Cominar REIT
Annual Report 2017

Plain-text annual report

INSPIRED BY PEOPLE. INSPIRING THE INDUSTRY. 2017 Annual Report COMINAR REAL ESTATE INVESTMENT TRUST Fiscal Year Ended December 31, 2017 MESSAGE TO UNITHOLDERS 3 Alban D’Amours, CM, GOQ, LH, Fellow Adm.A. Sylvain Cossette, B.C.L. EMBRACING COMINAR 2.0 As an integral part of our evolution into “Cominar 2.0”, we wish to highlight three important and recent achievements: › Stabilization of our balance sheet through our agree- ment to sell $1.14 billion of non-core properties; › Refocusing our strategy on our core Québec markets where we enjoy competitive advantages; and › Revitalization of our Board of Trustees to reflect the continuously evolving real estate landscape. In December of 2017, we announced the sale of $1.14 billion of non-core properties to Slate Acquisitions Inc., allowing us to exit the Atlantic Provinces, Western Canada and the Greater Toronto Area. Closing is scheduled for late March, with the proceeds to be used to repay debt, including appro- ximately $50 million of debt incurred to fund unit buybacks under our normal course issuer bid. This is a significant and important step in stabilizing our balance sheet. This sale will allow us to narrow our focus to our strong leadership position in Montreal and Québec City. The Montreal economy is favorable and vibrant, with strengthe- ning fundamentals, a deep pool of educated workers, and a competitive cost environment. With over 50% of our continuing portfolio located in Montreal, we are eager to participate in the growth of Canada’s second largest city as major infrastructure projects, including the REM (Réseau express métropolitain), further propel the success of this major urban centre. Québec City provides both stability and growth opportunities, with our office and industrial portfolio occupancy at 95.5%. Like Montreal, Québec City stands to further prosper as it refines its urban development strategy and mass transit orientation. Cominar is well positioned to capture future benefits in our capital region through our leading strategi- cally positioned portfolio. 5 We plan to review our portfolio looking for both further opportunities to sell assets, as well as opportunities to enhance and further intensify our properties to increase NOI and surface value. Included in our portfolio are many well-located urban assets with significant potential for value creation, including our flagship property Gare Centrale de Montréal, one of Canada’s most important transportation infrastructure assets. As an important element of “Cominar 2.0”, we are also pleased to welcome three new board members with deep real estate and capital markets experience, enhancing our best in class board as we navigate a dynamic real estate landscape. › Paul Campbell joins our board March 8, with over 40 years of leading real estate experience in Canada and abroad in the office and retail segments. Mr. Campbell has held numerous board, senior leadership and advisory positions with several large real estate organizations, including Kingsett, 20 Vic, SITQ, Bentall, Revenue Proper- ties, Maron Properties, Oxford, Campeau Corporation, Trilea and Bramalea. Mr. Campbell was awarded the NAIOP Lifetime Achievement Award for his contribu- tions to the real estate industry. • René Tremblay joins our board March 8, with over 35 years of global real estate experience, primarily in retail and strong named executive officer (NEO) experience. Former Chairman and President of Taubman Asia, the Asian arm of U.S. NYSE listed Taubman Centres, a leader in the shopping centre industry, Mr. Tremblay was responsible for driving Taubman’s shopping center expansion in the Asia-Pacific region. Prior to Taubman, Mr. Tremblay was CEO of Ivanhoe Cambridge and has great familiarity with many of Cominar’s core retail centres. • Heather Kirk, CFA, will stand for election at our upcoming annual meeting of unitholders. She has over 20 years of capital markets experience in the Canadian REIT sector, most recently as Managing Director at BMO from 2013 to 2018, where as an equity analyst she covered several Canadian REITS including Cominar. Prior to joining BMO, Mrs. Kirk was at National Bank as an equity analyst from 2009 to 2013, and as an investment banker from 2002 to 2009, with coverage over Cominar. In 2017 we recorded write-downs totalling $643 million, including $616 million of reductions to fair value of investment properties (of which $288 million related to the sale of non-core properties to Slate) and a $27 million de-recognition of goodwill. At year-end, our debt ratio was 57.4%, dropping to 50.1% pro forma the closing of the Slate transaction. Our path to recovery has also required that we take difficult but necessary steps with respect to our debt and payout levels. In order to ensure that Cominar has the required financial flexibility to pursue its plan, we have significantly reduced our distributions. At the same time, we are also re-evaluating our capital plans. These measures aim to restore our financial flexibility and protect our ability to make distributions on a sustainable level, which remains at the heart of our purpose. Much ink has been spilled on the dynamic retail sector. As we evolve our retail properties alongside retailers adapting to an omni-channel environment, we are investing in the mall experience, and introducing new retailers, features and amenities to attract shoppers. At our flagship Rockland shopping centre, innovative initiatives such as bringing a Mandy’s food truck within our mall and our Womance pop up road show are examples of our dynamic retail group differentiating our offering. At the same time, we are exploring intensification and redevelopment opportunities to grow revenue streams and bring additional shopper traffic, such as office, residential and hotel uses to drive value from our portfolio of large format urban shopping centres. Cominar has also started an important transition towards the internalization of certain construction activities and the diversification of its use of outside construction suppliers. As part of this transition, the use of Groupe Dallaire for construction services will be reduced in an orderly manner, over an approximate 12-month transition period. As part of this transition, Cominar expects to integrate certain dedicated elements of Groupe Dallaire’s workforce in Montreal at no additional cost to the REIT, with a view of ensuring continuity and best addressing our needs and those of our clients in the most cost-effective manner. In 2017, we also undertook a significant modernization of our governance practices, including executive com- pensation. Our Board has further enhanced Cominar’s governance by resolving to update our contract of trust with current best-in-class practices, including introducing rights and remedies in favour of unitholders consistent with those available to shareholders of a corporation pursuant to the Canada Business Corporations Act. These changes are to be presented to unitholders for adoption at our upcoming annual meeting of unitholders. We take this opportunity to thank all employees, as well as our trustees for their contribution over the last year. Our Board and management have been engaged in an intensive review of Cominar’s governance and strategy. Actions and steps taken are the result of thoughtful analysis both internally and externally in consultation with financial and legal advisors and with various stakeholders including unit- holders. We thank our unitholders for their constructive dialogue and input. Finally, we wish to thank Michel Dallaire and Ghislaine Laberge for their contributions to Cominar since 1998. Alban D’Amours, CM, GOQ, LH, Fellow Adm.A. Chairman of the Board of Trustees Sylvain Cossette, B.C.L. President and Chief Executive Officer 07 STARTING A NEW CHAPTER OF OUR STORY INSPIRED BY THE COLLECTIVE INTELLIGENCE OF OUR PEOPLE As a society, we are currently in the midst of a technological, social, environmental and economic upheaval that will rewrite the future and usher in radical changes in every facet of our consumption. This is why, building on our strengths, we have been hard at work formulating our vision of the future of our industry and the real estate profession. More than a hundred people throughout the organization have been called upon to help integrate this vision into our culture and our business solutions. We are building Cominar 2.0 and this stimulating project drives us all deeply. This vision involves redefining Cominar’s role, raising the bar for the real estate profession and repositioning the company’s brands to drive deeper engagement, secure a unique position on the market, maximize appeal and foster agility. It underpins the very concept of the role of leasable space and serves as the impetus. Behind the creation of “lifestyle spaces” for our clients throughout our portfolio – be they in shopping centres, office buildings or industrial and mixed-use properties. In shaping the future, we will have to strive to gain a better grasp of the core needs and expectations of the clients of tomorrow. Many avenues are already beginning to open up in this regard and point to opportunities that will arise from the changes that are currently taking place. The time has come for us to accelerate the emergence of a new, more sustainable and more prosperous economic model. And Cominar is well poised to assume an influential, forwardlooking leadership position in the business world. ment where teamwork is encouraged and valued. These spaces emblematic of the creative, contemporary and vibrant spirit that embodies Cominar’s new vision. They have been redesigned from A to Z with a focus on coope- ration, flexibility and technology – a clear look forward to the workplace of tomorrow. They boast a variety of different spaces, most of which are open plan, with height-adjustable, for innovation, health and productivity. Every member of our workforce plays a unique and valuable role in putting us at the vanguard of our industry. These collaborative spaces create a sense of cohesion and boost the performance of our multidisciplinary teams. The talent and passion that guide our people are driving us forward and redefining our relationships with our clients. We are tapping into the entrepreneurial mindset that is part of our DNA to rethink how our employees, partners, clients and users interact. The approach embraced by our teams every single day is underpinned by three pillars: agility, creativity and connec- tion. The diversification of our office, retail and industrial/ mixed-use assets gives us a strategic edge. Located in robust markets such as Montreal, Quebec City and Ottawa, they pave the way to unmatched opportunities to create value by developing and repositioning our properties in their respective markets. Our vision is built around users’ experience, with a focus on providing them with compelling environments that meet their needs over the long term. We are now starting a new chapter in the remarkable story of our company. And I have every confidence that our people will enable us to secure a favourable position in this constantly changing industry. Accordingly, we have invested in setting up collaborative, stimulating offices in Montreal, Quebec City and Ottawa so that our employees can grow and thrive in an environ- Sylvain Cossette President and Chief Executive Officer 09 agility creativity connection Cominar Offices AGILITY BOLDNESS / ADAPTABILITY / FLEXIBILITY Agility is more than the capacity to adapt quickly to the ever-shifting real estate landscape. It is a way of doing business and an integral part of our processes and our vision here at Cominar. Agility is what allows us to adjust our business model to meet the evolving needs of our industry and cater to our clients more and more effectively. It impels us to see and think differently, and stay nimble in our methods and our overall approach. These are the foundations for our ambition and our determination to lead the way in our sector. This core value manifests itself every day in several vital aspects of our client offering: › › › The diversification of our portfolio, which enables us to optimize our flexible business solutions in line with the individual needs and aspirations of our clients. Our ability to adapt our services and roll out initiatives that keep us one step ahead of the changes in our industry. Our commitment to thinking outside the box and embracing a collaborative management style that brings teams together in a hands-on way. Agility, boldness, adaptation and flexibility – these are key drivers of our ongoing success that will continue to shape our outlook for the years and decades to come. Cominar Offices 11 Cominar Offices ″The best way to predict the future is to create it yourself.″ Peter Diamandis Engineer, physician and entrepreneur Founder and Executive Chairman, XPRIZE Foundation 13 ″If you can dream it, you can do it.″ Walt Disney Founder, The Walt Disney Company Cominar Offices Cominar Offices CREATIVITY PASSION / INNOVATION / CURIOSITY In business, creativity is what pushes us to see things from another angle and to keep reinventing ourselves. It fuels our curiosity of the unknown and sparks our passion for coming up with new ways to look at our industry and deliver experiences that are anything but the same old same old. Our world is changing at breakneck speed, and our proper- ties have to keep pace with it. But we are able to tap into the boundless creativity and steadfast commitment of our people at every level of our organization to develop tomorrow’s solutions today. How can we push the innovation envelope to reach out to current and prospective clients? How can we foster continuous improvement methods that engage each and every one of our stakeholders? How can we make technological innovation a strategic and operational priority? How can we fundamentally redefine what an office space, an industrial property or a shopping centre is – and what it does? This journey toward something new, something more, something better, motivates us to embrace novel ideas with an open mind and an exceptional spirit of resourcefulness to offer solutions that woo and wow our clients in new and unexpected ways. Creativity is the renewable energy of our time, an invisible force that spurs us to excellence, and inspires us to live the present and dream the future. 15 CONNECTION APPROACHABILITY / COLLABORATION / RESPECT What if we redefined the concept of teamwork and took it to a whole new level? That’s precisely what’s happening at Cominar: by working together in an environment where connection, dialogue and respect matter, we are building the future of our company and reshaping the way we do business. Opening the door to innovation, to sharing knowledge and collabo- rating with others – this is the cornerstone of the philosophy that guides and inspires our people every single day. This coming together has been the impetus behind revamping our work structure to foster an environment where personal excellence and team cohesion are at the heart of the innovative solutions we bring to the table. The end goal is to develop practices adapted to the new realities of the business world and leverage the talents of every member of our team in order to better serve the interests of our clients, investors and partners. At Cominar, we’re about more than real estate. We are committed to growing and developing in an ecosystem where relationships nourish our prosperity over the long term. These relationships with our clients, our suppliers, our people and society as a whole play a critical role in our success. Our world is changing a little every day. And it’s up to us to put our collective spirit of creativity and innovation to work to change with it. Cominar Offices Cominar Offices ″Coming together is a beginning; keeping together is progress; working together is success.″ Henry Ford Early 20th century industrialist Founder, Ford Motor Company PROPERTY PORTFOLIO 17 P O P U P RETAIL The Cominar brand is intrinsically linked to market-leading retail properties in prime locations. Our portfolio is made up of shopping centres and retail strips that cater to market and customer needs. The Cominar shopping centre is a veritable lifestyle hub, with an ambiance that is open to what customers want in terms of experience. It can be calm if they wish to sit back and relax in comfort, or dynamic and engaging if they are looking to be entertained. The merchandise mix in our centres must be personalized, diverse and constantly evolving to keep pace with these needs. But beyond personalization, products must be locally and ethically sourced in order to correspond to consumers’ values and allow them to fully express their personalities. In 2017, we initiated a major strategic shift to redefine the consumer experience in our retail properties, bringing in a number of distinctive concepts in sync with this vision. The Womance concept, for one, travelled to several of our centres to provide online shoppers with a unique experience based on the human contact of a store environment. Place de la Cité, Carrefour Rimouski, Alexis Nihon, Les Rivières, Galeries de Hull, Centre commercial Rivière-du-Loup and Galeries Rive Nord proved to be popular destinations for this new, and diverse, group of customers. CARTE BLANCHE PROGRAM Our partnership with Montreal’s Fashion & Design Festival was also a unique opportunity to bring emerging concepts together under the same roof and give them a direct line to their customer base. The pop-up tour kicked off at Rockland, featuring a lineup of hotter-than-hot Quebec brands such as Allcovered, Maguire, Le Cartel, Duy and Horace – to the great delight of shoppers. In keeping with our commitment to innovation, we welcomed Mandy’s food truck to the Rockland central court during the year to serve up their delicious gourmet salads. Rockland thus became the first shopping centre in Quebec to host a full-size food truck indoors. The move was also a first for Mandy’s, whose “create your own salad” concept is already faring extremely well in five locations in Montreal. In addition, we are investing in the renovation of the Rockland food court, inspired by the latest design and restaurant trends. It will feature a large atrium with open-air kitchens for permanent restaurateurs as well as a few novel pop- up concepts. Through this initiative, we will be redefining the culinary experience and making Rockland one of Montreal’s groundbreaking culinary destinations, where professional chefs will hold demonstrations and unique gastronomic events. Womance Tour Mandy’s Food Truck – Rockland Food Court – Rockland We expanded and revamped our already popular gift card program, which extends to 18 shopping centres across Canada. The new program allows consumers to purchase gift cards online or at one of our centres, or to order them electronically. The accompanying promotional campaign was greeted with great enthusiasm, lending an extra measure of visibility to Cominar and our participating properties. TOTAL NUMBER OF PROPERTIES TOTAL LEASABLE SPACE (SQ. FT.) OCCUPANCY RATE 154 12.1M 93.2% PROPERTY PORTFOLIO 19 OFFICE We are a leader in the Quebec office space market. Our office properties boast strategic locations, excellent visibility and easy access for both our clients and their clients. There were multiple success stories in office leasing in 2017. For one, our teams finalized several deals at 3055 Saint-Martin Boulevard, in Laval, to incorporate clients such as Lafarge and Kiewit into the property’s roster of occupants. In keeping with our ongoing commitment to serving our clients better and more effectively, we introduced a number of innovative promotional tools in the past year – including augmented and virtual reality applications. These tools help optimize our efforts to market our available space and showcase our business solutions in an increasingly impactful way. What’s more, Cominar’s own collabo- rative, stimulating offices reflect our steadfast determination to be a source of inspiration for our clients and the industry as a whole. Companies that choose to team up with Cominar enjoy first-rate amenities in line with their business imperatives and the requirements specific to their sector of activity. We are proud to specialize in creating environments that enable our clients to thrive in their market and remain focused on their growth. Cominar Offices Complexe Jules-Dallaire TOTAL NUMBER OF PROPERTIES TOTAL LEASABLE SPACE (SQ. FT.) OCCUPANCY RATE 136 14.8M 89.1% PROPERTY PORTFOLIO 21 INDUSTRIAL AND MIXED-USE Our industrial and mixed-use properties are ideally located and designed to accommodate the particular needs of this segment. Facilities can easily be adapted to suit a variety of purposes, including production, processing, distribution, warehousing, administration and/or manufacturing. In an effort to meet the less conventional needs of certain clients during the year, we came up with solutions to adapt industrial spaces for office use for companies such as Ubisoft, InnovMetric and Coveo, and create entertainment venues such as iSaute Quebec. A number of development projects will be kicked off in 2018 to meet robust market demand. A new website has been developed to view available spaces in the Cominar portfolio. The search tool makes it easy for real estate agents and direct clients to find industrial and mixed-use properties that match their requirements. At Cominar, we take pride in working hand in hand with our clients to ensure their success by providing them with flexible environments that energize, engage and inspire. 1201 Marie-Victorin Street, Saint-Bruno-de-Montarville, QC TOTAL NUMBER OF PROPERTIES TOTAL LEASABLE SPACE (SQ. FT.) OCCUPANCY RATE 235 17.5M 95.2% SOCIAL RESPONSIBILITY Guided by the human values that have been at the core of our organization since day one and our deep-seated commitment to building better communities, we are passionate about doing our part to improve our collective future. VOLUNTEERING PROGRAM IN 2017 69% RATE OF EMPLOYEE ENGAGEMENT 7,640 HOURS INVESTED IN THE COMMUNITY Accessibility Ramp CRIR Project – Alexis Nihon Under our volunteering program, the aim of which is to encourage employees to give back to the communities where they live and work, a total of 14,961 hours has been invested in local charities since 2016. ARTS AND CULTURE 18 EDUCATION 8 SPORTS 6 104 INITIATIVES IN 2017 30 HEALTH 36 HUMANITARIAN ENDEAVOURS 6 BUSINESS OUTREACH AND DEVELOPMENT With the support of our people throughout the organization, we are proud to contribute to no fewer than 104 initiatives that are making a difference in multiple spheres. ″Effective philanthropy requires a lot of time and creativity – the same kind of focus and skills that building a business requires.″ Bill Gates Founder, Microsoft Corporation 23 n o i l l i F l i e n a D : o t o h p Spin-O-Cage Event – Place de la Cité Interdisciplinary Research in Rehabilitation of Greater Montreal (CRIR), we adapted the renovations to provide a safe environment for people with mobility and visual impairments. Alexis Nihon is actually the first building in North America to introduce these features. In recognition of its efforts, the property received a Maple Leaf Silver Award in 2015 from the ICSC Canadian Shopping Centre Awards in the Renovations/Expansions category. The dedication of each and every individual involved in these activities helps us enhance the quality of life of thousands of people and reinforce Cominar’s reputation as an industry leader committed to striking a balance between empathy, humanity and business acumen. Since 2008, our employees and managers have voluntarily contributed to Centraide/United Way – and every year we as a company proudly match these amounts. The combined total to date comes to $1,874,028. In 2017 alone, we raised $383,700 for this very worthy cause, thanks to the partici- pation of 448 employees, or 71% of our organization. In 2017, 18 of our shopping centres in Quebec took part in our signature event, Cominar’s Forest of Stars, benefiting Opération Enfant Soleil. The $161,000 raised handily surpassed the initial target of $150,000. The success of this initiative is attributable to the generosity of our partners and the hard work of our volunteers, employees and retailers in the nine regions covered by the event. Our corporate social responsibility priorities have also been reflected in the revitalization project at the Alexis Nihon shopping centre. Working closely with the Centre for   ENVIRONMENTAL STEWARDSHIP We took up the sustainability mantle in the mid-’90s as the first company in Quebec to spearhead a project, at our Place de la Cité shopping centre in collaboration with Hydro-Québec, in which generators were used to offset power consumption peaks incurred through the utility. For more than two decades, a central platform has allowed the engineering team in charge of energy management for the portfolio to introduce and monitor best practices, especially those related to the recommissioning of existing buildings. This involves a process designed to reoptimize HVAC systems in order to enhance occupant comfort and save energy. This environmentally responsible approach is the backbone of everything we do and all of the projects we undertake at Cominar. What can we improve to reduce our carbon footprint? How can we get everyone on board to build a cleaner, greener, more eco-minded world? The sum of our actions, day in and day out, is decisive in creating a better future for our company, our people and the communities we operate in. › › › 27 of our properties are BOMA-certified. Complexe Jules-Dallaire is certified under the LEED program, and certification procedures are currently underway for Tower 5 of Place Laval. Participation in the GRAME environmental program and the SOVERDI project to plant over 300 trees on our properties in Dorval, Lachine and Saint-Laurent. Development of the Plug & Drive program, in partnership with the FLO network, so drivers of electric vehicles (EVs) can recharge their batteries at 18 of our shopping centres, as well as Complexe Jules-Dallaire in Quebec City and Montreal Central Station. › › › › › A fast-charge station, part of Hydro-Québec’s Electric Circuit, at Centre commercial Rivière-du-Loup, serving EV drivers along the corridor between Montreal and Mont-Joli. Bicycle parking facilities at Alexis Nihon, complete with a Biciborne bicycle repair station for cycle commuters. Car-sharing service at Alexis Nihon in conjunction with Car2go. Program to collect recyclables, organic waste, power chargers, cables, computer peripheral devices, small electronics and printer cartridges. In 2017, close to 44,900 electronic devices were recycled through the Electrobac program. At Cominar, sustainability isn’t about looking good – it’s about doing good. 25 Energy Recovery System – Complexe Jules-Dallaire EV Charging Station – La Plaza de la Mauricie ″Sustainable development is essential to the survival of the market economy.″ Louis Schweitzer French government official and business executive Former Chair and CEO of Renault 20 17 27 TABLE OF CONTENTS 02 MESSAGE TO UNITHOLDERS 06 PRESIDENT AND CHIEF EXECUTIVE OFFICER VISION 16 RETAIL 18 OFFICE 20 INDUSTRIAL AND MIXED-USE 22 SOCIAL RESPONSABILITY 24 ENVIRONMENTAL STEWARDSHIP 29 MANAGEMENT’S DISCUSSION AND ANALYSIS 30 Real estate portfolio 32 Highlights 34 Subsequent events 34 Caution regarding forward-looking statements 35 Non-ifrs financial measures 35 Performance indicators 36 Financial and operational highlights 37 Selected quarterly information 38 Selected annual information 39 General business overview 40 Objectives and strategy 41 Reconciliations to Cominar’s proportionate share 43 Performance analysis 44 Results of operations 55 Funds from operations and adjusted funds from operations 58 Adjusted cash flows from operations 59 Distributions 60 Liquidity and capital resources 63 Financial instruments 65 Property portfolio 66 Acquisitions, investments and dispositions 69 Real estate operations 72 73 Related party transactions 75 Disclosure controls and procedures and internal control over financial reporting 76 Significant accounting policies and estimates 80 Future accounting policy changes 80 Risks and uncertainties Issued and outstanding units 89 CONSOLIDATED FINANCIAL STATEMENTS 96 Notes to consolidated financial statements 126 CORPORATE INFORMATION 127 UNITHOLDERS INFORMATION 29 4 MANAGEMENT’S DISCUSSION AND ANALYSIS MANAGEMENT'S DISCUSSION AND ANALYSIS The following Management's Discussion and Analysis (“MD&A”) is provided to enable the reader to assess the results of operations of Cominar Real Estate Investment Trust (“Cominar,” the “Trust” or the “REIT”) for the fiscal year ended December 31, 2017, in comparison with the fiscal year ended December 31, 2016, as well as its financial position as at that date and its outlook. Dated March 7, 2018, this MD&A reflects all significant information available as of that date and should be read in conjunction with the consolidated financial statements and accompanying notes included in this report. Unless otherwise indicated, all amounts are in thousands of Canadian dollars, except for per unit and per square-foot amounts, and are based on the consolidated financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”). income, BASIS OF PRESENTATION Certain financial information in this MD&A present the consolidated balance sheets and consolidated statements of comprehensive including Cominar’s proportionate share in the assets, liabilities, revenues and charges of its joint ventures, hereinafter referred to as “Cominar’s proportionate share”, which are non-IFRS measures. Management believes that presenting the operating and financial results of Cominar, including its proportionate share in the assets, liabilities, revenues and charges of its joint ventures, provides more useful information to current and prospective investors to assist them in understanding Cominar’s financial performance. The reader is invited to refer to the section Reconciliations to Cominar’s proportionate share for a complete reconciliation of Cominar’s consolidated financial statements prepared in accordance with IFRS to the financial information including its proportionate share in the assets, liabilities, revenues and charges of its joint ventures presented in this MD&A. Additional information on Cominar, including its 2016 Annual Information Form, is available on Cominar’s website at www.cominar.com and on the Canadian Securities Administrators’ (“CSA”) website at www.sedar.com. The Board of Trustees, under the recommendation of the Audit Committee, has approved the contents of this MD&A. 30 31 REAL ESTATE PORTFOLIO 525 PROPERTIES 44.4M sq. ft. LEASABLE AREA $7.8B ASSETS GEOGRAPHIC DIVERSIFICATION (PROPERTIES) 41.6% 36.7% 21.7% OFFICE RETAIL INDUSTRIAL SEGMENT DIVERSIFICATION (NET OPERATING INCOME) REAL ESTATE PORTFOLIO CORE MARKETS 429 PROPERTIES 38.4% 38.4% 23.2% OFFICE RETAIL INDUSTRIAL SEGMENT DIVERSIFICATION (NET OPERATING INCOME) 38.1M sq. ft. LEASABLE AREA $6.7B ASSETS GEOGRAPHIC DIVERSIFICATION (PROPERTIES) 127 QUEBEC REGION 282 MONTREAL REGION 20 OTTAWA 24 TORONTO REGION 58 14 ATLANTIC PROVINCES WESTERN CANADA 127 QUEBEC REGION 282 MONTREAL REGION 20 OTTAWA 33 33 HIGHLIGHTS SURFACE LOCATIVE $120.7M DISPOSITIONS OF INVESTMENT PROPERTIES 70.7% INCREASE IN RETENTION RATE TO HIGHLIGHTS CORE MARKETS -0.1% GROWTH IN THE AVERAGE NET RENT OF RENEWED LEASES 76.0% INCREASE IN RETENTION RATE TO 0.6% GROWTH IN THE AVERAGE NET RENT OF RENEWED LEASES 1.4 M sq. ft. COMMITTED LEASES COMMENCING IN THE COMING QUARTERS 93.2% INCREASE IN THE OCCUPANCY RATE TO 1.2 M sq. ft. COMMITTED LEASES COMMENCING IN THE COMING QUARTERS 92.6% INCREASE IN THE OCCUPANCY RATE TO $1.1B DEFINITIVE AGREEMENT TO SELL INVESTMENT PROPERTIES IN NON-CORE MARKETS 34 35 SUBSEQUENT EVENTS NON-IFRS FINANCIAL MEASURES On January 10, 2018, Cominar announced the increase of its normal course issuer bid (“NCIB”), increasing the maximum number of units that can be repurchased for cancellation from 9,000,000 units to 17,596,591 units. Under this NCIB, Cominar has repurchased, since the beginning of fiscal year 2018, 2,709,500 units at an average price of $14.58, for a total consideration of $39.5 million paid cash. Since December 19, 2017, Cominar has repurchased a total of 3,440,400 units at an average price of $14.50, for a total consideration of $49.9 million paid cash. On January 15, 2018 and February 15, 2018, Cominar declared a monthly distribution of $0.095 per unit for each of these months. Subsequent to the end of fiscal 2017, Cominar entered into the following loans: a $75.0 million bridge loan bearing interest at the prime rate plus 110 basis points or at the bankers’ acceptance rate plus 210 basis points and repayable on the closing of the $1.1 billion sale of investment properties, a 10-year $42.5 million mortgage payable, bearing interest at 4.484% and a 5-year $45.0 million mortgage payable, bearing interest at prime rate plus 90 basis points or 4.00%, whichever is greater. The net proceeds from these loans were used to repay a portion of the unsecured revolving operating and acquisition credit facility. On February 12, 2018, Alban D’Amours was appointed as Cominar’s Chairman of the Board of Trustees following the departure of Michel Dallaire. On March 7, 2018, Cominar decreased the monthly distribution from $0.095 per unit to $0.06 per unit, beginning with the distribution of March 2018, payable in April 2018. CAUTION REGARDING FORWARD-LOOKING STATEMENTS From time to time, we make written or oral forward-looking statements within the meaning of applicable Canadian securities legislation. We may make such statements in this document and in other reports filed with Canadian regulators, in reports to unitholders or in other communications. These forward-looking statements include, among other things, statements with respect to our medium-term and 2018 objectives, and strategies to achieve our objectives, as well as statements with respect to our beliefs, outlooks, plans, objectives, expectations, anticipations, estimates and intentions. The words "may," "could," "should," "would," "suspect," "outlook," "believe," "plan," "anticipate," "estimate," "expect," and "intend," and the use of the conditional tense, and words and expressions of similar import are intended to identify forward-looking statements. By their very nature, forward-looking statements involve numerous factors and assumptions, and are subject to inherent risks and uncertainties, both general and specific, which give rise to the possibility that predictions, forecasts, projections and other forward- looking statements will not be achieved. We caution readers not to place undue reliance on these statements as a number of important factors could cause our actual results to differ materially from the expectations expressed in such forward-looking statements. These factors include financial conditions in Canada and elsewhere in the world; the effects of competition in the markets where we operate; the impact of changes in laws and regulations, including tax laws; successful execution of our strategy; our ability to complete and integrate acquisitions successfully; our ability to attract and retain key employees and executives; the financial position of clients; our ability to refinance our debts upon maturity and to lease vacant space; our ability to complete developments according to plans and schedules and to raise capital to finance growth as well as the interest rate variations. We caution readers that the foregoing list of important factors that may affect future results is not exhaustive. When relying on our forward-looking statements to make decisions with respect to Cominar, investors and others should carefully consider the foregoing factors, as well as other factors and uncertainties. Unless otherwise stated, all forward-looking statements are valid only as at the date of this MD&A. We do not assume any obligation to update the aforementioned forward-looking statements, except as required by applicable laws. Additional information about these factors can be found in the “Risks and Uncertainties” section of this MD&A, as well as in the “Risk Factors” section of Cominar’s 2016 Annual Information Form. In this MD&A, we provide guidance and report on certain non-IFRS measures, including “net operating income,” “adjusted net income,” “funds from operations,” “adjusted funds from operations,” “adjusted cash flows from operations” and “proportionate share in joint ventures adjustments,” which management uses to evaluate Cominar’s performance. Because non-IFRS measures do not have standardized meanings and may differ from similar measures presented by other entities, securities regulations require that non-IFRS measures be clearly defined and qualified, reconciled with their closest IFRS measure and given no more prominence than the latter. You may find such information in the sections dealing with each of these measures. PERFORMANCE INDICATORS Cominar measures the success of its strategy using a number of performance indicators:  Same property net operating income, which provides an indication of the operating profitability of the same property portfolio, that is, Cominar’s ability to increase revenues, reduce costs, and generate organic growth;  Funds from operations ("FFO") per unit, which represents a standard real estate benchmark used to measure an entity’s performance;  Adjusted funds from operations ("AFFO") per unit, which, by excluding the rental income arising from the recognition of leases on a straight-line basis, the investments needed to maintain the property portfolio’s ability to generate rental income from the calculation of funds from operations and a provision for leasing costs, provides a meaningful measure of Cominar’s ability to generate steady profits;  Adjusted cash flows from operations (“ACFO”) per unit, which provides a helpful real estate benchmark to measure Cominar’s ability to generate stable cash flows;  Debt ratio, which is used to assess the financial balance essential to the smooth running of an organization;   Occupancy rate, which gives an indication of the economic health of the geographical regions and sectors in which Cominar Interest coverage ratio, which is used to assess Cominar’s ability to pay interest on its debt from operating revenues; owns properties;  Retention rate, which helps assess client satisfaction and loyalty;  Growth in the average net rent of renewed leases, which is a measure of organic growth and gives an indication of our capacity to increase our rental revenue;  Segment and geographic diversification, which contributes to revenue stability by spreading real estate risk. The above-mentioned performance indicators are not IFRS financial measures. Definitions and other relevant information regarding these performance indicators are provided in the appropriate sections. 36 37 SELECTED QUARTERLY INFORMATION The following table presents, in summary form, Cominar’s financial information for the last eight quarters: For the quarters ended Dec. 31, 2017 Sept. 30, 2017 June 30, 2017 March 31, 2017 Dec. 31, 2016 Sept. 30, 2016 June 30, 2016 March 31, 2016 $ $ $ $ $ $ $ $ Operating revenues – Financial statements Operating revenues – Cominar’s proportionate share(4) Net operating income(4) – Financial statements Net operating income(4) – 207,418 204,160 209,955 213,956 210,350 217,946 217,262 221,424 211,197 207,753 213,032 216,858 213,008 220,371 219,859 223,857 110,487 110,180 109,487 105,883 114,301 124,569 116,069 113,670 Cominar’s proportionate share 112,654 112,247 111,268 107,417 115,790 126,055 117,456 115,053 Net income (net loss) Adjusted net income(4) Recurring FFO(4) Recurring AFFO(4)(5) Cash flows provided by operating activities – Financial statements Recurring ACFO(4) Distributions (581,256) (1) 68,551 63,892 51,628 81,471 52,117 52,792 63,981 63,981 65,287 55,414 100,702 54,924 58,006 PER UNIT Net income (net loss) (basic and diluted) Adjusted net income (diluted)(4) Recurring FFO (FD)(3)(4) Recurring AFFO (FD)(3)(4) Recurring ACFO (FD)(3)(4) Distributions (3.14) (1) 0.37 0.34 0.28 0.28 0.35 0.35 0.35 0.30 0.30 65,837 63,553 64,902 56,312 15,299 59,275 68,079 0.36 0.35 0.35 0.31 0.32 59,713 59,713 61,008 52,473 35,753 50,380 67,646 0.33 0.33 0.33 0.29 0.30 26,341 (1) 77,529 (2) 67,996 69,423 59,213 66,805 68,511 58,782 102,031 120,213 60,601 67,156 54,181 63,513 0.14 (1) 0.37 0.38 0.33 0.33 0.46 0.39 0.40 0.35 0.32 69,787 69,787 71,359 62,908 23,214 65,614 61,817 0.41 0.41 0.42 0.37 0.39 68,081 68,081 69,277 61,034 38,632 65,592 61,970 0.40 0.40 0.41 0.36 0.39 0.2850 0.3125 0.3675 0.3675 0.3675 0.3675 0.3675 0.3675 Includes the change in fair value of investment properties of -$616.4 million in 2017 [-$46.7 million in 2016] and the derecognition of goodwill of $27.0 million. Includes the net proceeds of $10.7 million from the settlement approved by the court between Target Canada and its creditors. (1) (2) (3) Fully diluted (4) Non-IFRS financial measure. See relevant section for definition and reconciliation to closest IFRS measure. (5) Following the publication by REALpac of a White Paper on AFFO effective January 1, 2017, the amounts for 2016 have been restated to comply with the REALpac definition. FINANCIAL AND OPERATIONAL HIGHLIGHTS For the years ended December 31 FINANCIAL PERFORMANCE Operating revenues – Financial statements Operating revenues – Cominar’s proportionate share(1) Net operating income(1) – Financial statements Net operating income(1) – Cominar’s proportionate share Same property net operating income(1) Net income (net loss)(7) Adjusted net income(1) Recurring funds from operations (FFO)(1) Recurring adjusted funds from operations (AFFO)(1) Cash flows provided by operating activities – Financial Statements Recurring adjusted cash flows from operations (ACFO)(1) Distributions Total assets PER UNIT FINANCIAL PERFORMANCE Net income (net loss) (basic and diluted) Adjusted net income (diluted)(1) Recurring funds from operations (FFO)(FD)(1)(2) Recurring adjusted funds from operations (AFFO)(FD)(1)(2) Recurring adjusted cash flows from operations (ACFO)(FD)(1)(2) Distributions Payout ratio of recurring adjusted cash flows from operations (ACFO)(1) Cash payout ratio of recurring adjusted cash flows from operations (ACFO)(1) Payout ratio of recurring adjusted funds from operations (AFFO)(2) FINANCING Debt ratio(3) Interest coverage ratio(4) Weighted average interest rate on total debt Residual weighted average term of total debt (years) Unsecured debts-to-total-debt ratio(5) Unencumbered income properties Unencumbered assets to unsecured debt ratio(6) OPERATIONAL DATA Number of investment properties Leasable area (in thousands of sq. ft.) Occupancy rate Retention rate Growth in the average net rent of renewed leases DEVELOPMENT ACTIVITIES Properties under development – Cominar’s proportionate share(1) 2017 $ 2016 $ % Δ Page 835,489 866,982 848,840 877,095 436,037 468,609 443,586 474,354 436,771 445,904 (3.6) (3.2) (7.0) (6.5) (2.0) (391,725) 241,738 (262,0) (6.2) (8.4) (10.8) (17.9) (11.9) (3.1) (5.6) (252.1) (12.0) (14.3) (16.4) (17.5) (9.4) 9.8 (0.6) 8.5% 255,798 272,669 255,089 278,570 215,827 241,938 233,225 284,090 216,696 245,988 246,523 254,456 7,824,993 8,287,785 (2.13) 1.39 1.38 1.17 1.18 1.3325 112.9% 94.7% 1.40 1.58 1.61 1.40 1.43 1.4700 102.8% 95.3% 113.9% 105.0% 57.4% 2.43:1 4.10% 3.7 52.1% 52.4% 2.65:1 4.23% 4.5 53.0% 3,347,839 3,736,476 1.43:1 1.62:1 525 539 44,370 44,919 92.6% 70.7% 0.6% 92.4% 68.2% 1.8% 43,547 63,647 44 45 46 46 46 54 54 55 55 58 58 59 43 54 54 55 55 58 59 58 58 55 62 62 62 62 63 63 63 65 65 69 70 70 41 (1) Non-IFRS financial measure. See relevant section for definition and reconciliation to closest IFRS measure. (2) Fully diluted. (3) Total of cash and cash equivalents, bank borrowings, mortgages payable and debentures divided by the total assets minus the total of cash and cash equivalents. (4) Net operating income less Trust administrative expenses divided by finance charges. (5) Unsecured debt divided by total debt. (6) Fair value of unencumbered income properties divided by the unsecured debt. (7) Includes the change in fair value of investment properties. 38 39 SELECTED ANNUAL INFORMATION The following table presents a summary of Cominar’s financial information for the last 3 fiscal years: For the years ended December 31 Operating revenues – Financial statements Operating revenues – Cominar’s proportionate share(3) Net operating income(3) – Financial statements Net operating income(3) – Cominar’s proportionate share Net income (net loss)(2) Adjusted net income(3) Recurring FFO(3) Recurring AFFO(3) Cash flows provided by operating activities – Financial statements Recurring ACFO(3) Distributions 2017 $ 835,489 848,840 436,037 443,586 (391,725) 255,798 255,089 215,827 233,225 216,696 246,523 2016 $ 866,982 877,095 468,609 474,354 241,738 272,669 278,570 241,938 284,090 245,988 254,456 2015 $ 889,175 898,042 487,488 492,378 272,434 298,910 302,240 265,430 263,942 268,489 251,295 Total assets 7,824,993 8,287,785 8,225,697 PER UNIT Net income (net loss) (basic and diluted) Adjusted net income (diluted)(3) Recurring FFO (FD)(1)(3) Recurring AFFO (FD)(1)(3) Recurring ACFO (FD)(1)(3) Distributions (2.13) 1.39 1.38 1.17 1.18 1.3325 1.40 1.58 1.61 1.40 1.43 1.62 1.78 1.79 1.57 1.59 1.4700 1.4700 (1) Fully diluted (2) (3) Non-IFRS financial measure. See relevant section for definition and reconciliation to closest IFRS measure. Includes the change in fair value of investment properties and the derecognition of goodwill. GENERAL BUSINESS OVERVIEW Cominar Real Estate Investment Trust is one of the largest diversified REITs in Canada and remains the largest commercial property owner and manager in the province of Quebec. As at December 31, 2017, Cominar owned and managed a high-quality portfolio of 525 properties including 136 office buildings, 154 retail buildings and 235 industrial and mixed-use buildings located in Quebec, Ontario, the Atlantic Provinces and Western Canada, representing a total leasable area of 44.4 million square feet. Cominar’s properties are mostly situated in prime locations and benefit from high visibility and easy access by both our tenants and their clients. Since its inception in 1998, Cominar has made a series of acquisitions and completed numerous construction and property development projects, bringing the value of its assets to $7.8 billion as at December 31, 2017. In December, 2017, Cominar announced that it has entered into a definitive agreement to sell its entire non-core market portfolio, for total gross proceeds of $1.14 billion. The portfolio comprises 96 properties totalling 6.2 million square feet, located in the Greater Toronto Area, the Atlantic Provinces and Western Canada. As a result of this transaction, Cominar will concentrate its activities in the cities of Montréal, Québec and Ottawa. Cominar’s asset and property management is internalized. Cominar is an integrated and self-managed real estate investment company. This property management structure enables us to rapidly and efficiently respond to our clients’ needs, while minimizing our operating cost. PROPERTY SUMMARY AS AT DECEMBER 31, 2017 Operating segment Office Retail Industrial and mixed-use TOTAL Number of properties Leasable area (sq. ft.) Occupancy rate 136 154 235 525 14,830,000 12,075,000 17,465,000 44,370,000 89.1% 93.2% 95.2% 92.6% PROPERTY SUMMARY AS AT DECEMBER 31, 2017 – CORE MARKETS Operating segment Office Retail Industrial and mixed-use TOTAL Number of properties Leasable area (sq. ft.) Occupancy rate 100 131 198 429 11,955,000 10,445,000 15,749,000 38,149,000 90.0% 93.1% 95.9% 93.2% Geographic market Number of properties Leasable area (sq. ft.) Occupancy rate Québec Montréal Ottawa TOTAL 127 282 20 429 10,253,000 25,420,000 2,476,000 38,149,000 94.9% 92.9% 89.7% 93.2% 40 41 OBJECTIVES AND STRATEGY RECONCILIATIONS TO COMINAR’S PROPORTIONATE SHARE Cominar’s primary objectives are to provide unitholders with stable and sustainable monthly cash distributions which are tax deferred, from investments in a diversified portfolio of properties, and to increase and maximize unit value through the proactive management of properties and the ongoing expansion of its real estate portfolio. According to IFRS 11, joint ventures are accounted for under the equity method in Cominar’s consolidated financial statements. Management considers that presenting operating and financial results including Cominar’s proportionate share of the assets, liabilities, revenues and charges of its joint ventures, provides more complete information on Cominar’s financial performance. In December, 2017, Cominar announced that it has entered into a definitive agreement to sell its entire non-core market portfolio, for total gross proceeds of $1.14 billion. The portfolio comprises 96 properties totalling 6.2 million square feet, located in the Greater Toronto Area, the Atlantic Provinces and Western Canada. The following tables present the reconciliations between Cominar’s consolidated financial statements prepared in accordance with IFRS and consolidated financial statements including its proportionate share of the assets, liabilities, revenues and charges of its joint ventures. As at December 31, 2017, Cominar is the third largest diversified real estate investment trust in Canada and its portfolio totals 44.4 million square feet located in Quebec, Ontario, the Atlantic Provinces and Western Canada. Cominar is the largest commercial property owner in the Province of Quebec in each of its three asset segments, being office, retail and industrial. After the sale of its entire non-core market portfolio, the REIT will continue to benefit from the diversification resulting from its three very distinct core markets, Montréal, Québec and Ottawa. This focus will allow the REIT to capitalize on its leading position in its core markets. The highly internalized management platform in the core markets further enhances its competitive advantage and operating synergies. It will also allow the REIT to focus its growth and developments in the markets where the competitive advantage exists. As at December 31 2017 2016 Consolidated financial statements $ Joint ventures $ Cominar’s proportionate share(1) $ Consolidated financial statements $ Joint ventures $ Cominar’s proportionate share(1) $ ASSETS Investment properties Income properties Properties under development Land held for future development Investment properties held for sale Investments in joint ventures Goodwill Mortgage receivable Accounts receivable Prepaid expenses and other assets Cash and cash equivalents 6,239,383 37,692 91,580 6,368,655 1,143,500 86,299 139,982 — 62,956 16,673 6,928 163,475 5,855 10,126 179,456 — (86,299) — — 481 100 77 Total assets 7,824,993 93,815 6,402,858 43,547 101,706 6,548,111 1,143,500 — 139,982 — 63,437 16,773 7,005 7,918,808 7,676,134 45,776 90,820 99,197 17,871 41,288 7,775,331 63,647 132,108 7,812,730 158,356 7,971,086 143,130 90,194 166,971 8,250 42,518 14,139 9,853 — 143,130 (90,194) — — 305 88 692 — 166,971 8,250 42,823 14,227 10,545 8,287,785 69,247 8,357,032 LIABILITIES Mortgages payable Mortgages payable related to the investment properties held for sale Debentures Bank borrowings Accounts payable and accrued liabilities Deferred tax liabilities Total liabilities UNITHOLDERS’ EQUITY Unitholders’ equity Total liabilities and unitholders’ equity (1) Non-IFRS financial measure. 1,873,776 79,286 1,953,062 2,048,009 56,437 2,104,446 276,350 1,721,577 620,366 117,482 6,681 4,616,232 — — 11,950 2,579 — 93,815 276,350 1,721,577 632,316 120,061 6,681 4,710,047 — 1,970,566 332,121 109,861 11,715 — — 10,800 2,010 — — 1,970,566 342,921 111,871 11,715 4,472,272 69,247 4,541,519 3,208,761 7,824,993 — 93,815 3,208,761 7,918,808 3,815,513 8,287,785 — 3,815,513 69,247 8,357,032 42 43 For the quarters ended December 31 2017 2016 Consolidated financial statements $ Joint ventures $ Cominar’s proportionate share(1) $ Consolidated financial statements $ Joint ventures $ Cominar’s proportionate share(1) $ 207,418 3,779 211,197 210,350 2,658 213,008 (96,931) (1,612) (98,543) 96,049 1,169 97,218 110,487 2,167 112,654 114,301 1,489 115,790 Operating revenues Operating expenses Net operating income(1) Finance charges Trust administrative expenses Change in fair value of investment properties Share of joint ventures’ net income Derecognition of goodwill(2) (42,839) (11,408) (616,354) 108 (26,989) Income (loss) before income taxes (586,995) Income taxes Net income (net loss) and comprehensive income 5,739 (581,256) (1) Non-IFRS financial measure. (2) Share of goodwill associated with investment properties held for sale For the years ended December 31 Consolidated financial statements $ (989) (6) (1,064) (108) — — — — 2017 Joint ventures $ (43,828) (11,414) (42,482) (4,490) (617,418) (46,675) — (26,989) 5,795 — (586,995) 26,449 5,739 (108) (581,256) 26,341 (692) (22) 5,020 (5,795) — — — — (43,174) (4,512) (41,655) — — 26,449 (108) 26,341 2016 Cominar’s proportionate share(1) Consolidated financial statements $ $ Joint ventures $ Cominar’s proportionate share(1) $ Operating revenues 835,489 13,351 848,840 866,982 10,113 877,095 Operating expenses (399,452) (5,802) 405,254 398,373 4,368 402,741 Net operating income(1) 436,037 7,549 443,586 468,609 5,745 474,354 Finance charges Trust administrative expenses Change in fair value of investment properties Share of joint ventures’ net income Derecognition of goodwill(2) (168,752) (25,977) (616,354) 5,276 (26,989) Income (loss) before income taxes (396,759) Income taxes Net income (net loss) and comprehensive income 5,034 (391,725) (1) Non-IFRS financial measure. (2) Share of goodwill associated with investment properties held for sale (3,449) (172,201) (44) (26,021) (170,645) (16,719) (2,691) (173,336) (68) (16,787) 1,220 (5,276) — — — — (615,134) (46,675) — (26,989) 8,006 — (396,759) 242,576 5,034 (838) (391,725) 241,738 5,020 (8,006) — — — — (41,655) — — 242,576 (838) 241,738 PERFORMANCE ANALYSIS FINANCIAL POSITION The following table indicates the changes in assets and liabilities as well as in unitholders’ equity as at December 31, 2017, and 2016, as shown in our consolidated financial statements: As at December 31 ASSETS Investment properties Income properties Properties under development Land held for future development Investment properties held for sale Investments in joint ventures Goodwill Mortgage receivable Accounts receivable Prepaid expenses and other assets Cash and cash equivalents Total assets LIABILITIES Mortgages payable Mortgages payable related to the investment properties held for sale Debentures Bank borrowings Accounts payable and accrued liabilities Deferred tax liabilities Total liabilities UNITHOLDERS’ EQUITY Unitholders’ equity Total liabilities and unitholders’ equity 2017 $ 2016 $ $ Δ % Δ 6,239,383 7,676,134 (1,436,751) 37,692 91,580 45,776 90,820 (8,084) 760 (18.7) (17.7) 0.8 6,368,655 7,812,730 (1,444,075) (18.5) 1,143,500 86,299 139,982 — 62,956 16,673 6,928 143,130 1,000,370 90,194 166,971 8,250 42,518 14,139 9,853 (3,895) (26,989) 698.9 (4.3) (16.2) (8,250) (100.0) 20,438 2,534 48.1 17.9 (2,925) (29.7) 7,824,993 8,287,785 (462,792) (5.6) 1,873,776 2,048,009 (174,233) (8.5) 276,350 1,721,577 620,366 117,482 6,681 4,616,232 3,208,761 7,824,993 — 276,350 1,970,566 (248,989) 100.0 (12.6) 86.8 6.9 288,245 7,621 (5,034) (43.0) 332,121 109,861 11,715 4,472,272 143,960 3.2 3,815,513 (606,752) (15.9) 8,287,785 (462,792) (5.6) 44 45 RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table indicates the main changes in our results of operations for the periods ended December 31, 2017 and 2016, as shown in our consolidated financial statements: For the periods ended December 31 Operating revenues Operating expenses Net operating income(1) Finance charges Trust administrative expenses Change in fair value of investment properties Share of joint ventures’ net income Derecognition of goodwill(2) Income taxes Net income (net loss) Quarter Year 2017 $ 207,418 (96,931) 110,487 (42,839) (11,408) (616,354) 108 (26,989) 5,739 (581,256) 2016 $ 210,350 (96,049) 114,301 (42,482) (4,490) (46,675) 5,795 — (108) % Δ (1.4) 0.9 (3.3) 0.8 154.1 1,220.5 (98.1) 100.0 (5,413.9) 2017 $ 835,489 (399,452) 436,037 (168,752) (25,977) (616,354) 5,276 (26,989) 5,034 2016 $ 866,982 (398,373) 468,609 (170,645) (16,719) % Δ (3.6) 0.3 (7.0) (1.1) 55.4 (46,675) 1,220.5 8,006 — (34.1) 100.0 (838) (700.7) 26,341 (2,306.7) (391,725) 241,738 (262.0) (1) Non-IFRS financial measure. (2) Share of goodwill associated with investment properties held for sale OPERATING REVENUES For the periods ended December 31 Operating revenues – Financial statements Operating revenues – Joint ventures Operating revenues – Cominar’s proportionate share(1) (1) Non-IFRS financial measure. Quarter Year 2017 $ 207,418 3,779 2016 $ 210,350 2,658 % Δ (1.4) 42.2 2017 $ 835,489 13,351 2016 $ 866,982 10,113 % Δ (3.6) 32.0 211,197 213,008 (0.9) 848,840 877,095 (3.2) During fiscal 2017, operating revenues, according to the financial statements, decreased by 3.6% [3.2% according to Cominar’s proportionate share] compared with fiscal 2016, due to the dispositions of income properties for a total amount of $221.4 million completed in 2016 and 2017 and to the non-recurring net proceeds of $10.7 million obtained in 2016 from the settlement of the claim against Target. For the periods ended December 31 Same property portfolio – Financial statements Same property portfolio – Joint ventures Same property portfolio(1) – Cominar’s proportionate share(2) Acquisitions, developments and dispositions – Financial statements Acquisitions and developments – Joint ventures Operating revenues – Cominar’s proportionate share(2) Quarter 2017 $ 204,850 3,571 2016 $ % Δ 205,372 2,531 (0.3) 41.1 Year 2016 $ 831,768 9,788 2017 $ 825,566 12,596 % Δ (0.7) 28.7 208,421 207,903 0.2 838,162 841,556 (0.4) 2,568 208 4,978 (48.4) 127 63.8 9,923 755 35,214 325 (71.8) 132.3 211,197 213,008 (0.9) 848,840 877,095 (3.2) (1) The same property portfolio includes the properties owned by Cominar as at December 31, 2015, except for the properties sold in 2016 and 2017, but does not include the results of properties acquired and those under development in 2016 and 2017. (2) Non-IFRS financial measure. During fiscal 2017, operating revenues of the same property portfolio, according to the financial statements, decreased by 0.7% [0.4% according to Cominar’s proportionate share] compared with fiscal 2016. This decrease is due to a decrease in the in-place occupancy rate for the office segment (Western Canada, Atlantic Provinces and Ottawa), and for the retail segment (Western Canada, Ottawa and Montréal), partially offset by an increase in the in-place occupancy rate for the industrial segment as well as a decrease in the average net rent of renewed leases for the retail segment. The chart below presents Cominar’s operating revenues, according to the consolidated financial statements, over the past 10 years. (1) Amounts not restated under IFRS, determined in accordance with Canadian GAAP before changeover. (2) Decrease in operating revenues due mainly to the dispositions of income properties for a total amount of $221.4 million completed in 2016 and 2017. 46 47 NET OPERATING INCOME The chart below presents Cominar’s net operating income based on the consolidated financial statements over the past 10 years. Although net operating income (“NOI”) is not an IFRS financial measure, it is widely used in the real estate industry to assess operating performance. We define it as operating income before the change in fair value of investment properties, derecognition of goodwill, share of joint ventures’ net income, finance charges, Trust administrative expenses and income taxes. This definition may differ from that of other entities and, therefore, Cominar’s NOI may not be comparable to similar measures presented by such other entities. For the periods ended December 31 Net operating income – Financial statements Net operating income – Joint ventures Net operating income – Cominar’s proportionate share(1) (1) Non-IFRS financial measure. Quarter Year 2017 $ 110,487 2,167 2016 $ % Δ 114,301 1,489 (3.3) 45.5 2017 $ 436,037 7,549 2016 $ 468,609 5,745 % Δ (7.0) 31.4 112,654 115,790 (2.7) 443,586 474,354 (6.5) During fiscal 2017, NOI, according to the financial statements, decreased by 7.0% [6.5% according to Cominar’s proportionate share] from fiscal 2016. This decrease is due to the dispositions of income properties for a total amount of $221.4 million completed in 2016 and 2017 and to the non-recurring net proceeds of $10.7 million obtained in 2016 from the settlement of the claim against Target. Quarter Year 2016 $ % Δ 2017 $ 2016 $ 110,721 1,405 (1.7) 44.4 429,717 440,369 7,054 5,535 2017 $ 108,860 2,029 % Δ (2.4) 27.4 (1) Amounts not restated under IFRS, determined in accordance with Canadian GAAP before changeover. (2) Decrease in net operating income due mainly to the dispositions of income properties for a total amount of $221.4 million completed in 2016 and 2017. SEGMENT NET OPERATING INCOME Cominar analyzes its segmented results of operations taking into account the proportionate share of its joint ventures to assess the operating performance of its investment properties. 110,889 112,126 (1.1) 436,771 445,904 (2.0) BY OPERATING SEGMENT For the periods ended December 31 Same property portfolio – Financial statements Same property portfolio – Joint ventures Same property portfolio(1) – Cominar’s proportionate share(2) Acquisitions, developments and dispositions – Financial statements Acquisitions and developments – Joint ventures Net operating income – Cominar’s proportionate share(2) 1,627 138 3,580 (54.6) 84 64.3 6,320 495 28,240 210 (77.6) 135.7 112,654 115,790 (2.7) 443,586 474,354 (6.5) (1) The same property portfolio includes the properties owned by Cominar as at December 31, 2015, except for the properties sold in 2016 and 2017, but does not include the results of properties acquired and those under development in 2016 and 2017. (2) Non-IFRS financial measure. Same property net operating income according to Cominar’s proportionate share decreased by 2.0% during fiscal 2017 from fiscal 2016. This decrease is due to the decrease in the in-place occupancy rate for the office segment (Western Canada, Atlantic Provinces and Ottawa), and for the retail segment (Western Canada, Ottawa and Montréal), partially offset by an increase in the in- place occupancy rate for the industrial segment as well as a decrease in the average net rent of renewed leases for the retail segment. For the periods ended December 31 Operating segment Office Retail Industrial and mixed-use Net operating income – Cominar’s proportionate share(1) Distribution: Core markets Other markets Total (1) Non-IFRS financial measure. Quarter Year 2017 $ 46,502 41,503 24,649 2016 $ 46,928 44,014 24,848 % Δ (0.9) (5.7) (0.8) 2017 $ 184,270 162,965 96,351 2016 $ % Δ 193,309 (4.7) 183,961 (11.4) 97,084 (0.8) 112,654 115,790 (2.7) 443,586 474,354 (6.5) 94,675 17,979 95,371 20,419 112,654 115,790 (0.7) (11.9) (2.7) 370,281 73,305 443,586 387,952 (4.6) 86,402 (15.2) 474,354 (6.5) 48 49 The decrease in net operating income according to Cominar’s proportionate share during fiscal 2017 compared to fiscal 2016 is due mainly to the dispositions of income properties for a total amount of $221.4 million completed in 2016 and 2017 and to the non- recurring net proceeds of $10.7 million obtained in 2016 from the settlement of the claim against Target. For the periods ended December 31 Operating segment Office Retail Industrial and mixed-use Same property net operating income – Cominar’s proportionate share(1) Distribution: Core markets Other markets Total (1) Non-IFRS financial measure. Quarter Year 2017 $ 45,778 41,226 23,885 2016 $ 46,014 42,536 23,576 % Δ (0.5) (3.1) 1.3 2017 $ 182,213 161,107 93,451 2016 $ 188,498 166,080 91,326 % Δ (3.3) (3.0) 2.3 110,889 112,126 (1.1) 436,771 445,904 (2.0) 93,119 17,770 93,368 18,758 110,889 112,126 (0.3) (5.3) (1.1) 365,115 71,656 436,771 368,549 77,355 445,904 (0.9) (7.4) (2.0) Same property net operating income according to Cominar’s proportionate share decreased by 2.0% in 2017 compared to 2016. This decrease was much larger in our non-core markets with a decrease of 7.4%, while our core markets had a better performance with a slight decrease of 0.9%. NET OPERATING INCOME – COMINAR’S PROPORTIONATE SHARE For the periods ended December 31 2017 2016 2017 2016 Quarter Year Operating segment Office Retail Industrial and mixed-use 41.3% 36.8% 21.9% 40.5% 38.0% 21.5% 41.6% 36.7% 21.7% 40.8% 38.7% 20.5% 100.0% 100.0% 100.0% 100.0% BY GEOGRAPHIC MARKET For the periods ended December 31 Core markets Québec Montréal Ottawa(1) Net operating income, core markets – Cominar’s proportionate share(2) Other markets Toronto Atlantic Provinces Western Canada Total net operating income – Cominar’s proportionate share(2) Quarter Year 2017 $ 26,568 59,354 7,197 2016 $ 26,388 59,607 7,373 % Δ 0.7 (0.4) (2.4) 2017 $ 104,085 232,943 28,087 2016 $ 104,576 233,603 30,370 % Δ (0.5) (0.3) (7.5) 93,119 93,368 (0.3) 365,115 368,549 (0.9) 9,450 3,974 4,346 8,824 4,211 5,723 7.1 (5.6) (24.1) 36,039 16,613 19,004 37,168 17,384 22,803 (3.0) (4.4) (16.7) 110,889 112,126 (1.1) 436,771 445,904 (2.0) (1) For presentation purposes, the Gatineau area is included in the Ottawa geographic market. (2) Non-IFRS financial measure. Same property net operating income according to Cominar’s proportionate share in the Québec area experienced a strong performance of 5.2% for the industrial segment and a good performance of 3.5% for the office segment, which were offset by a decrease of 5.5% for the retail segment. In the Montréal area, the industrial segment increased by 2.4%, while the retail segment decreased by 1.3% and the office segment decreased by 1.0%. The decrease in same property net operating income according to Cominar’s proportionate share in the Ottawa area is concentrated in the office segment. The decrease in our non-core market same property net operating income according to Cominar’s proportionate share is due mainly to a strong decrease of 20.1% in Western Canada for the office segment, a decrease of 9.8% in the Greater Toronto Area for the retail segment and a decrease of 10.5% in the Atlantic Provinces for the office segment. 50 51 NET OPERATING INCOME – COMINAR’S PROPORTIONATE SHARE CHANGE IN FAIR VALUE OF INVESTMENT PROPERTIES For the periods ended December 31 2017 2016 2017 2016 Quarter Year Québec Montréal Ottawa(1) Core markets Toronto Atlantic Provinces Western Canada Overall market 24.0% 53.6% 6.4% 84.0% 8.3% 3.8% 3.9% 23.5% 52.5% 6.4% 82.4% 8.7% 4.0% 4.9% 23.9% 53.3% 6.3% 83.5% 8.2% 4.0% 4.3% 23.4% 52.0% 6.4% 81.8% 8.9% 4.4% 4.9% 100.0% 100.0% 100.0% 100.0% (1) For presentation purposes, the Gatineau area is included in the Ottawa geographic market. (1) For presentation purposes, the Gatineau area is included in the Ottawa geographic market. Cominar opted to present its investment properties in the consolidated financial statements according to the fair value model. Fair value is determined based on evaluations performed using management’s internal estimates (based on current market data) and by independent real estate appraisers, plus capital expenditures made during the period, if applicable, or on a definitive agreement to sell investment properties. External valuations were carried out by independent national firms holding a recognized and relevant professional qualification and having recent experience in the location and category of the investment properties being valued. As per Cominar’s policy on valuing investment properties, during fiscal 2017, management revalued the entire real estate portfolio and determined that a decrease of $615.1 million (taking into account an upward adjustment of $1.2 million in the joint ventures) was necessary to adjust the carrying amount of investment properties to their fair value [decrease of $41.7 million in 2016]. This decrease’s proportionate share attributable to our non-core market property portfolio amounted to $288.1 million, while the proportionate share attributable to our non-core market property portfolio amounted to $327.0 million. In 2017, the fair value of investment properties derived from external valuations or sources amounted to 28% [14% in 2016] of the total fair value of all investment properties. The following table presents, in summary form, the changes in fair value for the entire Cominar portfolio as at December 31, 2017: Québec Montréal $ $ Ottawa $ Toronto $ Atlantic Provinces $ Western Canada $ Operating segment Office Retail Industrial and mixed-use (7,030) (77,928) 137 (54,411) (114,654) (18,382) (36,365) (18,483) N/A TOTAL (84,821) (187,447) (54,848) (6,961) 43,822 11,754 48,615 (25,864) (45,200) (9,215) (80,279) (235,114) (20,126) (1,114) (256,354) Total $ (365,745) (232,569) (16,820) (615,134) The following table presents, in summary form, the changes in fair value as a percentage for the entire Cominar portfolio as at December 31, 2017: Québec Montréal Ottawa Toronto Atlantic Provinces Western Canada Operating segment Office Retail Industrial and mixed-use TOTAL (0,1)% (1,0)% — (1,1)% (0,7)% (1,5)% (0,2)% (2,4)% (0,5)% (0,2)% N/A (0,7)% (0,1)% 0,6% 0,1% 0,6% (0,3)% (0,6)% (0,1)% (1,0)% (3,1)% (0,3)% — (3,4)% Total (4,8)% (3,0)% (0,2)% (8,0)% Internally appraised investment properties have been valued using the capitalized net operating income method. Externally valued investment properties have been valued either with the capitalized net operating income method and/or the discounted cash flow method. Here is a description of these methods and the key assumptions used: Capitalized net operating income method – Under this method, capitalization rates are applied to standardized net operating income in order to comply with current valuation standards. The standardized net operating income represents adjusted net operating income for items such as administrative expenses, occupancy rates, the recognition of leases on a straight-line basis and other non- recurring items. The key factor is the capitalization rate for each property or property type. Cominar regularly receives publications from national firms dealing with real estate activity and trends. Such market data reports include different capitalization rates by property type and geographical area. Discounted cash flow method – Under this method, the expected future cash flows are discounted using an appropriate rate based on the risk of the property. Expected future cash flows for each investment property are based upon, but not limited to, rental income from current leases, budgeted and actual expenses, and assumptions about rental income from future leases. Discount and capitalization rates are estimated using market surveys, available appraisals and market comparables. 52 53 To the extent that the capitalization rate ranges change from one reporting period to the next, or if another rate within the provided ranges is more appropriate than the rate previously used, the fair value of investment properties increases or decreases accordingly. The change in the fair value of investment properties is reported in net income. As required under IFRS, Cominar has determined that an increase or decrease in 2017 of 0.1% in the applied capitalization rates for the entire real estate portfolio, except for the investment properties held for sale, would result in a decrease or increase of approximately $103.4 million [$135.3 million in 2016] in the fair value of its investment properties. Capitalization and discount rates used in both the internal and external valuations are consistent. WEIGHTED AVERAGE CAPITALIZATION AND DISCOUNT RATES As at December 31 2017 Québec Montréal Ontario Toronto(1) Atlantic Provinces(1) Western Canada(1) Weighted average rate 2016 Weighted average rate Office properties Capitalized net operating income method Capitalization rate 6.1% 6.2% 6.4% Discounted cash flow method Overall capitalization rate Terminal capitalization rate Discount rate Retail properties 5.3% 5.5% 6.0% N/A N/A N/A 6.0% 6.5% 7.3% Capitalized net operating income method Capitalization rate 6.4% 6.0% 5.9% Discounted cash flow method Overall capitalization rate Terminal capitalization rate Discount rate Industrial and mixed-use properties Capitalized net operating income method 6.8% 7.0% 7.6% 5.4% 5.5% 5.9% N/A N/A N/A Capitalization rate 7.0% 6.7% N/A Discounted cash flow method Overall capitalization rate Terminal capitalization rate Discount rate Total Capitalized net operating income method 6.6% N/A N/A 6.4% 6.5% 7.2% N/A N/A N/A Capitalization rate 6.4% 6.2% 6.3% Discounted cash flow method Overall capitalization rate Terminal capitalization rate Discount rate 6.0% 6.0% 6.5% 5.5% 5.7% 6.1% 6.0% 6.5% 7.3% N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A 6.2% 6.2% N/A N/A N/A N/A N/A N/A 5.4% 5.8% 6.3% 5.4% 5.6% 6.7% N/A N/A 6.1% 5.9% N/A N/A N/A N/A N/A N/A 5.7% 5.8% 6.2% 5.9% 6.1% 6.9% N/A N/A 6.8% 6.9% N/A N/A N/A N/A N/A N/A 6.5% 6.5% 7.2% N/A N/A N/A N/A N/A 6.3% 6.2% N/A N/A N/A N/A N/A N/A 5.8% 5.9% 6.3% 5.6% 5.8% 6.7% (1) For the year ended December 31, 2017, all the properties in the Toronto Area, the Atlantic Provinces and Western Canada have been valued according to a definitive agreement to sell these investment properties. FINANCE CHARGES Quarter Year For the periods ended December 31 Interest on mortgages payable Interest on debentures Interest on bank borrowings Net amortization of premium and discount on debenture issues Amortization of deferred financing costs and other costs Amortization of fair value adjustments on assumed indebtedness Less: Capitalized interest(1) Total finance charges – Financial statements 2017 $ 22,329 18,298 5,696 (124) 760 (1,385) (2,735) 42,839 2016 $ % Δ 22,152 20,898 0.8 (12.4) 2,091 172.4 (203) (38.9) 898 (15.4) (1,468) (1,886) 42,482 (5.7) 45.0 0.8 Percentage of operating revenues 20.7% 20.2% Weighted average interest rate on total debt 2017 $ 89,007 77,952 14,867 (691) 3,454 (5,577) (10,260) 168,752 20.2% 4.10% 2016 $ 87,780 83,456 9,747 % Δ 1.4 (6.6) 52.5 (801) (13.7) 3,771 (8.4) (14.2) 50.7 (1.1) (6,501) (6,807) 170,645 19.7% 4.23% (1) Includes capitalized interest on properties under development and on major revitalization projects for income properties that take place over a substantial period of time. The decrease in finance charges for the year is mainly due to an increase in capitalized interest on properties under development and on major revitalization projects for income properties. TRUST ADMINISTRATIVE EXPENSES During fiscal 2017, Trust administrative expenses amounted to $26.0 million, accounting for 3.1% of operating revenues, compared to 1.9% during fiscal 2016. This increase resulted from a $5.4 million retirement allowance following the end of the chief executive officer’s employement, an increase in compensation expense related to the long-term incentive plan of $1.1 million and in total payroll due to the increase in personnel in the leasing department, as well as in sponsorships and representation costs. Excluding the retirement allowance following the retirement of the chief executive officer, Trust administrative expenses would have amounted to $20.6 million, 2.5% of operating revenues. DERECOGNITION OF GOODWILL During the last quarter of 2017, Cominar transferred to investment properties held for sale its entire non-core market property portfolio. In December 2017, Cominar entered into a definitive agreement to sell this investment property portfolio for total gross proceeds of $1.14 billion. A portion of goodwill, in the amount of $27.0 million, associated with this property portfolio has been allocated to the assets held for sale and then has been subject to derecognition. The derecognized goodwill was distributed as follows: $18.6 million for the office segment, $6.6 million for the retail segment and $1.8 million for the industrial and mixed-use segment. At year-end, Cominar conducted an impairment test on the $140.0 million goodwill balance presented in the balance sheet and concluded that, at that date, there was no impairment loss. 54 55 NET INCOME For the periods ended December 31 Quarter 2017 $ 2016 $ Year 2017 $ 2016 $ Net income (net loss) (581,256) 26,341 (391,725) 241,738 Net income (net loss) per unit (basic and diluted) (3.14) 0.14 (2.13) 1.40 Weighted average number of units outstanding (basic) Weighted average number of units outstanding (diluted)(1) 185,289,552 181,566,067 184,213,583 172,131,831 185,289,552 181,735,991 184,213,583 172,505,427 (1) The calculation of the diluted weighted average number of units outstanding used to calculate the net loss per unit for the year ended December 31, 2017 does not take into account the effect of the conversion of options and deferred units due to the fact that they are antidilutive. Net loss for fiscal 2017 amounted to $391.7 million, compared to a net income of $241.7 million for fiscal 2016. This decrease is due mainly to the $569.7 million increase in the change in fair value of investment properties compared with fiscal 2016, the derecognition of goodwill of $27.0 million and the $32.6 million decrease in net operating income previously explained. ADJUSTED NET INCOME Adjusted net income is not an IFRS financial measure. The calculation method used by Cominar may differ from those used by other entities. Cominar calculates an adjusted net income to eliminate the change in fair value of investment properties and the derecognition of goodwill, which are non-monetary and have no impact on cash flows, as well as to eliminate a non-recurring item. For the periods ended December 31 Quarter Year 2017 $ 2016 $ % Δ 2017 $ 2016 $ % Δ Net income (net loss) (581,256) 26,341 (2,306.7) (391,725) 241,738 (262.0) Change in fair value of investment properties – Cominar’s proportionate share(3) Derecognition of goodwill(4) Non-recurring items(1)(2) Adjusted net income(3) Adjusted net income per unit (diluted)(3) Weighted average number of units outstanding 617,418 26,989 5,400 41,655 1,382.2 — — 100.0 100.0 615,134 26,989 5,400 41,655 1,376.7 — (10,724) 100.0 150.4 68,551 67,996 0.8 255,798 272,669 (6.2) 0.37 0.37 — 1.39 1.58 (12.0) (diluted) 185,493,800 181,735,991 184,356,722 172,505,427 In 2017, a retirement allowance was allocated following the end of the Chief Executive Officer’s employment. In 2016, net proceeds of $10.7 million were obtained in settlement of the claim against Target Canada. (1) (2) (3) Non-IFRS financial measure. (4) Share of goodwill associated with investment properties held for sale. Adjusted net income for the year decreased by $16.9 million from the year 2016, due mainly to the decrease in net operating income following the dispositions of income properties for a total amount of $221.4 million completed in 2016 and 2017. FUNDS FROM OPERATIONS AND ADJUSTED FUNDS FROM OPERATIONS Although the concepts of funds from operations (“FFO”) and adjusted funds from operations (“AFFO”) are not IFRS financial measures, they are widely used in the real estate investment trust industry. REALpac defines FFO as net income (calculated in accordance with IFRS), adjusted for, among other things, changes in the fair value of investment properties, deferred taxes, derecognition of goodwill, initial and re-leasing salary costs, adjustments relating to the accounting of joint ventures under the equity method and transaction costs incurred upon a business combination. During the first quarter of 2017, REALpac published a White Paper on its AFFO definition. REALpac defines AFFO as FFO net of rental revenue less leases derived from the recognition of leases on a straight-line basis, capital expenditures for maintaining the ability to generate income and leasing costs. Cominar adopted this new AFFO definition and adjusted the figures of comparative periods accordingly. FFO and AFFO are not a substitute for net income established in accordance with IFRS when measuring Cominar’s performance. While our methods of calculating FFO and AFFO comply with REALpac recommendations, they may differ from and not be comparable to those used by other entities. The fully diluted weighted average number of units outstanding used for the calculation of FFO and AFFO takes into account the potential issuance of units under the long-term incentive plan, when dilutive. The following table presents a reconciliation of net income (net loss), as determined in accordance with IFRS, and FFO and AFFO: FUNDS FROM OPERATIONS AND ADJUSTED FUNDS FROM OPERATIONS For the periods ended December 31 Net income (net loss) Deferred income taxes Initial and re-leasing salary costs Change in fair value of investment properties(1) Capitalizable interest on properties under development – joint ventures Derecognition of goodwill(6) Funds from operations(1)(5) Non-recurring items(2)(3) Recurring funds from operations(1)(5) Provision for leasing costs Recognition of leases on a straight-line basis(1) Capital expenditures – maintenance of rental income generating capacity Quarter 2017 $ 2016 $ Year 2017 $ 2016 $ (581,256) 26,341 (391,725) 241,738 (5,739) 882 617,418 198 26,989 58,492 5,400 63,892 (6,583) (1,554) 108 797 41,655 522 — 69,423 — 69,423 (6,390) (806) (5,034) 3,532 615,134 793 26,989 249,689 5,400 255,089 (25,820) (4,027) 838 3,095 41,655 1,968 — 289,294 (10,724) 278,570 (24,090) (4,044) (4,127) (3,014) (9,415) (8,498) Recurring adjusted funds from operations(1)(5) 51,628 59,213 215,827 241,938 Per unit information: Recurring funds from operations (FD)(4)(5) Recurring adjusted funds from operations (FD)(4)(5) Weighted average number of units outstanding (FD)(4) 0.34 0.28 0.38 0.33 1.38 1.17 1.61 1.40 185,493,800 181,735,991 184,356,722 172,505,427 Payout ratio of recurring ajusted funds from operations(2) 101.8% 111.4% 113.9% 105.0% Including Cominar’s proportionate share in joint ventures. In 2017, a retirement allowance was allocated following the end of the Chief Executive Officer’s employment. In 2016, net proceeds of $10.7 million were obtained in settlement of the claim against Target Canada. (1) (2) (3) (4) Fully diluted. (5) Non-IFRS financial measure. (6) Share of goodwill associated with investment properties held for sale. 56 57 The provision for leasing costs which is deducted in computing the adjusted funds from operations represents the amortization, over the terms of the leases, of leasehold improvements and initial direct costs, mostly brokerage fees incurred when negotiating and preparing leases. This allows for better reconciliation of the investments incurred with the operating revenues generated over the terms of the leases. During the fiscal year ended December 31, 2017, the actual costs incurred by Cominar were $39.2 million in leasehold improvements and $13.1 million in initial direct costs that will be amortized over the terms of the related leases, while the provision for leasing costs amounted to $25.8 million. Recurring FFO for fiscal 2017 decreased by $23.5 million from fiscal 2016, due mainly to the $16.9 million decrease in adjusted net income explained above. Recurring AFFO for fiscal 2017 decreased by $26.1 million compared with fiscal 2016, due mainly to the $16.9 million decrease in adjusted net income explained above. TRACK RECORD OF RECURRING FUNDS FROM OPERATIONS PER UNIT For the years ended December 31 2017 $ 2016 $ 2015 $ 2014 $ 2013 $ Recurring funds from operations per unit (FD)(1) 1.38 1.61 1.79 1.88 1.80 (1) Fully diluted. The chart below presents Cominar’s recurring funds from operations over the past 10 years. TRACK RECORD OF RECURRING ADJUSTED FUNDS FROM OPERATIONS PER UNIT For the years ended December 31 2017 $ 2016 $ 2015 $ 2014 $ 2013 $ Recurring adjusted funds from operations per unit (FD)(1) 1.17 1.40 1.57 1.65 1.58 (1) Fully diluted. The chart below presents Cominar’s recurring adjusted funds from operations over the past 10 years. (1) Amounts not restated under IFRS, determined in accordance with Canadian GAAP before changeover. (2) Decrease in recurring adjusted funds from operations due mainly to the dispositions of income properties for a total amount of $221.4 million completed in 2016 and 2017. (1) Amounts not restated under IFRS, determined in accordance with Canadian GAAP before changeover. (2) Decrease in recurring funds from operations due mainly to the dispositions of income properties for a total amount of $221.4 million completed in 2016 and 2017. 58 59 ADJUSTED CASH FLOWS FROM OPERATIONS DISTRIBUTIONS During the first quarter of 2017, REALpac published a White Paper on the determination of adjusted cash flows from operations (“ACFO”). The ACFO are intended to be used as a measure of a company’s ability to generate stable cash flows. The ACFO do not replace the cash flows provided by operating activities as per the consolidated financial statements prepared in accordance with IFRS. Our method to determine the ACFO complies with REALpac recommendations but may differ from and not be comparable to that used by other entities. The fully diluted weighted average number of units outstanding for the calculation of ACFO takes into account the potential issuance of units under the long-term incentive plan, when dilutive. The following table presents a reconciliation between the cash flows provided by operating activities as per the consolidated financial statements and the recurring ACFO: For the periods ended December 31 Cash flows provided by operating activities as per the consolidated financial statements Adjustments – investments in joint ventures(1) Provision for leasing costs Initial and re-leasing salary costs Changes in adjusted non-cash working capital items(2) Capital expenditures – maintenance of rental income generating capacity Amortization of deferred financing costs and other costs Amortization of fair value adjustments on assumed mortgages payable Capitalizable interest on properties under development – joint ventures Adjusted cash flows from operations(1)(7) Non-recurring items(3)(4) Recurring adjusted cash flows from operations(1)(7) Per unit information: Recurring adjusted cash flows from operations (FD)(5)(7) Weighted average number of units outstanding (FD)(5) Payout ratio(5) Cash payout ratio(5)(6) Quarter 2017 $ 81,471 1,138 (6,583) 882 (27,011) (4,127) (636) 1,385 198 46,717 5,400 52,117 2016 $ 102,031 (22) (6,390) 797 (34,108) (3,014) (681) 1,468 522 Year 2017 $ 233,225 3,720 (25,820) 3,532 2,447 (9,415) (2,763) 5,577 793 2016 $ 284,090 2,061 (24,090) 3,095 (5,445) (8,498) (2,970) 6,501 1,968 60,603 211,296 256,712 — 60,603 5,400 216,696 (10,724) 245,988 0.28 0.33 1.18 1.43 185,493,800 181,735,991 184,356,722 172,505,427 101.8% 101.8% 111.4% 88.1% 112.9% 94.7% 102.8% 95.3% (1) (2) Including Cominar’s proportionate share in joint ventures. Includes working capital changes that, in management’s view and based on the REALpac February 2017 whitepaper, are not indicative of sustainable cash flow available for distribution. Examples include, but are not limited to, working capital changes relating to prepaid realty taxes and insurance, interest payable and interest receivable, sales and other indirect taxes payable to or receivable from applicable governments, income taxes and transaction cost accruals relating to acquisitions and dispositions of investment properties. In 2017, a retirement allowance was allocated following the end of the Chief Executive Officer’s employment. In 2016, net proceeds of $10.7 million were obtained in settlement of the claim against Target Canada. (3) (4) (5) Fully diluted. (6) The cash payout ratio corresponds to the cash distribution per unit divided by the fully diluted recurring adjusted cash flows from operations per unit. (7) Non-IFRS financial measure. Cominar is governed by a Contract of Trust whereby the trustees, under the discretionary power attributed to them, intend to distribute a portion of its distributable income to unitholders. Distributable income generally means net income determined in accordance with IFRS, before adjustments to fair value, transaction costs – business combinations, rental revenue derived from the recognition of leases on a straight-line basis, the provision for leasing costs, gains on the disposition of investment properties and certain other items not affecting cash, if applicable. DISTRIBUTIONS TO UNITHOLDERS For the periods ended December 31 Cash distributions Distributions reinvested under the distribution reinvestment plan(1) Distributions to unitholders Percentage of distributions reinvested Per unit distributions Quarter Year 2017 $ 2016 $ % Δ 2017 $ 2016 $ % Δ 52,792 53,119 (0.6) 206,753 236,000 (12.4) — 52,792 — 0.2850 14,037 (100.0) 67,156 (21.4) 20.9% 0.3675 39,770 246,523 16.1% 1.3325 18,456 115.5 254,456 (3.1) 7.3% 1.4700 (1) This amount includes units to be issued under the plan upon payment of distributions. Distributions to unitholders for fiscal 2017 totalled $246.5 million, down 3.1% from fiscal 2016, due to the decrease in distribution per unit announced on August 3, 2017. The percentage of distributions reinvested under the distribution reinvestment plan amounted to 16.1% on average, or $39.8 million, for fiscal 2017 and the cash distributions decreased by 12.4% compared with fiscal 2016. On August 3, 2017, Cominar announced the suspension of the Distribution Reinvestment Plan and the decrease in the monthly distribution from $0.1225 per unit to $0.095 per unit, beginning with the distribution of August 2017, which was payable in September 2017. In accordance with CSA guidelines, Cominar also provides the following table to allow readers to assess sources of cash distributions and how they reconcile to net income: For the periods ended December 31 2017 (3 months) $ 2017 (12 months) $ 2016 (12 months) $ 2015 (12 months) $ Net income (net loss) (581,256) (391,725) 241,738 272,434 Cash flows provided by operating activities as per the consolidated financial statements Distributions to unitholders Surplus (deficit) of cash flows provided by operating activities compared with distributions payable to unitholders 81,471 52,792 233,225 246,523 284,090 254,456 263,942 251,295 28,679 (13,298) 29,634 12,647 For the three-month period ended December 31, 2017, cash flows provided by operating activities presented a $28.7 million surplus over distributions to unitholders. For the fiscal year ended December 31, 2017, cash flows provided by operating activities showed a deficit of $13.3 million compared with distributions to unitholders. This deficit was more than offset by the $39.8 million distributions reinvested under the distribution reinvestment plan. During the last two quarters of 2017, our cash flows provided by operating activities exceeded the distributions to unitholders, and we expect that it will remain this way in the future. 60 61 For fiscal years ended December 31, 2016 and earlier, cash flows provided by operating activities have always been sufficient to fund distributions to unitholders. The chart below presents Cominar’s distributions over the past 10 years. The following table shows mortgage contractual maturity dates for the specified years: CONTRACTUAL MATURITY DATES OF MORTGAGES PAYABLE For the years ending December 31 Repayment of principal $ Balances at maturity $ 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 and thereafter Total Weighted average contractual rate 4.65% 6.18% 4.37% 5.48% 3.35% 4.56% 4.08% 3.55% 3.51% 3.85% 4.19% 4.22% Total $ 641,586 48,841 128,312 135,055 224,393 290,248 208,680 49,488 353,995 54,841 18,457 48,974 44,700 46,299 45,618 40,145 35,598 26,947 19,940 8,310 3,931 6,807 592,612(1) 4,141 82,013 89,437 184,248 254,650 181,733 29,548 345,685 50,910 11,650 327,269 1,826,627 2,153,896 (1) Amount of distribution in dollars per unit. (2) On August 3, 2017, Cominar decreased the monthly distribution to $0.095 per unit, or $1.14 per unit on an annualized basis. LIQUIDITY AND CAPITAL RESOURCES During fiscal 2017, Cominar generated $233.2 million in cash flows provided by operating activities. Cominar foresees no difficulty in meeting its short-term obligations and its commitments, including the monthly payment of distributions, using the funds from operations, refinancing of mortgages payable, debenture or unit issuance, amounts available on its credit facility and cash and cash equivalents. On August 3, 2017, Cominar decreased the monthly distribution from $0.1225 per unit to $0.095 per unit, or $1.14 per unit on an annualized basis. MORTGAGES PAYABLE As at December 31, 2017, the nominal balance of mortgages payable was $2,153.9 million, up $107.9 million from $2,046 million as at December 31, 2016. This increase is explained by contracted mortgages payable of $321.8 million at a weighted average contractual rate of 3.27%, by the repayments of balances at maturity of $150.1 million at a weighted average contractual rate of 4.94% and by the monthly repayments of capital of $63.7 million. As at December 31, 2017, the weighted average contractual rate was 4.22%, down 15 basis points from 4.37% as at December 31, 2016. As at December 31, 2017, the effective weighted average interest rate was 3.95%, compared to 4.09% as at December 31, 2016. Cominar’s mortgages payable contractual maturity dates are staggered over a number of years to reduce risks related to renewal. As at December 31, 2017, the residual weighted average term of mortgages payable was 4.8 years, compared to 5.5 years as at December 31, 2016. (1) Since December 31, 2017, Cominar repaid mortgages payable for $8.7 million and renewed a mortgage payable of $210.6 million that had matured. In addition, mortgages payable totalling $276.4 million will be assumed by the purchaser or repaid by Cominar on the closing of the sale of investment properties held for sale expected in March 2018. SENIOR UNSECURED DEBENTURES The following table presents the features of Cominar’s senior unsecured debentures: Date of issuance Contractual interest rate Effective interest rate Dates of interest payments Series 2 Series 3 Series 4 Series 7 Series 8 Series 9 December 2012(1) 4.23% 4.37% May 2013 4.00% 4.24% July 2013(2) 4.941% 4.81% September 2014 3.62% 3.70% December 2014 4.25% 4.34% June 2015 4.164% 4.25% Series 10 May 2016 Weighted average interest rate Total 4.247% 4.23% 4.34% 4.29% (1) Re-opened in February 2013 ($100.0 million). (2) Re-opened in January 2014 ($100.0 million) and March 2014 ($100.0 million). June 4 and December 4 May 2 and November 2 July 27 and January 27 December 21 and June 21 June 8 and December 8 June 1 and December 1 May 23 and November 23 Maturity date Nominal value as at December 31, 2017 $ December 2019 300,000 November 2020 100,000 July 2020 300,000 June 2019 300,000 December 2021 200,000 June 2022 300,000 May 2023 225,000 1,725,000 On June 15, 2017, Cominar reimbursed at maturity its Series 1 senior unsecured debentures totalling $250.0 million and bearing interest at 4.274% using its unsecured revolving operating and acquisition credit facility. As at December 31, 2017, the residual weighted average term of senior unsecured debentures was 3.2 years. 62 63 BANK BORROWINGS As at December 31, 2017, Cominar had an unsecured revolving operating and acquisition credit facility of up to $700.0 million maturing in August 2019. This credit facility bears interest at the prime rate plus 110 basis points or at the bankers’ acceptance rate plus 210 basis points. This credit facility contains certain restrictive covenants, with which Cominar was in compliance as at December 31, 2017. As at December 31, 2017, bank borrowings totalled $620.4 million and cash available was $79.6 million. Cominar's management intends to use the $1.14 billion proceeds from the sale of investment properties held for sale to repay its operating and acquisition credit facility. DEBT SUMMARY As at December 31 Mortgages payable Debentures Bank borrowings Total debt 2017 Weighted average contractual rate 4.22% 4.23% 3.30% 4.10% $ 2,150,126 1,721,577 620,366 4,492,069 Residual weighted average term 4.8 years 3.2 years 1.7 year $ 2,048,009 1,970,566 332,121 3.7 years 4,350,696 2016 Weighted average contractual rate 4.37% 4.23% 2.81% 4.23% Residual weighted average term 5.5 years 3.7 years 2.6 years 4.5 years As at December 31, 2017, the weighted average interest rate on Cominar’s total debt was 4.10%, down 13 basis points from December 31, 2016. DEBT RATIO The following table presents the changes in the debt ratio: As at December 31 Cash and cash equivalents Mortgages payable Debentures Bank borrowings Total net debt Total assets less cash and cash equivalents Debt ratio(1)(2) 2017 $ (6,928) 2,150,126 1,721,577 620,366 4,485,141 7,818,065 57.4% 2016 $ (9,853) 2,048,009 1,970,566 332,121 4,340,843 8,277,932 52.4% (1) The debt ratio is equal to the total of cash and cash equivalents, bank borrowings, mortgages payable and debentures, divided by total assets less cash and cash equivalents. (2) This ratio is not defined by IFRS and may differ from similar measures presented by other entities. As at December 31, 2017, the 57.4% debt ratio increased by 5.0% from December 31, 2016. This increase is due mainly to the $616.4 million change in fair value of investment properties and to the derecognition of goodwill of $27.0 million that have increased the debt ratio by 4.4%. Cominar's management intends to use the $1.14 billion proceeds from the sale of investment properties held for sale to reduce the debt ratio. This transaction is expected to close at the end of March 2018. INTEREST COVERAGE RATIO Cominar calculates its interest coverage ratio by dividing net operating income less Trust administrative expenses by finance charges. The interest coverage ratio is used to assess Cominar’s ability to pay interest on its total debt from operating revenues. As at December 31, 2017, the annualized interest coverage ratio stood at 2.43:1 [2.65:1 as at December 31, 2016], evidence of its capacity to meet its interest payment obligations. UNENCUMBERED ASSETS AND UNSECURED DEBTS The following table presents information on Cominar’s unencumbered income properties and unsecured debts: As at December 31 2017 2016 Number of properties Fair value of properties ($) Number of properties Fair value of properties ($) Unencumbered income properties 334 3,347,839 322 3,736,476 Unencumbered assets to unsecured debt ratio(1)(2) Unsecured debts-to-total-debt ratio(2)(3) 1,43:1 52.1% 1.62:1 53.0% (1) Fair value of unencumbered income properties divided by the unsecured debt. (2) These ratios are not defined by IFRS and may differ from similar measures presented by other entities. (3) Unsecured debts divided by total debt. As at December 31, 2017, Cominar owned unencumbered income properties whose fair value was approximately $3.3 billion. The unencumbered assets to unsecured debt ratio stood at 1.43:1, whereas the restrictive covenant on debentures requires a ratio of 1.30:1 or more. OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL COMMITMENTS Cominar has no off-balance sheet arrangements that have or are likely to have a material impact on its results of operations or its financial position, including its cash position and sources of financing. Cominar has no significant contractual commitments other than those arising from its long-term debt and payments due under emphyteutic leases on land held for income properties. FINANCIAL INSTRUMENTS CLASSIFICATION AND FAIR VALUE Cominar uses a three-level hierarchy to classify its financial instruments. The hierarchy reflects the relative weight of inputs used in the valuation of financial assets and liabilities at fair value. The levels in the hierarchy are:    Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities 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) Level 3 – Inputs for the asset or liability that are not based on observable market data (i.e., unobservable inputs) Cominar’s policy is to recognize transfers between hierarchy levels on the date of changes in circumstances that caused the transfer. There was no transfer between hierarchy levels in fiscal years 2017 and 2016. The fair value of cash and cash equivalents, mortgages receivable, accounts receivable, accounts payable and accrued liabilities and bank borrowings approximates the carrying amount since they are short-term in nature or bear interest at current market rates. The fair value of mortgages payable and debentures has been estimated based on current market rates for financial instruments with similar terms and maturities. 64 65 Financial liabilities and their carrying amounts and fair values, when the fair values do not approximate the carrying amounts, are classified as follows: Liquidity risk Liquidity risk is the risk that Cominar will be unable to meet its financial obligations as they come due. As at December 31 2017 2016 Financial liabilities Mortgages payable Debentures RISK MANAGEMENT Level Carrying amount $ Fair value $ Carrying amount $ Fair value $ 2 2 2,150,126 1,721,577 2,153,043 1,739,278 2,048,009 2,104,025 1,970,566 2,019,802 The main risks arising from Cominar’s financial instruments are credit risk, interest rate risk and liquidity risk. The strategy for managing these risks is summarized below. Credit risk Credit risk arises from the possibility that tenants may experience financial difficulty and be unable to fulfill their lease commitments. Cominar mitigates credit risk via segment and geographic portfolio diversification, staggered lease maturities, and diversification of revenue sources through a varied tenant mix as well as by avoiding dependence on any single tenant by ensuring that no individual tenant contributes a significant portion of the operating revenues and by conducting credit assessments on all new tenants. Cominar has a broad, highly diversified retail client base consisting of about 5,700 clients occupying an average of approximately 7,000 square feet each. The top three clients, Public Works Canada, Société québécoise des infrastructures and Canadian National Railway Company, account respectively for approximately 4.8%, 4.7% and 4.2% of operating revenues from several leases with staggered maturities. The stability and quality of cash flows from operating activities are enhanced by the fact that approximately 10.8% of operating revenues come from government agencies, representing approximately 100 leases. Cominar regularly assesses its accounts receivable and records a provision for doubtful accounts when there is a risk of non-collection. The maximum credit risk to which Cominar is exposed corresponds to the carrying amount of its accounts receivable and cash and cash equivalents position. Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in market interest rates. Cominar’s objective in managing this risk is to minimize the net impact on future cash flows. Cominar reduces its exposure to interest rate risk by staggering the maturities of its borrowings over several years and by generally using long-term debt bearing interest at fixed rates. Accounts receivable, except for the receivables bearing interest, and accounts payable and accrued liabilities do not bear interest. Almost all mortgages payable and all debentures bear interest at fixed rates. Cominar is exposed to interest rate fluctuations mainly due to bank borrowings, which bear interest at variable rates. As required under IFRS, a 25-basis-point increase or decrease in the average interest rate on variable interest debts during the period, assuming that all other variables are held constant, would have resulted in a $1.2 million increase or decrease in Cominar’s net income for the year ended December 31, 2017 [$1.5 million in 2016]. Cominar manages this risk by the management of its capital structure, the continuous monitoring of current and projected cash flows and adherence to its capital management policy. Undiscounted contractual cash flows (interest and principal) related to financial liabilities as at December 31, 2017 are as follows: Cash flows One to five years $ 785,781 1,663,211 633,016 — Under one year $ 724,595 72,921 22,016 106,863 Over five years $ 1,095,321 234,556 — — Mortgages payable Debentures Bank borrowings Accounts payable and accrued liabilities(1) (1) Excludes consumption taxes and other non-financial liabilities PROPERTY PORTFOLIO The following table presents information on the property portfolio, including Cominar’s proportionate share: As at December 31 Income properties – Cominar’s proportionate share(1) Properties under development and land held for future development – Cominar’s proportionate share(1) Investment properties held for sale Number of income properties Leasable area (sq. ft.) (1) Non-IFRS financial measure. SUMMARY BY OPERATING SEGMENT As at December 31 Office Retail Industrial and mixed-use Total 2017 $ 2016 $ % Δ 6,402,858 7 775 331 (17.7) 145,253 1,143,500 195,755 143,130 (25.8) 698.9 525 539 44,370,000 44,919,000 2017 2016 Number of properties Leasable area (sq. ft.) Number of properties Leasable area (sq. ft.) 136 154 235 525 14,830,000 12,075,000 17,465,000 44,370,000 134 168 237 539 14,522,000 12,372,000 18,025,000 44,919,000 66 67 SUMMARY BY GEOGRAPHIC MARKET As at December 31 Québec Montréal Ottawa(1) Total core markets Toronto Atlantic Provinces Western Canada Total overall market 2017 2016 Number of properties Leasable area (sq. ft.) Number of properties Leasable area (sq. ft.) 127 282 20 429 24 58 14 10,253,000 25,420,000 2,476,000 38,149,000 2,466,000 2,647,000 1,108,000 129 288 21 438 27 60 14 10,139,000 25,254,000 2,516,000 37,909,000 3,187,000 2,715,000 1,108,000 525 44,370,000 539 44,919,000 DISPOSITIONS OF INCOME PROPERTIES On July 19, 2017, Cominar completed the sale of a retail property located in Ontario, for a total amount of $0.9 million, at a capitalization rate of 5.2%. On July 27, 2017, Cominar completed the sale of a retail property located in the Granby area, Quebec, for a total amount of $1.0 million, at a capitalization rate of 7.3%. On August 17, 2017, Cominar completed the sale of a retail property located in Chicoutimi, Quebec, for a total amount of $2.3 million, at a capitalization rate of 7.9%. On December 8, 2017, Cominar completed the sale of an industrial and mixed-use property located in the Montréal area, Quebec, for a total amount of $4.0 million, at a capitalization rate of 5.5%. (1) For presentation purposes, the Gatineau area is included in the Ottawa geographic market. The net sale proceeds of these properties were used to repay a portion of the credit facility. ACQUISITIONS, INVESTMENTS AND DISPOSITIONS Over the years, Cominar has achieved much of its growth through the acquisition of companies and high-quality properties based on strict selection criteria, while maintaining an appropriate allocation among its three business segments, namely, office buildings, retail buildings and industrial and mixed-use properties, and geographic diversification of its property portfolio. ACQUISITIONS OF ADDITIONAL OWNERSHIP INTEREST IN JOINT VENTURES Société en commandite Chaudière-Duplessis (IKEA site) As part of the site development for the new IKEA store in Québec, on January 13, 2017 Cominar acquired from Groupe Dallaire an additional 25% ownership interest in a joint venture for an amount of $10.0 million, increasing its interest from 75% to 100%, in order to consolidate its ownership. On that date, Société en commandite Chaudière-Duplessis became a wholly owned subsidiary of Cominar. The fair value of the net assets acquired for an amount of $10.0 million was established by a national independent appraiser holding a recognized and relevant professional qualification, as well as recent experience with respect to the geographical location and the category of the investment properties being appraised. This acquisition was submitted for analysis and approval by the investment committee made up of independent trustees, which recommended it to the Board of Trustees, which, in turn, endorsed it. Société en commandite Complexe Jules-Dallaire On May 31, 2017, Cominar acquired from Groupe Dallaire an additional 25% ownership interest in Société en commandite Complexe Jules-Dallaire for an amount of $21.2 million, increasing its interest to 75%, in order to consolidate its ownership. The fair value of the net assets acquired for an amount of $21.2 million was established by a national independent appraiser holding a recognized and relevant professional qualification, as well as recent experience with respect to the geographical location and the category of the investment properties being appraised. This acquisition was submitted for analysis and approval by the investment committee made up of independent trustees, which recommended it to the Board of Trustees, which, in turn, endorsed it. The capitalization rate used to estimate the fair value of this investment property is 5.25%. TRANSFERS TO INCOME PROPERTIES During the fourth quarter of 2017, Cominar transferred two properties from properties under development to income properties. The first property, a $31.3 million office building with a leasable area of 119,000 square feet, is located at 3055 Saint-Martin Boulevard, in Laval and has an occupancy rate of 95.0%. This property is part of the Centropolis complex in Laval. Its capitalization rate is 9.0%. The second property, a $11.3 million industrial and mixed-use building with a leasable area of 75,000 square feet, is located in Lévis and has an occupancy rate of 67%. Its estimated capitalization rate is 8.1%. DISPOSITIONS OF INVESTMENT PROPERTIES HELD FOR SALE On January 31, 2017, Cominar completed the sale of an industrial and mixed-use property and a retail property located in the Toronto area, for a total amount of $58.3 million, net of costs to sell, at a capitalization rate of 7.0%. On March 3, 2017, Cominar completed the sale of a portfolio of 8 retail properties located in the Montréal area and in Ontario, for a total amount of $34.7 million, net of costs to sell, at a capitalization rate of 6.7%. On April 19, 2017, Cominar completed the sale of a retail property located in the Québec area, for a total amount of $0.8 million, net of costs to sell, at a capitalization rate of 5.4%. On June 26, 2017, Cominar completed the sale of a retail property located in Nova Scotia, for a total amount of $0.4 million, net of costs to sell, at a capitalization rate of 7.8%. On July 13, 2017, Cominar completed the sale of an industrial and mixed-use property located in the Québec area, for a total amount of $2.2 million, net of costs to sell, at a capitalization rate of 6.0%. The net sale proceeds of these properties were used to repay a portion of the credit facility. INVESTMENTS IN INCOME PROPERTIES Cominar continues to develop its income properties in the normal course of business. Investments made include additions, expansions, modernizations, modifications and upgrades to existing properties with a view to increasing or maintaining their rental income generating capacity. During fiscal 2017, Cominar incurred $141.5 million [$110.7 million in 2016] in capital expenditures specifically to increase the rental income generating capacity of its properties or to reduce the related operating expenses. These capital expenditures include, among others, investment of $51.6 million in revitalization and redevelopment, $14.9 million in property expansion, $25.0 million in roofing and other structural work, and $11.3 million in facade renovation. During the year, Cominar also incurred $9.4 million [$8.5 million in 2016] in capital expenditures to maintain rental income generating capacity, consisting mainly of major maintenance and repair expenses, as well as property equipment replacements, which will garner benefits for Cominar for the coming years. These expenditures do not include current repair and maintenance costs. Finally, Cominar invests in leasehold improvements that aim to increase the value of its properties through higher lease rates, as well as in other leasing costs, mostly brokerage fees and tenant inducements. The level of investment required may vary from quarter to quarter since it closely depends on lease renewals and the signing of new leases. It also depends on increases in rental space due to newly acquired, expanded or upgraded properties, or rental space transferred from properties under development. During fiscal 2017, Cominar made investments of $52.3 million in this respect [$45.0 million in 2016]. 68 69 Société en commandite Chaudière-Duplessis (IKEA site) During the first quarter of 2017, Cominar commenced the development of a new commercial centre located at the junction of Highways 40 and 540, two of the main arteries of Québec, around the Swedish banner IKEA, which made the announcement in the fall of 2016 and which will itself occupy just over 1 million square feet, including the parking areas. This will make it a major attraction in the new area. The official opening of the IKEA store is scheduled for the end of summer 2018. Cominar’s commercial project will have 14 buildings of various sizes to welcome approximately 25 clients, which, with time, will occupy an estimated area of approximately 500,000 square feet, the first phases of which will be delivered by the end of 2018. Decathlon, a company specialized in the sale of sporting goods, is the first client to announce its arrival in the commercial complex, with an expected opening in July 2019. When completed, this project, with an investment estimated at $113 million, will have a development capitalization rate of approximately 8.1%. REAL ESTATE OPERATIONS OCCUPANCY RATE As at December 31, 2017, the average occupancy rate of our properties was 92.6%, compared to 92.4% as at December 31, 2016. The following table presents the occupancy rates by operating segment. OCCUPANCY RATE TRACK RECORD INVESTMENT PROPERTIES HELD FOR SALE On December 18, 2017, Cominar entered into a definitive agreement to sell its entire non-core market portfolio, for total gross proceeds of $1.14 billion. This transaction is expected to close at the end of March 2018. Cominar’s management intends to use the net proceeds of this transaction to pay down debt. This portfolio comprises 96 properties located in the Greater Toronto Area, the Atlantic Provinces and Western Canada. A portion of goodwill, in the amount of $27.0 million, associated with this property portfolio has been allocated to the assets held for sale and then has been subject to derecognition. For the years ended December 31 2017 2016 Office properties Retail properties Industrial and mixed-use properties $ $ Total $ Total $ $ — — 590,552 10,000 18,577 (18,577) 93,630 (44,634) 332,711 — 6,564 (6,564) 49,500 (51,683) 143,130 163,733 (96,317) (117,000) 163,424 1,086,687 96,397 — 1,848 (1,848) 10,000 26,989 (26,989) — — — Investment properties and goodwill Balance, beginning of year Dispositions Net transfers from income properties Transfers from properties under development and land held for future development Transfers of goodwill Derecognition of goodwill Balance, end of year As at December 31 Liabilities 600,552 381,707 161,241 1,143,500 143,130 December 31, 2017 December 31, 2016 December 31, 2015 December 31, 2014 December 31, 2013 2017 2016 Office properties Retail properties Industrial and mixed-use properties $ $ $ Total $ Total $ Operating segment Office Retail Industrial and mixed-use Portfolio total 89.1% 93.2% 95.2% 92.6% 89.6% 93.0% 94.3% 92.4% 90.3% 90.3% 94.3% 91.9% 93.5% 94.7% 94.9% 94.4% 93,3% 94,2% 92,4% 93,1% Mortgages payable related to investment properties held for sale 238,312 3,614 34,424 276,350 — The following table presents the occupancy rates as at December 31, 2017 by operating segment for our core markets: Operating segment Office Retail Industrial and mixed-use Core markets Québec Montréal Ottawa Total 96.3% 94.1% 94.8% 94.9% 87.7% 92.4% 96.2% 92.9% 89.3% 93.1% N/A 89.7% 90.0% 93.1% 95.9% 93.2% PROPERTIES UNDER CONSTRUCTION AND DEVELOPMENT PROJECTS Société en commandite Bouvier-Bertrand (Québec) Cominar and Groupe Dallaire Inc., each having 50% ownership interest, are in joint venture for the purpose of developing commercial land located on Highway 40, one of the main arteries of Québec. Upon completion, this project, Espace Bouvier, will consist of an office building of 80,000 square feet and five retail buildings totalling approximately 191,500 square feet with more than 900 parking spaces. The office building was transferred to income properties since it is currently 66% leased, and it is expected to be 77% leased by the end of the first quarter of 2018. The first retail building, a property of 65,000 square feet 100% leased by a single tenant, was delivered in December 2015. The second retail building, a property of 25,000 square feet 100% leased by a single tenant, was delivered in May 2016. The third retail building, a property of 9,000 square feet 100% leased by a single tenant, was completed and delivered to the tenant at the end of 2016. The fourth retail building, whose construction will be completed during the first quarter of 2018 with a pre-leasing rate of 89%, will have a total leasable area of approximately 34,400 square feet and an estimated construction cost of $4.5 million. The fifth retail building to be constructed will have a total leasable area of approximately 58,000 square feet and an estimated construction cost of $7.3 million. The expected weighted average capitalization rate for all of these properties is estimated at 8.0%. Société en commandite Marais (Québec) Cominar, at 75%, and Groupe Dallaire Inc., at 25%, are in joint venture for the purpose of developing 1,542,000 square feet of commercial land located along du Marais Street, in Québec, at the junction of Robert-Bourassa and Félix-Leclerc Highways, two major arteries easily accessible, giving it great visibility. The development of this site will depend on market conditions and on whether we obtain a change of zoning, if necessary. 70 71 LEASING ACTIVITY The following table summarizes Cominar’s leasing activity in 2017: LEASE MATURITIES For the years ending December 31 2018 2019 2020 2021 2022 Leases that matured in 2017 Number of clients Leasable area (sq. ft.) Average minimum rent ($/sq. ft.) Renewed leases in 2017 Number of clients Leasable area (sq. ft.) Average minimum rent of renewed leases ($/sq. ft.) Retention rate New leases in 2017 Number of clients Leasable area (sq. ft.) Average minimum rent ($/sq. ft.) Office Retail Industrial and mixed-use 375 2,174,000 17.79 228 1,504,000 16.75 69.2% 169 768,000 15.07 642 2,179,000 19.11 415 1,629,000 17.85 74.8% 154 622,000 15.69 321 3,679,000 6.80 226 2,545,000 6.43 69.2% 154 1,487,000 6.09 Total 1,338 8,032,000 12.91 869 5,678,000 12.15 70.7% 477 2,877,000 10.49 During the year ended December 31, 2017, 70.7% [68.2% in 2016] of leasable area expiring in 2017 were renewed, while new leases were also signed, representing 2.9 million square feet of leasable area. Overall, as at December 31, 2017, 106.5% [109.0% in 2016] of the total leasable area maturing during the year was either renewed or subject to a new lease. GROWTH IN THE AVERAGE NET RENT OF RENEWED LEASES For the years ended December 31 Operating segment Office Retail Industrial and mixed-use Portfolio total 2017 (0.2)% (0.7)% 4.7% 0.6% 2016 2.0% (1.0)% 2.5% 1.8% Office Leasable area (sq. ft.) Average minimum rent ($/sq. ft.) % of portfolio – Office Retail Leasable area (sq. ft.) Average minimum rent ($/sq. ft.) % of portfolio – Retail Industrial and mixed-use Leasable area (sq. ft.) 2,449,000 1,645,000 1,271,000 1,185,000 1,229,000 17.67 16.5% 17.78 11.1% 18.00 8.6% 16.90 8.0% 17.45 8.3% 2,477,000 1,754,000 1,337,000 1,352,000 1,131,000 17.09 20.5% 19.65 14.5% 22.95 11.1% 22.25 11.2% 18.31 9.4% 2,984,000 1,875,000 2,785,000 1,565,000 1,997,000 Average minimum rent ($/sq. ft.) % of portfolio – Industrial and mixed-use 6.65 17.1% 7.09 10.7% 6.60 15.9% 6.68 9.0% 6.38 11.4% Portfolio total Leasable area (sq. ft.) Average minimum rent ($/sq. ft.) % of portfolio 7,910,000 5,274,000 5,393,000 4,102,000 4,357,000 13.28 17.8% 14.50 11.9% 13.23 12.2% 14.45 9.2% 12.62 9.8% The following table summarizes information on leases as at December 31, 2017: Residual weighted average term (years) Weighted average term of leases (years) Average leased area per client (sq. ft.) Average minimum rent ($/sq. ft.) Operating segment Office Retail Industrial and mixed-use Weighted average of total portfolio 5.2 4.7 5.1 5.0 8.4 7.9 8.3 8.2 6,900 4,200 13,000 7,000 17.89 18.82 6.69 13.51 Cominar has a broad, highly diversified retail client base consisting of approximately 5,700 clients occupying an average of 7,000 square feet each. The top three clients, Public Works Canada, Société québécoise des infrastructures and Canadian National Railway Company, account respectively for approximately 4.8%, 4.7% and 4.2% of operating revenues from several leases with staggered maturities. The stability and quality of cash flows provided by operating activities are enhanced by the fact that approximately 10.8% of operating revenues come from government agencies, representing approximately 100 leases. 72 73 The following table presents our top ten clients by percentage of operating revenues: RELATED PARTY TRANSACTIONS Client Public Works Canada Société québécoise des infrastructures Canadian National Railway Company Scotiabank(1) Thales Canada Harvest Operations Corp. Shoppers Drug Mart Dollarama Groupe Immobilier Desjardins Kraft Canada Total % of operating revenues 4.8 4.7 4.2 1.0 0.8 0.8 0.7 0.7 0.6 0.6 18.9 (1) As at January 1, 2018, Scotiabank will represent 0.4% of operating revenues. ISSUED AND OUTSTANDING UNITS On January 10, 2017, Cominar filed a short form base shelf prospectus allowing it to issue up to $1.0 billion in securities during the 25-month period that this prospectus remains valid. On August 3, 2017, Cominar announced the suspension of the Distribution Reinvestment Plan and the implementation of a NCIB, up to 9,000,000 units. On January 10, 2018, Cominar announced the increase of its normal course issuer bid (“NCIB”), increasing the maximum number of units that can be repurchased for cancellation from 9,000,000 units to 17,596,591 units. Under this NCIB, Cominar has repurchased, during the fourth quarter of 2017, 730,900 units at an average price of $14.19, for a total consideration of $10.4 million paid cash, and since the beginning of fiscal year 2018, 2,709,500 units at an average price of $14.58, for a total consideration of $39.5 million paid cash. Since the beginning of this issuer bid, Cominar has therefore repurchased a total of 3,440,400 units at an average price of $14.50, for a total consideration of $49.9 million paid cash. For the years ended December 31 2017 2016 Units issued and outstanding, beginning of year 182,334,562 170,912,647 Public offering Repurchase of units under NCIB Exercise of options Distribution reinvestment plan Conversion of deferred units and restricted units Units issued and outstanding, end of year Additional information Issued and outstanding units Outstanding unit options Deferred units and restricted units — (730,900) 3,900 2,887,370 134,565 12,780,000 (2,717,396) — 1,265,157 94,154 184,629,497 182,334,562 March 7, 2018 181,930,672 12,767,300 244,638 During fiscal years 2016 and 2017, Michel Dallaire and Alain Dallaire were trustees and members of Cominar’s management team, and they exercised indirect control over the activities of Groupe Dallaire Inc. and Dalcon Inc. (the “related companies”). On January 1, 2018, Sylvain Cossette was appointed as President and Chief Executive Officer to replace Michel Dallaire. This appointment was part of the succession plan put in place by the Board of Trustees when Sylvain Cossette joined Cominar in 2013 as President and Chief Operating Officer. On the same day, January 1, 2018, Sylvain Cossette was appointed as a trustee of Cominar to fill the vacancy created by the departure of Alain Dallaire as trustee. On February 12, 2018, Alban D’Amours was appointed as Chairman of the Board of Cominar following the departure of Michel Dallaire. While Alain Dallaire has a passive indirect economic interest in Groupe Dallaire, Alain Dallaire is neither an employee nor a director of Groupe Dallaire. In 2016 and 2017, Cominar entered into transactions with those related companies in the normal course of business, the details of which are as follows: For the years ended December 31 Investment properties – Capital costs Acquisition of additional ownership interest in the joint venture Société en commandite Chaudière-Duplessis Investment properties held by joint ventures – Acquisition Investment properties held by joint ventures – Capital costs Recovery of mortgage receivable Acquisition of an additional ownership interest in the joint venture Société en commandite Complexe Jules-Dallaire Share of joint ventures’ net income Net rental revenue from investment properties Interest income Balances shown in the consolidated balance sheets are detailed as follows: As at December 31 Investments in joint ventures Mortgage receivable Accounts receivable Accounts payable 2017 $ 2016 $ 138,129 86,639 10,016 — 3,263 (8,250) 21,190 5,276 313 140 2017 $ 86,299 — 1,969 15,696 — 6,204 2,958 — — 8,006 301 280 2016 $ 90,194 8,250 1,182 7,624 In summary, Cominar incurred with related parties capital costs of approximately $138.1 million for its properties. Of this amount, $43.9 million were invested in three major projects, being $19.6 million for the preparation of the future retail project being built around the IKEA store in Québec, $13.5 million for the 76,000 square feet expansion of a property located in Montréal (including tenant work), and $10.8 million for the redevelopment of our Centre Laval retail centre to greet the 66,600 square feet sporting goods store Sportium (including tenant work). In addition, Dalcon completed approximately 1,100 jobs with costs varying between $0 and $50,000, and slightly less than 250 jobs where the costs exceeded $50,000. These investments are allocated as follows: approximately 34% for tenant improvements, 21% for roofs, pavement and other structural work, 19% for the expansion and construction of properties, 15% for prepping a future retail site, 9% for work related to common areas and interiors, and finally 2% for miscellaneous maintenance and repairs. The leasehold improvement, repair and maintenance work on properties carried out by Dalcon Inc. are invoiced to Cominar at cost plus a 5.0% markup. For construction projects, the work is invoiced at cost plus a 2.5% markup. By retaining the services of related companies for property construction work and leasehold improvements, Cominar achieves significant time and cost savings while providing better service to its clients. 74 75 Dalcon Inc. is a fully integrated construction company with hundreds of skilled workers in various construction trades, including electricians, plumbers, carpenters, interior system installers, plasterers, painters, tilers, roofers, masonry workers, fire protection mechanics and other. Therefore, Dalcon combines many construction specializations within the company, unlike a standard general contractor, which has to subcontract these trades to carry out the construction work. Since it hires very few or no sub-trades, Dalcon is not charged for the usual sub-trade profit margin, with amounts ranging between 15% and 20% of construction costs, depending on the markets. This represents considerable cost savings for Cominar. There is no exclusivity between Cominar and Dalcon. Cominar (or its tenants) has the option to work with various sub-trades and other general contractors if they wish to. In 2017, the total amount of investments in investment properties (capital costs) amounted to $206.3 million, including $138.1 million with related companies, which represents approximately 67% of the investments. All leasehold improvement, expansion, refurbishment or building construction work must be subject to prior approval by a vice president or an executive vice president of Cominar. Execution plans as well as a detailed budget of the work must be prepared and submitted to the vice president for approval, for each project. Once approval is granted, a project manager from Cominar monitors and supervises the site to ensure compliance with the deadlines, the quality of construction and the budget. Sometimes, certain situations force us to deliver client premises as quickly as possible. In such instances, Cominar may ask Dalcon to start renovation work based on preliminary estimates without detailed construction plans, in order to meet the time constraints of its clients. Cominar periodically checks that the hourly rates of professionals and workers charged by Dalcon are competitive compared with the market. Hourly rates of architects, engineers, designers and technicians are compared with the rates included in third party bids submitted to Cominar and also with the rates charged by different professional firms at the service of Cominar. The hourly rates of construction workers are partially regulated, and Cominar periodically validates that they are in line with the market rates, but also with the Association de la construction du Québec (the “ACQ”) recommendations. The construction costs of various specialties, such as roofing, are also validated periodically and compared with the market to ensure the most competitive prices. The invoicing at “cost plus a markup” between Cominar and Dalcon also contributes to eliminating the financial risk associated with the management of extras, as known in the field of construction. During the work, if Dalcon faces unexpected events on the site and/or additions are requested by Cominar, a change order is issued by Dalcon, with an estimate of the costs related to these unexpected events and/or additions. These change orders are then approved by a project manager from Cominar, and the additional costs related to these unexpected events and/or additions are still chargeable at “cost plus a markup” by Dalcon, unlike standard general contractors that charge these unexpected events by adding significant profit percentages. By constantly collaborating on matters such as repairs and maintenance costs, durability of products and equipment and construction techniques, Cominar and Dalcon managed over time to refine their methods and choices of equipment and products, thus meeting Cominar’s requirements in terms of building operations, maintenance, sustainability and durability. In order to improve efficiency and speed in performing less significant construction work, Cominar asked Dalcon to set up mobile teams made up of carpenters, plumbers, electricians and painters. Work that requires few or no professionals and that has an estimated cost lower than $20,000 is carried out by these mobile workers. This significantly reduces costs and delivery deadlines as it eliminates the time associated with the implementation of design, architecture and engineering plans as well as calls for tenders. The added value of these mobile teams can be summarized as a fast, effective and cost-efficient way to carry out work, thus providing Cominar with an undeniable competitive advantage vis-à-vis competitors. Dalcon’s mobile teams have carried out approximately 550 construction projects in 2017, for an average value of $2,700 each. Cominar is a proactive real estate owner in terms of energy management and savings. This energy management is done in collaboration with various Dalcon engineers who are specialized in energy management. These engineers have been working for a long time in collaboration with Cominar’s engineers and building operators, and have developed several energy management principles, techniques and methods that make Cominar one of the leaders in this field. Leasing of commercial space with the related companies is carried out at the market rate for similar spaces. As at December 31, 2017, Groupe Dallaire and its affiliated companies were occupying 65,425 square feet of office space in Complexe Jules-Dallaire in Québec, 8,670 square feet of office space in the Alexis Nihon complex in Montréal, and 43,709 square feet of space at 605 Deslauriers Street in Montréal, an industrial and mixed-use building. The business objective of investments in joint ventures with the related company Groupe Dallaire is the ownership, management and development of real estate projects. Cominar has developed a new business plan aiming to diversify its sources of construction suppliers and to create new partnerships with leaders in the field, with the goal of promoting better development and increasing the value of all of its assets in the major areas in which it is active. In parallel with the implementation of this new strategy, the business relationship with Groupe Dallaire for construction services will be terminated in an orderly manner. To ensure an orderly transition, Cominar estimates that an approximate twelve month transition period could be required. Contractual rights and obligations The formation of each joint venture is recognized by limited partnership agreements and unanimous shareholder agreements of the general partner, in which the rights and obligations of each limited partner or shareholder are provided for. Among these terms and conditions, the important decisions with regard to joint ventures are taken unanimously by the limited partners for the limited partnerships, and by the shareholders for the general partners. Capital contributions are made on a pro rata basis between the limited partners. In addition, each limited partner has the right of first refusal, should the other limited partner transfer its participation in the joint venture. Recourse or purchase option mechanisms benefit each limited partner with respect of the other limited partner if it is in default under the agreements or if it becomes insolvent. In addition, if a Triggering Event (as defined below) occurs in respect of one of the limited partners, the other limited partner shall be entitled, within a thirty (30) day period following the beginning of the Triggering Event, to provide to the limited partner subject to a Triggering Event a notice that contains a purchase offer for the entire ownership interest at fair market value of such interest upon transmission of the notice, and the limited partner in respect of which the Triggering Event occurred will be required to sell its ownership interest. “Triggering Event” means, in respect of Groupe Dallaire Inc., the loss of control of Groupe Dallaire Inc. by the Dallaire family, and, in respect of Cominar, situations where there is a change of control resulting from a takeover bid or a business combination transaction, an acquisition of a significant equity position or an important change outside the normal course of business in the composition of the Board of Trustees during a period of eighteen (18) consecutive months. If the parties cannot mutually agree upon the fair market value, an appraisal mechanism is provided for in the agreements. DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL REPORTING The Chief Executive Officer and the Executive Vice President and Chief Financial Officer of Cominar are responsible for establishing and maintaining disclosure controls and procedures (“DC&P”) and internal control over financial reporting (“ICFR”), as defined in Canadian Securities Administrators’ Multilateral Instrument 52-109. Evaluations are performed regularly to assess the effectiveness of DC&P, including this MD&A and the consolidated financial statements. Based on these evaluations, the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer concluded that the DC&P were effective as at the end of the year ended December 31, 2017, and that the current controls and procedures provide reasonable assurance that material information about Cominar, including its consolidated subsidiaries, is made known to them during the period in which these reports are being prepared. Evaluations are also performed to assess the effectiveness of ICFR. Based on those evaluations, the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer of Cominar concluded that ICFR was effective as at the end of the year ended December 31, 2017, and, more specifically, that the financial reporting is reliable and that the consolidated financial statements have been prepared for financial reporting purposes in accordance with IFRS. No changes were made to the Trust’s internal controls over financial reporting during fiscal 2017 that have materially affected, or are reasonably likely to materially affect, internal controls over financial reporting. 76 77 SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES a) Basis of presentation Cominar’s consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS"). The accounting policies and application methods thereof have been consistently applied throughout each of the fiscal years presented in these consolidated financial statements. b) Basis of preparation Consolidation These consolidated financial statements include the accounts of Cominar and its wholly owned subsidiaries. Use of estimates, assumptions and judgments The preparation of financial statements in accordance with IFRS requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities in the financial statements. Those estimates, assumptions and judgments also affect the disclosure of contingencies as at the date of the financial statements and the reported amounts of revenues and expenses during the year. Actual results that could differ materially from those estimates, assumptions and judgments, are described below:  Investment properties Investment properties are recorded at fair value at the balance sheet date. Fair value is determined using management’s internal measurements and valuations from independent real estate appraisers, performed in accordance with recognized valuation techniques, as well as a definitive agreement to sell investment properties. Techniques used include the capitalized net operating income method and the discounted cash flow method, including notably estimates of capitalization rates and standardized net operating income as well as estimates of discount rates and future cash flows applicable to investment properties, respectively. Management’s fair value internal measurements rely on internal financial information and are corroborated by capitalization rates obtained from independent experts. However, internal measurements and values obtained from independent appraisers are both subject to significant judgments, estimates and assumptions about market conditions at the balance sheet date.  Business combinations Business combinations are accounted for using the acquisition method. The cost of a business combination is the value, at the acquisition date, of the assets transferred, liabilities incurred and Unitholders’ equity instruments issued in exchange for control of the acquired business. When the cost of a business combination exceeds the fair value of the assets acquired and liabilities assumed, such excess is recorded as goodwill. Transaction-related costs, as well as costs related to the acquisition of real estate assets, are expensed as incurred. Cominar accounts for investment property acquisitions in accordance with IFRS 3, “Business Combinations” (“IFRS 3”), only when it considers that a business has been acquired. Under IFRS 3, a business is defined as an integrated set of activities and assets that could be conducted and managed for the purpose of providing a direct return to investors in the form of lower costs or other economic benefits. If the investment properties acquisition does not correspond to the definition of a business, a group of assets is deemed to have been acquired. If goodwill is present, the acquisition is presumed to be a business. Judgment is therefore used by management in determining if the acquisition qualifies as a business combination in accordance with IFRS 3 or as an acquisition of a group of assets. Generally, based on its judgment, when Cominar acquires a property or property portfolio without taking on the management of personnel or acquiring an operational platform, it categorizes the acquisition as an acquisition of a group of assets.  Joint arrangements Upon the creation of a joint arrangement, Cominar’s management reviews its classification criteria to determine if it is a joint venture to be accounted for using the equity method or if it is a joint operation for which it must recognize the proportionate share of assets, liabilities, revenues and expenses. Cominar holds 50% and 75% interests in its joint arrangements. It has joint control over them since, under the contractual agreements, unanimous consent is required from all parties to the agreements in decisions concerning all relevant activities. The joint arrangements in which Cominar is involved are structured so that they provide Cominar rights to these entities’ net assets. Therefore, these arrangements are presented as joint ventures and are accounted for using the equity method.  Impairment of goodwill Goodwill represents the excess of the purchase price of an acquired business over the fair value of the net identifiable assets acquired. Its useful life is indefinite. It is not amortized but is tested for impairment on an annual basis or more frequently if events or circumstances indicate that it is more likely than not that goodwill may be impaired. Goodwill resulting from business combinations is allocated to each group of cash-generating units (“CGU”) expected to benefit from the combination. To test impairment, Cominar must determine the recoverable value of net assets of each group of CGU, making assumptions about standardized net operating income and capitalization rates. These assumptions are based on Cominar’s past experience as well as on external sources of information. The recoverable value is the fair value less the cost of disposal. Should the carrying amount of a group of cash-generating units, including goodwill, exceed its recoverable value, impairment is recorded and recognized in profit or loss in the period during which the impairment occurs.  Financial instruments Financial instruments must be initially measured at fair value. Cominar must also estimate and disclose the fair value of certain financial instruments for information purposes in the financial statements presented for subsequent periods. When fair value cannot be derived from active markets, it is determined using valuation techniques, namely the discounted cash flow method. If possible, data used in these models are derived from observable markets, and if not, judgment is required to determine fair value. Judgments take into account liquidity risk, credit risk and volatility. Any changes in assumptions related to these factors could modify the fair value of financial instruments.  Unit options The compensation expense related to unit options is measured at fair value and is amortized based on the graded vesting method using the Black-Scholes model. This model requires management to make many estimates on various data, such as expected life, volatility, the weighted average dividend yield of distributions, the weighted average risk-free interest rate and the expected forfeiture rate. Any changes to certain assumptions could have an impact on the compensation expense related to unit options recognized in the financial statements.  Income taxes Deferred taxes of Cominar’s subsidiaries are measured at the tax rates expected to apply in the future as temporary differences between the reported carrying amounts and the tax bases of the assets and liabilities reverse. Changes to deferred taxes related to changes in tax rates are recognized in income in the period during which the rate change is substantively enacted. Any changes in future tax rates or in the timing of the reversal of temporary differences could affect the income tax expense. Investment properties An investment property is an immovable property held by Cominar to earn rentals or for capital appreciation, or both, rather than for use in the production or supply of goods and services or for administrative purposes, or for sale in the ordinary course of business. Investment properties include income properties, properties under development and land held for future development. Cominar presents its investment properties based on the fair value model. Fair value is the amount for which the property could be exchanged between knowledgeable, willing parties in an arm’s length transaction. Any change in the fair value is recognized in profit or loss in the period in which it arises. The fair value of investment properties should reflect market conditions at the end of the reporting period. Fair value is time-specific as at a given date. As market conditions could change, the amount presented as fair value could be incorrect or inadequate at another date. The fair value of investment properties is based on measurements derived from management’s estimates and valuations from independent appraisers, plus capital expenditures made during the period, where applicable, or from a definitive agreement to sell investment properties. Management regularly reviews appraisals of its investment properties between the appraisal dates in order to determine whether the related assumptions, such as standardized net operating income and capitalization rates, still apply. These assumptions are compared to market data issued by independent experts. When increases or decreases are required, Cominar adjusts the carrying amount of its investment properties. The fair value of Cominar’s investment properties recorded on the balance sheet in accordance with IFRS is the sum of the fair values of each investment property considered individually and does not necessarily reflect the contribution of the following elements that characterize Cominar: (i) the composition of the property portfolio diversified through its client base, geographic markets and business segments; (ii) synergies among different investment properties; and (iii) a fully integrated management 78 79 approach. Therefore, the fair value of Cominar’s investment properties taken as a whole could differ from that appearing on the consolidated balance sheet. Properties under development in the construction phase are measured at cost until their fair value can be reliably determined, usually when development has been completed. The fair value of land held for future development is based on recent prices derived from comparable market transactions. Capitalization of costs Cominar capitalizes into investment properties the costs incurred to increase their capacity, replace certain components and make improvements after the acquisition date. Cominar also capitalizes major maintenance and repair expenses providing benefits that will last far beyond the end of the reporting period. For construction, expansion or major revitalization projects of income properties that take place over a substantial period of time, Cominar capitalizes the borrowing costs that are directly attributable to the investments in question. Leasehold improvements, incurred directly by Cominar or through an allowance to tenants, which represent capital investments that increase the service capacity and value of properties and for which the economic advantage will extend beyond the term of the lease and will mainly benefit Cominar, as well as initial direct costs, mostly brokerage fees incurred to negotiate or prepare leases, are added to the carrying amount of investment properties when incurred, and are not amortized subsequently. Concerning properties under development and land held for future development, Cominar capitalizes all direct costs incurred for their acquisition, development and construction. Such capitalized costs also include borrowing costs that are directly attributable to the property concerned. Cominar begins capitalizing borrowing costs when it incurs expenditures for the properties in question and when it undertakes activities that are necessary to prepare these properties for their intended use. Cominar ceases capitalizing borrowing costs when the asset is ready for management’s intended use. When Cominar determines that the acquisition of an investment property is an asset acquisition, it capitalizes all costs that are directly related to the acquisition of the property, as well as all expenses incurred to carry out the transaction. Tenant inducements Tenant inducements, mostly the payment of a monetary allowance to tenants and the granting of free occupancy periods, are added to the carrying amount of investment properties as they are incurred and are subsequently amortized against rental revenue from investment properties on a straight-line basis over the related lease term. Investment properties held for sale Investment properties held for sale are classified as being held for sale if their carrying amount will be recovered mainly through a sale transaction rather than through continuing use. Investment properties continue to be measured using the fair value model. Financial instruments Cominar groups its financial instruments into classes according to their nature and characteristics. Management determines such classification upon initial measurement, which is usually at the date of acquisition. Cominar uses the following classifications for its financial instruments: − Cash and cash equivalents, the mortgage receivable and accounts receivable are classified as “Loans and receivables.” They are initially measured at fair value. Subsequently, they are measured at amortized cost using the effective interest method. For Cominar, this value generally represents cost. − Mortgages payable, debentures, bank borrowings and accounts payable and accrued liabilities are classified as “Other financial liabilities.” They are initially measured at fair value. Subsequently, they are measured at amortized cost using the effective interest method. Cash and cash equivalents Cash and cash equivalents consist of cash and investments that are readily convertible into a known amount of cash, that are not subject to a significant risk of change in value and that have original maturities of three months or less. Bank borrowings are considered to be financing activities. Deferred financing costs Issue costs incurred to obtain term loan financing, typically through mortgages payable or debentures, are applied against the borrowings and are amortized using the effective interest rate method over the term of the related debt. Financing costs related to the operating and acquisition credit facility are recorded as assets under prepaid expenses and other assets and are amortized on a straight-line basis over the term of the credit facility. Revenue recognition Management has determined that all leases concluded between Cominar and its tenants are operating leases. Minimum lease payments are recognized using the straight-line method over the term of the related leases, and the excess of payments recognized over amounts payable is recorded on Cominar’s consolidated balance sheet under investment properties. Leases generally provide for the tenants’ payment of maintenance expenses for common elements, realty taxes and other operating costs, such payment being recognized as operating revenues in the period when the right to payment vests. Percentage leases are recognized when the minimum sales level has been reached pursuant to the related leases. Lease cancellation fees are recognized when they are due. Lastly, incidental income is recognized when services are rendered. Long-term incentive plan Cominar has a long-term incentive plan in order to attract, retain and motivate its employees to attain Cominar’s objectives. This plan does not provide for any cash settlements. Unit purchase options Cominar recognizes a compensation expense on units granted, based on their fair value on the date of the grant, which is calculated using an option valuation model. The compensation expense is amortized using the graded vesting method. Restricted units Cominar recognizes a compensation expense on restricted unit options granted, based on their fair value, which corresponds to the market value of Cominar units on the date of the grant. The compensation expense is amortized on a straight-line basis over the duration of the vesting period. Deferred units Cominar recognizes compensation expense on deferred units granted, based on their fair value, which corresponds to the market value of Cominar units on the date of the grant. The compensation expense is amortized using the graded vesting method. Income taxes Cominar is considered a mutual fund trust for income tax purposes. Pursuant to the Contract of Trust, the trustees intend to distribute or designate all taxable income directly earned by Cominar to unitholders and to deduct such distributions and allocations from its income for tax purposes. Therefore, no provision for income taxes is required. Cominar’s subsidiaries that are incorporated as business corporations are subject to tax on their taxable income under the Income Tax Act (Canada) and the taxation acts of the provinces concerned. These subsidiaries account for their taxes payable or recoverable at the current enacted tax rates and use the asset and liability method to account for deferred taxes. The net deferred tax liability represents the cumulative amount of taxes applicable to temporary differences between the reported carrying amounts and tax bases of the assets and liabilities. Per unit calculations Basic net income (net loss) per unit is calculated based on the weighted average number of units outstanding for the year. The calculation of net income (net loss) per unit on a diluted basis considers the potential issuance of units in accordance with the long-term incentive plan, if dilutive. Segment information Segment information is presented in accordance with IFRS 8, “Operating segments,” which recommends presenting and disclosing segment information in accordance with information that is regularly assessed by the chief operating decision makers in order to determine the performance of each segment. 80 81 FUTURE ACCOUNTING POLICY CHANGES IFRS 9, “Financial Instruments” In July 2014, the International Accounting Standards Board (“IASB”) issued its final version of IFRS 9, which will replace IAS 39, “Financial Instruments: Recognition and Measurement” and modifications to IFRS 7, “Financial Instruments: Disclosures,” in order to add disclosure requirements regarding the transition to IFRS 9. The new standard includes guidance on recognition and derecognition of financial assets and financial liabilities, impairment and hedge accounting. IFRS 9 will be effective for annual periods beginning on or after January 1, 2018, with early adoption permitted. The adoption of this new standard will have no significant impact on Cominar’s consolidated financial statements. IFRS 15, “Revenue from Contracts with Customers” In May 2014, the IASB issued IFRS 15, “Revenue from Contracts with Customers.” IFRS 15 specifies how and when to recognize revenue and requires entities to provide users of financial statements with more informative, relevant disclosures. The standard will supersede IAS 18, “Revenue,” IAS 11, “Construction Contracts,” and related interpretations. Adoption of the standard will be mandatory for all IFRS reporters, and will apply to nearly all contracts with customers: the main exceptions are leases, financial instruments and insurance contracts. IFRS 15 will be effective for annual periods beginning on or after January 1, 2018, with earlier adoption permitted. The adoption of this new standard will have no significant impact on Cominar’s consolidated financial statements. IFRS 16, “Leases” In January 2016, the IASB issued IFRS 16, “Leases.” IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract, i.e. the customer (lessee) and the supplier (lessor). IFRS 16 will cancel and replace the previous leases standard, IAS 17, “Leases,” and related interpretations. IFRS 16 will be effective for annual periods beginning on or after January 1, 2019, with earlier adoption permitted if IFRS 15 is also applied. The adoption of this new standard will have no significant impact on Cominar’s consolidated financial statements since no important changes were made to the accounting model by the lessor. RISKS AND UNCERTAINTIES Like all real estate entities, Cominar is exposed, in the normal course of business, to various risk factors that may have an impact on its ability to attain strategic objectives, despite all the measures implemented to counter them. Accordingly, unitholders should consider the following risks and uncertainties when assessing Cominar’s outlook in terms of investment potential. RISK FACTORS RELATED TO THE BUSINESS OF COMINAR ACCESS TO CAPITAL AND DEBT FINANCING, AND CURRENT GLOBAL FINANCIAL CONDITIONS The real estate industry is capital intensive. Cominar requires access to capital to maintain its properties, as well as to fund its growth strategy and significant capital expenditures from time to time. There can be no assurances that Cominar will have access to sufficient capital (including debt financing) on terms favourable to Cominar for future property acquisitions and developments, for the financing or refinancing of properties, for funding operating expenses or for other purposes. In addition, Cominar may not be able to borrow funds under its credit facilities due to limitations on Cominar’s ability to incur debt set forth in the Contract of Trust or conditions in its debt instruments. Cominar’s access to the unsecured debenture market and the cost of Cominar’s borrowings under the Unsecured Revolving Credit Facility are also dependent on its credit rating. A new negative change in its credit rating could further materially adversely impact Cominar. See “Risks and Uncertainties – Risk Factors Related to the Ownership of Securities – Credit rating”. Market events and conditions, including disruptions in international and regional credit markets and in other financial systems and global economic conditions, could impede Cominar’s access to capital (including debt financing) or increase the cost of such capital. The Canadian economy, including the Province of Alberta, is being adversely impacted by volatile oil prices. Failure to raise or access capital in a timely manner or under favourable terms could have a material adverse effect on Cominar’s financial position and results of operations, including on its acquisition and development program. DEBT FINANCING Cominar has substantial outstanding consolidated borrowings comprised primarily of hypothecs, property mortgages, debentures, bridge loan, and borrowings under its acquisition and operating credit facilities. Cominar intends to finance its growth strategy, including developments and acquisitions, through a combination of its working capital and liquidity resources, including cash flows from operations, additional borrowings and public or private sales of properties, equities or debt securities. Cominar’s activities are therefore partially dependent upon the interest rates applied to its existing debt. Cominar may not be able to refinance its existing debt or renegotiate the terms of repayment at favourable rates. In addition, the terms of Cominar’s indebtedness provide that, upon an event of default, such indebtedness becomes immediately due and payable and distributions that may be made by Cominar may be restricted. Therefore, upon an event of default under such borrowings, or inability to renew same at maturity, Cominar’s ability to make distributions will be adversely affected. A portion of Cominar’s cash flows is dedicated to servicing its debt, and there can be no assurance that Cominar will continue to generate sufficient cash flows from operations to meet required interest or principal payments, such that it could be required to seek renegotiation of such payments or obtain additional financing, including equity or debt financing. The Unsecured Revolving Credit Facility in the stated amount of $700.0 million is repayable in one tranche in August 2019. Cominar is exposed to debt financing risks, including the risk that the existing hypothecary borrowings secured by its properties and the Unsecured Revolving Credit Facility cannot be refinanced or that the terms of such refinancing will not be as favourable as the terms of the existing loans. On August 4, 2017, DBRS announced that it had downgraded the rating of the senior unsecured debentures from BBB (low) with a negative trend to BB (high) with a stable trend. This downgrade materially adversely impacted Cominar. Any further downgrade of the credit rating assigned by DBRS to Cominar and to the unsecured debentures could materially adversely impact Cominar. See “Risks and Uncertainties – Risk Factors Related to the Business of Cominar – Credit Rating”. OWNERSHIP OF IMMOVABLE PROPERTY All immovable property investments are subject to risk exposures. Such investments are affected by general economic conditions, local real estate markets, demand for leased premises, competition from other vacant premises, municipal valuations and assessments, and various other factors. The value of immovable property and improvements thereto may also depend on the solvency and financial stability of tenants, the economic environment in which they operate and the increase in interest rates. Due to difficult conditions in the Canadian retail environment, certain retailers have announced the closure of their stores, including Sears Canada Co. and other retailers, who were or are, as the case may be, tenants of Cominar. Other retailers may follow. The existing difficult retail environment is also materially impacting Cominar, notably with the increase in e-commerce, while this segment is still hardly recovering from the closing of Target stores, with the added closing of Sears stores. Cominar has also been impacted by vacancies and by the downward review of rents in the Montréal area’s suburban office market and the Ottawa office market. The Calgary office market is also adversely impacted by volatile oil prices. Cominar’s income and Distributable Income would be adversely affected if one or more major tenants or a significant number of tenants were unable to meet their lease obligations or if a significant portion of vacant space in Cominar’s properties cannot be leased on economically favourable lease terms, or simply re-leased. In the event of default by a tenant, delays or limitations may be experienced in enforcing Cominar’s rights as a lessor and substantial costs may be incurred to protect Cominar’s investment. The ability to rent unleased space in Cominar’s properties will be affected by many factors, including the level of general economic activity and competition for tenants by other properties. Significant costs may need to be incurred to make improvements or repairs to property as required by a new tenant. The failure to rent unleased space on a timely basis or at all or at rents that are equivalent to or higher than current rents would likely have an adverse effect on Cominar’s financial position and the value of its properties. Certain significant expenditures, including property taxes, maintenance and operating costs, hypothecary payments, insurance costs and related charges must be made throughout the period of ownership of immovable property regardless of whether the property is producing any income. If Cominar is unable to meet mortgage payments on a property, a loss could be sustained as a result of the mortgage creditor’s exercise of its hypothecary remedies. Immovable property investments tend to be relatively illiquid, with the degree of liquidity generally fluctuating in relationship with the demand for and the perceived desirability of such investments. Such illiquidity may tend to limit Cominar’s ability to make changes to its portfolio promptly in response to changing economic or investment conditions. If Cominar were to be required to liquidate its immovable property investments, the proceeds to Cominar might be significantly less than the aggregate carrying amount of its properties. 82 83 Leases for Cominar’s properties, including those of significant tenants, will mature from time to time over the short and long term. There can be no assurance that Cominar will be able to renew any or all of the leases upon maturity or that rental rate increases will occur or be achieved upon any such renewals. The failure to renew leases or achieve rental rate increases may adversely impact Cominar’s financial position and results of operations. RECRUITMENT AND RETENTION OF EMPLOYEES AND EXECUTIVES Management depends on the services of certain key personnel. Competition for qualified employees and executives is intense. If Cominar is unable to attract and retain qualified and capable employees and executives, the conduct of its activities may be adversely affected. ENVIRONMENTAL MATTERS GOVERNMENT REGULATION Environmental and ecological legislation and policies have become increasingly important in recent years. As an owner or operator of real property, Cominar could, under various federal, provincial and municipal laws, become liable for the costs of removal or remediation of certain hazardous or toxic substances released on or in its properties or disposed of at other locations. The failure to remove or remediate such substances, or address such matters through alternative measures prescribed by the governing authority, may adversely affect Cominar’s ability to sell such real estate or to borrow using such real estate as collateral, and could potentially also result in claims against Cominar by private plaintiffs or governmental agencies. Cominar is not currently aware of any material non-compliance, liability or other claim in connection with any of its properties, nor is Cominar aware of any environmental condition with respect to any of its properties that it believes would involve material expenditures by Cominar, other than in respect of remediation expenditures taken into consideration as part of the acquisition of properties. Pursuant to Cominar’s operating policies, Cominar shall obtain or review a Phase I environmental audit of each immovable property to be acquired by it. See “Description of the Business – Investment Guidelines and Operating Policies – Operating Policies” on pages 11 and 12 of the 2016 AIF. LEGAL RISKS Cominar’s operations are subject to various laws and regulations across all of its operating jurisdictions and Cominar faces risks associated with legal and regulatory changes and litigation. COMPETITION Cominar competes for suitable immovable property investments with individuals, corporations, pension funds and other institutions (both Canadian and foreign) which are presently seeking, or which may seek in the future, immovable property investments similar to those desired by Cominar. Many of those investors have greater financial resources than Cominar, or operate without the investment or operating restrictions applicable to Cominar or under more flexible conditions. An increase in the availability of investment funds and heightened interest in immovable property investments could increase competition for immovable property investments, thereby increasing the purchase prices of such investments and reducing their yield. In addition, numerous property developers, managers and owners compete with Cominar in seeking tenants. The existence of competing developers, managers and owners and competition for Cominar’s tenants could have an adverse effect on Cominar’s ability to lease space in its properties and on the rents charged, and could adversely affect Cominar’s revenues and, consequently, its ability to meet its debt obligations. PROPERTY DEVELOPMENT PROGRAM Information regarding Cominar’s development projects, development costs, capitalization rates and expected returns are subject to change, which may be material, as assumptions regarding items such as, but not limited to, tenant rents, building sizes, leasable areas, project completion timelines and project costs, are updated periodically based on revised site plans, Cominar’s cost tendering process, continuing tenant negotiations, demand for leasable space in Cominar’s markets, the obtaining of required building permits, ongoing discussions with municipalities and successful property re-zonings. There can be no assurance that any assumptions in this regard will materialize as expected and any changes in these assumptions could have a material adverse effect on Cominar’s development program, asset values and financial performance. ACQUISITIONS Cominar’s business plan is focused in part on growth by identifying suitable acquisition opportunities, pursuing such opportunities, completing acquisitions and effectively operating and leasing such properties. If Cominar is unable to manage its growth effectively, this could adversely impact Cominar’s financial position and results of operations, and decrease the Distributable Income. There can be no assurance as to the pace of growth through property acquisitions or that Cominar will be able to acquire assets on an accretive basis, and as such there can be no assurance that distributions to Unitholders will increase in the future. Cominar and its properties are subject to various government statutes and regulations. Any change in such statutes or regulations that is adverse to Cominar and its properties could affect Cominar’s operating results and financial performance. See “Risks and Uncertainties – Risk Factors Related to the Business of Cominar – Environmental matters”. LIMIT ON ACTIVITIES In order to maintain its status as a “mutual fund trust” under the Income Tax Act, Cominar cannot carry on most active business activities and is limited in the types of investments it may make. The Contract of Trust contains restrictions to this effect. GENERAL UNINSURED LOSSES Cominar carries a blanket comprehensive general liability policy, and a property policy including insurance against fire, flood, extended coverage and rental loss insurance with policy specifications, limits and deductibles customarily carried for similar properties. There are, however, certain types of risks (generally of a catastrophic nature such as wars or environmental contamination) which are either uninsurable or not insurable on an economically viable basis. Cominar also carries insurance for earthquake risks, subject to certain policy limits, deductibles, and will continue to carry such insurance if it is economical to do so. Should an uninsured or underinsured loss occur, Cominar could lose its investment in, and anticipated profits and cash flows from, one or more of its properties, but Cominar would continue to be obligated to repay any hypothecary recourse or mortgage indebtedness on such properties. Many insurance companies have eliminated coverage for acts of terrorism from their policies, and Cominar may not be able to obtain coverage for terrorist acts at commercially reasonable rates or at any price. Damage to a property sustained as a result of an uninsured terrorist or similar act would likely adversely impact Cominar’s financial condition and results of operations and decrease the amount of cash available for distribution. POTENTIAL CONFLICTS OF INTEREST Cominar may be subject to conflicts of interest due to the fact that Groupe Dallaire and related entities are engaged in a wide range of real estate and other business activities. Dalcon Inc. is a wholly owned subsidiary of Groupe Dallaire Inc. Cominar rents premises to Groupe Dallaire Inc. and to Dalcon Inc. Dalcon Inc. also performs leasehold improvements and carries out construction and development projects, all on behalf of Cominar. Finally, Cominar owns one participation of 50% and two participations of 75% in joint ventures with Groupe Dallaire Inc. The business objective of these three joint ventures is the ownership, management and development of real estate projects. The Dallaire Family and related entities may become involved in transactions or leasing opportunities which conflict with the interests of Cominar. Cominar has started an important transition towards a new business plan aiming to diversify its sources of construction suppliers and to develop partnerships with new partners who are leaders in the field, with the goal of promoting better development and increasing the value of all of its assets in the major areas in which it is active. In parallel with the implementation of this new strategy, the business relationship with Groupe Dallaire for construction services will be terminated in an orderly manner. To ensure an orderly transition, Cominar estimates that an approximate twelve month transition period could be required. CYBERSECURITY EVENTS Cominar faces various security threats, including cybersecurity threats to gain unauthorized access to sensitive information, to render data or systems unusable, or otherwise affect Cominar’s ability to operate. Cybersecurity attacks in particular are evolving and include, but are not limited to, malicious software, attempts to gain unauthorized access to data, and other electronic security breaches that could lead to disruptions in critical systems, unauthorized release of confidential or otherwise protected information and corruption of data. The occurrence of one of these events could cause a substantial decrease in revenues, increased costs to respond or other financial loss, damage to reputation, increased regulation or litigation or inaccurate information reported from Cominar’s operations. These developments may subject Cominar’s operations to increased risks, as well as increased costs, and, depending on their ultimate magnitude, could have a material adverse effect on Cominar’s financial position and results of operations. 84 85 RISK FACTORS RELATED TO THE OWNERSHIP OF SECURITIES STRUCTURAL SUBORDINATION OF SECURITIES MARKET PRICE A publicly traded real estate investment trust will not necessarily trade at values determined solely by reference to the underlying value of its real estate assets. Accordingly, the Units may trade at a premium or a discount to values implied by the initial appraisal of the value of its properties or the value of such properties from time to time. Although Cominar intends to make distributions of its available cash to Unitholders, these cash distributions are not assured. The actual amount distributed will depend on numerous factors including, but not limited to, Cominar’s financial performance, debt covenants and obligations, working capital requirements and future capital requirements. The market price of the Units may deteriorate if Cominar is unable to meet its cash distribution targets in the future. The after-tax return from an investment in Units to Unitholders subject to Canadian income tax will depend, in part, on the composition for tax purposes of distributions paid by Cominar (portions of which may be fully or partially taxable or may constitute non-taxable returns of capital). The composition for tax purposes of those distributions may change over time, thus affecting the after-tax return to Unitholders. Factors that may influence the market price of the Units include the annual yield on the Units, the number of Units issued and outstanding and Cominar’s payout ratio. An increase in market interest rates may lead purchasers of Units to demand a higher annual yield which could adversely affect the market price of the Units. Unlike fixed-income securities, there is no obligation of Cominar to distribute to Unitholders any fixed amount and reductions in, or suspensions of, distributions may occur that would reduce yield based on the market price of the Units. In addition, the market price for the Units may be affected by changes in general market conditions, fluctuations in the markets for equity securities, changes in the economic environment and numerous other factors beyond the control of Cominar. CREDIT RATING The credit rating assigned by DBRS to Cominar and to the unsecured debentures is not a recommendation to buy, hold or sell securities of Cominar. A rating is not a comment on the market price of a security nor is it an assessment of ownership given various investment objectives. Prospective investors should consult with DBRS with respect to the interpretation and implications of the rating. There is no assurance that any rating will remain in effect for any given period of time and ratings may be upgraded, downgraded, placed under review, confirmed or withdrawn. Non-credit risks that can meaningfully impact the value of the securities issued include market risk, trading liquidity risk and covenant risk. DBRS uses rating symbols as a simple and concise method of expressing its opinion to the market, although DBRS usually provides broader contextual information regarding securities in rating reports, which generally set out the full rationale for the chosen rating symbol, and in other releases. On August 4, 2017, DBRS announced that it had downgraded the rating of the senior unsecured debentures from BBB (low) with a negative trend to BB (high) with a stable trend. This downgrade materially adversely impacted Cominar. Any further downgrade of the credit rating assigned by DBRS to Cominar and to the unsecured debentures could have a material adverse effect on Cominar. Real or anticipated changes in the credit rating in respect of the Unsecured Debentures may affect the market value of the Unsecured Debentures. In addition, real or anticipated changes in such credit rating can affect the ability of Cominar to access debt capital markets and increase the cost at which Cominar can do so. Any failure or inability on Cominar’s part to access debt capital markets on satisfactory terms, or at all, could have a material adverse effect on Cominar’s financial position and results of operations, including on its acquisition and development program. See “Risks and Uncertainties – Risk Factors Related to the Business of Cominar – Access to capital and debt financing, and current global financial conditions” and “Risks and Uncertainties – Risk Factors Related to the Business of Cominar – Debt financing”. ABSENCE OF MARKET FOR DEBT SECURITIES There is currently no trading market for any Debt Securities that may be offered. No assurance can be given that an active or liquid trading market for these securities will develop or be sustained. If an active or liquid market for these securities fails to develop or be sustained, the prices at which these securities trade may be adversely affected. Whether or not these securities will trade at lower prices depends on many factors, including liquidity of these securities, prevailing interest rates and the markets for similar securities, the market price of the Units, general economic conditions and Cominar’s financial condition, historic financial performance and future prospects. In the event of a bankruptcy, liquidation or reorganization of Cominar or any of its subsidiaries, holders of certain of their indebtedness and certain trade creditors will generally be entitled to payment of their claims from the assets of Cominar and those subsidiaries before any assets are made available for distribution to the holders of Securities. The Securities will be effectively subordinated to most of the other indebtedness and liabilities of Cominar and its subsidiaries. Neither Cominar, nor any of its subsidiaries will be limited in their ability to incur additional secured or unsecured debts. AVAILABILITY OF CASH FLOW Distributable Income may exceed actual cash available to Cominar from time to time because of items such as principal repayments, tenant allowances, leasing commissions and capital expenditures. Cominar may be required to use part of its debt capacity or to reduce distributions in order to accommodate such items. The $700.0 million unsecured revolving credit facility is repayable in one tranche in August 2019, and it is expected that it cannot be refinanced in the same amount or under such favourable terms and conditions in light of the downgrade in the rating of the senior unsecured debentures. Cominar may need to refinance its debt obligations from time to time, including upon expiration of its debt. There could be a negative impact on Distributable Income if debt obligations of Cominar are replaced with debt that has less favourable terms or if Cominar is unable to refinance its debt. In addition, loan and credit agreements with respect to debt obligations of Cominar, include, and may include in the future, certain covenants with respect to the operations and financial condition of Cominar and Distributable Income may be restricted if Cominar is unable to maintain any such covenants. UNITHOLDER LIABILITY The Contract of Trust provides that no Unitholder or annuitant under a plan of which a Unitholder acts as trustee or carrier (an “annuitant”) will be held to have any personal liability as such, and that no resort shall be had to the private property of any Unitholder or annuitant for satisfaction of any obligation or claim arising out of or in connection with any contract or obligation of Cominar or of the Trustees. Only the assets of Cominar are intended to be subject to levy or execution. The Contract of Trust further provides that certain written instruments signed by Cominar (including all immovable hypothecs and, to the extent the Trustees determine to be practicable and consistent with their obligation as Trustees to act in the best interests of the Unitholders, other written instruments creating a material obligation of Cominar) shall contain a provision or be subject to an acknowledgment to the effect that such obligation will not be binding upon Unitholders or annuitants personally. Except in case of bad faith or gross negligence on their part, no personal liability will attach under the laws of the Province of Québec to Unitholders or annuitants for contract claims under any written instrument disclaiming personal liability as aforesaid. However, in conducting its affairs, Cominar will be acquiring immovable property investments, subject to existing contractual obligations, including obligations under hypothecs or mortgages and leases. The Trustees will use all reasonable efforts to have any such obligations, other than leases, modified so as not to have such obligations binding upon any of the Unitholders or annuitants personally. However, Cominar may not be able to obtain such modification in all cases. If a claim is not satisfied by Cominar, there is a risk that a Unitholder or annuitant will be held personally liable for the performance of the obligations of Cominar where the liability is not disavowed as described above. The possibility of any personal liability attaching to Unitholders or annuitants under the laws of the Province of Québec for contract claims where the liability is not so disavowed is remote. Cominar uses all reasonable efforts to obtain acknowledgments from the hypothecary creditors under assumed hypothecs that assumed hypothec obligations will not be binding personally upon the Trustees or the Unitholders. Claims against Cominar may arise other than under contracts, including claims in delict, claims for taxes and possibly certain other statutory liabilities. The possibility of any personal liability of Unitholders for such claims is considered remote under the laws of the Province of Québec and, as well, the nature of Cominar’s activities are such that most of its obligations arise by contract, with non- contractual risks being largely insurable. In the event that payment of a REIT obligation were to be made by a Unitholder, such Unitholder would be entitled to reimbursement from the available assets of Cominar. Article 1322 of the Civil Code of Québec effectively states that the beneficiary of a trust is liable towards third persons for the damage caused by the fault of the trustees of such trust in carrying out their duties only up to the amount of the benefit such beneficiary has derived from the act of such trustees and that such obligations are to be satisfied from the trust patrimony. Accordingly, although this provision remains to be interpreted by the courts, it should provide additional protection to Unitholders with respect to such obligations. 86 87 The Trustees will cause the activities of Cominar to be conducted, with the advice of counsel, in such a way and in such jurisdictions as to avoid, to the extent they determine to be practicable and consistent with their duty to act in the best interests of the Unitholders, any material risk of liability on the Unitholders for claims against Cominar. DILUTION The number of Units Cominar is authorized to issue is unlimited. The Trustees have the discretion to issue additional Units in other circumstances. Additional Units may also be issued pursuant to the DRIP (which is currently suspended), the Equity Incentive Plan and any other incentive plan of Cominar. Any issuance of Units may have a dilutive effect on Unitholders. RESTRICTIONS ON CERTAIN UNITHOLDERS AND LIQUIDITY OF UNITS The Contract of Trust imposes restrictions on non-resident Unitholders, who are prohibited from beneficially owning more than 49% of the Units. These restrictions may limit the rights of certain Unitholders, including non-residents of Canada, to acquire Units, to exercise their rights as Unitholders and to initiate and complete take-over bids in respect of the Units. As a result, these restrictions may limit the demand for Units from certain Unitholders and thereby adversely affect the liquidity and market value of the Units held by the public. Unitholders who are non-residents of Canada are required to pay all withholding taxes payable in respect of distributions by Cominar. Cominar withholds such taxes as required by the Income Tax Act and remits such payment to the tax authorities on behalf of the Unitholder. The Income Tax Act contains measures to subject non-residents of Canada to withholding tax of certain otherwise non-taxable distributions of Canadian mutual funds to non-resident Unitholders. This may limit the demand for Units and thereby affect their liquidity and market value. CASH DISTRIBUTIONS ARE NOT GUARANTEED There can be no assurance regarding the amount of income to be generated by Cominar’s properties. The ability of Cominar to make cash distributions, and the actual amounts distributed, will be entirely dependent on the operations and assets of Cominar and its subsidiaries, and will be subject to various factors including financial performance and results of operations, obligations under applicable credit facilities, fluctuations in working capital, the sustainability of income derived from anchor tenants and capital expenditure requirements. The market value of the Units will deteriorate if Cominar is unable to meet its distribution targets in the future, and that deterioration may be significant. In addition, the composition of cash distributions for tax purposes may change over time and may affect the after-tax return for investors. NATURE OF INVESTMENT A Unitholder does not hold a share of a body corporate. As holders of Units, the Unitholders will not have statutory rights normally associated with ownership of shares of a corporation including, for example, the right to bring “oppression” or “derivative” actions. The rights of Unitholders are based primarily on the Contract of Trust. There is no statute governing the affairs of Cominar equivalent to the CBCA, which sets out the rights, and entitlements of shareholders of corporations in various circumstances. STATUS FOR TAX PURPOSES Cominar is considered a mutual fund trust for income tax purposes. Pursuant to the Contract of Trust, the Trustees intend to distribute or designate all taxable income directly earned by Cominar to Holders and to deduct such distributions and designations for income tax purposes. In the context of the sale of a significant part of its investment properties, Cominar could end up with a substantial taxable profit that would require it to make a sizeable additional special distribution to avoid having to pay taxes itself. Certain of Cominar’s subsidiaries are subject to tax on their taxable income under the Income Tax Act and the Taxation Act (Québec). A special tax regime applies to trusts that are considered SIFTs as well as those individuals who invest in SIFTs. Under the SIFT Rules, a SIFT is subject to tax in a manner similar to corporations on income from business carried on in Canada and on income (other than taxable dividends) or capital gains from “non-portfolio properties” (as defined in the Income Tax Act), at a combined federal/provincial tax rate similar to that of a corporation. The SIFT Rules apply unless (among other exceptions not applicable here) the trust qualifies as a “real estate investment trust” for the year (the “Real Estate Investment Trust Exception”). If Cominar fails to qualify for the Real Estate Investment Trust Exception, Cominar will be subject to the tax regime introduced by the SIFT Rules. Management believes that Cominar currently meets all the criteria required to qualify for the Real Estate Investment Trust Exception, as per the Real Estate Investment Trust Exception currently in effect. As a result, Management believes that the SIFT Rules do not apply to Cominar. Management intends to take all the necessary steps to meet these conditions on an on-going basis in the future. Nonetheless, there is no guarantee that Cominar will continue to meet all the required conditions to be eligible for the Real Estate Investment Trust Exception for fiscal 2018 or any other subsequent year. 88 89 CONSOLIDATED FINANCIAL STATEMENTS COMINAR REAL ESTATE INVESTMENT TRUST December 31, 2017 90 91 MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING INDEPENDENT AUDITOR’S REPORT TO THE UNITHOLDERS OF COMINAR REAL ESTATE INVESTMENT TRUST The accompanying consolidated financial statements of Cominar Real Estate Investment Trust (“Cominar”) were prepared by management, which is responsible for the integrity and fairness of the information presented, including those amounts that must be based on estimates and judgments. These consolidated financial statements were prepared International Financial Reporting Standards (“IFRS”). The financial information in our MD&A is consistent with these consolidated financial statements. in accordance with In discharging our responsibility for the integrity and fairness of the consolidated financial statements and for the accounting systems from which they are derived, we maintain the necessary system of internal controls designed to ensure that transactions are duly authorized, assets are safeguarded and proper records are maintained. As at December 31, 2017, the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer of Cominar had an evaluation carried out, under their direct supervision, of the effectiveness of the controls and procedures used for the preparation of reports as well as internal control over financial reporting, as defined in Multilateral Instrument 52-109 of the Canadian Securities Administrators. Based on that evaluation, they concluded that the disclosure controls were effective. of Trustees oversees management’s The Board responsibility for financial reporting through its Audit Committee, which is composed entirely of trustees who are not members of Cominar’s management or personnel. This Committee reviews our consolidated financial statements and recommends them to the Board for approval. Other key responsibilities of the Audit Committee include reviewing our the internal control procedures and their updates, identification and management of risks, and advising the trustees on auditing matters and financial reporting issues. PricewaterhouseCoopers LLP, a partnership of independent professional chartered accountants appointed by the unitholders of Cominar upon the recommendation of the Audit Committee and the Board of Trustees, have performed the Consolidated Financial an Statements as at December 31, 2017 and their report follows. The auditors have full and unrestricted access to the Audit Committee to discuss their audit and related findings. independent audit of Sylvain Cossette, B.C.L. President and Chief Executive Officer GILLES HAMEL, CPA, CA Executive Vice President and Chief Financial Officer Québec, March 7, 2018 We have audited the accompanying consolidated financial statements of Cominar Real Estate Investment Trust and its subsidiaries, which comprise the consolidated balance sheets as at December 31, 2017 and 2016 and the consolidated equity, comprehensive income and cash flows for the years then ended, and the related notes, which comprise a summary of significant accounting policies and other explanatory information. unitholders' statements of Management’s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is the preparation of consolidated necessary to enable financial statements from material that are misstatement, whether due to fraud or error. free Auditor’s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit in the evidence about the amounts and disclosures consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Cominar Real Estate Investment Trust and its subsidiaries as at December 31, 2017 and 2016, and their financial performance and their cash flows for the years then ended in accordance with Reporting Standards. International Financial PricewaterhouseCoopers LLP (1) March 7, 2018 Place de la Cité, Tour Cominar 2640 Laurier Boulevard, Suite 1700 Québec, Quebec G1V 5C2 Canada "PwC" refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership. (1) CPA auditor, CA, public accountancy permit no. A125971 92 93 CONSOLIDATED BALANCE SHEETS CONSOLIDATED STATEMENTS OF UNITHOLDERS’ EQUITY [in thousands of Canadian dollars] ASSETS Investment properties Income properties Properties under development Land held for future development Investment properties held for sale Investments in joint ventures Goodwill Mortgage receivable Accounts receivable Prepaid expenses and other assets Cash and cash equivalents Total assets LIABILITIES Mortgages payable Mortgages payable related to investment properties held for sale Debentures Bank borrowings Accounts payable and accrued liabilities Deferred tax liabilities Total liabilities UNITHOLDERS’ EQUITY Unitholders’ equity Total liabilities and unitholders’ equity See accompanying notes to the consolidated financial statements. Approved by the Board of Trustees. Note December 31, 2017 December 31, 2016 $ $ For the years ended December 31 [in thousands of Canadian dollars] 5 6 6 7 8 9 10 11 7, 11 12 13 14 19 6,239,383 37,692 91,580 6,368,655 1,143,500 86,299 139,982 — 62,956 16,673 6,928 7,676,134 45,776 90,820 7,812,730 143,130 90,194 166,971 8,250 42,518 14,139 9,853 7,824,993 8,287,785 1,873,776 276,350 1,721,577 620,366 117,482 6,681 4,616,232 3,208,761 7,824,993 2,048,009 — 1,970,566 332,121 109,861 11,715 4,472,272 3,815,513 8,287,785 Note Unitholders’ contributions $ Cumulative net income $ Cumulative distributions $ Contributed surplus $ Total $ Balance as at January 1, 2017 3,234,693 2,250,944 (1,675,689) 5,565 3,815,513 Net loss and comprehensive income Distributions to unitholders Unit issuances Unit issuance expense Repurchase of units under NCIB(1) Long-term incentive plan 15 15 15 15 — — 41,734 (58) (10,374) (391,725) — — — — — 1,810 — (246,523) — — — — — — (1,908) — — 292 (391,725) (246,523) 39,826 (58) (10,374) 2,102 Balance as at December 31, 2017 3,265,995 1,861,029 (1,922,212) 3,949 3,208,761 Note Unitholders’ contributions $ Cumulative net income $ Cumulative distributions $ Contributed surplus $ Total $ Balance as at January 1, 2016 3,063,920 2,008,364 (1,421,233) 6,946 3,657,997 Net income and comprehensive income Distributions to unitholders Unit issuances Unit issuance expense Repurchase of units under NCIB(1) Long-term incentive plan 15 15 15 15 — — 220,043 (8,491) (40,779) — 241,738 — — — — 842 — (254,456) — — — — — — (1,579) — — 198 241,738 (254,456) 218,464 (8,491) (40,779) 1,040 Balance as at December 31, 2016 3,234,693 2,250,944 (1,675,689) 5,565 3,815,513 (1) Normal course issuer bid (“NCIB”) See accompanying notes to the consolidated financial statements. Alban D’Amours, CM, GOQ, LH, Fellow Adm.A. Chairman of the Board of Trustees Michel Théroux, FCPA, FCA President of the Audit Committee 94 95 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31 [in thousands of Canadian dollars, except per unit amounts] For the years ended December 31 [in thousands of Canadian dollars] Operating revenues Rental revenue from investment properties Operating expenses Operating costs Realty taxes and services Property management expenses Net operating income Finance charges Trust administrative expenses Change in fair value of investment properties Share of joint ventures’ net income Derecognition of goodwill Income (loss) before income taxes Income taxes Net income (net loss) and comprehensive income Basic and diluted net income (net loss) per unit See accompanying notes to the consolidated financial statements. Note 17 17 18 17 5 8 7 19 20 2017 $ 2016 $ 835,489 866,982 (187,895) (194,929) (16,628) (399,452) (185,436) (196,822) (16,115) (398,373) 436,037 468,609 (168,752) (25,977) (616,354) 5,276 (26,989) (170,645) (16,719) (46,675) 8,006 — (396,759) 242,576 5,034 (838) (391,725) 241,738 (2.13) 1.40 OPERATING ACTIVITIES Net income (net loss) Adjustments for: Excess of share of net income over distributions received from the joint ventures Change in fair value of investment properties Depreciation and amortization Compensation expense related to long-term incentive plan Deferred income taxes Derecognition of goodwill Recognition of leases on a straight-line basis Changes in non-cash working capital items Cash flows provided by operating activities INVESTING ACTIVITIES Acquisitions of and investments in income properties Acquisitions of and investments in properties under development and land held for future development Mortgage receivable Cash consideration paid in a business combination Cash consideration paid on the acquisition of an additional interest in a joint venture Net proceeds from the sale of investment properties Contributions to the capital of the joint ventures Return of capital from a joint venture Change in other assets Cash flows used in investing activities FINANCING ACTIVITIES Cash distributions to unitholders Bank borrowings Mortgages payable Debenture issuance net proceeds Unit issuance net proceeds Repurchase of units under NCIB Repayments of debentures at maturity Repayments of mortgages payable at maturity Monthly repayments of mortgages payable Cash flows used in financing activities Net change in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year Other information Interest paid Cash distributed by a joint venture See accompanying notes to the consolidated financial statements. Note 8 5 15 19 7 5 21 5, 21 6, 21 4, 8 8 4, 6 8 8 15 12 11 11 8 2017 $ 2016 $ (391,725) 241,738 (5,026) 616,354 (1,504) 2,102 (5,034) 26,989 (3,941) (4,990) 233,225 (7,206) 46,675 (2,398) 1,028 838 — (3,931) 7,346 284,090 (203,823) (178,578) (50,009) 8,250 (10,016) (21,190) 116,372 — — (3,518) (39,908) — — — 107,157 (10,850) 2,750 (377) (163,934) (119,806) (206,753) (236,000) 288,245 320,530 — 3 (10,380) (250,000) (150,134) (63,727) (72,216) (2,925) 9,853 6,928 (49,045) 239,354 223,725 191,516 (40,779) (250,000) (183,498) (54,954) (159,681) 4,603 5,250 9,853 183,217 250 181,469 800 96 97 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2017 and 2016 [in thousands of Canadian dollars, except per unit amounts] 1) DESCRIPTION OF THE TRUST Cominar Real Estate Investment Trust ("Cominar" or the "Trust") is an unincorporated closed-end real estate investment trust created by a Contract of Trust on March 31, 1998, under the laws of the Province of Quebec. As at December 31, 2017, Cominar owned and managed a real estate portfolio of 525 high-quality properties that covered a total area of 44.4 million square feet in Quebec, Ontario, the Atlantic Provinces and Western Canada. Cominar is listed on the Toronto Stock Exchange, and its units trade under the symbol "CUF.UN." The head office is located at Complexe Jules-Dallaire – T3, 2820 Laurier Boulevard, Suite 850, Québec, Quebec, Canada, G1V 0C1. Additional information about the Trust is available on Cominar's website at www.cominar.com. The Board of Trustees approved Cominar’s consolidated financial statements on March 7, 2018. 2) SIGNIFICANT ACCOUNTING POLICIES a) Basis of presentation Cominar’s consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS"). The accounting policies and application methods thereof have been consistently applied throughout each of the fiscal years presented in these consolidated financial statements. b) Basis of preparation Consolidation These consolidated financial statements include the accounts of Cominar and its wholly owned subsidiaries. Use of estimates, assumptions and judgments The preparation of financial statements in accordance with IFRS requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities in the financial statements. Those estimates, assumptions and judgments also affect the disclosure of contingencies as at the date of the financial statements and the reported amounts of revenues and expenses during the year. Actual results that could differ materially from those estimates, assumptions and judgments, are described below:  Investment properties Investment properties are recorded at fair value at the balance sheet date. Fair value is determined using management’s internal measurements and valuations from independent real estate appraisers, performed in accordance with recognized valuation techniques, as well as a definitive agreement to sell investment properties. Techniques used include the capitalized net operating income method and the discounted cash flow method, including notably estimates of capitalization rates and standardized net operating income as well as estimates of discount rates and future cash flows applicable to investment properties, respectively. Management’s fair value internal measurements rely on internal financial information and are corroborated by capitalization rates obtained from independent experts. However, internal measurements and values obtained from independent appraisers are both subject to significant judgments, estimates and assumptions about market conditions at the balance sheet date.  Business combinations Business combinations are accounted for using the acquisition method. The cost of a business combination is the value, at the acquisition date, of the assets transferred, liabilities incurred and Unitholders’ equity instruments issued in exchange for control of the acquired business. When the cost of a business combination exceeds the fair value of the assets acquired and liabilities assumed, such excess is recorded as goodwill. Transaction-related costs, as well as costs related to the acquisition of real estate assets, are expensed as incurred. Cominar accounts for investment property acquisitions in accordance with IFRS 3, “Business Combinations” (“IFRS 3”), only when it considers that a business has been acquired. Under IFRS 3, a business is defined as an integrated set of activities and assets that could be conducted and managed for the purpose of providing a direct return to investors in the form of lower costs or other economic benefits. If the investment properties acquisition does not correspond to the definition of a business, a group of assets is deemed to have been acquired. If goodwill is present, the acquisition is presumed to be a business. Judgment is therefore used by management in determining if the acquisition qualifies as a business combination in accordance with IFRS 3 or as an acquisition of a group of assets. Generally, based on its judgment, when Cominar acquires a property or property portfolio without taking on the management of personnel or acquiring an operational platform, it categorizes the acquisition as an acquisition of a group of assets.  Joint arrangements Upon the creation of a joint arrangement, Cominar’s management reviews its classification criteria to determine if it is a joint venture to be accounted for using the equity method or if it is a joint operation for which we must recognize the proportionate share of assets, liabilities, revenues and expenses. Cominar holds 50% and 75% interests in its joint arrangements. It has joint control over them since, under the contractual agreements, unanimous consent is required from all parties to the agreements in decisions concerning all relevant activities. The joint arrangements in which Cominar is involved are structured so that they provide Cominar rights to these entities’ net assets. Therefore, these arrangements are presented as joint ventures and are accounted for using the equity method.  Impairment of goodwill Goodwill represents the excess of the purchase price of an acquired business over the fair value of the net identifiable assets acquired. Its useful life is indefinite. It is not amortized but is tested for impairment on an annual basis or more frequently if events or circumstances indicate that it is more likely than not that goodwill may be impaired. Goodwill resulting from business combinations is allocated to each group of cash-generating units (“CGU”) expected to benefit from the combination. To test impairment, Cominar must determine the recoverable value of net assets of each group of CGU, making assumptions about standardized net operating income and capitalization rates. These assumptions are based on Cominar’s past experience as well as on external sources of information. The recoverable value is the fair value less the cost of disposal. Should the carrying amount of a group of cash-generating units, including goodwill, exceed its recoverable value, impairment is recorded and recognized in profit or loss in the period during which the impairment occurs.  Financial instruments Financial instruments must be initially measured at fair value. Cominar must also estimate and disclose the fair value of certain financial instruments for information purposes in the financial statements presented for subsequent periods. When fair value cannot be derived from active markets, it is determined using valuation techniques, namely the discounted cash flow method. If possible, data used in these models are derived from observable markets, and if not, judgment is required to determine fair value. Judgments take into account liquidity risk, credit risk and volatility. Any changes in assumptions related to these factors could modify the fair value of financial instruments.  Unit options The compensation expense related to unit options is measured at fair value and is amortized based on the graded vesting method using the Black-Scholes model. This model requires management to make many estimates on various data, such as expected life, volatility, the weighted average dividend yield of distributions, the weighted average risk-free interest rate and the expected forfeiture rate. Any changes to certain assumptions could have an impact on the compensation expense related to unit options recognized in the financial statements.  Income taxes Deferred taxes of Cominar’s subsidiaries are measured at the tax rates expected to apply in the future as temporary differences between the reported carrying amounts and the tax bases of the assets and liabilities reverse. Changes to deferred taxes related to changes in tax rates are recognized in income in the period during which the rate change is 98 99 substantively enacted. Any changes in future tax rates or in the timing of the reversal of temporary differences could affect the income tax expense. Investment properties An investment property is an immovable property held by Cominar to earn rentals or for capital appreciation, or both, rather than for use in the production or supply of goods and services or for administrative purposes, or for sale in the ordinary course of business. Investment properties include income properties, properties under development and land held for future development. Cominar presents its investment properties based on the fair value model. Fair value is the amount for which the property could be exchanged between knowledgeable, willing parties in an arm’s length transaction. Any change in the fair value is recognized in profit or loss in the period in which it arises. The fair value of investment properties should reflect market conditions at the end of the reporting period. Fair value is time-specific as at a given date. As market conditions could change, the amount presented as fair value could be incorrect or inadequate at another date. The fair value of investment properties is based on measurements derived from management’s estimates and valuations from independent appraisers, plus capital expenditures made during the period, where applicable, or on a definitive agreement to sell investment properties. Management regularly reviews appraisals of its investment properties between the appraisal dates in order to determine whether the related assumptions, such as standardized net operating income and capitalization rates, still apply. These assumptions are compared to market data issued by independent experts. When increases or decreases are required, Cominar adjusts the carrying amount of its investment properties. The fair value of Cominar’s investment properties recorded on the balance sheet in accordance with IFRS is the sum of the fair values of each investment property considered individually and does not necessarily reflect the contribution of the following elements that characterize Cominar: (i) the composition of the property portfolio diversified through its client base, geographic markets and business segments; (ii) synergies among different investment properties; and (iii) a fully integrated management approach. Therefore, the fair value of Cominar’s investment properties taken as a whole could differ from that appearing on the consolidated balance sheet. Properties under development in the construction phase are measured at cost until their fair value can be reliably determined, usually when development has been completed. The fair value of land held for future development is based on recent prices derived from comparable market transactions. Capitalization of costs Cominar capitalizes into investment properties the costs incurred to increase their capacity, replace certain components and make improvements after the acquisition date. Cominar also capitalizes major maintenance and repair expenses providing benefits that will last far beyond the end of the reporting period. For construction, expansion or major revitalization projects of income properties that take place over a substantial period of time, Cominar capitalizes the borrowing costs that are directly attributable to the investments in question. Leasehold improvements, incurred directly by Cominar or through an allowance to tenants, which represent capital investments that increase the service capacity and value of properties and for which the economic advantage will extend beyond the term of the lease and will mainly benefit Cominar, as well as initial direct costs, mostly brokerage fees incurred to negotiate or prepare leases, are added to the carrying amount of investment properties when incurred, and are not amortized subsequently. Concerning properties under development and land held for future development, Cominar capitalizes all direct costs incurred for their acquisition, development and construction. Such capitalized costs also include borrowing costs that are directly attributable to the property concerned. Cominar begins capitalizing borrowing costs when it incurs expenditures for the properties in question and when it undertakes activities that are necessary to prepare these properties for their intended use. Cominar ceases capitalizing borrowing costs when the asset is ready for management’s intended use. When Cominar determines that the acquisition of an investment property is an asset acquisition, it capitalizes all costs that are directly related to the acquisition of the property, as well as all expenses incurred to carry out the transaction. Tenant inducements Tenant inducements, mostly the payment of a monetary allowance to tenants and the granting of free occupancy periods, are added to the carrying amount of investment properties as they are incurred and are subsequently amortized against rental revenue from investment properties on a straight-line basis over the related lease term. Investment properties held for sale Investment properties held for sale are classified as being held for sale if their carrying amount will be recovered mainly through a sale transaction rather than through continuing use. Investment properties continue to be measured using the fair value model. Financial instruments Cominar groups its financial instruments into classes according to their nature and characteristics. Management determines such classification upon initial measurement, which is usually at the date of acquisition. Cominar uses the following classifications for its financial instruments: − Cash and cash equivalents, the mortgage receivable and accounts receivable are classified as “Loans and receivables.” They are initially measured at fair value. Subsequently, they are measured at amortized cost using the effective interest method. For Cominar, this value generally represents cost. − Mortgages payable, debentures, bank borrowings and accounts payable and accrued liabilities are classified as “Other financial liabilities.” They are initially measured at fair value. Subsequently, they are measured at amortized cost using the effective interest method. Cash and cash equivalents Cash and cash equivalents consist of cash and investments that are readily convertible into a known amount of cash, that are not subject to a significant risk of change in value and that have original maturities of three months or less. Bank borrowings are considered to be financing activities. Deferred financing costs Issue costs incurred to obtain term loan financing, typically through mortgages payable or debentures, are applied against the borrowings and are amortized using the effective interest rate method over the term of the related debt. Financing costs related to the operating and acquisition credit facility are recorded as assets under prepaid expenses and other assets and are amortized on a straight-line basis over the term of the credit facility. Revenue recognition Management has determined that all leases concluded between Cominar and its tenants are operating leases. Minimum lease payments are recognized using the straight-line method over the term of the related leases, and the excess of payments recognized over amounts payable is recorded on Cominar’s consolidated balance sheet under investment properties. Leases generally provide for the tenants’ payment of maintenance expenses for common elements, realty taxes and other operating costs, such payment being recognized as operating revenues in the period when the right to payment vests. Percentage leases are recognized when the minimum sales level has been reached pursuant to the related leases. Lease cancellation fees are recognized when they are due. Lastly, incidental income is recognized when services are rendered. Long-term incentive plan Cominar has a long-term incentive plan in order to attract, retain and motivate its employees to attain Cominar’s objectives. This plan does not provide for any cash settlements. Unit purchase options Cominar recognizes a compensation expense on units granted, based on their fair value on the date of the grant, which is calculated using an option valuation model. The compensation expense is amortized using the graded vesting method. Restricted units Cominar recognizes a compensation expense on restricted unit options granted, based on their fair value, which corresponds to the market value of Cominar units on the date of the grant. The compensation expense is amortized on a straight-line basis over the duration of the vesting period. Deferred units Cominar recognizes compensation expense on deferred units granted, based on their fair value, which corresponds to the market value of Cominar units on the date of the grant. The compensation expense is amortized using the graded vesting method. 100 101 Income taxes Cominar is considered a mutual fund trust for income tax purposes. Pursuant to the Contract of Trust, the trustees intend to distribute or designate all taxable income directly earned by Cominar to unitholders and to deduct such distributions and allocations from its income for tax purposes. Therefore, no provision for income taxes is required. Cominar’s subsidiaries that are incorporated as business corporations are subject to tax on their taxable income under the Income Tax Act (Canada) and the taxation acts of the provinces concerned. These subsidiaries account for their taxes payable or recoverable at the current enacted tax rates and use the asset and liability method to account for deferred taxes. The net deferred tax liability represents the cumulative amount of taxes applicable to temporary differences between the reported carrying amounts and tax bases of the assets and liabilities. Per unit calculations Basic net income (net loss) per unit is calculated based on the weighted average number of units outstanding for the year. The calculation of net income (net loss) per unit on a diluted basis considers the potential issuance of units in accordance with the long-term incentive plan, if dilutive. Segment information Segment information is presented in accordance with IFRS 8, “Operating segments,” which recommends presenting and disclosing segment information in accordance with information that is regularly assessed by the chief operating decision makers in order to determine the performance of each segment. 3) FUTURE ACCOUNTING POLICY CHANGES IFRS 9, “Financial Instruments” In July 2014, the International Accounting Standards Board (“IASB”) issued its final version of IFRS 9, which will replace IAS 39, “Financial Instruments: Recognition and Measurement” and modifications to IFRS 7, “Financial Instruments: Disclosures,” in order to add disclosure requirements regarding the transition to IFRS 9. The new standard includes guidance on recognition and derecognition of financial assets and financial liabilities, impairment and hedge accounting. IFRS 9 will be effective for annual periods beginning on or after January 1, 2018, with early adoption permitted. The adoption of this new standard will have no significant impact on Cominar’s consolidated financial statements. IFRS 15, “Revenue from Contracts with Customers” In May 2014, the IASB issued IFRS 15, “Revenue from Contracts with Customers.” IFRS 15 specifies how and when to recognize revenue and requires entities to provide users of financial statements with more informative, relevant disclosures. The standard will supersede IAS 18, “Revenue,” IAS 11, “Construction Contracts,” and related interpretations. Adoption of the standard will be mandatory for all IFRS reporters, and will apply to nearly all contracts with customers: the main exceptions are leases, financial instruments and insurance contracts. IFRS 15 will be effective for annual periods beginning on or after January 1, 2018, with earlier adoption permitted. The adoption of this new standard will have no significant impact on Cominar’s consolidated financial statements. IFRS 16, “Leases” In January 2016, the IASB issued IFRS 16, “Leases”. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract, i.e. the customer (lessee) and the supplier (lessor). IFRS 16 will cancel and replace the previous leases standard, IAS 17, “Leases”, and related interpretations. IFRS 16 will be effective for annual periods beginning on or after January 1, 2019, with earlier adoption permitted if IFRS 15 is also applied. The adoption of this new standard will have no significant impact on Cominar’s consolidated financial statements since no important changes were made to the accounting model by the lessor. 4) ACQUISITIONS AND DISPOSITIONS BUSINESS COMBINATIONS On January 13, 2017, Cominar acquired an additional 25% ownership interest in Société en commandite Chaudière-Duplessis for an amount of $10,016, increasing its interest in the company from 75% to 100%. On that date, Société en commandite Chaudière- Duplessis became a wholly owned subsidiary of Cominar. Cominar accounted for this transaction using the acquisition method, in accordance with IFRS 3 “Business Combinations.” IFRS 3 requires the recognition of 100% of the net assets acquired in the consolidated financial statements as well as the derecognition of the investment in a joint venture. The following table summarizes the acquisition-date fair value of net assets acquired and the purchase price: As at January 13, 2017 Properties under development Working capital Net assets of Société en commandite Chaudière-Duplessis Previously held interest in the joint venture Cash consideration Final purchase price allocation $ 40,334 (207) 40,127 (30,111) 10,016 The cash consideration paid for the acquisition has been financed by the credit facility. The results of this subsidiary are included in the consolidated financial statements from the date of acquisition. DISPOSITIONS OF INCOME PROPERTIES On July 19, 2017, Cominar completed the sale of a retail property located in Ontario, for a total selling price of $850. On July 27, 2017, Cominar completed the sale of a retail property located in the Granby area, Quebec, for a total selling price of $1,000. On August 17, 2017, Cominar completed the sale of a retail property located in Chicoutimi, Quebec, for a total selling price of $2,250. On December 8, 2017, Cominar completed the sale of an industrial and mixed-use property located in the Montréal area, Quebec, for a total selling price of $4,000. These properties sold during fiscal 2017 have been subject to an overall increase in their carrying amount to their fair value of $276. These properties had been subject to an increase in their carrying amount to their fair value of $157 in 2016. DISPOSITIONS OF INVESTMENT PROPERTIES HELD FOR SALE IN 2017 On January 31, 2017, Cominar completed the sale of one industrial and mixed-use property and one retail property located in the Toronto area, for a total selling price of $58,253, net of costs to sell. On March 3, 2017, Cominar completed the sale of a portfolio of 8 retail properties located in the Montréal area and in Ontario for a total selling price of $34,658, net of costs to sell. On April 19, 2017, Cominar completed the sale of a retail property located in the Québec area for a total selling price of $835, net of costs to sell. 102 103 On June 26, 2017, Cominar completed the sale of a retail property located in Nova Scotia for a total selling price of $388, net of costs to sell. On July 13, 2017, Cominar completed the sale of an industrial and mixed-use property located in the Québec area, for a total selling price of $2,183, net of costs to sell. The properties sold by Cominar during fiscal 2017 have been subject to an overall decrease in their carrying amount to their fair value of $819 following an adjustment of the estimated costs to sell. These properties had been subject to an increase in their carrying amount to their fair value of $7,847 in 2016. DISPOSITIONS OF INVESTMENT PROPERTIES HELD FOR SALE IN 2016 On January 29, 2016, Cominar completed the sale of a portfolio of 10 retail properties located in Quebec and Ontario, for a total price of $14,949, net of costs to sell. On March 31, 2016, Cominar completed the sale of a portfolio of 14 retail properties located in Quebec and Ontario, for a total price of $55,482, net of costs to sell. On May 2, 2016, Cominar completed the sale of a portfolio of 5 retail properties located in the Québec and Montréal areas, for a total price of $39,293, net of costs to sell. On December 19, 2016, Cominar completed the sale of two retail properties located in the Montréal area, for a total price of $5,914, net of costs to sell. The properties sold by Cominar during fiscal 2016 have been subject to an overall decrease in their carrying amount to their fair value of $1,362. These properties had been subject to an increase in their carrying amount to their fair value of $4,836 in 2015. TRANSFERS TO INCOME PROPERTIES IN 2017 During the fourth quarter of 2017, Cominar transferred two properties from properties under development to income properties. The first property, a $31,285 office building with a leasable area of 119,000 square feet, is located in Laval and has an occupancy rate of 95.0%. Its capitalization rate is 9.0%. The second property, a $11,315 industrial and mixed-use building with a leasable area of 75,000 square feet, is located in Lévis and has an occupancy rate of 67%. Its estimated capitalization rate is 8.1%. TRANSFERS TO INCOME PROPERTIES IN 2016 During the third quarter of 2016, Cominar completed the construction of an industrial and mixed-use property that it transferred from property under development to income property. Located in Québec, this property valued at $5,599, with a leasable area of 46,000 square feet, has an occupancy rate of 100%. The capitalization rate is 8.5%. During the fourth quarter of 2016, Cominar completed the construction of two properties that were transferred from properties under development to income properties. The first one, a $2,262 retail property located in Trois-Rivières with a leasable area of 6,000 square feet, has an occupancy rate of 100% and its capitalization rate is 7.6%. The second one, a $19,970 industrial and mixed-use property located in Laval with a leasable area of 130,000 square feet, has an occupancy rate of 100% and its capitalization rate is 8.4%. 5) INCOME PROPERTIES For the years ended December 31 Balance, beginning of year Acquisitions and related costs Change in fair value Capital costs Dispositions Transfers from properties under development Net transfers to investment properties held for sale Change in initial direct costs Recognition of leases on a straight-line basis Balance, end of year Note 4 6 7 2017 $ 7,676,134 478 (592,229) 190,151 (8,100) 42,600 (1,086,687) 13,095 3,941 6,239,383 2016 $ 7,614,990 10,648 (49,086) 149,011 — 27,831 (96,397) 15,206 3,931 7,676,134 CHANGE IN FAIR VALUE OF INVESTMENT PROPERTIES Cominar opted to present its investment properties in the consolidated financial statements according to the fair value model. Fair value is determined based on evaluations performed using management’s internal estimates and by independent real estate appraisers, plus capital expenditures made during the period, where applicable, or on a definitive agreement to sell investment properties. External valuations were carried out by independent national firms holding a recognized and relevant professional qualification and having recent experience in the location and category of the investment properties being valued. As per Cominar’s policy on valuing investment properties, during fiscal 2017, management revalued the entire real estate portfolio and determined that a decrease of $616,354 was necessary to change the carrying amount in fair value of investment properties [decrease of $46,675 in 2016]. The change in fair value related to investment properties held as at the year-end date amounts to $615,811 [$45,313 in 2016]. In 2017, the fair value of investment properties from external valuations amounted to 28% [14% in 2016] of the total fair value of all investment properties. Internally valued investment properties have been valued using the capitalized net operating income method. Externally valued investment properties have been valued either with the capitalized net operating income method or the discounted cash flow method. Here is a description of these methods and the key assumptions used: Capitalized net operating income method – Under this method, capitalization rates are applied to standardized net operating income in order to comply with current valuation standards. The standardized net operating income represents adjusted net operating income for items such as administrative expenses, occupancy rates, the recognition of leases on a straight-line basis and other non- recurring items. The key factor is the capitalization rate for each property or property type. Cominar regularly receives publications from national firms dealing with real estate activity and trends. Such market data reports include different capitalization rates by property type and geographical area. Discounted cash flow method – Under this method, the expected future cash flows are discounted using an appropriate rate based on the risk of the property. Expected future cash flows for each investment property are based upon, but not limited to, rental income from current leases, budgeted and actual expenses, and assumptions about rental income from future leases. Discount and capitalization rates are estimated using market surveys, available appraisals and market comparables. To the extent that the capitalization rate ranges change from one reporting period to the next, or if another rate within the provided ranges is more appropriate than the rate previously used, the fair value of investment properties increases or decreases accordingly. The change in the fair value of investment properties is reported in net income. As required under IFRS, Cominar has determined that an increase or decrease in 2017 of 0.1% in the applied capitalization rates for the entire real estate portfolio, except for the investment properties held for sale, would result in a decrease or increase of approximately $103,400 [$135,300 in 2016] in the fair value of its investment properties. Capitalization and discount rates used in both the internal and external valuations are consistent. 104 105 Capitalization and discount rates 2017 2016 6) PROPERTIES UNDER DEVELOPMENT AND LAND HELD FOR FUTURE Category Office properties Capitalized net operating income method Capitalization rate Discounted cash flow method Overall capitalization rate Terminal capitalization rate Discount rate Retail properties Capitalized net operating income method Capitalization rate Discounted cash flow method Overall capitalization rate Terminal capitalization rate Discount rate Industrial and mixed-use properties Capitalized net operating income method Capitalization rate Discounted cash flow method(1) Overall capitalization rate Terminal capitalization rate Discount rate Total Capitalized net operating income method Capitalization rate Discounted cash flow method Overall capitalization rate Terminal capitalization rate Discount rate Range Weighted average Range Weighted average 5.3% - 9.3% 6.2% 4.8% - 9.3% 5.3% - 6.0% 5.5% - 6.5% 6.0% - 7.3% 5.4% 5.8% 6.3% 5.3% - 6.3% 5.6% - 6.5% 6.6% - 7.0% 5.0% - 8.3% 6.1% 5.0% - 9.0% 5.0% - 8.0% 5.3% - 8.8% 5.3% - 8.0% 5.7% 5.8% 6.2% 5.8% - 6.3% 6.0% - 6.5% 6.8% - 7.3% 5.5% - 11.0% 6.8% 5.5% - 11.0% 6.0% - 6.8% 6.3% - 7.0% 7.0% - 7.8% 6.5% 6.5% 7.2% 6.3% 5.8% 5.9% 6.3% 6.2% 5.4% 5.6% 6.7% 5.9% 5.9% 6.1% 6.9% 6.9% N/A N/A N/A 6.2% 5.6% 5.8% 6.7% (1) For the year ended December 31, 2016, no industrial and mixed-use properties have been subject to external valuation according to the discounted cash flow method. DEVELOPMENT For the years ended December 31 Balance, beginning of year Acquisitions and related costs Change in fair value of properties transferred to investment properties held for sale Capital costs Disposition of a portion of land Capitalized interest Transfers to income properties Transfer to investment properties held for sale Business combination Change in initial direct costs Balance, end of year Breakdown: Properties under development Land held for future development Note 4, 5 7 4 2017 $ 136,596 22,600 (24 125) 16,051 (16,244) 6,636 (42,600) (10,000) 40,334 24 129,272 37,692 91,580 2016 $ 120,760 14,818 3,773 19,191 — 5,252 (27,831) — — 633 136,596 45,776 90,820 7) INVESTMENT PROPERTIES HELD FOR SALE On December 18, 2017, Cominar entered into a definitive agreement to sell its entire non-core market portfolio, for total gross proceeds of $1,143,500. This transaction is expected to close at the end of March 2018. Cominar’s management intends to use the net proceeds of this transaction to reduce the debt ratio. This portfolio comprises 96 properties located in the Greater Toronto Area, the Atlantic Provinces and Western Canada. A portion of goodwill, in the amount of $26,989, associated with this property portfolio has been allocated to the assets held for sale and then has been subject to derecognition. For the years ended December 31 2017 2016 Note Office properties Retail properties Industrial and mixed-use properties $ $ Total $ Total $ Investment properties and goodwill Balance, beginning of year Dispositions Net transfers from income properties Transfers from properties under development and land held for future development Transfers of goodwill Derecognition of goodwill Balance, end of year 4 5 6 9 — — 93,630 49,500 143,130 163,733 (44,634) (51,683) (96,317) (117,000) 590,552 332,711 163,424 1,086,687 96,397 10,000 18,577 — 6,564 — 10,000 1,848 26,989 (18,577) (6,564) (1,848) (26,989) — — — 600,552 381,707 161,241 1,143,500 143,130 106 107 As at December 31 2017 2016 The following tables summarize the joint ventures’ net assets and net income: Office properties Retail properties Industrial and mixed-use properties $ $ $ Total $ Total $ Liabilities Mortgages payable related to investment properties held for sale 238,312 3,614 34,424 276,350 — 8) JOINT VENTURES As at December 31 Joint venture Address City/province Société en commandite Complexe Jules-Dallaire 2820 Laurier Boulevard Société en commandite Bouvier-Bertrand Espace Bouvier Québec, Quebec Québec, Quebec Société en commandite Chaudière-Duplessis Boulevard de la Chaudière Québec, Québec Société en commandite Marais Du Marais Street Québec, Quebec 2017 2016 Ownership interest Ownership interest 75% 50% — 75% 50% 50% 75% 75% The business objective of these joint ventures is the ownership, management and development of real estate projects. Contractual rights and obligations The formation of each joint venture is recognized by limited partnership agreements and unanimous shareholder agreements of the general partner, in which the rights and obligations of each limited partner or shareholder are provided for. Among these terms and conditions, the important decisions with regard to joint ventures are taken unanimously by the limited partners for the limited partnerships, and by the shareholders for the general partners. Capital contributions are made on a pro rata basis between the limited partners. In addition, each limited partner has the right of first refusal, should the other limited partner transfer its participation in the joint venture. In the event that one of the limited partners is subject to a change of control, or if its assets are sold, the other limited partner has a purchase option for the participation at the fair market value. Recourse or purchase option mechanisms benefits each limited partner in respect of the other limited partner if it is in default under the agreements or if it becomes insolvent. On January 13, 2017, Cominar completed the acquisition of an additional 25% ownership interest in Société en commandite Chaudière-Duplessis, for a purchase price of $10,016. On that date, Société en commandite Chaudière-Duplessis became a wholly owned subsidiary of Cominar. On May 31, 2017, Cominar completed the acquisition of an additional 25% ownership interest in Société en commandite Jules- Dallaire, for an amount of $21,190. The following table summarizes the financial information on the investments in these joint ventures accounted for under the equity method: For the years ended December 31 Investments in joint ventures, beginning of year Contributions to the capital of the joint ventures Share of joint ventures’ net income Cash distributions by a joint venture Return of capital from a joint venture Acquisition of an additional interest in a joint venture Business combination Investments in joint ventures, end of year Note 4 2017 $ 90,194 — 5,276 (250) — 21,190 (30,111) 86,299 2016 $ 74,888 10,850 8,006 (800) (2,750) — — 90,194 As at December 31 Income properties Properties under development Land held for future development Other assets Mortgages payable Bank borrowings(1) Other liabilities Net assets of the joint ventures Proportionate share of joint ventures’ net assets (1) Société en commandite Bouvier-Bertrand has a $25,000 credit facility, which is secured by Cominar and Groupe Dallaire. For the years ended December 31 Operating revenues Operating expenses Net operating income Finance charges Administrative expenses Change in fair value of investment properties Net income Share of joint ventures’ net income 9) GOODWILL 2017 $ 2016 $ 231,650 198,394 11,711 13,501 1,020 35,741 55,050 2,126 (109,918) (112,873) (23,900) (4,502) 119,562 86,299 (21,600) (3,942) 152,896 90,194 2017 $ 21,503 (9,287) 12,216 (5,525) (81) 704 7,314 5,276 2016 $ 20,226 (8,736) 11,490 (5,383) (134) 9,461 15,434 8,006 Goodwill represents the excess of the purchase price of an acquired business over the fair value of the net identifiable assets acquired. Its useful life is indefinite. It is not amortized but is tested for impairment on an annual basis or more frequently if events or circumstances indicate that it is more likely than not that goodwill may be impaired. Goodwill resulting from business combinations is allocated to each group of CGUs expected to benefit from the combination. To test impairment, Cominar must determine the recoverable value of net assets of each group of CGUs, making assumptions about standardized net operating income and adjusted capitalization rates. These assumptions are based on Cominar’s past experience as well as on external sources of information. The recoverable value is the fair value less the cost of disposal. Should the carrying amount of a group of CGU, including goodwill, exceed its recoverable value, impairment is recorded and recognized in profit or loss in the period during which the impairment occurs. At year-end, Cominar tested its assets for impairment by determining the recoverable value of the net assets of each group of CGUs and comparing it to the carrying amount, including goodwill. As at December 31, 2017 and 2016, goodwill was not impaired. Goodwill is measured using Level 3 inputs of the fair value hierarchy, which means that inputs for the asset or liability are not based on observable market data (unobservable inputs). 108 GOODWILL Note Office properties $ Retail properties $ Industrial and mixed-use properties $ Balance as at December 31, 2016 Transfer to assets held for sale 7 Balance as at December 31, 2017 98,073 (18,577) 79,496 51,212 (6,564) 44,648 17,686 (1,848) 15,838 Total $ 166,971 (26,989) 139,982 The adjusted capitalization rates used to value the recoverable amount of net assets for each group of CGUs are as follows: Adjusted capitalization rates As at December 31 Category Office properties Retail properties Industrial and mixed-use properties 10) ACCOUNTS RECEIVABLE As at December 31 Trade receivables Allowance for doubtful accounts Accounts receivable – related parties Interest-bearing accounts receivable(1) Security deposits Other receivables and accrued income (1) Average effective interest rate 2017 Weighted average 6.0% 5.8% 6.3% 6.0% 2017 $ 27,403 (7,581) 19,822 1,969 3,554 8,434 29,177 62,956 5.91% 2016 Weighted average 5.8% 5.7% 6.5% 5.9% 2016 $ 27,693 (8,557) 19,136 1,182 1,044 6,295 14,861 42,518 6.89% 109 11) MORTGAGES PAYABLE For the years ended December 31 2017 2016 Weighted average contractual rate Weighted average contractual rate Balance, beginning of year Mortgages payable contracted Monthly repayments of principal Repayments of balances at maturity or assigned Plus: Fair value adjustments on assumed mortgages payable Deferred financing costs Less: Balance, end of year(1) 1) Including the $276,350 mortgages payable related to the properties held for sale. $ 2,045,957 321,800 (63,727) (150,134) 2,153,896 2,167 (5,937) 2,150,126 4.37% 3.27% — 4.94% 4.22% $ 2,051,335 241,555 (54,954) (191,979) 2,045,957 7,746 (5,694) 2,048,009 Contractual maturity dates of mortgages payable are as follows as at December 31, 2017: For the years ending December 31 Repayment of principal $ Balances at maturity $ 2018 2019 2020 2021 2022 2023 and thereafter 48,974 44,700 46,299 45,618 40,145 101,533 327,269 592,612 4,141 82,013 89,437 184,248 874,176 1,826,627 2,153,896 investment properties having a carrying amount of Mortgages payable are secured by $4,025,062 [$4,072,140 as at December 31, 2016]. They bear annual contractual interest rates ranging from 2.52% to 7.75% [2.52% to 7.75% as at December 31, 2016], representing a weighted average contractual rate of 4.22% as at December 31, 2017 [4.37% as at December 31, 2016], and are renewable at various dates from January 2018 to January 2039. As at December 31, 2017, the weighted average effective interest rate was 3.95% [4.09% as at December 31, 2016]. immovable hypothecs on As at December 31, 2017, nearly all mortgages payable were bearing interest at fixed rates. Some of the mortgages payable include restrictive covenants, with which Cominar was in compliance as at both December 31, 2017 and December 31, 2016. % 4.46% 3.50% — 5.44% 4.37% Total $ 641,586 48,841 128,312 135,055 224,393 975,709 110 111 12) DEBENTURES 14) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES For the years ended December 31 2017 2016 As at December 31 Balance, beginning of year Issuances Repayment at maturity Less: Plus: Deferred financing costs Net premium and discount on issuance Balance, end of year Weighted average contractual rate $ $ 1,975,000 4.23% 2,000,000 — (250,000) 1,725,000 (4,878) 1,455 1,721,577 — 4.274% 4.23% 225,000 (250,000) 1,975,000 (6,552) 2,118 1,970,566 Weighted average contractual rate 3.95% 4.25% 1.97% 4.23% On June 15, 2017, Cominar reimbursed at maturity its Series 1 senior unsecured debentures totalling $250,000 and bearing interest at 4.274% using its unsecured revolving operating and acquisition credit facility. The following table presents characteristics of outstanding debentures as at December 31, 2017: Series 2 Series 3 Series 4 Series 7 Series 8 Series 9 Series 10 Date of issuance Contractual interest rate Effective interest rate Maturity date Par value as at December 31, 2017 $ December 2012(1) May 2013 July 2013(2) September 2014 December 2014 June 2015 May 2016 4.23% 4.00% 4.941% 3.62% 4.25% 4.164% 4.247% 4.23% 4.37% 4.24% 4.81% 3.70% 4.34% 4.25% 4.34% 4.29% December 2019 November 2020 July 2020 June 2019 December 2021 June 2022 May 2023 300,000 100,000 300,000 300,000 200,000 300,000 225,000 1,725,000 (1) Re-opened in February 2013 ($100,000). (2) Re-opened in January 2014 ($100,000) and March 2014 ($100,000). The debentures, under the trust indenture, contain restrictive covenants, with which Cominar was in compliance as at December 31, 2017 and 2016. 13) BANK BORROWINGS As at December 31, 2017, Cominar had an unsecured renewable operating and acquisition credit facility of up to $700,000 maturing in August 2019. This credit facility bears interest at the prime rate plus 110 basis points or at the bankers’ acceptance rate plus 210 basis points. This credit facility contains certain restrictive covenants, with which Cominar was in compliance as at December 31, 2017 and 2016. As at December 31, 2017, bank borrowings totalled $620,366 and cash available was $79,634. Trade accounts payable Accounts payable – related parties Accrued interest payable Prepaid rent and tenants’ deposits Other accounts payable and accrued expenses Commodity taxes and other non-financial liabilities 2017 $ 2,617 15,696 17,473 29,188 41,889 10,619 2016 $ 4,848 7,624 18,818 27,848 39,961 10,762 117,482 109,861 15) ISSUED AND OUTSTANDING UNITS Ownership interests in Cominar are represented by a single class of units, unlimited in number. Units represent a unitholder’s undivided and proportionate ownership interest in Cominar. Each unit confers the right to one vote at any unitholders’ meeting and to participate equally and rateably in all Cominar distributions. All issued units are fully paid. For the years ended December 31 2017 2016 Units $ Units $ Units issued and outstanding, beginning of year 182,334,562 3,234,693 170,912,647 3,063,920 Public offering Repurchase of units under NCIB Exercise of options Distribution reinvestment plan Conversion of deferred units and restricted units — — (730,900) (10,380) 3,900 2,887,370 134,565 57 39,717 1,908 12,780,000 (2,717,396) — 1,265,157 94,154 191,516 (40,779) — 18,457 1,579 Units issued and outstanding, end of year 184,629,497 3,265,995 182,334,562 3,234,693 During the fourth quarter of 2017, Cominar repurchased 730,900 units under its normal course issuer bid of a maximum of 17,596,591 units, at an average price of $14.19, for a total consideration of $10,380, including transaction costs. 112 113 LONG TERM INCENTIVE PLAN The following table presents changes in the number of restricted units for the years indicated: Unit options Cominar has granted unit options to management and employees under the long-term incentive plan. As at December 31, 2017, options to purchase 12,928,000 units were outstanding. The following table shows characteristics of outstanding options at year-end: As at December 31, 2017 Date of grant August 5, 2013 December 17, 2013 December 16, 2014 December 15, 2015 December 13, 2016 August 24, 2017 Graded vesting method 50% 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3% Expiration date August 5, 2018 December 17, 2018 December 16, 2019 December 15, 2022 December 13, 2023 August 24, 2024 Exercise price $ Outstanding options Exercisable options 20.09 17.55 18.07 14.15 14.90 13.46 150,000 1,757,300 1,996,300 2,565,500 2,995,700 3,463,200 12,928,000 150,000 1,757,300 1,996,300 1,845,900 1,267,700 451,200 7,468,400 As at December 31, 2017, the average weighted contractual life of outstanding options was 4.6 years [4.3 years as at December 31, 2016]. For the years ended December 31 Outstanding, beginning of year Exercised Granted Accrued distributions Outstanding, end of year Vested restricted units, end of year 2017 $ 5,250 (697) — 473 5,026 — 2016 $ 4,047 (637) 1,373 467 5,250 — Deferred units Deferred units consist of allocations whose values, for the participant, rise or fall according to the value of Cominar units on the stock market. Each deferred unit provides the right to receive one Cominar unit when the holder ceases to be a Cominar trustee, member of management or employee. Vesting periods are determined by the Board of Trustees on the date of the grant. These rights are usually vested at a rate of 33 1/3% per anniversary year of the grant date. Once a year, the deferred unit holder can convert its vested deferred units into Cominar units. For each cash distribution on Cominar units, an additional number of deferred units is granted to each participant. The fair value of deferred units is represented by the market value of Cominar units on the date of the grant. The following table presents changes in the number of deferred units for the years indicated: The following table presents changes in the number of options for the years indicated: For the years ended December 31 For the years ended December 31 2017 2016 Outstanding, beginning of year Exercised Granted Forfeited or cancelled Expired Outstanding, end of year Exercisable options, end of year Weighted average exercise price $ 17.02 14.15 13.46 15.83 23.05 15.28 16.20 Options 10,493,750 — 3,424,200 (561,800) (900,700) 12,455,450 6,408,150 Weighted average exercise price $ 18.15 — 14.90 17.51 21.80 17.02 18.89 Options 12,455,450 (3,900) 3,689,400 (1,377,100) (1,835,850) 12,928,000 7,468,400 Restricted units Restricted units consist of allocations whose values, for the participant, rise or fall according to the value of Cominar units on the stock market. When the vesting period is over, each restricted unit provides the right to receive one Cominar unit on the settlement date. Vesting periods are determined by the Board of Trustees on the date of the grant. These rights are usually vested three years after the date of the grant. For each cash distribution on Cominar units, an additional number of restricted units is granted to each participant. The fair value of restricted units is represented by the market value of Cominar units on the date of the grant. Outstanding, beginning of year Exercised Granted Accrued distributions Outstanding, end of year Vested deferred units, end of year 2017 $ 161,676 (133,868) 122,045 25,895 175,748 56,858 2016 $ 180,434 (93,517) 54,520 20,239 161,676 37,185 Unit-based compensation The compensation expense related to the options granted in 2017 and 2016 was calculated using the Black-Scholes option pricing model based on the following assumptions: Date of grant Volatility(1) Weighted average return Weighted average risk-free interest rate Weighted average expected life (years) Weighted average fair value per unit $ Exercise price(2) $ December 13, 2016 August 24, 2017 14.34% 14.25% 14.90 13.46 9.51% 8.47% 1.04% 1.61% 4.5 6.0 0.18 0.20 (1) The volatility is estimated by considering the historical volatility of Cominar’s units’ price. (2) The exercise price of the options corresponds to the closing price of Cominar units the day before the grant. The compensation expense related to restricted units and deferred units granted in March 2017 was calculated based on the market price of Cominar units on the grant date, which was $14.52. The overall compensation expense for the fiscal year was $2,102 [$1,028 in 2016]. A maximum of 16,819,525 units may be issued under the long-term incentive plan. 114 115 DISTRIBUTIONS TO UNITHOLDERS Cominar is governed by a Contract of Trust whereby the trustees, under the discretionary power attributed to them, intend to distribute a portion of its distributable income to unitholders. Distributable income generally means net income determined in accordance with IFRS, before fair value adjustments, transaction costs – business combinations, rental revenue derived from the recognition of leases on a straight-line basis, the provision for leasing costs, gains on disposal of investment properties and certain other items not affecting cash, if applicable. For the years ended December 31 Distributions to unitholders Distributions per unit 2017 $ 246,523 1.3325 2016 $ 254,456 1.4700 Unitholder distribution reinvestment plan Cominar has adopted a distribution reinvestment plan under which unitholders may elect to receive all cash distributions from Cominar automatically as additional units. The plan provides plan participants with a number of units equal to 103% of the cash distributions. For the year ended December 31, 2017, 2,887,370 units [1,265,157 in 2016] were issued for a total net consideration of $39,770 [$18,457 in 2016] under this plan. On August 3, 2017, Cominar decreased the monthly distribution from $0.1225 per unit to $0.095 per unit and temporarily suspended the distribution reinvestment plan, beginning with the distribution of August 2017, which was payable in September 2017. 16) OPERATING LEASE INCOME a) The future minimum lease payments from tenants are as follows: - Less than one year - More than one year to five years - More than five years b) Contingent rents included in revenues for the year are as follows: For the years ended December 31 Contingent rents As at December 31, 2017 $ 473,097 1,323,623 832,241 2017 $ 7,219 2016 $ 7,417 17) OPERATING COSTS, PROPERTY MANAGEMENT EXPENSES AND TRUST ADMINISTRATIVE EXPENSES The following table presents the main components of operating costs, property management expenses and Trust administrative expenses based on their nature: For the years ended December 31 Repairs and maintenance Energy Salaries and other benefits Professional fees Costs associated with public companies Other expenses 18) FINANCE CHARGES For the years ended December 31 Interest on mortgages payable Interest on debentures Interest on bank borrowings Net amortization of premium and discount on debenture issues Amortization of deferred financing costs and other costs Amortization of fair value adjustments on assumed borrowings Less: Capitalized interest(1) Total finance charges 2017 $ 69,759 65,851 58,990 2,574 653 32,673 230,500 2017 $ 89,007 77,952 14,867 (691) 3,454 (5,577) (10,260) 168,752 2016 $ 68,209 66,063 50,088 2,205 556 31,149 218,270 2016 $ 87,780 83,456 9,747 (801) 3,771 (6,501) (6,807) 170,645 (1) Includes capitalized interest on properties under development and on major revitalization projects for income properties that take place over a substantial period of time. The weighted average interest rate used in 2017 was 4.13% [4.21% in 2016]. 19) INCOME TAXES Cominar is considered a mutual fund trust for income tax purposes. Pursuant to the Contract of Trust, the trustees intend to distribute or designate all taxable income directly earned by Cominar to unitholders and to deduct such distributions and allocations from its income for tax purposes. Therefore, no provision for income taxes is required. Taxation of distributions of specified investment flow-through (“SIFT”) trusts and exception for real estate investment trusts (“REITs”) Since 2007, SIFT trusts are subject to income taxes on the distributions they make. In short, a SIFT trust is a trust that resides in Canada, whose investments are listed on a stock exchange or other public market and that holds one or more non-portfolio properties. The SIFT trust rules do not apply to SIFT trusts that qualify as REITs for a given taxation year. Cominar has reviewed the conditions to qualify as a REIT. For the fiscal years ended December 31, 2017 and 2016, Cominar believes that it met all of these conditions and qualified as a REIT. As a result, the SIFT trust tax rules for 2017 and 2016 did not apply to Cominar and no deferred tax provision, be it an asset or liability, was recorded in relation to the Trust’s activities. Cominar’s management intends on taking the necessary steps to meet these conditions on an ongoing basis in the future. Some of Cominar’s subsidiaries are subject to tax on their taxable income under the Income Tax Act (Canada) and the taxation acts of the provinces concerned. 116 117 The tax expense (income) differs from the amount calculated by applying the combined federal and provincial tax rate to income before income taxes. The following table presents the reasons for such difference: Changes in deferred income tax assets and liabilities during the year, excluding the offsetting of balances within the same tax jurisdiction, were as follows: For the years ended December 31 Income (loss) before income taxes Canadian combined statutory tax rate Tax expense (income) at the statutory tax rate Loss (income) not subject to income tax Other Income taxes Deferred taxes relating to incorporated subsidiaries are shown in the following table: As at December 31 Deferred tax assets to be recovered after more than 12 months Mortgages payable Tax losses Deferred tax liabilities to be settled after more than 12 months Investment properties Deferred taxes (net) Changes in the deferred income tax account were as follows: For the years ended December 31 Balance, beginning of year Tax expense (income) recorded in the consolidated statements of comprehensive income Balance, end of year 2017 $ 2016 $ (396,759) 242,576 29.38% (116,568) 28.16% 68,309 112,438 (68,107) (904) (5,034) 2017 $ 7 353 360 (7,041) (6,681) 2017 $ 11,715 (5,034) 6,681 636 838 2016 $ 30 250 280 (11,995) (11,715) 2016 $ 10,877 838 11,715 Deferred tax assets Balance as at January 1, 2016 Origination and reversal of timing differences included in profit or loss Balance as at December 31, 2016 Origination and reversal of timing differences included in profit or loss Balance as at December 31, 2017 Deferred tax liabilities Balance as at January 1, 2016 Origination and reversal of timing differences included in profit or loss Balance as at December 31, 2016 Origination and reversal of timing differences included in profit or loss Balance as at December 31, 2017 20) PER UNIT CALCULATION BASIS Mortgages payable $ Tax losses $ 59 (29) 30 (23) 7 263 (13) 250 103 353 Total $ 322 (42) 280 80 360 Income properties $ (11,199) (796) (11,995) 4,954 (7,041) The following table provides a reconciliation of the weighted average number of units outstanding used to calculate basic and diluted net income (net loss) per unit for the years indicated: For the years ended December 31 Weighted average number of units outstanding – basic Dilutive effect related to the long-term incentive plan Weighted average number of units outstanding – diluted 2017 Units 2016 Units 184,213,583 172,131,831 — 373,596 184,213,583 172,505,427 The calculation of the diluted weighted average number of units outstanding does not take into account the effect of the conversion into units of 12,928,000 options outstanding for the year ended December 31, 2017 [7,140,850 options in 2016] due to the fact that the exercise price of the options, including the unrecognized portion of the related compensation expense, is higher than the average price of the units or due to the fact that they are antidilutive. 118 119 The leasehold improvement, repair and maintenance work on properties carried out by Dalcon Inc. are invoiced at cost plus a 5.0% markup. For construction projects, the work is invoiced at cost plus a 2.5% markup. By retaining the services of related companies for property construction work and leasehold improvements, Cominar achieves significant time and cost savings while providing better service to its clients. Leasing of commercial space with the related companies is carried out at the market rate for similar spaces. 23) KEY MANAGEMENT PERSONNEL COMPENSATION Compensation of key management personnel is set out in the following table: KEY MANAGEMENT PERSONNEL COMPENSATION For the years ended December 31 Short-term benefits Contribution to the retirement savings plans Long-term incentive plan Retirement allowance Total 2017 $ 5,717 179 1,351 5,400 12,647 2016 $ 4,928 169 650 — 5,747 Unit options granted to senior executives and other officers may not be exercised, even if they have vested, until the following three conditions have been met. The first condition requires that the market price of the security must be at least ten percent (10%) higher than the exercise price of the option, and this condition will be considered as met if the unit price has remained at such level for a period of twenty (20) consecutive trading days during the option’s term. The second condition requires that the senior executive or other officer must undertake to hold a number of units corresponding to the multiple determined for his base salary. The third condition is that when the options are exercised, if the senior executive or other officer does not hold the required minimum number of units, he must retain at least five percent (5%) of the units purchased until he has the multiple corresponding to his base salary. 21) SUPPLEMENTAL CASH FLOW INFORMATION For the years ended December 31 Accounts receivable Prepaid expenses Accounts payable and accrued liabilities Changes in non-cash working capital items Other information Accounts payable and accrued liabilities relating to investing activities Accounts receivable relating to investing activities 2017 $ (8,623) (1,052) 4,685 (4,990) 2016 $ 14,238 (1,572) (5,320) 7,346 14,834 11,814 11,898 — 22) RELATED PARTY TRANSACTIONS During fiscal years 2016 and 2017, Michel Dallaire and Alain Dallaire were trustees and members of Cominar’s management team, and they exercised indirect control over the activities of Groupe Dallaire Inc. and Dalcon Inc. (the “related companies”). On January 1, 2018, Sylvain Cossette was appointed as President and Chief Executive Officer to replace Michel Dallaire. This appointment was part of the succession plan put in place by the Board of Trustees when Sylvain Cossette joined Cominar in 2013 as President and Chief Operating Officer. On the same day, January 1, 2018, Sylvain Cossette was appointed as a trustee of Cominar to fill the vacancy created by the departure of Alain Dallaire as trustee. On February 12, 2018, Alban D’Amours was appointed as Chairman of the Board of Cominar following the departure of Michel Dallaire. While Alain Dallaire has a passive indirect economic interest in Groupe Dallaire, Alain Dallaire is neither an employee nor a director of Groupe Dallaire. In 2016 and 2017, Cominar entered into transactions with those related companies in the normal course of business, the details of which are as follows: For the years ended December 31 Investment properties – Capital costs Acquisition of an additional ownership interest in the joint venture Société en commandite Chaudière-Duplessis Investment properties held by joint ventures – Acquisition Investment properties held by joint ventures – Capital costs Recovery of mortgage receivable Acquisition of an additional ownership interest in the joint venture Société en commandite Complexe Jules-Dallaire Share of joint ventures’ net income Net rental revenue from investment properties Interest income Balance as at December 31 Investments in joint ventures Mortgage receivable Accounts receivable Accounts payable Note 4 8 8 Note 8 10 14 2017 $ 2016 $ 138,129 86,639 10,016 — 3,263 (8,250) 21,190 5,276 313 140 2017 $ 86,299 — 1,969 15,696 — 6,204 2,958 — — 8,006 301 280 2016 $ 90,194 8,250 1,182 7,624 120 121 24) CAPITAL MANAGEMENT Cominar manages its capital to ensure that capital resources are sufficient for its operations and development, while maximizing returns for unitholders by adequately maintaining the debt ratio. Cominar’s capital consists of cash and cash equivalents, long-term debt, bank borrowings and unitholders’ equity. Cominar’s capitalization is based on expected business growth and changes in the economic environment. It is not subject to any capital requirements imposed by regulatory authorities. Cominar’s capitalization is as follows: As at December 31 Cash and cash equivalents Mortgages payable Debentures Bank borrowings Unitholders’ equity Total capitalization Debt ratio(1) Interest coverage ratio(2) 2017 $ (6,928) 2,150,126 1,721,577 620,366 3,208,761 7,693,902 57.4% 2.43:1 2016 $ (9,853) 2,048,009 1,970,566 332,121 3,815,513 8,156,356 52.4% 2.65:1 CLASSIFICATION Non-financial assets and their carrying amount and fair value as well as financial liabilities and their carrying amount and fair value, when that fair value does not approximate the carrying amount, are classified as follows: December 31, 2017 December 31, 2016 Level Carrying amount $ Fair value $ Carrying amount $ Fair value $ 3 3 3 2 2 6,239,383 1,143,500 91,580 6,239,383 1,143,500 91,580 7,676,134 7,676,134 143,130 90,820 143,130 90,820 2,150,126 1,721,577 2,153,043 1,739,278 2,048,009 2,104,025 1,970,566 2,019,802 Recurring valuations of non-financial assets Income properties Investment properties held for sale Land held for future development Financial liabilities Mortgages payable Debentures 26) FINANCIAL INSTRUMENTS RISK MANAGEMENT The main risks arising from Cominar’s financial instruments are credit risk, interest rate risk and liquidity risk. The strategy for managing these risks is summarized below. (1) The debt ratio is equal to the total of cash and cash equivalents, bank borrowings, mortgages payable and debentures, divided by total assets less cash and cash equivalents. (2) The interest coverage ratio is equal to net operating income (operating revenues less operating expenses) less Trust administrative expenses divided by finance charges. Credit risk Cominar’s Contract of Trust provides that it may not incur debt if, taking into consideration the debt thus incurred or assumed, its total debt exceeds 60% of if convertible debentures are outstanding). As at December 31, 2017, Cominar had maintained a debt ratio of 57.4%. the carrying amount of its assets (65% The interest coverage ratio is used to assess Cominar’s ability to pay interest on its debt from operating revenues. As such, for the year ended December 31, 2017, the interest coverage ratio was 2.43:1, reflecting Cominar’s capacity to meet its debt-related obligations. Capital management objectives remain unchanged from the previous period. 25) FAIR VALUE Cominar uses a three-level hierarchy to classify its financial instruments measured at fair value. The hierarchy reflects the relative weight of inputs used in the valuation. The levels in the hierarchy are:  Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities  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)  Level 3 – Inputs for the asset or liability that are not based on observable market data (i.e., unobservable inputs) Cominar’s policy is to recognize transfers between hierarchy levels on the date of changes in circumstances that caused the transfer. There were no transfers made between hierarchy levels during fiscal years 2017 and 2016. The fair value of cash and cash equivalents, mortgages receivable, accounts receivable, accounts payable and accrued liabilities and bank borrowings approximates the carrying amount since they are short-term in nature or bear interest at current market rates. The fair value of mortgages payable and debentures has been estimated based on current market rates for financial instruments with similar terms and maturities. Credit risk arises from the possibility that tenants may experience financial difficulty and be unable to fulfill their lease commitments. Cominar mitigates credit risk via segment and geographic portfolio diversification, staggered lease maturities, and diversification of revenue sources through a varied tenant mix as well as by avoiding dependence on any single tenant by ensuring that no individual tenant contributes a significant portion of operating revenues and by conducting credit assessments on all new tenants. Cominar has a broad, highly diversified retail client base consisting of about 5,700 clients occupying an average of approximately 7,000 square feet each. The top three clients, Public Works Canada, Société québécoise des infrastructures and Canadian National Railway Company, account respectively for approximately 4.8%, 4.7% and 4.2% of operating revenues from several leases with staggered maturities. The stability and quality of cash flows from operating activities are enhanced by the fact that approximately 10.8% of operating revenues come from government agencies, representing approximately 100 leases. Cominar regularly assesses its accounts receivable and records a provision for doubtful accounts when there is a risk of non- collection. The maximum credit risk to which Cominar is exposed corresponds to the carrying amount of accounts receivable and the cash and cash equivalents position. Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in market interest rates. Cominar’s objective in managing this risk is to minimize the net impact on future cash flows. Cominar reduces its exposure to interest rate risk by staggering the maturities of its borrowings over several years and by generally using long-term debt bearing interest at fixed rates. Accounts receivable, except for the receivables bearing interest, and accounts payable and accrued liabilities do not bear interest. Almost all mortgages payable and all debentures bear interest at fixed rates. Cominar is exposed to interest rate fluctuations mainly due to bank borrowings, which bear interest at variable rates. 122 123 As at December 31, 2017 Office properties $ Retail properties $ Industrial and mixed-use properties $ Cominar’s proportionate share $ Income properties 2,554,803 2,492,891 1,355,164 Investment properties held for sale 600,552 381,707 161,241 Investments in joint ventures As at December 31, 2016 — $ — $ — $ 6,402,858 1,143,500 — $ Joint ventures $ (163,475) — 86,299 Consolidated financial statements $ 6,239,383 1,143,500 86,299 $ $ Income properties 3,327,390 2,974,870 1,473,071 7,775,331 (99,197) 7,676,134 Investment properties held for sale Investments in joint ventures — — 93,630 — 49,500 143,130 — — — 90,194 143,130 90,194 28) COMMITMENTS The annual future payments required under emphyteutic leases expiring between 2046 and 2065, on land for three income properties having a total fair value of $49,692, are as follows: For the years ending December 31 2018 2019 2020 2021 2022 2023 and thereafter Emphyteutic Leases $ 634 634 648 654 689 21,832 Cominar has no significant contractual commitments other than those arising from its long-term debt and payments due under emphyteutic leases on land held for income properties. As required under IFRS, a 25-basis-point increase or decrease in the average interest rate on variable interest debts during the period, assuming that all other variables are held constant, would have impacted Cominar’s net income by more or less $1,195 for the year ended December 31, 2017 [$1,543 in 2016]. Liquidity risk Liquidity risk is the risk that Cominar will be unable to meet its financial obligations as they come due. Cominar manages this risk by managing its capitalization, continuously monitoring current and projected cash flows and adhering to its capital management policy. Undiscounted contractual cash flows (interest and principal) related to financial liabilities as at December 31, 2017 are as follows: Cash flows One to five years $ 785,781 1,663,211 633,016 — Under one year $ 724,595 72,921 22,016 106,863 Over five years $ 1,095,321 234,556 — — Note 11 12 13 14 Mortgages payable Debentures Bank borrowings Accounts payable and accrued liabilities(1) (1) Excludes consumption taxes and other non-financial liabilities 27) SEGMENT INFORMATION Cominar’s activities include a diversified portfolio of three property types located in several Canadian provinces. The accounting policies followed for each property type are the same as those disclosed in the significant accounting policies in note 2. Cominar uses net operating income as its main criterion to measure operating performance, that is, the operating revenues less the operating expenses of its investment properties. Management of expenses, such as interest and administrative expenses, is centralized and, consequently, these expenses have not been allocated to Cominar’s segments. The segments include Cominar’s proportionate share in joint ventures. The Joint ventures columns reconcile the segment information including the proportionate share in assets, liabilities, revenues and charges, to the information presented in these consolidated financial statements, where the investments in joint ventures are accounted for using the equity method. The following tables provide financial information on Cominar’s three property types: For the year ended December 31, 2017 Rental revenue from investment properties Net operating income Share of joint ventures’ net income December 31, 2016 Rental revenue from investment properties Net operating income Share of joint ventures’ net income Office properties $ Retail properties $ Industrial and mixed-use properties $ Cominar’s proportionate share $ Joint ventures $ Consolidated financial statements $ 372,757 184,270 312,752 162,965 163,331 96,351 848,840 443,586 — $ — $ — $ — $ (13,351) (7,549) 5,276 835,489 436,037 5,276 $ $ 380,761 193,309 — 334,187 183,961 — 162,147 97,084 — 877,095 474,354 — (10,113) (5,745) 8,006 866,982 468,609 8,006 124 125 29) SUBSEQUENT EVENTS On January 10, 2018, Cominar announced the increase of its normal course issuer bid (“NCIB”), increasing the maximum number of units it intends to repurchase for cancellation from 9,000,000 units to 17,596,591 units. Under this NCIB, Cominar has repurchased, since the beginning of fiscal year 2018, 2,709,500 units at an average price of $14.58, for a total consideration of $39,517 paid cash. Since December 19, 2017, Cominar has repurchased a total of 3,440,400 units at an average price of $14.50, for a total consideration of $49,891 paid cash. On January 15 and February 15, 2018, Cominar declared a monthly distribution of $0.095 per unit for each of these months. Subsequent to the end of fiscal 2017, Cominar entered into the following loans: a $75,000 bridge loan bearing interest at the prime rate plus 110 basis points or at the bankers’ acceptance rate plus 210 basis points and repayable on the closing of the $1,143,500 sale of investment properties, a 10-year $42,500 mortgage payable, bearing interest at 4.484% and a 5-year $45,000 mortgage payable, bearing interest at prime rate plus 90 basis points or 4.00%, whichever is greater. The net proceeds from these loans were used to repay a portion of the unsecured revolving operating and acquisition credit facility. On February 12, 2018, Alban D’Amours was appointed as Cominar’s Chairman of the Board of Trustees following the departure of Michel Dallaire. On March 7, 2018, Cominar decreased the monthly distribution from $0.095 per unit to $0.06 per unit, beginning with the distribution of March 2018, payable in April 2018. 126 127 CORPORATE INFORMATION CORPORATE INFORMATION BOARD OF TRUSTEES Alban D’Amours, CM, GOQ, LH, Fellow Adm.A. (1)(3) Johanne M. Lépine (3)(4) Corporate Director Chairman of the Board of Trustees President and Chief Executive Officer Aon Parizeau Inc. Michel Théroux, FCPA, FCA (1)(3) Corporate Director Claude Dussault, B. Sc. (1)(2) President Placements ACVA Inc. Luc Bachand (1)(4) Corporate Director Mary-Ann Bell, Eng., M.Sc., ASC (2)(4) Corporate Director Sylvain Cossette, B.C.L. President and Chief Executive Officer Cominar Real Estate Investment Trust Ghislaine Laberge (2)(4) Corporate Director KEY OFFICERS Sylvain Cossette, B.C.L. Todd Bechard, CPA, CMA, CFA President and Chief Executive Officer Executive Vice President, Acquisitions Alain Dallaire Executive Vice President and Chief Operating Officer Gilles Hamel, CPA, CA Executive Vice President and Chief Financial Officer Guy Charron, CPA, CA Executive Vice President, Operations Retail Wally Commisso Executive Vice President, Operations and Property Management Jean Laramée, Eng. Executive Vice President, Development Michael Racine Executive Vice President, Leasing Office and Industrial Manon Deslauriers Vice President, Legal Affairs and Corporate Secretary UNITHOLDERS INFORMATION UNITHOLDERS INFORMATION COMINAR REAL ESTATE INVESTMENT TRUST Complexe Jules-Dallaire – T3 2820 Laurier Boulevard, Suite 850 Québec, Quebec, Canada G1V 0C1 Tel.: 418 681-8151 Fax: 418 681-2946 Toll-free: 1-866 COMINAR Email: info@cominar.com Website: www.cominar.com LISTING TRANSFER AGENT Computershare Trust Company of Canada 1500 Robert-Bourassa Blvd., Suite 700 Montréal, Quebec, Canada H3A 3S8 Tel.: 514 982-7555 Fax: 514 982-7580 Toll-free: 1-800 564-6253 Email: service@computershare.com TAXABILITY OF DISTRIBUTIONS In 2017, 89.72% of the distributions made by Cominar to unitholders were returns of capital, reducing the adjusted cost base of the units. LEGAL COUNSEL Davies Ward Phillips & Vineberg LLP AUDITORS PricewaterhouseCoopers LLP ANNUAL MEETING OF UNITHOLDERS May 16, 2018 11:00 a.m. (HAE) Hôtel Plaza Québec 3031 Laurier Boulevard Québec (Québec) UNITHOLDERS DISTRIBUTION REINVESTMENT PLAN (the Cominar Real Estate Investment Trust offers unitholders the opportunity to participate in its Unitholders Distribution Reinvestment Plan “DRIP”). The DRIP allows participants to receive their monthly distributions as additional units of Cominar. In addition, participants will be entitled to receive an additional distribution equal to 3% of each cash distribution reinvested pursuant to the DRIP, which will be reinvested in additional units. On August 3, 2017, Cominar temporarily suspended the distribution reinvestment plan, starting with the distribution of August 2017, which was payable in September 2017. If Cominar decides to resume the plan in the future, the unitholders who were registered in the plan at the time of its suspension and who are still registered at the time of its resumption shall automatically resume their participation in the plan. For further information about the DRIP, please refer to the DRIP section of our website at www.cominar.com or contact us by email at info@cominar.com or contact the Transfer Agent. (1) Member of the Audit Committee (2) Member of the Compensation Committee (3) Member of the Nomination and Governance Committee (4) Member of the Investment Committee The units of Cominar Real Estate Investment Trust are listed on the Toronto Stock Exchange under the trading symbol CUF.UN. 

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