Crombie REIT
Annual Report 2016

Plain-text annual report

BUILDING A BETTER REIT 20 1 6 T R O P E R L A U N N A A B O U T C R O M B I E R E I T Crombie REIT (TSX: CRR.UN, Crombie) is an open-ended real estate invest ment trust. Established in 2006, we are one of the country’s leading national retail property landlords. Our strategy is focused on increasing net asset value and income growth through the acquisition, ownership, management and development of high-quality grocery and drug store anchored shopping centres, freestanding stores and mixed use developments primarily in Canada’s top urban and suburban markets. As of December 31, 2016, Crombie owned a portfolio of 280 retail and office properties across Canada, comprising approximately 19.1 million square feet of gross leasable area (GLA) and approximately $4.8 billion in assets. IMPROVING FFO/AFFO PAYOUT RATIO Units of Crombie REIT offer a high yield relative to the dependable, low-risk cash flow generated by our portfolio and the quality of our tenant base and retail assets. O F F A / O F F T I N U R E P ($) 1.50 1.30 1.10 0.90 0.70 0.50 (%) 110 100 90 80 70 60 P A Y O U T R A T I O F F O / A F F O 2010 2011 2012 2013 2014 2015 2016 FFO/Unit AFFO/Unit FFO Payout Ratio AFFO Payout Ratio I N S I D E T H I S R E P O R T 2 2016 Highlights 3 Message from the President and CEO 6 A Strong National Platform 8 High-Quality Properties 10 Active Management & Development 12 A Strong Balance Sheet 14 A Talented Real Estate Team 16 Building Better Communities 18 Message from the Chair and Lead Independent Trustee Financial Review 20 Table of Contents 2 1 Management’s Discussion and Analysis 56 Management’s Statement of Responsibility for Financial Reporting 57 Independent Auditor’s Report 58 Consolidated Financial Statements 62 Notes to the Consolidated Financial Statements 90 Property Portfolio 92 Unitholder Information IBC Top 20 Tenants BUILDING A BETTER REIT In the 11 years since our IPO, Crombie has transformed a small regional portfolio into a geographically diversified, retail-focused national REIT with $4.8 billion in assets across the country and a reputation for creating value by executing on a full range of commercial real estate activities. This year’s report shows how we are Building a Better REIT. A N N U A L R E P O R T 2 0 1 6 1 2 0 1 6 H I G H L I G H T S DEVELOPMENT PROPERTIES Davie Street (top), 2733 Broadway (bottom), Vancouver, BC Elbow Drive, Calgary, AB Bronte Village, Oakville, ON Scotia Square, Halifax, NS Avalon Mall, St. John’s, NL Crombie’s expanding development pipeline includes 19 exceptional properties that are located in the heart of prosperous and growing urban and suburban markets across the country. 19 Development Properties Across Canada GROSS LEASABLE AREA ENTERPRISE VALUE UNENCUMBERED ASSETS 2016 19,093 sq. ft. 2011 12,598 sq. ft. 2006 7,458 sq. ft. 2016 $4,412 M 2011 $2,044 M 2006 $974 M 2016 $995 B 2011 $80 B 2006 $0 F O R A F U L L TA B L E O F 2 0 1 6 H I G H L I G H T S , P L E A S E S E E PA G E 2 2 I N T H E M D & A . 2 C R O M B I E R E I T MACDONALD STBEACH AVEENGLISH BAYW BROADWAYELBOW DR SWBRONTE RDJones StSovereign StLAKESHORE RD WBARRINGTON STBRUNSWICK STDUKE STUPPER WATER STBARRINGTON STKENMOUNT RDTHORNBURN RDO’Leary AveELBOW RIVERBRONTE CREEK5 ST SW4 ST SW23 AVE SW24 AVE SW23 AVE SWW 12TH AVEDAVIE STBIDWELL STDENMAN STM E S S A G E F R O M T H E P R E S I D E N T A N D C E O / Donald E. Clow, FCPA, FCA PERFORMANCE, OPPORTUNITY AND GROWTH 2016 was a strong year for Crombie REIT on all fronts. We achieved record financial results, improved the quality of our portfolio, expanded and advanced our $2 to $3 billion development pipeline opportunity, and continued to strengthen our platform for sustainable long-term growth. The past year was one of continued geopolitical and economic same-asset net operating income grew by 4.2 percent in 2016, uncertainty as reflected by slow GDP growth, historically reflecting increased average rents from leasing activities, low interest rates, and signs of political discontent in much improved recovery rates and land-use intensification activities. of the developed world. Amid this environment, our ability to achieve record financial and operating results was a testament to the soundness of Crombie’s strategy and the commitment of our people to Building a Better REIT. Crombie’s successful growth strategy starts with the acquisition, management and increasingly, the development of great real estate properties. We continue to work with Sobeys to leverage the sustainable competitive advantage For the 12 months ending December 31, 2016, funds from that comes from our relationship with Canada’s second operations (FFO) on an adjusted basis increased 11.2 percent largest food retailer. In 2016, we acquired, expanded or to $166.2 million; or $1.17 per unit diluted. Adjusted funds from renovated more than $444 million of properties from or with operations (AFFO) increased 12.0 percent to $140.7 million; or Sobeys, several of which contain compelling redevelopment $1.00 per unit diluted. Growth in FFO and AFFO was driven by opportunities. Together, these acquisitions have increased $574 million in new acquisitions, higher renewal rents, higher our presence in everyday retailing – what we consider to be operating margins and lower financing costs. On a cash basis, the most resilient segment in commercial real estate – while A N N U A L R E P O R T 2 0 1 6 3 A M E S S A G E F R O M T H E P R E S I D E N T A N D C E O increasing the concentration of our portfolio located in adjacent to our properties in Beaumont, Alberta, Leduc, Canada’s largest urban markets, increasing our geographic Alberta and Halifax, Nova Scotia over the past three years. diversity and adding to our growing development pipeline. All of these initiatives reflect a growing spirit of creativity In 2016, we continued to build a development pipeline that now includes 19 potential projects in various stages of in our relationships to reduce risk, gain access to capital, expertise and the best urban locations. evaluation, planning and development. Thirteen of these Crombie’s untapped development also extends to our properties are prime urban locations that came to us with the commercial properties portfolio in Atlantic Canada. Scotia 2013 acquisition of the Safeway portfolio. Our most advanced Square continues to undergo a three-year $13 million project, Davie Street in Vancouver, is expected to break refresh and expansion to strengthen its position as Halifax’s ground later this year subject to final approvals. Featured premier business location and longer term is estimated to on the cover of this annual report, Davie Street will combine hold approximately one million square feet of residential 53,000 square feet of retail space with 320 residential suites and commercial development potential. We are also master in one of the city’s top urban neighbourhoods. Four similar planning for a major redevelopment of Avalon Mall in projects are in the pre-planning stage, including 1780 East St. John’s, Newfoundland and Labrador, one of Atlantic Broadway, located at the busiest transit station in Vancouver’s Canada’s busiest shopping centres. SkyTrain system. All of these projects will help satisfy the burgeoning demand for urban rental residential space, diversify Crombie’s revenue, and have a positive impact on same-asset income and net asset value per unit. We also continue to develop relationships in the wider commercial real estate market, as evidenced by more than $189 million in off-market, third-party property acquisitions during the year, and by finding new and creative ways to add value. To help fund our core growth strategies, we have become more active in recycling capital to support our core growth strategy. This included a record $196 million of dispositions, primarily in secondary and tertiary markets this past year. We also continue to strengthen our operating platform, as evidenced by the strong performance of our property management and leasing teams and our continued progress in filling vacancies from the departure of Target from the Canadian retail landscape. With respect to Target, we have The same kind of thinking has led to the acquisition of replaced most of the income for one location and are third-party properties that feature long-term leases with committed to making the right deal at two other locations Sobeys stores, where our unique relationship with Sobeys because these are strong assets in their markets. By the end provides the opportunity to unlock value more readily of 2016, we had successfully replaced 96 percent of Zellers through intensification or development. We are also making income with tenants occupying 56 percent of the Zellers more bolt-on acquisitions, as evidenced by asset purchases space, leaving additional income upside at these locations. TOTAL UNITHOLDER RETURN (% - March 31, 2006 to December 31, 2016) Crombie REIT has produced a total unitholder return of 178% since its IPO, compared to 115% total return for the S&P/TSX Capped REIT Index and a 72% total return for the S&P/TSX Composite Index. 250 200 150 100 50 0 -50 CROMBIE REIT TSX CAPPED REIT TSX 06 07 08 09 10 11 12 13 14 15 16 10% Units in Crombie REIT have generated a compound average annual total return of 10% since our IPO. 4 C R O M B I E R E I T In addition to acquiring, managing and developing great real As I look back on Crombie’s progress over the past 11 years, estate, we are also committed to a conservative management I cannot help but be proud of how far we’ve come. Starting approach and strong financial condition. All of our relevant with an approximately $800 million property portfolio financial key performance indicators improved during the predominantly located in Eastern Canada, we have grown year including FFO per unit, AFFO per unit, AFFO payout ratio into a leading national REIT with assets of $4.8 billion and and same-asset cash net operating income. We also achieved an estimated $2–3 billion in development potential over the greater financial flexibility by reducing leverage, improving next 10 to 15 years. With the continued support of Crombie’s debt service coverage and interest coverage ratios and employees, our associates at Empire and Sobeys, and other increasing unencumbered assets to $995 million by year end. business partners, I am confident we will continue to be All of our progress depends, of course, on the talent and Building a Better REIT for many years to come. dedication of many people, both inside and outside the Sincerely, organization. To keep pace with our development as a leading national REIT, we continue to invest in the development of our people; as you will see on page 14 of this report, our efforts continue to attract the attention of leading awards programs. We also continue to foster our unique and mutually beneficial relationship with Sobeys and Empire, as well as the capable development partners who are helping to advance our progress on major development projects. Donald E. Clow, F C PA , F C A P R E S I D E N T A N D C H I E F E X E C U T I V E O F F I C E R 1 2 3 4 5 6 7 8 9 10 11 12 13 S E N I O R M A N A G E M E N T T E A M 1 G L E N N H Y N E S Executive Vice President, Chief Financial Officer and Secretary 2 A A R O N B R YA N T Vice President, Construction and Design, Eastern Canada 3 D O N A L D C L O W President and Chief Executive Officer 4 T R E V O R L E E Senior Vice President, Western Canada 5 C H E R Y L F R A S E R Chief Talent Officer and Vice President, Communications 7 J O H N B A R N O S K I Senior Vice President, Corporate Development 9 S T E V E C L E R O U X Vice President, National Leasing and Atlantic Development 6 T E R R Y D O R A N Vice President, Office Properties 8 K E N T U R P L E Vice President, Accounting and Financial Reporting 1 0 B R A D Y L A N D R Y Vice President, Financial Analysis and Treasury 1 1 F R E D S A N T I N I General Counsel 1 2 S C O T T M A C L E A N Senior Vice President, Eastern Canada 1 3 J E F F D O W N S Vice President, Enterprise Information Systems A N N U A L R E P O R T 2 0 1 6 A N N U A L R E P O R T 2 0 1 6 5 5 C R O M B I E AT - A - G L A N C E A STRONG NATIONAL PLATFORM Following $574 million of acquisitions in 2016, Crombie REIT is more urban-focused and geographically diversified than ever before. Today, our $4.8 billion property portfolio consists of 280 commercial assets from coast to coast and a growing development pipeline in Canada’s fastest growing metropolitan areas. DEBT TO GBV (FV) (%) UNENCUMBERED ASSETS (in millions of dollars) MARKET CAPITALIZATION (in millions of dollars) Crombie’s debt to gross book value improved to 50.3% in 2016, reflecting the growing strength of the REIT’s balance sheet. Unencumbered assets in our property portfolio reached a record $1 billion in 2016, reflecting unprecedented liquidity and financial flexibility. Crombie’s market capitalization reached approximately $2 billion, with a public float of approximately $1.2 billion, at the end of 2016. 53 52 51 50 49 1,000 800 600 400 200 2000 1600 1200 800 400 13 14 15 16 13 14 15 16 IPO 06 07 08 09 10 11 12 13 14 15 16 6 C R O M B I E R E I T 2000 1600 1200 800 400 0 19 Development Properties Across Canada Over the past 11 years, Crombie has grown from a small regional property portfolio into one of Canada’s larger REITs. PROPERTIES ACROSS CANADA 280 WEST 119 ONTARIO QUÉBEC ATLANTIC 50 33 78 BC 7 1 1 AB 1 3 SK MB QB ON 1 NF PEI 1 2 NB NS ANNUAL RENT GENERATED BY RETAIL/MIXED USE TOTAL SQUARE FEET 96.0% 19.1 Million 1 1 GEOGRAPHIC DIVERSIFICATION (% of annual minimum rent) REVENUE BY PROPERTY TYPE (%) At year-end 2016, 62.4% of the annual minimum rent generated by our portfolio was derived outside of Atlantic Canada compared to 14.3% at the time of our IPO in March 2006. At year-end 2016, 86.1% of the revenue from our portfolio was generated by retail assets compared to 56.4% at the time of our IPO. ATLANTIC WEST 85.7% 39.0% ATLANTIC 37.6% RETAIL/ MIXED USE 56.4% 2006 IPO ONTARIO 11.5% 2016 2006 IPO 2016 QUÉBEC ONTARIO 2.8% 15.7% QUÉBEC 7.7% OFFICE 43.6% RETAIL/ MIXED USE 86.1% OFFICE 13.9% A N N U A L R E P O R T 2 0 1 6 7 B U I L D I N G A B E T T E R R E I T We acquire high-quality grocery or drug store anchored properties in Canada’s top urban and suburban markets 0 1 T E E R T S E L L I V N A R G 5 5 5 8 C B , R E V U O C N A V Acquired in 2016, our Safeway property at 8555 Granville Street in Vancouver is located in the heart of one of the city’s busiest commercial and residential districts. 8 C R O M B I E R E I T Crombie REIT’s growth strategy is centred primarily on the acquisition of the steadiest performing assets in commercial real estate — grocery and drug store anchored properties and freestanding stores that serve everyday needs in their communities. Increasingly, they are located in Canada’s largest urban markets, which are experiencing faster than average population and per capita income growth. Today, 77 percent of the annual minimum rent from our portfolio is derived from grocery and drug store anchored properties and freestanding stores. Crombie’s growth strategy has also driven our transformation into a geographically diversified Canadian REIT. Since the time of our IPO, we have acquired $2.4 billion in accretive real estate assets through our strategic relationship with Sobeys and Empire, helping to support the expansion and development of Canada’s second largest national food retailer. In 2016, Crombie acquired $385 million of real estate properties from Sobeys and Empire with an additional $189 million in acquisitions through third-party relationships. TOP 6 & TOP 36 MARKETS – TOTAL PORTFOLIO Crombie’s growth strategy is successfully increasing our presence in the largest and fastest growing urban and suburban markets across the country. (%) 100 80 60 40 20 6 3 & 6 P O T ($000s) 5,000 4,000 3,000 2,000 1,000 T O T A L P O R T F O L I O 2006/ IPO 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 % Top 6 % Top 36 Total Portfolio Value (RHS) SOURCE OF RETAIL ASSETS ACQUIRED IN 2016 (%) Growing relationships in the commercial real estate markets led to $574 million in acquisitions in 2016. 2016 SOBEYS PROPERTY PIPELINE 67.1% THIRD-PARTY RELATIONSHIPS 32.9% A N N U A L R E P O R T 2 0 1 6 9 B U I L D I N G A B E T T E R R E I T We actively manage and develop our assets to optimize financial performance and create value 0 2 T E E R T S E I V A D 1 4 6 1 C B , R E V U O C N A V 1641 Davie Street in Vancouver – a partnership with Westbank – is the most advanced of Crombie’s major developments. It is expected to break ground this year subject to final approvals. 1 0 C R O M B I E R E I T In terms of quality and size as a proportion of enterprise value, Crombie’s development pipeline opportunity is one of the best in the industry with 19 potential urban and suburban developments in various stages of evaluation, planning and development. Thirteen of these prime locations came to Crombie with the acquisition of the Safeway property portfolio in 2013. Together, these major development opportunities hold the potential to add approximately 692,000 square feet of commercial space, and up to 5.7 million square feet of residential GLA. Based on current estimates, the total cost to develop these projects could reach $2 to $3 billion, of which Crombie may enter joint venture or other partnerships arrangements to share cost, revenue, risk and development expertise, depending on the nature of each project. We also continue to optimize the performance of our existing assets through the strong performance of our property management, leasing and redevelopment teams. The continuous improvement in Crombie’s operations was reflected by solid increases in net operating income, FFO, AFFO and EBITDA in 2016. TO P P E R F O R M E R Major redevelopment plans are in store for Avalon Mall in St. John’s, one of Atlantic Canada’s busiest shopping centres. A N N U A L R E P O R T 2 0 1 6 1 1 4.2% Same asset property cash net operating income, an important measure of performance in commercial real estate, increased 4.2% to $235 million in 2016. SAME ASSET PROPERTY CASH NET OPERATING INCOME GROWTH (%) Same-asset property cash net operating income has grown at an average annual rate of 2.4% over the past five years. 11 12 13 14 15 16 5 4 3 2 1 5 4 3 2 1 0 B U I L D I N G A B E T T E R R E I T We maximize liquidity and financial flexibility by maintaining a strong balance sheet and access to multiple sources of capital 0 3 L L A M N O L A V A F N , S ’ N H O J . T S The new proposed parkade at Avalon Mall in St. John’s represents Phase I of a masterplanned redevelopment for Newfoundland and Labrador’s largest and busiest shopping centre. 1 2 C R O M B I E R E I T The strength of Crombie’s foundation is reflected in our balance sheet debt to gross book value, which at 50.3 percent at year end, was well below the 60 to 65 percent maximum permitted by our Declaration of Trust and relatively modest given the steady occupancy of our retail properties and the creditworthiness of our tenants. We continued to de-risk our business, strengthen our capital structure and lower our cost of capital in 2016. We possess more liquidity and financial flexibility than ever with $278 million of unused credit facilities and $1 billion of unencumbered assets at the end of 2016. The financial covenants and weighted average remaining lease terms of our major tenants, including those of grocery and drug retailers, banks and other high-quality tenants at our properties, allow us to borrow using long debt maturities, which translates into low risk. No more than 4.8 percent of the GLA of our portfolio will be maturing in a single year over the next five years. T H E P L A C E TO B E Scotia Square, Halifax’s premier business location, is in the midst of a $13 million, three-year refresh and expansion. 9.5% Since Crombie’s IPO in March 2006, the gross leasable area in our commercial real estate portfolio has grown at a compound average annual growth rate of 9.5%. STRONG PROPERTY GROWTH WITH STEADY OCCUPANCY Crombie REIT’s portfolio has experienced strong growth in GLA and steady occupancy rates during challenging economic times. (sq. ft.) 18,000 15,000 12,000 9,000 6,000 3,000 A L G O I L O F T R O P (%) 100 90 80 70 60 50 O C C U P A N C Y IPO 06 07 08 09 10 11 12 13 14 15 16 Portfolio GLA Occupancy A N N U A L R E P O R T 2 0 1 6 1 3 B U I L D I N G A B E T T E R R E I T We attract and develop great talent and foster strong relationships with our real estate partners. 0 4 G N I D N A P X E N A M R O F T A L P L A N O I T A N Crombie’s skilled team of real estate professionals continues to grow as we expand our capabilities and geographic reach across the country. 1 2 3 4 5 6 7 8 1 4 C R O M B I E R E I T AWA R D S 2 0 1 6 INDUSTRY RECOGNITION Crombie’s culture of operational excellence, continuous learning and leadership development attracted multiple employer awards in 2016 including, for the 4th year in a row, Crombie CEO Don Clow being named one of Atlantic Business Magazine’s Top 50 CEOs. Our strategic relationship with Empire and Sobeys has been the primary driver of Crombie’s evolution into a geographically diversified, retail-focused REIT over the past 11 years. Today, this relationship continues to grow as we work together to add value through major mixed use developments. As a significant Unitholder of Crombie, Empire shares a common interest in realizing the income potential and long-term asset value of our properties. We also continue to strengthen our relationships with leading residential development partners such as Westbank to engage talent, share risk, and gain access to select development opportunities. Leading these efforts is a growing team of talented real estate professionals and an expanding national platform that includes our newly opened regional office in Western Canada. We attract and develop great people through our solid talent programs placing a strong focus on leadership development, inclusion and engagement. Over the past year, we have enhanced our talent in analytics, development, and construction to ensure we are well positioned to execute our strategy. Crombie has received Atlantic Canada’s and Nova Scotia’s Top Employer Award for the past three years. O U R G R O W I N G T E A M O F TA L E N T E D R E A L E S TAT E P R O F E S S I O N A L S 1 A N G E L A C O R M I E R Leasing Manager New Glasgow 3 G E O R G E D E C O F F Senior Project Manager New Glasgow 5 R E B E C C A H E B B Corporate Development Analyst Toronto 7 S T E P H A N I E S M I T H Advisor Talent Management New Glasgow Angela joined the Crombie team as a Lease Administrator in 2008 and has since transitioned into the role of Leasing Manager in Atlantic Canada. With her extensive knowledge of the company’s properties, Angela continues to advance Crombie’s strategy with innovative leasing. 2 K E V I N P R I C H A R D Manager Development Calgary Kevin joined Crombie in 2015 to grow the development capacity in the Western Region. He is responsible for intensifying existing sites, looking for new development opportunities and working with the team on Crombie’s mixed use initiatives to further enhance Crombie’s rapidly expanding portfolio. Working as a Senior Project Manager in Atlantic Canada, George is involved with designing, constructing and managing projects that allow him to collaborate with Crombie team members and outside partners throughout the region. In his years with Crombie, George has been involved in projects ranging from site development, property redevelopment, retail and office construction. 4 L E S L E Y B O W E S Senior Property Accountant Halifax Lesley joined Crombie in 2012 as Property Accountant with experience in Real Estate as well as Construction and Steel Fabrication. She currently oversees accounting for Crombie’s portfolio of Office properties and plays a vital role on our Operations and Acquisition and Development teams. Lesley is a graduate of St. Xavier University. Rebecca joined Crombie in 2015 as an Analyst in the Corporate Development group. She supports the advancement of Crombie’s strategy through the analysis and execution of acquisitions, dispositions and other corporate development opportunities. She holds an MBA from Dalhousie University and is currently working towards becoming a CFA charter holder. 6 TA R A R U S S E L L Director, Financial Analysis New Glasgow Tara joined Crombie in 2012 with her CPA, CMA designation as well as her MBA from Saint Mary’s University. With her strong background in budgeting, forecasting and analytics, she liaises with development, operations and accounting teams across the country to bring superior budgeting, forecasting and reporting to Crombie. Stephanie joined Crombie in 2016 with a diverse background in Talent Management, Compensation and Benefits. Since joining Crombie, Stephanie has been responsible for advancing our Wellness initiatives and the execution and management of our Compensation programs. 8 D A N B O U R Q U E Director Operations, Atlantic Halifax Dan joined Crombie in 2003 and is responsible for oversight of operations in Atlantic Canada. His progressive leadership style has cultivated an award winning team with a focus on customer service and environmental initiatives at the Scotia Square mixed use complex. A N N U A L R E P O R T 2 0 1 6 1 5 B U I L D I N G B E T T E R C O M M U N I T I E S BUILDING BETTER COMMUNITIES Crombie’s commitment to building a better REIT extends to the numerous communities that are home to our commercial real estate properties across the country. This commitment can be seen everyday, from our support for important social causes to the way we build and manage our portfolio. 1 6 C R O M B I E R E I T M A K I N G A D I F F E R E N C E Crombie is a proud supporter of YMCA Strong Kids, an annual fundraising campaign that helps kids live healthier, happier lives. Each year, we are proud to support numerous charitable causes with direct financial support and through the generosity and volunteer efforts of our employees. These include YMCA Strong Kids, which allows more kids to participate in life-enhancing programs that build a healthy spirit, mind and body and Catapult, a non-profit leadership camp that provides a fun, high-energy learning experience focused on enhancing the leadership, social, problem-solving and decision-making skills of young Nova Scotians. Other important causes we supported in 2016 included: the Canadian Heart and Stroke Foundation, the Alberta Adolescent Recovery Centre, Princess Margaret Hospital’s Ride to Conquer Cancer, the Nova Scotia Cancer Society, Dreams Take Flight, the Mental Health Foundation of Nova Scotia, Ronald McDonald House, the Special Olympics of Pictou County and regional health care and recreational facilities. A similar sense of responsibility extends to the environment. All of the new-build designs in our retail properties match LEEDS® equivalent standards and we continue to earn and upgrade BOMA BEST® certification for our office properties. All of our Scotia Square properties hold BOMA BEST Gold Certification while Park Lane holds a Silver Certification. Avalon Mall received Silver Certification during 2016 following the completion of numerous environmental upgrades. As always, the year marked a number of important initiatives aimed at reducing our energy consumption and environmental impact at Scotia Square. The most intensive project completed in 2016 was a redesign of the main plant, which included the installation of variable speed drive pumps and flow meters. This project resulted in energy reduction of almost 1.5 million kilowatt hours per year and annual savings of $126,000. In total, projects completed in 2016 bring the total energy saved since we began the process of greening our buildings in 2008 to more than 19.7 million kilowatt hours. E N V I R O N M E N TA L L E A D E R S H I P The expanded food court at Scotia Square will incorporate state-of-the-art window and lighting technologies to minimize energy consumption. A N N U A L R E P O R T 2 0 1 6 1 7 A M E S S A G E F R O M T H E C H A I R A N D L E A D I N D E P E N D E N T T R U S T E E ADVANCING OUR COMMITMENT TO LONG-TERM, SUSTAINABLE GROWTH Crombie enjoyed a strong year with solid financial results, a high level of focused acquisitions and dispositions, and enhancements in its key talent while continuing to advance its strategy for sustainable growth and value creation. Despite an ongoing scarcity of attractive retail assets on the elected and independent. The elected Trustees hold separate open market, management successfully executed more than in-camera meetings with and without the appointed Trustees $574 million in acquisitions in 2016, a testament to both the and management at each Board meeting. Empire appointed competitive advantage of Crombie’s strategic relationship Trustees do not participate in any decisions concerning with Sobeys and Empire, and the REIT’s growing expertise related party transactions or matters. in the country’s major commercial real estate markets. The Board reviews its Governance Standards regularly. In Despite having a very strong year, Crombie REIT’s total return 2017, the Board will be proposing to Unitholders amendments of 13 percent trailed the performance of both the S&P/TSX to its Declaration of Trust that are described in our Proxy Index and the Canadian REIT Index. Although valuations material. These amendments are being proposed to better for REITs in general were dampened by expectations of align our Unitholders rights and definitions with those of rising interest rates, Crombie’s unit price was also affected other REITs and incorporated public companies. by Sobeys’ recent operating difficulties. However, we are confident that Sobeys represents an attractive and stable long-term tenant for our grocery anchored retail assets. On behalf of the Board, we would like to convey our gratitude to John Latimer, who will be retiring from the Board in May 2017. He has provided great leadership and knowledge to Crombie has an engaged Board of Trustees representing the Board for the past eleven years. Mr. Latimer has served a diverse range of backgrounds and experience. We are on the Audit Committee and was most recently Chair of the committed to a strategy of long-term and stable growth Governance and Nominating Committee. We wish him the with a high standard of corporate governance. Although very best in the years to come. Empire maintains a 40.3% (fully diluted) ownership interest in Crombie REIT, the Board of Trustees is structured and operates to fairly represent the interests of all Unitholders. The Board consists of both appointed and elected trustees, as specified in our Declaration of Trust, with a majority being 1 8 C R O M B I E R E I T Frank C. Sobey John Eby T R U S T E E A N D C H A I R L E A D I N D E P E N D E N T T R U S T E E 1 2 3 4 5 6 7 8 9 10 11 12 B O A R D O F T R U S T E E S 1 F R A N K C . S O B E Y Trustee and Chair 2 J O H N E B Y Independent Trustee 7 K E N T R . S O B E Y Independent Trustee 1 0 B R I A N A . J O H N S O N Independent Trustee Frank Sobey has been a trustee of Crombie and its predecessors since 1981 and Chair since 1998. He is a director of Empire Company Limited, was Chairman of the former Oversight Committee of Empire and served as a trustee of the Wajax Income Fund. Currently Chairman of the Dalhousie Medical Research Foundation, Mr. Sobey is a graduate of the Harvard Business School’s Advanced Management Program and received the ICD.D designation in 2013. John Eby was Vice-Chairman of Scotia Capital from 2000 until his retirement in 2006 and for 10 years prior to that Senior Vice President, Corporate and Energy Banking, The Bank of Nova Scotia. He is also a director of Wajax Corporation. Mr. Eby received his BA and MBA in Finance from Queen’s University and is the founder and CEO of Developing Scholars, a not-for- profit organization that promotes educational initiatives in Guatemala. 3 D O N A L D E . C L O W Trustee 5 B A R B A R A F. PA L K Independent Trustee Donald Clow became President and CEO in 2009 after serving as President, ECL Developments Limited for two years and previously, as President of Southwest Properties. Mr. Clow earned his BBA from Acadia University, his CA designation with KPMG and Fellow Chartered Accountant designation in 2002. He is a graduate of the YPO President’s Program at Harvard Business School and received his ICD.D designation in 2014. Mr. Clow is a trustee of Granite REIT. 4 E . J O H N L AT I M E R Independent Trustee John Latimer is the Managing Director of Aldert Chemicals Limited and the former President and CEO of Monarch Corporation, a real estate development company, from which he retired in 2000 after 22 years of service. He also served on the Executive Committee of Taylor Woodrow plc, the London, U.K. based major shareholder of Monarch. Mr. Latimer is the Audit Chairman and Director of R Split III Corp., a managed company of The Bank of Nova Scotia. Barbara Palk is the former President of TD Asset Management Inc. She serves on the Boards of TD Asset Management USA Funds Inc., Ontario Teachers’ Pension Plan, First National Financial Corporation and Queen’s University (Chair). Ms. Palk has an Honours BA in Economics from Queen’s University, has received the ICD.D and CFA designations and is a Fellow of the Canadian Securities Institute. 6 J A S O N P. S H A N N O N Independent Trustee Jason Shannon is the President and Chief Operating Officer of Shannex Inc. and previously practised corporate law at Stewart McKelvey Stirling Scales. He serves on the boards of Atlantic Corporation, ITacit Inc., Atlantic Institute on Aging, and the Loran Scholarship Foundation, and as an advisory member on the Sobeys Pension Investment Committee. Mr. Shannon graduated from Dalhousie University with a Bachelor of Commerce (1994) and an LL.B (1997). Kent Sobey is founder and President of Farmhouse Productions Ltd. He is a corporate director of Blue Ant Media and Hollywood Suite and serves on the board of The North York Harvest Food Bank. Mr. Sobey received his BA from Dalhousie University, is a graduate of The Vancouver Film School and has completed executive development at Rotman School of Management and Queen’s University. 8 J . M I C H A E L K N O W L TO N Independent Trustee Michael Knowlton retired from Dundee Realty Corporation as President of Dundee REIT in May 2011 after 13 years of service. A director of Tricon Capital Group Inc. and a trustee of both Dream Industrial REIT and Dream Global REIT, Mr. Knowlton received his BSc (Engineering) and MBA from Queen’s University, earned his CA designation in 1977 and his ICD.D designation in 2011. 9 E L I S A B E T H S T R O B A C K Independent Trustee Elisabeth Stroback is the Managing Principal and Owner of Tanalex Corp. She is the former Executive Lead, Capital Projects and Real Estate for Ryerson University and prior to 1999, served as President of Hammerson Canada Inc. She is Human Resources Compensation Committee Certified (HRCC) from the Director’s College. Ms. Stroback also holds a BA as well as an MA in Economics. Brian Johnson is a partner of Crown Realty Partners. From 1993 to 2007 he was President and Chief Executive Officer of Crown Life Insurance Company. Mr. Johnson received his B. Comm. (Gold Medalist) from the University of Manitoba and his MBA from the University of Pennsylvania. He also holds the Chartered Financial Analyst (CFA) designation. 1 1 PA U L D . S O B E Y Trustee Paul Sobey retired as President and Chief Executive Officer of Empire Company Limited in 2013. He sits on the boards of Empire Company Limited, Sobeys Inc., The Bank of Nova Scotia, and is Chancellor of Saint Mary’s University. Mr. Sobey received his Bachelor of Commerce from Dalhousie University, attended Harvard University Business School, Advanced Manage ment Program and is a Chartered Accountant. He became a Fellow Chartered Accountant of Nova Scotia in 2006. 12 FRANCOIS VIMARD Trustee François Vimard, CPA, CA is the Executive Vice President of Empire Company Limited and served as interim CEO from July 2016 to January 2017. Prior to this he served in various senior positions with both Empire and Sobeys Inc. and provided leadership for the Company’s Finance, Information Technology, Distribution & Logistics, Corporate Strategy, Real Estate, and Legal functions. Mr. Vimard earned his BBA degree and Licence in Accounting Sciences from Université Laval. He is a member of the Québec Chartered Accountant Order. For complete biographical information on Crombie REIT’s Trustees and Executive Management, please visit us at crombiereit.ca A N N U A L R E P O R T 2 0 1 6 1 9 F I N A N C I A L R E V I E W Management’s Discussion and Analysis 21 Introduction 25 Overview of the Property Portfolio 30 Financial Results 39 Liquidity and Capital Resources 44 Accounting 48 Risk Management 53 Subsequent Events 53 Controls and Procedures 54 Quarterly Information Consolidated Financial Statements 56 Management’s Statement of Responsibility for Financial Reporting 57 Independent Auditor’s Report 58 Consolidated Balance Sheets 59 Consolidated Statements of Comprehensive Income (Loss) 60 Consolidated Statements of Changes in Net Assets Attributable to Unitholders 61 Consolidated Statements of Cash Flows 62 Notes to the Consolidated Financial Statements E V E R Y D AY R E TA I L I N G Crombie’s grocery and drug store anchored properties serve steady, everyday needs for their communities. 2 0 C R O M B I E R E I T M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S (In thousands of CAD dollars, except per unit amounts) INTRODUCTION The following is Management’s Discussion and Analysis (“MD&A”) of the consolidated financial condition and results of operations of Crombie Real Estate Investment Trust (“Crombie”) for the year and quarter ended December 31, 2016, with a comparison to the financial condition and results of operations for the comparable periods in 2015. This MD&A should be read in conjunction with Crombie’s audited consolidated financial statements and accompanying notes for the year ended December 31, 2016 and December 31, 2015, prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). Information about Crombie can be found on SEDAR at www.sedar.com. DAT E O F M D & A The information contained in the MD&A, including forward-looking statements, is based on information available to management as of February 22, 2017, except as otherwise noted. F O RWA R D - L OO K I N G I N F O R M AT I O N This MD&A contains forward-looking statements about expected future events and the financial and operating performance of Crombie. These statements include, but are not limited to, statements concerning management’s beliefs, plans, estimates, intentions, and similar statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical fact. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may”, “will”, “estimate”, “anticipate”, “believe”, “expect”, “intend” or similar expressions suggesting future outcomes or events. Such forward-looking statements reflect management’s current beliefs and are based on information currently available to management. All forward-looking information in this MD&A is qualified by the following cautionary statements: (i) (ii) (iii) (iv) the accretive acquisition of properties and the anticipated extent of the accretion of any acquisitions, which could be impacted by demand for properties and the effect that demand has on acquisition capitalization rates and changes in interest rates; the cost and timing of new properties under development and right of first offer (“ROFO”) agreements, which development activities are primarily undertaken by related parties and thus are not under the direct control of Crombie and whose activities could be impacted by real estate market cycles, the availability of labour and general economic conditions; the disposition of properties and the anticipated reinvestment of net proceeds, which could be impacted by the availability of purchasers, the availability of accretive property acquisitions or other accretive uses for net proceeds and real estate market conditions; generating improved rental income and occupancy levels, which could be impacted by changes in demand for Crombie’s properties, tenant bankruptcies, the effects of general economic conditions and supply of competitive locations in proximity to Crombie locations; (v) (vi) the anticipated rate of general and administrative expenses as a percentage of property revenue, which could be impacted by changes in property revenue and/or changes in general and administrative expenses; overall indebtedness levels and terms and expectations relating to refinancing, which could be impacted by the level of acquisition activity that Crombie is able to achieve, levels of indebtedness, Crombie’s ability to maintain and strengthen its investment grade credit rating, future financing opportunities, future interest rates, creditworthiness of major tenants, and market conditions; (vii) the estimated payments on derivative and non-derivative financial liabilities, which could be impacted by interest rate subsidy payments, conversions of convertible debentures, interest rates on floating rate debt and fluctuations in the settlement value and settlement timing of any derivative financial liabilities; (viii) asset growth and reinvesting to develop or otherwise make improvements to existing properties, which could be impacted by the availability of labour, capital resource allocation decisions and actual development costs; tax exempt status, which can be impacted by regulatory changes enacted by governmental authorities; anticipated distributions, distribution growth and payout ratios, which could be impacted by results of operations and capital resource allocation decisions; the effect that any contingencies would have on Crombie’s financial statements, which could be impacted by their eventual outcome; (ix) (x) (xi) (xii) anticipated replacement of expiring tenancies, which could be impacted by the effects of general economic conditions and the supply of competitive locations; and, (xiii) statements under the heading “Property Development/ Redevelopment” including the locations identified, timing, cost, development size and nature, impact on net asset value, cash flow growth, unitholder value or other financial measures, all of which may be impacted by real estate market cycles, the availability of financing opportunities and labour, actual development costs and general economic conditions and factors described under the “Property Development/ Redevelopment” section and which assumes obtaining required municipal zoning and development approvals and successful agreements with development partners and existing tenants. A N N U A L R E P O R T 2 0 1 6 2 1 MD&A These forward-looking statements are presented for the purpose of assisting Crombie’s Unitholders and financial analysts in understanding Crombie’s operating environment, and may or may not be appropriate for other purposes. These forward- looking statements are not guarantees of future events or performance and, by their nature, are based on Crombie’s current estimates and assumptions. Crombie can give no assurance that actual results will be consistent with these forward-looking statements. A number of factors, including those discussed under “Risk Management” could cause actual results, performance, achievements, prospects or opportunities to differ materially from the results discussed or implied in the forward-looking statements. These factors should be considered carefully and a reader should not place undue reliance on the forward-looking statements. These forward-looking statements are made as at the date of the MD&A and Crombie assumes no obligation to update or revise them to reflect new or current events or circumstances unless otherwise required by applicable securities legislation. F I N A N C I A L H I G H L I G H T S N O N - G A A P F I N A N C I A L M E A S U R E S There are financial measures included in this MD&A that do not have a standardized meaning under IFRS as prescribed by the IASB. These measures are property net operating income (“NOI”), same-asset property cash NOI, operating income attributable to Unitholders, funds from operations (“FFO”), FFO as adjusted, adjusted funds from operations (“AFFO”), debt to gross book value, earnings before interest, taxes, depreciation and amortization (“EBITDA”), interest service coverage and debt service coverage. Management includes these measures as they represent key performance indicators to management and it believes certain investors use these measures as a means of assessing relative financial performance. These measures as computed by Crombie may differ from similar computations as reported by other entities and, accordingly, may not be comparable to other such entities. Financial Highlights for the three months and year ended December 31, 2016 and 2015 are as follows: Number of properties Gross leaseable area (square feet) Debt to gross book value – fair value basis (In thousands of CAD dollars, except per unit amounts and as otherwise noted) Property revenue Property net operating income Operating income attributable to Unitholders Operating income attributable to Unitholders per unit – basic Operating income attributable to Unitholders per unit – diluted FFO, as adjusted – basic FFO, as adjusted – diluted FFO, as adjusted per unit – basic FFO, as adjusted per unit – diluted FFO, as adjusted payout ratio (%) AFFO – basic AFFO – diluted AFFO per unit – basic AFFO per unit – diluted Distributions per unit AFFO payout ratio (%)(1) Interest service coverage Debt service coverage As at December 31, 2016 280 December 31, 2015 260 19,093,000 17,666,000 50.3% 52.5% Three months ended December 31, Year ended December 31, $ $ $ $ $ $ $ $ $ $ $ $ $ $ 2016 105,269 75,874 31,478 0.21 0.21 45,452 47,193 0.31 0.30 72.6% 38,452 40,193 0.26 0.26 0.22 85.8% $ $ $ $ $ $ $ $ $ $ $ $ $ $ 2015 92,847 63,989 13,945 0.11 0.11 38,311 40,052 0.29 0.29 76.3% 32,310 33,295 0.25 0.25 0.22 90.5% $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 2016 400,001 284,695 125,130 0.89 0.89 166,235 173,141 1.19 1.17 75.6% 140,739 144,645 1.01 1.00 0.89 89.3% 2.97 1.96 2015 369,866 256,605 65,729 0.50 0.50 149,474 156,720 1.14 1.13 78.0% 125,654 129,900 0.96 0.96 0.89 92.8% 2.72 1.81 (1) AFFO payout ratio is calculated using a per square foot charge for maintenance expenditures (see “AFFO” section). Weighted average number of Units outstanding for per unit measures calculations: Basic number of Units for all measures Diluted for operating income attributable to Unitholders purposes Diluted for FFO purposes Diluted for AFFO purposes Three months ended December 31, Year ended December 31, 2016 2015 2016 2015 148,038,591 148,179,446 155,502,713 155,502,713 131,182,278 139,919,678 131,333,794 140,062,763 138,657,061 147,386,030 135,671,986 144,400,955 130,787,712 130,946,425 138,655,853 135,670,778 2 2 C R O M B I E R E I T MD&AMANAGEMENT’S DISCUSSION AND ANALYSIS (In thousands of CAD dollars, except per unit amounts) The diluted weighted average number of Units outstanding does not include the impact of any series of convertible debentures that would be anti-dilutive for that calculation. — Renewals on 222,000 square feet of 2017 and later expiring leases at an average rate of $17.05 per square foot, an increase of 5.3% over the expiring lease rate. H I G H L I G H T S • • • • • • • • • • • FFO, as adjusted, for the year ended December 31, 2016 increased 11.2% to $166,235; or $1.17 per unit diluted, an increase of $0.04 or 3.9% per unit from the year ended December 31, 2015. FFO, as adjusted, for the three months ended December 31, 2016 increased 18.6% to $45,452; or $0.30 per unit diluted, an increase of $0.01 or 5.1% per unit from the three months ended December 31, 2015. AFFO for the year ended December 31, 2016 increased 12.0% to $140,739; or $1.00 per unit diluted, an increase of $0.04 or 4.6% per unit from the AFFO per unit for the year ended December 31, 2015. AFFO for the three months ended December 31, 2016 increased 19.0% to $38,452; or $0.26 per unit diluted, an increase of $0.01 or 5.3% per unit from the three months ended December 31, 2015. FFO, as adjusted, payout ratio of 75.6% for the year ended December 31, 2016 compared to 78.0% for the same period in 2015. AFFO payout ratio of 89.3% for the year ended December 31, 2016 compared to 92.8% for the same period in 2015. FFO, as adjusted, payout ratio of 72.6% for the three months ended December 31, 2016 compared to 76.3% for the same period in 2015. AFFO payout ratio of 85.8% for the three months ended December 31, 2016 compared to 90.5% for the same period in 2015. Same-asset property cash NOI for the year ended December 31, 2016 increased by 4.2% or $9,393 ($234,710 compared to $225,317 for the year ended December 31, 2015). Increase in same-asset property cash NOI for the three months ended December 31, 2016 of 9.2% or $5,203 ($61,785 compared to $56,582 for the three months ended December 31, 2015). Completed acquisitions in the year ended December 31, 2016 totalling 2,663,000 square feet for $573,833 before closing and transaction costs, including 38 retail properties; a 50% interest in three distribution centres; two parcels of development land adjacent to existing Crombie properties and a 50% interest in an additional development property; and, invested $58,823 in the renovation and expansion of 10 existing Sobeys anchored properties. Completed dispositions of 19 retail properties in the year ended December 31, 2016 totalling 1,210,000 square feet for proceeds of approximately $196,000 before closing and transaction costs. 8.1% growth of property revenue for the year ended December 31, 2016 ($400,001 versus $369,866 for the year ended December 31, 2015). Fourth quarter property revenue of $105,269, an increase of $12,422, or 13.4% over fourth quarter 2015. Committed occupancy was 94.4% at December 31, 2016 compared with 94.2% at September 30, 2016 and 93.6% at December 31, 2015. Crombie’s renewal activity during the year ended December 31, 2016 included: — Renewals on 499,000 square feet of 2016 expiring leases at an average rate of $16.96 per square foot, an increase of 9.9% over the expiring lease rate. • • • • New leases and expansions increased occupancy by 290,000 square feet at December 31, 2016 at an average first year rate of $15.05 per square foot. 132,000 square feet of space was committed at December 31, 2016 at an average first year rate of $12.51 per square foot. Debt to gross book value (fair value basis) was 50.3% at December 31, 2016, compared to 52.5% at December 31, 2015. Crombie’s interest service coverage for the year ended December 31, 2016 was 2.97 times EBITDA and debt service coverage was 1.96 times EBITDA, compared to 2.72 times EBITDA and 1.81 times EBITDA, respectively, for the year ended December 31, 2015. Recognized $14,172 in property revenue during the year ended December 31, 2016 related to settlement proceeds from Target Canada for three leases vacated in May 2015 and from Best Buy/ Future Shop related to one vacated lease. These amounts have been adjusted out of FFO for the year ended December 31, 2016. B U S I N E S S O V E R V I E W Crombie is an unincorporated, “open-ended” real estate investment trust (REIT) established pursuant to the Declaration of Trust dated January 1, 2006, as amended and restated (the “Declaration of Trust”) under, and governed by, the laws of the Province of Ontario. The REIT Units of Crombie trade on the Toronto Stock Exchange (“TSX”) under the symbol “CRR.UN”. Crombie invests in income-producing retail, office and mixed use properties in Canada, with a growth strategy focused primarily on the acquisition of grocery and drug store anchored retail properties in Canada’s top markets. At December 31, 2016, Crombie owned a portfolio of 280 investment properties in 10 provinces, comprising approximately 19.1 million square feet of gross leaseable area (“GLA”). Empire Company Limited (“Empire”), through a subsidiary, holds a 41.5% (fully diluted 40.3%) economic and voting interest in Crombie at December 31, 2016. B U S I N E S S O B J E C T I V E S A N D O U T L OO K The objectives of Crombie are threefold: 1. Generate reliable and growing cash distributions; 2. Enhance the value of Crombie’s assets and maximize long-term unitholder value through active asset management; and 3. Expand the asset base of Crombie and increase its cash available for distribution through accretive acquisitions. Generate reliable and growing cash distributions: Management focuses both on improving the same-asset results while expanding the asset base with accretive acquisitions to grow the cash distributions to unitholders. Crombie`s focus on grocery-anchored and drug store-anchored retail properties, a stable and defensive oriented asset class, assists in enhancing the reliability of cash distributions. Enhance value of Crombie`s assets: Crombie anticipates reinvesting approximately 3% to 5% of its property revenue each year into its properties to maintain their productive capacity and thus overall value. Crombie`s internal growth strategy focuses on generating greater rental income from its existing properties. Crombie plans to achieve this by strengthening its asset base A N N U A L R E P O R T 2 0 1 6 2 3 MD&A through judicious expansion and improvement of existing properties, leasing vacant space at competitive market rates with the lowest possible transaction costs, and maintaining good relations with tenants. Management will continue to conduct regular reviews of properties and, based on its experience and market knowledge, assess ongoing opportunities within the portfolio. Expand asset base with accretive acquisitions: Crombie`s external growth strategy focuses primarily on acquisitions of income- producing, grocery-anchored and drug store-anchored retail properties in Canada’s top urban and suburban markets. Crombie pursues two primary sources of acquisitions which are third party acquisitions and the relationship with ECL Developments Limited (“ECLD”) and Sobeys. The relationship with ECLD and Sobeys includes currently owned and future development properties, as well as opportunities through the rights of first refusal (“ROFR”) that one of Empire’s subsidiaries has negotiated in certain of their third party leases. Crombie will seek to identify future property acquisitions using investment criteria that focuses on the strength of anchor tenancies, market demographics, age of properties, terms of tenancies, proportion of revenue from national and regional tenants, opportunities for expansion, security of cash flow, potential for capital appreciation and potential for increasing value through more efficient management of assets being acquired, including expansion and repositioning. Crombie continues to work closely with Sobeys to identify opportunities that further Crombie’s growth strategy. Crombie has a ROFO agreement with Sobeys to acquire both existing income producing commercial properties from Sobeys as well as properties from their development pipeline, subject to certain exceptions. Through these relationships, Crombie expects to have accretive acquisition opportunities which provide many of the benefits associated with property development while limiting its exposure to the inherent risks of development, such as real estate market cycles, cost overruns, labour disputes, construction delays and unpredictable general economic conditions. The agreements provide Crombie with a preferential right to acquire retail properties from ECLD and/or Sobeys, subject to approval by Crombie’s elected trustees. These relationships between Crombie and ECLD and Sobeys continue to provide promising opportunities for growth of Crombie’s portfolio through future developments on both new and existing sites. The following table outlines the property transactions completed since the initial public offering (“IPO”). (In thousands of CAD dollars) Transaction date Transactions with Empire and subsidiaries 2006 through 2014 2015 June 29, 2016 July 15, 2016 July 29, 2016 Transactions with third party vendors 2006 through 2014 2015 February 5, 2016 March 10, 2016 April 8, 2016 April 15, 2016 April 28, 2016 May 3, 2016 May 16, 2016 June 1, 2016 June 9, 2016 June 23, 2016 August 15, 2016 November 14, 2016 November 30, 2016 December 8, 2016 December 13, 2016 Number of properties Acquisition cost (disposition GLA (sq. ft.) proceeds)(1) 175 4 22 (1) 1 50 1 1 (10) 1 (1) (1) 2 9 1 1 1 (1) 1 1 (1) (4) 8,740,700 232,800 2,090,000 (21,000) 62,000 2,409,000 101,000 21,000 (791,000) 58,000 (8,000) (47,000) 117,000 94,000 37,000 84,000 54,000 (48,000) 29,000 6,000 (80,000) (215,000) $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 1,955,393 63,158 348,386 (9,057) 26,400 693,812 33,150 5,500 (143,400) 15,700 (793) (7,500) 46,200 32,272 7,000 29,000 14,150 (2,300) 29,000 5,000 (10,750) (21,750) (1) Excluding closing and transaction costs The table highlights the growth opportunities provided through the Empire/Sobeys relationship as well as the growth realized through Crombie’s expanding base of third party vendors. Through its relationships with Sobeys and ECLD, Crombie is provided a preferential right to acquire retail properties developed and/or owned by these entities. There is currently approximately $300,000 – $500,000 of properties which are anticipated to be made available to Crombie over the next four years. 2 4 C R O M B I E R E I T MD&AMANAGEMENT’S DISCUSSION AND ANALYSIS (In thousands of CAD dollars, except per unit amounts) B U S I N E S S E N V I R O N M E N T A significant factor impacting the Canadian economy and its future prospects continues to be the prolonged decrease in the price of oil. While oil has recently found stability and slight price recovery, aided by supply management of OPEC countries, it remains well below previous levels. By way of offset, the Canadian economy has been helped by the lowering of the Canadian dollar relative to our largest trading partner, the United States. A weaker currency is a potential catalyst for Canada’s export sectors. Interest rates in Canada and globally remain at all time lows with occasional signs of rate increases as yields have recently started to trend upwards. Within Canada, the key factors of low oil and low Canadian dollar are having mixed results on provincial economies with negative impacts in specific areas such as Alberta and Newfoundland with loss of employment, higher office vacancy primarily in Alberta and reduced consumer spending and capital investment. Positive impacts from the lower oil price and interest rates are being felt on economies with a heavier reliance on manufacturing and exports such as Ontario. Capitalization rates have continued at record low levels as interest rates remain low and large investors such as REITs and pension funds seek long-term sustainable returns. The bifurcation noted in 2015 continues, with strong assets in urban markets maintaining their historically low cap rates and strong buyer interest while weaker properties in rural and secondary markets continuing to see slight increases in cap rates and sporadic acquisition interest. With these low cap rates and interest rates, REITs are continuing to turn inward for accretive growth with a focus on intensifications of existing properties and complete redevelopments to repurpose prime urban properties to take advantage of highest and best use potential. OVERVIEW OF THE PROPERTY PORTFOLIO P R O P E R T Y P O R T F O L I O At December 31, 2016, Crombie’s property portfolio consisted of 280 investment properties that contain approximately 19.1 million square feet of GLA in all 10 provinces. As at December 31, 2016, the portfolio distribution of the GLA by province was as follows: Province AB BC MB NB NL NS ON PE QC SK Total GLA (sq. ft.) January 1, Acquisitions (Dispositions) 2016 December 31, Number of Properties 2016 Other 2,386,000 1,416,000 644,000 1,582,000 1,414,000 988,000 352,000 — 3,000 — — — 3,374,000 1,768,000 644,000 1,000 1,586,000 — (31,000) 1,383,000 5,374,000 (29,000) (25,000) 5,320,000 3,022,000 (197,000) 25,000 2,850,000 128,000 (24,000) 1,246,000 364,000 454,000 — — — — 104,000 1,610,000 454,000 55 41 15 20 13 43 50 2 33 8 % of Annual Minimum Rent % of GLA 17.7% 9.3% 3.4% 8.3% 7.2% 27.9% 14.9% 0.5% 8.4% 2.4% 20.7% 11.6% 4.3% 5.7% 9.8% 21.5% 15.7% 0.6% 7.7% 2.4% 17,666,000 1,457,000 (30,000) 19,093,000 280 100.0% 100.0% During the year ended December 31, 2016, Crombie had a net increase of 1,457,000 square feet or 8.2% growth of GLA from acquisition and disposition activity consisting of: The development property has been excluded from GLA until development plans are finalized. This is offset by disposition of three properties totalling 190,000 square feet; • acquisition of nine properties, totalling 951,000 square feet and a 37,000 square foot addition to a property in Alberta; • acquisition of nine properties in British Columbia totalling 373,000 square feet offset in part by disposition of one property totalling 21,000 square feet; • acquisition of eight properties in Ontario totalling 587,000 square feet, offset by disposition of 12 properties totalling 784,000 square feet; • disposition of one property in Prince Edward Island totalling 24,000 square feet; and, • acquisition of one property in New Brunswick totalling 11,000 square feet offset in part by disposition of one property totalling 8,000 square feet; • acquisition of 12 properties in Quebec totalling 547,000 square feet, offset in part by disposition of one property in Quebec totalling 183,000 square feet. • acquisition of one property totalling 77,000 square feet, an 84,000 square foot addition to a property, and an acquisition of a 54,000 square foot development property, in Nova Scotia. Crombie continues to diversify its geographic concentration through growth and divestiture opportunities. As at December 31, 2016, our allocation of Annual Minimum Rent consists of: Atlantic Canada 37.6%; Central Canada 23.4%; and Western Canada 39.0%. A N N U A L R E P O R T 2 0 1 6 2 5 MD&A Crombie believes this diversification adds stability to the portfolio while reducing vulnerability to economic fluctuations that may affect any particular region. P O R T F O L I O OCC U PA N C Y A N D L E A S E AC T I V I T Y The portfolio occupancy and committed activity for the year ended December 31, 2016 were as follows: Occupied Space (sq. ft.) Province January 1, Acquisitions (Dispositions) 2016 New Leases(1) Lease Expiries Other December 31, 2016 Changes(2) Committed Space (sq. ft.)(3) Space (sq. ft.) Total Leased Leased December 31, AB BC MB NB NL NS ON PE QC SK 2,376,000 1,416,000 644,000 1,222,000 1,371,000 4,816,000 984,000 345,000 — 3,000 — 11,000 2,000 5,000 70,000 14,000 (7,000) (2,000) 3,362,000 5,000 3,367,000 — 1,000 1,764,000 1,000 1,765,000 (1,000) (25,000) (17,000) (4,000) 644,000 (4,000) 1,266,000 — — 1,266,000 644,000 100.0% (31,000) 1,337,000 2,000 1,339,000 (29,000) 159,000 (159,000) (17,000) 4,770,000 93,000 4,863,000 2,782,000 (113,000) 17,000 128,000 1,226,000 448,000 (24,000) 363,000 — — 6,000 6,000 (28,000) (5,000) — (50,000) (4,000) 2,654,000 26,000 2,680,000 — — — 99,000 1,595,000 404,000 5,000 104,000 100.0% — — 1,595,000 404,000 2016 99.8% 99.8% 79.8% 96.8% 91.4% 94.0% 99.1% 89.0% 94.4% Total 16,429,000 1,529,000 290,000 (292,000) (61,000) 17,895,000 132,000 18,027,000 (1) New leases include: new leases and expansions to existing properties. (2) Other changes include: amendments to existing leases; lease terminations and surrenders; bankruptcies; and space certifications. (3) Committed space represents lease contracts for future occupancy of currently vacant space. Management believes such reporting, along with reported lease maturities, provides more balanced reporting of potential pending overall vacant space. Committed space increased to 132,000 square feet at December 31, 2016, from 97,000 square feet at December 31, 2015. Overall leased space (occupied plus committed) increased from 93.6% at December 31, 2015 to 94.4% at December 31, 2016. During 2016, Crombie had a net increase from acquisitions and dispositions of 1,529,000 square feet; had lease expiries outpace new leases by 2,000 square feet, and had committed space increase by 35,000 square feet to 132,000 square feet. New leases and expansions increased occupancy by 290,000 square feet at December 31, 2016 at an average first year rate of $15.05 per square foot. 267,000 square feet are new leases at an average rate of $15.40 per square foot while the remaining 23,000 square feet are expansions of existing tenants at an average rate of $11.29 per square foot. 132,000 square feet of space was committed at December 31, 2016 at an average first year rate of $12.51 per square foot. During the year ended December 31, 2016, Crombie renewed 499,000 square feet of 2016 anchor and non-anchor tenant lease maturities at an average rate of $16.96 per square foot, an increase of 9.9% over the expiring lease rate. The renewal activity compares favourably with the average rent per square foot on full year 2016 lease maturities of $13.05 per square foot. Crombie also renewed 222,000 square feet of 2017 and later anchor and non-anchor expiring leases at an average rate of $17.05 per square foot, an increase of 5.3% over the expiring lease rate. In addition, as part of the recent investment in the renovation and expansion of 10 existing Sobeys, leases have been amended with new 20-year terms. These amendments have not been included in the calculation of the renewal activity previously discussed. S E C TO R I N F O R M AT I O N While Crombie does not distinguish or group its operations on a geographical or other basis, the following sector information is provided as supplemental disclosure. As at December 31, 2016, the portfolio distribution of the GLA by asset type was as follows: Asset Type Retail and Mixed Use Office Total Number of Properties GLA (sq. ft.) % of GLA % of Annual Minimum Rent 275 5 280 18,093,000 1,000,000 19,093,000 94.8% 5.2% 100.0% 96.0% 4.0% 100.0% (1) For purposes of calculating leased percentage, Crombie considers GLA covered by head lease agreements as occupied. As at December 31, 2015, the portfolio distribution of the GLA by asset type was as follows: Asset Type Retail and Mixed Use Office Total Number of Properties GLA (sq. ft.) % of GLA % of Annual Minimum Rent 255 5 260 16,677,000 989,000 17,666,000 94.4% 5.6% 100.0% 95.7% 4.3% 100.0% (1) For purposes of calculating leased percentage, Crombie considers GLA covered by head lease agreements as occupied. Leased(1) 94.7% 89.0% 94.4% Leased(1) 93.8% 89.8% 93.6% 2 6 C R O M B I E R E I T MD&AMANAGEMENT’S DISCUSSION AND ANALYSIS (In thousands of CAD dollars, except per unit amounts) Retail and mixed use properties represent 94.8% of Crombie’s GLA and 96.0% of annual minimum rent at December 31, 2016 compared to 94.4% of GLA and 95.7% of annual minimum rent at December 31, 2015, reflecting Crombie’s strategy to focus growth primarily on retail properties. Leased space in retail and mixed use properties of 94.7% at December 31, 2016, increased from 93.8% at December 31, 2015. Leased space in office properties of 89.0% decreased from 89.8% at December 31, 2015. L E A S E M AT U R I T I E S The following table sets out as of December 31, 2016, the number of leases maturing during the periods indicated (assuming tenants do not holdover on a month-to-month basis or exercise renewal options or termination rights), the renewal area, the percentage of the total GLA of the properties represented by such maturities and the estimated average rent per square foot at the time of expiry. Year 2017 2018 2019 2020 2021 Thereafter Total Number of Leases Renewal Area (sq. ft.) % of Total GLA 223 178 171 146 154 702 1,574 923,000 730,000 889,000 591,000 756,000 14,138,000 18,027,000 Average Rent per sq. ft. at Expiry $ 17.43 17.92 16.84 19.31 19.06 18.15 4.8% 3.8% 4.7% 3.1% 4.0% 74.0% 94.4% $ 18.11 P R O P E R T Y D E V E L O P M E N T / R E D E V E L O P M E N T (“ D E V E L O P M E N T ”) Property Development is a strategic priority for Crombie to improve net asset value, cash flow growth and Unitholder value. With the acquisition of 70 Safeway properties from Sobeys in November 2013, Crombie added a number of locations in Canada’s major cities. With urban intensification becoming an important reality across the country, Crombie management is focused on evaluating and undertaking Major Developments at certain properties, defined as properties where incurred costs are projected to be greater than $50 million and where Development may include a combination of commercial and/or residential uses (“Major Developments”). Potential Major Developments Crombie’s current potential Major Developments have the potential to add up to 692,000 (September 30, 2016 – 839,000) square feet of commercial GLA and up to 5,700,000 square feet (up to 6,500 units) (September 30, 2016 – 5,100,000 square feet and 5,800 units) of residential GLA (which may include either rental or condominium units). Included in Crombie’s pipeline of 19 (September 30, 2016 – 19) potential Major Developments are 13 (September 30, 2016 – 13) properties in Western Canada, located primarily in Vancouver, British Columbia (nine) (September 30, 2016 – nine) and Calgary and Edmonton, Alberta (four) (September 30, 2016 – four) and six additional properties located in Central Canada and Atlantic Canada (September 30, 2016 – six). Based on Crombie’s current estimates, total costs to develop these properties could reach $2 to $3 billion (September 30, 2016 – $2 to $3 billion), of which Crombie may enter joint venture or other partnership arrangements to share cost, revenue, risks and development expertise depending upon the nature of each project. Each project remains subject to normal development approvals, achieving required economic hurdles including financial accretion and Board of Trustees approval. As at December 31, 2016, Crombie has identified the following 19 locations as having potential to become Major Developments. Development of each property is subject to management completing full due diligence on the opportunity, including commercial and residential components, as well as seeking all necessary Board, municipal/provincial and tenant approvals prior to proceeding. While the precise timing of each project is not determinable currently, Crombie expects that a number of these projects could be under construction over the next one to two years and/or complete over the next four to five years. The time horizon for certain of these projects could be longer and Crombie may choose to not proceed with development on some properties after further review and completion of financial accretion projections. A N N U A L R E P O R T 2 0 1 6 2 7 MD&A Existing Property City, Province Site Size Potential Potential Existing Commercial Residential Expansion Expansion Tenants 1. 1641 Davie Street Vancouver, BC 1.09 acres Safeway/Other tenants 2. 2733 West Broadway Vancouver, BC 1.95 acres Safeway Vancouver, BC 3.74 acres Safeway/Other tenants 3. 3410 Kingsway 4. 990 West 25 Avenue (King Edward) 5. 1170 East 27 Street North Vancouver, BC 2.82 acres 6. 1780 East Broadway Vancouver, BC 2.43 acres Vancouver, BC 1.80 acres 7. Royal Oak 8. East Hastings Vancouver, BC 2.76 acres Burnaby, BC 3.30 acres Safeway/Other tenants 9. 10355 King George Boulevard Surrey, BC 5.07 acres 10. 813 11 Avenue SW 11. 524 Elbow Drive SW 12 410 10 Street NW 13. 10930 82 Avenue 14. Brampton Mall 15. Bronte Village 16. Triangle Lands 17. Penhorn Lands 18. Scotia Square 19. Avalon Mall Calgary, AB 2.59 acres Calgary, AB 1.60 acres Calgary, AB 1.73 acres Edmonton, AB 2.44 acres Safeway/Other tenants Brampton, ON 8.74 acres Retail Oakville, ON 5.66 acres Sobeys/Other tenants Halifax, NS 0.68 acres Dartmouth, NS 31.00 acres Land Land Halifax, NS 14.47 acres Office/Retail St. John’s, NL 50.91 acres Retail Safeway Safeway Safeway Safeway Safeway Safeway Safeway Safeway Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes No Status Development Planning To be determined “TBD” TBD TBD Pre-planning Pre-planning TBD TBD TBD TBD Pre-planning TBD TBD TBD Pre-planning TBD TBD In Development Pre-planning Projects described as having a “pre-planning” status include projects that Crombie has undertaken potential development planning, which could include seeking municipal approvals for zoning, developing image renderings, seeking potential commercial and/or residential development partners, evaluation of financing options and other activities required to determine viability of the opportunity. Projects described as having a “development planning” status include projects where significant progress has been made in several areas of the pre-planning phase and Crombie is in the process of committing costs to undertake a Major Development. Projects described as having an “in development’ status include projects where internal approvals have been obtained and construction is imminent or underway. The following section provides more detail for projects that have progressed beyond the pre-planning phase. Properties in the Development Planning Phase 1641 Davie Street, Vancouver, British Columbia Davie Street is a single-storey retail plaza located in a high density residential area of downtown Vancouver, British Columbia. The site is currently anchored by a 32,000 square foot Safeway grocery store and a number of additional tenants. Crombie has entered into a partnership agreement with a Vancouver based development partner (Westbank Corp.) for the planned replacement of the existing retail asset with a new mixed use development. The proposed development currently envisions a new, larger approximately 44,000 square foot grocery store with almost 9,000 square feet of ancillary retail, and rental residential totalling up to 252,000 square feet (up to 320 rental units) comprised of two residential towers. Zoning is in place and a development permit application was submitted in December 2015 with approval expected shortly. Under the current project, Crombie would ultimately retain 100% of the new commercial component and jointly own the rental residential component. Properties in Development Phase Scotia Square, Barrington Street, Halifax, Nova Scotia Scotia Square Complex is situated at the entrance to the downtown Halifax business district at the corner of Barrington and Duke Streets. The retail and mixed use portion of the property is comprised of 290,000 square feet and is directly connected to two hotels and nearly 1,300,000 square feet of office space. Phase I of this Major Development involved a complete re-merchandising and renovation of the food court. This project was completed in early 2014 at a construction cost of approximately $3 million. Phase II is a three-level expansion on Barrington Street of approximately 25,000 square feet (gross building area) which includes a new and modern main entrance into the complex. The expansion is comprised of new third floor office space, second floor food court expansion and seating, and new street level retail GLA. The new three-storey glazed facade will modernize the overall image of the facility. The construction cost for Phase II is expected to be approximately $10 million. Crombie is also in the pre-planning stage of a number of other residential and/or office development opportunities at this location for future development phases. The costs disclosed exclude direct tenant costs and include both productive capacity enhancement and recoverable amounts. O T H E R P R O P E R T Y R E D E V E L O P M E N T On a regular basis, Crombie will complete redevelopment work on properties to enhance the economic viability of a location when the environment in which it operates warrants. Properties currently under redevelopment are included in development property cash NOI and excluded from same-asset operating results until the redevelopment is complete and the operating results from the property are available for the current and comparative reporting years, at which time they are included in same-asset property operating results. Operating results from these properties are included in FFO, AFFO, occupancy, and other measures per normal. 2 8 C R O M B I E R E I T MD&AMANAGEMENT’S DISCUSSION AND ANALYSIS (In thousands of CAD dollars, except per unit amounts) Province ON NS NB Property Property GLA Algonquin Ave Mall Amherst Centre Uptown Centre 211,000 228,000 320,000 The redevelopment of Algonquin Avenue Mall, Amherst Centre and Uptown Centre consists of redemising and developing vacant anchor space in readiness for leasing. Construction will be completed in phases in conjunction with leasing. Planning and design work is currently underway and is subject to management review and approval. Province Property Property GLA Estimated Construction Development Cost(1) NS NS NS NS NL NB NB NB Aberdeen Business Centre 389,000 Leasing of Anchor Space $ 3,274 County Fair Mall–New Minas 268,000 To be determined In planning Downsview Mall 70,000 Phased demolition and development Sydney Shopping Centre 186,000 Partial demolition and development $ $ 2,572 6,909 Kenmount Business Centre / Woodgate Plaza 68,000 Avalon Mall Master Plan In planning Loch Lomond Place 192,000 Riverview Place 150,000 1234 Main Street / 1222 Main Street 140,000 To be determined In planning To be determined In planning To be determined In planning Incurred To Date Estimated Completion 3,005 Q1 2017 — To be determined 379 2,349 Q3 2017 Q3 2017 — To be determined — To be determined — To be determined — To be determined $ $ $ $ $ $ $ $ (1) Excludes direct tenant costs Aberdeen Business Centre – final lease agreements to replace vacant anchor space have been executed. This property will be included in same-asset results for 2017. Loch Lomond Place – has been designated for redevelopment. Initial planning and design work is currently underway and is subject to management review and approval. County Fair Mall – New Minas has been designated for redevelopment. Initial planning and design work is currently underway and is subject to management review and approval. Riverview Place – has been designated for redevelopment. Initial planning and design work is currently underway and is subject to management review and approval. Downsview Mall – currently under redevelopment consisting of phased demolition and development. Zoning approvals have been obtained. Construction and leasing are underway. 1234 Main Street / 1222 Main Street – Phase I redevelopment of 1234 Main Street has been completed. Initial planning of Phase II involving 1222 Main Street is underway. Sydney Shopping Centre – currently under redevelopment consisting of partial demolition and redemising of remaining space. Development is under construction and expected to be completed by Q3 2017. Kenmount Business Centre / Woodgate Plaza – has been designated for redevelopment to facilitate planned Major Development at adjacent property Avalon Mall. As indicated in the previous section this Major Development is in the pre-planning stage. L A R G E S T T E N A N T S Productive Capacity Enhancement In addition to Major Developments and work done on properties under redevelopment, Crombie also performs productive capacity enhancements on other properties which totals $90,166 of investment for the year ended December 31, 2016. This includes $58,823 of investment in the renovation and expansion of 10 properties anchored by Sobeys. This spending is further discussed in the Maintenance Expenditures section. The following table illustrates the ten largest tenants in Crombie’s portfolio of income-producing properties as measured by their percentage contribution to total annual minimum rent as at December 31, 2016. Tenant Sobeys(1) Shoppers Drug Mart Cineplex Province of Nova Scotia CIBC Lawtons/Sobeys Pharmacy Dollarama GoodLife Fitness Bank of Nova Scotia Bank of Montreal Total (1) Excludes Lawtons/Sobeys Pharmacy. % of Annual Minimum Rent Average Remaining Lease Term 52.9% 5.1% 1.4% 1.2% 1 . 1 % 1 . 1 % 1.0% 1.0% 0.9% 0.9% 66.6% 15.4 years 11.3 years 8.6 years 1.9 years 14.2 years 10.3 years 6.4 years 10.3 years 4.3 years 11.2 years A N N U A L R E P O R T 2 0 1 6 2 9 MD&A Crombie’s portfolio is leased to a wide variety of tenants. The above table is based on the tenant’s percentage of annual minimum rent and, other than Sobeys which accounts for 52.9% of annual minimum rent and Shoppers Drug Mart which accounts for 5.1% of annual minimum rent, no other tenant accounts for more than 1.4% of Crombie’s annual minimum rent. For the year ended December 31, 2016, Sobeys also represents 44.8% of total property revenue. Total property revenue includes annual minimum rent as well as operating and realty tax cost recovery income and percentage rent. These additional amounts can vary by property type, specific tenant leases and where tenants may directly incur and pay operating and realty tax costs. The weighted average remaining term of all Crombie leases is approximately 12.5 years. This lengthy remaining lease term is influenced by the average Sobeys remaining lease term of 15.4 years. FINANCIAL RESULTS CO M PA R I S O N TO P R E V I O U S Y E A R (In thousands of CAD dollars, except per unit amounts and as otherwise noted) Total assets Total investment property debt and unsecured debt Debt to gross book value – fair value basis(1) (1) See “Debt to Gross Book Value – Fair Value Basis” for detailed calculation. As At December 31, 2016 December 31, 2015 December 31, 2014 $ $ 3,963,318 2,396,199 50.3% $ $ 3,472,193 2,170,801 52.5% $ $ 3,413,414 2,073,354 52.8% Three months ended December 31, Year ended December 31, 2016 2015 Variance 2016 2015 Variance Property revenue Property operating expenses Property NOI NOI margin percentage Other items: Gain on disposal of investment properties Impairment of investment properties Depreciation and amortization General and administrative expenses Finance costs – operations Operating income before taxes Taxes – current Taxes – deferred Operating income attributable to Unitholders $ 105,269 $ 92,847 $ 12,422 $ 400,001 $ 369,866 $ 29,395 75,874 72.1% 9,761 (6,000) (19,435) (4,266) (25,656) 30,278 — 1,200 31,478 28,858 63,989 68.9% 25 (7,300) (16,789) (3,541) (24,600) 11,784 (39) 2,200 13,945 (537) 11,885 3.2% 9,736 1,300 (2,646) (725) (1,056) 18,494 39 (1,000) 17,533 (3,751) 115,306 284,695 71.2% 37,490 (6,000) (73,332) (16,341) (100,156) 126,356 (26) (1,200) 125,130 113,261 256,605 69.4% 23 (12,575) (66,576) (14,401) (98,611) 64,465 (2,936) 4,200 65,729 (125,737) (116,576) 30,135 (2,045) 28,090 1.8% 37,467 6,575 (6,756) (1,940) (1,545) 61,891 2,910 (5,400) 59,401 (9,161) Finance costs – distributions to Unitholders (32,987) (29,236) Finance income (costs) – change in fair value of financial instruments Increase (decrease) in net assets attributable to Unitholders Operating income attributable to Unitholders per Unit, Basic Operating income attributable to Unitholders per Unit, Diluted Basic weighted average Units outstanding (in 000’s) Diluted weighted average Units outstanding (in 000’s) $ $ $ (46) 3,068 (3,114) 312 56 256 (1,555) $ (12,223) $ 10,668 $ (295) $ (50,791) $ 50,496 0.21 $ 0.11 0.21 $ 0.11 $ $ 0.89 $ 0.50 0.89 $ 0.50 148,039 131,182 139,920 130,788 148,179 131,334 140,063 130,946 Distributions per Unit to Unitholders $ 0.22 $ 0.22 $ 0.89 $ 0.89 3 0 C R O M B I E R E I T MD&AMANAGEMENT’S DISCUSSION AND ANALYSIS (In thousands of CAD dollars, except per unit amounts) Operating Results For the three months ended December 31, 2016, Operating income before taxes of $30,278 increased by $18,494 or 156.9% compared to the three months ended December 31, 2015. The increase was primarily due to: • an increase in property revenue of $12,422 or 13.4% which is impacted by: — improved leasing activity including increased average rental rates on lease renewals and new leases; — acquisition activity since the third quarter of 2015. Acquisitions include approximately $60,825 in the fourth quarter of 2015; $5,500 in the first quarter of 2016; $492,708 in the second quarter of 2016; $26,400 in the third quarter of 2016; and $34,000 in the fourth quarter of 2016; — invested $58,823 on June 29, 2016 in the renovation and expansion of 10 existing Sobeys anchored properties which generated $549 in total property revenue; and, — an increase in lease termination income of $4,133 over the fourth quarter of 2015, primarily related to $3,000 from Best Buy/Future Shop for one retail location and additional settlement amounts of $828 related to two vacated Target Canada leases. offset in part by: These improvements were partly offset by: • an increase in depreciation and amortization of $2,646 or 15.8% related to the net acquisition activity as noted above; and, • an increase in finance costs – operations of $1,056 or 4.3% primarily due to acquisition activity since the third quarter of 2015, offset in part by finance costs savings from proceeds on property dispositions during 2016 and lower rate debt on new and renewal mortgages. For the year ended December 31, 2016, Operating income before taxes of $126,356 increased by $61,891 or 96.0% compared to the year ended December 31, 2015. In addition to the above variance explanations for the three month period, the year was impacted by: • higher lease termination income of $14,584 compared to $4,175 for the same period in 2015. During 2016, Crombie recorded receipt from Target Canada of $11,172 in lease termination settlement payments on three leases vacated in May 2015 as well as $3,000 from Best Buy/Future Shop related to one retail location. During 2015, Crombie received termination income of $3,995 primarily related to two vacated long-term leases; • the disposition of 19 retail properties in the year ended December 31, 2016, resulting in a gain on disposal of $37,490; and, — reduced property revenue resulting from the disposition • a decrease in impairment costs of $6,575. During 2016, of 10 retail properties in the first quarter of 2016, two retail properties in the second quarter of 2016, an additional two retail properties in the third quarter of 2016, and five properties in the fourth quarter of 2016. • the disposition of five retail properties during the fourth quarter, resulting in a gain on disposal of $9,761. • the recognition in the fourth quarter of 2015 of $7,300 of impairment related to one office property. Crombie recorded impairment on two retail properties; in 2015, impairment was recorded on three retail properties and one office property. Pursuant to CSA Staff Notice 52-306 “(Revised) Non-GAAP Financial Measures”, non-GAAP measures should be reconciled to the most directly comparable GAAP measure, which, in the case of Operating income attributable to Unitholders, is Increase (decrease) in net assets attributable to Unitholders from the Statement of Comprehensive Income (Loss). The reconciliation is as follows: Three months ended December 31, Year ended December 31, (In thousands of CAD dollars) 2016 2015 2016 2015 Operating income attributable to Unitholders Finance costs – distributions to Unitholders Finance income (costs) – change in fair value of financial instruments $ 31,478 $ 13,945 $ 125,130 $ 65,729 (32,987) (46) (29,236) 3,068 (125,737) (116,576) 312 56 Increase (decrease) in net assets attributable to Unitholders $ (1,555) $ (12,223) $ (295) $ (50,791) Classification of Crombie REIT Units and Class B LP Units with attached Special Voting Units (collectively the “Units”) Crombie has determined that in accordance with IAS 32 Financial Instruments: Presentation, Crombie’s Units are to be classified as financial liabilities on the Consolidated Balance Sheet. Each of the REIT Units and Class B LP Units are puttable by the respective holder and meet the definition of financial liabilities under IFRS. As a result of the Units being classified as financial liabilities on the Consolidated Balance Sheet, distributions on the Units are recognized as a finance charge on the Consolidated Statements of Comprehensive Income (Loss). Had either, or both, of the Units been classified as equity instruments, the related distributions would be recognized as a reduction to equity rather than a charge against income. A N N U A L R E P O R T 2 0 1 6 3 1 MD&A P R O P E R T Y N O I Same-asset properties are properties owned and operated by Crombie throughout the current and comparative reporting periods, excluding any property that is classified as held for sale or that was designated for redevelopment during either the current or comparative period. Property NOI on a cash basis is as follows: (In thousands of CAD dollars) 2016 2015 Variance 2016 2015 Variance Three months ended December 31, Year ended December 31, Property NOI $ 75,874 $ 63,989 $ 11,885 $ 284,695 $ 256,605 $ 28,090 (3,840) (2,801) (1,039) (12,876) (11,142) (1,734) Non-cash straight-line rent Non-cash tenant incentive amortization Property cash NOI Acquisitions, dispositions and development property cash NOI Same-asset property cash NOI $ 61,785 $ 56,582 $ 3,328 75,362 13,577 2,512 63,700 7,118 816 11,662 6,459 5,203 11,622 283,441 9,712 255,175 48,731 29,858 $ 234,710 $ 225,317 $ 1,910 28,266 18,873 9,393 Property NOI, on a cash basis, excludes non-cash straight-line rent recognition and amortization of tenant incentive amounts. The $5,203 or 9.2% increase in same-asset cash NOI for the three months ended December 31, 2016 over the same period in 2015 is primarily the result of: higher lease termination income; increased average rent per square foot from leasing activity; rental rate increases in existing leases; improved recovery rates; revenues from land use intensifications at several properties; and, the $58,823 investment in 10 Sobeys anchored properties which generated $1,029 in same-asset property cash NOI. Acquisitions, dispositions and development property cash NOI increased $6,459 for the three months ended December 31, 2016 over the same period in 2015 primarily due to acquisitions in the fourth quarter of 2015 and in 2016, offset in part by the disposition of 19 retail properties during 2016. Same-asset property cash NOI is as follows: The $9,393 or 4.2% increase in same-asset cash NOI for the year ended December 31, 2016 over the same period in 2015 was impacted by the same factors noted above for the three month period. Included in same-asset property cash NOI for the three months and year ended December 31, 2016 is $3,000 in lease termination income from Best Buy/Future Shop related to a vacated lease. Excluding this $3,000 amount, same-asset property cash NOI increased $2,203 or 3.9% and $6,393 or 2.8% for the three months and year ended December 31, 2016, respectively, compared to the same period in 2015. Management emphasizes property NOI on a cash basis as it reflects the cash generated by the properties period-over-period. (In thousands of CAD dollars) 2016 2015 Variance Percent 2016 2015 Variance Percent Three months ended December 31, Year ended December 31, Retail and Mixed Use $ 59,064 $ 53,848 $ 5,216 9.7% $ 223,633 $ 214,579 $ 9,054 Office Same-asset property cash NOI 2,721 2,734 (13) (0.5)% 11,077 10,738 339 $ 61,785 $ 56,582 $ 5,203 9.2% $ 234,710 $ 225,317 $ 9,393 4.2% 3.2% 4.2% Variances in same-asset property cash NOI for the three months ended December 31, 2016 compared to the same period in 2015 include: • Retail and Mixed Use increased $5,216 or 9.7% due to increased base rent and related recoveries driven by new and renewal lease activity as well as continued land use intensification, $1,029 additional same-asset property cash NOI from the $58,823 investment in Sobeys anchored properties on June 29, 2016 and $3,000 in lease termination income. • Office decreased $13 or 0.5% as a result of changes in occupancy. Same-asset property cash NOI for the year ended December 31, 2016 compared to the same period in 2015 was impacted by these same factors, offset by lease termination income received in the second quarter of 2015 and the related lost NOI from the resulting transitional vacancy. 3 2 C R O M B I E R E I T MD&AMANAGEMENT’S DISCUSSION AND ANALYSIS (In thousands of CAD dollars, except per unit amounts) Acquisitions, dispositions and development property cash NOI is as follows: (In thousands of CAD dollars) 2016 2015 Variance 2016 2015 Variance Three months ended December 31, Year ended December 31, Acquisitions and dispositions property cash NOI Development property cash NOI Total acquisitions, dispositions and development property cash NOI $ $ 9,907 3,670 $ $ 4,655 2,463 $ 5,252 1,207 27,214 21,517 $ 19,011 $ 10,847 8,203 10,670 13,577 $ 7,118 $ 6,459 $ 48,731 $ 29,858 $ 18,873 For the three months ended December 31, 2016, acquisitions and dispositions property cash NOI increased $5,252 compared to the three months ended December 31, 2015. The increase was the result of property acquisitions during 2015 and 2016, offset in part by the disposition of 19 retail properties during 2016, including 10 during the first quarter. For the year ended December 31, 2016, acquisitions and dispositions property cash NOI increased $8,203 compared to the year ended December 31, 2015 as a result of the same acquisition and disposition activity. Change in cash NOI from development properties period- over-period is impacted by the timing of commencement and completion of each development project. The nature and extent of development projects results in operations being impacted minimally in some instances and a significant disruption in others. Consequently, comparison of period-over-period development operating results may not be meaningful. During the second and fourth quarters of 2016, Crombie recorded receipt of lease termination income from Target Canada on three leases vacated in May 2015. Crombie undertakes development of properties to position them for long-term sustainability and growth in cash NOI resulting in improvement in value. Property NOI for the three months and year ended December 31, 2016 by province was as follows: (In thousands of CAD dollars) Property NOI Property NOI Variance Property NOI Property NOI Variance Three months ended December 31, Year ended December 31, 2016 2015 2016 2015 AB BC MB NB NL NS ON PE QC SK Total $ 15,880 $ 13,244 $ 9,009 3,377 3,637 7,303 14,631 14,314 482 5,544 1,697 6,449 3,310 2,822 7,070 13,397 11,154 347 4,370 1,826 2,636 2,560 67 815 233 1,234 3,160 135 1,174 (129) $ 59,076 $ 51,005 $ 30,973 13,493 14,467 28,639 58,045 51,923 1,835 19,261 6,983 25,609 12,988 12,295 27,933 52,941 47,589 1,001 17,946 7,298 8,071 5,364 505 2,172 706 5,104 4,334 834 1,315 (315) $ 75,874 $ 63,989 $ 11,885 $ 284,695 $ 256,605 $ 28,090 The significant variances in property NOI for the three months and year ended December 31, 2016 compared to the same periods in 2015 primarily relate to: • • • Alberta – property acquisitions including 10 properties acquired during 2016, one in the first quarter and nine in the second quarter; three properties during 2015, two in the fourth quarter and one in the third quarter; and, acquisition of additional development on an existing property during 2015; British Columbia – property acquisitions including nine properties during 2016, eight in the second quarter and one in the third quarter, and one property during the fourth quarter of 2015, offset in part by the disposition of one retail property in the third quarter of 2016; New Brunswick – lease termination income from Target Canada for one property in the second and fourth quarters of 2016 as well as the acquisition of additional development on existing properties including one each during the first and fourth quarters of 2016 and additional development on three existing properties during 2015, offset in part by the disposition of one retail property in the second quarter of 2016; • • • • Nova Scotia – property acquisitions including one retail property in the second quarter of 2016; acquisition of additional development on existing retail properties in the fourth quarter of 2015; and, lease termination income from Target Canada for one property in the second and fourth quarters of 2016, offset in part by the disposition of three retail properties in the fourth quarter of 2016; Ontario – property acquisitions including six properties during the first six months of 2016 and two properties in the fourth quarter of 2016 as well as lease termination income from Target Canada for one property in the second quarter of 2016 and lease termination income from Best Buy/Future Shop in the fourth quarter of 2016, offset in part by the disposition of 12 properties in 2016, nine in the first quarter, one in the second quarter, one in the third quarter, and one in the fourth quarter; Prince Edward Island – acquisition of a retail property in the fourth quarter of 2015, offset in part by the disposition of a retail property in the fourth quarter of 2016; and, Quebec – acquisition of 12 properties in the first six months of 2016, offset in part by the disposition of one property in the first quarter of 2016. A N N U A L R E P O R T 2 0 1 6 3 3 MD&A F F O A N D A F F O FFO and AFFO are not measures recognized under IFRS and do not have standardized meanings prescribed by IFRS. As such, these non-GAAP financial measures should not be considered as an alternative to cash provided by operating activities or any other measure prescribed under IFRS. FFO represents a supplemental non-GAAP industry-wide financial measure of a real estate organization’s operating performance. AFFO is presented in this MD&A because management believes this non-GAAP measure is relevant to the ability of Crombie to earn and distribute returns to Unitholders. FFO and AFFO as computed by Crombie may differ from similar computations as reported by other REITs and, accordingly, may not be comparable to other such issuers. F U N D S F R O M O P E R AT I O N S ( F F O ) Crombie follows the recommendations of the Real Property Association of Canada (“REALpac”) in calculating FFO and defines FFO as increase (decrease) in net assets attributable to Unitholders (computed in accordance with IFRS), adjusted for the following applicable amounts: • • • • • Gain or loss on disposal of investment properties and related income tax; Impairment charges and recoveries; Depreciation and amortization expense, including amortization of tenant incentives charged against property revenue; Deferred taxes; Finance costs – distributions on Crombie’s REIT and Class B LP Units classified as financial liabilities; and, • Change in fair value of financial instruments. REALpac provides for other adjustments in determining FFO which are currently not applicable to Crombie, therefore not included in the above list. Crombie’s expenditures on tenant incentives are capital in nature. Crombie considers these costs comparable to other capital costs incurred to earn property revenue. Whereas the depreciation and amortization of other capital costs is added back in the calculation of FFO as recommended by REALpac, Crombie also adds back the amortization of tenant incentives. Crombie’s method of calculating FFO may differ from other issuers’ methods and accordingly may not be directly comparable to FFO reported by other issuers. The calculation of FFO for the three months and year ended December 31, 2016 and 2015 is as follows: (In thousands of CAD dollars) 2016 2015 Variance 2016 2015 Variance Three months ended December 31, Year ended December 31, Increase (decrease) in net assets attributable to Unitholders Add (deduct): $ (1,555) $ (12,223) $ 10,668 $ (295) $ (50,791) $ 50,496 Amortization of tenant incentives 3,328 2,512 816 11,622 9,712 1,910 Loss (gain) on disposal of investment properties Impairment of investment properties Depreciation of investment properties Amortization of intangible assets Amortization of deferred leasing costs Taxes – current on disposition of investment properties Taxes – deferred Finance costs – distributions to Unitholders Finance costs (income) – change in fair value of financial instruments FFO as calculated based on REALpac recommendations Adjustments: Net lease termination income from Target Canada and Best Buy/Future Shop Subscription Receipts Adjustment Payment Lease termination income, non-cash FFO, as adjusted Lease termination, cash, included in FFO, as adjusted (9,761) 6,000 17,483 1, 7 91 161 — (1,200) (25) 7,300 15,456 1,180 153 (10) (2,200) (9,736) (1,300) 2,027 611 8 10 1,000 (37,490) 6,000 66,552 6,170 610 — 1,200 (23) 12,575 60,498 5,480 598 2,066 (4,200) (37,467) (6,575) 6,054 690 12 (2,066) 5,400 32,987 29,236 3,751 125,737 116,576 9,161 46 (3,068) 3,114 (312) (56) (256) 49,280 38,311 10,969 179,794 152,435 27,359 (3,828) — — — — — $ $ 45,452 313 $ $ 38,311 8 $ $ (3,828) (14,172) — — 7,141 305 613 — $ $ 166,235 412 $ $ — — (2,961) 149,474 1,214 $ $ (14,172) 613 2,961 16,761 (802) 3 4 C R O M B I E R E I T MD&AMANAGEMENT’S DISCUSSION AND ANALYSIS (In thousands of CAD dollars, except per unit amounts) For the year ended December 31, 2016 and December 31, 2015, Crombie is providing FFO on an adjusted basis by reducing it by $13,559 and $2,961, respectively. The following adjustments are being made: • • • During the year ended December 31, 2016, Crombie recorded net lease termination income from Target Canada of $11,172 related to three Target Canada leases vacated in May, 2015 and $3,000 from Best Buy/Future Shop related to one vacated lease. Due to their significant size, these amounts are being deducted from FFO for the year ended December 31, 2016. During the year ended December 31, 2016, Crombie issued Subscription Receipts related to a potential property acquisition. While the funds from the Subscription Receipts were held in trust, the Receipt holders were entitled to earn an adjustment payment equivalent to what they would have earned had they owned REIT Units during that same period. On June 29, 2016, the Subscription Receipts were converted to REIT Units and Crombie incurred a finance cost of $613 related to the adjustment payment, which is net of any interest earned on the funds while held in trust. This amount is being added back to FFO for the year ended December 31, 2016. During the year ended December 31, 2015, Crombie recognized $2,961 in lease termination income related to a Sobeys store closure. In relation to the closure, Crombie received development activity rights on specific other properties in exchange for a future development right fee which will reduce the actual cash Crombie will receive from the lease termination income. This non-cash lease termination income is being deducted from FFO for the year ended December 31, 2015. Management believes that FFO, as adjusted, is more reflective of Crombie’s ongoing operating results by removing these amounts from FFO as calculated by following REALpac recommendations. All FFO, and by extension AFFO, measures within the MD&A are based on these adjusted amounts. For the three months ended December 31, 2016, FFO, as adjusted, increased by $7,141 or 18.6% compared to the three months ended December 31, 2015. The increase primarily relates to acquisition activity in the previous 12 months, including the acquisition of 22 properties on June 29, 2016, as well as improved operating results from leasing activity, partially offset by the disposition of 19 retail properties during 2016. For the year ended December 31, 2016, FFO, as adjusted, increased by $16,761 or 11.2% compared to the year ended December 31, 2015. The increase is impacted by the improved operating results during the fourth quarter of 2016 as discussed above. A DJ U S T E D F U N D S F R O M O P E R AT I O N S ( A F F O ) Crombie considers AFFO to be a useful measure in evaluating the recurring economic performance of its operating activities which will be used to support future distribution payments. AFFO reflects cash available for distributions after the provision for non-cash adjustments to revenue, amortization of effective swap agreements, maintenance capital expenditures, maintenance tenant incentives (“TI”) and leasing costs and any settlement of effective interest rate swap agreements. M A I N T E N A N C E C A P I TA L E X P E N D I T U R E S , M A I N T E N A N C E T E N A N T I N C E N T I V E S A N D L E A S I N G CO S T S ( “ M A I N T E N A N C E E X P E N D I T U R E S ”) Crombie’s policy is to charge AFFO with a normalized rate per square foot for these maintenance expenditures. Crombie uses an annual rate per square foot as a charge against AFFO. On June 29, 2016, Crombie acquired a portfolio of properties which have quad net lease terms making the tenant primarily responsible for maintenance expenses on the property. As a result of the 2,090,000 square foot increase in Crombie’s GLA from this acquisition, with minimal additional maintenance expenditures, the per square foot charge has been decreased from $0.87 to $0.78 per square foot effective for the third quarter of 2016. The per square foot rate is a proxy for actual historic costs, anticipated future costs and any significant changes in the nature and age of the properties in the portfolio as it evolves over time. Crombie continues to track and report actual expenditures and the productive capacity enhancement of those expenditures for comparative purposes. The rate will be reviewed periodically and adjusted if required. This per square foot charge removes volatility in reported AFFO results from quarter to quarter as costs are not generally incurred on a consistent basis during the year, or from year to year. The calculation of AFFO for the three months and year ended December 31, 2016 and 2015 is as follows: (In thousands of CAD dollars) 2016 2015 Variance 2016 2015 Variance Three months ended December 31, Year ended December 31, FFO, as adjusted Add (deduct): Amortization of effective swap agreements Straight-line rent adjustment Maintenance expenditures on a square footage basis $ 45,452 $ 38,311 $ 7,141 $ 166,235 $ 149,474 $ 16,761 603 (3,840) 623 (2,801) (20) (1,039) 2,440 (12,876) 2,520 (11,142) (3,763) (3,823) 60 (15,060) (15,198) (80) (1,734) 138 AFFO $ 38,452 $ 32,310 $ 6,142 $ 140,739 $ 125,654 $ 15,085 For the three months ended December 31, 2016, AFFO increased by $6,142 or 19.0% compared to the three months ended December 31, 2015. The increase relates to the $7,141 increase in FFO as previously discussed less the impact of straight-line rent increases in 2016 compared to 2015. For the year ended December 31, 2016, AFFO increased by $15,085 or 12.0% compared to the year ended December 31, 2015. The increase relates to the $16,761 increase in FFO as previously discussed less the impact of straight-line rent increases in 2016 compared to 2015. A N N U A L R E P O R T 2 0 1 6 3 5 MD&A Pursuant to CSA Staff Notice 52-306 “(Revised) Non-GAAP Financial Measures”, non-GAAP measures such as AFFO should be reconciled to the most directly comparable IFRS measure, which is interpreted to be the cash flow from operating activities. The reconciliation is as follows: (In thousands of CAD dollars) 2016 2015 Variance 2016 2015 Variance Three months ended December 31, Year ended December 31, Cash provided by (used in) operating activities Add back (deduct): Finance costs – distributions to Unitholders Change in other non-cash operating items Unit-based compensation expense Amortization of deferred financing charges Amortization of issue premium on senior unsecured notes Non-cash distributions to Unitholders in the form of DRIP Units Maintenance expenditures on a square footage basis Change in current income taxes Income taxes – current on disposition of investment properties Lease termination income, non-cash Adjustments for lease termination income $ 16,239 $ 17,858 $ (1,619) $ 66,920 $ 41,114 $ 25,806 32,987 29,236 3,751 125,737 116,576 3,799 (10) (877) 14 (5,125) (14) (729) 13 8,924 4 1,686 (42) (1,481) (51) (148) (3,310) (3,616) 1 54 54 9,161 3,167 9 306 — (6,109) (5,141) (968) (21,661) (11,504) (10,157) (3,763) — — — (3,823) 45 (10) — — 60 (45) 10 — (15,060) (26) (15,198) 655 138 (681) — — 2,066 (2,066) (2,961) 2,961 and Subscription Receipts (3,828) (3,828) (13,559) — AFFO $ 38,452 $ 32,310 $ 6,142 $ 140,739 $ 125,654 $ (13,559) 15,085 M A I N T E N A N C E E X P E N D I T U R E S There are two types of TI and capital expenditures: • • maintenance TI and leasing costs and maintenance capital expenditures that maintain existing productive capacity; and, productive capacity enhancement expenditures. Maintenance TI and leasing costs and maintenance capital expenditures are reinvestments in the portfolio to maintain the productive capacity of the existing assets. These costs are capitalized and depreciated or charged against revenue over their useful lives and deducted when calculating AFFO. (In thousands of CAD dollars) Total additions to investment properties Less: productive capacity enhancements and recoverable amounts Maintenance capital expenditures Productive capacity enhancements are costs incurred that increase the property NOI, or expand the GLA of a property by a minimum threshold, or otherwise enhance the property’s overall value. Productive capacity enhancement expenditures are capitalized and depreciated or charged against revenue over their useful lives, but not deducted when calculating AFFO. Obligations for expenditures for TIs occur when renewing existing tenant leases or for new tenants occupying a space. Typically, leasing costs for existing tenants are lower on a per square foot basis than for new tenants. However, new tenants may provide more overall cash flow to Crombie through higher rents or improved traffic to a property. The timing of such expenditures fluctuates depending on the satisfaction of contractual terms contained in the leases. Three months ended December 31, Year ended December 31, 2016 2015 2016 $ $ 10,821 $ 9,144 $ 29,928 $ (7,124) (5,031) (21,444) 3,697 $ 4,113 $ 8,484 $ 2015 25,684 (17,064) 8,620 Three months ended December 31, Year ended December 31, (In thousands of CAD dollars) 2016 2015 2016 Total additions to TI and deferred leasing costs Less: productive capacity enhancements Maintenance TI and deferred leasing costs $ $ 5,273 $ 5,197 $ 75,119 $ (4,225) (594) (68,722) 1,048 $ 4,603 $ 6,397 $ 2015 13,464 (2,657) 10,807 3 6 C R O M B I E R E I T MD&AMANAGEMENT’S DISCUSSION AND ANALYSIS (In thousands of CAD dollars, except per unit amounts) As maintenance TI and capital expenditures are not incurred or paid for evenly throughout the fiscal year, there can be comparative volatility from period-to-period. Maintenance capital expenditures for the year ended December 31, 2016, are primarily payments for costs associated with building interior and exterior maintenance, roof repairs and ongoing parking deck and structural maintenance. Maintenance TI and deferred leasing costs are the result of both lease renewals and new leases and are reflective of the leasing activity during 2015 and 2016. D E P R E C I AT I O N , A M O R T I Z AT I O N A N D I M PA I R M E N T Productive capacity enhancements during the year ended December 31, 2016 consisted primarily of development work and GLA expansions at: Hamlyn Road Plaza, St. John’s, NL; Scotia Square Mall, Halifax, NS; Sydney Shopping Centre, Sydney, NS; Rockhaven Centre, Peterborough, ON; Fort St. John, BC; and, Vaughan Harvey Plaza, Moncton, NB. During the year ended December 31, 2016, Crombie invested $58,823 in TIs for the renovation and expansion of 10 existing Sobeys anchored properties. (In thousands of CAD dollars) 2016 2015 Variance 2016 2015 Variance Three months ended December 31, Year ended December 31, $ 14,459 $ 14,949 $ 490 $ 58,410 $ 59,091 $ 681 Same-asset depreciation and amortization Acquisitions, dispositions and development depreciation/amortization Depreciation and amortization $ 19,435 $ 16,789 $ (2,646) $ 4,976 1,840 (3,136) 14,922 73,332 7,485 $ 66,576 $ (7,437) (6,756) Same-asset depreciation and amortization decreased by $490 for the three months ended December 31, 2016 and decreased by $681 for the year ended December 31, 2016 compared to the same periods in 2015. Same-asset depreciation and amortization will decrease over time as certain components of investment property are amortized over the term of tenant leases and will increase as a result of capital additions and improvements to same-asset investment properties. During the first quarter of 2015, Crombie determined that an investment property previously classified as held for sale no longer met the criteria and the property was reclassified to same-asset and held for use. As a result, depreciation and amortization totalling $673 was recognized in the first quarter of 2015, representing the depreciation and amortization that was not recorded while the property was classified as held for sale. Acquisitions, dispositions and development depreciation and amortization increased as a result of net acquisition activity during 2016 and 2015, including the acquisition of 41 properties during 2016 and the disposition of 10 properties in March 2016, two properties in April 2016, an additional property in each of July and August 2016, and five in December 2016. Crombie’s total fair value of investment properties, including properties held for sale, exceeds carrying value by $844,033 at December 31, 2016 (December 31, 2015 – $708,949). Crombie uses the cost method for accounting for investment properties, and increases in fair value over carrying value are not recognized until realized through disposition or derecognition of properties, while impairment, if any, is recognized on a property by property basis when circumstances indicate that fair value is less than carrying value. During the year ended December 31, 2016, Crombie recorded an impairment of $6,000 on two retail properties and during the year ended December 31, 2015, recorded an impairment of $12,575 on three retail properties and an office property. The impairments were the result of the impact on fair value of tenant departures during the year, lower occupancy rates, and slower than expected leasing activity. Impairment was measured on a per property basis and was determined as the amount by which carrying value, using the cost method, exceeded the recoverable amount for that property. The recoverable amount was determined to be each property’s fair value, which is the higher of the economic benefits of the continued use of the asset or the selling price less costs to sell. G E N E R A L A N D A D M I N I S T R AT I V E E X P E N S E S The following table outlines the major categories of general and administrative expenses: (In thousands of CAD dollars) 2016 2015 Variance 2016 2015 Variance Three months ended December 31, Year ended December 31, $ 2,476 $ 1,956 $ (520) $ 10,120 $ 8,202 $ (1,918) Salaries and benefits Professional fees Public company costs Rent and occupancy Other 186 617 205 782 General and administrative expenses $ 4,266 $ As a percentage of property revenue 4.1% 329 353 181 722 3,541 3.8% 143 (264) (24) (60) 1,253 1,892 838 2,238 1,386 1,695 917 2,201 $ (725) $ 16,341 $ 14,401 $ (0.3)% 4.1% 3.9% 133 (197) 79 (37) (1,940) (0.2)% A N N U A L R E P O R T 2 0 1 6 3 7 MD&A For the three months ended December 31, 2016, general and administrative expenses, as a percentage of property revenue, were 4.1%, an increase of 0.3% from the same period in 2015, with expenses increasing $725 or 20.5% and property revenue increasing 13.4%. For the year ended December 31, 2016, general and administrative expenses, as a percentage of property revenue, increased 0.2% compared to the year ended December 31, 2015, with expenses increasing $1,940 or 13.5% and property revenue increasing by 8.1%. The increase is impacted by the implementation of Crombie’s Restricted Unit Plan in 2015 which recognizes a portion of long-term compensation over a vesting period and the valuation of the Restricted Unit Plan is impacted by mark to market adjustments to the Units which impacts salaries and benefits. F I N A N C E CO S T S – O P E R AT I O N S (In thousands of CAD dollars) 2016 2015 Variance 2016 2015 Variance Three months ended December 31, Year ended December 31, Same-asset finance costs $ 20,607 $ 20,917 $ 310 $ 81,444 $ 84,270 $ 2,826 Acquisitions, dispositions and development finance costs Subscription Receipts Adjustment Payment Amortization of effective swaps and deferred financing charges 3,569 — 1,480 2,331 — 1,352 (1,238) 12,349 8,205 (4,144) — 613 (128) 5,750 — 6,136 (613) 386 (1,545) Finance costs – operations $ 25,656 $ 24,600 $ (1,056) $ 100,156 $ 98,611 $ Same-asset finance costs for the three months and year ended December 31, 2016 decreased by $310 and $2,826, respectively, compared to the same periods in 2015. The decreases are primarily due to lower interest rates on new and refinanced debt, regular repayment of existing mortgages and lump sum repayments of mortgages from proceeds received on dispositions. The decrease in same-asset finance costs is partially offset by finance costs associated with the $58,823 invested in the renovation and expansion of 10 existing Sobeys anchored properties on June 29, 2016. Acquisitions, dispositions and development finance costs for the three months and year ended December 31, 2016 increased by $1,238 and $4,144, respectively, compared to the same periods in 2015 primarily due to acquisition activity during the fourth quarter of 2015 and during 2016, offset in part by finance costs on properties disposed in 2016. Details of distributions to Unitholders are as follows: During the year ended December 31, 2016, Crombie issued Subscription Receipts related to a property acquisition. While the funds from the Subscription Receipts were held in trust, the Receipt holders were entitled to earn an adjustment payment equivalent to what they would have earned had they owned REIT Units during that same period. On June 29, 2016, the Subscription Receipts were converted to REIT Units and Crombie incurred a finance cost of $613, which is net of interest earned on the funds while they were held in trust. F I N A N C E CO S T S – D I S T R I B U T I O N S Pursuant to Crombie’s Declaration of Trust, cash distributions are to be determined by the Trustees at their discretion. Crombie intends, subject to approval of the Board of Trustees, to make distributions to Unitholders of not less than the amount equal to the net income and net realized capital gains of Crombie, to ensure that Crombie will not be liable for income taxes. Three months ended December 31, Year ended December 31, (In thousands of CAD dollars, except as otherwise noted) 2016 2015 2016 Distributions to Unitholders Distributions to Special Voting Unitholders Total distributions FFO payout ratio AFFO payout ratio $ $ 19,502 $ 17,308 $ 74,375 $ 13,485 11,928 51,362 32,987 $ 29,236 $ 125,737 $ 116,576 72.6% 85.8% 76.3% 90.5% 75.6% 89.3% 78.0% 92.8% 2015 69,016 47,560 On June 29, 2016, Crombie issued a total of 15,306,141 REIT and Class B LP Units related to a portfolio acquisition on that date. This resulted in distributions of $1,135 for June 2016, while the property acquisitions generated minimal income for Crombie for June 2016. Excluding the distributions in June 2016 on these new Units, our FFO and AFFO payout ratios for the year ended December 31, 2016 would have been 75.0% and 88.5%, respectively. I N CO M E TA X E S A trust that satisfies the criteria of a REIT throughout its taxation year will not be subject to income tax in respect of distributions to its unitholders that would otherwise apply to trusts classified as specified investment flow-through entities (“SIFTs”). Crombie has organized its assets and operations to satisfy the criteria contained in the Income Tax Act (Canada) in regard to the definition of a REIT. Crombie’s management and its advisors have completed an extensive review of Crombie’s organizational structure and operations to support Crombie’s assertion that it met the REIT criteria throughout 2016 and continues to do so. The relevant tests apply throughout the taxation year of Crombie and as such the actual status of Crombie for any particular taxation year can only be ascertained at the end of the year. The deferred tax liability of $75,400 represents the future tax provision relating to the difference in tax and book values offset by non-capital losses for Crombie’s wholly-owned corporate subsidiaries which are subject to corporate income taxes. 3 8 C R O M B I E R E I T MD&AMANAGEMENT’S DISCUSSION AND ANALYSIS (In thousands of CAD dollars, except per unit amounts) TA X AT I O N O F D I S T R I B U T I O N S Crombie, through its subsidiaries, has a large asset base that is depreciable for Canadian income tax purposes. Consequently, certain of the distributions from Crombie are treated as returns of capital and are not taxable to Canadian resident Unitholders for Canadian income tax purposes. The composition for tax purposes of distributions from Crombie may change from year to year, thus affecting the after-tax return to Unitholders. The following table summarizes the last five years of the taxation of distributions from Crombie: Taxation Year 2015 per $ of distribution 2014 per $ of distribution 2013 per $ of distribution 2012 per $ of distribution 2011 per $ of distribution Return of Capital Investment Income Dividend Income 56.3% 64.4% 90.2% 67.1% 62.5% 28.8% 18.1% 9.8% 32.9% 37.5% 13.4% 0.0% 0.0% 0.0% 0.0% Capital Gains 1.5% 17.5% 0.0% 0.0% 0.0% LIQUIDITY AND CAPITAL RESOURCES The real estate industry is highly capital intensive. Cash flow generated from operating the property portfolio represents the primary source of liquidity used to fund the finance costs on debt, general and administrative expenses, reinvestment in the portfolio through capital expenditures, as well as funding TI costs and distributions to Unitholders. (i) secured short-term financing through an authorized three year revolving credit facility, maturing June 30, 2019, of up to $400,000, subject to available borrowing base, of which $120,374 ($125,401 including outstanding letters of credit) was drawn at December 31, 2016; (ii) unsecured short-term financing through an authorized floating rate revolving credit facility, maturing May 16, 2018, of up to $100,000, of which $100,000 was drawn at December 31, 2016; Crombie expects to refinance debt obligations as they mature. (iii) secured mortgage and term debt on unencumbered assets; Crombie has the following sources of financing available to fund future growth: (iv) the issuance of additional senior unsecured notes; (v) the issuance of additional unsecured convertible debentures; and, (vi) the issuance of new units. Capital Structure (In thousands of CAD dollars) December 31, 2016 December 31, 2015 December 31, 2014 Investment property debt $ 1,865,477 49.3% $ 1,641,203 49.5% $ 1,624,547 Senior unsecured notes Convertible debentures Crombie REIT Unitholders Special Voting Units and Class B Limited Partnership Unitholders 398,588 132,134 834,203 10.5% 3.5% 22.0% 398,080 131,518 694,484 12.0% 4.0% 20.9% 273,592 175,215 716,025 555,943 14.7% 452,746 13.6% 467,289 $ 3,786,345 100.0% $ 3,318,031 100.0% $ 3,256,668 49.9% 8.4% 5.4% 22.0% 14.3% 100.0% L I Q U I D I T Y A N D F I N A N C I N G S O U R C E S Revolving credit facility Crombie has in place an authorized floating rate revolving credit facility of up to $400,000 (the “revolving credit facility”), of which $120,374 ($125,401 including outstanding letters of credit) was drawn as at December 31, 2016. The revolving credit facility is secured by a pool of first and second mortgages on certain properties. The floating interest rate is based on bankers’ acceptance rates plus a spread or specified margin over prime rate. The spread or specified margin changes depending on Crombie’s unsecured bond rating with DBRS and whether the facility remains secured or migrates to an unsecured status. Funds available for drawdown pursuant to the revolving credit facility are determined with reference to the value of the Borrowing Base (as defined under “Borrowing Capacity and Debt Covenants”) relative to certain financial covenants of Crombie. As at December 31, 2016, Crombie had sufficient Borrowing Base to permit $398,007 of funds to be drawn pursuant to the revolving credit facility, subject to certain other financial covenants. See “Borrowing Capacity and Debt Covenants”. Unsecured Bilateral Credit Facility The unsecured bilateral credit facility has a maximum principal amount of $100,000, the full amount of which was drawn as at December 31, 2016, and matures May 16, 2018. The facility is used by Crombie for working capital purposes and to provide temporary financing for acquisitions and development activity. The floating interest rate is based on bankers’ acceptance rates plus a spread or specific margin over prime rate. The specified spread or margin changes depending on Crombie’s unsecured bond rating with DBRS. Mortgage debt As of December 31, 2016, Crombie had fixed rate mortgages outstanding of $1,652,091 ($1,655,817 after including the fair value debt adjustment of $3,726), carrying a weighted average interest rate of 4.46% (after giving effect to the interest rate subsidy from Empire under an Omnibus Subsidy Agreement) and a weighted average term to maturity of 5.90 years. A N N U A L R E P O R T 2 0 1 6 3 9 MD&A From time to time, Crombie has entered into interest rate swap agreements to manage the interest rate profile of its current or future debts without an exchange of the underlying principal amount (see “Risk Management”). Crombie currently has no such outstanding interest rate swap agreements. Principal repayments of the debt are scheduled as follows: Maturing Debt Balances (In thousands of CAD dollars) 12 Months Ending Fixed Rate Floating Rate Total % of Total Payments of Principal Total Required Payments December 31, 2017 December 31, 2018 December 31, 2019 December 31, 2020 December 31, 2021 Thereafter Total(1) $ 50,363 $ — $ 50,363 3.3% $ 49,290 $ 99,653 64,666 124,973 225,241 89,182 750,518 100,000 120,374 — — — 164,666 245,347 225,241 89,182 750,518 10.8% 16.1% 14.8% 5.8% 49.2% 48,357 48,799 42,028 40,204 118,470 213,023 294,146 267,269 129,386 868,988 $ 1,304,943 $ 220,374 $ 1,525,317 100.0% $ 347,148 $ 1,872,465 % of Total 5.3% 11.4% 15.7% 14.3% 6.9% 46.4% 100.0% (1) Excludes fair value debt adjustment of $3,726 and deferred financing charges of $10,714. Of the maturing debt balances, only 18.4% of fixed rate debt, and 30.2% of total maturing debt balances mature over the next three years. Senior unsecured notes Series A Series B Series C Unamortized Series B issue premium Deferred financing charges Maturity Date Effective Interest Rate December 31, 2016 December 31, 2015 October 31, 2018 3.986% $ 175,000 $ 175,000 June 1, 2021 February 10, 2020 3.900% 2.775% 100,000 125,000 240 (1,652) 100,000 125,000 294 (2,214) $ 398,588 $ 398,080 There are no required periodic principal payments, with the full face value of the Notes due on their respective maturity dates. Convertible debentures Series D (CRR.DB.D) Series E (CRR.DB.E) Deferred financing charges Conversion Price $ $ 20.10 17.15 Maturity Date Interest Rate December 31, 2016 December 31, 2015 September 30, 2019 5.00% $ 60,000 $ 60,000 March 31, 2021 5.25% 74,400 (2,266) 74,400 (2,882) $ 132,1 34 $ 1 3 1 , 5 1 8 Maximum REIT Units issuable at December 31, 2016 was 2,985,074 for Series D Debentures and 4,338,192 for Series E Debentures. The Series D Debentures (issued July 3, 2012) and the Series E Debentures (issued August 14, 2013) pay interest semi-annually on March 31 and September 30 of each year and Crombie has the option to pay interest on any interest payment date by issuing REIT Units and applying the proceeds to satisfy its interest obligation. For the first three years from the date of issue, there is no ability to redeem the convertible debentures, after which, each series of convertible debentures has a period, lasting two years, during which the convertible debentures may be redeemed, in whole or in part, on not more than 60 days’ and not less than 30 days’ prior notice, at a redemption price equal to the principal amount thereof plus accrued and unpaid interest, provided that the volume-weighted average trading price of the REIT Units on the TSX for the 20 consecutive trading days ending on the fifth trading day preceding the date on which notice of redemption is given exceeds 125% of the conversion price. After the end of the five year period from the date of issue, and to the maturity date, the convertible debentures may be redeemed, in whole or in part, at any time at the redemption price equal to the principal amount thereof plus accrued and unpaid interest. Provided that there is not a current event of default, Crombie will have the option to satisfy its obligation to pay the principal amount of the convertible debentures at maturity or upon redemption, in whole or in part, by issuing the number of REIT Units equal to the principal amount of the convertible debentures then outstanding divided by 95% of the volume-weighted average trading price of the REIT Units for a stipulated period prior to the date of redemption or maturity, as applicable. Upon change of control of Crombie, convertible debenture holders have the right to put the convertible debentures to Crombie at a price equal to 101% of the principal amount plus accrued and unpaid interest. 4 0 C R O M B I E R E I T MD&AMANAGEMENT’S DISCUSSION AND ANALYSIS (In thousands of CAD dollars, except per unit amounts) REIT Units and Class B LP Units and the attached Special Voting Units On May 31, 2016, Crombie closed a public offering, on a bought deal basis, of 8,952,400 Subscription Receipts, at a price of $14.70 per Subscription Receipt, for gross proceeds of $131,600. On June 29, 2016, in conjunction with the closing of property acquisitions from Empire, each of the 8,952,400 outstanding Subscription Receipts were automatically exchanged for one Crombie REIT Unit. On June 29, 2016, concurrently with the REIT Units issued on exchange for Subscription Receipts, subsidiaries of Empire received 6,353,741 Class B LP Units and the attached SVUs at a price of $14.70 per Class B LP Unit for gross consideration of $93,400. For the year ended December 31, 2016, Crombie issued 927,701 REIT Units and 657,901 Class B LP Units under its distribution reinvestment plan (the “DRIP”) at a three percent (3%) discount to market prices as determined under the DRIP. Total units outstanding at January 31, 2017, were as follows: Units Special Voting Units(1) 87,855,116 60,753,209 (1) Crombie Limited Partnership, a subsidiary of Crombie, has also issued 60,753,209 Class B LP Units. These Class B LP Units accompany the Special Voting Units, are the economic equivalent of a Unit, and are exchangeable for Units on a one-for- one basis. In addition to the total units outstanding at January 31, 2017, Crombie has convertible debentures which could result in a total of 7,323,266 REIT Units being issued should all outstanding debentures be converted. S O U R C E S A N D U S E S O F F U N D S (In thousands of CAD dollars) 2016 2015 Variance 2016 2015 Variance Three months ended December 31, Year ended December 31, Cash provided by (used in): Operating activities Financing activities Investing activities $ 16,239 $ 17,858 $ (1,619) $ 66,920 $ 4 1 , 1 1 4 $ (10,475) (5,764) 59,051 (75,852) (69,526) 70,088 395,384 (463,361) 75,664 (116,332) 25,806 319,720 (347,029) Net change during the period $ — $ 1,057 $ (1,057) $ (1,057) $ 446 $ (1,503) Operating Activities (In thousands of CAD dollars) 2016 2015 Variance 2016 2015 Variance Three months ended December 31, Year ended December 31, Cash provided by (used in): Net assets attributable to Unitholders and non-cash items Non-cash operating items Income taxes paid Cash provided by (used in) operating activities $ 20,038 $ 12,817 $ 7,221 $ 68,606 $ 43,224 $ 25,382 (3,799) — 5,125 (84) (8,924) 84 (1,686) — 1,481 (3,591) (3,167) 3,591 $ 16,239 $ 17,858 $ (1,619) $ 66,920 $ 41,114 $ 25,806 For the three months ended December 31, 2016, cash from operating activities decreased by $1,619 over the same period in 2015. Cash from operations increased $7,221 as a result of the improvement in operating income resulting from growth through acquisitions and stronger results from existing properties as well as an increase in lease termination income. The decrease of $8,924 in non-cash operating items primarily relates to an increase in prepaid expenses and deposits in the quarter. For the year ended December 31, 2016, cash from operating activities increased $25,806 over the same period in 2015. The increase primarily relates to the improved operating results as noted above as well as an increase of $11,157 in the DRIP participation rate over 2015. A N N U A L R E P O R T 2 0 1 6 4 1 MD&A Financing Activities (In thousands of CAD dollars) 2016 2015 Variance 2016 2015 Variance Three months ended December 31, Year ended December 31, Cash provided by (used in): Issuance of new mortgages $ 123,731 $ 113,650 $ 10,081 $ 193,401 $ 119,134 $ 74,267 Regular principal repayment of mortgages Lump sum principal repayment of mortgages Net issue (repayment) on credit facilities Deferred financing charges – investment property debt Net issue of senior unsecured notes Net issue (redemption) of convertible debentures Net issue of REIT Units and Class B LP Units Other items (net) Cash provided by (used in) financing activities (12,055) (12,404) 349 (49,864) (48,390) — (7,575) 7,575 (49,774) (58,162) (1,474) 8,388 (120,997) (33,663) (87,334) 90,374 (15,000) 105,374 (1,099) (880) (219) (2,967) (1,020) (1,947) — — — — — — (55) (77) — — — 22 — — 219,111 (4,897) 124,012 (124,012) (44,795) 44,795 — (115) 219,111 (4,782) $ (10,475) $ 59,051 $ (69,526) $ 395,384 $ 75,664 $ 319,720 Cash from financing activities for the three months ended December 31, 2016 decreased by $69,526 from the same period in 2015. During the three months ended December 31, 2016, Crombie issued $123,731 (three months ended December 31, 2015 – $113,650) in new mortgages with a weighted average interest rate of 3.72% and utilized the proceeds to reduce floating rate credit facilities. During the three months ended December 31, 2015, Crombie repaid $7,575 in maturing mortgages and utilized a portion of the new mortgage financing to fund property acquisitions in the quarter. Cash from financing activities for the year ended December 31, 2016 increased by $319,720 over the same period in 2015. During the year ended December 31, 2016, proceeds from the disposition of retail properties were used to reduce the revolving credit facility and repay maturing mortgages. In conjunction with the purchase of properties completed on June 29, 2016, Crombie issued 8,952,400 REIT Units and 6,353,741 Class B LP Units for net proceeds of $219,111 and increased floating rate debt during the period. During the year ended December 31, 2015, Crombie raised funds through the issuance of 2.775% Series C Notes (senior unsecured). The funds raised were used to repay maturing mortgages and the outstanding 5.75% Series C Convertible Unsecured Subordinated Debentures. Investing Activities (In thousands of CAD dollars) 2016 2015 Variance 2016 2015 Variance Three months ended December 31, Year ended December 31, Cash provided by (used in): Acquisition of investment properties $ (21,039) $ (61,511) $ 40,472 $ (550,863) $ (79,954) $ (470,909) Additions to investment properties (10,821) (9,144) (1,677) (29,928) (25,684) (4,244) Proceeds on disposal of investment properties Additions to tenant incentives Additions to deferred leasing costs Cash provided by (used in) investing activities 31,369 (4,893) (380) — (5,063) (134) 31,369 170 (246) 192,549 (74,071) (1,048) 2,770 (12,638) (826) 189,779 (61,433) (222) $ (5,764) $ (75,852) $ 70,088 $ (463,361) $ (116,332) $ (347,029) Cash used in investing activities for the three months ended December 31, 2016 decreased by $70,088 over the same period in 2015. During the three months ended December 31, 2016, Crombie completed two property acquisitions and an addition to an existing property for net cash of $21,039 as well as the disposition of five retail properties for net proceeds of $31,369. Cash used in investing activities for the year ended December 31, 2016 increased by $347,029 over the same period in 2015. During 2016, Crombie disposed of 19 retail properties for net proceeds of $192,549 as well as completing property acquisitions for net cash of $550,863 and additions to tenant incentives of $74,071, primarily related to the transaction that closed June 29, 2016. B O R R OW I N G C A PAC I T Y A N D D E B T CO V E N A N T S Under the amended terms governing the revolving credit facility, Crombie is entitled to borrow a maximum of 70% of the fair market value of assets subject to a first security position and 60% of the excess of fair market value over first mortgage financing of assets subject to a second security position or a negative pledge (the “Borrowing Base”). The revolving credit facility provides 4 2 C R O M B I E R E I T MD&AMANAGEMENT’S DISCUSSION AND ANALYSIS (In thousands of CAD dollars, except per unit amounts) Crombie with flexibility to add or remove properties from the Borrowing Base, subject to compliance with certain conditions. The terms of the revolving credit facility also require that Crombie must maintain certain covenants: • • • annualized NOI for the prescribed properties must be a minimum of 1.4 times the coverage of the related annualized debt service requirements; annualized NOI on all properties must be a minimum of 1.4 times the coverage of all annualized debt service requirements; and, distributions to Unitholders are limited to 100% of distributable income as defined in the revolving credit facility. The revolving credit facility also contains a covenant limiting the amount which may be utilized under the revolving credit facility at any time. This covenant provides that the aggregate of amounts drawn under the revolving credit facility plus any outstanding letters of credit, may not exceed the “Aggregate Borrowing Base”, which is based on a modified calculation of the Borrowing Base, as defined in the revolving credit facility. At December 31, 2016, the remaining amount available under the revolving credit facility was $278,000 (prior to reduction for standby letters of credit outstanding of $5,027) and was limited by the Aggregate Borrowing Base. At December 31, 2016, Crombie remained in compliance with all debt covenants. D E B T TO G R O S S B OO K VA L U E – FA I R VA L U E B A S I S When calculating debt to gross book value, debt is defined under the terms of the Declaration of Trust as obligations for borrowed money including obligations incurred in connection with acquisitions, excluding specific deferred taxes payable, trade payables and accruals in the ordinary course of business and distributions payable. Gross book value means, at any time, the book value of the assets of Crombie and its consolidated subsidiaries plus deferred financing charges, accumulated depreciation and amortization in respect of Crombie’s properties and cost of any below-market component of properties less (i) the amount of any receivable reflecting interest rate subsidies on any debt assumed by Crombie and (ii) the amount of deferred tax liability arising out of the fair value adjustment in respect of the indirect acquisitions of certain properties. If approved by a majority of the independent trustees, the appraised value of the assets of Crombie and its consolidated subsidiaries may be used instead of book value. Debt to gross book value on a fair value basis includes investment properties measured at fair value with all other components of gross book value measured at the carrying value included in Crombie’s financial statements. The debt to gross book value on a fair value basis was 50.3% and 52.5% at December 31, 2016 and December 31, 2015, respectively. These leverage ratios are below the maximum 60%, or 65% including convertible debentures, as permitted by Crombie’s Declaration of Trust. On a long-term basis, Crombie intends to maintain reasonable overall indebtedness so as to maintain and strengthen its investment grade rating. During the year ended December 31, 2016, Crombie raised $219,111 through the issuance of REIT Units and Class B LP Units and disposed of 19 retail properties for proceeds of approximately $196,000, before closing and transaction costs, with the proceeds being used to pay down debt. In addition, Crombie’s weighted average cap rate used in the determination of the fair value of its investment properties decreased 0.27% to 5.88%. The combination of proceeds from the Units issuance and increased fair value of investment properties resulted in the significant reduction of the debt to gross book value ratio since December 31, 2015. As at (In thousands of CAD dollars, except as otherwise noted) Dec. 31, 2016 Sep. 30, 2016 Jun. 30, 2016 Mar. 31, 2016 Dec. 31, 2015 Fixed rate mortgages Senior unsecured notes Convertible debentures Revolving credit facility payable Bilateral credit facility Total debt outstanding $ 1,655,817 $ 1,528,048 $ 1,518,846 $ 1,509,925 $ 1,521,079 400,000 134,400 120,374 100,000 2,410,591 400,000 134,400 241,371 100,000 2,403,819 400,000 134,400 247,340 100,000 400,000 134,400 8,706 — 400,000 134,400 130,000 — 2,400,586 2,053,031 2,185,479 Less: Applicable fair value debt adjustment (1,452) (1,509) (1,567) (1,636) (1,721) Debt Investment properties, at fair value $ $ 2,409,139 4,752,000 $ $ 2,402,310 4,732,000 $ $ 2,399,019 4,697,000 $ $ 2,051,395 4,109,000 $ $ 2,183,758 4,143,000 Long-term receivables Other assets, cost(1) Cash and cash equivalents Deferred financing charges Investment in joint ventures Interest rate subsidy Fair value adjustment to deferred taxes 19,969 34,567 — 14,631 815 (1,452) (34,120) 19,897 28,872 — 14,409 — (1,509) (34,299) 14,158 53,224 — 14,646 — (1,567) (34,299) 14,039 28,117 — 14,558 — (1,636) (34,299) 13,933 23,152 1,057 14,972 — (1,721) (34,645) Gross book value – fair value basis $ 4,786,410 $ 4,759,370 $ 4,743,162 $ 4,129,779 $ 4,159,748 Debt to gross book value – fair value basis 50.3% 50.5% 50.6% 49.7% 52.5% (1) Other assets exclude Tenant incentives and Accrued straight-line rent receivable. Crombie’s management believes that through the issuance of Notes, convertible debentures, mortgage financings, refinancings and bank debt, Crombie continues to maintain leverage at an appropriate level while staying conservatively within its maximum borrowing capacity. A N N U A L R E P O R T 2 0 1 6 4 3 MD&A I N T E R E S T A N D D E B T S E R V I C E CO V E R AG E R AT I O S Crombie’s interest and debt service coverage ratios for the year ended December 31, 2016 were 2.97 times EBITDA and 1.96 times EBITDA, respectively. This compares to 2.72 times EBITDA and 1.81 times EBITDA, respectively, for the year ended December 31, 2015. The improvement in the coverage ratios is attributable to: • • Crombie’s improved operating results, with EBITDA increasing $28,060 or 11.1%; an increase in adjusted interest expense of $1,931 or 2.1% as Crombie continues to finance new and maturing debt at lower interest rates; and, • issued $219,111 in new REIT and Class B LP Units during the year ended December 31, 2016 to partially fund acquisitions. EBITDA should not be considered an alternative to operating income attributable to Unitholders, cash provided by operating activities or any other measure of operations as prescribed by IFRS. EBITDA is not an IFRS financial measure; however, Crombie believes it is an indicative measure of its ability to service debt requirements, fund capital projects and acquire properties. Crombie’s measurement of EBITDA may not be comparable to that used by other entities. (In thousands of CAD dollars, except as otherwise noted) Property revenue Amortization of tenant incentives Adjusted property revenue Property operating expenses General and administrative expenses EBITDA (1) Finance costs – operations Amortization of deferred financing charges Amortization of effective swap agreements Adjusted interest expense (2) Debt repayments (advances) Change in fair value debt premium Payments relating to interest rate subsidy Advances (payments) relating to credit facilities Lump sum payments on mortgages Adjusted debt repayments (3) Interest service coverage ratio {(1)/(2)} Debt service coverage ratio {(1)/((2)+(3))} ACCOUNTING R E L AT E D PA R T Y T R A N S AC T I O N S As at December 31, 2016, Empire, through its wholly-owned subsidiary ECLD, holds a 41.5% (fully diluted 40.3%) indirect interest in Crombie. Related party transactions primarily include transactions with entities associated with Crombie through Year ended December 31, 2016 2015 $ 400,001 $ 369,866 $ $ $ $ 1 1 ,622 411,623 (115,306) (16,341) 279,976 100,156 (3,310) (2,440) 94,406 8,192 39 (269) 90,374 (49,774) $ $ $ $ $ 48,562 $ 2.97 1.96 9,712 379,578 (113,261) (14,401) 251,916 98,611 (3,616) (2,520) 92,475 121,440 (837) (482) (15,000) (58,050) 47,071 2.72 1.81 Empire’s indirect interest. Related party transactions also include transactions with key management personnel and post-employment benefit plans. Related party transactions are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. 4 4 C R O M B I E R E I T MD&AMANAGEMENT’S DISCUSSION AND ANALYSIS (In thousands of CAD dollars, except per unit amounts) Crombie’s transactions with related parties are as follows: Property revenue Property revenue Head lease income Lease termination income Property operating expenses General and administrative expenses Property management services recovered Other general and administrative expenses Finance costs – operations Interest on convertible debentures Interest rate subsidy Interest income Finance costs – distributions to Unitholders Three months ended December 31, Year ended December 31, Note 2016 2015 2016 2015 (a) (b) (c) (d) (e) (f) (b) $ $ $ $ $ $ $ $ $ $ 54,504 170 64 (19) 205 (79) (302) 57 118 (13,687) $ $ $ $ $ $ $ $ $ $ 38,048 170 — 38 231 (101) (303) 99 179 (12,130) $ $ $ $ $ $ $ $ $ $ 183,411 453 64 (64) 949 (281) (1,203) 269 651 (52,171) $ $ $ $ $ $ $ $ $ $ 160,470 736 3,999 242 869 (385) (1,200) 482 711 (48,369) (a) Crombie earned property revenue from Sobeys Inc. and other subsidiaries of Empire. • (b) (c) (d) For various periods, ECLD has an obligation to provide rental income and interest rate subsidies pursuant to an Omnibus Subsidy Agreement dated March 23, 2006, between Crombie Developments Limited, Crombie Limited Partnership and ECLD. The rental income is included in Property revenue and the interest rate subsidy is netted against Finance costs – operations. Certain executive management individuals and other employees of Crombie provide general management, financial, leasing, administrative, and other administration support services to certain subsidiaries of Empire on a cost sharing basis pursuant to a Management Agreement effective January 1, 2016. Crombie provides property management, leasing services and environmental management to specific properties owned by certain subsidiaries of Empire on a fee for service basis pursuant to a Management Agreement effective January 1, 2016. Revenue generated from the Management Agreement is being recognized as a reduction of General and administrative expenses. This Agreement replaces the previous cost sharing arrangement covered by a Management Cost Sharing Agreement. (e) Crombie previously leased its head office space from ECLD under a lease that ended in May 2015. (f) Empire holds $24,000 of Series D Convertible Debentures with an annual interest rate of 5.00%. In addition to the above: • During the third quarter of 2016, Crombie acquired a retail property in British Columbia from Empire including 61,600 square feet of gross leaseable area for $26,400 before closing and transaction costs. In addition, Crombie closed on the disposition of a retail property in British Columbia to Empire including 21,300 square feet of gross leaseable area for $9,057 before closing and transaction costs. This transaction resulted in a gain on disposal of $959. • • • • • On June 29, 2016, Crombie completed the acquisition of a portfolio of properties and the investment in the renovation and expansion of 10 existing Sobeys anchored properties. The transaction total was approximately $418 million before closing and transaction costs. As partial consideration, Crombie issued to Empire 6,353,741 Class B LP Units and the attached SVUs at a price of $14.70 per Class B LP Unit for gross consideration of $93,400. During the year ended December 31, 2016, Crombie issued 657,901 (December 31, 2015 – 383,036) Class B LP Units to ECLD under the DRIP. During the fourth quarter of 2015, Crombie acquired four retail properties and additions to two existing retail properties from Empire for $60,825 excluding closing and transactions costs. The properties, located in Alberta, British Columbia, Prince Edward Island, Manitoba and Quebec, contain approximately 225,300 square feet of fully occupied space. On April 1, 2015, Crombie acquired additional development space from Empire on a pre-existing retail property for $2,333 excluding closing and transaction costs. The property, located in Nova Scotia, contains approximately 7,500 square feet of fully occupied space. During the second quarter of 2015, Sobeys closed two retail stores on Crombie properties for which Crombie recognized lease termination income in the amount of $3,849, a portion of which is non-cash consideration. In relation to one of the store closures, Sobeys has assigned to Crombie future development activity rights in their leases on specific other Crombie properties in exchange for a fee on future developments which will reduce the actual cash Crombie will receive from the lease termination income. During the year ended December 31, 2015, Crombie and ECLD negotiated an extension of a rental income guarantee and put option on a property Crombie acquired from ECLD in 2006. The rental income guarantee and put option were originally scheduled to mature in March 2016 and have been extended for a period of five years with either party having the ability to terminate the agreements with written notice. The fixed price put option is in excess of the carrying value of the property. • During the first quarter of 2015, Crombie acquired development lands in British Columbia with Sobeys Developments Limited Partnership (“SDLP”). Crombie’s 50% portion of the acquisition cost was $2,676, including closing and transaction costs. A N N U A L R E P O R T 2 0 1 6 4 5 MD&A K E Y M A N AG E M E N T P E R S O N N E L CO M P E N S AT I O N Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of Crombie. The following are considered to be Crombie’s key management personnel: the Chief Executive Officer, Chief Financial Officer and the three other highest compensated executives. The remuneration of members of key management during the period was approximately as follows: Salary, bonus and other short-term employee benefits Other long-term benefits U S E O F E S T I M AT E S A N D J U DG M E N T S The preparation of consolidated financial information requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. Significant judgment, estimate and assumption items include impairment, employee future benefits, income taxes, investment properties, purchase price allocations and fair value of financial instruments. These estimates are based on historical experience and management’s best knowledge of current events and actions that Crombie may undertake in the future. Actual results could differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revisions affect only that period or in the period of the revision and future periods if the revision affects both current and future periods. C R I T I C A L ACCO U N T I N G E S T I M AT E S A N D A S S U M P T I O N S Investment property acquisitions Upon acquisition, Crombie performs an assessment of investment properties being acquired to determine whether the acquisition is to be accounted for as an asset acquisition or a business combination. A transaction is considered to be a business combination if the acquired property meets the definition of a business; being an integrated set of activities and assets that are capable of being managed for the purpose of providing a return to the Unitholders. Crombie performs an assessment of the fair value of the properties’ related tangible and intangible assets and liabilities and allocates the purchase price to the acquired assets and liabilities. Crombie assesses and considers fair value based on cash flow projections that take into account relevant discount and capitalization rates and any other relevant sources of market information available. Estimates of future cash flow are based on factors that include historical operating results, if available, and anticipated trends, local markets and underlying economic conditions. Crombie allocates the purchase price based on the following: Land – The amount allocated to land is based on an appraisal estimate of its fair value. Buildings – Buildings are recorded at the estimated fair value of the building and its components and significant parts. Intangible Assets – Intangible assets are recorded for tenant relationships, based on estimated costs avoided should the respective tenants renew their leases at the end of the initial lease term, adjusted for the estimated probability of renewal. Three months ended December 31, Year ended December 31, 2016 785 $ 26 811 $ 2015 835 24 859 $ $ 2016 3,153 $ 112 3,265 $ 2015 2,860 102 2,962 $ $ Fair value of debt – Values ascribed to fair value of debt are determined based on the differential between contractual and market interest rates on long-term liabilities assumed at acquisition. Investment properties Investment properties are properties which are held to earn rental income. Investment properties include land, buildings and intangible assets. Investment properties are carried at cost less accumulated depreciation and are reviewed periodically for impairment. Depreciation of buildings is calculated using the straight-line method with reference to each property’s cost, the estimated useful life of the building (not exceeding 40 years) and its components, significant parts and residual value. Repairs and maintenance improvements are expensed as incurred or, in the case of major items that constitute a capital asset, are capitalized to the building and amortized on a straight-line basis over the expected useful life of the improvement. Change in useful life of investment properties The estimated useful lives of significant investment properties are reviewed whenever events or circumstances indicate a change in useful life. Estimated useful lives of significant investment properties are based on management’s best estimate and the actual useful lives may be different. Revisions to the estimated useful lives of investment properties constitute a change in accounting estimate and are accounted for prospectively by amortizing the cumulative changes over the remaining estimated useful life of the related assets. Revenue recognition Property revenue includes rents earned from tenants under lease agreements, percentage rent, realty tax and operating cost recoveries, and other incidental income. Certain leases have rental payments that change over their term due to changes in rates. Crombie records the rental revenue from leases on a straight-line basis over the term of the lease. Accordingly, an accrued rent receivable is recorded for the difference between the straight-line rent recorded as property revenue and the rent that is contractually due from the tenants. In addition, tenant incentives are amortized on a straight-line basis over the term of existing leases and the amortization is shown as a reduction in property revenue. Percentage rents are recognized when tenants are obligated to pay such rent under the terms of the related lease agreements. Realty tax and operating cost recoveries, and other incidental income, are recognized on an accrual basis. 4 6 C R O M B I E R E I T MD&AMANAGEMENT’S DISCUSSION AND ANALYSIS (In thousands of CAD dollars, except per unit amounts) C R I T I C A L J U DG M E N T S Judgments made by management in the preparation of these financial statements that have significant effect and estimates with a significant risk of material adjustment to the carrying amount of assets and liabilities are as follows: Impairment of long-lived tangible and definite life intangible assets Long-lived tangible and definite life intangible assets are reviewed for impairment at each reporting period for events or changes in circumstances that indicate that the carrying value of the assets may not be recoverable. If such an indication exists, the recoverable amount of the asset is estimated in order to determine the extent of impairment loss (if any). The recoverable amount is the higher of fair value less costs to sell and value in use. Where the asset does not generate cash flows that are independent from other assets, Crombie estimates the recoverable amount of the cash generating unit(s) to which the asset belongs. When the recoverable amount of an asset (or cash generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash generating unit) is reduced to the recoverable amount. An impairment loss is recognized as an expense immediately in operating income. Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash generating unit) is increased to the revised estimate, but is limited to the carrying amount that would have been determined if no impairment loss had been recognized in prior periods. A reversal of impairment loss is recognized immediately in operating income. Defined benefit liability Management estimates the defined benefit liability annually with the assistance of independent actuaries; however, the actual outcome may vary due to estimation uncertainties. The estimate of Crombie’s defined benefit liability is based on standard rates of inflation, medical cost trends and mortality. It also takes into account Crombie’s specific anticipation of future salary increases. Discount factors are determined each reporting period by reference to high quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating the terms of the related pension liability. Estimation uncertainties exist particularly with regard to medical cost trends, which may vary significantly in future appraisals of Crombie’s defined benefit obligations. Investment property valuation External, independent valuation companies, having appropriate recognized professional qualifications and recent experience in the location and category of properties being valued, value Crombie’s investment property portfolio on a rotating basis over a maximum period of four years. The fair values, based on the date of the valuation, represent an estimate of the price that would be agreed upon between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. Internal quarterly revaluations are performed using internally generated valuation models prepared by considering the aggregate cash flows received from leasing the property. A yield obtained from an independent valuation company, which reflects the specific risks inherent in the net cash flows, is then applied to the net annual cash flows to arrive at the property valuation. Deferred taxes The assessment of the probability of future taxable income in which deferred tax assets can be utilized is based on Crombie’s latest budget forecast, which is adjusted for significant non-taxable income and expenses and specific limits to the use of any unused tax loss or credit. If a positive forecast of taxable income indicates the probable use of a deferred tax asset, especially when it can be used without a time limit, that deferred tax asset is usually recognized in full. The recognition of deferred tax assets that are subject to certain legal or economic limits or uncertainties are assessed individually by management based on the specific facts and circumstances. Crombie recognizes expected liabilities for tax based on an estimation of the likely taxes due, which requires significant judgment as to the ultimate tax determination of certain items. Where the actual liability arising from these issues differs from these estimates, such differences will have an impact on the income tax and deferred tax balances in the period when such determination is made. Purchase price allocation Investment properties are properties which are held to earn rental income. Investment properties include land, buildings and intangible assets. Upon acquisition, management allocates the purchase price of the acquisition. This allocation contains a number of estimates and underlying assumptions including, but not limited to, estimated cash flows, discount rates, lease-up rates, inflation rates, renewal rates and leasing costs. Fair value of financial instruments The fair value of marketable financial instruments is the estimated amount for which an instrument could be exchanged, or a liability settled, by Crombie and a knowledgeable, willing party in an arm’s length transaction. The fair value of other financial instruments is based upon discounted future cash flows using discount rates that reflect current market conditions for instruments with similar terms and risks. Such fair value estimates are not necessarily indicative of the amounts Crombie might pay or receive in actual market transactions. F I N A N C I A L I N S T R U M E N T S The fair value of a financial instrument is the estimated amount that Crombie would receive to sell a financial asset or pay to transfer a financial liability in an orderly transaction between market participants at the measurement date. Fair value determination is classified within a three-level hierarchy, based on observability of significant inputs, as follows: 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 or indirectly. Level 3 – unobservable inputs for the asset or liability. A N N U A L R E P O R T 2 0 1 6 4 7 MD&A The following table provides information on financial assets and liabilities measured at fair value as at December 31, 2016: Financial assets Marketable securities Total financial assets measured at fair value There were no transfers between Level 1 and Level 2 during the year ended December 31, 2016. Due to their short-term nature, the carrying value of the following financial instruments approximates their fair value at the balance sheet date: • Cash and cash equivalents • Trade receivables Financial assets Long-term receivables Total other financial assets Financial liabilities Investment property debt Senior unsecured notes Convertible debentures Level 1 Level 2 Level 3 Total $ $ — — $ $ — — $ $ 2,290 2,290 $ $ 2,290 2,290 • Restricted cash • Trade and other payables (excluding embedded derivatives). The fair value of other financial instruments is based on discounted cash flows using discount rates that reflect current market conditions for instruments with similar terms and risks. The following table summarizes the estimated fair value of other financial instruments which have a fair value different from their carrying value: December 31, 2016 December 31, 2015 Fair Value Carrying Value Fair Value Carrying Value $ $ 19,999 19,999 $ $ 19,969 19,969 $ $ 13,968 13,968 $ $ 13,933 13,933 $ 1,959,091 $ 1,876,1 9 1 $ 1,782,776 $ 1,651,079 402,361 139,147 400,000 134,400 405,348 138,360 400,000 134,400 Total other financial liabilities $ 2,500,599 $ 2,410,591 $ 2,326,484 $ 2,185,479 The fair value of convertible debentures is a Level 1 measurement and the long-term receivables, investment property debt and senior unsecured notes are Level 2. CO M M I T M E N T S A N D CO N T I N G E N C I E S There are various claims and litigation which Crombie is involved with arising out of the ordinary course of business operations. In the opinion of management, any liability that would arise from such contingencies would not have a significant adverse effect on these operating results. Crombie has agreed to indemnify its trustees and officers, and particular employees, in accordance with Crombie’s policies. Crombie maintains insurance policies that may provide coverage against certain claims. Crombie obtains letters of credit to support its obligations with respect to construction work on its investment properties and satisfying mortgage financing requirements. As at December 31, 2016, Crombie has a total of $5,027 in outstanding letters of credit related to: Construction work being performed on investment properties Mortgage lenders primarily to satisfy mortgage financings on redevelopment properties Total outstanding letters of credit December 31, 2016 2,027 3,000 5,027 $ $ 2015 1,425 — 1,425 $ $ Crombie does not believe that any of these standby letters of credit are likely to be drawn upon. Land leases have varying terms ranging from eight to 73 years including renewal options. For the three months and year ended December 31, 2016, Crombie paid $364 and $1,431, respectively, in land lease payments to third party landlords (three months and year ended December 31, 2015 – $354 and $1,418, respectively). As at December 31, 2016, Crombie had signed construction contracts totalling $53,310 of which $37,292 has been paid. RISK MANAGEMENT In the normal course of business, Crombie is exposed to a number of financial risks that can affect its operating performance. The more significant risks, and the action taken to manage them, are as follows: Real Property Ownership and Tenant Risks All real property investments are subject to elements of risk. The value of real property and any improvements thereto depend on the credit and financial stability of tenants and upon the vacancy rates of the properties. In addition, certain significant expenditures, including property taxes, ground rent, mortgage payments, insurance costs and related charges must be made throughout the period of ownership of real property regardless of whether a property is producing any income. Cash available for distribution will be adversely affected if a significant number of tenants are unable to meet their obligations under their leases or if a significant amount of available space in the properties becomes vacant and cannot be leased on economically favourable lease terms. Upon the expiry of any lease, there can be no assurance that the lease will be renewed or the tenant replaced. The terms of any 4 8 C R O M B I E R E I T MD&AMANAGEMENT’S DISCUSSION AND ANALYSIS (In thousands of CAD dollars, except per unit amounts) subsequent lease may be less favourable to Crombie than those of an existing lease. The ability to rent unleased space in the properties in which Crombie has an interest will be affected by many factors, including general economic conditions, local real estate markets, changing demographics, supply and demand for leased premises, competition from other available premises and various other factors. Management utilizes staggered lease maturities so that Crombie is not required to lease unusually large amounts of space in any given year. In addition, the diversification of our property portfolio by geographic location, tenant mix and asset type also helps to mitigate this risk. C R E D I T R I S K Credit risk arises from the possibility that tenants may experience financial difficulty and be unable to fulfill their lease commitments. A provision for doubtful accounts is taken for all anticipated collectability risks. Crombie mitigates credit risk by geographical diversification, utilizing staggered lease maturities, diversifying both its tenant mix and asset mix and conducting credit assessments for new and renewing tenants. In measuring tenant concentration, Crombie considers both the annual minimum rent and total property revenue of major tenants. • Upon completion of the June 29, 2016 property transactions, Crombie’s largest tenant, Sobeys, represents 52.9% of annual minimum rent; an increase from 49.9% at December 31, 2015. No other tenant accounts for more than 5.1% of Crombie’s annual minimum rent, and; • Total property revenue includes operating and realty tax cost recovery income and percentage rent. These amounts can vary by property type, specific tenant leases and where tenants may directly incur and pay operating and realty tax costs. Crombie earned total property revenue of $54,504 and $183,411, respectively, for the three months and year ended December 31, 2016 (three months and year ended December 31, 2015 – $38,048 and $160,470, respectively) from Sobeys Inc. and other subsidiaries of Empire. Over the next five years, leases representing no more than 4.8% of the gross leaseable area of Crombie will expire in any one year. Receivables are substantially comprised of current balances due from tenants. The balance of accounts receivable past due is not significant. Generally, rents are due the first of each month and other tenant billings are due 30 days after invoiced, and in general, balances over 30 days are considered past due. None of the receivable balances are considered impaired. The provision for doubtful accounts is reviewed at each balance sheet date. A provision is taken on accounts receivable from independent accounts and is recorded as a reduction to its respective receivable account on the balance sheet. Crombie updates its estimate of provision for doubtful accounts based on past due balances on accounts receivable. Current and long-term accounts receivable are reviewed on a regular basis and are provided for when collection is considered uncertain. Provision for doubtful accounts, beginning of year Additional provision Recoveries Write-offs Provision for doubtful accounts, end of year There have been no significant changes to Crombie’s credit risk since December 31, 2015. CO M P E T I T I O N The real estate business is competitive. Numerous other developers, managers and owners of properties compete with Crombie in seeking tenants. Some of the properties located in the same markets as Crombie’s properties are newer, better located, less levered or have stronger anchor tenants than Crombie’s properties. Some property owners with properties located in the same markets as Crombie’s properties may be better capitalized and may be stronger financially and hence better able to withstand an economic downturn. Competitive pressures in such markets could have a negative effect on Crombie’s ability to lease space in its properties and on the rents charged or concessions granted. Year ended December 31, 2016 Year ended December 31, 2015 $ $ 60 195 (120) (8) $ 127 $ 59 20 (38) 19 60 R I S K FAC TO R S R E L AT E D TO T H E B U S I N E S S O F C R O M B I E Significant Relationship Crombie’s anchor tenants are concentrated in a relatively small number of retail operators. Specifically, 52.9% of the annual minimum rent and 44.8% of total property revenue generated from Crombie’s properties is derived from anchor tenants that are owned and/or operated by Sobeys. Therefore, Crombie is reliant on the sustainable operation by Sobeys in these locations. Retail and Geographic Concentration Crombie’s portfolio of properties is heavily weighted in retail properties. Consequently, changes in the retail environment and general consumer spending could adversely impact Crombie’s financial condition. Crombie’s portfolio of properties was historically heavily concentrated in Atlantic Canada. Through property acquisitions and dispositions over the last four years, Crombie has reduced its geographic concentration in Atlantic Canada, and reduced the adverse impact an economic downturn any one specific geographic region in Canada could have on Crombie’s financial condition. The geographic breakdown of properties and percentage of annual minimum rent of Crombie’s properties as at December 31, 2016 is detailed under the Property Portfolio section. A N N U A L R E P O R T 2 0 1 6 4 9 MD&A Crombie’s growth strategy of expansion outside of Atlantic Canada has been predicated on reducing the geographic concentration risk. The percentage of annual minimum rent to be earned in Atlantic Canada has decreased from 43.4% at December 31, 2013 to 37.6% at December 31, 2016. I N T E R E S T R AT E R I S K Interest rate risk is the potential for financial loss arising from increases in interest rates. Crombie mitigates this risk by utilizing staggered debt maturities and limiting the use of permanent floating rate debt and, on occasion, utilizing interest rate swap agreements. Crombie does not enter into interest rate swaps on a speculative basis. As at December 31, 2016: • Crombie’s weighted average term to maturity of its fixed rate mortgages was 5.90 years; • • • Crombie has a floating rate revolving credit facility available to a maximum of $400,000, subject to available Borrowing Base, with a balance of $120,374 at December 31, 2016; Crombie has a floating rate bilateral credit facility available to a maximum of $100,000 with a balance of $100,000 at December 31, 2016; and, Crombie has interest rate swap agreements in place on $123,731 of floating rate mortgage debt. Crombie estimates that $2,348 of accumulated other comprehensive income (loss) will be reclassified to finance costs during the year ending December 31, 2017, based on all settled swap agreements as of December 31, 2016. A fluctuation in interest rates would have had an impact on Crombie’s operating income related to the use of floating rate debt. Based on the previous year’s rate changes, a 0.5% interest rate change would reasonably be considered possible. The changes would have had the following impact: Impact on operating income attributable to Unitholders of interest rate changes on the floating rate revolving credit facility Three months ended December 31, 2016 Three months ended December 31, 2015 Year ended December 31, 2016 Year ended December 31, 2015 Impact of a 0.5% interest rate change Decrease in rate Increase in rate $ $ $ $ 373 172 1,130 635 $ $ $ $ (373) (172) (1,130) (635) There have been no significant changes to Crombie’s interest rate risk since December 31, 2015. L I Q U I D I T Y R I S K The real estate industry is highly capital intensive. Liquidity risk is the risk that Crombie may not have access to sufficient debt and equity capital to fund its growth program, refinance debt obligations as they mature or meet its ongoing obligations as they arise. Cash flow generated from operating the property portfolio represents the primary source of liquidity used to service the interest on debt, fund general and administrative expenses, reinvest in the portfolio through capital expenditures, as well as fund tenant incentive costs and make distributions to Unitholders. Debt repayment requirements are primarily funded from refinancing Crombie’s maturing debt obligations. Property acquisition funding requirements are funded through a combination of accessing the debt and equity capital markets and recycling capital from property dispositions. There is a risk that the debt capital markets may not refinance maturing fixed rate and floating rate debt on terms and conditions acceptable to Crombie or at any terms at all. Crombie seeks to mitigate this risk by staggering its debt maturity dates. There is also a risk that the equity capital markets may not be receptive to a REIT unit offering issue from Crombie with financial terms acceptable to Crombie. Crombie mitigates its exposure to liquidity risk utilizing a conservative approach to capital management. Access to the revolving credit facility is limited by the amount utilized under the facility and the amount of any outstanding letters of credit, and cannot exceed the borrowing base security provided by Crombie. The estimated payments, including principal and interest, on non-derivative financial liabilities to maturity date are as follows: Fixed rate mortgages(2) Senior unsecured notes Convertible debentures Floating rate debt Total Year ending December 31, Contractual Cash Flows(1) 2017 2018 2019 2020 2021 Thereafter $ 2,022,289 $ 170,090 $ 178,077 $ 235,086 $ 313,864 $ 170,736 $ 954,436 441,079 159,251 2,622,619 231,647 14,407 6,906 191,403 5,697 188,244 6,906 373,227 104,047 7,431 66,156 308,673 121,903 129,346 3,906 447,116 — 101,651 75,377 347,764 — — — 954,436 — $ 2,854,266 $ 197,100 $ 477,274 $ 430,576 $ 447,116 $ 347,764 $ 954,436 (1) Contractual cash flows include principal and interest and ignore extension options. (2) Reduced by the interest rate subsidy payments to be received from ECLD. There have been no significant changes to Crombie’s liquidity risk since December 31, 2015. 5 0 C R O M B I E R E I T MD&AMANAGEMENT’S DISCUSSION AND ANALYSIS (In thousands of CAD dollars, except per unit amounts) E N V I R O N M E N TA L M AT T E R S Environmental legislation and regulations have become increasingly important in recent years. As an owner of interests in real property in Canada, Crombie is subject to various Canadian federal, provincial and municipal laws relating to environmental matters. Such laws provide that Crombie could become liable for environmental harm, damage or costs, including with respect to the release of hazardous, toxic or other regulated substances into the environment, and the removal or other remediation of hazardous, toxic or other regulated substances that may be present at or under its properties. The failure to remove or otherwise address such substances or properties, if any, may adversely affect Crombie’s ability to sell such property, realize the full value of such property or borrow using such property as collateral security, and could potentially result in claims against Crombie by public or private parties by way of civil action. Crombie’s operating policy is to obtain a Phase I environmental site assessment, conducted by an independent and experienced environmental consultant, prior to acquiring a property and to have Phase II environmental site assessment work completed where recommended in a Phase I environmental site assessment. Crombie is not aware of any material non-compliance with environmental laws at any of its properties, and is not aware of any pending or threatened investigations or actions by environmental regulatory authorities in connection with any of its properties. Crombie has implemented policies and procedures to assess, manage and monitor environmental conditions at its properties to manage exposure to liability. Potential Conflicts of Interest The trustees will, from time to time, in their individual capacities, deal with parties with whom Crombie may be dealing, or may be seeking investments similar to those desired by Crombie. The interests of these persons could conflict with those of Crombie. The Declaration of Trust contains conflict of interest provisions requiring the trustees to disclose their interests in certain contracts and transactions and to refrain from voting on those matters. In addition, certain decisions regarding matters that may give rise to a conflict of interest must be made by a majority of independent trustees only. Conflicts may exist due to the fact that certain trustees, senior officers and employees of Crombie are directors and/or senior officers of Empire and/or its affiliates or will provide management or other services to Empire and its affiliates. Empire and its affiliates are engaged in a wide variety of real estate and other business activities. Crombie may become involved in transactions that conflict with the interests of the foregoing. The interests of these persons could conflict with those of Crombie. To mitigate these potential conflicts, Crombie and Empire have entered into a number of agreements to outline how potential conflicts of interest will be dealt with, including a Non-Competition Agreement, Management Agreement and Development Agreement. As well, the Declaration of Trust contains a number of provisions to manage potential conflicts of interest including setting limits to the number of Empire appointees to the Board, “conflict of interest” guidelines, as well as outlining which matters require the approval of a majority of the independent elected trustees such as any property acquisitions or dispositions between Crombie and Empire or another related party. Reliance on Key Personnel The management of Crombie depends on the services of certain key personnel. The loss of the services of any key personnel could have an adverse effect on Crombie and adversely impact Crombie’s financial condition. Crombie does not have key-man insurance on any of its key employees. Reliance on Empire, Sobeys and Other Empire Affiliates Empire has agreed to support Crombie under an Omnibus Subsidy Agreement and to pay ongoing rent pursuant to a head lease and a ground lease. Empire and specific subsidiaries have provided the Omnibus Environmental Indemnity described above under “Related Party Transactions”. In addition, a significant portion of Crombie’s rental income will be received from tenants that are affiliates of Empire. Finally, Empire has obligations to indemnify Crombie in respect to the cost of environmental remediation of certain properties acquired by Crombie from Empire to a maximum permitted amount. There is no certainty that Empire will be able to perform its obligations to Crombie in connection with these agreements. Empire and specific subsidiaries have not provided any security to guarantee these obligations. If Empire, Sobeys or such affiliates are unable or otherwise fail to fulfill their obligations to Crombie, such failure could adversely impact Crombie’s financial condition. Prior Commercial Operations Crombie Limited Partnership (“Crombie LP”) acquired from Empire all of the outstanding shares of Crombie Developments Limited (“CDL”). CDL is the company resulting from the amalgamation of predecessor companies which began their operations in 1964 and have since been involved in various commercial activities in the real estate sector. In addition, the share capital of CDL and its predecessors has been subject to various transfers, redemptions and other modifications. Pursuant to the acquisition, Empire made certain representations and warranties to Crombie with respect to CDL, including with respect to the structure of its share capital and the scope and amount of its existing and contingent liabilities. Empire also provided an indemnity to Crombie under the acquisition which provides, subject to certain conditions and thresholds, that Empire will indemnify Crombie for breaches of such representations and warranties. There can be no assurance that Crombie will be fully protected in the event of a breach of such representations and warranties or that Empire will be in a position to indemnify Crombie if any such breach occurs. Empire has not provided any security for its obligations and is not required to maintain any cash within Empire for this purpose. Crombie LP acquired from Empire directly and indirectly 61 properties on April 22, 2008 (the “Portfolio Acquisition”). Pursuant to the Portfolio Acquisition, Empire made certain representations and warranties to Crombie with respect to the properties, including with respect to the scope and amount of its existing and contingent liabilities. Empire also provided an indemnity to Crombie under the Portfolio Acquisition which provides, subject to certain conditions and thresholds, that Empire will indemnify Crombie for breaches of such representations and warranties. There can be no assurance that Crombie will be fully protected in the event of a breach of such representations and warranties or that Empire will be in a position to indemnify Crombie if any such breach occurs. Empire has not provided any security for its obligations and is not required to maintain any cash within Empire for this purpose. A N N U A L R E P O R T 2 0 1 6 5 1 MD&A R I S K FAC TO R S R E L AT E D TO T H E U N I T S Cash Distributions Are Not Guaranteed There can be no assurance regarding the amount of income to be generated by Crombie’s properties. The ability of Crombie to make cash distributions and the actual amount distributed are entirely dependent on the operations and assets of Crombie and its subsidiaries, and are subject to various factors including financial performance, obligations under applicable credit facilities, the sustainability of income derived from anchor tenants and capital expenditure requirements. Cash available to Crombie to fund distributions may be limited from time to time because of items such as principal repayments, tenant allowances, leasing commissions, capital expenditures and redemptions of Units, if any. Crombie may be required to use part of its debt capacity or to reduce distributions in order to accommodate such items. The market value of the Units will deteriorate if Crombie is unable to maintain its distribution 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. Restrictions on Redemptions It is anticipated that the redemption of Units will not be the primary mechanism for holders of Units to liquidate their investments. The entitlement of Unitholders to receive cash upon the redemption of their Units is subject to the following limitations: (i) the total amount payable by Crombie in respect of such Units and all other Units tendered for redemption in the same calendar month must not exceed $50 (provided that such limitation may be waived at the discretion of the Trustees); (ii) at the time such Units are tendered for redemption, the outstanding Units must be listed for trading on a stock exchange or traded or quoted on another market which the Trustees consider, in their sole discretion, provides fair market value prices for the Units; and, (iii) the trading of Units is not suspended or halted on any stock exchange on which the Units are listed (or, if not listed on a stock exchange, on any market on which the Units are quoted for trading) on the redemption date for more than five trading days during the 10-day trading period commencing immediately after the redemption date. Potential Volatility of Unit Prices One of the factors that may influence the market price of the Units is the annual yield on the Units. An increase in market interest rates may lead purchasers of Units to demand a higher annual yield, which accordingly could adversely affect the market price of the Units. In addition, the market price of the Units may be affected by changes in general market conditions, fluctuations in the markets for equity securities and numerous other factors beyond the control of Crombie. Tax-Related Risk Factors Crombie intends to make distributions not less than the amount necessary to eliminate Crombie’s liability for tax under Part I of the Income Tax Act (Canada). Where the amount of net income and net realized capital gains of Crombie in a taxation year exceeds the cash available for distribution in the year, such excess net income and net realized capital gains will be distributed to Unitholders in the form of additional Units. Unitholders will generally be required to include an amount equal to the fair market value of those Units in their taxable income, notwithstanding that they do not directly receive a cash distribution. Income fund or REIT structures in which there is a significant corporate subsidiary such as CDL generally involve a significant amount of inter-company or similar debt, generating substantial interest expense, which reduces earnings and therefore income tax payable. Management believes that the interest expense inherent in the structure of Crombie is supportable and reasonable in the circumstances; however, there can be no assurance that taxation authorities will not seek to challenge the amount of interest expense deducted on the debt owing by CDL to Crombie LP. If such a challenge were to succeed, it could adversely affect the amount of cash available for distribution. Certain properties have been acquired by Crombie LP on a tax deferred basis, whereby the tax cost of these properties is less than their fair market value. Accordingly if one or more of such properties are disposed of, the gain for tax purposes recognized by Crombie LP will be in excess of that which it would have been if it had acquired the properties at a tax cost equal to their fair market values. The cost amount for taxation purposes of various properties of CDL will be lower than their fair market value, generally resulting in correspondingly lower deductions for taxation purposes and higher recapture of depreciation or capital gains on their disposition. In addition, CDL (unlike Crombie) may not reduce its taxable income through cash distributions. If CDL should become subject to corporate income tax, the cash available for distribution to Unitholders would likely be reduced. On June 22, 2007, tax legislation Bill C-52, the Budget Implementation Act, 2007 (the “Act”) was passed into law. The Act related to the federal income taxation of publicly traded income trusts and partnerships. The Act subjects all existing income trusts, or specified investment flow-through entities (“SIFTs”), to corporate tax rates, beginning in 2011, subject to an exemption for real estate investment trusts (“REITs”). The exemption for REITs was provided to “recognize the unique history and role of collective real estate investment vehicles,” which are well-established structures throughout the world. A trust that satisfies the criteria of a REIT throughout its taxation year will not be subject to income tax in respect of distributions to its unitholders or be subject to the restrictions on its growth that would apply to SIFTs. While REITs were exempted from the SIFT taxation, the Act proposed a number of technical tests to determine which entities would qualify as a REIT. These technical tests did not fully accommodate the business structures used by many Canadian REITs. Crombie and its advisors underwent an extensive review of Crombie’s organizational structure and operations to support Crombie’s assertion that it meets the REIT technical tests contained in the Act throughout the 2008 through 2016 fiscal years. The relevant tests apply throughout the taxation year of Crombie and, as such, the actual status of Crombie for any particular taxation year can only be ascertained at the end of the year. Notwithstanding that Crombie may meet the criteria for a REIT under the Act and thus be exempt from the distribution tax, there can be no assurance that the Department of Finance (Canada) or other governmental authority will not undertake initiatives which have an adverse impact on Crombie or its Unitholders. 5 2 C R O M B I E R E I T MD&AMANAGEMENT’S DISCUSSION AND ANALYSIS (In thousands of CAD dollars, except per unit amounts)Indirect Ownership of Units by Empire Empire holds a 41.5% (fully diluted 40.3%) economic interest in Crombie through the ownership of REIT and Class B LP Units. Pursuant to the Exchange Agreement, each Class B LP Unit will be exchangeable at the option of the holder for one Unit of Crombie and will be attached to a Special Voting Unit of Crombie, providing for voting rights in Crombie. Furthermore, pursuant to the Declaration of Trust, Empire is entitled to appoint a certain number of Trustees based on the percentage of Units held by it. Thus, Empire is in a position to exercise a certain influence with respect to the affairs of Crombie. If Empire sells substantial amounts of its Class B LP Units or exchanges such units for Units and sells these Units in the public market, the market price of the Units could fall. The perception among the public that these sales will occur could also produce such effect. Ownership of Debentures The Debentures may trade at lower than issued prices depending on many factors, including liquidity of the Debentures, prevailing interest rates and the markets for similar securities, the market price of the Units, general economic conditions and Crombie’s financial condition, historic financial performance and future prospects. Ownership of Senior Unsecured Notes (“Notes”) There is no market through which the Notes may be sold. Crombie does not intend to list the Notes on any securities exchange or include the Notes in any automated quotation system. Therefore, an active market for the Notes may not develop or be maintained, which would adversely affect the market price and liquidity of the Notes. In such case, the holders of the Notes may not be able to sell their Notes at a particular time or at a favourable price. If a trading market were to develop, future trading prices of the Notes may be volatile and will depend on many factors, including: • the number of holders of Notes; • prevailing interest rates; • Crombie’s operating performance and financial condition; • the interest of securities dealers in making a market for them; and, • the market for similar securities. Even if an active trading market for the Notes does develop, there is no guarantee that it will continue. The Notes may trade at a discount from their initial offering price, depending upon prevailing interest rates, the market for similar Notes, Crombie’s performance and other factors. SUBSEQUENT EVENTS (a) (b) On January 20, 2017, Crombie declared distributions of 7.417 cents per Unit for the period from January 1, 2017 to and including, January 31, 2017. The distributions were paid on February 15, 2017, to Unitholders of record as of January 31, 2017. On February 16, 2017, Crombie declared distributions of 7.417 cents per Unit for the period from February 1, 2017 to and including, February 28, 2017. The distributions will be paid on March 15, 2017, to Unitholders of record as of February 28, 2017. CONTROLS AND PROCEDURES Crombie maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by Crombie in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in the securities legislation and include controls and procedures designed to ensure that information required to be disclosed by Crombie is accumulated and communicated to Crombie’s management, including its President and Chief Executive Officer (“CEO”) and Executive Vice President, Chief Financial Officer and Secretary (“CFO”), as appropriate, to allow timely decisions regarding disclosure. Our CEO and CFO have evaluated the design and effectiveness of our disclosure controls and procedures as of December 31, 2016. They have concluded that our current disclosure controls and procedures are effective. In addition, our CEO and CFO have designed, or caused to be designed under their supervision, internal controls over financial reporting (“ICFR”) to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes as defined in National Instrument 52-109. The control framework management used to design and assess the effectiveness of ICFR is Internal Control-Integrated Framework (2013) issued by The Committee of Sponsoring Organizations of the Treadway Commission (COSO). Further, our CEO and CFO have evaluated, or caused to be evaluated under their supervision, the effectiveness of the design and operation of ICFR as at December 31, 2016, and have concluded that our current ICFR was effective based on that evaluation. There have been no material changes to Crombie’s internal controls during the year. A N N U A L R E P O R T 2 0 1 6 5 3 MD&A QUARTERLY INFORMATION The following table shows information for revenues, expenses, increase (decrease) in net assets attributable to Unitholders, AFFO, FFO, distributions and per unit amounts for the eight most recently completed quarters. (In thousands of CAD dollars, except per unit amounts) Dec. 31, 2016 Sep. 30, 2016 Jun. 30, 2016 Mar. 31, 2016 Dec. 31, 2015 Sep. 30, 2015 Jun. 30, 2015 Mar. 31, 2015 Property revenue $ 105,269 $ 98,757 $ 101,031 $ 94,944 $ 92,847 $ 89,611 $ 94,907 $ 92,501 Three Months Ended Property operating expenses Property net operating income Gain (loss) on disposal Expenses: General and administrative Finance costs – operations Depreciation and amortization Impairment Operating income before taxes Taxes – current Taxes – deferred Operating income Finance costs – distributions to Unitholders Finance income (costs) – change in fair value of financial instruments Increase (decrease) in net assets attributable to Unitholders Operating income per unit – Basic Operating income per unit – Diluted $ $ $ 29,395 27,732 27,538 30,641 28,858 26,892 27,328 30,183 75,874 9,761 (4,266) (25,656) (19,435) (6,000) 30,278 — 1,200 31,478 71,025 1,225 73,493 244 64,303 26,260 63,989 25 62,719 67,579 — — (3,546) (25,342) (4,122) (24,793) (4,407) (24,365) (3,541) (24,600) (19,933) (17,514) (16,450) — — — (16,789) (7,300) (3,923) (24,306) (16,340) — 23,429 27,308 45,341 1 1 , 784 18,150 (3) (300) 23,126 — (100) 27,208 (23) (2,000) 43,318 (39) 2,200 13,945 (621) 400 17,929 (3,463) (24,287) (16,925) (5,275) 17,629 (2,276) 1,800 17,153 62,318 (2) (3,474) (25,418) (16,522) — 16,902 — (200) 16,702 (32,987) (32,890) (30,538) (29,322) (29,236) (29,153) (29,111) (29,076) (46) 789 (397) (34) 3,068 (3,112) 368 (268) (1,555) $ (8,975) $ (3,727) $ 13,962 $ (12,223) $ (14,336) $ (11,590) $ (12,642) 0.21 $ 0.16 $ 0.21 $ 0.33 $ 0.11 $ 0.14 $ 0.13 $ 0.13 0.21 $ 0.16 $ 0.21 $ 0.33 $ 0.11 $ 0.14 $ 0.13 $ 0.13 (In thousands of CAD dollars, except per unit amounts) Dec. 31, 2016 Sep. 30, 2016 Jun. 30, 2016 Mar. 31, 2016 Dec. 31, 2015 Sep. 30, 2015 Jun. 30, 2015 Mar. 31, 2015 Three Months Ended Distributions Distributions Per unit AFFO Basic Per unit – Basic Per unit – Diluted(1) Payout ratio FFO, as adjusted Basic Per unit – Basic Per unit – Diluted(1) Payout ratio $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 32,987 0.22 38,452 0.26 0.26 85.8% 45,452 0.31 0.30 72.6% 32,890 0.22 38,808 0.26 0.26 84.8% 45,567 0.31 0.31 $ $ $ $ $ $ $ $ 30,538 0.22 31,432 0.24 0.24 97.2% 37,256 0.28 0.28 $ $ $ $ $ $ $ $ 72.2% 82.0% 29,322 0.22 32,048 0.24 0.24 91.5% 37,961 0.29 0.29 77.2% $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 29,236 0.22 32,310 0.25 0.25 90.5% 38,311 0.29 0.29 76.3% 29,153 0.22 30,694 0.23 0.23 95.0% 36,312 0.28 0.28 80.3% $ $ $ $ $ $ $ $ 29,111 0.22 32,733 0.25 0.25 88.9% 39,079 0.30 0.30 74.5% $ $ $ $ $ $ $ $ 29,076 0.22 29,917 0.23 0.23 97.2% 35,772 0.27 0.27 81.3% (1) FFO and AFFO per unit are calculated on a diluted basis. The diluted weighted average number of total Units and Special Voting Units included the conversion of all series of convertible debentures outstanding during the period, excluding any series that is anti-dilutive. Distributions per unit for each period are based on the total distributions per unit declared during the specific period. 5 4 C R O M B I E R E I T MD&AMANAGEMENT’S DISCUSSION AND ANALYSIS (In thousands of CAD dollars, except per unit amounts) Variations in quarterly results over the past eight quarters have been influenced by the following specific transactions and ongoing events: • Property acquisitions and dispositions (excluding closing and transaction costs) for each of the above three month periods were: – December 31, 2016 – acquisition of two retail properties and an addition to an existing office property for a total purchase price of $34,000, and disposition of five retail properties for proceeds of $32,500; – September 30, 2016 – acquisition of one retail property and one development property for a total purchase price of $32,858, and disposition of two retail properties for proceeds of $11,357; – June 30, 2016 – acquisition of 33 retail properties, a 50% interest in three distribution centres, a property for development and two parcels of development land adjacent to existing Crombie properties for a total purchase price of $502,683, and disposition of two retail properties for proceeds of $8,293; – March 31, 2016 – acquisition of one retail property for a total – September 30, 2015 – acquisition of one retail property for a total purchase price of $20,500; – June 30, 2015 – acquisition of an addition to an existing retail property for a total purchase price of $2,333; and, – March 31, 2015 – acquisition of an addition to an existing retail property for a total purchase price of $12,650. • Property revenue and property operating expenses – Crombie’s business is subject to seasonal fluctuations. Property operating expenses during winter months include particular expenses such as snow removal, which is a recoverable expense, thus increasing property revenue during these same periods. Property operating expenses during the summer and fall periods include particular expenses such as paving and roof repairs. • Per unit amounts for FFO and AFFO are influenced by operating results as detailed above and by the timing of the issuance of REIT Units and Class B LP Units. Additional information relating to Crombie, including its latest Annual Information Form, can be found on the SEDAR website for Canadian regulatory filings at www.sedar.com. purchase price of $5,500 and disposition of 10 retail properties for proceeds of $143,400; Dated: February 22, 2017 New Glasgow, Nova Scotia, Canada – December 31, 2015 – acquisition of four retail properties and two additions to existing retail properties for a total purchase price of $60,825; A N N U A L R E P O R T 2 0 1 6 5 5 MD&A M A N A G E M E N T ’ S S TAT E M E N T O F R E S P O N S I B I L I T Y F O R F I N A N C I A L R E P O R T I N G Preparation of the consolidated financial statements accompanying this annual report and the presentation of all other information in the report is the responsibility of management. The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards and reflect management’s best estimates and judgments. All other financial information in the report is consistent with that contained in the consolidated financial statements. Management of the Trust has established and maintains a system of internal control that provides reasonable assurance as to the integrity of the consolidated financial statements, the safeguard of Trust assets, and the prevention and detection of fraudulent financial reporting. The Board of Trustees, through its Audit Committee, oversees management in carrying out its responsibilities for financial reporting and systems of internal control. The Audit Committee, which is chaired by and composed solely of trustees who are unrelated to, and independent of, the Trust, meet regularly with financial management and external auditors to satisfy itself as to reliability and integrity of financial information and the safeguarding of assets. The Audit Committee reports its findings to the Board of Trustees for consideration in approving the annual consolidated financial statements to be issued to unitholders. The external auditors have full and free access to the Audit Committee. Donald E. Clow, FCPA, FCA President and Chief Executive Officer Glenn R. Hynes, FCPA, FCA Executive Vice President, Chief Financial Officer and Secretary February 22, 2017 February 22, 2017 5 6 C R O M B I E R E I T FINANCIAL STATEMENTSI N D E P E N D E N T A U D I TO R ’ S R E P O R T TO T H E B OA R D O F T R U S T E E S O F C R O M B I E R E A L E S TAT E I N V E S T M E N T T R U S T We have audited the accompanying consolidated financial statements of Crombie Real Estate Investment Trust (“Crombie”) and its subsidiaries, which comprise the consolidated balance sheet as at December 31, 2016 and the consolidated statements of comprehensive income, changes in net assets attributable to unitholders and cash flows for the year then ended, and the related notes, which comprise a summary of significant accounting policies and other explanatory information. Management’s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on 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 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 Crombie and its subsidiaries as at December 31, 2016 and their financial performance and their cash flows for the year then ended in accordance with International Financial Reporting Standards. Other matter The financial statements of Crombie Real Estate Investment Trust for the year ended December 31, 2015 were audited by another auditor who expressed an unmodified opinion on those financial statements on February 24, 2016. Chartered Professional Accountants, Licensed Public Accountants Halifax, Canada February 22, 2017 A N N U A L R E P O R T 2 0 1 6 5 7 FINANCIAL STATEMENTS Note December 31, 2016 December 31, 2015 $ 3,716,720 $ 3,202,886 815 191,247 6,104 — 100,891 600 3,914,886 3,304,377 — 34,567 13,865 — 48,432 3,963,318 1,765,824 398,588 132,134 75,400 8,110 8,493 1,057 33,978 13,333 119,448 167,816 3,472,193 1,548,648 398,080 131,518 74,200 7,736 6,661 2,388,549 2,166,843 99,653 282 84,688 184,623 92,555 246 65,319 158,120 2,573,172 2,324,963 $ 1,390,146 $ 1,147,230 $ 834,203 $ 694,484 555,943 452,746 $ 1,390,146 $ 1,147,230 3 4 5 6 5 6 7 8 9 10 11 12 13 8 12 13 23 24 C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S CO N S O L I DAT E D B A L A N C E S H E E T S (In thousands of CAD dollars) Assets Non-current assets Investment properties Investment in joint ventures Other assets Long-term receivables Current assets Cash and cash equivalents Other assets Long-term receivables Investment properties held for sale Total Assets Liabilities Non-current liabilities Investment property debt Senior unsecured notes Convertible debentures Deferred taxes Employee future benefits obligation Trade and other payables Current liabilities Investment property debt Employee future benefits obligation Trade and other payables Total liabilities excluding net assets attributable to Unitholders Net assets attributable to Unitholders Net assets attributable to Unitholders represented by: Crombie REIT Unitholders Special Voting Units and Class B Limited Partnership Unitholders Commitments and contingencies Subsequent events See accompanying notes to the consolidated financial statements. Approved on behalf of the Board of Trustees “Signed John Eby” “Signed J. Michael Knowlton” John Eby Lead Trustee J. Michael Knowlton Audit Committee Chair 5 8 C R O M B I E R E I T FINANCIAL STATEMENTS CO N S O L I DAT E D S TAT E M E N T S O F CO M P R E H E N S I V E I N CO M E ( L O S S ) (In thousands of CAD dollars) Property revenue Property operating expenses Net property income Gain on disposal of investment properties Impairment of investment properties Depreciation of investment properties Amortization of intangible assets Amortization of deferred leasing costs General and administrative expenses Finance costs – operations Operating income before taxes Taxes – current Taxes – deferred Operating income attributable to Unitholders Finance costs – other Distributions to Unitholders Change in fair value of financial instruments Increase (decrease) in net assets attributable to Unitholders Other comprehensive income Items that will not be subsequently reclassified to Increase (decrease) in net assets attributable to Unitholders: Year ended December 31, 2016 Year ended December 31, 2015 Note 14 $ 400,001 $ 369,866 3 3 3 3 3 16 17 11 11 13 115,306 284,695 37,490 (6,000) (66,552) (6,170) (610) (16,341) (100,156) 126,356 (26) (1,200) 125,130 (125,737) 312 (125,425) (295) 113,261 256,605 23 (12,575) (60,498) (5,480) (598) (14,401) (98,611) 64,465 (2,936) 4,200 65,729 (116,576) 56 (116,520) (50,791) Unamortized actuarial gains (losses) in employee future benefit obligation 12 (110) 352 Items that will be subsequently reclassified to Increase (decrease) in net assets attributable to Unitholders: Costs incurred on derivatives designated as cash flow hedges transferred to finance costs – operations Other comprehensive income Comprehensive income (loss) See accompanying notes to the consolidated financial statements. 2,440 2,330 2,035 2,520 2,872 $ (47,919) $ A N N U A L R E P O R T 2 0 1 6 5 9 FINANCIAL STATEMENTS CO N S O L I DAT E D S TAT E M E N T S O F C H A N G E S I N N E T A S S E T S AT T R I B U TA B L E TO U N I T H O L D E R S (In thousands of CAD dollars) REIT Units, Special Voting Units and Class B LP Units (Note 18) Net Assets Accumulated Other Attributable Comprehensive Income (Loss) to Unitholders Attributable to Total REIT Units Class B LP Units Balance, January 1, 2016 $ 1,473,885 $ (315,750) $ (10,905) $ 1,147,230 $ 694,484 $ 452,746 Adjustments related to EUPP Statements of comprehensive income (loss) Units issued under Distribution Reinvestment Plan (“DRIP”) Unit issue proceeds, net of costs of $5,889 67 — 21,661 219,111 42 — (295) 2,330 — — — — 109 2,035 21,661 109 973 12,666 — 1,062 8,995 219,111 125,971 93,140 Balance, December 31, 2016 $ 1,714,724 $ (316,003) $ (8,575) $ 1,390,146 $ 834,203 $ 555,943 (In thousands of CAD dollars) REIT Units, Special Voting Units and Class B LP Units (Note 18) Net Assets Attributable to Unitholders Accumulated Other Comprehensive Income (Loss) Attributable to Total REIT Units Class B LP Units Balance, January 1, 2015 $ 1,462,101 $ (265,010) $ (13,777) $ 1,183,314 $ 716,025 $ 467,289 Adjustments related to EUPP Conversion of debentures Statements of comprehensive income (loss) Units issued under DRIP 75 205 — 11,504 51 — (50,791) — — — 2,872 — 126 205 (47,919) 11,504 126 205 (28,595) 6,723 — — (19,324) 4,781 Balance, December 31, 2015 $ 1,473,885 $ (315,750) $ (10,905) $ 1,147,230 $ 694,484 $ 452,746 See accompanying notes to the consolidated financial statements. 6 0 C R O M B I E R E I T FINANCIAL STATEMENTSCONSOLIDATED FINANCIAL STATEMENTS CO N S O L I DAT E D S TAT E M E N T S O F C A S H F L OW S (In thousands of CAD dollars) Cash flows provided by (used in) Operating Activities Year ended December 31, 2016 Year ended December 31, 2015 Note Increase (decrease) in net assets attributable to Unitholders $ (295) $ Items not affecting operating cash Change in other non-cash operating items Income taxes paid Cash provided by (used in) operating activities Financing Activities Issue of mortgages Deferred financing charges – investment property debt Repayment of mortgages Advance (repayment) of floating rate credit facilities Issue of senior unsecured notes Deferred financing charges – senior unsecured notes Redemption of convertible debentures REIT Units and Class B LP Units issued REIT Units and Class B LP Units issue costs Repayment of EUPP loans receivable Collection of (increase in) long-term receivables Cash provided by (used in) financing activities Investing Activities Acquisition of investment properties and intangible assets Additions to investment properties Proceeds on disposal of investment properties Additions to tenant incentives Additions to deferred leasing costs Cash provided by (used in) investing activities Net change in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year See accompanying notes to the consolidated financial statements. 19 19 68,901 (1,686) — 66,920 193,401 (2,967) (98,566) 90,374 — — — 225,000 (5,889) 67 (6,036) 395,384 (550,863) (29,928) 192,549 (74,071) (1,048) (50,791) 94,015 1,481 (3,591) 41,114 119,134 (1,020) (106,440) (15,000) 125,000 (988) (44,795) — — 75 (302) 75,664 (79,954) (25,684) 2,770 (12,638) (826) (463,361) (116,332) (1,057) 1,057 $ — $ 446 611 1,057 A N N U A L R E P O R T 2 0 1 6 6 1 FINANCIAL STATEMENTS N O T E S TO T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S (In thousands of CAD dollars) 1 G E N E R A L I N F O R M AT I O N A N D N AT U R E O F O P E R AT I O N S Crombie Real Estate Investment Trust (“Crombie”) is an unincorporated “open-ended” real estate investment trust created pursuant to the Declaration of Trust dated January 1, 2006, as amended. The principal business of Crombie is investing in income-producing retail, office and mixed use properties in Canada. Crombie is registered in Canada and the address of its registered office is 610 East River Road, Suite 200, New Glasgow, Nova Scotia, Canada, B2H 3S2. The consolidated financial statements for the years ended December 31, 2016 and December 31, 2015 include the accounts of Crombie and all of its subsidiary entities. The units of Crombie are traded on the Toronto Stock Exchange (“TSX”) under the symbol “CRR.UN”. The consolidated financial statements were authorized for issue by the Board of Trustees on February 22, 2017. 2 S U M M A R Y O F S I G N I F I C A N T ACCO U N T I N G P O L I C I E S (a) Statement of compliance These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). (b) Basis of presentation The consolidated financial statements are presented in Canadian dollars (“CAD”); Crombie’s functional and reporting currency, rounded to the nearest thousand. The consolidated financial statements are prepared on a historical cost basis except for any financial assets and liabilities classified as fair value with changes in fair value recognized in Increase (decrease) in net assets attributable to Unitholders (“FVTPL” classification) or designated as available for sale (“AFS”) that have been measured at fair value. (c) Presentation of financial statements When Crombie: (i) applies an accounting policy retrospectively; (ii) makes a retrospective restatement of items in its financial statements; or (iii) reclassifies items on the balance sheet, it will present an additional balance sheet as at the beginning of the earliest comparative period. (d) Basis of consolidation (i) Subsidiaries Crombie’s financial statements consolidate those of Crombie and all of its subsidiary entities as at December 31, 2016. Subsidiaries are all entities over which Crombie has control. All subsidiaries have a reporting date of December 31, 2016. All intercompany transactions, balances, income and expenses are eliminated in preparing the consolidated financial statements. Where unrealized losses on intercompany asset sales are reversed on consolidation, the underlying asset is also tested for impairment from an entity perspective. Operating income (loss) and other comprehensive income (loss) of subsidiaries acquired or disposed of during the period are recognized from the effective date of acquisition, or up to the effective date of disposal, as applicable. (ii) Joint arrangements Joint arrangements are business arrangements whereby two or more parties have joint control. Joint control is based on the contractual sharing of control over the decisions related to the relevant activities. Joint arrangements are classified as either joint operations or joint ventures depending on the contractual arrangements related to the rights and obligations of the parties to the arrangement. Joint operations A joint operation is an arrangement wherein the parties to the arrangement have rights to the assets and obligations for the liabilities related to the arrangement. For joint operations, Crombie recognizes its proportionate share of the assets, liabilities, revenues and expenses of the joint operation in the relevant categories of Crombie’s financial statements. Joint ventures A joint venture is an entity over which Crombie shares joint control with other parties and where the joint venture parties have rights to the net assets of the joint venture. Joint control exists where there is a contractual agreement for shared control and wherein decisions about the significant relevant activities of the arrangement require unanimous consent of the parties sharing control. Investment in joint ventures is accounted for using the equity method. Under the equity method, the investment is initially recorded at cost with subsequent adjustments for Crombie’s share of the results of operations and any change in net assets. Crombie’s joint venture entities have the same reporting period as Crombie and adjustments, if any, are made to bring the accounting policies of joint venture entities in line with the policies of Crombie. (e) Investment properties Investment properties are properties which are held to earn rental income. Investment properties include land, buildings and intangible assets. Investment properties are carried at cost less accumulated depreciation and are reviewed for impairment as described in Note 2(w). Depreciation of buildings is calculated using the straight-line method with reference to each property’s cost, the estimated useful life of the building (not exceeding 40 years) and its components, significant parts and residual value. 6 2 C R O M B I E R E I T NOTESAmortization of intangible assets is calculated using the straight-line method over the term of the tenant lease. Repairs and maintenance items are expensed as incurred or, in the case of major items that constitute a capital asset, are capitalized to the building and amortized on a straight-line basis over the estimated useful life of the improvement. Upon acquisition, Crombie performs an assessment of investment properties being acquired to determine whether the acquisition is to be accounted for as an asset acquisition or a business combination. A transaction is considered to be a business combination if the acquired property meets the definition of a business under IFRS 3 – Business Combinations; being an integrated set of activities and assets that are capable of being managed for the purpose of providing a return to the Unitholders. For asset acquisitions, the total cost is allocated to the identifiable assets and liabilities on the basis of their relative fair values on the acquisition date. Asset acquisitions do not give rise to goodwill. Fair value of such assets and liabilities is determined based on the following: Land – the amount allocated to land is based on an appraisal estimate of its fair value. Buildings – are recorded at the estimated fair value of the building and its components and significant parts. Intangible assets – are recorded for tenant relationships, based on estimated costs avoided should the respective tenants renew their leases at the end of the initial lease term, adjusted for the estimated probability of renewal. Fair value of debt – values ascribed are determined based on the differential between contractual and market interest rates on long-term liabilities assumed at acquisition. For business combinations, the acquisition method is used wherein the components of the business combination (assets acquired, liabilities assumed, consideration transferred and any goodwill or bargain purchase) are recognized and measured. The assets acquired and liabilities assumed from the acquiree are measured at their fair value on the acquisition date. Change in useful life of investment properties The estimated useful lives of significant investment properties are reviewed whenever events or circumstances indicate a change in useful life. Estimated useful lives of significant investment properties are based on management’s best estimate and the actual useful lives may be different. Revisions to the estimated useful lives of investment properties constitute a change in accounting estimate and are accounted for prospectively by amortizing the cumulative changes over the remaining estimated useful life of the related assets. (f) Cash and cash equivalents Cash and cash equivalents are defined as cash on hand, cash in bank and guaranteed investments with a maturity less than 90 days at date of acquisition. (g) Assets held for sale and discontinued operations A non-current asset is classified as held for sale if its carrying amount will be recovered principally through a sale transaction rather than continuing use. A property is classified as held for sale at the point in time when it is available for immediate sale, management has committed to a plan to sell the property and is actively locating a purchaser for the property at a sales price that is reasonable in relation to the current estimated fair value of the property, and the sale is expected to be completed within a one year period. Properties held for sale are carried at the lower of their carrying values and estimated fair value less costs to sell. In addition, assets classified as held for sale are not depreciated and amortized. A property that is subsequently reclassified as held and in use is measured at the lower of its carrying value amount before it was classified as held for sale, adjusted for any depreciation and amortization expense that would have been recognized had it been continuously classified as held and in use, and its estimated fair value at the date of the subsequent decision not to sell. Assets that are classified as held for sale and that constitute a component of Crombie are presented as discontinued operations and their operating results are presented separately in the Consolidated Statements of Comprehensive Income (Loss). A component of Crombie includes a property type or geographic area of operations. (h) Convertible debentures Convertible debentures issued by Crombie are convertible into a fixed number of REIT Units (a liability) at the option of the holder and are redeemable by the issuer under certain conditions (Note 10). Upon issuance, convertible debentures are separated into their debt component and embedded derivative features. The debt component of the convertible debentures is recognized initially at the fair value of a similar debt instrument without the embedded derivative features. Subsequent to initial recognition, the debt component is measured at amortized cost using the effective interest method. The embedded derivative features include a holder conversion option at any time and an issuer redemption option under certain conditions. The multiple embedded derivative features are treated as a single compound embedded derivative liability and initially recognized at fair value. Subsequent to initial recognition, changes in fair value are recognized in the Consolidated Statements of Comprehensive Income (Loss). A N N U A L R E P O R T 2 0 1 6 6 3 NOTES Upon issuance, any directly attributable costs are allocated to the debt component and embedded derivative liability in proportion to their initial carrying amounts. For the debt component, the transaction costs are reflected in the determination of the effective interest rate. For the embedded derivative liability, the transaction costs are immediately expensed in the Consolidated Statements of Comprehensive Income (Loss). Upon conversion, the carrying amount of the debt component and the related fair value of the derivative liability as of the date of conversion are transferred to Net assets attributable to Unitholders in the Consolidated Balance Sheets. Upon redemption, the redemption proceeds are compared to the carrying amount of the debt component and the related fair value of the embedded derivative extinguished as of the date of redemption, and any gain or loss on redemption is recognized in the Consolidated Statements of Comprehensive Income (Loss). (i) Employee future benefits obligation The cost of Crombie’s pension benefits for defined contribution plans is expensed for employees in respect of the period in which they render services. The cost of defined benefit pension plans and other benefit plans is accrued based on estimates, using actuarial techniques, of the amount of benefits employees have earned in return for their services in the current and prior periods. The present value of the defined benefit obligation and current service cost is determined by discounting the estimated benefits using the projected unit credit method to determine the fair value of the plan assets and total actuarial gains and losses and the proportion thereof which will be recognized. Other factors considered for other benefit plans include assumptions regarding salary escalation, retirement ages and expected growth rate of health care costs. The fair value of any plan assets is based on current market values. The present value of the defined benefit obligation is based on the discount rate determined by reference to the yield of high quality corporate bonds of similar currency, having terms of maturity which align closely with the period of maturity of the obligation. The defined benefit plan and post- employment benefit plan are unfunded. The impact of changes in plan provisions will be recognized in benefit costs on a straight-line basis over a period not exceeding the average period until the benefit becomes vested. To the extent that the benefits are already vested immediately following the introduction of, or changes to, the plan, the past service cost will be recognized immediately. In measuring its defined benefit liability, Crombie recognizes actuarial gains and losses directly to other comprehensive income (loss). (j) Unit based compensation plans (i) Deferred Unit Plan (“DU Plan”) Crombie provides a voluntary DU Plan whereby eligible trustees, officers and employees (the “Participants”) may elect to receive all or a portion of their eligible compensation in deferred units (“DUs”). Unless otherwise determined by the Board (or its designated Committee), DUs are fully vested at the time they are allocated, with the value of the award recorded as a liability and expensed as general and administrative expenses. A Participant may redeem their vested DUs in whole or in part by filing a written notice of redemption; redemption will also occur as the result of specific events such as the retirement of a Participant. Upon redemption, a Participant will receive the net value of the vested DUs being redeemed, with the net value determined by multiplying the number of DUs redeemed by the REIT Unit’s market price on redemption date, less applicable withholding taxes. The Participant may elect to receive this net amount as a cash payment or instead receive Crombie REIT Units for redeemed DUs after deducting applicable withholding taxes. For fair value measurement purposes, each DU is measured based on the market value of a REIT Unit at the balance sheet date with changes in fair value recognized in the Consolidated Statements of Comprehensive Income (Loss). (ii) Restricted Unit Plan (“RU Plan”) Crombie has an RU Plan for certain eligible executives and employees (“RU Participants”), whereby the RU Participants may elect each year to participate in the RU Plan and receive all or a portion of their annual long-term incentive plan awards in restricted units (“RUs”). The RUs are accounted for under IAS 19 Employee benefits and the liability and expense are recognized over the service period which ends on the vesting date. On the vesting date, each eligible RU Participant shall be entitled to receive a cash amount (net of any applicable withholding taxes) equal to the number of vested RUs held by the RU Participant multiplied by the market value on the vesting date, with the market value of each RU determined by the market value of a REIT Unit. No REIT Units or other securities of Crombie will be issued from treasury. Alternatively, an RU Participant may elect to convert their RUs to DUs under Crombie’s DU Plan. (k) Distribution reinvestment plan (“DRIP”) Crombie has a DRIP which is described in Note 18. (l) Revenue recognition Property revenue includes rents earned from tenants under lease agreements, percentage rent, realty tax and operating cost recoveries, and other incidental income. Certain leases have rental payments that change over their term due to changes in rates. Crombie records the rental revenue from leases on a straight-line basis over the term of the lease. Accordingly, an accrued rent receivable is recorded for the difference between the straight-line rent recorded as property revenue and the rent that is contractually due from the tenants. In addition, tenant incentives are amortized on a straight-line basis over the term of existing leases and the amortization is shown as a reduction in property revenue. Percentage rents are recognized when tenants are obligated to pay such rent under the terms of the related lease agreements. Realty tax and operating cost recoveries, and other incidental income, are recognized on an accrual basis. 6 4 C R O M B I E R E I T NOTESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of CAD dollars)(m) Leasing Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Operating leases (i) Crombie as lessor Crombie has determined that all of its leases with its tenants are operating leases. Revenue is recorded in accordance with Crombie’s revenue recognition policy (Note 2(l)). (ii) Crombie as lessee Operating leases consist mainly of land leases which are expensed to property operating costs as incurred. Crombie also has a small amount of equipment and vehicle leases that are expensed to general and administrative expenses as incurred. (n) Deferred financing charges Deferred financing charges consist of costs directly attributable to the issuance of debt. These charges are amortized in finance costs – operations using the effective interest method, over the term of the related debt. (o) Finance costs – operations Finance costs – operations primarily comprise interest on Crombie’s borrowings. Finance costs directly attributable to the acquisition, redevelopment, construction or production of a qualifying asset are capitalized as a component of the cost of the asset to which it is related. All other finance costs – operations are expensed in the period in which they are incurred. (p) Finance costs – distributions to Unitholders The determination to declare and make payable distributions from Crombie is at the discretion of the Board of Trustees and, until declared payable by the trustees, Crombie has no contractual obligation to pay cash distributions to Unitholders. (q) Income taxes Crombie is taxed as a “mutual fund trust” for income tax purposes. It is the intention of Crombie, subject to approval of the trustees, to make distributions not less than the amount necessary to ensure that Crombie will not be liable to pay income tax, except for the amounts incurred in its incorporated subsidiaries. Deferred tax assets and/or liabilities of Crombie relate to tax and accounting basis differences of all incorporated subsidiaries of Crombie. Income taxes are accounted for using the liability method. Under this method, deferred taxes are recognized for the expected deferred tax consequences of differences between the carrying amount of balance sheet items and their corresponding tax values. Deferred taxes are computed using substantively enacted corporate income tax rates for the years in which tax and accounting basis differences are expected to reverse. Deferred tax assets and/or liabilities are offset only when Crombie has a right and intention to set off tax assets and liabilities from the same taxation authority. Changes in deferred tax assets or liabilities are recognized as a component of income or expense in operations, except where they relate to items that are recognized in other comprehensive income (loss) (such as the unrealized gains and losses on cash flow hedges) or directly in change in net assets, in which case the related deferred tax is also recognized in other comprehensive income (loss) or change in net assets, respectively. (r) Hedges Crombie may use cash flow hedges to manage exposures to increases in variable interest rates. Cash flow hedges are recognized on the balance sheet at fair value with the effective portion of the hedging relationship recognized in other comprehensive income (loss). Any ineffective portion of the cash flow hedge is recognized in operating income. Amounts recognized in accumulated other comprehensive income (loss) are reclassified to operating income in the same periods in which the hedged item is recognized in operating income. Fair value hedges and the related hedged items are recognized on the balance sheet at fair value with any changes in fair value recognized in operating income. To the extent the fair value hedge is effective, the changes in the fair value of the hedge and the hedged item will offset each other. Crombie assesses on an ongoing basis whether any existing derivative financial instrument continues to be effective in offsetting changes in interest rates on the hedged items. (s) Comprehensive income (loss) Comprehensive income (loss) is the change in net assets attributable to Unitholders during a period from transactions and other events and circumstances from non-unitholder sources. Crombie reports a consolidated statement of comprehensive income (loss), comprising changes in net assets attributable to Unitholders and other comprehensive income (loss) for the year. Accumulated other comprehensive income (loss), has been included in the Consolidated Statements of Changes in Net Assets Attributable to Unitholders. (t) Provisions Provisions are recognized when: Crombie has a present obligation (legal or constructive) as a result of a past event; it is probable that Crombie will be required to settle the obligation; and, a reliable estimate can be made of the amount of the obligation. A N N U A L R E P O R T 2 0 1 6 6 5 NOTES The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the balance sheet date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows, where the time value of money is material. When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, the receivable is recognized as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably. Provisions reflect Crombie’s best estimate at the reporting date. Environmental liabilities are recognized when Crombie has an obligation relating to site closure or rehabilitation. The extent of the work required and the associated costs are dependent on the requirements of the relevant authorities and Crombie’s environmental policies. Provisions for the cost of each closure and rehabilitation program are recognized at the time of occurrence and when Crombie has a reliable estimate of the obligation. Changes in the provision are recognized in the period of the change. Crombie’s provisions are immaterial and are included in trade and other payables. (u) Financial instruments Crombie classifies financial assets and liabilities according to their characteristics and management’s choices and intentions related thereto for the purpose of ongoing measurement. Classification choices for financial assets include: a) FVTPL – measured at fair value with changes in fair value recognized in increase (decrease) in net assets attributable to Unitholders for the period; b) held to maturity – recorded at amortized cost with gains and losses recognized in increase (decrease) in net assets attributable to Unitholders in the period that the asset is derecognized or impaired; c) available-for-sale – measured at fair value with changes in fair value recognized in other comprehensive income (loss) for the current period until realized through disposal or impairment; and, d) loans and receivables – recorded at amortized cost with gains and losses recognized in increase (decrease) in net assets attributable to Unitholders in the period that the asset is no longer recognized or impaired. Classification choices for financial liabilities include: a) FVTPL – measured at fair value with changes in fair value recognized in increase (decrease) in net assets attributable to Unitholders for the period; and, b) other – measured at amortized cost with gains and losses recognized in comprehensive income (loss) in the period that the liability is no longer recognized. Subsequent measurement for these assets and liabilities is based on either fair value or amortized cost using the effective interest method, depending upon their classification. Crombie’s financial assets and liabilities are generally classified and measured as follows: Asset/Liability Cash and cash equivalents Trade receivables Restricted cash Long-term receivables Marketable securities Derivative financial assets and liabilities Accounts payable and other liabilities (excluding convertible debentures embedded derivatives and interest rate swaps) Investment property debt Convertible debentures (excluding embedded derivatives) Senior unsecured notes Classification Measurement Loans and receivables Amortized cost Loans and receivables Amortized cost Loans and receivables Amortized cost Loans and receivables Amortized cost FVTPL FVTPL Fair value Fair value Other liabilities Amortized cost Other liabilities Amortized cost Other liabilities Amortized cost Other liabilities Amortized cost Other balance sheet accounts, including, but not limited to, prepaid expenses, accrued straight-line rent receivable, tenant incentives, investment properties, deferred taxes and employee future benefits obligation are not financial instruments. Transaction costs, other than those related to financial instruments classified as FVTPL that are expensed as incurred, are added to the fair value of the financial asset or financial liability on initial recognition and amortized using the effective interest method. Financing costs incurred to establish revolving credit facilities are deferred and amortized on a straight-line basis over the term of the facilities. In the event any debt is extinguished, the associated unamortized financing costs are expensed immediately. Embedded derivatives are required to be separated and measured at fair values if certain criteria are met. The holder conversion option and issuer redemption options in Crombie’s convertible debentures are considered to be embedded derivatives. Crombie’s accounting policies relating to convertible debentures are described in Note 2(h). (v) Fair value measurement The fair value of financial instruments is the estimated amount that Crombie would receive to sell a financial asset or pay to transfer a financial liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either in the principal market for the asset or liability or, in the absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most advantageous market must be accessible by Crombie. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. 6 6 C R O M B I E R E I T NOTESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of CAD dollars) Crombie uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs. The fair value of any interest rate swap is estimated by discounting net cash flows of the swaps using forward interest rates for swaps of the same remaining maturities. A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. When determining the highest and best use of non-financial assets Crombie takes into account the following; • • • use of the asset that is physically possible – Crombie assesses the physical characteristics of the asset that market participants would take into account when pricing the asset; use that is legally permissible – Crombie assesses any legal restrictions on the use of the asset that market participants would take into account when pricing the asset; and, use that is financially feasible – Crombie assesses whether a use of the asset that is physically possible and legally permissible generates adequate income or cash flows to produce an investment return that market participants would require from an investment in that asset put to that use. (w) Impairment of long-lived tangible and definite life intangible assets Long-lived tangible and definite life intangible assets are reviewed for impairment when events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. When such an indication exists, the recoverable amount of the asset is estimated in order to determine the extent of impairment loss (if any). The recoverable amount is the higher of fair value less costs to sell and value in use. Where the asset does not generate cash flows that are independent from other assets, Crombie estimates the recoverable amount of the cash generating unit(s) to which the asset belongs. When the recoverable amount of an asset (or cash generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash generating unit) is reduced to the recoverable amount. An impairment loss is recognized as an expense immediately in operating income. Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash generating unit) is increased to the revised estimate, but is limited to the carrying amount that would have been determined if no impairment loss had been recognized in prior periods. A reversal of impairment loss is recognized immediately in operating income. (x) Net assets attributable to Unitholders (i) Balance Sheet presentation In accordance with International Accounting Standard (“IAS”) 32 Financial Instruments: Presentation, puttable instruments are generally classified as financial liabilities. Crombie’s REIT Units and Class B LP Units with attached Special Voting Units (“SVU”) are both puttable instruments, meeting the definition of financial liabilities in IAS 32. There are exception tests within IAS 32 which could result in classification as equity; however, Crombie’s units do not meet the exception requirements. Therefore, Crombie has no instrument qualifying for equity classification on its Balance Sheet pursuant to IFRS. The classification of all units as financial liabilities with presentation as net assets attributable to Unitholders does not alter the underlying economic interest of the Unitholders in the net assets and net operating results attributable to Unitholders. (ii) Balance Sheet measurement REIT Units and Class B LP Units with attached SVUs are carried on the Balance Sheet at net asset value. Although puttable instruments classified as financial liabilities are generally required to be remeasured to fair value at each reporting period, the alternative presentation as net assets attributable to Unitholders reflects that, in total, the interests of the Unitholders is limited to the net assets of Crombie. (iii) Statement of Comprehensive Income (Loss) presentation As a result of the classification of all units as financial liabilities, the Statement of Comprehensive Income (Loss) recognizes distributions to Unitholders as a finance cost. In addition, terminology such as net income has been replaced by Increase (decrease) in net assets attributable to Unitholders to reflect the absence of an equity component on the Balance Sheet. (iv) Presentation of per unit measures As a result of the classification of all units as financial liabilities, Crombie has no equity instrument; therefore, in accordance with IAS 33 Earnings per Share, there is no denominator for purposes of calculation of per unit measures. (v) Allocation of Comprehensive income (loss) The components of Comprehensive income (loss) are allocated between REIT Units and Class B LP Units as follows: • • • Operating income – based on the weighted average number of units outstanding during the reporting period. Distributions to Unitholders – based on the actual distributions paid to each separate unit class. Accumulated other comprehensive income (loss) – increases are allocated based on the weighted average number of units outstanding during the reporting period, decreases in previously accumulated amounts are drawn down based on the average accumulation allocation rate. A N N U A L R E P O R T 2 0 1 6 6 7 NOTES (y) Critical judgments in applying accounting policies The following are the critical judgments that have been made in applying Crombie’s accounting policies and that have the most significant effect on the consolidated financial statements: (i) Investment properties Crombie’s accounting policies relating to investment properties are described in Note 2(e). In applying these policies, judgment is applied in determining whether certain costs are additions to the carrying amount of an investment property and whether properties acquired are considered to be asset acquisitions or business combinations. Crombie has determined that all properties acquired to date are asset acquisitions. (ii) Investment in joint ventures Crombie makes judgments in determining the appropriate accounting for investments in other entities. Such judgments include: determining the significant relevant activities and assessing the level of influence Crombie has over such activities through agreements and contractual arrangements. (iii) Leases Crombie makes judgments in determining whether certain leases, in particular long-term ground leases where Crombie is the lessee and the property meets the definition of investment property, are operating or finance leases. Crombie determined that all long-term ground leases where Crombie is the lessee are operating leases. All tenant leases where Crombie is a lessor have been determined to be operating leases. (iv) Classifications of Units as liabilities Crombie’s accounting policies relating to the classification of Units as liabilities are described in Note 2(x). The critical judgments inherent in this policy relate to applying the criteria set out in IAS 32, “Financial Instruments: Presentation”, relating to the puttable instrument exception. (v) Income taxes The assessment of the probability of future taxable income in which deferred tax assets can be utilized is based on Crombie’s latest budget forecast, which is adjusted for significant non-taxable income and expenses and specific limits to the use of any unused tax loss or credit. If a positive forecast of taxable income indicates the probable use of a deferred tax asset, especially when it can be used without a time limit, that deferred tax asset is usually recognized in full. The recognition of deferred tax assets that are subject to certain legal or economic limits or uncertainties are assessed individually by management based on the specific facts and circumstances. Crombie recognizes expected liabilities for tax based on an estimation of the likely taxes due, which requires significant judgment as to the ultimate tax determination of certain items. Where the actual liability arising from these issues differs from these estimates, such differences will have an impact on the income tax and deferred tax balances in the period when such determination is made. (z) Critical accounting estimates and assumptions The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates. The estimates and assumptions that are critical to the determination of the amounts reported in the consolidated financial statements relate to the following: (i) Fair value measurement A number of assets and liabilities included in Crombie’s consolidated financial statements require measurement at, and/or disclosure of, fair value. In estimating the fair value of an asset or a liability, Crombie uses market-observable data to the extent it is available. Where Level 1 inputs are not available, Crombie estimates the fair value based on discounted future cash flows using discount rates that reflect current market conditions for instruments with similar terms and risks. Such fair value estimates are not necessarily indicative of the amounts Crombie might pay or receive in actual market transactions. The significant methods and assumptions used in estimating fair value are set out in Notes 3 and 21. (ii) Investment in joint arrangements Crombie makes judgments in determining the appropriate accounting for investments in other entities. Such judgments include: determining the significant relevant activities and assessing the level of control or influence Crombie has over such activities through agreements and contractual arrangements; and, determining whether Crombie’s rights and obligations are directly related to the assets and liabilities of the arrangement or to the net assets of the joint arrangement. (iii) Investment properties Investment properties are carried at cost less accumulated depreciation. Crombie estimates the residual value and useful lives of investment properties and the significant components thereof to calculate depreciation and amortization. 6 8 C R O M B I E R E I T NOTESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of CAD dollars)(iv) Impairment of long-lived tangible and definite life intangible assets Long-lived tangible and definite life intangible assets are reviewed for impairment when events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. When such an indication exists, the recoverable amount of the asset is estimated in order to determine the extent of impairment loss (if any). The recoverable amount is the higher of fair value less costs to sell and value in use. Where the asset does not generate cash flows that are independent from other assets, Crombie estimates the recoverable amount of the cash generating unit(s) to which the asset belongs. When the recoverable amount of an asset (or cash generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash generating unit) is reduced to the recoverable amount. An impairment loss is recognized as an expense immediately in operating income. Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash generating unit) is increased to the revised estimate, but is limited to the carrying amount that would have been determined if no impairment loss had been recognized in prior periods. A reversal of impairment loss is recognized immediately in operating income. (v) Investment property valuation External, independent valuation companies, having appropriate recognized professional qualifications and recent experience in the location and category of properties being valued, value Crombie’s investment property portfolio on a rotating basis over a maximum period of four years. The fair values, based on the measurement date, represent the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Internal quarterly valuations are performed using internally generated valuation models prepared by considering the aggregate net property income received from leasing the property. A yield obtained from an independent valuation company, which reflects the specific risks inherent in the net property income, is then applied to the net annual property income to arrive at the property valuation. (vi) Defined benefit liability Management estimates the defined benefit liability annually with the assistance of independent actuaries; however, the actual outcome may vary due to estimation uncertainties. The estimate of Crombie’s defined benefit liability is based on standard rates of inflation, medical cost trends and mortality. It also takes into account Crombie’s specific anticipation of future salary increases. Discount factors are determined each reporting period by reference to high quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating the terms of the related pension liability. Estimation uncertainties exist particularly with regard to medical cost trends, which may vary significantly in future appraisals of Crombie’s defined benefit obligations. (vii) Purchase price allocation Investment properties are properties which are held to earn rental income. Investment properties include land, buildings and intangible assets. Upon acquisition, management allocates the purchase price of the acquisition as described in Note 2(e). This allocation contains a number of estimates and underlying assumptions including, but not limited to, highest and best use and fair value of the properties, estimated cash flows, discount rates, lease-up rates, inflation rates, renewal rates, tenant incentive allowances, cost recoveries and leasing costs and termination costs. (aa) Future changes in accounting standards The IASB has issued a number of standards and interpretations with an effective date after the date of these financial statements. Set out below are only those standards that may have a material impact on the consolidated financial statements in future periods. Management is currently evaluating the impact of these future policies on its consolidated financial statements. (i) IFRS 9 – Financial Instruments In July 2014, the IASB issued IFRS 9 Financial Instruments which replaces IAS 39 – Financial Instruments: Recognition and Measurement. IFRS 9 has three main phases: classification and measurement, impairment and general hedging. The new standard requires assets to be classified based on the business model for managing the financial assets and the contractual cash flow characteristics of the financial assets. Financial assets will be measured at FVTPL unless certain conditions are met which permit measurement at amortized cost or fair value through other comprehensive income. The classification and measurement of financial liabilities remain generally unchanged, with the exception of financial liabilities recorded at FVTPL. For financial liabilities designated at FVTPL, IFRS 9 requires the presentation of the effects of changes in our own credit risk in other comprehensive income instead of increase (decrease) in net assets attributable to Unitholders. IFRS 9 also introduces an impairment model for financial instruments not measured at FVTPL that requires recognition of expected losses at initial recognition of a financial instrument and the recognition of full lifetime expected losses if certain criteria are met. A new model for hedge accounting expands the scope of eligible hedged items and risks eligible for hedge accounting and aligns hedge accounting more closely with risk management. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with early adoption permitted. Management is currently assessing the impact the adoption of this standard will have on Crombie’s consolidated financial statements. (ii) IFRS 15 – Revenue from Contracts with Customers In May 2014, the IASB issued IFRS 15 which replaces IAS 11 Construction Contracts, IAS 18 Revenue and IFRIC 13 Customer Loyalty Programmes. This standard outlines a single comprehensive model for entities to account for revenue arising from contracts with customers. IFRS 15 is effective for annual periods beginning on or after January 1, 2018, with early adoption permitted and is to be applied retrospectively. Management is currently assessing the impact the adoption of this standard will have on Crombie’s consolidated financial statements. A N N U A L R E P O R T 2 0 1 6 6 9 NOTES (iii) IFRS 16 – Leases In January 2016, the IASB issued IFRS 16 which replaces IAS 17, “Leases” and its associated interpretative guidance. IFRS 16 applies a control model to the identification of leases, distinguishing between a lease and a service contract on the basis of whether the customer controls the asset being leased. For those assets determined to meet the definition of a lease, IFRS 16 introduces significant changes to the accounting by lessees, introducing a single, on-balance sheet accounting model that is similar to current finance lease accounting, with limited exceptions for short-term leases or leases of low value assets. Lessor accounting remains similar to current accounting practice. The standard is effective for annual periods beginning on or after January 1, 2019, with early application permitted for entities that apply IFRS 15. Management is currently assessing the impact of IFRS 16 on Crombie’s consolidated financial statements. 3 I N V E S T M E N T P R O P E R T I E S Cost Land Buildings Intangibles Deferred Leasing Costs Total Opening balance, January 1, 2016 $ 976,002 $ 2,500,700 $ 98,136 $ 6,780 $ 3,581,618 Acquisitions Additions Disposition Transfer to investment properties held for sale (Note 7) 259,796 1,310 (13,503) (164) 312,684 30,849 (23,572) (468) 18,285 — (1,846) (26) — 1,185 (165) — 590,765 33,344 (39,086) (658) Balance, December 31, 2016 1,223,441 2,820,193 114,549 7,800 4,165,983 Accumulated depreciation and amortization and impairment Opening balance, January 1, 2016 Depreciation and amortization Disposition Impairment Transfer to investment properties held for sale (Note 7) Balance, December 31, 2016 — — — 2,357 — 2,357 322,625 66,552 (7,020) 3,643 (69) 385,731 52,529 6,170 (1,591) — (10) 57,098 Net carrying value, December 31, 2016 $ 1,221,084 $ 2,434,462 $ 57,451 $ 3,578 610 (111) — — 4,077 3,723 378,732 73,332 (8,722) 6,000 (79) 449,263 $ 3,716,720 Land Buildings Intangibles Deferred Leasing Costs Total Cost Opening balance, January 1, 2015 $ 977,895 $ 2,479,018 $ 99,019 $ 5,540 $ 3,561,472 Acquisitions Additions Disposition Transfer to investment properties held for sale (Note 7) Transfer from investment properties held for sale (Note 7) 20,503 3,537 (1,453) (31,619) 7,139 74,229 23,155 (706) (103,315) 28,319 Balance, December 31, 2015 976,002 2,500,700 Accumulated depreciation and amortization and impairment Opening balance, January 1, 2015 Depreciation and amortization Disposition Impairment Transfer to investment properties held for sale (Note 7) Transfer from investment properties held for sale (Note 7) Balance, December 31, 2015 — — — — — — — 263,391 60,498 (23) 12,575 (18,424) 4,608 322,625 3,457 — — (4,432) 92 98,136 50,913 5,480 — — (3,956) 92 52,529 Net carrying value, December 31, 2015 $ 976,002 $ 2,178,075 $ 45,607 $ — 1,118 — (332) 454 6,780 2,965 598 — — (217) 232 3,578 3,202 98,189 27,810 (2,159) (139,698) 36,004 3,581,618 317,269 66,576 (23) 12,575 (22,597) 4,932 378,732 $ 3,202,886 Crombie’s total fair value of investment properties, including properties held for sale, exceeds carrying value by $844,033 at December 31, 2016 (December 31, 2015 – $708,949). Crombie uses the cost method for accounting for investment properties, and increases in fair value over carrying value are not recognized until realized through disposition or derecognition of properties, while impairment is recognized at the time of impairment. During the year ended December 31, 2016, Crombie recorded an impairment of $6,000 on two retail properties and during the year ended December 31, 2015, recorded an impairment of $12,575 on three retail properties and an office property. The impairments were the result of the fair value impact of tenant departures during the year; lower occupancy rates; and slower than expected leasing activity. Impairment was measured on a per property basis and was determined as the amount by which carrying value, using the cost method, exceeded the recoverable amount for that property. The recoverable amount was determined to be each property’s fair value which is the higher of the economic benefits of the continued use of the asset or the selling price less costs to sell. 7 0 C R O M B I E R E I T NOTESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of CAD dollars) The estimated fair values of Crombie’s investment properties are as follows: December 31, 2016 December 31, 2015 Carrying value consists of the net carrying value of: Investment properties Accrued straight-line rent receivable Tenant incentives Investment properties held for sale Total carrying value Fair Value Carrying Value $ $ 4,752,000 4,143,000 $ $ 3,907,967 3,434,051 Note December 31, 2016 December 31, 2015 3 5 5 7 $ 3,716,720 $ 3,202,886 59,225 132,022 — 50,050 61,667 119,448 $ 3,907,967 $ 3,434,051 The fair value of investment properties is a Level 3 fair value measurement. The fair value represents the estimated price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value included in this summary reflects the fair value of the properties as at December 31, 2016 and 2015, respectively, based on each property’s current use as a revenue generating investment property. Crombie owns several properties where the highest and best use as a development property would result in higher fair values. The valuation techniques and significant unobservable inputs used in determining the fair value of investment properties are set out below: (i) The capitalized net operating income method – Under this method, capitalization rates are applied to net operating income (property revenue less property operating expenses). The key assumption is the capitalization rates for each specific property. Crombie receives quarterly capitalization rate reports from external, knowledgeable property valuators. The capitalization rate reports provide a range of rates for various geographic regions and for various types and qualities of properties within each region. Management selects the appropriate rate for each property from the range provided. Crombie generally employs this method to determine fair value. (ii) The discounted cash flow method – Under this method, discount rates are applied to the forecasted cash flows reflecting the initial terms of the lease or leases for that specific property and assumptions as to renewal and new leasing activity. The key assumptions are the discount rate applied over the initial term of the lease, as well as lease renewals and new leasing activity. Crombie employs this method when the capitalized net operating income method indicates a risk of impairment or when a property is or will be undergoing redevelopment. (iii) External appraisals – Crombie has external, independent appraisals performed on all properties on a rotational basis over a period of not more than four years. As at December 31, 2016, all properties have been subjected to external, independent appraisal over the past four years. Crombie utilizes capitalization and discount rates within the ranges provided by external valuations. To the extent that the externally provided capitalization rate ranges change from one reporting period to the next, or should another rate within the provided ranges be more appropriate than the rate previously used, the fair value of the investment properties would increase or decrease accordingly. Crombie has utilized the following weighted average capitalization rates and has determined that an increase (decrease) in this applied capitalization rate of 0.25% would result in an increase (decrease) in the fair value of the investment properties as follows: December 31, 2016 December 31, 2015 Impact of a 0.25% Change in Capitalization Rate Weighted Average Capitalization Rate Increase in Rate Decrease in Rate 5.88% 6.15% $ $ (191,000) (163,000) $ $ 208,000 177,000 A N N U A L R E P O R T 2 0 1 6 7 1 NOTES Investment Property Acquisitions and Dispositions The operating results of acquired properties are included from the respective date of acquisition and for disposed properties up to the date of disposition. 2016 Transaction Date February 5, 2016 March 10, 2016 April 8, 2016 April 15, 2016 April 28, 2016 May 3, 2016 May 16, 2016 June 1, 2016 June 9, 2016 June 23, 2016 June 29, 2016 July 15, 2016 July 29, 2016 August 15, 2016 November 14, 2016 November 30, 2016 December 8, 2016 December 13, 2016 Vendor/Purchaser Properties Acquired (Disposed) Approximate Square Footage Initial Acquisition (Disposition) Price Assumed Mortgages 21,000 $ 5,500 $ Third party Third party Third party Third party Third party Third party Third party Third party Third party Third party Empire(1) Empire(1) Empire(1) Third party Third party Third party Third party Third party 1 (10) 1 (1) (1) 2 9 1 1 1 (791,000) 58,000 (8,000) (47,000) 117,000 94,000 37,000 84,000 54,000 22 2,090,000 (1) 1 (1) 1 1 (1) (4) (21,000) 62,000 (48,000) 29,000 6,000 (80,000) (215,000) (143,400) 15,700 (793) (7,500) 46,200 32,272 7,000 29,000 14,150 348,386 (9,057) 26,400 (2,300) 29,000 5,000 (10,750) (21,750) — — — — — 8,041 — 3,751 12,017 — — — — — 16,093 — — — (1) Empire includes Empire Company Limited, a related party, and its subsidiaries. 1,442,000 $ 363,058 $ 39,902 On July 8, 2016, Crombie acquired a 50% interest in a development property with a third party for an initial acquisition price of $5,250 which is not included in the above schedule. This investment is being accounted for as a joint operation. The disposition on July 15, 2016 and the acquisitions on July 29, 2016 and June 29, 2016 were transacted with Empire Company Limited or its subsidiaries (“Empire”), a related party. The June 29, 2016 acquisition included 19 retail properties and a 50% interest in three distribution centres. In addition to the 22 properties included in the above schedule were two parcels of development land adjacent to existing Crombie properties, with an initial acquisition price of $9,975. The remaining acquisitions and dispositions were transacted with third parties. The acquisition on June 23, 2016 was a vacant building which has since been demolished as part of a redevelopment plan for the property. The initial acquisition (disposition) prices stated above exclude closing and transaction costs. 2015 Transaction Date February 2, 2015(1) April 1, 2015(1) August 18, 2015 November 3, 2015(1) November 3, 2015 December 23, 2015(1) Vendor/Purchaser Third party Empire(2) Third party Empire(2) Empire(2) Empire(2) Properties Acquired (Disposed) Approximate Square Footage Initial Acquisition (Disposition) Price — — 1 — 4 — 51,000 $ 12,650 $ 7,500 50,000 34,800 183,800 6,700 2,333 20,500 8,450 48,845 3,530 Assumed Mortgages 5,479 — 12,077 — — — 333,800 $ 96,308 $ 17,556 (1) Relates to an acquisition of an addition to a pre-existing retail property. (2) Empire includes Empire Company Limited, a related party, and its subsidiaries. The initial acquisition prices stated above exclude closing and transaction costs. During the first quarter of 2015, Crombie disposed of a portion of one property’s land and building through a partial expropriation. The carrying value of the portion disposed was derecognized at that time. During the fourth quarter of 2015, Crombie disposed of a portion of one property’s land through a partial expropriation. The carrying value of the portion disposed was derecognized at that time. 7 2 C R O M B I E R E I T NOTESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of CAD dollars) The allocation of the total cost of the acquisitions (including closing and transaction costs) is as follows: Investment property acquired, net: Land Buildings Intangibles Fair value debt adjustment on assumed mortgages Net purchase price Assumed mortgages Investment property disposed: Gross proceeds Selling costs Carrying values derecognized Land Buildings Intangibles Deferred leasing costs Tenant Incentives Accrued straight-line rent Provisions Gain on disposal 4 I N V E S T M E N T I N J O I N T V E N T U R E S The following represents Crombie’s interest in its equity accounted investments: 1600 Davie Limited Partnership Year ended December 31, 2016 Year ended December 31, 2015 $ 259,796 $ 312,684 18,285 (1,072) 589,693 (39,902) $ 549,791 $ 20,503 74,229 3,457 (679) 97,510 (17,556) 79,954 Year ended December 31, 2016 Year ended December 31, 2015 $ 195,621 $ (3,072) 192,549 (45,288) (101,842) (747) (173) (3,434) (3,701) 126 $ 37,490 $ 3,323 (553) 2,770 (1,453) (683) — — 540 — (1,151) 23 December 31, 2016 50.0% The entity, which was created on January 19, 2016, is engaged in the development of a mixed use (retail and residential) property located at Davie Street, Vancouver, BC. The following table represents 100% of the financial results of the equity accounted entities as at December 31, 2016: Non-current assets Current assets Non-current liabilities Current liabilities Net assets Crombie’s investment in joint ventures The entity had no operating results during the reporting periods. 5 O T H E R A S S E T S 1600 Davie Limited Partnership $ 1,849 573 — 793 1,629 815 $ $ December 31, 2016 December 31, 2015 Current Non-current Total Current Non-current Total Trade receivables $ 11,625 $ Provision for doubtful accounts Net trade receivables Marketable securities Prepaid expenses and deposits Restricted cash Accrued straight-line rent receivable Tenant incentives (127) 11,498 2,290 12,104 8,675 — — — — — — — — 59,225 132,022 $ 11,625 $ 10,624 $ (127) 11,498 2,290 12,104 8,675 59,225 132,022 (60) 10,564 1,965 10,548 75 2,874 7,952 — — — — — — 47,176 53,715 $ 10,624 (60) 10,564 1,965 10,548 75 50,050 61,667 $ 34,567 $ 191,247 $ 225,814 $ 33,978 $ 100,891 $ 134,869 A N N U A L R E P O R T 2 0 1 6 7 3 NOTES Tenant Incentives Balance, January 1, 2016 Additions Amortization Disposition Transfer to investment properties held for sale (Note 7) Balance, December 31, 2016 Balance, January 1, 2015 Additions Amortization Disposition Transfer to investment properties held for sale (Note 7) Transfer from investment properties held for sale (Note 7) Balance, December 31, 2015 Cost Accumulated Amortization Net Carrying Value $ 107,122 $ 45,455 $ $ $ 83,092 — (3,049) (3) 187,162 94,825 12,509 — — (4,625) 4,413 $ $ — 11,622 (1,936) (1) 55,140 35,574 — 9,712 540 (2,278) 1,907 $ $ $ 107,122 $ 45,455 $ 61,667 83,092 (11,622) (1,113) (2) 132,022 59,251 12,509 (9,712) (540) (2,347) 2,506 61,667 On June 29, 2016, Crombie invested $58,823 in the renovation and expansion of 10 existing Sobeys anchored properties. The amount is included in tenant incentive additions and is being amortized over the 20 year amended lease terms. See Note 21(a) for fair value information. 6 L O N G - T E R M R E C E I VA B L E S December 31, 2016 Current Non-current Capital expenditure program $ — $ Interest rate subsidy Amount receivable from related party Amount receivable from third party 103 13,762 — $ 13,865 $ 105 392 — 5,607 6,104 $ Total 105 495 13,762 5,607 December 31, 2015 Current Non-current $ — $ 222 13,111 — $ 105 495 — — Total 105 717 13,111 — $ 19,969 $ 13,333 $ 600 $ 13,933 The amount receivable from a third party pertains to a development property which was acquired on July 8, 2016. During March 2014, Crombie advanced $11,856 to a subsidiary of Empire to partially finance their acquisition of development lands. The loan is repayable March 31, 2017. See Note 21(a) for fair value information. 7 I N V E S T M E N T P R O P E R T I E S H E L D F O R S A L E Land Buildings Intangibles Deferred Leasing Costs Tenant Incentives Total Balance, January 1, 2016 $ 31,619 $ 84,891 $ 476 $ 115 $ 2,347 $ 119,448 Additions Assets transferred to held for sale 2 164 — 399 Derecognition through disposition (31,785) (85,290) — 16 (492) 4 — (119) (28) 2 (22) 581 (2,321) (120,007) Net carrying value, December 31, 2016 $ — $ — $ — $ — $ — $ — Land Buildings Intangibles Deferred Leasing Costs Tenant Incentives Total Balance, January 1, 2015 $ 7,139 $ 23,711 $ — $ Assets transferred to held for sale Assets transferred from held for sale 31,619 (7,139) 84,891 (23,711) 476 — $ 222 115 (222) 2,506 2,347 (2,506) $ 33,578 119,448 (33,578) Net carrying value, December 31, 2015 $ 31,619 $ 84,891 $ 476 $ 115 $ 2,347 $ 119,448 On March 10, 2016, Crombie disposed of 10 retail properties to a third party. The remaining property which was classified as held for sale as at December 31, 2015 was disposed of on April 28, 2016. As at December 31, 2016, no properties met the criteria for classification as held for sale. During the first quarter of 2015, Crombie determined that an investment property previously classified as held for sale no longer met the criteria and was reclassified to in use. The determination was based on the decision to defer the sale to maximize Crombie’s return on the property. As a result, depreciation and amortization totalling $673 was recognized in the first quarter of 2015, representing the depreciation and amortization not recorded during the period the property was classified as held for sale. 7 4 C R O M B I E R E I T NOTESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of CAD dollars) 8 I N V E S T M E N T P R O P E R T Y D E B T Fixed rate mortgages Floating rate revolving credit facility Unsecured bilateral credit facility Deferred financing charges Fixed rate mortgages Floating rate revolving credit facility Deferred financing charges Range 2.35 – 6.90% Range 2.70 – 6.90% Weighted Average Interest Rate Weighted Average Term to Maturity December 31, 2016 4.46% 2.54% 2.64% 5.90 years $ 1,655,817 2.50 years 1.37 years 120,374 100,000 (10,714) $ 1,865,477 Weighted Average Interest Rate Weighted Average Term to Maturity December 31, 2015 4.62% 2.48% 6.6 years $ 1,521,079 2.5 years 130,000 (9,876) $ 1,641,203 As at December 31, 2016, debt retirements for the next five years are: 12 Months Ending December 31, 2017 December 31, 2018 December 31, 2019 December 31, 2020 December 31, 2021 Thereafter Deferred financing charges Unamortized fair value debt adjustment Fixed Rate Principal Payments Fixed Rate Maturities Floating Rate Maturities Total $ 49,290 $ 50,363 $ — $ 99,653 48,357 48,799 42,028 40,204 118,470 64,666 124,973 225,241 89,182 750,518 100,000 120,374 — — — 213,023 294,146 267,269 129,386 868,988 $ 347,148 $ 1,304,943 $ 220,374 1,872,465 (10,714) 3,726 $ 1,865,477 Specific investment properties with a carrying value of $2,974,237 as at December 31, 2016 (December 31, 2015 – $2,686,589) are currently pledged as security for mortgages or provided as security for the floating rate revolving credit facility. Carrying value includes investment properties, investment properties held for sale, as well as accrued straight-line rent receivable and tenant incentives which are included in other assets. Mortgage Activity For the year ended: December 31, 2016 For the year ended: December 31, 2015 Type New Assumed Repayment Type New Assumed Repayment Number of Mortgages 11 4 10 Number of Mortgages 12 2 11 Rates 3.48% 4.02% 4.81% Rates 2.85% 4.88% 4.85% Weighted Average Terms in Years Amortization Period in Years Proceeds (Repayments) 6.7 3.5 — 24.9 21.3 — $ 193,402 39,902 (49,774) $ 183,530 Weighted Average Terms in Years Amortization Period in Years Proceeds (Repayments) 4.9 4.7 — 24.8 12.6 — $ 119,134 17,556 (58,162) 78,528 $ Floating Rate Revolving Credit Facility The floating rate revolving credit facility has a maximum principal amount of $400,000 (December 31, 2015 – $300,000) and matures June 30, 2019. The facility is used by Crombie for working capital purposes and to provide temporary financing for acquisitions and development activity. It is secured by a pool of first and second mortgages on certain properties and the maximum principal amount is subject to available borrowing base (December 31, 2016 – borrowing base of $398,007). The floating interest rate is based on bankers’ acceptance rates plus a spread or specific margin over prime rate. The specified spread or margin changes depending on Crombie’s unsecured bond rating with DBRS and whether the facility remains secured or migrates to an unsecured status. A N N U A L R E P O R T 2 0 1 6 7 5 NOTES Unsecured Bilateral Credit Facility The unsecured bilateral credit facility has a maximum principal amount of $100,000 and matures May 16, 2018. The facility is used by Crombie for working capital purposes and to provide temporary financing for acquisitions and development activity. The floating interest rate is based on bankers’ acceptance rates plus a spread or specific margin over prime rate. The specified spread or margin changes depending on Crombie’s unsecured bond rating with DBRS. See Note 21(a) for fair value information. 9 S E N I O R U N S E C U R E D N O T E S Series A Series B Series C Unamortized Series B issue premium Deferred financing charges See Note 21(a) for fair value information. 10 CO N V E R T I B L E D E B E N T U R E S Maturity Date Interest Rate December 31, 2016 December 31, 2015 October 31, 2018 3.986% $ 175,000 $ 175,000 June 1, 2021 February 10, 2020 3.962% 2.775% 100,000 125,000 240 (1,652) 100,000 125,000 294 (2,214) $ 398,588 $ 398,080 Conversion Price Maturity Date Interest Rate December 31, 2016 December 31, 2015 Series D (CRR.DB.D) Series E (CRR.DB.E) Deferred financing charges $ $ Debenture Conversions Series C REIT Units Issued 20.10 September 30, 2019 5.00% $ 60,000 $ 60,000 17.15 March 31, 2021 5.25% Conversion Price $ 15.30 74,400 (2,266) $ 132,134 $ 74,400 (2,882) 131,518 Year ended December 31, 2016 Year ended December 31, 2015 $ $ $ $ — — — 205 205 13,398 The Series D (issued July 3, 2012) and Series E (issued August 14, 2013) Debentures pay interest semi-annually on March 31 and September 30 each year. Crombie has the option to pay interest on any interest payment date by issuing REIT units and applying the proceeds to satisfy its interest obligation. The Series D and Series E Convertible Debentures (collectively the “Debentures”) are convertible into REIT Units at the option of the debenture holder at any time up to the maturity date, at the conversion price indicated in the table above, being a conversion rate per one thousand dollars of principal amount of approximately: 49.7512 REIT Units for Series D Convertible Debentures and 58.3090 REIT Units for Series E Convertible Debentures. If all conversion rights attaching to the Series D Convertible Debentures and the Series E Convertible Debentures were exercised, as at December 31, 2016, Crombie would be required to issue approximately 2,985,074 REIT Units and 4,338,192 REIT Units, respectively, subject to anti-dilution adjustments. For the first three years from the date of issue, there is no ability to redeem the Debentures, after which, each series of convertible debentures has a period, lasting two years, during which the Debentures may be redeemed, in whole or in part, on not more than 60 days’ and not less than 30 days’ prior notice, at a redemption price equal to the principal amount thereof plus accrued and unpaid interest, provided that the volume-weighted average trading price of the REIT Units on the TSX for the 20 consecutive trading days ending on the fifth trading day preceding the date on which notice of redemption is given exceeds 125% of the conversion price. After the end of the five year period from the date of issue, and to the maturity date, the Debentures may be redeemed, in whole or in part, at any time at the redemption price equal to the principal amount thereof plus accrued and unpaid interest. Provided that there is not a current event of default, Crombie will have the option to satisfy its obligation to pay the principal amount of the Debentures at maturity or upon redemption, in whole or in part, by issuing the number of REIT Units equal to the principal amount of the Debentures then outstanding divided by 95% of the volume-weighted average trading price of the REIT Units for a stipulated period prior to the date of redemption or maturity, as applicable. Upon change of control of Crombie, Debenture holders have the right to put the Debentures to Crombie at a price equal to 101% of the principal amount plus accrued and unpaid interest. See Note 21(a) for fair value information. 7 6 C R O M B I E R E I T NOTESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of CAD dollars) 11 I N CO M E TA X E S On September 22, 2007, tax legislation Bill C-52, the Budget Implementation Act, 2007 (the “Act”) was passed into law. The Act related to the federal income taxation of publicly traded income trusts and partnerships. The Act subjects all existing income trusts, or specified investment flow-through entities (“SIFTs”), to corporate tax beginning in 2011, subject to an exemption for real estate investment trusts (“REITs”). A trust that satisfies the criteria of a REIT throughout its taxation year will not be subject to income tax in respect of distributions to its Unitholders or be subject to the restrictions on its growth that would apply to SIFTs. Crombie’s management and their advisors have completed an extensive review of Crombie’s organizational structure and operations to support Crombie’s assertion that it meets the REIT technical tests contained in the Act. The relevant tests apply throughout the taxation year of Crombie and, as such, the actual status of Crombie for any particular taxation year can only be ascertained at the end of the year. The deferred tax liability of the wholly-owned corporate subsidiaries which are subject to income taxes consist of the following: Tax liabilities relating to difference in tax and book value Tax asset relating to non-capital loss carry-forward Deferred tax liability The tax recovery (expense) consists of the following: Taxes – current Taxes – gains on disposal of investment properties Taxes – operating income earned in corporate subsidiaries Total current taxes Taxes – deferred Provision for income taxes at the expected rate Tax effect of income attribution to Crombie’s Unitholders Taxes – gains on disposal of investment properties Total deferred taxes December 31, 2016 December 31, 2015 $ $ 82,486 $ (7,086) 75,400 $ 85,815 (11,615) 74,200 Year ended December 31, 2016 Year ended December 31, 2015 $ $ $ — $ (26) (26) $ (2,066) (870) (2,936) (38,339) $ (19,362) 37,139 (1,200) — $ (1,200) $ 21,496 2,134 2,066 4,200 There are no corporate tax implications to Crombie from any of the components of accumulated other comprehensive income. 12 E M P L O Y E E F U T U R E B E N E F I T S Crombie has a number of defined benefit and defined contribution plans providing pension and other retirement benefits to most of its employees. Defined contribution pension plans The contributions required by the employee and the employer are specified. The employee’s pension depends on what level of retirement income (for example, annuity purchase) can be achieved with the combined total of employee and employer contributions and investment returns over the period of plan membership, and the annuity purchase rates at the time of the employee’s retirement. Defined benefit plans The retirement benefit provides pension benefits to members designated in writing by the Board of Trustees based on a formula recognizing length of service and final average earnings. The annual pension payable at age 65 is equal to 2% of the final average earnings multiplied by years of credited service (to a maximum of 30 years) over the estimated retirement income provided under the defined contribution pension plan and deferred profit sharing plan. The final average earnings are 12 times the average of the 60 highest months of eligible earnings. Employee contributions, if required, pay for part of the cost of the benefit, and the employer contributions fund the balance. The employer contributions are not specified or defined within the plan text; they are based on the result of actuarial valuations which determine the level of funding required to meet the total obligation as estimated at the time of the valuation. Crombie’s defined benefit plans are unfunded. Once participants attain age 55 and 5 years of continuous service, they can retire. The total pension payable is reduced by 5/12% for each month by which the early retirement precedes age 60 (62 for a member who was designated as a member on or after June 25, 2009). The normal form of pension payment is a 60% joint and survivor pension. The post-employment benefits program offered to Crombie employees and retirees in Canada is an open plan that provides life and medical benefits for grandfathered employees and employees retired prior to May 1, 2011 as well as critical illness coverage for other employees. Full-time employees must be over age 55 to be eligible for the post-employment benefits program. A N N U A L R E P O R T 2 0 1 6 7 7 NOTES The total defined benefit cost related to pension plans and post-employment benefit plans for the year ended December 31, 2016 was $546 (year ended December 31, 2015 – $531). The plan typically exposes Crombie to actuarial risks such as: interest rate risk, mortality risk and salary risk. (i) Interest rate risk – The present value of the defined benefit liability is calculated using discount rates that reflect the average yield, as at the measurement date, on high quality corporate bonds of similar duration to the plans’ liabilities. A decrease in the market yield on high quality corporate bonds will increase Crombie’s defined benefit liability. (ii) Mortality risk – The present value of the defined benefit plan is calculated by reference to the best estimate of the mortality of plan participants both during and after their employment. An increase in the life expectancy of the plan participants will increase the plan’s liability. (iii) Salary risk – The present value of the defined benefit plan liability is calculated by reference to the anticipated future salary of the plan participants. As such, an increase in the salary of plan participants over that anticipated will increase the plan’s liability. Senior Management Pension Plan Post-Employment Benefit Plans Most recent valuation date Next required valuation date December 31, 2016 January 1, 2016 December 31, 2017 December 31, 2018 The significant actuarial assumptions adopted in measuring the Company’s accrued benefit obligations and pension costs are as follows: Discount rate – accrued benefit obligation Rate of compensation increase December 31, 2016 December 31, 2015 Senior Management Pension Plan Post- Employment Benefit Plans Senior Management Pension Plan Post- Employment Benefit Plans 3.75% 3.50% 3.75% N/A 4.00% 3.50% 4.00% N/A For measurement purposes, a 5.75% (2015 – 6.50%) annual rate increase in the per capita cost of covered health care benefits was assumed. The cumulative rate is expected to decrease 0.25% annually to 5.00% in 2020. These assumptions were developed by management with the assistance of independent actuaries. Discount factors are determined close to year-end by reference to market yields of high quality corporate bonds that have a maturity approximating the terms of the related pension obligation. Other assumptions are based on current actuarial benchmarks and management’s historical experience. The projected unit credit method is used to determine the present value of the defined benefit obligation and the related current service cost for all active members. Crombie uses December 31 as a measurement date for accounting purposes for its defined benefit pension plans. Information about Crombie’s defined benefit plans are as follows: Accrued benefit obligation Balance, beginning of year Current service cost Interest cost Actuarial losses (gains) Benefits paid Balance, end of year Plan Assets Fair value, beginning of the year Employer contributions Benefits paid Fair value, end of year Funded status – deficit Current portion Non-current portion Accrued benefit obligation recorded as a liability Net expense Current service cost Interest cost Net expense 7 8 C R O M B I E R E I T December 31, 2016 December 31, 2015 Senior Management Pension Plan Post- Employment Benefit Plans Senior Management Pension Plan Post- Employment Benefit Plans $ 4,258 $ 3,724 $ 4,160 $ 3,882 179 173 123 (200) 4,533 — 200 (200) — 4,533 200 4,333 4,533 179 173 352 $ $ $ 44 150 (13) (46) 3,859 — 46 (46) — 3,859 82 3,777 3,859 44 150 194 $ $ $ 171 159 (32) (200) 4,258 — 200 (200) — 4,258 200 4,058 4,258 171 159 330 $ $ $ 45 156 (320) (39) 3,724 — 39 (39) — 3,724 46 3,678 3,724 45 156 201 $ $ $ NOTESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of CAD dollars) The table below outlines the sensitivity of the fiscal 2016 key economic assumptions used in measuring the accrued benefit plan obligations and related expenses of Crombie’s pension and other benefit plans. The sensitivity of each key assumption has been calculated independently. Changes to more than one assumption simultaneously may amplify or reduce the impact on the accrued benefit obligation or benefit plan expenses. There was no change to the method and assumptions used in preparing the sensitivity analysis from prior years. Discount Rate Impact of: Growth rate of health costs(2) Impact of: Senior Management Pension Plan Post-Employment Benefit Plans Benefit Obligations Benefit Cost(1) Benefit Obligations Benefit Cost(1) 3.75% 3.75% 1% increase 1% decrease $ $ (529) 646 $ $ (12) 13 1% increase 1% decrease 3.75% (543) 675 5.75% 548 (452) $ $ $ $ 3.75% 7 (12) 5.75% 27 (22) $ $ $ $ (1) Reflects the impact on the current service costs, the interest cost and the expected return on assets. (2) Gradually decreasing to 5.0% in 2020 and remaining at that level thereafter. For the year ended December 31, 2016, the net defined contribution pension plans expense was $756 (year ended December 31, 2015 – $689). 13 T R A D E A N D O T H E R PAYA B L E S December 31, 2016 December 31, 2015 Current Non-current Total Current Non-current Total Tenant incentives and capital expenditures Property operating costs Prepaid rents Finance costs on investment property debt, notes and debentures Distributions payable Unit based compensation plans Deferred revenue $ 28,894 $ 29,457 4,827 10,385 11,007 — 118 $ 84,688 $ — — — — — 3,846 4,647 8,493 $ 28,894 $ 16,648 $ 29,457 4,827 10,385 11,007 3,846 4,765 23,858 4,782 10,163 9,755 — 113 $ 93,181 $ 65,319 $ — — — — — 1,947 4,714 6,661 $ 16,648 23,858 4,782 10,163 9,755 1,947 4,827 $ 71,980 Unit based compensation plans (i) Deferred Unit Plan Crombie has a DU Plan available to eligible Participants, which is designed to promote a greater alignment of interests between the Trustees, officers and employees of Crombie and its Unitholders. Participation in the DU Plan is voluntary unless Crombie’s Board of Trustees (the “Board”) or Human Resources Committee (“HRC”) decides that special compensation is to be provided in the form of DUs. Unless otherwise determined by the Board or HRC, DUs granted under the DU Plan are fully vested at the time they are awarded. DUs are not Crombie REIT Units and do not entitle a Participant to any Unitholder rights, including voting rights, distribution entitlements (other than those noted below) or rights on liquidation. During the time that a Participant has outstanding DUs, whenever cash distributions are paid on REIT Units, additional DUs will be credited to the Participant’s DU account, determined by multiplying the number of DUs in the Participant’s DU account on the REIT distribution record date by the distribution paid per REIT Unit, and dividing the result by the market value of a Unit as determined in accordance with the DU Plan. Additional DUs issued as a result of distributions vest on the same basis as noted above and the value of the additional DUs credited is expensed to general and administrative expenses on allocation. Upon redemption, a Participant will receive the net value of the vested DUs being redeemed, with the net value determined by multiplying the number of DUs redeemed by the REIT Unit’s market price on redemption date, less applicable withholding taxes. The Participant may elect to receive this net amount as a cash payment or instead receive one Crombie REIT Unit issued for each DU redeemed after deducting applicable withholding taxes. (ii) Restricted Unit Plan Crombie has an RU Plan available to eligible RU Participants, which is designed to promote a greater alignment of interests between the specific employees of Crombie and its Unitholders; and assist Crombie in attracting, retaining and rewarding specific employees. RU Participants will receive their long-term incentive plan awards in RUs. The RUs vest over a period of not more than three years, ending on the final day of the third quarter of the third calendar year of the RUs term. The RUs are subject to vesting conditions including continuing employment. The number of RUs which fully vest is determined by: (a) the dollar amount of the award divided by the market value of a REIT Unit on the award grant date, plus (b) deemed distributions on RUs during the vesting period at a rate equivalent to the number of REIT Units that would have been issued had the vested RUs been treated as a REIT Unit. The value of these additional RUs from deemed distributions is expensed to general and administrative expenses at the time of allocation. On the vesting date, each participant shall be entitled to receive a cash amount (net of any applicable withholding taxes) equal to the number of vested RUs held A N N U A L R E P O R T 2 0 1 6 7 9 NOTES by the RU Participant multiplied by the market value on the vesting date, as determined by the market value of a REIT Unit. Alternatively, an RU Participant who is an eligible employee on the vesting date may elect to convert their vested RUs to DUs under Crombie’s DU Plan. No REIT Units or other securities of Crombie will be issued from treasury as settlement of any obligation under the RU Plan. Deferred Revenue During 2014, Crombie completed a sale-leaseback of the land component of an investment property. The proceeds received in excess of fair value of the land have been deferred and will be recognized as a reduction in property operating expenses over the term of the land lease. In addition, Crombie received a prepayment, from a related party, of their future obligation under a land sub-lease. This prepayment has also been deferred and will be recognized as a reduction in property operating expenses over the term of the land lease. Change in fair value of financial instruments: Deferred Unit (“DU”) Plan Marketable securities Total change in fair value of financial instruments 14 P R O P E R T Y R E V E N U E Rental revenue contractually due from tenants Contingent rental revenue Straight-line rent recognition Tenant incentive amortization Lease terminations Year ended December 31, 2016 Year ended December 31, $ $ (13) $ 325 312 $ 2015 (18) 74 56 Year ended December 31, 2016 Year ended December 31, 2015 $ 382,428 $ 362,699 1,735 12,876 (11,622) 14,584 1,562 11,142 (9,712) 4,175 $ 400,001 $ 369,866 Lease terminations include $11,172 related to three leases vacated by Target Canada in 2015. The amount, if any, of additional settlement will be recognized as revenue when the amount is determinable and there is certainty of receipt. The following table sets out tenants that contributed in excess of 10% of total property revenue: Year ended December 31, 2016 December 31, 2015 Revenue Percentage Revenue Percentage Sobeys Inc. $ 179,166 44.8% $ 156,289 42.3% 15 O P E R AT I N G L E A S E S Crombie as a Lessor Crombie’s operations include leasing commercial real estate. Future minimum rental income under non-cancellable tenant leases as at December 31, 2016, is as follows: Year Ending December 31, 2017 2018 2019 2020 2021 Thereafter Total Future minimum rental income $ 274,648 $ 264,622 $ 254,235 $ 243,108 $ 231,599 $ 2,173,805 $ 3,442,017 Crombie as a Lessee Operating lease payments primarily represent rentals payable by Crombie for all of its land leases. These land leases have varying terms ranging from eight to 73 years including renewal options: Year Ending December 31, 2017 2018 2019 2020 2021 Thereafter Total Future minimum lease payments $ 1,508 $ 1,548 $ 1,562 $ 1,576 $ 1,595 $ 136,811 $ 144,600 8 0 C R O M B I E R E I T NOTESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of CAD dollars) 16 CO R P O R AT E E X P E N S E S (a) General and administrative expenses Salaries and benefits Professional and public company costs Occupancy and other Year ended December 31, 2016 Year ended December 31, $ 10,120 $ 3,145 3,076 2015 8,202 3,081 3,118 (b) Employee benefit expense Crombie’s payroll expenses are included in property operating expenses and in general and administrative expenses. $ 16,341 $ 14,401 Wages and salaries Post-employment benefits 17 F I N A N C E CO S T S – O P E R AT I O N S Fixed rate mortgages Floating rate term, revolving and demand facilities Senior unsecured notes Convertible debentures Subscription receipts payment Finance costs – operations Amortization of fair value debt adjustment and accretion income Change in accrued finance costs Amortization of effective swap agreements Amortization of issue premium on senior unsecured notes Amortization of deferred financing charges Finance costs – operations, paid 18 U N I T S O U T S TA N D I N G Year ended December 31, 2016 Year ended December 31, 2015 $ $ 24,003 $ 22,906 756 689 24,759 $ 23,595 Year ended December 31, 2016 Year ended December 31, $ 72,289 $ 4,816 14,915 7,523 613 100,156 1,349 (222) (2,440) 54 (3,310) $ 95,587 $ 2015 71,871 3,685 14,506 8,549 — 98,611 1,391 (1,272) (2,520) 54 (3,616) 92,648 Crombie REIT Units Class B LP Units and attached Special Voting Units Number of Units Amount Number of Units Amount Total Number of Units Amount Balance, January 1, 2016 77,857,608 $ 877,581 53,658,302 $ 596,304 131,515,910 $ 1,473,885 Net change in EUPP loans receivable Units issued under DRIP Units issued (proceeds are net of issue costs) — 927,701 67 12,666 — 657,901 — 8,995 — 1,585,602 67 21,661 8,952,400 125,971 6,353,741 93,140 15,306,141 219,111 Balance, December 31, 2016 87,737,709 $ 1,016,285 60,669,944 $ 698,439 148,407,653 $ 1,714,724 Crombie REIT Units Class B LP Units and attached Special Voting Units Number of Units Amount Number of Units Amount Total Number of Units Amount Balance, January 1, 2015 77,304,079 $ 870,578 53,275,266 $ 591,523 130,579,345 $ 1,462,101 Net change in EUPP loans receivable Units issued under DRIP Conversion of debentures — 540,131 13,398 75 6,723 205 — 383,036 — — 4,781 — — 923,167 13,398 75 11,504 205 Balance, December 31, 2015 77,857,608 $ 877,581 53,658,302 $ 596,304 131,515,910 $ 1,473,885 A N N U A L R E P O R T 2 0 1 6 8 1 NOTES Crombie REIT Units Crombie is authorized to issue an unlimited number of REIT Units and an unlimited number of SVU and Class B LP Units. Issued and outstanding REIT Units may be subdivided or consolidated from time to time by the Trustees without the approval of the Unitholders. REIT Units are redeemable at any time on demand by the holders at a price per REIT Unit equal to the lesser of: (i) 90% of the weighted average price per Crombie REIT Unit during the period of the last ten days during which Crombie’s REIT Units traded; and (ii) an amount equal to the price of Crombie’s REIT Units on the date of redemption, as defined in the Declaration of Trust. The aggregate redemption price payable by Crombie in respect of any REIT Units surrendered for redemption during any calendar month will be satisfied by way of a cash payment in Canadian dollars within 30 days after the end of the calendar month in which the REIT Units were tendered for redemption, provided that the entitlement of Unitholders to receive cash upon the redemption of their REIT Units is subject to the limitation that: (i) the total amount payable by Crombie in respect of such REIT Units and all other REIT Units tendered for redemption, in the same calendar month must not exceed $50 (provided that such limitation may be waived at the discretion of the Trustees); (ii) at the time such REIT Units are tendered for redemption, the outstanding REIT Units must be listed for trading on the TSX or traded or quoted on any other stock exchange or market which the Trustees consider, in their sole discretion, provides representative fair market value prices for the REIT Units; and, (iii) the normal trading of REIT Units is not suspended or halted on any stock exchange on which the REIT Units are listed (or if not listed on a stock exchange, in any market where the REIT Units are quoted for trading) on the Redemption Date or for more than five trading days during the 10 day trading period commencing immediately after the Redemption Date. On May 31, 2016, Crombie closed a public offering, on a bought deal basis, of 8,952,400 Subscription Receipts, at a price of $14.70 per Subscription Receipt, for gross proceeds of $131,600. On June 29, 2016, in conjunction with the closing of property acquisitions from Empire, each of the 8,952,400 outstanding Subscription Receipts were automatically exchanged for one Crombie REIT Unit. During the year ended December 31, 2015, $205 of Series C Convertible Debentures were converted for a total of 13,398 REIT Units at the conversion price of $15.30 per unit. Crombie REIT Special Voting Units (“SVU”) and Class B LP Units The Declaration of Trust and the Exchange Agreement provide for the issuance of SVUs to the holders of Class B LP Units used solely for providing voting rights proportionate to the votes of Crombie’s REIT Units. The SVUs are not transferable separately from the Class B LP Units to which they are attached and will be automatically transferred upon the transfer of such Class B LP Unit. If the Class B LP Units are exchanged in accordance with the Exchange Agreement, a like number of SVUs will be redeemed and cancelled for no consideration by Crombie. The Class B LP Units issued by a subsidiary of Crombie to ECL Developments Limited (“ECLD”) are indirectly exchangeable on a one-for- one basis for Crombie’s REIT Units at the option of the holder, under the terms of the Exchange Agreement. Each Class B LP Unit entitles the holder to receive distributions from Crombie, pro rata with distributions made by Crombie on REIT Units. On June 29, 2016, concurrently with the REIT Units issued on exchange for Subscription Receipts, subsidiaries of Empire received 6,353,741 Class B LP Units and the attached SVUs at a price of $14.70 per Class B LP Unit for gross proceeds of $93,400 which formed part of the consideration for property acquisitions completed on that same date. Employee Unit Purchase Plan (“EUPP”) Crombie previously provided for REIT Unit purchase entitlements under the EUPP for certain senior executives. As at December 31, 2014, the EUPP was replaced with an RU Plan with a specific vesting period and no employee loans. As at December 31, 2016, there are loans receivable from executives of $1,789 under Crombie’s EUPP, representing 140,855 REIT Units, which are classified as a reduction to net assets attributable to Unitholders. The loans are being repaid through the application of the after-tax amounts of all distributions received on the REIT Units, as payments on interest and principal. The loans are required to be repaid by December 31, 2023. Loan repayments will result in a corresponding increase to net assets attributable to Unitholders. Market value of the REIT Units held as collateral at December 31, 2016 was $1,913. The compensation expense related to the EUPP for the year ended December 31, 2016 was $42 (year ended December 31, 2015 – $42). Distribution Reinvestment Plan During the fourth quarter of 2014, Crombie instituted a DRIP whereby Canadian resident REIT unitholders may elect to automatically have their distributions reinvested in additional REIT units. Units issued under the DRIP will be issued directly from the treasury of Crombie REIT at a price equal to 97% of the volume-weighted average trading price of the REIT units on the TSX for the five trading days immediately preceding the relevant distribution payment date, which is typically on or about the 15th day of the month following the declaration. Crombie recognizes the net proceeds in Net assets attributable to Unitholders. 8 2 C R O M B I E R E I T NOTESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of CAD dollars)19 S U P P L E M E N TA R Y C A S H F L OW I N F O R M AT I O N a) Items not affecting operating cash Items not affecting operating cash: Straight-line rent recognition Amortization of tenant incentives Loss (gain) on disposal of investment properties Impairment of investment properties Depreciation of investment properties Amortization of intangible assets Amortization of deferred leasing costs Unit based compensation Amortization of effective swap agreements Amortization of deferred financing charges Amortization of issue premium on senior unsecured notes Non-cash distributions to Unitholders in the form of DRIP Units Taxes – deferred Income tax expense Change in fair value of financial instruments b) Change in other non-cash operating items Cash provided by (used in): Trade receivables Prepaid expenses and deposits and other assets Payables and other liabilities 20 R E L AT E D PA R T Y T R A N S AC T I O N S Year ended December 31, 2016 Year ended December 31, 2015 $ (12,876) $ 11,622 (37,490) 6,000 66,552 6,170 610 42 2,440 3,310 (54) 21,661 1,200 26 (312) (11,142) 9,712 (23) 12,575 60,498 5,480 598 51 2,520 3,616 (54) 11,504 (4,200) 2,936 (56) $ 68,901 $ 94,015 Year ended December 31, 2016 Year ended December 31, 2015 $ (934) $ (10,156) 9,404 $ (1,686) $ (1,989) 3,130 340 1,481 As at December 31, 2016, Empire, through its wholly-owned subsidiary ECLD, holds a 41.5% (fully diluted 40.3%) indirect interest in Crombie. Related party transactions primarily include transactions with entities associated with Crombie through Empire’s indirect interest. Related party transactions also include transactions with key management personnel and post-employment benefit plans. Related party transactions are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. Crombie’s revenue (expense) transactions with related parties are as follows: Property revenue Property revenue Head lease income Lease termination income Property operating expenses General and administrative expenses Property management services recovered Other general and administrative expenses Finance costs – operations Interest on convertible debentures Interest rate subsidy Interest income Finance costs – distributions to Unitholders Year ended December 31, 2016 Year ended December 31, 2015 Note (a) (b) (c) (d) (e) (f) (b) $ $ $ $ $ $ $ $ $ $ 183,411 453 64 (64) 949 (281) (1,203) 269 651 (52,171) $ $ $ $ $ $ $ $ $ $ 160,470 736 3,999 242 869 (385) (1,200) 482 711 (48,369) A N N U A L R E P O R T 2 0 1 6 8 3 NOTES (a) Crombie earned total property revenue from Sobeys Inc. and other subsidiaries of Empire. (b) For various periods, ECLD has an obligation to provide rental income and interest rate subsidies pursuant to an Omnibus Subsidy Agreement dated March 23, 2006, between Crombie Developments Limited, Crombie Limited Partnership and ECLD. (c) (d) Certain executive management individuals and other employees of Crombie provide general management, financial, leasing, administrative, and other administration support services to certain subsidiaries of Empire on a cost sharing basis pursuant to a Management Agreement effective January 1, 2016. Crombie provides property management, leasing services and environmental management to specific properties owned by certain subsidiaries of Empire on a fee for service basis pursuant to a Management Agreement effective January 1, 2016. Revenue generated from the Management Agreement is being recognized as a reduction of General and administrative expenses. This Agreement replaces the previous cost sharing arrangement covered by a Management Cost Sharing Agreement. (e) Crombie previously leased its head office space from ECLD under a lease that ended in May 2015. (f) Empire holds $24,000 of Series D Convertible Debentures with an annual interest rate of 5.00%. In addition to the above: • • • • • • • • • On July 29, 2016, Crombie acquired a retail property in British Columbia from Empire including approximately 62,000 square feet of gross leaseable area for $26,400 before closing and transaction costs. On July 15, 2016, Crombie disposed of a retail property in British Columbia to Empire including approximately 21,000 square feet of gross leaseable area for $9,057 before closing and transaction costs. On June 29, 2016, Crombie completed the acquisition of a portfolio of properties and the investment in the renovation and expansion of 10 existing Sobeys anchored properties. The transaction total was approximately $418 million before closing and transaction costs. As partial consideration, Crombie issued to Empire 6,353,741 Class B LP Units and the attached SVUs at a price of $14.70 per Class B LP Unit for gross consideration of $93,400. During the year ended December 31, 2016, Crombie issued 657,901 (December 31, 2015 – 383,036) Class B LP Units to ECLD under the DRIP (Note 18). During the fourth quarter of 2015, Crombie acquired four retail properties and additions to two existing retail properties from Empire for $60,825, before closing and transactions costs. The properties, located in Alberta, British Columbia, Prince Edward Island, Manitoba and Quebec, contain approximately 225,300 square feet of fully occupied space. On April 1, 2015, Crombie acquired additional development space from Empire on a pre-existing retail property for $2,333, before closing and transaction costs. The property, located in Nova Scotia, contains approximately 7,500 square feet of fully occupied space. During the second quarter of 2015, Sobeys closed two retail stores on Crombie properties for which Crombie recognized lease termination income in the amount of $3,849, a portion of which is non-cash consideration. In relation to one of the store closures, Sobeys has assigned to Crombie future development activity rights in their leases on specific other Crombie properties in exchange for a fee on future developments which will reduce the actual cash Crombie will receive from the lease termination income. During the year ended December 31, 2015, Crombie and ECLD negotiated an extension of a rental income guarantee and put option on a property Crombie acquired from ECLD in 2006. The extension ends in 2021 with either party having the ability to terminate the agreements with written notice. The fixed price put option is in excess of the carrying value of the property. During the first quarter of 2015, Crombie acquired development lands in British Columbia with Sobeys Developments Limited Partnership (“SDLP”). Crombie’s 50% portion of the acquisition cost was $2,676, including closing and transaction costs. Key management personnel compensation Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of Crombie. The following are considered to be Crombie’s key management personnel: the Chief Executive Officer, Chief Financial Officer and the three other highest compensated executives. The remuneration of members of key management during the period was approximately as follows: Salary, bonus and other short-term employee benefits Other long-term benefits $ $ 3,153 $ 112 3,265 $ 8 4 C R O M B I E R E I T Year ended December 31, 2016 Year ended December 31, 2015 2,860 102 2,962 NOTESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of CAD dollars) 21 F I N A N C I A L I N S T R U M E N T S a) Fair value of financial instruments The fair value of a financial instrument is the estimated amount that Crombie would receive to sell a financial asset or pay to transfer a financial liability in an orderly transaction between market participants at the measurement date. Fair value determination is classified within a three-level hierarchy, based on observability of significant inputs, as follows: 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 or indirectly. Level 3 – unobservable inputs for the asset or liability. The following table provides information on financial assets and liabilities measured at fair value as at December 31, 2016: Financial assets Marketable securities Total financial assets measured at fair value Level 1 Level 2 Level 3 Total $ $ — — $ $ — — $ $ 2,290 2,290 $ $ 2,290 2,290 There were no transfers between Level 1 and Level 2 during the year ended December 31, 2016. The fair value of other financial instruments is based on discounted cash flows using discount rates that reflect current market conditions for instruments with similar terms and risks. The following table summarizes the estimated fair value of other financial instruments which have a fair value different from their carrying value: Financial assets Long-term receivables Total other financial assets Financial liabilities Investment property debt Senior unsecured notes Convertible debentures December 31, 2016 December 31, 2015 Fair Value Carrying Value Fair Value Carrying Value $ $ 19,999 19,999 $ $ 19,969 19,969 $ $ 13,968 13,968 $ $ 13,933 13,933 $ 1,959,091 $ 1,876,191 $ 1,782,776 $ 1,651,079 402,361 139,147 400,000 134,400 405,348 138,360 400,000 134,400 Total other financial liabilities $ 2,500,599 $ 2,410,591 $ 2,326,484 $ 2,185,479 The fair value of convertible debentures is a Level 1 measurement and the long-term receivables, investment property debt and senior unsecured notes are Level 2. Due to their short-term nature, the carrying value of the following financial instruments approximates their fair value at the balance sheet date: • Cash and cash equivalents • Trade receivables • Restricted cash • Trade and other payables (excluding embedded derivatives). b) Risk Management In the normal course of business, Crombie is exposed to a number of financial risks that can affect its operating performance. The more significant risks, and the actions taken to manage them, are as follows: Credit risk Credit risk arises from the possibility that tenants may experience financial difficulty and be unable to fulfill their lease commitments. A provision for doubtful accounts is taken for all anticipated collectability risks (Note 5). Crombie mitigates credit risk by geographical diversification, utilizing staggered lease maturities, diversifying both its tenant mix and asset mix and conducting credit assessments for new and renewing tenants. In measuring tenant concentration, Crombie considers both the annual minimum rent and total property revenue of major tenants: • Upon completion of the June 29, 2016 property transactions, Crombie’s largest tenant, Sobeys, represents 52.9% of annual minimum rent; an increase from 49.9% at December 31, 2015. Excluding Sobeys, no other tenant accounts for more than 5.1% of Crombie’s minimum rent. A N N U A L R E P O R T 2 0 1 6 8 5 NOTES • Total property revenue includes operating and realty tax cost recovery income and percentage rent. These amounts can vary by property type, specific tenant leases and where tenants may directly incur and pay operating and realty tax costs. For the year ended December 31, 2016, Sobeys represents 44.8% of total property revenue. Excluding Sobeys, no other tenant accounts for more than 4.4% of Crombie’s total property revenue. • Over the next five years, no more than 4.8% of the gross leasable area of Crombie will expire in any one year. Receivables are substantially comprised of current balances due from tenants. The balance of accounts receivable past due is not significant. Generally, rents are due the first of each month and other tenant billings are due 30 days after invoiced, and in general, balances over 30 days are considered past due. None of the receivable balances are considered impaired. The provision for doubtful accounts is reviewed at each balance sheet date. A provision is taken on accounts receivable from independent accounts and is recorded as a reduction to its respective receivable account on the balance sheet. Crombie updates its estimate of provision for doubtful accounts based on past due balances on accounts receivable. Current and long-term accounts receivable are reviewed on a regular basis and are provided for when collection is considered uncertain. Provision for doubtful accounts, beginning of year Additional provision Recoveries Write-offs Provision for doubtful accounts, end of year There have been no significant changes to Crombie’s credit risk. Year ended December 31, 2016 Year ended December 31, 2015 $ $ 60 195 (120) (8) $ 127 $ 59 20 (38) 19 60 Interest rate risk Interest rate risk is the potential for financial loss arising from increases in interest rates. Crombie mitigates this risk by utilizing staggered debt maturities and limiting the use of permanent floating rate debt and, on occasion, utilizing interest rate swap agreements. Crombie does not enter into interest rate swaps on a speculative basis. As at December 31, 2016: • • • • Crombie’s weighted average term to maturity of its fixed rate mortgages was 5.90 years; Crombie has a floating rate revolving credit facility available to a maximum of $400,000, subject to available borrowing base, with a balance of $120,374 at December 31, 2016; Crombie has an unsecured bilateral credit facility available to a maximum of $100,000 with a balance of $100,000 at December 31, 2016; and, Crombie has interest rate swap agreements in place on $123,731 of floating rate mortgage debt. Crombie estimates that $2,348 of accumulated other comprehensive income (loss) will be reclassified to finance costs during the year ending December 31, 2017, based on all settled swap agreements as of December 31, 2016. A fluctuation in interest rates would have had an impact on Crombie’s operating income related to the use of floating rate debt. Based on recent years’ rate changes, a 0.5% interest rate change would reasonably be considered possible. The changes would have had the following impact: Impact on operating income attributable to Unitholders of interest rate changes on the floating rate revolving credit facility Year ended December 31, 2016 Year ended December 31, 2015 There have been no significant changes to Crombie’s interest rate risk. Impact of a 0.5% interest rate change Decrease in rate Increase in rate $ $ 1,130 635 $ $ (1,130) (635) 8 6 C R O M B I E R E I T NOTESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of CAD dollars) Liquidity risk The real estate industry is highly capital intensive. Liquidity risk is the risk that Crombie may not have access to sufficient debt and equity capital to fund its growth program, refinance debt obligations as they mature or meet its ongoing obligations as they arise. Cash flow generated from operating the property portfolio represents the primary source of liquidity used to service the interest on debt, fund general and administrative expenses, reinvest in the portfolio through capital expenditures, as well as fund tenant incentive costs and make distributions to Unitholders. Debt repayment requirements are primarily funded from refinancing Crombie’s maturing debt obligations. Property acquisition funding requirements are funded through a combination of accessing the debt and equity capital markets and recycling capital from property dispositions. There is a risk that the debt capital markets may not refinance maturing fixed rate and floating rate debt on terms and conditions acceptable to Crombie or at any terms at all. Crombie seeks to mitigate this risk by staggering its debt maturity dates. There is also a risk that the equity capital markets may not be receptive to a REIT unit offering issue from Crombie with financial terms acceptable to Crombie. As discussed in Note 21, Crombie mitigates its exposure to liquidity risk utilizing a conservative approach to capital management. Access to the revolving credit facility is limited by the amount utilized under the facility and the amount of any outstanding letters of credit, and cannot exceed the borrowing base security provided by Crombie. The estimated payments, including principal and interest, on non-derivative financial liabilities to maturity date are as follows: Fixed rate mortgages(2) Senior unsecured notes Convertible debentures Floating rate debt Total Year ending December 31, Contractual Cash Flows(1) 2017 2018 2019 2020 2021 Thereafter $ 2,022,289 $ 170,090 $ 178,077 $ 235,086 $ 313,864 $ 170,736 $ 954,436 441,079 159,251 14,407 6,906 2,622,619 191,403 231,647 5,697 188,244 6,906 373,227 104,047 7,431 66,156 308,673 121,903 129,346 3,906 447,116 — 101,651 75,377 347,764 — — — 954,436 — $ 2,854,266 $ 197,100 $ 477,274 $ 430,576 $ 447,116 $ 347,764 $ 954,436 (1) Contractual cash flows include principal and interest and ignore extension options. (2) Reduced by the interest rate subsidy payments to be received from ECLD. There have been no significant changes to Crombie’s liquidity risk. 22 C A P I TA L M A N AG E M E N T Crombie’s objective when managing capital on a long-term basis is to maintain overall indebtedness, including convertible debentures, at reasonable levels, utilize staggered debt maturities, minimize long-term exposure to excessive levels of floating rate debt and maintain conservative payout ratios. Crombie’s capital structure consists of the following: Investment property debt Senior unsecured notes Convertible debentures Crombie REIT Unitholders SVU and Class B LP Unitholders December 31, 2016 December 31, 2015 $ 1,865,477 $ 1,641,203 398,588 132,134 834,203 555,943 398,080 131,518 694,484 452,746 $ 3,786,345 $ 3,318,031 At a minimum, Crombie’s capital structure is managed to ensure that it complies with the limitations pursuant to Crombie’s Declaration of Trust, the criteria contained in the Income Tax Act (Canada) in regard to the definition of a REIT and existing debt covenants. Some of the restrictions pursuant to Crombie’s Declaration of Trust would include, among other items: • • A restriction that Crombie shall not incur indebtedness (other than by the assumption of existing indebtedness) where the indebtedness would exceed 75% of the market value of an individual property; and, A restriction that Crombie shall not incur indebtedness of more than 60% of gross book value (65% including any convertible debentures). A N N U A L R E P O R T 2 0 1 6 8 7 NOTES For debt to gross book value calculation, Crombie does not include in total debt the financial liabilities to REIT Unitholders and to holders of Class B LP Units, as shown on the balance sheet as Net assets attributable to Unitholders. Crombie’s debt to gross book value as defined in Crombie’s Declaration of Trust is as follows: Fixed rate mortgages Senior unsecured notes Convertible debentures Revolving credit facility Bilateral credit facility Total debt outstanding Less: Applicable fair value debt adjustment Debt Investment properties, cost Below-market lease component, cost(1) Long-term receivables Other assets, cost (see below) Cash and cash equivalents Deferred financing charges Investment in joint ventures Investment properties held for sale, cost Interest rate subsidy Fair value adjustment to deferred taxes Gross book value Debt to gross book value (1) Below-market lease component is included in the carrying value of investment properties and assets held for sale. Other assets are calculated as follows: Other assets per Note 5 Add: Tenant incentive accumulated amortization Other assets, cost December 31, 2016 December 31, 2015 $ 1,655,817 $ 1,521,079 400,000 134,400 120,374 100,000 2,410,591 (1,452) 400,000 134,400 130,000 — 2,185,479 (1,721) $ $ 2,409,139 4,165,983 $ $ 2,183,758 3,581,618 85,946 19,969 280,954 — 14,631 815 — (1,452) (34,120) 72,634 13,933 180,324 1,057 14,972 — 144,323 (1,721) (34,645) $ 4,532,726 $ 3,972,495 53.1% 55.0% December 31, 2016 December 31, 2015 $ 225,814 $ 134,869 55,140 45,455 $ 280,954 $ 180,324 Under the amended terms governing the revolving credit facility, Crombie is entitled to borrow a maximum of 70% of the fair market value of assets subject to a first security position and 60% of the excess fair market value over first mortgage financing of assets subject to a second security position or a negative pledge. The terms of the revolving credit facility also require that Crombie must maintain certain covenants: • • • annualized net operating income for the prescribed properties must be a minimum of 1.4 times the coverage of the related annualized debt service requirements; annualized net operating income on all properties must be a minimum of 1.4 times the coverage of all annualized debt service requirements; access to the revolving credit facility is limited by the amount utilized under the facility and the amount of any outstanding letters of credit not to exceed the borrowing base security provided by Crombie; and, • distributions to Unitholders are limited to 100% of distributable income as defined in the revolving credit facility. As at December 31, 2016, Crombie is in compliance with all externally imposed capital requirements and all covenants relating to its debt facilities. 8 8 C R O M B I E R E I T NOTESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of CAD dollars) 23 CO M M I T M E N T S A N D CO N T I N G E N C I E S There are various claims and litigation which Crombie is involved with arising out of the ordinary course of business operations. In the opinion of management, any liability that would arise from such contingencies would not have a significant adverse effect on these financial statements. Crombie has agreed to indemnify its trustees and officers, and particular employees, in accordance with Crombie’s policies. Crombie maintains insurance policies that may provide coverage against certain claims. Crombie obtains letters of credit to support its obligations with respect to construction work on its investment properties and satisfying mortgage financing requirements. As at December 31, 2016, Crombie has a total of $5,027 in outstanding letters of credit related to: Construction work being performed on investment properties Mortgage lenders primarily to satisfy mortgage financings on redevelopment properties Total outstanding letters of credit December 31, 2016 $ $ 2,027 $ 3,000 5,027 $ 2015 1,425 — 1,425 Crombie does not believe that any of these standby letters of credit are likely to be drawn upon. Land leases have varying terms ranging from eight to 73 years including renewal options. For the year ended December 31, 2016, Crombie paid $1,431 in land lease payments to third party landlords (year ended December 31, 2015 – $1,418). Crombie’s commitments under the land leases are disclosed in Note 15. As at December 31, 2016, Crombie had signed construction contracts totalling $53,310 of which $37,292 has been paid. 24 S U B S E Q U E N T E V E N T S (a) On January 20, 2017, Crombie declared distributions of 7.417 cents per Unit for the period from January 1, 2017 to and including, January 31, 2017. The distributions were paid on February 15, 2017, to Unitholders of record as of January 31, 2017. (b) On February 16, 2017, Crombie declared distributions of 7.417 cents per Unit for the period from February 1, 2017 to and including, February 28, 2017. The distributions will be paid on March 15, 2017, to Unitholders of record as of February 28, 2017. 25 S E G M E N T D I S C L O S U R E Crombie owns and operates primarily retail and office real estate assets located in Canada. Management, in measuring Crombie’s performance or making operating decisions, does not distinguish or group its operations on a geographical or other basis. Accordingly, Crombie has a single reportable segment for disclosure purposes. 26 I N D E M N I T I E S Crombie has agreed to indemnify its trustees and officers, and particular employees, in accordance with Crombie’s policies. Crombie maintains insurance policies that may provide coverage against certain claims. A N N U A L R E P O R T 2 0 1 6 8 9 NOTES GLA % (approx. Occu- sq. ft.) pancy Property City Description GLA % (approx. Occu- sq. ft.) pancy P R O P E R T Y P O R T F O L I O Property City Description N E W F O U N D L A N D & L A B R A DO R 2A Commerce St. 10 Elizabeth Ave 21 Cromer Ave 45 Ropewalk Lane 69 Blockhouse Rd 71 Grand View Blvd Avalon Mall Conception Bay Plaza Hamlyn Road Plaza Kenmount Woodgate Random Square Topsail Rd Plaza Torbay Rd Plaza Deer Lake St John’s Grand Falls St John’s Placentia Grand Bank St John’s Conception Bay Retail – Plazas Retail – Plazas St John’s Mixed Use St John’s Retail – Enclosed Clarenville Retail – Plazas St John’s Retail – Plazas St John’s Retail – Plazas 18,000 Retail – Freestanding 80,000 Retail – Freestanding 27,000 50,000 Retail – Freestanding Retail – Freestanding 20,000 19,000 Retail – Freestanding 572,000 Retail – Enclosed 65,000 38,000 66,000 108,000 158,000 162,000 100.0 100.0 100.0 100.0 100.0 100.0 98.5 100.0 65.2 100.0 99.9 99.3 86.3 1,383,000 96.8 P R I N C E E DWA R D I S L A N D Kinlock Plaza University Avenue Stratford Charlottetown Retail – Freestanding Retail – Plazas 54,000 50,000 100.0 100.0 104,000 100.0 N O VA S CO T I A 2 Forest Hills Parkway 293 Foord Street 39 Pitt St. 75 Emerald St 133 Church St. Russell Lake 279 Herring Cove Road 634 Reeves Street 22579 Hwy #7 Aberdeen Business Centre Amherst Centre Amherst Plaza Blink Bonnie Plaza County Fair Mall Dartmouth Crossing – Cineplex Downsview Mall Downsview Plaza Elmsdale Plaza Fall River Plaza Fundy Trail Centre Hemlock Square Highland Square Park West Plaza Mill Cove Plaza North & Windsor Streets North Shore Centre Panavista Dr Park Lane Penhorn Plaza Penhorn Plaza Prince Street Plaza Queen St Plaza Sydney Shopping Centre Tantallon Plaza West Side Plaza Scotia Square Properties Barrington Place Barrington Tower Brunswick Place CIBC Building Cogswell Tower Duke Tower Scotia Square Mall Scotia Square Parkade N E W B R U N S W I C K 273 Pleasant St 501 Regis St. 850 St. Peters Avenue 1234 Main Street Brookside Mall Catherwood St Champlain Place Sobeys Charlotte Mall Edmundston Elmwood Drive Fairvale Plaza Loch Lomond Place 9 0 C R O M B I E R E I T Retail – Freestanding Dartmouth Stellarton Retail – Freestanding Sydney Mines Retail – Freestanding New Waterford Retail – Freestanding Retail – Freestanding Antigonish Retail – Plazas Dartmouth Spryfield Retail – Freestanding Port Hawkesbury Retail – Freestanding Sheet Harbour Retail – Freestanding 44,000 24,000 18,000 26,000 51,000 62,000 73,000 100.0 100.0 100.0 100.0 100.0 100.0 100.0 34,000 9,000 100.0 100.0 New Glasgow Mixed Use Amherst Amherst Pictou New Minas Retail – Enclosed Retail – Plazas Retail – Plazas Retail – Enclosed Retail – Freestanding Dartmouth Lower Sackville Retail – Plazas Lower Sackville Retail – Plazas Retail – Plazas Elmsdale Retail – Plazas Fall River Retail – Enclosed Truro Bedford Retail – Plazas New Glasgow Retail – Enclosed Halifax Bedford Halifax Tatamagouche Retail – Plazas Retail – Freestanding Dartmouth Mixed Use Halifax Retail – Plazas Dartmouth Retail – Freestanding Dartmouth Retail – Plazas Sydney Retail – Freestanding Halifax Retail – Plazas Sydney Tantallon Retail – Plazas New Glasgow Retail – Plazas Retail – Plazas Retail – Plazas Retail – Freestanding Halifax Halifax Halifax Halifax Halifax Halifax Halifax Halifax Mixed Use Office Mixed Use Office Office Office Mixed Use Mixed Use 390,000 228,000 25,000 45,000 268,000 45,000 71,000 226,000 147,000 98,000 125,000 159,000 201,000 143,000 144,000 50,000 17,000 48,000 273,000 104,000 77,000 71,000 54,000 186,000 157,000 71,000 191,000 186,000 256,000 208,000 204,000 251,000 260,000 89.4 45.0 100.0 93.7 50.2 100.0 100.0 96.3 97.9 97.8 97.5 99.3 100.0 96.5 95.2 100.0 100.0 100.0 86.9 100.0 100.0 98.7 87.8 75.9 96.2 92.4 100.0 98.7 100.0 84.8 98.0 89.5 79.7 5,320,000 91.4 Newcastle Dieppe Bathurst Moncton Fredericton Saint John Dieppe St Stephen Edmundston Retail – Freestanding Moncton Rothesay Saint John Retail – Freestanding 20,000 25,000 Retail – Freestanding 18,000 Retail – Freestanding 151,000 Office 43,000 Retail – Freestanding 46,000 Retail – Freestanding 52,000 Retail – Freestanding 119,000 Retail – Plazas 42,000 74,000 52,000 192,000 Retail – Plazas Retail – Freestanding Mixed Use 100.0 100.0 100.0 69.9 100.0 100.0 100.0 92.9 100.0 100.0 100.0 67.1 Mountain Road Northwest Centre, Mountain Road Prospect St Plaza Riverview – Findlay Blvd Riverview Place Tracadie Uptown Centre Vaughan Harvey Plaza Moncton Retail – Plazas 17,000 100.0 Moncton Fredericton Riverview Riverview Tracadie Fredericton Moncton Retail – Freestanding Retail – Plazas Retail – Plazas Mixed Use Retail – Plazas Retail – Plazas Retail – Plazas 52,000 22,000 66,000 150,000 40,000 320,000 85,000 100.0 100.0 98.3 50.1 83.8 62.5 100.0 1,586,000 79.8 84.6 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 94.1 100.0 100.0 100.0 96.5 100.0 100.0 100.0 98.7 100.0 92.9 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Q U É B E C 50 Rue Bourgeoys 88-90 Boul. D’Anjou 254 del’Hotel de Ville 1450 rue Royale 551 du Phare Est 645 rue Thibeau 680 avenue Chaussee 714 boul St-Laurent 871 rue Principale 1101 Blvd Piniere Ou 1205 rue de Neuville 1295 Chemin Ridge 1500 Rue Bretagne 2959 rue King Ouest 3260 Blvd, Lapiniere 3950 Rue King Ouest 5651 rue de Verdun 8980 Boul Lacroix Retail – Freestanding 27,000 58,000 72,000 29,000 30,000 Bromptonville Retail – Plazas Chateauguay Riviere du Loup Retail – Plazas Retail – Plaza Malartic Matane Retail – Freestanding Cap de la 49,000 Madeleine Retail – Freestanding 43,000 Rouyn-Noranda Retail – Freestanding 23,000 Retail – Freestanding Louiseville Retail – Freestanding Saint-Donat 34,000 Retail – Freestanding 235,000 Terrebonne 31,000 Retail – Plazas Gatineau 19,000 Retail – Freestanding Huntingdon 50,000 Baie Comeau Retail – Freestanding Retail – Freestanding Sherbrooke 13,000 48,000 Retail – Plazas Brossard 52,000 Retail – Freestanding Sherbrooke Montreal 6,000 Retail – Freestanding St Georges Retail – Freestanding de Beauce Retail – Plazas Beauport Ile Perrot Retail – Freestanding Charlesbourg Retail – Freestanding Quebec Beauport Plaza Ile Perrot Lebourgneuf Les Saules, DeLormiere Retail – Plazas McMasterville, Laurier Blvd McMasterville Retail – Plazas Mercier Retail – Plazas Mercier blvd Retail – Plazas Paspebiac Paspebiac Plaza Saint Apollinaire Retail – Plazas Saint Apollinaire Plaza Retail – Plazas Shawinigan Shawinigan Marche St-Augustin Retail – Plazas Mirabel Marche St-Charles-de- Drummond St Lambert Saint Romuald Plaza Vanier 1 Westminster Ave N Drummondville Retail – Plazas St Lambert Saint Romuald Retail – Plazas Vanier Montreal Retail – Freestanding Retail – Freestanding Retail – Freestanding 44,000 68,000 24,000 59,000 69,000 54,000 58,000 73,000 62,000 67,000 38,000 48,000 19,000 70,000 17,000 21,000 O N TA R I O 34 Livingstone Ave 142 Dundas Street 215 Park Ave W, 385 Springbank 400 First Ave South 409 Bayfield Street 417 Scott Street 680 Longworth 807 King Street East 977 Golf Links Road 3130 Danforth Avenue 3362-3370 Yonge Street 5931 Kalar Rd 8265 Huntington Algonquin Avenue Mall Bradford Brampton Mall Brampton Plaza Bronte Village Burlington Plaza Dorchester Road Centre Village Square Centre Eglinton Centre Glendale Ave Mountain Locks Plaza Grimsby Centre Grimsby Mews Havelock Centre Lansdowne Centre Rockhaven Lansdowne Plaza Lindsay Street Centre London Pine Valley Markham Plaza Milltowne Plaza 1,610,000 99.1 Grimsby Cambridge Chatham Woodstock Kenora Barrie Fort Frances Bowmanville Cambridge Ancaster Scarborough Toronto Niagara Falls Woodbridge North Bay Bradford Brampton Brampton Oakville Burlington Dorchester Dorchester Toronto 36,000 Retail – Freestanding 4,000 Retail – Freestanding 48,000 Retail – Freestanding 55,000 Retail – Plazas 36,000 Retail – Freestanding 48,000 Retail – Freestanding 43,000 Retail – Freestanding 42,000 Retail – Plazas 9,000 Retail – Freestanding 65,000 Retail – Freestanding 6,000 Retail – Freestanding 28,000 Retail – Freestanding Retail – Freestanding 36,000 Retail – Freestanding 397,000 211,000 Retail – Plazas 35,000 Retail – Freestanding 103,000 Retail – Plazas 76,000 Retail – Plazas 54,000 Retail – Plazas 56,000 Retail – Plazas Retail – Freestanding 18,000 32,000 Retail – Plazas 17,000 Retail – Freestanding St Catharines Grimsby Grimsby Havelock Retail – Plazas Retail – Freestanding Retail – Plazas Retail – Freestanding Peterborough Retail – Plazas Peterborough Retail – Plazas Fenelon Falls South London Retail – Plazas Retail – Plazas Toronto Retail – Plazas Burlington Retail – Freestanding 85,000 29,000 34,000 15,000 48,000 67,000 35,000 39,000 39,000 11,000 100.0 100.0 100.0 94.6 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 44.8 100.0 89.8 100.0 100.0 100.0 100.0 100.0 100.0 98.2 100.0 100.0 100.0 49.4 100.0 100.0 100.0 89.3 100.0 Property City Description GLA % (approx. Occu- sq. ft.) pancy Property City Description GLA % (approx. Occu- sq. ft.) pancy Milligan Corners Niagara Falls Centre Niagara Plaza Orleans – 5150 Innes Rd Parry Sound Perth Mews Queensway Plaza Riddell Rd Sinclair Place Southdale Stittsville Corner Stoney Creek Plaza Taunton & Wilson Plaza Upper James Square Village Square Mall Weston Rd Shoppers White Horse Plaza M A N I TO B A Napanee Niagara Falls Niagara Falls Orleans Parry Sound Perth Toronto Orangeville Georgetown London Stittsville Stoney Creek Oshawa Hamilton Nepean Toronto Simcoe Retail – Plazas Retail – Freestanding Retail – Plazas Retail – Plazas Retail – Plazas Retail – Plazas Retail – Plazas Retail – Freestanding Retail – Plazas Retail – Plazas Retail – Plazas Retail – Plazas Retail – Plazas Retail – Plazas Retail – Plazas Retail – Freestanding Retail – Plazas 25,000 17,000 64,000 63,000 46,000 103,000 67,000 46,000 28,000 20,000 80,000 12,000 107,000 114,000 92,000 16,000 93,000 100.0 100.0 100.0 100.0 100.0 79.0 100.0 100.0 100.0 100.0 97.4 100.0 100.0 100.0 99.1 100.0 86.7 2,850,000 94.0 Neepawa Winnipeg 498 Mountain Avenue Safeway 594 Mountain Avenue Safeway 1305-1321 Pembina Highway Safeway 2155 Pembina Highway Bird’s Hill Road Plaza Jefferson Avenue Kildare Avenue East Kildonan Green Marion Street Manitoba Avenue Osborne Street Safeway Portage La Praire Shoppers Portage la Prairie Winnipeg Winnipeg Winnipeg Winnipeg Winnipeg Birds Hill Winnipeg Winnipeg Winnipeg Winnipeg Selkirk Winnipeg Portage Avenue Safeway River Avenue Safeway River East Plaza Retail – Freestanding 18,000 100.0 Retail – Freestanding 18,000 100.0 39,000 Retail – Plazas 46,000 Retail – Freestanding 39,000 Retail – Freestanding 55,000 Retail – Freestanding 43,000 Retail – Freestanding 74,000 Retail – Plazas 38,000 Retail – Freestanding Retail – Freestanding 42,000 Retail – Freestanding 20,000 Retail – Freestanding 20,000 55,000 Retail – Freestanding 59,000 Retail – Plazas 78,000 Retail – Plazas 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 644,000 100.0 S A S K ATC H E WA N 1 Avenue NW Safeway 2 Avenue West Safeway 13th Avenue McOrmond Drive Safeway Albert Street South River City Center Territorial Drive Plaza University Park A L B E R TA Retail – Freestanding Moose Jaw Retail – Freestanding Prince Albert Retail – Plazas Regina Retail – Freestanding Saskatoon Retail – Plazas Regina Saskatoon Retail – Plazas North Battleford Retail – Plazas Regina Retail – Freestanding 39,000 56,000 41,000 50,000 41,000 160,000 30,000 37,000 100.0 100.0 100.0 100.0 100.0 69.0 100.0 100.0 454,000 89.0 Lethbridge Retail – Freestanding 20,000 Calgary 48,000 Retail – Plazas Cochrane 54,000 Retail – Freestanding Calgary Retail – Freestanding 38,000 Calgary Retail – Freestanding 40,000 Calgary 42,000 Retail – Freestanding Lethbridge Retail – Freestanding 45,000 Calgary Retail – Freestanding 69,000 Calgary 48,000 Retail – Plazas Stettler 31,000 Retail – Freestanding 21,000 Beaumont Retail – Plazas 138,000 Retail – Plazas Leduc 66,000 Grande Prairie Retail – Plazas 48,000 34,000 62,000 44,000 79,000 55,000 51,000 52,000 80,000 43,000 46,000 606 4th Avenue South 4th Street NW Safeway 304 5 Avenue West 10 Street NW Safeway 11th Avenue SW Safeway 16th Avenue NW Safeway 23rd Street North Safeway 32nd Avenue NE Safeway 34th Avenue SW Safeway 4607 50th Street 5700 50th Street Leduc Centre 100 Street Safeway Retail – Freestanding 2304 109 Street NW Safeway Edmonton Retail – Plazas 8204 109 Street NW Safeway Edmonton Retail – Plazas 114th Avenue Safeway Retail – Freestanding 118th Avenue NW Retail – Plazas South Trail Plaza Retail – Freestanding 137th Avenue NW Safeway Retail – Freestanding 94 MacLeod Ave Retail – Freestanding 395 St. Albert St. Retail – Plazas Strathcona Square 615 Division Ave Retail – Freestanding 688 Wye Road, Nottingham Sherwood Park Retail – Freestanding 1109 James Mowatt Trail Southbrook Sobeys 1200 Railway Ave 1818 Centre St NE 260199 High Plains Blvd. Beaumont Plaza Big Rock Lane Safeway 45,000 Retail – Freestanding 53,000 Retail – Freestanding Retail – Freestanding 35,000 Retail – Freestanding 655,000 59,000 Retail – Plazas 42,000 Retail – Freestanding Grand Prairie Edmonton Calgary Edmonton Spruce Grove St. Albert Calgary Medicine Hat Edmonton Canmore Calgary Rocky View Beaumont Okotoks 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 99.2 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 95.5 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Calgary Calgary Calgary Calgary Calgary McKenzie Towne Drive Cassils Road West Safeway Brooks Castleridge Boulevard NE Safeway Chestermere Station Way Safeway Clearwater Landing Crowfoot Cresent NW Safeway Crowfoot Way NW Elbow Drive Safeway Fairway Plaza Road South Safeway Forest Lawn Sobeys Franklin Avenue & JW Mann Drive Safeway Gaetz South Plaza Gateway Ave Guardian Road NW Safeway Edmonton Marten Street Safeway Manning Crossing Millwood Commons Namao Centre Namao Centre 167 Ave. 95 St Lethbridge Calgary Retail – Freestanding Retail – Plazas 19,000 54,000 100.0 100.0 Retail – Freestanding 56,000 100.0 Chestermere Fort McMurray Retail – Plazas Retail – Freestanding 43,000 143,000 100.0 100.0 Retail – Plazas Retail – Freestanding Retail – Freestanding 75,000 10,000 25,000 100.0 100.0 100.0 Retail – Plazas Retail – Freestanding 64,000 42,000 100.0 100.0 Fort McMurray Retail – Freestanding 40,000 74,000 Retail – Plazas Red Deer 50,000 Retail – Freestanding Canmore 49,000 Retail – Freestanding 19,000 Retail – Freestanding 49,000 Retail – Freestanding 58,000 Retail – Plazas 37,000 Retail – Freestanding Banff Edmonton Edmonton Edmonton Edmonton Calgary Stony Plain Red Deer Lethbridge Lethbridge Edmonton 34,000 Retail – Plazas 51,000 Retail – Freestanding Retail – Freestanding 44,000 Retail – Freestanding 40,000 29,000 Retail – Plazas 105,000 Retail – Plazas 21,000 Retail – Freestanding 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 94.5 100.0 100.0 100.0 100.0 93.8 100.0 3,374,000 99.8 Saddletowne Circle NE South Park Drive Safeway Red Deer Cineplex Hwy II Town Centre West Lethbridge 10907 82 Avenue B R I T I S H CO L U M B I A 2nd Avenue West Safeway 8th Street Safeway 27 Street East Safeway Langley Retail – Freestanding Retail – Freestanding Retail – Freestanding Prince Rupert Retail – Plazas Dawson Creek Retail – Freestanding North Vancouver Vernon Vernon Fort St. John Surrey Surrey Terrace Retail – Freestanding Retail – Freestanding Retail – Freestanding Retail – Freestanding Retail – Plazas Retail – Freestanding Retail – Freestanding 30 Avenue Safeway 32 Street Safeway 100 Street Safeway 120 Street Safeway 152nd Street Safeway 4655 Lakelse Avenue 20871 Fraser Highway Safeway 27566 Fraser Highway Langley Safeway Vancouver 8475 Granville Street 100 Mile House Retail – Plazas Alder Avenue Cranbrook Baker Street Safeway Cranbrook Baker Street Kelowna Bernard Avenue Safeway Kelowna Bernard Avenue Blundell Road Richmond Columbia Avenue Safeway Castlegar Columbia Street West Safeway Davie Street Safeway East Hastings East Broadway Safeway Hastings Street King Edward Avenue West King George Blvd. Kingsway Fortune Drive Safeway Kingsway Safeway Lerwick Road Lougheed Highway Safeway Mission McBride Boulevard Safeway New Kamloops Vancouver Burnaby Vancouver Burnaby Vancouver Surrey Burnaby Kamloops Vancouver Courtenay Retail – Freestanding Retail – Plazas Retail – Freestanding Retail – Freestanding Retail – Plazas Retail – Freestanding Retail – Freestanding Retail – Plazas Retail – Freestanding Retail – Plazas Retail – Plazas Retail – Plazas Retail – Freestanding Retail – Freestanding Retail – Freestanding Retail – Freestanding Retail – Freestanding Retail – Freestanding Westminster Retail – Freestanding Mount. Seymour Rd Safeway North Vancouver Retail – Freestanding Penticton Main Street Safeway Vancouver Robson Street Quesnel Reid Street Safeway Second Avenue Safeway Trail Shaughnessy Street Safeway Port Coquitlam Retail – Freestanding West Broadway Safeway Yale Road Safeway Yellowhead Highway Safeway Retail – Plazas Retail – Freestanding Retail – Freestanding Retail – Plazas Retail – Plazas Retail – Freestanding Vancouver Chilliwack Retail – Freestanding Smithers 52,000 43,000 100.0 100.0 37,000 29,000 56,000 55,000 53,000 56,000 43,000 100.0 100.0 100.0 100.0 100.0 100.0 100.0 48,000 100.0 45,000 47,000 28,000 48,000 8,000 30,000 19,000 28,000 27,000 50,000 37,000 4,000 42,000 61,000 28,000 62,000 33,000 56,000 51,000 97,000 55,000 43,000 36,000 59,000 41,000 30,000 32,000 49,000 55,000 52,000 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 97.9 100.0 100.0 100.0 100.0 100.0 96.8 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 43,000 100.0 TOTAL 1,768,000 99.8 19,093,000 94.4 A N N U A L R E P O R T 2 0 1 6 9 1 U N I T H O L D E R S ’ I N F O R M AT I O N Board of Trustees Donald E. Clow Trustee, President and Chief Executive Officer John Eby Independent Trustee and Lead Trustee Crombie REIT Head Office: 610 East River Road, Suite 200 New Glasgow, Nova Scotia, B2H 3S2 Telephone: (902) 755-8100 Fax: (902) 755-6477 Internet: www.crombiereit.com Unit Symbol REIT Trust Units – CRR.UN Stock Exchange Listing Toronto Stock Exchange Investor Relations and Inquiries Unitholders, analysts, and investors should direct their financial inquiries or requests to: Glenn R. Hynes, FCPA, FCA Executive Vice President, Chief Financial Officer and Secretary Email: investing@crombie.ca Communication regarding investor records, including changes of address or ownership, lost certificates or tax forms, should be directed to the company’s transfer agent and registrar, CST Trust Company. Distribution Record and Payment Dates for Fiscal 2016 Record Date Payment Date January 31, 2016 February 29, 2016 March 31, 2016 April 30, 2016 May 31, 2016 June 30, 2016 July 31, 2016 August 31, 2016 September 30, 2016 October 31, 2016 November 30, 2016 December 31, 2016 Transfer Agent February 13, 2016 March 15, 2016 April 15, 2016 May 13, 2016 June 15, 2016 July 15, 2016 August 15, 2016 September 15, 2016 October 14, 2016 November 15, 2016 December 15, 2016 January 13, 2017 CST Trust Company Investor Correspondence P.O. Box 700 Montreal, Quebec, H3B 3K3 Telephone: (800) 387-0825 Email: inquiries@canstockta.com Website: www.canstockta.com Brian A. Johnson Independent Trustee J. Michael Knowlton Independent Trustee E. John Latimer Independent Trustee Barbara Palk Independent Trustee Jason P. Shannon Independent Trustee Frank C. Sobey Trustee and Chairman Kent R. Sobey Independent Trustee Paul D. Sobey Trustee Elisabeth Stroback Independent Trustee Francois Vimard Trustee Officers Frank C. Sobey Chairman Donald E. Clow President and Chief Executive Officer Glenn R. Hynes Executive Vice President, Chief Financial Officer and Secretary Cheryl Fraser Chief Talent Officer and Vice President Communications Scott R. MacLean Senior Vice President, Eastern Canada Trevor Lee Senior Vice President, Western Canada John Barnoski Senior Vice President, Corporate Development Fred Santini General Counsel 9 2 C R O M B I E R E I T Counsel Stewart McKelvey Halifax, Nova Scotia Auditors PricewaterhouseCoopers, LLP Halifax, Nova Scotia Multiple Mailings If you have more than one account, you may receive a separate mailing for each. If this occurs, please contact CST Trust Company at (800) 387-0825 or (416) 682-3860 to eliminate multiple mailings. a d a n a C n i d e t n i r P . i m o c b a r c w w w . i s n o i t a c n u m m o C & n g i s e D b a r C i : n g i s e D TO P 2 0 T E N A N T S Crombie’s portfolio is home to a wide diversity of regional and national tenants, most of whom serve the everyday needs of Canadian consumers. Also characterized by long average lease terms, such properties are among the steadiest performing assets in commercial real estate. Tenant (As at December 31, 2016) Sobeys (1)(2) Shoppers Drug Mart Cineplex Province of Nova Scotia CIBC Lawtons/Sobeys Pharmacy Dollarama GoodLife Fitness Bank of Nova Scotia Bank of Montreal Mark’s Work Wearhouse Canadian Tire Public Works Canada Royal Bank of Canada Winners Reitmans (Canada) Tim Hortons Best Buy The Brick Warehouse Staples (1) Excludes Lawtons/Sobeys Pharmacy (2) Represents 44.8% of total property revenue % of Annual Minimum Rent 52.9% 5.1% 1.4% 1.2% 1.1% 1.1% 1.0% 1.0% 0.9% 0.9% 0.7% 0.6% 0.6% 0.5% 0.5% 0.5% 0.6% 0.5% 0.5% 0.4% Average Remaining Lease Term 15.4 years 11.3 years 8.6 years 1.9 years 14.2 years 10.3 years 6.4 years 10.3 years 4.3 years 11.2 years 2.3 years 11.4 years 1.1 years 3.1 years 5.4 years 2.4 years 6.9 years 3.0 years 8.8 years 4.1 years 20 1 6 1 6 1 6 T R O P E R L A U N N A W H Y C R O M B I E ? An investment in Crombie REIT provides the opportunity to achieve steady income growth and capital appreciation in one of the most reliable and defensive segments in commercial real estate. • Strong Unitholder Return • High quality, diversified and defensive grocery anchored retail portfolio • Proven growth and value creation track record Large development pipeline opportunity Investment grade rating – strong and improving fundamentals • • • Strong capital structure, moderate leverage and ample liquidity • Strong management CROMBIEREIT.CA 

Continue reading text version or see original annual report in PDF format above