188)
N/A
N/A
(4,188)
(3,663)
N/A
(3,663)
development activities
$ 148,126
$
78,732
$
1,870
$ 228,728
$ 146,011
$
3,364
$ 149,375
(i)
Properties acquired subsequent to September 30, 2017, including properties acquired in the Acquisition Transaction, net of the dispositions (see Section 22, “Additional
Information”, of this MD&A).
(ii) GLA developed in the comparative periods.
For the years ended December 31
($ thousands)
(unaudited)
Proportionate share rental
2018
2017
Same
Properties
Acquisition
Transaction
Property
Transactions(i)
All
Properties
Same
Properties
Property
Transactions(i)
All
Properties
revenue
$ 848,724
$ 319,396
$
19,416
$1,187,536
$ 824,053
$
6,577
$ 830,630
Revenue attributable to non-
controlling interests(ii)
Less: Straight-line rent
—
—
—
—
(930)
—
(930)
included in rental revenue
(28,334)
(6,383)
(347)
(35,064)
(34,643)
(97)
(34,740)
Proportionate share rental
revenue, on a cash basis
Proportionate share property
820,390
313,013
19,069
1,152,472
788,480
6,480
794,960
operating costs
(219,526)
(104,532)
(3,356)
(327,414)
(208,632)
(842)
(209,474)
Net Operating Income
$ 600,864
$ 208,481
$
15,713
$ 825,058
$ 579,848
$
5,638
$ 585,486
Less: NOI from developed
GLA(ii)
NOI, excluding
(14,028)
N/A
N/A
(14,028)
(6,540)
N/A
(6,540)
development activities
$ 586,836
$ 208,481
$
15,713
$ 811,030
$ 573,308
$
5,638
$ 578,946
(i)
Properties acquired subsequent to December 31, 2017, including properties acquired in the Acquisition Transaction, net of the dispositions (see Section 22, “Additional
Information”, of this MD&A).
(ii) GLA developed in the comparative periods.
74 Choice Properties REIT 2018 Fourth Quarter Report
21.3
Funds from Operations
The following table reconciles net income, as determined in accordance with GAAP, to Funds from Operations for the periods ended as
indicated. Refer to Section 7, “Other Measures of Performance” and Section 21, “Non-GAAP Financial Measures” of this MD&A, for further
details about this non-GAAP measure.
For the periods ended December 31
($ thousands)
(unaudited)
Three Months
2018
$ 281,099
$
2017
36,533
Year End
Change
$ 244,566
2018
$ 649,577
2017
$ 405,345
Change
$ 244,232
Net income
Add (deduct) impact of the following:
Net income attributable to non-controlling
interests
Acquisition transaction costs and other
related expenses
Adjustment to fair value of unit-based
compensation
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
ventures
Interest otherwise capitalized for
development in equity accounted joint
ventures
Exchangeable Units distributions
Internal expenses for leasing
Income taxes
Funds from Operations, as calculated
per the White Paper
Accelerated amortization of debt
premium(i)
Funds from Operations, for
management purposes(i)
FFO per unit - diluted(i)
FFO payout ratio - diluted(i)(ii)
Distribution declared per unit
Weighted average Units outstanding -
diluted
—
(930)
930
—
(930)
930
11,044
(707)
—
267
11,044
141,493
—
141,493
(974)
(4,792)
468
(5,260)
(214,479)
19,026
(233,505)
(593,706)
(38,212)
(555,494)
18,548
2,710
15,838
88,575
(159,458)
248,033
1,240
(505)
1,745
5,254
745
4,509
1,140
72,143
1,644
200
138
58,895
709
—
1,002
13,248
935
200
3,102
271,089
5,428
538
442
232,199
2,336
—
2,660
38,890
3,092
538
$ 171,872
$
116,843
$
55,029
$ 566,558
$ 442,935
$ 123,623
—
—
—
37,282
—
37,282
$ 171,872
0.256
$
72.2%
$
0.1850
$
$
$
116,843
0.282
65.6%
0.1850
$
$
$
55,029
$ 603,840
$ 442,935
$ 160,905
(0.026)
6.6%
—
$
$
1.033
71.6%
0.7400
$
$
1.072
68.1%
0.7300
$
$
(0.039)
3.5%
0.0100
670,486,393
414,285,762
256,200,631
584,605,228
413,208,961
171,396,267
(i)
FFO per unit on a diluted basis and the FFO payout ratio were calculated using the FFO for management purposes which excludes the impact of the accelerated amortization
of the debt premium.
(ii)
Funds from Operations payout ratio is calculated as the distribution declared per unit divided by the FFO per unit diluted.
Choice Properties REIT 2018 Fourth Quarter Report 75
calculated per the White Paper
Accelerated amortization of debt
premium(i)
Funds from Operations, for
management purposes(i)
Add (deduct) impact of the
following:
Straight-line rent - on a
proportionate share basis
Property capital expenditures - on
a proportionate share basis
Leasing capital expenditures - on a
21.4
Adjusted Funds from Operations
The following table reconciles FFO to AFFO for the periods ended as indicated. Refer to Section 7, “Other Measures of Performance” and
Section 21, “Non-GAAP Financial Measures”, of this MD&A, for further details about this non-GAAP measure.
For the periods ended December 31
($ thousands)
(unaudited)
Funds from Operations, as
Three Months
2018
2017
Change
2018
2017
Change
Year End
$
171,872
$
116,843
$
55,029
$
566,558
$
442,935
$
123,623
—
—
—
37,282
—
37,282
$
171,872
$
116,843
$
55,029
$
603,840
$
442,935
$
160,905
Internal expenses for leasing
(1,644)
(709)
(8,365)
(8,092)
(935)
(273)
(5,428)
(2,336)
(3,092)
(35,064)
(34,740)
(324)
(42,655)
(20,661)
(21,994)
(57,737)
(44,960)
(12,777)
proportionate share basis
(8,876)
(973)
(7,903)
(22,233)
(4,409)
(17,824)
Adjusted Funds from Operations,
for management purposes
AFFO per unit - diluted(i)
AFFO payout ratio - diluted(i)(ii)
Distribution declared per unit
Weighted average Units
outstanding - diluted
$
$
$
110,332
0.165
112.1%
0.1850
$
$
$
86,408
0.209
88.5%
0.1850
$
$
$
23,924
(0.044)
23.6%
—
$
$
$
483,378
0.827
89.5%
0.7400
$
$
$
356,490
0.863
84.6%
0.7300
$
$
$
126,888
(0.036)
4.9%
0.0100
670,486,393
414,285,762
256,200,631
584,605,228
413,208,961
171,396,267
(i)
AFFO per unit on a diluted basis and the AFFO payout ratio were calculated using the AFFO for management purposes which excludes the impact of the accelerated
amortization of the debt premium.
(ii)
Adjusted Funds from Operations payout ratio is calculated as the distribution declared per unit divided by the AFFO per unit diluted.
76 Choice Properties REIT 2018 Fourth Quarter Report
The following tables reconcile AFFO to FFO, as previously disclosed, for the prior periods as indicated:
For the periods
($ thousands)
(unaudited)
Funds from Operations
Internal expenses for leasing
Straight-line rent
Property capital expenditures
Leasing capital expenditures
Adjusted Funds from Operations
AFFO per unit - diluted
AFFO payout ratio - diluted
Distribution declared per unit
Weighted average Units outstanding - diluted
For the periods
($ thousands)
(unaudited)
Funds from Operations
Internal expenses for leasing
Straight-line rent
Property capital expenditures
Leasing capital expenditures
Adjusted Funds from Operations
AFFO per unit - diluted
AFFO payout ratio - diluted
Distribution declared per unit
Weighted average Units outstanding - diluted
Annual 2017
$ 442,935
(2,336)
(34,740)
(44,960)
(4,409)
$ 356,490
$
$
0.863
84.6%
0.7300
$
$
$
Fourth
Quarter 2017
$ 116,843
(709)
Third
Quarter 2017
$ 108,896
(522)
Second
Quarter 2017
$ 108,360
(546)
First
Quarter 2017
$ 108,836
(559)
(8,092)
(20,661)
(973)
86,408
0.209
88.5%
0.1850
$
$
$
(8,030)
(22,318)
(1,070)
76,956
0.186
99.5%
0.1850
$
$
$
(9,320)
(1,621)
(976)
95,897
0.232
78.7%
0.1825
$
$
$
(9,298)
(360)
(1,390)
97,229
0.236
75.2%
0.1775
413,208,961
414,285,762
413,445,869
413,031,606
412,164,820
Annual 2016
$ 410,125
(2,135)
(36,582)
(42,192)
(5,384)
$ 323,832
$
$
0.790
89.2%
0.7050
$
$
$
Fourth
Quarter 2016
$ 103,131
(518)
Third
Quarter 2016
$ 101,879
(546)
Second
Quarter 2016
$ 102,316
(603)
First
Quarter 2016
$ 102,799
(468)
(9,159)
(16,343)
(1,354)
75,757
0.184
100.5%
0.1850
$
$
$
(8,695)
(24,074)
(2,395)
66,169
0.161
114.9%
0.1850
$
$
$
(9,845)
(1,759)
(191)
89,918
0.221
75.8%
0.1675
$
$
$
(8,883)
(16)
(1,444)
91,988
0.225
74.4%
0.1675
410,034,555
411,272,728
410,254,616
406,798,046
409,095,647
Choice Properties REIT 2018 Fourth Quarter Report 77
21.5
Adjusted Cash Flow from Operations
The following table reconciles cash flows from operating activities to ACFO, as determined in accordance with GAAP, for the periods ended
as indicated. Refer to Section 11.6, “Unit Equity” and Section 21, “Non-GAAP Financial Measures”, of this MD&A, for further details about this
non-GAAP measure.
For the periods ended December 31
($ thousands)
(unaudited)
2018
2017
Three Months
Year End
Change
2018
2017
Change
Cash flows from operating activities
$
236,594
$
194,285
$
42,309
$
683,632
$
503,676
$
179,956
Interest paid
(36,129)
(12,737)
(23,392)
(278,440)
(163,237)
(115,203)
Cash flows from operating activities less
interest paid
200,465
181,548
18,917
405,192
340,439
64,753
—
(930)
930
—
(930)
930
(102,423)
(87,660)
(14,763)
(235,424)
(231,589)
(3,835)
72,143
58,895
13,248
271,089
232,199
38,890
835
1,140
822
64
138
354
771
4,195
1,002
468
3,102
2,714
398
442
1,168
3,797
2,660
1,546
(42,655)
(20,661)
(21,994)
(57,737)
(44,960)
(12,777)
(8,876)
(973)
(7,903)
(22,233)
(4,409)
(17,824)
11,044
9,356
—
69
11,044
141,493
9,287
21,476
—
254
141,493
21,222
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
Interest and other income in excess of
interest received(i)
Interest otherwise capitalized for
development in equity accounted joint
ventures
Portion of internal expenses for leasing
relating to development activity
Property capital expenditures on a
proportionate share basis
Leasing capital expenditures - on a
proportionate share basis
Acquisition transaction costs and other
related expenses
Adjustments for proportionate share of
equity accounted joint ventures(ii)
Adjustment for changes in non-cash
working capital items which are not
indicative of sustainable operating
cash flows(iii)
Adjusted Cash Flow from Operations(iv)
Total distributions declared
Cash retained after distributions(iv)
(32,807)
109,044
123,612
(14,568)
$
$
(38,220)
92,624
76,312
16,312
$
$
$
$
5,413
16,420
47,300
(30,880)
31.0%
(45,409)
488,458
431,392
57,066
$
$
69,478
362,490
300,452
62,038
$
$
(114,887)
125,968
130,940
(4,972)
$
$
88.3%
82.9%
5.4%
ACFO payout ratio(iv)(v)
113.4%
82.4%
(i)
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, 2018
and December 31, 2017 were adjusted for this factor to make the periods more comparable(2). Net interest expense and other financing charges in excess of interest paid
was calculated for the year ended December 31, 2018 was calculated excluding the impact of the accelerated amortization of debt premium.
(ii)
Includes proportionate share of working capital items.
(iii) 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.
(iv) The ACFO, the ACFO payout ratio and the cash retained after distribution, for the year ended December 31, 2018, have been calculated excluding the impact of the
accelerated amortization of debt premium. The ACFO, the ACFO payout ratio and the cash retained after distribution for the year ended December 31, 2017, have been
adjusted from the prior year’s presentation to remove the impact of normalizing capital spending over the year. ACFO is impacted by property capital expenditures that
vary from quarter to quarter and year to year.
(v) Adjusted Cash Flow from Operations payout ratio is calculated as the total distributions declared divided by the ACFO.
78 Choice Properties REIT 2018 Fourth Quarter Report
Based on the Real Property Association of Canada’s White Paper on Adjusted Cashflow from Operations (ACFO) for IFRS issued in February
2018, 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)
Three Months
2018
27,776
$
2017
42,922
$
Net change in non-cash working capital(i)
$
Year End
Change
(15,146)
$
2018
39,568
$
2017
(68,439) $
Change
108,007
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
(32,807)
(38,220)
5,413
(45,409)
69,478
(114,887)
$
(5,031)
$
4,702
$
(9,733)
$
(5,841)
$
1,039
$
(6,880)
(i)
As calculated under GAAP and disclosed in the Trust’s consolidated financial statements and the accompanying notes in this Quarterly Report to Unitholders.
21.6
Earnings Before Interest, Taxes, Depreciation, Amortization and Fair Value
The following table reconciles net income, as determined in accordance with GAAP, to EBITDAFV for the periods ended as indicated. Refer
to Section 21, “Non-GAAP Financial Measures” of this MD&A, for further details about this non-GAAP measure.
For the periods ended December 31
($ thousands)
(unaudited)
Three Months
2018
281,099
$
2017
36,533
$
Net income
$
Add (deduct) impact of the following:
Year End
Change
244,566
2018
649,577
$
2017
405,345
$
Change
244,232
$
Net income attributable to non-
controlling interests
Accelerated amortization of debt
premium
Acquisition transaction costs and
other related expenses
Adjustment to fair value of unit-
based compensation
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 ventures
Interest expense(i)
Amortization of other assets
Income taxes
Earnings Before Interest, Taxes,
Depreciation, Amortization
and Fair Value
—
—
11,044
(930)
—
—
930
—
37,282
11,044
141,493
—
(930)
930
—
—
37,282
141,493
(707)
267
(974)
(4,792)
468
(5,260)
(214,479)
19,026
(233,505)
(593,706)
(38,212)
(555,494)
18,548
2,710
15,838
88,575
(159,458)
248,033
1,240
140,004
—
200
(505)
100,066
235
—
3,825
39,938
(235)
200
5,254
515,589
495
538
745
393,983
934
—
3,000
121,606
(439)
538
$
236,949
$
157,402
$
79,547
$
840,305
$
602,875
$
237,430
(i)
As calculated in Section 6, “Results of Operations” of this MD&A.
Choice Properties REIT 2018 Fourth Quarter Report 79
22.
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.
80 Choice Properties REIT 2018 Fourth Quarter Report
Consolidated Financial Statements
Financial Results
Management’s Statement of Responsibility for Financial Reporting
Independent Auditor’s Report
Consolidated Balance Sheets
Consolidated Statements of Income and Comprehensive Income
Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
Note 1.
Note 2.
Note 3.
Note 4.
Note 5.
Note 6.
Note 7.
Note 8.
Note 9.
Nature and Description of the Trust
Significant Accounting Policies
Critical Accounting Judgments and Estimates
Future Accounting Standards
Acquisition of Canadian Real Estate Investment Trust ("CREIT")
Investment Property Transactions
Investment Properties
Equity Accounted Joint Ventures
Co-Ownership Property Interests
Note 10. Subsidiaries
Note 11. Accounts Receivable and Other Assets
Note 12. Mortgages, Loans and Notes Receivable
Note 13.
Intangible Assets
Note 14.
Long Term Debt and Class C LP Units
Note 15. Credit Facilities and Term Loans
Note 16. Unitholders' Equity
Note 17.
Income Taxes
Note 18. Trade Payables and Other Liabilities
Note 19. Unit-Based Compensation
Note 20. Rental Revenue
Note 21. Net Interest Expense and Other Financing Charges
Note 22.
Interest and Other Income
Note 23. Employee Costs
Note 24. Capital Management
Note 25. Financial Instruments
Note 26. Financial Risk Management
Note 27. Contingent Liabilities and Financial Guarantees
Note 28. Related Party Transactions
Note 29. Supplementary Information
Note 30. Segment Information
82
83
87
88
89
90
91
91
91
100
101
101
103
105
107
109
110
110
111
112
113
117
118
120
120
121
124
125
126
126
126
128
129
130
131
135
138
Choice Properties REIT 2018 Fourth Quarter Report 81
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 Fourth Quarter
Report - Financial Review (“Fourth Quarter 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 Fourth Quarter 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 Fourth Quarter Report based
on the review and recommendation of the Audit Committee.
Toronto, Canada
February 13, 2019
[signed]
Stephen Johnson
President and Chief Executive Officer
[signed]
Mario Barrafato
Chief Financial Officer
82 Choice Properties REIT 2018 Fourth Quarter 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
Opinion
We have audited the consolidated financial statements of Choice Properties Real Estate
Investment Trust (the “Entity”), which comprise:
•
•
•
•
the consolidated balance sheets as at December 31, 2018 and December 31, 2017;
the consolidated statements of income and comprehensive income for the years then
ended;
the consolidated statements of changes in equity for the years then ended;
the consolidated statements of cash flows for the years then ended; and
• and notes to the consolidated financial statements, including a summary of significant
accounting policies
(Hereinafter referred to as the “financial statements”).
In our opinion, the accompanying financial statements present fairly, in all material respects,
the consolidated balance sheets of the Entity as at December 31, 2018 and December 31,
2017, and its consolidated financial performance, and its consolidated cash flows for the
years then ended in accordance with International Financial Reporting Standards (“IFRS”).
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing
standards. Our responsibilities under those standards are further described in the
“Auditors’ Responsibilities for the Audit of the Financial Statements” section of our
auditors’ report.
We are independent of the Entity in accordance with the ethical requirements that are
relevant to our audit of the financial statements in Canada and we have fulfilled our other
responsibilities in accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide
a basis for our opinion.
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
February 13, 2019
Other Information
Management is responsible for the other information. Other information comprises:
•
the information included in the Management’s Discussion and Analysis filed with the
relevant Canadian Securities Commissions
Our opinion on the financial statements does not cover the other information and we do not
and will not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other
information identified above and, in doing so, consider whether the other information is
materially inconsistent with the financial statements or our knowledge obtained in the audit
and remain alert for indications that the other information appears to be materially misstated.
We obtained the information included in the Management’s Discussion and Analysis filed
with the relevant Canadian Securities Commissions as at the date of this auditors’ report
thereon. If, based on the work we have performed on this other information, we conclude
that there is a material misstatement of this other information, we are required to report that
fact in the auditors’ report.
We have nothing to report in this regard.
Responsibilities of Management and Those Charged with Governance for the
Financial Statements
Management is responsible for the preparation and fair presentation of the financial
statements in accordance with IFRS, and for such internal control as management
determines is necessary to enable the preparation of financial statements that are free from
material misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible for assessing the Entity’s
ability to continue as a going concern, disclosing as applicable, matters related to going
concern and using the going concern basis of accounting unless management either intends
to liquidate the Entity or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Entity’s financial
reporting process.
2
Choice Properties Real Estate Investment Trust
February 13, 2019
Auditors’ Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements
as a whole are free from material misstatement, whether due to fraud or error, and to issue
an auditors’ report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit
conducted in accordance with Canadian generally accepted auditing standards will always
detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in
the aggregate, they could reasonably be expected to influence the economic decisions of
users taken on the basis of the financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we
exercise professional judgment and maintain professional skepticism throughout the audit.
We also:
•
Identify and assess the risks of material misstatement of the financial statements,
whether due to fraud or error, design and perform audit procedures responsive to those
risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for
our opinion.
The risk of not detecting a material misstatement resulting from fraud is higher than for
one resulting from error, as fraud may involve collusion, forgery, intentional omissions,
misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit 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.
• Evaluate the appropriateness of accounting policies used and the reasonableness of
accounting estimates and related disclosures made by management.
• Conclude on the appropriateness of management's use of the going concern basis of
accounting and, based on the audit evidence obtained, whether a material uncertainty
exists related to events or conditions that may cast significant doubt on the Entity’s ability
to continue as a going concern. If we conclude that a material uncertainty exists, we are
required to draw attention in our auditors’ report to the related disclosures in the financial
statements or, if such disclosures are inadequate, to modify our opinion. Our
conclusions are based on the audit evidence obtained up to the date of our auditors’
report. However, future events or conditions may cause the Entity to cease to continue
as a going concern.
• Evaluate the overall presentation, structure and content of the financial statements,
including the disclosures, and whether the financial statements represent the underlying
transactions and events in a manner that achieves fair presentation.
3
Choice Properties Real Estate Investment Trust
February 13, 2019
• Communicate with those charged with governance regarding, among other matters, the
planned scope and timing of the audit and significant audit findings, including any
significant deficiencies in internal control that we identify during our audit.
• Provide those charged with governance with a statement that we have complied with
relevant ethical requirements regarding independence, and communicate with them all
relationships and other matters that may reasonably be thought to bear on our
independence, and where applicable, related safeguards.
• Obtain sufficient appropriate audit evidence regarding the financial information of the
entities or business activities within the group Entity to express an opinion on the
financial statements. We are responsible for the direction, supervision and performance
of the group audit. We remain solely responsible for our audit opinion.
Chartered Professional Accountants, Licensed Public Accountants
The engagement partner on the audit resulting in this auditors’ report is Tony Marino.
Toronto, Canada
February 13, 2019
4
Choice Properties Real Estate Investment Trust
Consolidated Balance Sheets
(in thousands of Canadian dollars)
Assets
Non-current Assets
Investment properties (note 7)
Equity accounted joint ventures (note 8)
Accounts receivable and other assets (note 11)
Mortgages, loans and notes receivable (note 12)
Intangible assets (note 13)
Current Assets
Accounts receivable and other assets (note 11)
Mortgages, loans and notes receivable (note 12)
Cash and cash equivalents
Total Assets
Liabilities and Equity
Non-current Liabilities
Long term debt and Class C LP Units (note 14)
Credit facilities and term loans (note 15)
Exchangeable Units (note 16)
Deferred income taxes (note 17)
Trade payables and other liabilities (note 18)
Current Liabilities
Long term debt and Class C LP Units (note 14)
Credit facilities and term loans (note 15)
Trade payables and other liabilities (note 18)
Total Liabilities
Equity
Unitholders’ equity
Non-controlling interests
Total Equity
Total Liabilities and Equity
As at
As at
December 31, 2018
December 31, 2017
$
14,501,000
$
9,551,000
$
$
734,167
1,950
88,300
30,000
32,339
5,565
2,556
—
15,355,417
9,591,460
37,975
125,110
30,713
193,798
21,419
304,225
6,407
332,051
15,549,215
$
9,923,511
5,566,915
$
1,114,407
4,492,359
509
6,021
3,338,420
309,522
4,259,724
—
2,713
11,180,211
7,910,379
496,036
—
372,982
869,018
12,049,229
3,492,185
7,801
3,499,986
400,088
250,000
426,063
1,076,151
8,986,530
928,280
8,701
936,981
$
15,549,215
$
9,923,511
Contingent Liabilities and Financial Guarantees (note 27).
See accompanying notes to the consolidated financial statements.
Approved on behalf of the Board of Trustees
[signed]
Anthony R. Graham
Board of Trustees Chair
[signed]
Paul R. Weiss
Audit Committee Chair
Choice Properties REIT 2018 Fourth Quarter Report 87
Choice Properties Real Estate Investment Trust
Consolidated Statements of Income and Comprehensive Income
(in thousands of Canadian dollars)
Net Property Income
Rental revenue (note 20)
Property operating costs (note 29)
Other Income and Expenses
General and administrative expenses (note 29)
Property management and other administration fees (note 29)
Net interest expense and other financing charges (note 21)
Interest and other income (note 22)
Share of income (loss) in equity accounted joint ventures (note 8)
Acquisition transaction costs and other related expenses (note 5)
Adjustment to fair value of Exchangeable Units (note 16)
Adjustment to fair value of investment properties (note 7)
Income before income taxes
Income taxes (note 17)
Net Income
Net Income attributable to:
Choice Properties’ Unitholders
Non-controlling interests (note 10)
Net Income
Other comprehensive income
Foreign exchange gain on currency translation
Unrealized gain on designated hedging instruments
Other comprehensive income
Comprehensive Income
Comprehensive Income attributable to:
Choice Properties’ Unitholders
Non-controlling interests (note 10)
See accompanying notes to the consolidated financial statements.
88 Choice Properties REIT 2018 Fourth Quarter Report
Year ended
December 31, 2018
Year ended
December 31, 2017
$
1,148,273
$
(314,436)
833,837
(30,183)
3,523
(551,146)
14,224
16,222
(141,493)
593,706
(88,575)
650,115
(538)
649,577
649,577
—
649,577
649,577
6,772
597
7,369
656,946
656,946
—
656,946
$
$
$
$
$
$
$
$
$
$
$
$
$
$
830,630
(209,474)
621,156
(24,263)
1,270
(394,826)
4,829
(491)
—
38,212
159,458
405,345
—
405,345
404,415
930
405,345
405,345
—
—
—
405,345
404,415
930
405,345
Choice Properties Real Estate Investment Trust
Consolidated Statements of Changes in Equity
Attributable to Choice Properties’ Unitholders
For the year ended December 31, 2018
(in thousands of Canadian dollars)
Trust
Units
Cumulative
net income
Accumulated
other
comprehensive
income
Cumulative
distributions
to
Unitholders
Total
Unitholders’
equity
Non-
controlling
interests
Total
equity
Equity, December 31, 2017
$
911,081
$
292,829
$
— $
(275,630) $
928,280
$
8,701
$
936,981
Net income
Other comprehensive income
Distributions
Units issued, net of costs
(note 16)
Issuance of Units under the
Distribution Reinvestment
Plan (note 16)
Issuance of Units under unit-based
compensation arrangements
(note 16)
Repurchase of Units for unit-based
compensation arrangement
(note 16)
Distribution from non-controlling
interests (note 10)
—
—
—
2,056,628
1,487
16,261
(7,114)
—
649,577
—
—
—
—
—
—
—
—
7,369
—
—
—
—
—
—
—
—
649,577
7,369
(160,303)
(160,303)
—
2,056,628
1,487
16,261
(7,114)
—
—
—
—
—
—
—
—
—
—
—
649,577
7,369
(160,303)
2,056,628
1,487
16,261
(7,114)
—
(900)
(900)
Equity, December 31, 2018
$ 2,978,343
$
942,406
$
7,369
$
(435,933) $ 3,492,185
$
7,801
$ 3,499,986
For the year end ended December 31, 2017
(in thousands of Canadian dollars)
Attributable to Choice Properties’ Unitholders
Trust
Units
Cumulative
net income
(loss)
Cumulative
distributions to
Unitholders
Total
Unitholders’
equity
Non-
controlling
interests
Total
equity
Equity, December 31, 2016
$
888,337
$
(111,586) $
(207,377) $
569,374
$
7,771
$
577,145
Net income
Distributions
Issuance of Units under the Distribution
Reinvestment Plan (note 16)
Issuance of Units under unit-based
compensation arrangements (note 16)
—
—
22,383
361
404,415
—
—
—
—
(68,253)
404,415
(68,253)
—
—
22,383
361
930
—
—
—
405,345
(68,253)
22,383
361
Equity, December 31, 2017
$
911,081
$
292,829
$
(275,630) $
928,280
$
8,701
$
936,981
See accompanying notes to the consolidated financial statements.
Choice Properties REIT 2018 Fourth Quarter Report 89
Choice Properties Real Estate Investment Trust
Consolidated Statements of Cash Flows
(in thousands of Canadian dollars)
Operating Activities
Net income
Straight-line rental revenue (note 7)
Net interest expense and other financing charges (note 21)
Interest and other income (note 22)
Unit-based compensation expense (note 19)
Share of (income) loss in equity accounted joint ventures (note 8)
Adjustment to fair value of Exchangeable Units (note 16)
Adjustment to fair value of investment properties (note 7)
Interest and other income received
Deferred income taxes (note 17)
Net change in non-cash working capital (note 29)
Cash Flows from Operating Activities
Investing Activities
Acquisition of CREIT, net of cash acquired (note 5)
Acquisitions of investment properties (note 6)
Additions to investment properties (note 7)
Contributions to equity accounted joint ventures (note 8)
Distributions from equity accounted joint ventures (note 8)
Mortgages, loans and notes receivable advances (note 12)
Mortgages, loans and notes receivable repayments (note 12)
Proceeds from disposition (note 6)
Cash Flows used in Investing Activities
Financing Activities
Proceeds from issuance of debentures, net of debt placement costs (note 14)
Repayments of debentures (note 14)
Net advances (repayments) of mortgages payable, net of debt placement costs (note 14)
Net advances on construction loans (note 14)
Repayment on conversion of Class C LP Units (note 5)
Net advances of credit facilities and term loans, net of debt placement costs (note 15)
Trust Unit issuance costs (note 16)
Cash received on exercise of options
Cash paid on vesting of restricted units
Repurchase of Units for unit-based compensation arrangement (note 16)
Interest paid
Distributions paid on Exchangeable Units
Distributions paid on Trust Units
Distribution to non-controlling interests (note 10)
Cash Flows from (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 29).
See accompanying notes to the consolidated financial statements.
90 Choice Properties REIT 2018 Fourth Quarter Report
Year ended
December 31, 2018
Year ended
December 31, 2017
$
$
649,577
(34,076)
551,146
(14,224)
2,456
(16,222)
(593,706)
88,575
10,029
509
39,568
683,632
(1,619,099)
(108,833)
(274,203)
(27,656)
25,339
(247,555)
541,970
127,195
(1,582,842)
1,940,089
(525,000)
11,400
11,747
(98,659)
481,737
(283)
9,920
(1,677)
(7,114)
(278,440)
(471,829)
(147,475)
(900)
923,516
24,306
6,407
30,713
$
$
405,345
(34,740)
394,826
(4,829)
4,261
491
(38,212)
(159,458)
4,431
—
(68,439)
503,676
—
(107,013)
(166,272)
(13,760)
—
(277,588)
263,574
38,179
(262,880)
—
(200,000)
(1,208)
—
—
388,725
—
235
(1,161)
—
(163,237)
(217,324)
(45,532)
—
(239,502)
1,294
5,113
6,407
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, Canada’s preeminent diversified real estate investment trust, is the owner, manager and developer of a high quality portfolio
of commercial retail, industrial, office and residential properties 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”). Pursuant to a reorganization
transaction on November 1, 2018, Loblaw spun out its 61.6% effective interest in Choice Properties to George Weston Limited (“GWL”). As
at December 31, 2018, GWL held a 65.4% direct effective interest in Choice Properties.
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 CPH Master Limited Partnership (“CPH Master LP”).
The Trust has three reportable operating segments: retail, industrial and office (note 30). Prior to the acquisition of Canadian Real Estate
Investment Trust (“CREIT”) on May 4, 2018 (note 5), the Trust had only one reportable segment, retail.
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,
2019.
Basis of Preparation The consolidated financial statements were prepared on a historical cost basis except for investment properties (note
7); Class B LP Units (the “Exchangeable Units”) which are exchangeable for Trust Units at the option of the holder (note 16); liabilities for unit-
based compensation arrangements (note 19); and certain financial instruments (note 25). 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.
Business Combinations When an investment is acquired, the Trust considers the substance of the assets and activities of the acquisition
in determining whether the acquisition represents an asset acquisition or a business combination. The transaction is considered to be a
business combination if the acquired investment meets the definition of a business in accordance with IFRS 3, “Business Combinations”,
being an integrated set of activities and assets that are capable of being managed for the purposes of providing a return to Unitholders.
The acquisition of a business is accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the
consideration transferred at fair value on the date of acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed
in a business combination are generally measured initially at fair value at the acquisition date. Any contingent consideration to be transferred
by the acquirer will be recognized at fair value at the acquisition date. Acquisition transaction costs and other related expenses are recognized
in the consolidated statements of income as incurred.
Joint Arrangements Joint arrangements are arrangements of which two or more parties have joint control. Joint control is the contractual
sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties
sharing control. Joint arrangements are classified as either joint operations or joint ventures depending on the Trust’s rights and obligations
in the arrangement based on factors such as the structure, legal form and contractual terms of the arrangement.
Choice Properties REIT 2018 Fourth Quarter Report 91
Notes to the Consolidated Financial Statements
Joint Ventures A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net
assets of the joint arrangement.
The Trust’s investment in a joint venture is recorded using the equity method and is initially recognized in the consolidated balance sheet at
cost and adjusted thereafter to recognize the Trust’s share of the profit or loss and other comprehensive income of the joint venture. The
Trust’s share of the joint venture’s profit or loss is recognized in the Trust’s consolidated statements of income and comprehensive income.
The financial statements of the equity-accounted investment are prepared for the same reporting period as the Trust. Where necessary,
adjustments are made to bring the accounting policies in line with those of the Trust.
A joint venture is considered to be impaired if there is objective evidence of impairment, as a result of one or more events that occurred after
initial recognition of the joint venture, and that event has a negative impact on the future cash flows of the joint venture that can be reliably
estimated.
Joint Operations A joint operation is a joint arrangement whereby the parties that have joint control have rights to the assets and obligations
for the liabilities relating to the arrangement.
The financial statements of the joint operations are prepared for the same reporting period as the Trust. Where necessary, adjustments are
made to bring the accounting policies in line with those of the Trust.
The Trust recognizes its proportionate share of assets, liabilities, revenues and expenses of joint operations.
Investment Properties Investment properties include income producing properties and properties under development that are held by 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 4-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.
•
92 Choice Properties REIT 2018 Fourth Quarter Report
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.
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. 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.
Classification and Measurement
Financial assets are classified and measured based on three categories: amortized cost, fair value through other comprehensive income
(FVOCI), and fair value through profit and loss (FVTPL). Financial liabilities are classified and measured on two categories: amortized cost
or FVTPL. Derivatives embedded in contracts where the host is a financial asset in the scope of IFRS 9, “Financial Instruments” are not
separated, but the hybrid financial instrument as a whole is assessed for classification.
The classification and measurement of financial assets based on the Trust’s business model for managing these financial assets and their
contractual cash flow characteristics, is summarized as follows:
•
•
•
Assets held for the purpose of collecting contractual cash flows that represent solely payments of principal and interest (“SPPI”)
are measured at amortized cost;
Assets held within a business model where assets are held for both the purpose of collecting contractual cash flows and selling
financial assets prior to maturity, and the contractual cash flows represent solely payments of principal and interest, are
measured at FVOCI; and
Assets held within another business model or assets that do not have contractual cash flow characteristics that are solely
payments of principal and interest are measured at FVTPL.
Financial assets are not reclassified subsequent to their initial recognition, unless the Trust identifies changes in its business model in managing
financial assets and would reassess the classification of financial assets.
All financial liabilities are measured subsequently at amortized cost using the effective interest method or at FVTPL.
Choice Properties REIT 2018 Fourth Quarter Report 93
Notes to the Consolidated Financial Statements
The following summarizes the classification and measurement of financial assets and liabilities:
Asset/Liability
Accounts receivable
Mortgages, loans and notes receivable - SPPI
Mortgages, loans and notes receivable - FVTPL
Cash and cash equivalents
Long term debt and Class C LP Units:
Senior unsecured debentures
Class C LP Units
Mortgages payable
Construction loans
Credit facilities and term loans
Trade payable and other liabilities
Designated hedging derivatives
Exchangeable Units
Classification and Measurement Basis
Amortized cost
Amortized cost
FVTPL
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
FVTPL
FVTPL
Impairment An allowance for expected credit losses (“ECL”) is recognized at each balance sheet date for all financial assets measured at
amortized cost or those measured at fair value through other comprehensive income, except for investments in equity instruments. The ECL
model requires considerable judgment, including consideration of how changes in economic factors affect ECLs, which are determined on a
probability-weighted basis.
Impairment losses, if incurred, would be recorded as expenses in the consolidated statement of income and comprehensive income with the
carrying amount of the financial asset 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 conditions and
changes in factors occurring after the impairment was initially recognized, the previously recognized impairment loss would be reversed
through the consolidated statement of income and comprehensive income. The impairment reversal would be 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.
Mortgages, Loans and Notes Receivable The Trust’s mortgages, loans and notes receivable are classified into two categories: (1) those
held for the purpose of collecting contractual cash flows that represent SPPI and are classified and measured at amortized cost; and (2) those
that do not meet the SPPI criteria and are classified and measured at FVTPL.
Interest income for both categories of mortgages and loans receivable is recognized using the effective interest method. At the end of each
reporting period management reviews its SPPI mortgages, loans and notes receivable to determine whether there is an event or change in
circumstance that indicates a possible impairment loss. If such indication exists, the recoverable amount of the asset is estimated in order to
measure any impairment loss.
An impairment indicator is present when there is objective evidence of impairment as a result of one or more events, such as a deterioration
in the credit quality of the borrower to the extent that there is a reasonable doubt as to the timely collection of the principal and interest. An
impairment loss is recognized if the present value of estimated future cash flows discounted at the original effective interest rate inherent in
the loan is less than its carrying value and is measured as the difference between the two amounts. When the amounts and timing of future
cash flows cannot be estimated with reasonable reliability, impairment is recognized if either (a) the fair value of the underlying security, net
of any realization costs and amounts legally required to be paid to the borrowers, or (b) the observable market price for the loan, is less than
the carrying value. The valuation of such amounts is subjective and is based upon assumptions regarding market conditions that could differ
materially from actual results in future periods.
Intangible Assets Indefinite life intangible assets are measured at cost less any accumulated impairment loss. At each balance sheet date,
the Trust reviews the carrying amount of its intangible assets to determine whether there is any indication of impairment. If such indication
exists, the asset is then tested for impairment by comparing its recoverable amount to its carrying value. Intangible assets are tested for
impairment at least annually. The recoverable amount of the intangible asset is the higher of its value in use and its fair value less costs to
sell. Value in use is based on the estimated future cash flows from the intangible asset discounted to their present value using a pre-tax
discount rate that reflects current market assessments of the time value of money and the risk specific to the asset. The fair value less costs
to sell is based on the best information available to reflect the amount that could be obtained from the disposal of the asset in an arm’s length
transaction between knowledgeable and willing parties, net of estimates of costs of disposal. An impairment loss is recognized if the carrying
amount exceeds the recoverable amount. Impairment losses and reversals are recognized in general and administrative expenses.
94 Choice Properties REIT 2018 Fourth Quarter Report
Financial Derivative Instruments The Trust does not use derivative instruments for speculative purposes. Any embedded derivative
instruments that may be identified are separated from their host contract and recorded on the consolidated balance sheet at fair value.
Derivative instruments are recorded in current or non-current assets and liabilities based on their remaining terms to maturity. All changes in
fair values of the derivative instruments are recorded in net earnings unless the derivative qualifies and is effective as a hedging item in a
designated hedging relationship. The Trust has cash flow hedges which are used to manage exposure to fluctuations in interest rates. The
effective portion of the change in fair value of the hedging item is recorded in other comprehensive income. If the change in fair value of the
hedging item is not completely offset by the change in fair value of the hedged item, the ineffective portion of the hedging relationship is
recorded in net income. Amounts accumulated in other comprehensive income are reclassified to net earnings when the hedged item is
recognized in net income.
Exchangeable Units The Class B LP Units of the Trust’s subsidiary, the Partnership, are exchangeable into Trust Units at the option of the
holder. Loblaw holds all of the Exchangeable Units. These Exchangeable Units are considered puttable instruments and are required to be
classified as financial liabilities at fair value through profit or loss. The distributions paid on the Exchangeable Units are accounted for as
interest expense.
Class C LP Units The Class C LP Units held by Loblaw provide for fixed cumulative monthly distributions from the Partnership to the holder
of the Class C LP Units to be paid in priority, subject to certain restrictions. These Class C LP Units are redeemable at Loblaw’s option and
the Trust has the option to settle the redemption payment in cash, Exchangeable Units, or any combination thereof. The Class C LP Units
have been classified as financial liabilities and are carried at amortized cost. Distributions on the Class C LP Units are accounted for as interest
expense.
Fair Value Choice Properties measures financial assets and financial liabilities under the following fair value hierarchy. The different levels
have been defined as follows:
•
•
•
Fair Value Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;
Fair Value Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly
(i.e. as prices) or indirectly (i.e. derived from prices); and
Fair Value Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).
Determination of fair value and the resulting hierarchy requires the use of observable market data whenever available. The classification of
a financial instrument in the hierarchy is based upon the lowest level of input that is significant to the measurement of fair value.
Acquisition costs, other than those related to financial instruments classified as fair value through profit or loss which are expensed as incurred,
are capitalized to the carrying amount of the instrument and amortized using the effective interest method.
Gains and losses on fair value through profit or loss financial assets and financial liabilities are recognized in net income.
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, cash and cash equivalents,
and accounts payable
Mortgages, loans and notes receivable
Unit Options
Restricted Units, Performance Units and Trustee
Deferred Units
Exchangeable Units
Long term debt and Class C LP Units
The carrying amount approximates fair value due to the short term maturity of
these instruments.
The fair value of each mortgage, loan and note receivable is based on the
current market conditions for financing with similar terms and risks.
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.
Choice Properties REIT 2018 Fourth Quarter Report 95
Notes to the Consolidated Financial Statements
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.
Foreign Currency Translation The functional currency of the Trust is the Canadian dollar.
The assets and liabilities of foreign operations that have a functional currency different from that of the Trust are translated into Canadian
dollars at the foreign currency exchange rate in effect at the balance sheet date. The resulting foreign currency exchange gains or losses are
recognized in the foreign currency translation adjustment as part of other comprehensive income. When such foreign operation is disposed
of, the related foreign currency translation reserve is recognized in net earnings as part of the gain or loss on disposal. On the partial disposal
of such foreign operation, the relevant proportion is reclassified to net income.
Asset and liabilities denominated in foreign currency held in foreign operations that have the same functional currency as the Trust are
translated into Canadian dollars at the foreign currency exchange rate in effect at the balance sheet date. The resulting foreign currency
exchange gains or losses are recognized in net income. Revenue and expenses of foreign operations are translated into Canadian dollars
at the foreign currency exchange rates that approximate the rates in effect at the dates when such items are transacted.
Trust Units With certain restrictions, Choice Properties’ Units are redeemable at the option of the holder, and, therefore, are considered
puttable instruments in accordance with IAS 32, “Financial Instruments - Presentation” (“IAS 32”). Puttable instruments are required to be
accounted for as financial liabilities, except where certain conditions are met in accordance with IAS 32, in which case, the puttable instruments
may be presented as equity.
To be presented as equity, a puttable instrument must meet all of the following conditions: (i) it must entitle the holder to a pro-rata share of
the entity’s net assets in the event of the entity’s dissolution; (ii) it must be in the class of instruments that is subordinate to all other instruments;
(iii) all instruments in the class in (ii) above must have identical features; (iv) other than the redemption feature, there can be no other contractual
obligations that meet the definition of a liability; and (v) the expected cash flows for the instrument must be based substantially on the profit
or loss of the entity or change in fair value of the instrument.
The Trust Units meet the conditions of IAS 32 and accordingly are presented as equity in the consolidated financial statements.
Revenue Recognition Choice Properties has retained substantially all of the risks and benefits of ownership of its investment properties
and, therefore, accounts for its leases with tenants as operating leases.
Rental revenue includes base rents earned from tenants under lease agreements, realty tax and operating cost recoveries and other incidental
income. Base rent revenue, including predetermined rent adjustments in lease agreements, is recognized as revenue on a straight-line basis
over the term of the underlying leases. Other revenue is recognized as the service is provided and when collection is reasonably assured.
Property tax and operating cost recoveries are recognized in the period that recoverable costs are chargeable to tenants. Percentage
participation rents are recognized when tenants’ specified sales targets have been met as set out in the lease agreements.
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.
96 Choice Properties REIT 2018 Fourth Quarter Report
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.
Unit-Settled Unit-Based Compensation Unit-Settled Restricted Units (“URUs”) are accounted for as cash-settled awards. Typically, full
vesting of the URUs would not occur until the employee had remained with Choice for three or five years from the grant date. Depending on
the nature of the grant, the URUs are subject to a six- or seven-year holding period during which the Units cannot be disposed. The fair value
of each URU granted is measured based on the market value of a Unit at the balance sheet date, less a discount to account for the vesting
and holding period restriction placed on the URUs.
Income Taxes Choice Properties qualifies as a “mutual fund trust” and a real estate investment trust (“REIT”) under the Income Tax Act
(Canada). Certain 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.
Under the SIFT rules, the taxation regime will not apply to a REIT that meets prescribed conditions relating to the nature of its assets and
revenue (the “REIT Conditions”) and distributions may be deducted against the REIT’s taxable income. Choice Properties has reviewed the
SIFT rules and has assessed its interpretation and application to its assets and revenue and has determined that it meets the REIT Conditions.
The Trustees intend to annually distribute all taxable income directly earned by Choice Properties to Unitholders and to deduct such distributions
for income tax purposes and, accordingly, no net current income tax expense or deferred income tax assets or liabilities have been recorded
in the consolidated financial statements related to its Canadian investment properties.
The Trust also consolidates certain taxable entities in Canada and in the United States for which current and deferred income taxes are
recorded. Current tax is the expected tax payable or receivable on the taxable income or loss for the period, using tax rates enacted or
substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.
Choice Properties REIT 2018 Fourth Quarter Report 97
Notes to the Consolidated Financial Statements
Deferred tax is recognized using the asset and liability method of accounting for temporary differences arising between the financial statement
carrying values of existing assets and liabilities and their respective income tax bases. Deferred tax is measured using enacted or substantively
enacted income tax rates expected to apply in the years in which those temporary differences are expected to be recovered or settled. A
deferred tax asset is recognized for temporary differences as well as unused tax losses and credits to the extent that it is probable that future
taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced
to the extent that it is no longer probable that the related tax benefit will be realized.
Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets and they relate to
income taxes levied by the same taxation authority on the same taxable entity, or on different taxable entities where the Choice Properties
intends to settle its current tax assets and liabilities on a net basis.
Deferred tax is recorded on temporary differences arising on investments in subsidiaries, except where the timing of the reversal of the
temporary difference is controlled by the Trust and it is probable that the temporary difference will not reverse in the foreseeable future.
Accounting Standards Implemented in 2018
On January 1, 2018, Choice Properties implemented IFRS 15, “Revenue from contracts with customers” (“IFRS 15”) and IFRS 9, “Financial
Instruments” (“IFRS 9”), in accordance with IAS 8, “Accounting Policies, Changes in Accounting Estimates and Errors”. The impacts from
implementation of IFRS 15 and IFRS 9 are described below.
IFRS 15 In 2014, the IASB issued IFRS 15 replacing IAS 18, “Revenue”, IAS 11, “Construction Contracts”, and related interpretations. IFRS
15 provides a comprehensive framework for the recognition, measurement and disclosure of revenue from contracts with customers, excluding
contracts within the scope of the accounting standards on leases, insurance contracts and financial instruments. IFRS 15 is effective for annual
periods beginning on or after January 1, 2018.
Choice Properties adopted the standard on January 1, 2018 and applied the requirements of the standard retrospectively. IFRS 15 permits
the use of exemptions and practical expedients. The Trust applied the practical expedient in which contracts that began and were completed
within the same annual reporting period before December 31, 2017 or are completed on January 1, 2017 do not require restatements.
The implementation of IFRS 15 did not have a significant impact on the Trust’s revenue streams. The presentation of insurance expense and
the revenue related to the recovery of insurance expense from tenants have been reclassified from operating costs to be grouped with property
taxes (notes 20 and 29).
IFRS 9 In 2014, the IASB issued 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 accounting model. IFRS 9 became effective for annual periods beginning on or after January 1, 2018.
Choice Properties implemented the new requirements for classification and measurement, impairment and general hedging on December
31, 2017 by applying the requirements for classification and measurement, including impairment, retrospectively with no restatement of
comparative periods. The Trust also applied related amendments to IFRS 7, “Financial Instruments: Disclosures” (“IFRS 7”). Refer to the
accounting policy for Financial Instruments for a discussion of the application of this standard.
Classification and Measurement IFRS 9 contains a new classification and measurement approach for financial assets that reflects the business
model in which assets are managed and their cash flow characteristics. Financial assets are classified and measured based on the three
categories: amortized cost, fair value through other comprehensive income (FVOCI), and fair value through profit and loss (FVTPL). Financial
liabilities are classified and measured on two categories: amortized cost or FVTPL. Under IFRS 9, derivatives embedded in contracts where
the host is a financial asset in the scope of the standard are not separated, but the hybrid financial instrument as a whole is assessed for
classification.
Financial assets are not reclassified subsequent to their initial recognition, unless the Trust identifies changes in its business model in managing
financial assets and would reassess the classification of financial assets.
98 Choice Properties REIT 2018 Fourth Quarter Report
The following table summarizes the classification impacts upon adoption of IFRS 9. The adoption of the new classification requirements under
IFRS 9 did not result in significant changes in measurement or the carrying amount of financial assets and liabilities.
Asset/Liability
Accounts receivable
Mortgages, loans and notes receivable - SPPI
Mortgages, loans and notes receivable - FVTPL
Cash and cash equivalents
Long term debt and Class C LP Units:
Senior unsecured debentures
Class C LP Units
Mortgages
Construction loans
Credit facilities and term loans
Trade payable and other liabilities
Designated hedging derivatives
Exchangeable Units
Classification under IAS 39
Loans and receivables
Loans and receivables
Loans and receivables
Fair value through profit and loss
Other liabilities
Other liabilities
Other liabilities
Other liabilities
Other liabilities
Other liabilities
Fair value through profit and loss
Fair value through profit and loss
Classification under IFRS 9
Amortized cost
Amortized cost
Fair value through profit and loss
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Fair value through profit and loss
Fair value through profit and loss
Impairment IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with a forward-looking ‘expected credit loss’ (“ECL”) model. The ECL
requires 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 is applied, at each balance sheet date, to financial assets measured at amortized
cost or those measured at fair value through other comprehensive income, except for investments in equity instruments.
Choice Properties adopted the practical expedient to determine ECL on account receivables using a provision matrix based on historical credit
loss experiences to estimate lifetime ECL. The ECL models applied to other financial assets also required judgment, assumptions and
estimations on changes in credit risks, forecasts of future economic conditions and historical information on the credit quality of the financial
asset. The provision matrix and ECL models applied did not have a material impact on account receivables of the Trust.
Impairment losses, if incurred, would be recorded in general and administrative expenses in the consolidated statement of income and
comprehensive income with the carrying amount of the financial asset 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 conditions and changes in factors occurring after the impairment was initially recognized, the previously recognized impairment
loss would be reversed through the consolidated statement of income and comprehensive income. The impairment reversal would be 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.
General Hedging IFRS 9 requires Choice Properties to ensure that hedge accounting relationships are aligned with the Trust’s risk management
objectives and strategy and to apply a more qualitative and forward-looking approach to assessing hedge effectiveness. The Trust’s risk
management strategy is disclosed in Note 26, Financial Risk Management.
Choice Properties REIT 2018 Fourth Quarter Report 99
Notes to the Consolidated Financial Statements
Note 3.
Critical Accounting Judgments and Estimates
The preparation of the consolidated financial statements requires management to make judgments and estimates in applying Choice Properties’
accounting policies that affect the reported amounts and disclosures made in the consolidated financial statements and accompanying notes.
Within the context of these consolidated financial statements, a judgment is a decision made by management in respect of the application of
an accounting policy, a recognized or unrecognized financial statement amount and/or note disclosure, following an analysis of relevant
information that may include estimates and assumptions. Estimates and assumptions are used mainly in determining the measurement of
balances recognized or disclosed in the consolidated financial statements and are based on a set of underlying data that may include
management’s historical experience, knowledge of current events and conditions and other factors that are believed to be reasonable under
the circumstances. Management continually evaluates the estimates and judgments it uses.
The following are the accounting policies subject to judgments and key sources of estimation uncertainty that Choice Properties believes
could have the most significant impact on the amounts recognized in the consolidated financial statements. Choice Properties’ significant
accounting policies are disclosed in note 2.
Investment Properties
Judgments Made in Relation to Accounting Policies Applied Judgment is applied in determining whether certain costs are additions to
the carrying value of investment properties, identifying the point at which substantial completion of the property occurs, and identifying the
directly attributable borrowing costs to be included in the carrying value of the development property.
Choice Properties also applies judgment in determining whether the properties it acquires are considered to be asset acquisitions or business
combinations. Choice Properties considers all the properties it has acquired to date to be asset acquisitions.
Key Sources of Estimation The fair value of investment properties is dependent on available comparable transactions, future cash flows
over the holding period and discount rates and capitalization rates applicable to those assets. The review of anticipated cash flows involves
assumptions relating to occupancy, rental rates and residual value. In addition to reviewing anticipated cash flows, management assesses
changes in the business climate and other factors, which may affect the ultimate value of the property. These assumptions may not ultimately
be achieved.
Joint Arrangements
Judgments Made in Relation to Accounting Policies Applied Judgment is applied in determining whether the Trust has joint control and
whether the arrangements are joint operations or joint ventures. In assessing whether the joint arrangements are joint operations or joint
ventures, management applies judgment to determine the Trust’s rights and obligations in the arrangement based on factors such as the
structure, legal form and contractual terms of the arrangement.
Leases
Judgments Made in Relation to Accounting Policies Applied Choice Properties is required to make judgments in determining whether
certain leases are operating or finance leases, in particular long-term leases. All tenant leases where Choice Properties is the lessor have
been determined to be operating leases.
Income Taxes
Judgments Made in Relation to Accounting Policies Applied Choice Properties is a mutual fund trust and a REIT as defined in the Income
Tax Act (Canada). Choice Properties is not liable to pay Canadian income taxes provided that its taxable income is fully distributed to Unitholders
each year. Choice Properties is a REIT if it meets the prescribed conditions under the Income Tax Act (Canada). Choice Properties uses
judgment in reviewing these conditions in assessing its interpretation and application to its assets and revenue.
Choice Properties 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.
100 Choice Properties REIT 2018 Fourth Quarter Report
Note 4.
Future Accounting Standards
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.
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 in the final stages of its evaluation of the impact of the standard on the consolidated financial statements. Based on its assessment
to date, the Trust does not believe it will have a significant impact on its consolidated financial statements.
Note 5.
Acquisition of Canadian Real Estate Investment Trust ("CREIT")
On May 4, 2018, Choice Properties acquired all the assets and assumed all the liabilities of CREIT, including outstanding debt, for total
consideration of $3,708,429, comprised of $1,651,518 of cash and the issuance of 182,836,481 Trust Units (note 16).
In connection with the acquisition, Choice Properties arranged a new $1,500,000 committed revolving credit facility. Concurrent with closing
of the acquisition, Choice Properties repaid and cancelled its existing credit facilities and those acquired from CREIT (note 15).
Also, concurrent with the closing of the acquisition, Choice Properties converted all its outstanding Class C LP Units, held by Loblaw, into
Class B LP Units (Exchangeable Units) (note 16). Choice Properties issued 70,881,226 Exchangeable Units, based on the 20-day volume
weighted average price of Choice Properties’ Trust Units. A conversion difference of $98,659 was paid to Loblaw in cash. These Exchangeable
Units were subject to an undertaking by Loblaw, and subsequently confirmed by GWL , to the TSX that restrict its voting rights and the exercise
of its exchange transfer rights to be consistent with the terms of the converted Class C LP Units.
The cash portion of the acquisition and other transactions pursuant to the Plan of Arrangement were financed as follows:
•
•
$1,300,000 was obtained from issuance of Series K and L senior unsecured debentures (note 14); and
$800,000 was obtained through two unsecured term loans of which $175,000 is due May 4, 2022, and $625,000 is due May 4, 2023
(note 15).
Choice Properties REIT 2018 Fourth Quarter Report 101
Notes to the Consolidated Financial Statements
The purchase equation is based on management’s best estimates of fair value. The actual amount allocated to certain identifiable net assets
could vary as the purchase equation is finalized. The Trust has one year to finalize the fair value of the assets acquired and the liabilities
assumed, however, the Trust does not expect significant changes from the amounts presented below:
($ thousands)
Assets
Investment properties
Equity accounted joint ventures
Intangible assets
Mortgages, loans and notes receivable
Accounts receivable and other assets(i)
Cash and cash equivalents
Total assets
Liabilities
Mortgages payable
Senior unsecured debentures
Constructions loans
Credit facility
Trade payables and other liabilities(ii)
Restricted unit plan liability
Total liabilities
Total net assets acquired
Consideration:
Cash
Units issued
Total consideration
As at
May 4, 2018
$
4,729,687
683,289
30,000
195,597
50,645
32,419
5,721,637
1,309,677
451,853
9,583
70,000
169,421
2,674
2,013,208
3,708,429
1,651,518
2,056,911
3,708,429
$
$
$
(i)
(ii)
Includes designated hedging derivative asset of $1,888 and accrued interest income on mortgages, loans and notes receivable of $1,252.
Includes designated hedging derivative liability of $3,070.
In the year ended December 31, 2018, Choice Properties incurred acquisition transaction costs and other related expenses of $141,493,
which were recorded in the consolidated statements of income.
Included in the consolidated statements of income and comprehensive income for the year ended December 31, 2018 are approximately
$280 million in revenue and approximately $165 million net income related to CREIT since the date of acquisition, excluding the impact of
acquisition transaction costs and other related expenses and any adjustment to the fair value of the investment properties acquired.
On a year-to-date pro forma basis, the contribution to the Trust attributable to CREIT for the year ended December 31, 2018 would have
amounted to approximately $420 million in revenue and $250 million of net income, respectively, excluding the impact of acquisition transaction
costs and other related expenses and any adjustment to the fair value of the investment properties acquired. This pro forma information
incorporates the effect of the preliminary purchase equation as if the acquisition had been effective January 1, 2018.
102 Choice Properties REIT 2018 Fourth Quarter Report
Note 6.
Investment Property Transactions
Acquisitions of Investment Properties
During the year ended December 31, 2018, excluding the acquisition of CREIT (note 5), Choice Properties completed the following acquisitions:
($ thousands)
Location
Sainte-Julie, QC
Calgary, AB
Bedford, NS
Kanata, ON
Acquisitions from Loblaw
Langley, BC
Acquisition from GWL
Toronto, ON
Riviere-du-Loup, QC
Toronto, ON
Sherbrooke, QC
Toronto, ON
Ottawa, ON
Calgary, AB
Acquisitions from third-parties
Total acquisitions
Date of
acquisition
Segment
Ownership
interest
Investment
properties
Other
assets
Other
liabilities
Net assets
acquired
Debt
assumed
Cash
Consideration
Acquisition
costs
included in
investment
properties
July 3
Land
75%
$
1,616 $
9 $
— $
1,625 $
— $
1,625 $
November 14
Retail
November 14
Retail
November 14
Retail
100%
100%
100%
December 7
Industrial
100%
January 10
January 22
January 31
February 1
March 20
May 29
October 1
Land
Retail
Land
Retail
Retail
Land
Retail
100%
100%
100%
100%
100%
100%
100%
31,780
9,084
14,758
57,238
20,866
20,866
2,950
2,409
2,990
4,561
17,915
2,086
1,224
34,135
—
126
—
135
14
14
—
—
—
—
—
—
—
—
(251)
(110)
(160)
(521)
(84)
(84)
(22)
(2)
(3)
—
(118)
—
—
31,529
9,100
14,598
56,852
20,796
20,796
2,928
2,407
2,987
4,561
17,797
2,086
1,224
(145)
33,990
—
—
—
—
—
—
—
—
—
—
2,805
—
—
2,805
31,529
9,100
14,598
56,852
20,796
20,796
2,928
2,407
2,987
4,561
14,992
2,086
1,224
31,185
$
112,239 $
149 $
(750) $ 111,638 $
2,805 $
108,833 $
During the year ended December 31, 2017, Choice Properties completed the following acquisitions:
Segment
Ownership
interest
Investment
properties
Other
assets
Other
liabilities
Net assets
acquired
Debt
assumed
Exchangeable
Units issued
Cash
Consideration
41
—
134
98
273
586
586
175
59
183
91
915
62
—
1,485
2,344
Acquisition
costs
included in
investment
properties
($ thousands)
Location
Toronto, ON
Hamilton, ON
Date of
acquisition
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
Total acquisitions
Retail
Retail
Retail
Retail
Land
Land
Land
Land
Retail
Retail
Retail
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
$
2,864 $
— $
— $
2,864 $
— $
2,651 $
213 $
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
66,034
—
—
—
—
—
50
—
2
—
9
20
33
38
5
—
—
—
(25)
(91)
(36)
—
(20)
—
—
(9)
(42)
(42)
—
157
(265)
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
2,973
65,926
—
—
—
—
—
—
—
—
—
—
—
—
6,601
—
6,601
141
11,840
14,632
—
—
—
—
—
—
—
—
—
—
—
—
2,250
45,225
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
$
128,354 $
157 $
(265) $ 128,246 $
6,601 $
14,632 $ 107,013 $
64
41
515
620
78
25
25
69
317
30
25
329
257
341
68
1,564
2,184
Choice Properties REIT 2018 Fourth Quarter Report 103
Notes to the Consolidated Financial Statements
Dispositions of Investment Properties
On December 4, 2018, Choice Properties sold its 50% interest in an office property in Calgary, Alberta, for a sale price of $104,000, excluding
selling costs, for cash consideration.
On October 1, 2018, Choice Properties sold its 50% interest in an office property in Ottawa, Ontario, at the fair value of $3,150, for cash
consideration.
On August 27, 2018, a portfolio of industrial properties in Dartmouth, Nova Scotia, with a fair value of $17,300, was sold for cash consideration.
On June 21, 2018, a retail property in Quebec, with a fair value of $2,745, was sold for cash consideration. On closing, Choice Properties
received a lease surrender payment from Loblaw of $6,892 (note 28) which was included in rental revenue.
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 28) which was included in rental revenue.
On July 17, 2017, Choice Properties sold certain gas bar capital assets, with a fair value of $34,745, to Loblaw for cash consideration equivalent
to the fair value of the assets. The disposition was made to facilitate the sale of substantially all of Loblaw’s gas bar operations to Brookfield
Business Partners L.P. (“Brookfield”) (note 28).
104 Choice Properties REIT 2018 Fourth Quarter Report
Note 7.
Investment Properties
($ thousands)
Balance, beginning of year
Reclassification(i)
Balance, beginning of year
Acquisition of CREIT (note 5)
Acquisitions of investment properties - including acquisition costs of
$2,344 (2017 - $2,184) (note 6)
Capital expenditures:
Development capital(ii)
Building improvements
Capitalized interest(iii) (note 21)
Operating capital expenditures:
Property capital (note 29)
Direct leasing costs
Tenant improvement allowances
Amortization of straight-line rent - included in revenue
Transfers from properties under development
Foreign currency translation
Dispositions (note 6)
Adjustment to fair value of investment properties
Balance, end of year
Income
producing
properties
Properties
under
development
$ 9,509,440
$
(57,547)
9,451,893
4,611,045
41,560
57,547
99,107
118,642
Year ended
Year ended
December 31,
2018
9,551,000
$
December 31,
2017
9,098,000
$
—
9,551,000
4,729,687
—
9,098,000
—
90,622
21,617
112,239
128,354
—
7,741
—
57,586
11,392
9,628
34,076
188,796
7,359
(123,869)
(84,653)
$ 14,261,616
$
187,856
—
4,880
—
—
—
—
(188,796)
—
—
(3,922)
239,384
187,856
7,741
4,880
57,586
11,392
9,628
34,076
—
7,359
111,785
5,109
2,355
44,962
2,489
1,927
34,740
—
—
(123,869)
(88,575)
$ 14,501,000
$
(38,179)
159,458
9,551,000
(i)
The opening balance of properties under development has been adjusted to include intensifications and land assemblies that were previously recorded as part of income
producing properties.
(ii) Development capital included $5,858 of site intensification payments (note 28) paid to Loblaw (year ended December 31, 2017 - $5,793). The year ended December 31,
2017, also included a payment of $1,542 in development capital received from Loblaw (note 28).
(iii)
Interest was capitalized to qualifying development projects based on a weighted average interest rate of 3.63% (year ended December 31, 2017 - 3.43%).
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 28), 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 2018 Fourth Quarter Report 105
Notes to the Consolidated Financial Statements
Independent Appraisals
Properties are typically independently appraised at the time of acquisition. As part of the acquisition of the CREIT’s portfolio, a sample of 78
investment properties, with a total value of $2.7 billion, were independently appraised. In addition, Choice Properties has engaged independent
nationally-recognized valuation firms to appraise its investment properties such that substantially all of the portfolio will be independently
appraised at least once over a four-year period. When an independent appraisal is obtained, the internal valuation team assesses all major
inputs used by the independent valuators in preparing their reports and holds discussions with them on the reasonableness of their assumptions.
The reports are then used by the internal valuation team for consideration in preparing the valuations as reported in these consolidated
financial statements.
The properties independently appraised each year represent a subset of the property types and geographic distribution of the overall portfolio.
A breakdown of the aggregate fair value of investment properties independently appraised each quarter, in accordance with the Trust’s policy,
is as follows:
($ thousands except where otherwise indicated)
March 31
June 30
September 30
December 31
Total
Internal Appraisals
Number of properties
26
27
26
26
105
2018
Fair value
711,000
Number of properties
25
603,000
593,000
884,000
2,791,000
25
27
25
102
$
$
2017
Fair value
600,000
559,000
681,000
475,000
2,315,000
$
$
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 which reports directly to the Chief Operating Officer, with the valuation processes and results reviewed
by management at least once per quarter. On a quarterly basis, 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 weighted averages of key rates
used in the valuation models for the Trust’s investment properties (including those within equity accounted joint ventures) by asset class:
Discount rate
Terminal capitalization rate
Overall capitalization rate
Discount rate
Terminal capitalization rate
Overall capitalization rate
Retail
6.87%
6.22%
5.95%
Retail
7.02%
6.39%
6.07%
Industrial
6.91%
6.15%
5.84%
Industrial
—%
—%
—%
As at December 31, 2018
Office
6.07%
5.33%
5.16%
Total investment
properties
6.82%
6.15%
5.88%
As at December 31, 2017
Office
—%
—%
—%
Total investment
properties
7.02%
6.39%
6.07%
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.
106 Choice Properties REIT 2018 Fourth Quarter Report
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)%
0.25%
0.50%
0.75%
5.13% $
5.38% $
5.63% $
6.13% $
6.38% $
6.63% $
Fair value of
investment
properties
16,615,449
15,845,294
15,143,372
13,910,909
13,366,965
12,863,958
$
$
$
$
$
$
Fair
value
variance
2,114,449
1,344,294
642,372
(590,091)
(1,134,035)
(1,637,042)
% change
15 %
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 8.
Equity Accounted Joint Ventures
Choice Properties accounts for its investments in joint ventures using the equity method. These investments hold primarily development
properties and some income-producing properties. The table below summarizes the Trust’s investment in joint ventures.
Retail
Industrial
Residential
Mixed-use, with related party (note 28)
Total equity accounted joint ventures
Choice Properties’ investment in equity accounted joint
ventures ($ thousands)
As at
As at
December 31, 2018
December 31, 2017
Number of joint
ventures
16
4
3
1
24
Ownership
interest
25% - 75%
50% - 85%
47% - 50%
40%
Number of joint
ventures
—
—
—
1
1
Ownership
interest
—
—
—
40%
$
734,167
$
32,339
($ thousands)
Year ended
December 31, 2018
Year ended
December 31, 2017
Choice Properties’ share of income (loss) and comprehensive income (loss) in equity
accounted joint ventures
$
16,222
$
(491)
The key assumptions and inputs used in the valuation techniques to estimate the fair value of equity accounted joint ventures are classified
as Level 3 in the fair value hierarchy as certain inputs for the valuation are not based on observable market data points. The following table
reconciles the changes in cash flows from equity accounted joint ventures.
Choice Properties REIT 2018 Fourth Quarter Report 107
Notes to the Consolidated Financial Statements
($ thousands)
Balance, beginning of year
Contributions to equity accounted joint ventures
Distributions from equity accounted joint ventures
Total cash flow activities
Acquisition of CREIT (note 5)
Share of income from equity accounted joint ventures
Total non-cash activities
Balance, end of year
Year ended
December 31, 2018
32,339
$
27,656
(25,339)
2,317
683,289
16,222
699,511
734,167
$
Summarized financial information for equity accounted joint ventures at 100% and Choice Properties’ ownership interest are set out below:
($ thousands)
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Net assets at 100%
Investment in equity accounted joint ventures
($ thousands)
Rental revenue
Property operating costs
Interest expense
Interest income
Adjustment to fair value of investment property
As at
As at
December 31, 2018
36,990
$
December 31, 2017
47,021
$
1,924,527
(220,641)
(342,082)
1,398,794
734,167
$
$
$
$
80,045
(46,219)
—
80,847
32,339
Year ended
December 31, 2018
70,851
$
Year ended
December 31, 2017
—
$
(22,890)
(10,220)
2,070
(17,396)
—
—
634
(1,863)
(1,229)
(491)
Net income (loss) and comprehensive income (loss) at 100%
Share of income (loss) and comprehensive income (loss) in equity accounted joint
ventures
$
$
22,415
16,222
$
$
108 Choice Properties REIT 2018 Fourth Quarter Report
Note 9.
Co-Ownership Property Interests
Choice Properties has the following co-owned property interests and includes its proportionate share of the related assets, liabilities, revenue
and expenses of these properties in the consolidated financial statements.
Retail
Industrial
Office
Residential
Land, held for development
Total co-ownership property interests
As at
As at
December 31, 2018
December 31, 2017
Number of
co-owned
properties
29
2
6
6
2
45
Ownership
interest
50% - 75%
50% - 67%
50%
50%
50% - 75%
Number of
co-owned
properties
—
—
—
—
1
1
Ownership
interest
—
—
—
—
50%
Summarized financial information for co-ownerships at 100% and Choice Properties’ ownership interest are set out below:
($ thousands)
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Net assets at 100%
Choice Properties’ proportionate share
($ thousands)
Rental revenue
Property operating costs
Interest expense
Interest income
Adjustment to fair value of investment property
Net income (loss) and comprehensive income (loss) at 100%
Choice Properties proportionate share
As at
As at
December 31, 2018
40,237
$
December 31, 2017
—
$
2,811,218
(324,774)
(987,778)
1,538,903
696,340
$
$
$
$
4,249
(199)
—
4,050
2,025
Year ended
December 31, 2018
195,778
$
Year ended
December 31, 2017
—
$
(77,060)
(38,896)
146
(48,010)
$
$
31,958
15,745
$
$
—
—
—
—
—
—
Choice Properties REIT 2018 Fourth Quarter Report 109
Notes to the Consolidated Financial Statements
Note 10. Subsidiaries
On November 7, 2014, Choice Properties acquired a 70% controlling interest in Choice Properties PRC Brampton Limited Partnership
(“Brampton LP”), 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
Canada
Mayfield/Chinguacousy, Brampton, ON
70%
While operating activities have not begun at Brampton LP, in the year ended December 31, 2017, 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 28), of which
$930 was attributable to non-controlling interests. In the year ended December 31, 2018, Brampton LP distributed $3,000 to the partners, of
which $900 was attributable to non-controlling interests.
Note 11. Accounts Receivable and Other Assets
($ thousands)
Net rent receivable - net of allowance for doubtful accounts of $5,017 (2017 - $928)(i)
As at
As at
December 31, 2018
8,095
$
December 31, 2017
1,107
$
Accrued recovery income
Other receivables
Due from related party(ii)
Construction inventory
Restricted cash
Prepaid property taxes
Prepaid insurance
Other assets
Deferred acquisition costs and deposits on land
Designated hedging derivatives (note 25)
Accounts receivable and other assets
Classified as:
Non-current
Current
(i)
Includes net rent receivable of $421 from Loblaw (December 31, 2017 - $520).
(ii) Other net receivables due from Loblaw of $1,339 (December 31, 2017 - $2,577).
6,238
7,068
1,339
—
946
6,338
1,119
5,520
2,226
1,036
2,246
163
2,577
6,925
—
3,156
347
9,350
1,113
—
$
$
$
39,925
$
26,984
1,950
37,975
39,925
$
$
5,565
21,419
26,984
110 Choice Properties REIT 2018 Fourth Quarter Report
Note 12. Mortgages, Loans and Notes Receivable
($ thousands)
Mortgages receivable(i)
Loans receivable
Notes receivable from related party (note 28)
Mortgages, loans and notes receivable
Classified as:
Non-current
Current
As at
As at
December 31, 2018
181,605
$
December 31, 2017
29,193
$
5,579
26,226
213,410
$
—
277,588
306,781
88,300
125,110
213,410
$
$
2,556
304,225
306,781
$
$
$
(i) Mortgages receivable includes $75,692 classified at FVTPL and $105,913 classified as amortized cost (December 31, 2017 - nil and $29,193, respectively).
Mortgages and Loans Receivable
Mortgages and loans receivable represent amounts advanced under mezzanine loans, joint venture financing, vendor take-back financing
and other arrangements. Choice Properties mitigates its risk by diversifying the number of entities and assets to which it loans funds.
There were no defaults or anticipated defaults by the borrowers for the mortgages and loans receivable. No impairment provisions or expected
credit losses were recorded in the year ended December 31, 2018 (year ended December 31, 2017 - nil).
December 31, 2018
December 31, 2017
Weighted
average
effective
interest rate
7.14%
8.00%
7.17%
Weighted
average term to
maturity (years)
2.0
2.2
2.0
Weighted
average
effective
interest rate
8.93%
—%
8.93%
Weighted
average term to
maturity (years)
1.8
—
1.8
Mortgages receivable
Loans receivable
Total
Notes Receivable from Related Party
Non-interest bearing short term notes totaling $277,588 were repaid by Loblaw in January 2018. During 2018, non-interest bearing short term
notes totaling $238,410 were issued to Loblaw (note 28), of which Loblaw repaid $94,122 on May 4, 2018 and $118,062 on October 31, 2018.
As at November 1, 2018, GWL assumed the notes from Loblaw as a result of the transfer by Loblaw of its effective interest in Choice Properties
to GWL and repaid the balance of $26,226 in January, 2019.
Schedules of Maturity and Cash Flow Activities
The schedule of repayment of mortgages, loans and notes receivable based on maturity and redemption rights is as follows:
($ thousands)
Principal repayments
Mortgages receivable
Loans receivable
2019
2020
2021
2022
2023 Thereafter
Total
$ 97,292 $ 14,289 $ 27,254 $ 31,091 $
3,247 $
6,127
$ 179,300
Notes receivable from related party
26,226
—
—
—
4,396
1,152
—
—
—
—
—
—
5,548
26,226
Total principal repayments
123,518
18,685
28,406
31,091
3,247
6,127
211,074
Interest accrued
Total Repayments
1,592
744
—
—
—
—
2,336
$ 125,110 $ 19,429 $ 28,406 $ 31,091 $
3,247 $
6,127
$ 213,410
Choice Properties REIT 2018 Fourth Quarter Report 111
Notes to the Consolidated Financial Statements
The following table reconciles the changes in cash flows from financing activities for mortgages, loans and notes receivable:
($ thousands)
Balance, beginning of year
Acquisition of CREIT
Advances
Repayments
Interest received
Total cash flow activities
Acquisition of CREIT - accrued interest
Interest accrued
Total non-cash activities
Balance, end of year
Mortgages
receivable
Loans
receivable
Notes
receivable from
related party
Year ended
December 31, 2018
Mortgages, loans
and notes
receivable
$
29,193
$
— $
277,588
$
191,005
7,565
(51,576)
(6,271)
140,723
1,252
10,437
11,689
4,592
1,580
(622)
(225)
5,325
—
254
254
—
238,410
(489,772)
—
(251,362)
—
—
—
$
181,605
$
5,579
$
26,226
$
306,781
195,597
247,555
(541,970)
(6,496)
(105,314)
1,252
10,691
11,943
213,410
Choice Properties invests in mortgages and loans to facilitate acquisitions. Credit risks arise in the event that the borrowers default on
repayment of their mortgages and loans to the Trust. Choice Properties’ receivables, including mezzanine financings, are typically subordinate
to prior ranking mortgage charges and generally represent equity financing for the Trust’s co-owners or development partners. Not all of the
Trust’s mezzanine financing activities will result in acquisitions. At the time of advancing financing, the Trust’s co-owners or development
partners would typically have some of the equity invested in the form of cash with the balance being financed by third-party lenders and Choice
Properties.
In the event of a large commercial real estate market correction, the fair market value of an underlying property may be unable to support the
investment. The Trust mitigates this risk by obtaining guarantees and registered mortgage charges, which are often cross-collateralized on
several different commercial properties that are in various stages of development.
Note 13.
Intangible Assets
Choice Properties’ intangible assets relate to the third-party revenue streams associated with property and asset management contracts for
co-ownership property interests and joint ventures. The Trust has the continuing rights, based on the co-ownership agreements, to property
and asset management fees from investment properties where it manages the interests of co-owners. As at December 31, 2018, the value
of the intangibles assets was $30,000 (December 31, 2017 - nil). The key assumptions and inputs used in the valuation techniques to estimate
the fair value of intangible assets are classified as Level 3 in the fair value hierarchy as certain inputs for the valuation are not based on
observable market data points. No impairment provisions were recorded at December 31, 2018.
112 Choice Properties REIT 2018 Fourth Quarter Report
Note 14.
Long Term Debt and Class C LP Units
($ thousands)
Senior unsecured debentures
Mortgages payable
Construction loans
Class C LP Units
Long term debt and Class C LP Units
Classified as:
Non-current
Current
Senior Unsecured Debentures
($ thousands)
Series A 3.55%, due 2018, effective interest 3.55%
Series B 4.90%, due 2023, effective interest 4.90%
Series C 3.50%, due 2021, effective interest 3.50%
Series D 4.29%, due 2024, effective interest 4.29%
Series E 2.30%, due 2020, effective interest 2.30%
Series F 4.06%, due 2025, effective interest 4.06%
Series G 3.20%, due 2023, effective interest 3.20%
Series H 5.27%, due 2046, effective interest 5.27%
Series I 3.01%, due 2022, effective interest 3.01%
Series J 3.55%, due 2025, effective interest 3.55%
Series K 3.56%, due 2024, effective interest 3.56%
Series L 4.18%, due 2028, effective interest 4.18%
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%
Series B-C 4.32%, due 2021, effective interest 3.06%
Series C-C 2.56%, due 2019, effective interest 2.60%
Series D-C 2.95%, due 2023, effective interest 3.30%
Debt discounts and premiums - net of accumulated amortization of ($13,531) (2017 - ($12,007))
Debt placement costs - net of accumulated amortization of $6,674 (2017 - $4,332)
As at
As at
December 31, 2018
4,711,134
$
December 31, 2017
2,843,323
$
1,330,487
21,330
—
6,062,951
$
8,361
—
886,824
3,738,508
5,566,915
496,036
6,062,951
$
$
3,338,420
400,088
3,738,508
$
$
$
As at
As at
December 31, 2018
$
— $
December 31, 2017
400,000
200,000
250,000
200,000
250,000
200,000
250,000
100,000
300,000
350,000
550,000
750,000
200,000
300,000
200,000
300,000
100,000
100,000
125,000
(22)
(13,844)
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)
Senior unsecured debentures
$
4,711,134
$
2,843,323
Choice Properties REIT 2018 Fourth Quarter Report 113
Notes to the Consolidated Financial Statements
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 3.01% 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 3.55% per annum, with semi-annual installments of interest due on January 10 and July 10
of each year, commencing July 10, 2018. Debt placement costs of $3,251 are amortized using the effective interest method and recorded to
net interest expense and other financing charges (note 21). The offering 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 $1,007.220 per $1,000 principal amount of Series A debentures, together with accrued and unpaid interest.
On March 8, 2018, Choice Properties issued $550,000 and $750,000 aggregate principal amount of Series K and L senior unsecured debentures
due September 9, 2024 and March 8, 2028, respectively. The Series K unsecured debentures bear interest at a rate of 3.56% per annum,
with semi-annual installments of interest due on March 9 and September 9 in each year, commencing September 9, 2018. The Series L
unsecured debentures bear interest at a rate of 4.18% per annum, with semi-annual installments of interest due on March 8 and September
8 of each year, commencing September 8, 2018. Debt placement costs of $6,609, of which $1,684 were paid from cash on hand, are amortized
using the effective interest method and recorded to net interest expense and other financing charges (note 21). The offering was conducted
on a private placement basis (note 24).
On May 4, 2018, as part of the acquisition of CREIT (note 5), Choice Properties assumed $450,000 aggregate principal amount of senior
unsecured debentures together with accrued but unpaid interest in four series:
•
•
Series A-C with $125,000 aggregate principal due July 24, 2018 bearing interest at a rate of 3.68% per annum;
Series B-C with $100,000 aggregate principal due January 15, 2021 bearing interest at a rate of 4.32% per annum, with semi-annual
installments of interest due on January 15 and July 15 in each year;
Series C-C with $100,000 aggregate principal due November 30, 2019 bearing interest at a rate of 2.56% per annum, with semi-annual
installments of interest due on May 30 and November 30 in each year; and
Series D-C with $125,000 aggregate principal due January 18, 2023 bearing interest at a rate of 2.95% per annum, with semi-annual
installments of interest due on January 18 and July 18 in each year.
•
•
The Series B-C, C-C, and D-C debentures have been guaranteed by each of the General Partner, the Partnership and certain other subsidiaries
of Choice Properties. 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.
On July 24, 2018, Choice Properties redeemed, at par, $125,000 Series A-C senior unsecured debentures at the original maturity date.
On January 23, 2017, Choice Properties redeemed, at par, $200,000 Series 6 senior unsecured debentures with an original maturity date of
April 20, 2017.
As at December 31, 2018, the senior unsecured debentures had a weighted average effective interest rate of 3.61% (December 31, 2017 -
3.61%). Senior unsecured debentures Series B through Series L were issued by the Trust, Series B-C through D-C were assumed by the
Trust, and Series 7 through Series 10 were issued by the Partnership.
Mortgages Payable
($ thousands)
Mortgage principal
Net debt discounts and premiums - net of accumulated amortization of ($2,068) (2017 - ($260))
Debt placement costs - net of accumulated amortization of $52 (2017 - nil)
Mortgages payable
As at
As at
December 31, 2018
1,328,280
$
December 31, 2017
8,320
$
2,600
(393)
$
1,330,487
$
41
—
8,361
Mortgages of $1,309,677 were assumed as part of the acquisition of CREIT (note 5) including net debt discounts and premiums of $4,367.
In connection with the property acquired from a third-party vendor on March 20, 2018, Choice Properties assumed a mortgage of $2,805
which is secured by the acquired property. The mortgage bears interest at a fixed rate of 2.86% and matures in 2020 (note 6).
114 Choice Properties REIT 2018 Fourth Quarter Report
As at December 31, 2018, the mortgages had a weighted average effective interest rate of 4.08% and a weighted average term to maturity
of 6.0 years (December 31, 2017 - 2.70% and 2.5 years, respectively).
Construction Loans
Construction loans of $9,583 were assumed as part of the acquisition of CREIT (note 5). As at December 31, 2018, $21,330 was outstanding
on construction loans (December 31, 2017 - nil).
For the purpose of financing the development of certain retail, industrial and residential properties, various investments in equity accounted
joint ventures and co-ownerships have variable rate non-revolving construction facilities in which certain subsidiaries of the Trust guarantee
its own share. These construction loans, which mature throughout 2019 to 2020, have a maximum amount available to be drawn at the Trust’s
ownership interest of $145,000 (December 31, 2017 - $nil).
As at December 31, 2018, the construction loans had a weighted average effective interest rate of 4.30% and a weighted average term to
maturity of 1.1 years.
Class C LP Units
($ thousands)
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 $nil (2017 - $10,562)
As at
As at
December 31, 2018
$
— $
December 31, 2017
300,000
—
—
—
300,000
325,000
(38,176)
886,824
Class C LP Units
$
— $
Concurrent with the closing of the acquisition of CREIT, Choice Properties converted all its outstanding Class C LP Units into 70,881,226
Exchangeable Units. A difference in value on conversion of $98,659 was paid to Loblaw in cash (note 5).
Schedules of Repayments and Cash Flow Activities
The schedule of principal repayment of long term debt, based on maturity, is as follows:
($ thousands)
Senior unsecured debentures
$
2019
300,000 $
2020
550,000 $
2021
550,000 $
2022
600,000 $
2023
Thereafter
575,000 $ 2,150,000
Total
$ 4,725,000
Mortgages payable
Construction loans
Total
182,126
12,493
136,616
118,259
145,153
105,761
640,365
1,328,280
8,837
—
—
—
—
21,330
$
494,619 $
695,453 $
668,259 $
745,153 $
680,761 $ 2,790,365
$ 6,074,610
Choice Properties REIT 2018 Fourth Quarter Report 115
Notes to the Consolidated Financial Statements
The following table reconciles the changes in cash flows from financing activities for long term debt and Class C LP Units.
($ thousands)
Balance, beginning of year
Proceeds from issuance of Series I through L
senior unsecured debentures
Repayment of Series A senior unsecured
debentures
Repayment of Series A-C senior unsecured
debentures
Advances on construction loans, net
Advances of mortgages, net
Conversion of Class C LP Units
Debt placement costs
Total cash flow activities
Assumption of mortgage on acquisition of
investment properties (note 6)
Debt discount expensed on issuance of Series I
Amortization of debt discounts and premiums
Amortization of debt placement costs
Accelerated amortization of debt premium on
conversion of Class C LP Units (note 21)
Conversion of Class C LP Units
Total non-cash activities
Balance, end of year
Senior
unsecured
debentures
Mortgages
payable
Construction
loans
Class C LP
Units
Year ended
December 31,
2018
Long term debt
and Class C LP
Units
$ 2,843,323
$
8,361
$
— $
886,824
$
3,738,508
1,949,949
(400,000)
(125,000)
—
—
—
(9,860)
—
—
—
—
11,845
—
(445)
—
—
—
11,747
—
—
—
—
—
—
—
—
(98,659)
—
1,415,089
11,400
11,747
(98,659)
—
51
(1,524)
2,342
—
—
2,805
—
(1,808)
52
—
—
—
—
—
—
—
—
452,722
1,310,726
9,583
—
—
—
894
—
37,282
(826,341)
(788,165)
1,949,949
(400,000)
(125,000)
11,747
11,845
(98,659)
(10,305)
1,339,577
1,771,113
2,805
51
(2,438)
2,394
37,282
(826,341)
984,866
$ 4,711,134
$ 1,330,487
$
21,330
$
— $
6,062,951
Acquisition of CREIT (note 5)
451,853
1,309,677
9,583
116 Choice Properties REIT 2018 Fourth Quarter Report
Note 15. Credit Facilities and Term Loans
($ thousands)
Credit Facilities
$1,500,000 syndicated
$250,000 bi-lateral
$500,000 syndicated
Debt placement costs - net of accumulated amortization of $4,285 (2017 - $1,854)
Term Loans
Unsecured term loan maturing May 4, 2022
Unsecured term loan maturing May 4, 2023
Debt placement costs - net of accumulated amortization of $717 (2017 - nil)
Credit facilities and term loans
Classified as:
Non-current
Current
Credit Facilities
As at
As at
December 31, 2018
December 31, 2017
$
325,000
$
—
—
(6,197)
175,000
625,000
(4,396)
—
250,000
311,000
(1,478)
—
—
—
$
$
$
1,114,407
$
559,522
1,114,407
—
1,114,407
$
$
309,522
250,000
559,522
Choice Properties has a $1,500,000 senior unsecured committed revolving credit facility provided by a syndicate of lenders maturing May 4,
2023. The credit facility bears interest at variable rates of either: Prime plus 0.45% or Bankers’ Acceptance rate plus 1.45%. This pricing is
contingent on Choice Properties’ credit ratings from DBRS and S&P remaining at BBB.
In the first quarter of 2018, Choice Properties repaid and cancelled its bi-lateral $250,000 senior unsecured committed revolving credit facility
with a major Canadian financial institution maturing December 21, 2018.
In the second quarter of 2018, Choice Properties repaid and cancelled its syndicated $500,000 senior unsecured committed revolving credit
facility provided by a syndicate of lenders maturing July 5, 2022, and repaid and cancelled the credit facility assumed on the acquisition of
CREIT.
The credit facility contains certain financial covenants. As at December 31, 2018, the Trust was in compliance with all of the financial covenants
for the credit facility (note 24).
Term Loans
Choice Properties has a $175,000 4-year unsecured term loan provided by a syndicate of lenders maturing May 4, 2022. The term loan bears
interest at variable rates of either: Prime plus 0.45% or Bankers’ Acceptance rate plus 1.45%. This pricing is contingent on Choice Properties’
credit ratings from DBRS and S&P remaining at BBB.
Choice Properties has a $625,000 5-year unsecured term loan provided by a syndicate of lenders maturing May 4, 2023. The term loan bears
interest at variable rates of either: Prime plus 0.45% or Bankers’ Acceptance rate plus 1.45%. This pricing is contingent on Choice Properties’
credit ratings from DBRS and S&P remaining at BBB.
The term loans contain certain financial covenants. As at December 31, 2018, the Trust was in compliance with all of the financial covenants
for the term loans (note 24).
Choice Properties REIT 2018 Fourth Quarter Report 117
Notes to the Consolidated Financial Statements
Schedule of Cash Flow Activities
The following table reconciles the changes in cash flows from financing activities for credit facilities and term loans:
($ thousands)
Balance, beginning of year
Repayment of $250,000 bi-lateral credit facility
Repayment of $500,000 syndicated credit facility
Repayment of credit facility acquired
Net advances of $1,500,000 syndicated credit facility
Net advances of May 4, 2022 unsecured term loan
Net advances of May 4, 2023 unsecured term loan
Debt placement costs
Total cash flow activities
Acquisition of CREIT (note 5)
Amortization of debt placement costs
Total non-cash activities
Balance, end of year
Note 16. Unitholders' Equity
Credit facilities
559,522
$
$
Term loans
— $
(250,000)
(311,000)
(70,000)
325,000
—
—
(7,150)
(313,150)
70,000
2,431
72,431
—
—
—
—
175,000
625,000
(5,113)
794,887
—
717
717
Year ended
December 31,
2018
Credit facilities
and term loans
559,522
(250,000)
(311,000)
(70,000)
325,000
175,000
625,000
(12,263)
481,737
70,000
3,148
73,148
$
318,803
$
795,604
$
1,114,407
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. As at December 31, 2018, all
the Exchangeable Units were held by GWL.
The 70,881,226 Exchangeable Units issued on May 4, 2018 in connection with the acquisition of CREIT (note 5) contain voting and exchange
restrictions which will expire based on the following schedule:
Voting and exchange rights restriction period expiration dates
July 5, 2027
Numbers of Exchangeable Units eligible for voting and transfer
22,988,505
July 5, 2028
July 5, 2029
22,988,505
24,904,216
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.
118 Choice Properties REIT 2018 Fourth Quarter Report
Units Outstanding
($ thousands except where otherwise indicated)
Units, beginning of year
Units issued, net of costs (note 5)
Issuance of Units under the Distribution Reinvestment Plan
Units issued under unit-based compensation arrangements
Units repurchased for unit-based compensation arrangement
Units, end of year
Exchangeable Units, beginning of year
Issued in conjunction with acquisition of investment properties
December 5, 2017 (note 6)
Issued in conjunction with acquisition of CREIT May 4, 2018
(note 5)
Adjustment to fair value of Exchangeable Units
As at
As at
December 31, 2018
December 31, 2017
Units
94,300,965
182,836,481
125,749
1,516,670
(577,306)
278,202,559
319,080,557
$
$
$
Amount
911,081
2,056,628
1,487
16,261
(7,114)
Units
92,568,828
—
1,694,763
37,374
—
2,978,343
94,300,965
4,259,724
317,988,505
Amount
888,337
—
22,383
361
—
911,081
4,283,304
$
$
$
—
—
1,092,052
14,632
70,881,226
—
826,341
(593,706)
—
—
—
(38,212)
Exchangeable Units, end of year
389,961,783
$
4,492,359
319,080,557
$
4,259,724
Total Units and Exchangeable Units, end of year
668,164,342
413,381,522
Units Issued In connection with the acquisition of CREIT, Choice Properties issued 182,836,481 Units at a price of $11.25 per unit, totaling
$2,056,911 and incurred costs of issuance of $283.
Units Issued under Unit-Based Compensation Arrangements Units were issued in connection with settlements under the Unit Option
Plan, the Unit-Settled Restricted Unit Plan and the Trustee Deferred Unit Plan (note 19).
Units Repurchased for Unit-Based Compensation Arrangement On September 18, 2018, Choice Properties received approval from the
Toronto Stock Exchange to purchase up to 13,880,839 Trust Units during the twelve-month period from September 20, 2018 to September
19, 2019, under a normal course issuer bid. During the year, the Trust acquired Units which were then granted to certain employees and are
subject to vesting conditions and disposition restrictions, in connection with the Unit-Settled Restricted Unit Plan (note 19).
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, 2018 (note 17). The taxable income allocated to the Trust and Exchangeable
Unitholders may vary in certain taxation years. Over time, such differences, in aggregate, will be minimal.
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, 2018, Choice Properties declared distributions of $0.740 per unit
(year ended December 31, 2017 - $0.73), or $431,392 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, 2017 - $300,452). 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 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.
Distribution Reinvestment Plan Choice Properties instituted a DRIP that allowed Unitholders to use the monthly cash distributions paid on
their existing Units to purchase additional Units directly from the Trust. Unitholders who elected to participate in the DRIP received a further
distribution, payable in Units, equal in value to 3% of each cash distribution. On April 25, 2018, the Board of Trustees temporarily suspended
the DRIP. Unitholders that were enrolled in the DRIP began receiving distributions in cash commencing with the distribution declared in May
2018. Choice Properties reserves the right to amend, suspend or terminate the DRIP at any time, but such actions will have no retroactive
effect that would prejudice the interests of DRIP participants. For the year ended December 31, 2018, Choice Properties issued 125,749 Units
under the DRIP (December 31, 2017 - 1,694,763 Units).
Choice Properties REIT 2018 Fourth Quarter Report 119
Notes to the Consolidated Financial Statements
Note 17.
Income Taxes
The Trust is taxed as a "mutual fund trust" and a REIT under the Income Tax Act (Canada). The Trustees intend to distribute all of the Trust’s
taxable income to the Unitholders and accordingly, the Trust is not taxable on its Canadian investment property income.
The Trust is subject to taxation on certain taxable entities in Canada and the United States. Income taxes recognized in the consolidated
statement of net income was as follows:
($ thousands)
Current income taxes
Deferred income taxes
Income taxes
Year ended
December 31, 2018
(49)
$
$
(489)
(538)
$
$
Year ended
December 31, 2017
—
—
—
A deferred income tax liability of $509 was recognized due to temporary differences between the carrying value and the tax basis of net assets
held in the U.S. subsidiary (December 31, 2017 - nil).
Note 18. Trade Payables and Other Liabilities
($ thousands)
Trade accounts payable
Accrued liabilities and provisions
Accrued acquisition transaction costs and other related expenses
Accrued capital expenditures
Accrued interest expense
Due to related party(i)
Unit-based compensation
Distributions payable(ii)
Tenant deposits
Deferred revenue
Designated hedging derivatives (note 25)
Trade payables and other liabilities
Classified as:
Non-current
Current
As at
As at
December 31, 2018
15,740
$
December 31, 2017
9,737
$
77,561
38,176
73,504
60,442
50,274
11,125
17,156
13,868
19,536
1,621
35,334
—
21,135
34,495
301,117
14,013
5,815
2,801
4,329
—
$
$
$
379,003
$
428,776
6,021
372,982
379,003
$
$
2,713
426,063
428,776
(i)
(ii)
Includes distributions accruing on Exchangeable Units of $50,274 (December 31, 2017 - $251,013) and Class C LP Units of nil (December 31, 2017 - $50,104).
Includes payable to Loblaw of nil and $2,889 payable to GWL (December 31, 2017 - $1,326 and $1,563, respectively).
120 Choice Properties REIT 2018 Fourth Quarter Report
Note 19. Unit-Based Compensation
Choice Properties’ unit-based compensation expense recognized in general and administrative expenses was:
($ thousands)
Unit Option plan
Restricted Unit plans
Performance Unit plan
Trustee Deferred Unit plan
Unit-based compensation expense
Adjustment to fair value included in the above
Year ended
December 31, 2018
(3,578)
$
Year ended
December 31, 2017
1,077
$
5,511
183
340
2,456
(4,792)
$
$
1,728
711
745
4,261
468
$
$
As at December 31, 2018, the carrying value of total unit-based compensation was $11,125 (December 31, 2017 - $14,013) (note 18).
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, 2018
Year ended December 31, 2017
Number of awards
4,403,857
Weighted average
exercise price/unit
11.56
$
724,571
(899,566)
(464,755)
3,764,107
2,287,879
$
$
$
$
$
11.92
11.01
12.41
11.66
11.24
Number of awards
3,990,231
451,000
(37,374)
$
$
$
— $
4,403,857
2,308,008
$
$
Weighted average
exercise price/unit
11.25
14.20
10.24
—
11.56
10.99
The Black-Scholes model (level 2) was used to measure the fair value of the Unit Options.
Choice Properties REIT 2018 Fourth Quarter Report 121
Notes to the Consolidated Financial Statements
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
The following table details the Unit Options outstanding as at December 31, 2018:
Exercise Price
$10.04
$10.81
$10.72
$11.51
$11.28
$12.38
$12.79
$14.21
$13.93
$11.92
$10.04 to $14.21
As at
As at
December 31, 2018
6.42%
December 31, 2017
5.54%
14.39% - 25.19%
10.03% - 16.88%
0.02% - 1.88%
0.1 - 4.6 Years
0.01% - 1.85%
0.1 - 4.8 Years
Number of
Unit Options
outstanding as at
December 31, 2018
442,586
Remaining weighted
average
life (in years)
1.5
536,932
6,009
1,128,790
215,518
486,628
4,897
340,015
20,424
582,308
3,764,107
2.2
2.9
3.2
3.9
4.2
4.9
5.2
5.3
6.2
3.7
122 Choice Properties REIT 2018 Fourth Quarter Report
Restricted Unit Plans Choice Properties has two Restricted Unit Plans.
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 a 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, 2018 (December 31, 2017 - 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, 2018
359,154
Year ended
December 31, 2017
264,691
215,002
28,029
(118,670)
(37,174)
446,341
160,361
17,517
(83,398)
(17)
359,154
Unit-Settled Restricted Unit Plan Under the terms of the URU plan, certain employees were granted URUs, which are subject to vesting
conditions and disposition restrictions. Typically, full vesting of the URUs would not occur until the employee had remained with Choice for
three or five years from the date of grant. Depending on the nature of the grant, the URUs are subject to a six- or seven-year holding period
during which the Units cannot be disposed. There were 1,110,761 URUs vested, but still subject to disposition restrictions as at December 31,
2018 (December 31, 2017 - nil).
The following is a summary of Choice Properties’ URU plan activity for units not yet vested:
(Number of awards)
Outstanding Unit-Settled Restricted Units, beginning of year
Assumed in conjunction with the acquisition of CREIT
Granted
Forfeited
No longer subject to disposition restrictions
Outstanding Unit-Settled Restricted Units, end of year
Year ended
December 31, 2018
—
Year ended
December 31, 2017
—
626,128
577,306
(28,946)
(456,673)
717,815
—
—
—
—
—
On May 4, 2018, Choice Properties assumed the obligations of CREIT under the CREIT unit-settled restricted unit plan and holders of CREIT
restricted units had each CREIT restricted unit redeemed for Units in Choice Properties as part of the acquisition. Plan participants are subject
to the same vesting, forfeiture and disposition provisions and such other terms and conditions as were applicable to the CREIT restricted
units pursuant to the CREIT restricted unit plan immediately prior to the completion of the acquisition of CREIT.
Choice Properties REIT 2018 Fourth Quarter Report 123
Notes to the Consolidated Financial Statements
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 a 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, 2018 (December 31, 2017 - nil).
The following is a summary of Choice Properties’ PU plan activity:
(Number of awards)
Outstanding Performance Units, beginning of year
Granted
Reinvested
Cancelled
Added by performance factor
Settled
Outstanding Performance Units, end of year
Year ended
December 31, 2018
79,612
Year ended
December 31, 2017
39,696
44,374
6,727
(16,194)
8,836
(18,906)
104,449
36,099
3,817
—
—
—
79,612
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
Cancelled
Exercised
Outstanding Trustee Deferred Units, end of year
Note 20. Rental Revenue
Rental revenue is comprised of the following:
Year ended
December 31, 2018
283,704
Year ended
December 31, 2017
218,992
56,705
17,631
(1,108)
(54,343)
302,589
Third-
party(i)
72,377
18,497
13,967
2,893
51,865
12,847
—
—
283,704
Year ended
December 31, 2017
605,024
$
162,218
54,875
8,513
830,630
($ thousands)
Base rent
Property tax and insurance
recoveries
Operating cost recoveries
Other revenue
Rental revenue
Loblaw(i)
$ 542,977
Third-
party(ii)
$ 255,963
151,803
47,070
10,218
67,623
61,680
10,939
Year ended
December 31, 2018
798,940
$
Loblaw(i)
$ 532,647
$
219,426
108,750
21,157
143,721
40,908
5,620
$ 752,068
$ 396,205
$
1,148,273
$ 722,896
$ 107,734
$
(i)
(ii)
Loblaw revenue includes lease surrender payments of $10,204 for the year ended December 31, 2018 (December 31, 2017 - $5,620 with $930 attributable to non-
controlling interests) (note 28).
Third-party revenue includes $2,296 received from leases to subsidiaries of GWL for the year ended December 31, 2018 (2017 - $2,154).
124 Choice Properties REIT 2018 Fourth Quarter Report
Choice Properties enters into long-term lease contracts with tenants for space in its properties. Initial lease terms are generally between three
and ten years for commercial units and longer terms for food store anchors. Leases generally provide for the tenant to pay Choice Properties
base rent, with provisions for contractual increases in base rent over the term of the lease, plus operating cost, property tax and insurance
recoveries. Many of the leases with Loblaw are for stand-alone retail sites. Loblaw is directly responsible for the operating costs on such sites.
Future base rent revenue, excluding adjustments for straight-line rent, for the years ended December 31 is as follows:
($ thousands)
2019
2020
2021
2022
2023
Thereafter
Total
Note 21. Net Interest Expense and Other Financing Charges
($ thousands)
Interest on senior unsecured debentures
Distributions on Class C LP Units(i)
Interest on mortgages and construction loans
Interest on credit facilities and term loans
Effective interest rate amortization of debt discounts and premiums (note 14)
Accelerated amortization of debt premium on conversion of Class C LP Units (note 14)
Effective interest rate amortization of debt placement costs (notes 14 and 15)
Distributions on Exchangeable Units(i)
Less: Capitalized interest(ii)
$
$
872,798
850,998
821,240
787,413
728,593
3,200,255
7,261,297
Year ended
December 31, 2018
164,010
$
Year ended
December 31, 2017
103,625
$
15,417
35,293
29,780
(2,387)
37,282
5,542
271,089
556,026
(4,880)
46,250
110
11,799
1,560
—
1,638
232,199
397,181
(2,355)
394,826
Net interest expense and other financing charges
$
551,146
$
(i)
(ii)
Represents interest on indebtedness due to related parties.
Interest was capitalized to qualifying development projects based on an annual weighted average interest rate of 3.63% (2017 - 3.43%).
Choice Properties REIT 2018 Fourth Quarter Report 125
Notes to the Consolidated Financial Statements
Note 22.
Interest and Other Income
($ thousands)
Interest income on mortgages and loans receivable
Other interest income
Other income
Interest and other income
Note 23. 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, 2018
10,691
$
Year ended
December 31, 2017
4,760
$
3,461
72
$
14,224
$
69
—
4,829
Year ended
December 31, 2018
31,787
Year ended
December 31, 2017
17,180
$
739
2,116
34,642
$
422
3,516
21,118
$
$
(i)
Before considering amounts capitalized to investment properties or amounts allocated to recoverable operating expenses.
Note 24. Capital Management
In order to maintain or adjust its capital structure, Choice Properties may issue new Units and debt, repay debt, or adjust the amount of
distributions paid to Unitholders. 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 14).
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 14).
On February 12, 2018, Choice Properties completed the early retirement of Series A senior unsecured debentures at a redemption price equal
to $1,007.220 per $1,000 principal amount of Series A debentures, together with accrued and unpaid interest (note 14).
Choice Properties has a $1,500,000 senior unsecured committed revolving credit facility provided by a syndicate of lenders maturing May 4,
2023. The credit facility bears interest at variable rates of either: Prime plus 0.45% or Bankers’ Acceptance rate plus 1.45%. This pricing is
contingent on Choice Properties’ credit ratings from DBRS and S&P remaining at BBB.
In the first quarter of 2018, Choice Properties repaid and cancelled its bi-lateral $250,000 senior unsecured committed revolving credit facility
with a major Canadian financial institution maturing December 21, 2018.
126 Choice Properties REIT 2018 Fourth Quarter Report
In the second quarter of 2018, Choice Properties repaid and cancelled its syndicated $500,000 senior unsecured committed revolving credit
facility provided by a syndicate of lenders maturing July 5, 2022, and repaid and cancelled the credit facility assumed on the acquisition of
CREIT.
Choice Properties has certain key covenants in its debentures and its committed credit facilities. The key financial covenants include debt
service ratios and leverage ratios, as defined in the respective agreements. These ratios are measured by the Trust on an ongoing basis to
ensure compliance with the agreements. Choice Properties was in compliance with each of the key financial covenants under these agreements
as at December 31, 2018 and December 31, 2017.
The following schedule details the capitalization of Choice Properties:
($ thousands)
Liabilities
As at
As at
December 31, 2018
December 31, 2017
Senior unsecured debentures (note 14)
$
4,725,000
$
2,850,000
Mortgages (note 14)
Class C LP Units (note 5)
Credit facilities (note 15)
Term loans (note 15)
Exchangeable Units (note 16)
Equity
Unitholders’ equity
Non-controlling interests
Total
1,328,280
—
325,000
800,000
4,492,359
3,492,185
7,801
8,320
925,000
561,000
—
4,259,724
928,280
8,701
$
15,170,625
$
9,541,025
Choice Properties REIT 2018 Fourth Quarter Report 127
Notes to the Consolidated Financial Statements
Note 25. Financial Instruments
The following table presents the fair value hierarchy of financial assets and liabilities, excluding those classified as amortized cost that are
short term in nature.
As at
December 31, 2018
As at
December 31, 2017
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
($ thousands)
Assets
Fair value through profit and loss:
Mortgages, loans and notes
receivable (note 12)
Designated hedging derivatives
(note 11)
Amortized cost:
Mortgages, loans and notes
receivable - SPPI (note 12)
Cash and cash equivalents
Liabilities:
Fair value through profit and loss:
Unit-based compensation (note 18)
Designated hedging derivatives
(note 18)
Amortized cost:
Credit facilities and term loans
(note 15)
$
— $
— $
75,692
$
75,692
$
— $
— $
— $
—
—
30,713
1,036
—
1,036
—
—
137,668
137,668
—
30,713
6,407
—
—
—
—
—
—
—
29,193
6,407
3,889,628
4,259,724
14,013
—
—
29,193
—
—
—
—
—
Long term debt and Class C LP Units
—
6,075,033
Exchangeable Units (note 16)
4,492,359
—
11,125
1,621
—
—
—
—
—
—
6,075,033
—
3,889,628
4,492,359
4,259,724
11,125
1,621
—
—
—
14,013
—
—
1,114,407
—
1,114,407
—
559,522
—
559,522
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.
Designated Hedging derivatives Designated hedging derivatives consist of interest rate swaps, which are classified as either current or
non-current and included in other assets or liabilities, as applicable. As at December 31, 2018, the Trust had entered into interest rate swaps
for original notional amounts of $321,700 (December 31, 2017 - nil) to hedge the interest rate associated with an equivalent amount of variable
rate mortgages. The fair value of the designated hedging derivatives is a net liability of approximately $585 (December 31, 2017 - nil). The
Trust also recorded, in other comprehensive income, fair value gains of $597 for the year ended December 31, 2018 (December 31, 2017 -
nil). The Trust did not enter into any designated hedging derivatives during the year ended December 31, 2017.
128 Choice Properties REIT 2018 Fourth Quarter Report
Note 26. 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 11).
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 27 years, thereby mitigating
the exposure to near term changes in interest rates. To the extent that Choice Properties incurs variable rate indebtedness (such as under the
credit facilities), this will result in fluctuations in Choice Properties’ cost of borrowing as interest rates change. If interest rates rise, Choice
Properties’ operating results and financial condition could be materially adversely affected and decrease the amount of cash available for
distribution to Unitholders.
Choice Properties analyzes its interest rate risk and the impact of rising and falling interest rates on operating results and financial condition
on a regular basis.
Choice Properties’ credit facilities and the Debentures also contain covenants that require it to maintain certain financial ratios on a consolidated
basis. If Choice Properties does not maintain such ratios, its ability to make distributions to Unitholders may be limited or suspended. An
increase of 1.0% per annum in the variable component of the credit facilities’ interest rates would result in an increase to liabilities and a
decrease in net income of $15,000 (2017 - $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 $389,962 (2017 - $319,081); and
Unit-based compensation liabilities $2,694 (2017 - $3,573).
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.
Choice Properties REIT 2018 Fourth Quarter Report 129
Notes to the Consolidated Financial Statements
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 are as follows:
($ thousands)
Senior unsecured debentures $
Mortgage
Constructions loans
Credit facilities(i)
Term loans
Total
2019
471,957 $
232,092
2020
707,993 $
180,499
12,493
8,837
—
—
—
—
2021
690,317 $
2022
722,068 $
2023
Thereafter
675,914 $ 2,468,225
Total
$ 5,736,474
156,428
176,842
134,092
747,863
1,627,816
—
—
—
—
—
175,000
—
325,000
625,000
—
—
—
21,330
325,000
800,000
$
716,542 $
897,329 $
846,745 $ 1,073,910 $ 1,760,006 $ 3,216,088
$ 8,510,620
(i)
Excludes interest on the revolving credit facilities at a floating interest rate.
Note 27. Contingent Liabilities and Financial Guarantees
Choice Properties is involved in and potentially subject to various claims by third-parties arising from the normal course of conduct of its
business including regulatory, property and environmental claims. In addition, Choice Properties is potentially subject to regular audits from
federal and provincial tax authorities, and as a result of these audits may receive assessments and reassessments. Although such matters
cannot be predicted with certainty, management currently considers Choice Properties’ exposure to such claims and litigation, to the extent
not covered by Choice Properties’ insurance policies or otherwise provided for, not to be material to the consolidated financial statements,
but they may have a material impact in future periods.
Legal Proceedings Choice Properties is potentially the subject of various legal proceedings and claims that arise in the ordinary course of
business. The outcome of all these proceedings and claims is uncertain. Based on information currently available, any proceedings and claims,
individually and in the aggregate, are not expected to have a material impact on Choice Properties.
Guarantees Choice Properties issues letters of credit to support guarantees related to its investment properties including maintenance and
development obligations to municipal authorities. As at December 31, 2018, the aggregate gross potential liability related to these letters of
credit totaled $38,540 including $3,248 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 28) (December 31, 2017 - $33,352
including $5,231 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.
CPH Master LP guarantees certain debt assumed by purchasers in connection with past dispositions of properties made by CREIT before
the acquisition. These guarantees will remain until the debt is modified, refinanced or extinguished. Credit risks arise in the event that the
purchasers default on repayment of their debt. These credit risks are mitigated by the recourse which the Trust has under these guarantees,
in which case the Trust would have a claim against the underlying property. The estimated amount of debt at December 31, 2018 subject to
such guarantees, and therefore the maximum exposure to credit risk, was $37,700 with an estimated weighted average remaining term of
4.5 years.
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 $315,209, of which $149,344 relates to equity
accounted joint ventures as at December 31, 2018 (December 31, 2017 - $72,777).
The Trust held debt obligations in the amount of $144,702 in its equity accounted joint ventures as at December 31, 2018. Generally, the Trust
is only liable for its proportionate share of the obligations of the co-ownerships and equity accounted joint ventures in which it participates,
except in limited circumstances. Credit risk arises in the event that the partners default on the payment of their proportionate share of such
obligations. This credit risk is mitigated as the Trust generally has recourse under its co-ownership agreements and joint venture arrangements
in the event of default of its partners, in which case the Trust’s claim would be against both the underlying real estate investments and the
partners that are in default. Management believes that the assets of its co-ownerships and joint ventures are sufficient for the purpose of
satisfying any obligation of the Trust should the Trust’s partner default.
130 Choice Properties REIT 2018 Fourth Quarter Report
Note 28. Related Party Transactions
Effective November 1, 2018, Choice Properties’ parent corporation is GWL, which held a 65.4% direct effective interest in the Trust through
ownership of 46,856,415 Units and 100% of the Exchangeable Units as at December 31, 2018. GWL is also the parent company of Loblaw,
with ownership of 50.4% of Loblaw’s outstanding common shares as at December 31, 2018.
On November 1, 2018, Loblaw and GWL completed a reorganization under which Loblaw spun out its effective interest in Choice Properties
to GWL. Prior to the reorganization, Loblaw held a 61.6% direct effective interest in the Trust through ownership of 21,500,000 Units and
100% of the Exchangeable Units as at October 31, 2018 (December 31, 2017 - 82.4% direct effective interest, 21,500,000 Units and 100%
Exchangeable Units, respectively). The reorganization will have no significant impact on the ongoing relationship between Loblaw and Choice
Properties. All current agreements and arrangements with Loblaw will remain in place and Loblaw will continue to be Choice Properties’
largest tenant.
In the ordinary course of business, Choice Properties’ enters into various transactions with related parties. These transactions are measured
at the exchange amount, which is the amount of consideration established and agreed upon by the related parties.
Transactions and Agreements with Loblaw
Acquisitions Included in the investment properties acquired as part of the acquisition of CREIT were 17 properties containing a Loblaw food
or drug store, with annual rental revenue of approximately $12,841 (note 5).
On November 14, 2018, Choice Properties acquired 100% interest in three retail properties from Loblaw for a combined purchase price of
$55,390, excluding acquisition costs, and settled the acquisition with cash (note 6).
On July 3, 2018, Choice Properties acquired a 75% interest in a property from Loblaw for a purchase price of $1,575, excluding acquisition
costs, and settled the acquisition with cash (note 6).
In the year ended December 31, 2017, Choice Properties acquired five investment properties from Loblaw with a fair value of $61,700,
excluding transaction 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 6).
Dispositions On June 21, 2018, a retail property in Quebec, with a fair value of $2,745, was sold for cash consideration. On closing, Choice
Properties received a lease surrender payment from Loblaw of $6,892 (note 6).
In the year ended December 31, 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.
Lease Surrender Payments In the year ended December 31, 2018, Loblaw made lease surrender payments of $10,204 to the Trust.
In the year ended December 31, 2017, Loblaw made lease surrender payments of $5,620. 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 $5,858 in connection with completed gross leasable area for which
tenants have taken possession during the year ended December 31, 2018 (year ended December 31, 2017 - $5,793).
Development Capital Payment In the year ended December 31, 2017, development capital included a payment of $1,542 which was received
from Loblaw.
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.
Services Agreement During 2017 and 2018, Loblaw provided Choice Properties with administrative and other support services.
Choice Properties REIT 2018 Fourth Quarter Report 131
Notes to the Consolidated Financial Statements
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 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, 2018, letters of credit totaling $3,248 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, 2017 -
$5,231) (note 27).
Distributions on LP Units and Notes Receivable Prior to the reorganization on November 1, 2018, Loblaw held all of the Exchangeable
Units and Class C LP Units issued by the Partnership. Loblaw had 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.
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 corresponding notes receivable from Loblaw were cancelled (January 2017 - paid $217,324 and $46,250, respectively).
During the year ended December 31, 2018, distributions declared on the Exchangeable Units and Class C LP Units totaling $222,994 and
$15,417, respectively, were payable to Loblaw (December 31, 2017 - $232,199 and $46,250, respectively). As at December 31, 2018, there
were no notes receivable from Loblaw (December 31, 2017 - $277,588).
Conversion of Class C LP Units Concurrent with the closing of the acquisition of CREIT, Choice Properties converted all its outstanding
Class C LP Units into 70,881,226 Exchangeable Units. A conversion difference of $98,659 was due to Loblaw and settled in cash. These
Exchangeable Units were subject to an undertaking by Loblaw, and subsequently confirmed by GWL , to the TSX that restrict its voting rights
and the exercise of its exchange transfer rights to be consistent with the terms of the converted Class C LP Units.
The reorganization under which Loblaw spun out its effective interest in Choice Properties to GWL, included all the issued and outstanding
Exchangeable Units, of which 70,881,226 Exchangeable Units continue to be subject to restrictions for voting and exchange transfer rights.
Trust Unit Distributions In the year ended December 31, 2018, Choice Properties declared distributions of $13,258 on the Units held by
Loblaw prior to the transfer of its effective interest in Choice Properties to GWL (year ended December 31, 2017 - $15,695).
Transaction Summary as Reflected in the Consolidated Financial Statements Loblaw is also Choice Properties’ largest tenant,
representing approximately 68.0% of Choice Properties’ base rental revenue and 58.9% of its gross leasable area as at December 31, 2018
(December 31, 2017 - 88.2% and 87.6% 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 $650 per annum to Choice Properties, subject to certain
conditions. Transactions with Loblaw recorded in the consolidated statements of income and comprehensive income were comprised as
follows:
($ thousands)
Rental revenue (note 20)
Property management and other administration fees (note 29)
Services Agreement expense (note 29)
Interest expense and other financing charges
Year ended
December 31, 2018
752,068
$
Year ended
December 31, 2017
722,896
$
899
(2,335)
(238,411)
1,270
(2,580)
(278,449)
132 Choice Properties REIT 2018 Fourth Quarter Report
The balances due from (to) Loblaw were as follows:
($ thousands)
Rent receivable and other receivables (note 11)
Notes receivable (note 12)
Class C LP Units (note 14)
Exchangeable Units (note 16)
Distributions payable and other liabilities (note 18)
Net due from (to) Loblaw
Transactions with GWL
As at
As at
December 31, 2018
1,760
$
December 31, 2017
3,097
$
—
—
—
—
277,588
(925,000)
(4,259,724)
(302,443)
$
1,760
$
(5,206,482)
Acquisitions On December 7, 2018, Choice Properties acquired a 100% interest in an industrial property from GWL for a purchase price of
$20,280, excluding acquisition costs, and settled the acquisition with cash (note 6).
Operating Lease Choice Properties entered into a ten-year lease 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.
Distributions on Exchangeable Units and Notes Receivable Subsequent to the reorganization on November 1, 2018, GWL holds all of
the Exchangeable Units issued by the Partnership. During the year ended December 31, 2018, distributions declared on the Exchangeable
Units totaling $48,095 were payable to GWL (December 31, 2017 - nil).
Subsequent to the reorganization on November 1, 2018, GWL assumed the notes receivable from Loblaw entities of $26,226 (December 31,
2017 - nil). On the first business day of 2019, distributions payable for Exchangeable Units of $26,226 were paid and the corresponding notes
receivable from GWL were cancelled.
Trust Unit Distributions In the year ended December 31, 2018, Choice Properties declared distributions of $21,416 on the Units held by
GWL (year ended December 31, 2017 - $18,045). As of December 31, 2017, GWL is no longer participating in the DRIP (note 16). During
the year ended December 31, 2017, the Trust issued 1,359,193 Units to GWL under the DRIP.
Transaction Summary as Reflected in the Consolidated Financial Statements Transactions with GWL recorded in the consolidated
statements of income and comprehensive income were comprised as follows:
($ thousands)
Rental revenue (note 20)
Interest expense and other financing charges
Office rent expense
The balances due from (to) GWL and subsidiaries were as follows:
($ thousands)
Notes receivable (note 12)
Exchangeable Units (note 16)
Distributions payable and other liabilities (note 18)
Due to GWL and subsidiaries
Year ended
December 31, 2018
2,296
$
Year ended
December 31, 2017
2,154
$
48,095
(1,028)
—
(616)
As at
As at
December 31, 2018
26,226
$
December 31, 2017
—
$
(4,492,359)
(53,163)
$
(4,519,296)
$
—
(1,563)
(1,563)
Choice Properties REIT 2018 Fourth Quarter Report 133
Notes to the Consolidated Financial Statements
Transactions with Other Related Parties
Joint Venture On December 9, 2014, Choice Properties and its joint venture partner, Wittington Properties Limited (“Wittington”), completed
the acquisition of 500 Lake Shore Boulevard West in Toronto, Ontario for $15,576 from Loblaw (note 8). Wittington is the development and
construction manager for the commercial space. Wittington’s parent company is Wittington Investments, Limited, which holds a majority
interest in GWL. Choice Properties contributed $7,080 to the joint venture and received distributions of $7,200 during the year ended December
31, 2018 (year ended December 31, 2017 - contributions $13,760 and distributions nil). Operating activities have not begun at the property,
however the joint venture did earn interest income during the year ended December 31, 2018 of $2,070 (2017 - $634). Also, in 2018,
developmental density was sold for a price equal to fair value.
Summarized financial information for Choice Properties’ share of the related party equity accounted joint venture is set out below:
($ thousands)
Current assets
Non-current assets
Current liabilities
Net assets at 100%
Investment in equity accounted joint venture at 40%
($ 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 at 40%
As at
As at
December 31, 2018
4,891
$
88,329
(11,075)
82,145
32,858
$
$
Year ended
December 31, 2018
2,070
$
$
$
(473)
1,597
639
$
$
$
$
$
$
December 31, 2017
47,021
80,045
(46,219)
80,847
32,339
Year ended
December 31, 2017
634
(1,863)
(1,229)
(491)
Transactions with Key Personnel
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, 2018
2,049
$
$
620
2,669
$
$
Year ended
December 31, 2017
3,859
3,206
7,065
134 Choice Properties REIT 2018 Fourth Quarter Report
Note 29. Supplementary Information
Property Operating Costs
($ thousands)
Property taxes and insurance
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
Services Agreement expense charged by related party
Other
Total general and administrative expenses
Less:
Capitalized to investment properties
Allocated to recoverable operating expenses
General and administrative expenses
Property Management and Other Administration Fees
($ thousands)
Fees charged to related party (note 28)
Fees charged to third-parties
Property management and other administration fees
Year ended
December 31, 2018
229,862
$
Year ended
December 31, 2017
167,198
$
80,958
3,616
$
314,436
$
41,656
620
209,474
Year ended
December 31, 2018
36,565
$
Year ended
December 31, 2017
22,907
$
1,246
1,920
2,335
7,721
49,787
(3,261)
(16,343)
$
30,183
$
1,892
1,515
2,580
5,809
34,703
(3,035)
(7,405)
24,263
Year ended
December 31, 2018
899
$
$
2,624
3,523
$
$
Year ended
December 31, 2017
1,270
—
1,270
Choice Properties REIT 2018 Fourth Quarter Report 135
Notes to the Consolidated Financial Statements
Change in Non-Cash Working Capital
($ thousands)
Net change in accounts receivable and other assets
Add back (deduct):
Change to designated hedging derivative assets
Amounts from acquisition of CREIT (note 5)
Amounts from acquired properties (note 6)
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
Change to designated hedging derivative liabilities
Amounts from acquisition of CREIT (note 5)
Amounts from acquired properties (note 6)
Impact of currency translation(i)
Change in non-cash working capital
Year ended
December 31, 2018
(12,941)
$
Year ended
December 31, 2017
(6,214)
$
1,036
47,505
149
(49,773)
(11,341)
2,888
234,679
(1,621)
(166,351)
(750)
(3,912)
—
—
157
(45,383)
(338)
(2,974)
(13,422)
—
—
(265)
—
$
39,568
$
(68,439)
(i)
Impact of currency translation includes $225 impact on cash held in foreign currency for the year ended December 31, 2018.
136 Choice Properties REIT 2018 Fourth Quarter Report
Supplemental Disclosure of Non-Cash Operating, Investing and Financing Activities
($ thousands)
Net assets from the acquisition of CREIT (note 5)
Debt assumed on the acquisition of CREIT (note 5):
Mortgages
Debentures
Construction loans
Credit facility
Issuance of Units (note 5)
Mortgage assumed on acquisition of investment properties (note 6)
Debt discount expensed on issuance of Series I (note 14)
Issuance of Exchangeable Units (note 16)
Value of Units issued under distribution reinvestment plan (note 16)
Trust expense component of Units issued under unit-based compensation plan
Year ended
December 31, 2018
(5,521,945)
$
Year ended
December 31, 2017
—
$
1,309,677
451,853
9,583
70,000
2,056,911
2,805
51
826,341
1,487
6,341
—
—
—
—
—
6,601
—
14,632
22,383
126
Recoverable Property Capital
($ thousands)
Balance yet to be recovered, beginning of the year
Add: Recoverable expenditures from the acquisition of CREIT
Add: Recoverable expenditures incurred during the period (note 7)
Less: Recoverable during the period
Balance yet to be recovered, end of the year
Year ended
December 31, 2018
137,961
Year ended
December 31, 2017
100,683
$
69,915
57,586
(22,204)
243,258
$
—
44,962
(7,684)
137,961
$
$
Choice Properties REIT 2018 Fourth Quarter Report 137
Notes to the Consolidated Financial Statements
Note 30. Segment Information
Prior to the second quarter of 2018, Choice Properties operated one reportable segment, retail, with all operations carried out in Canada.
Following the acquisition of CREIT on May 4, 2018, the Trust operates in three reportable segments: retail, industrial and office.
The segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker, determined to
be the CEO of the Trust. The CEO measures and evaluates the performance of the Trust based on net operating income which is presented
by property type below and included in these consolidated financial statements at the proportionate share of the related revenue and expenses
for these properties while other net income items are reviewed on a consolidated basis. Other net income items and the balance sheet are
reviewed on a consolidated basis by the CEO and therefore are not included in the segmented disclosure below.
The chart below presents net income for the year ended December 31, 2018, in a manner consistent with internal reporting and the accounting
policies of the segments presented here are the same as the Trust's accounting policies as described in note 2.
($ thousands)
Rental revenue
Deduct: Straight-line rent
Property operating costs
Net operating income
Add back: Straight-line rent
$
Retail
955,686
(27,995)
(259,846)
667,845
$
Industrial
143,527
(5,416)
(35,399)
102,712
$
Office
88,323
(1,653)
(32,169)
54,501
$
Consolidation and
eliminations(i)
(39,263)
988
12,978
(25,297)
General and administrative expenses
Property management and other administration fees
Net interest expense and other financing charges
Interest and other income
Share of income from equity accounted joint ventures
Acquisition transaction costs and other related expenses
Adjustment to fair value of Exchangeable Units
Adjustment to fair value of investment properties
Income before income taxes
Income taxes
Net income
(i)
Reconciling items adjust Choice Properties’ proportionate share of joint ventures to reflect the equity method of accounting under GAAP.
Year ended
December 31, 2018
1,148,273
(34,076)
(314,436)
799,761
34,076
833,837
(30,183)
3,523
(551,146)
14,224
16,222
(141,493)
593,706
(88,575)
650,115
(538)
649,577
$
$
138 Choice Properties REIT 2018 Fourth Quarter Report
Corporate Profile
Choice Properties, Canada's preeminent diversified real estate investment trust, is the owner, manager and developer of a high quality portfolio
comprising 753 properties totaling 66.8 million square feet of gross leasable area. The portfolio is comprised of retail properties, predominantly
leased to necessity-based tenants, industrial, office and residential assets concentrated in attractive markets and offers an unmatched
development pipeline. Choice Properties' strategic alliance with its principal tenant, Loblaw Companies Limited, the country's leading retailer,
is a key competitive advantage providing long-term growth opportunities.
Conference Call and Webcast
Management will host a conference call the following day on Thursday, February 14, 2019 at 11:00AM (ET) with a simultaneous audio webcast.
To access via teleconference, please dial (647) 427-7450 or (888) 231-8191 toll free. A playback will be made available two hours after the
event at (416) 849-0833, access code: 5394967. The link to the audio webcast will be available on 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
AST Trust Company (Canada)
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@astfinancial.com
Website: www.astfinancial.com/ca-en
Investor Relations
Tel: 416-960-6990
Toll free: 1-855-322-2122
Email: investor@choicereit.ca
Website: www.choicereit.ca
Additional financial information has been filed electronically with
various securities regulators in Canada through the System for
Electronic Document Analysis and Retrieval (SEDAR),
www.sedar.com. Choice Properties holds a conference call shortly
following the release of its quarterly results. These calls are
archived in the Investor Relations section of the Trust’s website,
www.choicereit.ca.
Ce rapport est disponible en français.
Choice Properties REIT 2018 Fourth Quarter Report 139
Ce rapport est disponible en français.
choicereit.ca