CT Real Estate Investment Trust
Annual Report 2014

Plain-text annual report

C T R E I T 2 0 1 4 A n n u a l R e p o r t CT REIT 2014 Annual Report YEAR IN REVIEW AND HIGHLIGHTS In fall 2013, CT REIT launched with one of the most successful Initial Public Offerings (IPO) for a Canadian REIT in recent years. In 2014, our first full year of operation, CT Real Estate Investment Trust (CT REIT) met the expectations outlined in our IPO – and exceeded them. In large measure, our performance was driven by a diverse investment program that delivered growth in adjusted funds from operations (AFFO) per Unit in 2014 and is expected to keep delivering growth for years to come. Canadian Tire Corporation, Limited (CTC), our principal tenant and largest Unitholder, is one of Canada’s most successful retail organizations and home to several of the country’s most highly regarded brands. Our special relationship with CTC provides CT REIT with many advantages – including the right of first offer on properties in its portfolio and special insights into its development needs and strategy – that translate into low risk growth opportunities. We also purchased properties outside the retail sector: notably, in July 2014, CT REIT entered into a co-ownership to acquire a one-third interest in Canada Square, a mixed-use commercial property at the intersection of Yonge Street and Eglinton Avenue in Toronto. In the same month, CT REIT acquired a well-located 201,415 square foot distribution centre in Calgary, replacing a facility that CTC was leasing from a third party. These accretive acquisitions add diversification to our portfolio and align with our growth strategy. In 2014, we completed thirteen property acquisitions, two land acquisitions, two developments and six property intensifications, increasing our total gross leasable area (GLA) to more than 20 million square feet. Most of these acquisitions were immediately accretive and, through escalating triple-net leases, our new retail properties will provide built-in growth over the long term. The value we created was acknowledged by the market and reflected in the more than 12 per cent increase in our Unit price over the course of the year. This capital growth combined with CT REIT’s dependable dividend payments provided our Unitholders with a very attractive total return of more than 19 per cent in 2014. Our success in implementing our growth strategy was demonstrated by another key milestone. On November 3, 2014, CT REIT’s Board of Trustees authorized CT REIT’s first distribution increase, a 2 per cent increase starting with the distribution paid in January 2015. All numbers and property listings current as at February 23, 2015, except where indicated. This Annual Report contains information that is forward-looking. See page 14 of the Management’s Discussion and Analysis. D CT REIT 2014 ANNUAL REPORT MISSISSAUGA, ONTARIO WELL-LOCATED PORTFOLIO DIVERSIFIED BY MARKET SIZE1 % of annualized base minimum rent DIVERSIFIED BY GEOGRAPHY1 % of annualized base minimum rent 17% 14% 69% 8% 23% 26% 43% Large urban (pop. >100,000) Medium Small (pop. 20,000–100,000) (pop. <20,000) Ontario Western Canada Quebec Atlantic Canada 1 Excludes development properties and includes CT REIT’s one-third interest in Canada Square. As of December 31, 2014. Invested $326.6 million in acquisitions, intensifications and developments Expanded portfolio to 278 properties from 258 Grew to 20.7 million square feet of gross leasable area ABOUT CT REIT CT REIT is an unincorporated, closed-end real estate investment trust formed to own income producing commercial real estate, primarily retail properties located in Canada. Its portfolio comprises 278 properties totalling 20.7 million square feet of GLA. CT REIT aims to create long-term value by generating reliable and durable growth, benefiting from its relationship with Canadian Tire Corporation, its principal tenant and largest Unitholder. TSX: CRT.UN CT REIT 2014 ANNUAL REPORT CT REIT 2014 ANNUAL REPORT 1 1 LETTER FROM THE CEO KEN SILVER Chief Executive Officer “ Reliable. Durable. Growing. We kept that promise by continuing to grow a portfolio of properties distinguished by high occupancy, low lease turnover, long average lease terms, long average maturity on our debt and an investment grade major tenant, CTC.” Dear Fellow Unitholders, After our highly successful launch in 2013, I am very pleased to share this report on 2014 – CT REIT’s highly successful first full year of operation. Unit price over the year. It showed that the market sees what we are doing – and how we are growing – and that it wants to be part of it. CT REIT’s promise to Unitholders is “Reliable. Durable. Growing.” We kept that promise by continuing to grow a portfolio of properties distinguished by high occupancy, low lease turnover, long average lease terms, long average maturity on our debt and an investment grade major tenant, CTC. And in doing so, we exceeded our Financial Forecast we established at our IPO. Our leases with CTC feature annual average rent escalations of 1.5 per cent – the first of these rent increases started in January 2015 – allowing us to deliver predictable, growing cash flows to our Unitholders. Throughout 2014, we added to this foundation of built-in growth, increasing our portfolio through a total of 23 investments in property acquisitions, land acquisitions, developments and property intensifications. We expanded our GLA to more than 20 million square feet through a combination of low risk strategies including accretive acquisitions from CTC and third-party vendors, intensification and expansion of our existing portfolio, and development initiatives. To deliver durable long-term value, we are always looking for prime development and redevelopment opportunities. In July 2014, we acquired a one-third interest in Canada Square, a mixed-use property at one of the best corners in Toronto and the home office of CTC and CT REIT. Though it was immediately accretive, we believe that Canada Square, located at what will be the intersection of two rapid transit lines, offers extraordinary potential as a long-term redevelopment opportunity. CT REIT’s strong performance in 2014 led the Board of Trustees to approve a 2 per cent increase in our monthly distribution, effective with the distribution paid in January 2015. Our success was also reflected in the steady increase in our 2 CT REIT 2014 ANNUAL REPORT Looking ahead to next year, the cornerstone of our growth strategy will continue to be the access to opportunities made possible by our special relationship with CTC. Canadian Tire is one of Canada’s truly iconic brands and its value has been enhanced by the evolution of the Canadian Tire Family of Companies. Brands like Canadian Tire, Mark’s and Sport Chek provide stability, growth and category diversification while attracting customers and tenants to our properties. The lease arrangements we have in place with CTC combined with its record of retail success provide a durable, reliable foundation that can support growth across a variety of market conditions. With this foundation we expect CT REIT to continue to deliver in 2015 and beyond. Before closing, I want to draw attention to another essential element of our success in 2014, and that is our Board of Trustees. Throughout the year, they were diligent in representing the interests of Unitholders, active in ensuring good governance, supportive in assisting us in implementing best in class processes, and invaluable in providing guidance on the development and implementation of our growth strategy. Along with CFO Louis Forbes, I want to thank the Board for their help during the year and our Unitholders for their continued confidence and support. KEN SILVER Chief Executive Officer LETTER FROM THE CHAIR DAVID LAIDLEY Chairman year 2014, CT REIT continued to execute its strategy and more than fulfilled the commitment reflected in “ Building on a strong launch in fall 2013, during fiscal its investor proposition: Reliable. Durable. Growing.” Dear Fellow Unitholders, On behalf of your Board of Trustees, I am very pleased to write to you about the first full year of operation for CT REIT. Building on a strong launch in fall 2013, during fiscal year 2014, CT REIT continued to execute its strategy and more than fulfilled the commitment reflected in its investor proposition: Reliable. Durable. Growing. Through prudent management and judicious acquisitions, CT REIT grew both the scale and the value of its portfolio. The reliable performance of that portfolio enabled your Board to not only approve 12 distributions in 2014, but to authorize a 2 per cent increase in distributions effective with the distribution paid in January 2015. The value of what CT REIT achieved was recognized by the market and subsequently reflected in the steady increase of its Unit price over the year. Central to our success in 2014, and an important focus of your Board, is the excellent relationship and close alignment of interests shared by CT REIT and our largest Unitholder, CTC. Through this relationship, and corresponding formal agreements, CT REIT and our Unitholders benefit from a low cost structure, favoured access to CTC’s outstanding property portfolio and the insights provided through its deep understanding of the evolving retail real estate market. CT REIT also benefits from a clearly defined and clearly demonstrated commitment to good governance, strong risk management and full transparency. The Board is composed of a majority of independent trustees who, collectively, bring decades of experience in corporate governance, capital markets, retail and real estate to their roles in overseeing CT REIT and its activities. Throughout the year, the Board worked closely with CEO Ken Silver and CFO Louis Forbes, providing guidance and support in the development and implementation of CT REIT’s strategy for growth. The variety of investments made in 2014 shows that CT REIT is able to pursue a wide range of opportunities in order to create value for Unitholders. Looking forward to 2015, the Board will continue to represent the interests of Unitholders by overseeing the evaluation and management of risk, ensuring a high standard of governance and supporting CT REIT’s management in their efforts to deliver durable, reliable growth in the year ahead and over the long term. Let me close by thanking and congratulating Ken and Louis for their leadership and hard work – their efforts made CT REIT’s first year exceptionally strong. I also want to thank my fellow trustees for their contribution and commitment and our Unitholders for their continuing support. DAVID H. LAIDLEY, FCPA, FCA Chairman of the Board CT REIT 2014 ANNUAL REPORT 3 Reliable Durable CT REIT’s relationship with CTC is central to our dependable performance and our capacity to create enduring value. Our largest tenant and Unitholder, CTC is a trusted name, one of Canada’s most successful retail organizations and home to many iconic brands, including Canadian Tire, Mark’s and Sport Chek. Though we’re a young enterprise, our portfolio is structured around a core of well-located, high-performing retail properties and was carefully developed as part of a retail network strategy. These assets, combined with an investment grade tenant, long-term leases, a strong balance sheet, sound governance, a low cost structure and a low risk strategy, provide CT REIT with a stable platform for weathering volatile markets and delivering long-term growth. Growing CT REIT is built to grow. Organic growth comes through the escalating leases in place at our retail properties. Growth in scale comes through our right of first offer on all CTC properties that meet our criteria, our preferred access to participate in development opportunities with CTC, and our capacity to acquire from – or with – third parties. Growth in asset value comes from many sources, including intensification and development and the sector- leading brands on our tenant roster. All of this supports growth in our distributions and Unit price. 4 4 CT REIT 2014 ANNUAL REPORT CT REIT 2014 ANNUAL REPORT Growing OUR STRATEGY FOR GROWTH Delivering predictability and growth is an appealing – and rare – combination CT REIT offers investors predictability and attractive baseline growth in AFFO per Unit. Escalating lease agreements in place with our investment grade anchor tenant, as well as our predictable low cost structure, position CT REIT to deliver solid performance and dependable growth across a range of market conditions. We also offer investors the opportunity to benefit from additional growth delivered through low risk strategies – including acquisition, intensification and development – for enhancing the value and return potential of our portfolio. In 2014, CT REIT demonstrated predictability by comfortably meeting the expectations outlined in our IPO – then we demonstrated our potential for growth by significantly exceeding those expectations. We have a strong foundation for predictable, durable cash flows and reliable monthly distributions. Our properties have a 99.9 per cent occupancy rate, and our portfolio of Canadian Tire store leases contains contractual annual rent escalations of 1.5 per cent per year on average over the initial term of the leases and a weighted average lease term of 14.5 years, one of the longest in the industry. Our principal tenant, CTC, accounts for more than 96 per cent of our base minimum rent. In 2014, CTC, one of Canada’s leading retailers, reported revenues of $12.5 billion, a market capitalization of $9.8 billion and was rated “BBB (high), stable” by Dominion Bond Rating Service and “BBB+, stable” by Standard & Poor’s. CTC comprises iconic brands such as Canadian Tire, Mark’s and Sport Chek which attract customers and other tenants – among them, sector-leading brands such as McDonald’s, RBC Financial Group and Tim Hortons. CTC is both our primary tenant and our largest Unitholder, and CT REIT enjoys the advantages of a relationship founded upon closely aligned interests. We benefit from a range of services provided on a cost pass-through basis by CTC and Canadian Tire Real Estate Limited, which, in turn, enable CT REIT to operate with a lean cost structure. Our relationship also provides CT REIT with invaluable insights into the retail and real estate markets along with an enduring growth pipeline through our contractual right of first offer on properties owned by CTC now and in the future. CT REIT can also pursue growth through intensifications and developments within our existing portfolio, and by acquiring and developing properties from third parties. While our portfolio is focused on retail assets, CT REIT has the flexibility to invest in property sectors beyond retail when we see an opportunity to create value for our Unitholders. BOWMANVILLE, ONTARIO CT REIT 2014 ANNUAL REPORT CT REIT 2014 ANNUAL REPORT 5 5 DEVELOPMENT CASE STUDY New development in Charlottetown drives growth for our tenant and our Unitholders To meet growing demand in the Charlottetown, PEI market, Canadian Tire wanted to provide its customers with a larger, more modern store. In December 2013, CT REIT purchased a portion of land in a strip plaza co-anchored by national grocery retailer Sobeys and adjacent to the largest enclosed mall and power centre in PEI. Canadian Tire Real Estate began construction in January and Charlottetown’s new Canadian Tire store opened in October 2014. With 94,704 square feet of GLA, the new store is approximately 30 per cent larger than the old location, and offers customers an enhanced shopping experience as well as 14 new auto service bays. As is customary, our triple-net lease agreement with our Canadian Tire tenant includes an annual 1.5 per cent rent escalation. CT REIT can grow in many ways, including development – acquiring land and building on it or purchasing existing buildings and adding value through renovation or repurposing the property. The new Charlottetown store shows that CT REIT, by being “plugged in” to CTC’s development needs, is positioned to grow with the company. 6 6 CT REIT 2014 ANNUAL REPORT CT REIT 2014 ANNUAL REPORT INTENSIFICATION CASE STUDY Intensification in Thunder Bay delivers more space, more selection and more value Adjacent to the largest enclosed mall and power centre in Thunder Bay, the Canadian Tire store on Fort William Road is one of the most popular shopping destinations for people living in and around Thunder Bay, Ontario. The existing Canadian Tire store was so popular that it did not have the space it needed to keep pace with growing customer demand. To help meet that welcomed challenge, we funded an addition, built onto one side of the store, which expanded the GLA to 100,855 square feet from 83,063 square feet. When upgrading or expanding an existing CTC property, CT REIT funds the cost of construction, and amends its lease agreements to provide for incremental, supportable rent increases related to that capital investment. Intensification, or finding ways to do more with the properties in our portfolio, is a low risk strategy for delivering growth, particularly in the short and medium term. CT REIT 2014 ANNUAL REPORT CT REIT 2014 ANNUAL REPORT 7 7 ACQUISITION CASE STUDY Canada Square – Long-term growth In July 2014, CT REIT acquired a one-third interest in Canada Square, a mixed-use commercial property at Yonge Street and Eglinton Avenue in Toronto. While our focus remains retail, this purchase complements our goals and our portfolio. Like most of our properties, Canada Square is situated at a prime location in a key urban market, and as the headquarters of CTC and CT REIT, it has an investment grade anchor tenant. In pursuing growth and value for our Unitholders, CT REIT is guided by a strategy that gives us the flexibility to act on many opportunities. The Canada Square acquisition was immediately accretive for Unitholders. Located as it is at one of the key intersections in Canada’s largest city, it also provides long-term potential development opportunities that we will be pursuing with our co-owners. 13 New Properties This Year: CALGARY, AB CAMROSE, AB MEDICINE HAT, AB YORKTON, SK BROCKVILLE, ON BURLINGTON, ON OSHAWA, ON STRATFORD, ON STRATHROY, ON TORONTO (CANADA SQUARE1), ON WASAGA BEACH, ON SHERBROOKE, QC VAUDREUIL, QC 201,415 SQ. FT. 28,126 SQ. FT. 63,023 SQ. FT. 34,621 SQ. FT. 70,380 SQ. FT. 63,899 SQ. FT. 99,532 SQ. FT. 97,908 SQ. FT. 67,834 SQ. FT. 843,912 SQ. FT. 54,081 SQ. FT. 97,522 SQ. FT. 73,965 SQ. FT. 1 CT REIT owns a one-third interest in Canada Square; GLA shown in the chart is at 100 per cent level. 8 8 CT REIT 2014 ANNUAL REPORT CT REIT 2014 ANNUAL REPORT Our Portfolio of Properties Location Whitehorse, YT Yellowknife, NT Castlegar, BC Chilliwack, BC Dawson Creek, BC Fernie, BC Invermere, BC Kamloops, BC Kamloops, BC Kelowna, BC Langley, BC Merritt, BC Mission, BC Penticton, BC Prince George, BC Quesnel, BC Sechelt, BC Smithers, BC Terrace, BC Trail, BC Vancouver, BC Vancouver, BC Athabasca, AB Brooks, AB Calgary, AB Calgary, AB Calgary, AB Camrose, AB Camrose, AB Cold Lake, AB Drumheller, AB Edmonton, AB Edmonton, AB Edmonton, AB Edmonton, AB Fort Saskatchewan, AB High Level, AB High River, AB Hinton, AB Lethbridge, AB Lloydminster, AB Medicine Hat, AB GLA Property Type Location GLA Property Type 103,276 sq. ft. 65,054 sq. ft. 67,585 sq. ft. 64,539 sq. ft. 56,586 sq. ft. 51,049 sq. ft. 28,670 sq. ft. 51,236 sq. ft. 24,338 sq. ft. 84,822 sq. ft. 88,266 sq. ft. 44,575 sq. ft. 40,621 sq. ft. 64,092 sq. ft. 96,197 sq. ft. 27,858 sq. ft. 37,082 sq. ft. 35,105 sq. ft. 64,164 sq. ft. 49,121 sq. ft. 181,212 sq. ft. 215,594 sq. ft. 39,119 sq. ft. 45,977 sq. ft. 72,996 sq. ft. 89,129 sq. ft. 201,415 sq. ft. 64,664 sq. ft. 28,126 sq. ft. 56,312 sq. ft. 31,183 sq. ft. 94,106 sq. ft. 64,786 sq. ft. 77,022 sq. ft. 79,555 sq. ft. 51,860 sq. ft. 28,676 sq. ft. – 36,016 sq. ft. 78,860 sq. ft. 65,109 sq. ft. 115,949 sq. ft. ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● Medicine Hat, AB Olds, AB Peace River, AB Red Deer, AB 63,023 sq. ft. 67,535 sq. ft. 28,162 sq. ft. 84,755 sq. ft. Rocky Mountain House, AB 47,247 sq. ft. Sherwood Park, AB Slave Lake, AB Spruce Grove, AB St. Albert, AB St. Paul, AB Stettler, AB Strathmore, AB Sylvan Lake, AB Vegreville, AB Wainwright, AB Wetaskiwin, AB Whitecourt, AB Estevan, SK Humboldt, SK Melfort, SK Regina, SK Regina, SK Saskatoon, SK Swift Current, SK Swift Current, SK Weyburn, SK Yorkton, SK Flin Flon, MB Portage La Prairie, MB Selkirk, MB Steinbach, MB Winnipeg, MB Winnipeg, MB Alexandria, ON Alliston, ON Amherstburg, ON Ancaster, ON Aylmer, ON Bancroft, ON Barrie, ON Blenheim, ON Bowmanville, ON 85,629 sq. ft. 45,995 sq. ft. 95,909 sq. ft. 101,034 sq. ft. 39,420 sq. ft. 28,783 sq. ft. 39,721 sq. ft. 59,143 sq. ft. 52,734 sq. ft. 45,804 sq. ft. 53,639 sq. ft. 64,021 sq. ft. 38,931 sq. ft. 28,677 sq. ft. 28,622 sq. ft. 100,480 sq. ft. 98,583 sq. ft. 82,989 sq. ft. 56,864 sq. ft. – 39,659 sq. ft. 34,621 sq. ft. 38,620 sq. ft. 38,162 sq. ft. 67,474 sq. ft. 58,537 sq. ft. 98,897 sq. ft. 72,051 sq. ft. 17,368 sq. ft. 66,532 sq. ft. 44,261 sq. ft. 68,951 sq. ft. 27,867 sq. ft. 48,779 sq. ft. 115,680 sq. ft. 27,814 sq. ft. 125,981 sq. ft. ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● Standalone ● Multi-tenant ● Standalone – Land Lease ● Multi-tenant – Land Lease ● Distribution Centre ● Development Property CT REIT 2014 ANNUAL REPORT CT REIT 2014 ANNUAL REPORT 9 9 OUR PORTFOLIO CONTINUED Location Bracebridge, ON Bradford, ON Brampton, ON Brampton, ON Brampton, ON Brantford, ON Brockville, ON Burlington North, ON Cambridge, ON Campbellford, ON Carleton Place, ON Casselman, ON Chelmsford, ON Cobourg, ON Cochrane, ON Cornwall, ON Deep River, ON Dryden, ON Dunnville, ON Elliot Lake, ON Espanola, ON Essex, ON Etobicoke, ON Exeter, ON Fenelon Falls, ON Fergus, ON Fort Erie, ON Fort Frances, ON Guelph, ON Guelph, ON Hamilton, ON Hanmer, ON Hearst, ON Huntsville, ON Kanata, ON Kemptville, ON Kenora, ON Keswick, ON Kincardine, ON Kingston, ON Lindsay, ON Listowel, ON London, ON London, ON London, ON Marathon, ON Markham, ON Midland, ON GLA Property Type 51,344 sq. ft. 45,004 sq. ft. 85,887 sq. ft. 84,507 sq. ft. 64,277 sq. ft. 107,139 sq. ft. 70,380 sq. ft. 63,899 sq. ft. 129,914 sq. ft. 28,410 sq. ft. 48,417 sq. ft. 42,466 sq. ft. 70,877 sq. ft. 92,771 sq. ft. 29,312 sq. ft. 88,522 sq. ft. 36,497 sq. ft. 41,132 sq. ft. 38,876 sq. ft. 20,561 sq. ft. 48,724 sq. ft. 47,033 sq. ft. 100,621 sq. ft. 28,134 sq. ft. 18,864 sq. ft. 36,813 sq. ft. 36,781 sq. ft. 55,737 sq. ft. 84,228 sq. ft. 52,864 sq. ft. 15,286 sq. ft. 52,982 sq. ft. 36,497 sq. ft. 61,604 sq. ft. 119,023 sq. ft. 62,666 sq. ft. 59,844 sq. ft. 59,125 sq. ft. 30,983 sq. ft. 119,791 sq. ft. 104,362 sq. ft. 35,188 sq. ft. 105,075 sq. ft. 100,233 sq. ft. 97,710 sq. ft. 28,164 sq. ft. 88,957 sq. ft. 69,868 sq. ft. ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● GLA Property Type Location Milton, ON Mississauga, ON Mississauga, ON Mississauga, ON Morrisburg, ON Nepean, ON Nepean, ON Nepean, ON New Liskeard, ON Newmarket, ON North Bay, ON Oakville, ON Oakville, ON Oakville, ON Orangeville, ON Orleans, ON Oshawa, ON Oshawa South, ON Ottawa, ON Ottawa, ON Owen Sound, ON Pembroke, ON Peterborough, ON Pickering, ON Port Elgin, ON Port Perry, ON Prescott, ON Renfrew, ON Rockland, ON Smiths Falls, ON St. Catharines, ON St. Thomas, ON Stratford, ON Strathroy, ON Sturgeon Falls, ON Thornhill, ON Thunder Bay, ON Tilbury, ON Timmins, ON 89,581 sq. ft. 114,804 sq. ft. 91,525 sq. ft. 99,333 sq. ft. 30,974 sq. ft. 107,222 sq. ft. 70,731 sq. ft. 84,679 sq. ft. 33,980 sq. ft. 126,758 sq. ft. 112,961 sq. ft. 99,074 sq. ft. 88,386 sq. ft. 88,847 sq. ft. 69,910 sq. ft. 119,753 sq. ft. 88,388 sq. ft. 99,532 sq. ft. 95,571 sq. ft. 75,146 sq. ft. 89,646 sq. ft. 91,157 sq. ft. 64,818 sq. ft. 89,858 sq. ft. 29,348 sq. ft. 45,152 sq. ft. 37,731 sq. ft. 40,604 sq. ft. 51,829 sq. ft. 56,712 sq. ft. 89,347 sq. ft. 71,726 sq. ft. 97,908 sq. ft. 67,834 sq. ft. 36,384 sq. ft. 70,301 sq. ft. 100,855 sq. ft. 11,904 sq. ft. 97,532 sq. ft. Toronto (Canada Square1), ON 843,912 sq. ft. Toronto, ON Toronto, ON Toronto, ON Uxbridge, ON Wasaga, ON Waterdown, ON Waterloo, ON Waterloo, ON 155,979 sq. ft. 109,674 sq. ft. 164,928 sq. ft. 56,875 sq. ft. 54,081 sq. ft. 71,424 sq. ft. 99,394 sq. ft. 57,580 sq. ft. ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● Standalone ● Multi-tenant ● Standalone – Land Lease ● Multi-tenant – Land Lease ● Distribution Centre ● Development Property 1 CT REIT owns a one-third interest in Canada Square; GLA shown in the chart is at 100 per cent level. 10 10 CT REIT 2014 ANNUAL REPORT CT REIT 2014 ANNUAL REPORT GLA Property Type Location GLA Property Type Location Welland, ON Whitby, ON Whitby, ON Windsor, ON Windsor, ON Woodbridge, ON Woodstock, ON Baie-Comeau, QC Blainville, QC Boucherville, QC Buckingham, QC Chambly, QC Châteauguay, QC Chicoutimi, QC 98,145 sq. ft. 72,095 sq. ft. 77,209 sq. ft. 94,432 sq. ft. 90,452 sq. ft. 109,634 sq. ft. 90,051 sq. ft. 47,284 sq. ft. 64,919 sq. ft. 92,802 sq. ft. 65,633 sq. ft. 51,322 sq. ft. 85,548 sq. ft. 75,617 sq. ft. Coteau-du-Lac, QC 1,658,165 sq. ft. Cowansville, QC Dolbeau-Mistassini, QC Donnacona, QC Drummondville, QC Gatineau, QC Granby, QC Greenfield Park, QC Jonquière, QC Kirkland, QC L’Ancienne-Lorette, QC La Baie, QC La Sarre, QC Lac-Mégantic, QC Laval, QC Laval, QC Laval, QC Lévis, QC Lévis, QC Longueuil, QC Magog, QC Mont-Laurier, QC Montmagny, QC Montréal, QC Montréal, QC Montréal, QC Montréal, QC Paspébiac, QC Québec, QC Québec, QC Repentigny, QC Roberval, QC Rosemère, QC Rouyn-Noranda, QC 64,928 sq. ft. 53,367 sq. ft. 31,355 sq. ft. 108,722 sq. ft. 100,724 sq. ft. 118,926 sq. ft. 94,703 sq. ft. 64,566 sq. ft. 100,759 sq. ft. 92,041 sq. ft. 39,540 sq. ft. 35,026 sq. ft. 27,868 sq. ft. 70,027 sq. ft. 99,349 sq. ft. 64,744 sq. ft. 76,780 sq. ft. 88,960 sq. ft. 91,374 sq. ft. 75,271 sq. ft. 36,913 sq. ft. 41,829 sq. ft. 90,705 sq. ft. 89,287 sq. ft. 54,184 sq. ft. 73,044 sq. ft. 31,334 sq. ft. 88,295 sq. ft. 88,065 sq. ft. 122,235 sq. ft. 21,689 sq. ft. 103,252 sq. ft. 65,467 sq. ft. Saint-Bruno-de-Montarville, QC 91,016 sq. ft. ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● Saint-Georges, QC Saint-Hyacinthe, QC Saint-Léonard, QC Sainte-Marie, QC 58,867 sq. ft. 92,062 sq. ft. 77,253 sq. ft. 37,749 sq. ft. Salaberry-de-Valleyfield, QC 97,021 sq. ft. Sept-Îles, QC Shawinigan, QC Sherbrooke, QC Sorel, QC Terrebonne, QC Terrebonne, QC Trois-Rivières, QC Val-d’Or, QC Vaudreuil, QC Atholville, NB Bathurst, NB Dieppe, NB Edmundston, NB Fredericton, NB Grand Falls, NB Miramichi, NB Oromocto, NB Riverview, NB Saint John, NB Saint John, NB St. Stephen, NB Tracadie Sheila, NB Woodstock, NB Amherst, NS Bedford, NS Cookville, NS Digby, NS Grace Bay, NS Greenwood, NS New Glasgow, NS New Minas, NS Port Hawkesbury, NS Sydney, NS Tantallon, NS Truro, NS Charlottetown, PE Summerside, PE Carbonear, NL Clarenville, NL Corner Brook, NL Mount Pearl, NL St. John’s, NL St. John’s, NL Stephenville, NL 47,557 sq. ft. 109,843 sq. ft. 97,522 sq. ft. 72,705 sq. ft. 99,388 sq. ft. 47,423 sq. ft. 98,931 sq. ft. 90,225 sq. ft. 73,965 sq. ft. 45,384 sq. ft. 51,807 sq. ft. 64,814 sq. ft. 33,142 sq. ft. 81,740 sq. ft. 39,857 sq. ft. 78,588 sq. ft. 53,775 sq. ft. 23,460 sq. ft. 72,777 sq. ft. 58,691 sq. ft. 38,068 sq. ft. 68,160 sq. ft. 39,870 sq. ft. 48,852 sq. ft. 84,726 sq. ft. 68,031 sq. ft. 30,931 sq. ft. 20,419 sq. ft. 53,775 sq. ft. 80,403 sq. ft. 56,096 sq. ft. 27,449 sq. ft. 59,779 sq. ft. 37,208 sq. ft. 62,312 sq. ft. 94,704 sq. ft. 50,882 sq. ft. 38,420 sq. ft. 32,517 sq. ft. 74,486 sq. ft. 87,909 sq. ft. 59,743 sq. ft. 94,704 sq. ft. 31,306 sq. ft. ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● Standalone ● Multi-tenant ● Standalone – Land Lease ● Multi-tenant – Land Lease ● Distribution Centre ● Development Property CT REIT 2014 ANNUAL REPORT CT REIT 2014 ANNUAL REPORT 11 11 BOARD OF TRUSTEES AND MANAGEMENT TEAM DAVID LAIDLEY 1, 2 Chairman of the Board, Westmount, Quebec BRENT HOLLISTER 2, 3 Toronto, Ontario ANNA MARTINI 1, 2 Town of Mount Royal, Quebec DEAN McCANN Toronto, Ontario JOHN O’BRYAN 1, 3 Toronto, Ontario STEPHEN WETMORE 2 Toronto, Ontario KEN SILVER 3 Trustee and Management, Toronto, Ontario LOUIS FORBES Management, Toronto, Ontario 1 Audit Committee (Chair: Anna Martini) 2 Governance, Compensation and Nominating Committee (Chair: Brent Hollister) 3 Investment Committee (Chair: John O’Bryan) 12 12 CT REIT 2014 ANNUAL REPORT CT REIT 2014 ANNUAL REPORT CT REIT is committed to providing our Unitholders with reliable, durable and growing distributions and to maximizing the value of their investment. We believe that good governance and transparency are essential to ensuring that the REIT meets these commitments. Under our Declaration of Trust, a majority of CT REIT’s Board of Trustees, including the Chairman, must be independent and unaffiliated with Canadian Tire Corporation. Collectively, the REIT’s trustees have extensive experience in corporate governance, capital markets, retail and real estate. The management team is responsible for CT REIT’s day-to-day operations and the implementation of strategy, while the Board’s mandate is to provide governance and stewardship for the REIT and its business. The Board’s responsibilities include monitoring the REIT’s performance, approving strategic goals and performance objectives, and ensuring that policies and procedures are in place to identify and manage the principal risks inherent in the REIT’s business. Management’s Discussion and Analysis CT REIT Fourth Quarter and Full Year 2014 TABLE OF CONTENTS FORWARD-LOOKING DISCLAIMER PART I Basis of presentation Definitions Accounting estimates and assumptions Quarterly and annual comparisons in this MD&A Non-GAAP and operational key performance indicators Review and approval by the Board of Trustees Nature and formation PART II Growth strategy and objectives PART III Overview of the property portfolio PART IV Results of operations PART V Liquidity and financial condition PART VI Equity PART VII Related party transactions PART VIII Accounting policies and estimates PART IX Non-GAAP and operational key performance indicators PART X Enterprise risk management PART XI Disclosure and internal control over financial reporting PART XII Forward looking information 14 15 15 15 15 15 15 16 16 16 21 25 30 32 33 35 39 41 42 CT REIT 2014 ANNUAL REPORT 13 FORWARD-LOOKING DISCLAIMER This Management’s Discussion and Analysis (“MD&A”) contains statements that are forward-looking. Actual results or events may differ materially from those forecasted in this disclosure because of the risks and uncertainties associated with the business of CT Real Estate Investment Trust and its subsidiaries, (unless the context requires otherwise referred to herein as “CT REIT”, the “Trust” or the “REIT”) and the general economic environment. See Part XII in this MD&A for additional important information and a caution on the use of forward-looking statements. CT REIT cannot provide any assurance that forecasted financial or operational performance will actually be achieved or, if it is, that it will result in an increase in the price of CT REIT’s units. 14 CT REIT 2014 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS PART I BASIS OF PRESENTATION The following MD&A is intended to provide readers with an assessment of the performance of CT REIT for the year ended December 31, 2014 (also referred to as “2014”) and should be read in conjunction with the REIT’s audited consolidated financial statements (“consolidated financial statements”) and accompanying notes for 2014 which have been prepared in accordance with International Financial Reporting Standards (“IFRS”). In addition, the following MD&A should be read in conjunction with CT REIT’s information about and caution with respect to the use of forward-looking statements which can be found in Part XII of this MD&A. Information about CT REIT, including the prospectus dated October 10, 2013 (the “Prospectus”) filed in connection with its initial public offering (the “Offering”), Annual Information Form (“AIF”), Annual Report, and all other continuous disclosure documents required by the Canadian securities regulators, can be found on the System for Electronic Document Analysis and Retrieval (“SEDAR”) website at www.sedar.com and on CT REIT’s website in the Investors section at www.ctreit.com. DEFINITIONS In this document, the terms “CT REIT”, “the REIT”, and “the Trust”, refer to CT Real Estate Investment Trust and its subsidiaries unless the context requires otherwise. In addition, “the Company”, “CTC” and the “Corporation” refer to Canadian Tire Corporation, Limited, entities that it controls and their collective businesses unless the context requires otherwise. For commonly used defined terminology refer to the glossary of terms at the end of this 2014 Annual Report. ACCOUNTING ESTIMATES AND ASSUMPTIONS The preparation of the consolidated financial statements in accordance with IFRS requires management to make judgements and estimates that affect the application of accounting policies and the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Refer to Part VIII in this MD&A for further information. Financial data included in this MD&A includes material information up to February 23, 2015. Disclosure contained in this document is current to that date, unless otherwise noted. QUARTERLY AND ANNUAL COMPARISONS IN THIS MD&A CT REIT was established on July 15, 2013 and commenced operations on October 23, 2013. CT REIT had no operations prior to October 23, 2013. The variances between the three months ended December 31, 2014 (“Q4 2014”) and the three months ended December 31, 2013 as well as the variances between the year ended December 31, 2014 and the period from July 15, 2013 to December 31, 2013 (“2013”) are primarily due to the shorter operating period in 2013. Unless otherwise indicated, all comparisons of results for Q4 2014 and 2014 are against forecasted results for the respective period. All amounts in this MD&A are in thousands of Canadian dollars, except unit, per unit, square foot amounts or unless otherwise indicated. NON-GAAP AND OPERATIONAL KEY PERFORMANCE INDICATORS Net operating income (“NOI”), funds from operations (“FFO”), FFO per Unit, adjusted funds from operations (“AFFO”), AFFO per Unit, earnings before interest and other financing costs, taxes and fair value adjustments (“EBITFV”), interest coverage ratio, indebtedness ratio, debt to enterprise value ratio and book value per unit are key performance indicators used by management to track and assess CT REIT’s performance in meeting its principle objective of creating Unitholder value. Some of these measures are not defined by IFRS, also referred to as GAAP, and therefore should not be construed as alternatives to net income or cash flow from operating activities calculated in accordance with IFRS. Further, the key performance indicators used by management may not be comparable to similar measures presented by other real estate investment trusts or enterprises. Net income prepared in accordance with IFRS is also subject to varying degrees of judgment, and some meaningful differences in accounting policies exist between publicly traded entities in Canada. Accordingly, net income as presented by CT REIT may not be comparable to net income presented by other real estate investment trusts or enterprises. For further information on the non-GAAP and operational key performance indicators used by management and for reconciliations to the nearest GAAP measures, refer to Part IX. REVIEW AND APPROVAL BY THE BOARD OF TRUSTEES The Board of Trustees (“the Board”), on the recommendation of its Audit Committee, authorized for issuance the contents of this MD&A on February 23, 2015. CT REIT 2014 ANNUAL REPORT 15 MANAGEMENT’S DISCUSSION AND ANALYSIS NATURE AND FORMATION CT REIT is an unincorporated, closed-end real estate investment trust established on July 15, 2013 pursuant to a declaration of trust under, and governed by, the laws of the Province of Ontario as amended and restated as at October 22, 2013 (the “Declaration of Trust”). CT REIT commenced operations on October 23, 2013. The principal, registered and head office of CT REIT is located at 2180 Yonge Street, Toronto, Ontario M4P 2V8. CTC owns an 83.2% effective interest in CT REIT as of December 31, 2014, consisting of 59,711,094 of the issued and outstanding units of CT REIT (“Units”) and all of the issued and outstanding Class B limited partnership units (“Class B LP Units”) of CT REIT Limited Partnership (the “Partnership”), which are economically equivalent to and exchangeable for Units. CTC also owns all of the Class C limited partnership units (“Class C LP Units”) of the Partnership. The Units are listed on the Toronto Stock Exchange (“TSX”) under the symbol CRT.UN. CT REIT has one segment which comprises the ownership and operation of primarily retail investment properties located in Canada. PART II The following section contains forward-looking information and users are cautioned that actual results may vary. GROWTH STRATEGY AND OBJECTIVES The principal objective of CT REIT is to create Unitholder value over the long-term by generating reliable, durable and growing monthly distributions on a tax- efficient basis. To achieve this objective, management is focusing on expanding the REIT’s asset base while also increasing its AFFO per Unit. Future growth is expected to be achieved from a number of sources including: 1. The current portfolio of Canadian Tire store leases contain contractual annual rent escalations of 1.5% per year, on average, over the initial term of the leases and have a weighted average remaining lease term of 14.5 years; 2. CT REIT has contractual arrangements with CTC whereby CT REIT has a right of first offer (“ROFO”) on all current and future CTC properties which meet the REIT’s investment criteria and preferential rights, subject to certain exceptions, to participate in the development of, and to acquire, certain new retail properties; and 3. CT REIT will seek to use its relationship with CTC to obtain insights into potential real estate acquisitions and development opportunities in markets across Canada. PART III OVERVIEW OF THE PROPERTY PORTFOLIO Property Profile The property portfolio as at December 31, 2014 consists of 268 retail properties, two distribution centres, one mixed-use commercial property and two development properties acquired for future development. These investment properties (the “Properties”) are located in each of the provinces and two territories across Canada and the retail properties, distribution centres and mixed-use commercial property contain approximately 20.4 million square feet of gross leasable area (“GLA”). CT REIT’s consolidated financial position, results of operations and property portfolio analyses include the REIT’s one-third interest in Canada Square, a mixed-use commercial property in Toronto, ON. CTC is CT REIT’s largest tenant. At December 31, 2014, CTC represented 97.9% of total GLA and 96.4% of annual base minimum rent. (in square feet) Canadian Tire stores and gas bars Distribution centres Mixed-use property Third party tenants (including other CTC banners) Total 16 CT REIT 2014 ANNUAL REPORT GLA Occupied GLA Occupancy 2014 17,642,796 17,642,796 1,859,580 1,859,580 281,304 574,440 270,594 561,997 20,358,120 20,334,967 100.0% 100.0% 96.2% 97.8% 99.9% MANAGEMENT’S DISCUSSION AND ANALYSIS (in square feet) Canadian Tire stores and gas bars Distribution centres Third party tenants (including other CTC banners) Total Number of Properties Standalone properties Multi-tenant properties anchored by Canadian Tire store Multi-tenant properties not anchored by Canadian Tire store Distribution centres Mixed-use property Total Operating properties Development properties Total properties Number of Gas Bars Gas bars at retail properties 2013 GLA Occupied GLA Occupancy 16,792,323 16,792,323 1,658,165 1,658,165 436,670 426,727 100.0% 100.0% 97.7% 18,887,158 18,877,215 99.9% 2014 2013 238 27 3 2 1 271 2 273 229 26 0 1 0 256 2 258 2014 2013 87 86 CT REIT’s properties by region, as a percentage of total GLA as at December 31, 2014 are as follows: PROPERTIES BY REGION (% of total GLA) 9.5% 23.2% 27.4% 39.9% Ontario Quebec Western Atlantic Six Largest Urban Markets As at December 31, 2014, a significant portion of CT REIT’s properties reside in the following large urban markets: Percentage of Annualized Base Minimum Retail Rent Toronto Montreal Vancouver Ottawa Calgary Edmonton 2014 2013 19.1% 17.4% 13.0% 13.1% 4.1% 5.3% 1.7% 3.9% 4.5% 5.7% 1.2% 4.2% 47.1% 46.1% CT REIT 2014 ANNUAL REPORT 17 MANAGEMENT’S DISCUSSION AND ANALYSIS Revenue by Province CT REIT’s portfolio is located across Canada with approximately 65.7% of annual base minimum rent received in respect of properties in Ontario and Quebec. PROPERTIES BY REGION (% of Annualized Base Minimum Rent) 8.0% 26.3% 22.7% 43.0% Ontario Quebec Western Atlantic 2014 Investment Activities (in thousands of Canadian dollars, except for GLA amounts) Property Location Burlington, ON1 Camrose, AB1 Medicine Hat, AB1 Oshawa, ON1 Sherbrooke, QC1 Stratford, ON1 Vaudreuil, QC1 Yorkton, SK1 Toronto, ON1 Calgary, AB1 Strathroy, ON1 Wasaga Beach, ON1 Brockville, ON1 Sturgeon Falls, ON4 Thunder Bay, ON4 Oshawa, ON4 Regina, SK4 Swift Current, SK2 Charlottetown, PEI3 St. John’s, NL3 High River, AB2 Hull, QC4 Shawinigan, QC4 Total 1 Acquisition of investment property 2 Development land acquisition 3 Development 4 Intensification of existing asset 5 Net of post-closing adjustments 18 CT REIT 2014 ANNUAL REPORT Total Investment Cost5 Transaction Date Feb 27, 2014 Apr 30, 2014 Apr 30, 2014 Apr 30, 2014 Jun 20, 2014 Jun 20, 2014 Jun 20, 2014 Jun 20, 2014 Jul 17, 2014 Jul 30, 2014 Sep 26, 2014 Sep 26, 2014 Sep 26, 2014 Nov 19, 2014 Nov 19, 2014 Dec 01, 2014 Dec 01, 2014 Dec 01, 2014 Dec 12, 2014 Dec 12, 2014 Dec 22, 2014 Dec 23, 2014 Dec 23, 2014 GLA 63,899 28,126 63,023 87,532 97,522 97,908 73,965 34,621 281,304 201,415 67,834 54,081 70,380 8,220 17,792 12,000 7,700 – 94,704 94,704 – 4,433 3,801 1,464,964 $ 264,580 MANAGEMENT’S DISCUSSION AND ANALYSIS For the three months ended December 31, 2014, two development land acquisitions, two developments and six intensifications were completed at a total cost of $36,140 and were funded as follows: (in thousands of Canadian dollars) Funded with working capital to CTC Funded with working capital to third parties Total costs Acquisitions of investment properties Development land acquisition Developments Intensifications Total Q4 2014 Investment Activity $ – 244 $ 244 $ – 3,982 $ 19,929 $ 11,951 $ 31,880 34 – 4,260 $ 3,982 $ 19,963 $ 11,951 $ 36,140 For the year ended December 31, 2014, thirteen investment property acquisitions, two development land acquisitions, two developments and six intensifications were completed at a total cost of $264,580 and were funded as follows: (in thousands of Canadian dollars) Funded with working capital to CTC1 Funded with working capital to third parties Issuance of Class B LP Units to CTC Issuance of Class C LP Units to CTC Mortgages assumed Total costs 1 Net of post-closing adjustments. 2013 Investment Activities Acquisitions of investment properties Development land acquisition $ 31,479 71,267 19,464 47,279 59,195 $ – 3,982 – – – 2014 Investment Activity Developments Intensifications Total $ 19,929 $ 11,951 $ 63,359 34 – – – – – – – 75,283 19,464 47,279 59,195 $ 228,684 $ 3,982 $ 19,963 $ 11,951 $ 264,580 At October 23, 2013, the REIT, indirectly, purchased a portfolio of 256 properties (the “Initial Properties”) from CTC in exchange for a combination of Class B LP Units (which are accompanied by an equivalent number of special voting units (the ‘‘Special Voting Units’’) of CT REIT; Class A limited partnership units (“Class A LP Units”) which were then immediately acquired by CT REIT using the net proceeds from the Offering; and Class C LP Units. The purchase price of the Initial Properties was $3,533,668 and was supported by independent appraisals. CT REIT incurred costs on the acquisition of the Initial Properties of $468, which was added to the carrying value of the Initial Properties upon their recognition. The purchase price was satisfied as follows: (in thousands of Canadian dollars) Cash1 Units acquired by CTC Class B LP Units Class C LP Units Total consideration paid 2013 $ 240,958 597,111 895,599 1,800,000 $ 3,533,668 1 Represents proceeds from the Offering less issuance costs of $22,074 and property acquisition costs of $468. On December 23, 2013, CT REIT completed two development land acquisitions from separate third-party vendors. The total purchase price was approximately $9,011 including acquisition costs. These acquisitions were funded with cash. Valuation Method The fair value of the property portfolio represents 99.6% of the total assets of CT REIT as at December 31, 2014. (in thousands of Canadian dollars) Balance at beginning of year Acquisitions of investment properties (including acquisition costs)2 Development land acquisitions Developments Intensifications Recoverable capital expenditures Capitalized interest and property taxes Straight-line rent Fair value adjustment on investment properties Balance at end of year 1 Based on operations beginning October 23, 2013. 2 Net of post-closing adjustments. 2014 $ 3,547,864 $ 20131 – 228,684 3,534,136 3,982 19,963 11,951 17,052 442 28,685 141,221 9,011 – – – – 5,185 (468) $ 3,999,844 $ 3,547,864 CT REIT 2014 ANNUAL REPORT 19 MANAGEMENT’S DISCUSSION AND ANALYSIS Investment properties were subject to independent valuations when initially acquired in 2013. At December 31, 2014, management’s determination of fair value was updated for current market assumptions, utilizing market capitalization rates provided by independent valuation professionals. CT REIT also obtained independent valuations for certain properties based on a four-year rotation cycle during which substantially all of its properties will be independently valued. Included in CT REIT’s property portfolio are seven buildings with a fair value of approximately $127,926 that are situated on leased land. Assuming all extension periods are exercised, the land leases have terms between 27 and 41 years with an average remaining lease term of 34 years. Lease Maturities CTC is CT REIT’s largest tenant. As at December 31, 2014 CTC, including all CTC banners, had leased over 20.0 million square feet of GLA, with approximately 90% and 9% of the GLA attributable to retail and distribution properties, respectively. The weighted average term of the retail leases with CTC, including all CTC banners, is 14.5 years, excluding the exercise of any renewals. The weighted average term of the Canadian Tire store leases is 14.5 years, with a weighted average rental rate of $13.03 per square foot. The weighted average lease term of the distribution centres, which are both leased by CTC, is 15.2 years. The weighted average lease term of the total portfolio, including all tenants, is 14.4 years. The following graph sets out as of December 31, 2014 the lease maturity profile from 2015 to 2035 (assuming tenants do not exercise renewal options or termination rights) as a percentage of total base minimum rent and GLA as of the time of expiry. INITIAL TERM LEASE EXPIRY BY % OF INITIAL MINIMUM RENT AND GLA Square Feet (millions) 13.7% 11.8% 10.1% 8.2% 9.4% 7.8% 5.2% 8.6% 8.0% 6.6% 5.6% 1.9% 4.0 3.5 3.0 2.5 2.0 1.5 1.0 .5 .0 0.0% 0.1% 0.4% 0.3% 0.3% 0.4% 1.3% 0.4% 0.1% 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 Canadian Tire Retail GLA Distribution Centre GLA Other GLA 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Notes: 1 Excludes development properties 2 Total base minimum rent excludes contractual escalation Top 10 Tenants Excluding CTC Banners As at December 31, 2014, CT REIT’s 10 largest tenants, excluding CTC banners, as represented by the percentage of total annualized base rental revenue, are: Rank Tenant Name 1 2 3 4 5 6 7 8 9 Overwaitea Foods Best Buy Precise Parklink Marshalls RBC Royal Bank Shoppers Drug Mart PetSmart Goodlife Fitness TV Ontario 10 TD Canada Trust 20 CT REIT 2014 ANNUAL REPORT Percentage of Total Annualized Base Rental Revenue 0.36% 0.30% 0.26% 0.26% 0.22% 0.20% 0.19% 0.18% 0.17% 0.14% 2.28% MANAGEMENT’S DISCUSSION AND ANALYSIS PART IV RESULTS OF OPERATIONS This section of the MD&A covers the three months and year ended December 31, 2014 compared to the forecasted information contained in the Prospectus (the “Forecast”) for the same time periods. As of December 31, 2014, management has identified the following items that have caused the actual 2014 results to be different than the Forecast: ‰ the Forecast did not assume that the over-allotment option would be exercised. Pursuant to the exercise of the over-allotment option, on November 4, 2013 CT REIT issued 3,952,500 additional Units to the public at a price of $10.00 per unit; ‰ the Forecast did not assume that CT REIT would complete any property acquisitions following October 23, 2013 and, as such, the Forecast numbers do not reflect this activity; ‰ the Forecast did not assume a fair value adjustment on the property portfolio. During the quarter, management’s determination of fair value incorporated a fair value adjustment of $7,305. On a year-to-date basis, management’s determination of fair value gave rise to a fair value adjustment of $141,221; ‰ the Forecast had differing assumptions for certain expenses, such as property taxes and general and administrative expenses; and ‰ the Forecast assumed a lower rate of recovery of operating expenses from tenants than was realized for 2014. CT REIT 2014 ANNUAL REPORT 21 MANAGEMENT’S DISCUSSION AND ANALYSIS Summary of Selected Financial and Operational Information Readers are reminded that certain key performance indicators may not have standardized meanings under GAAP. For further information on the REIT’s operating measures and non-GAAP financial measures, refer to Parts I and IX. (in thousands of Canadian dollars, except per Unit, Unit and square footage amounts) Q4 2014 Q4 2014 Forecast Variance 2014 2014 Forecast Variance Property revenue Income before interest and other financing charges, taxes and fair value adjustments1 Income before interest and other financing charges, taxes and fair value adjustments/unit (basic)1, 2 Income before interest and other financing charges, taxes and fair value adjustments/unit (diluted, non-GAAP)1, 3 Net operating income1 Net income Net income/Unit (basic)2 Net income/Unit (diluted)4 Funds from operations1 Funds from operations/Unit (diluted, non-GAAP)1,2,3 Adjusted funds from operations1 Adjusted funds from operations/Unit (diluted, non-GAAP)1,2,3 Distributions/Unit – paid2 AFFO payout ratio1 Excess of AFFO over distributions: Cash retained from operations before distribution reinvestment7 Per Unit (diluted, non-GAAP)1,2,3 Weighted average number of Units outstanding2 Basic Diluted4 Diluted (non-GAAP)1,3 Period-end Units outstanding2 Total assets at December 31, 2014 Total debt and Class C LP Units as at December 31, 2014 Book value per Unit as at December 31, 20141,2 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ OTHER DATA Weighted average interest rate Indebtedness ratio1 Interest coverage (times)1 Debt / enterprise value ratio1 Gross leaseable area5 Occupancy rate6 89,212 $ 83,110 $ 6,102 $ 344,791 $ 333,510 $ 11,281 67,699 $ 62,877 $ 4,822 $ 260,031 $ 251,088 $ 8,943 0.373 $ 0.358 $ 0.015 $ 1.440 $ 1.429 $ 0.011 0.373 $ 62,115 $ 53,711 $ 0.296 $ 0.222 $ 46,528 $ 0.256 $ 34,657 $ 0.191 $ 0.163 $ 85% 0.358 $ 57,903 $ 42,295 $ 0.241 $ 0.176 $ 42,295 $ 0.241 $ 31,656 $ 0.180 $ 0.163 $ 90% 0.015 $ 4,212 $ 1.439 $ 1.429 $ 239,648 $ 231,196 $ 0.010 8,452 11,416 $ 318,261 $ 169,425 $ 148,836 0.055 $ 0.046 $ 4,233 $ 0.015 $ 3,001 $ 0.011 $ – $ 5% 1.762 $ 1.203 $ 0.965 $ 0.704 $ 176,798 $ 169,425 $ 0.979 $ 0.965 $ 132,866 $ 126,836 $ 0.736 $ 0.650 $ 88% 0.722 $ 0.650 $ 90% 0.797 0.499 7,373 0.014 6,030 0.014 – 2% 5,170 $ 0.028 $ 3,030 $ 0.017 $ 2,140 $ 0.011 $ 15,520 $ 0.086 $ 12,682 $ 0.072 $ 2,838 0.014 181,468,432 175,620,865 5,847,567 180,599,151 175,620,865 4,978,286 334,627,758 355,620,865 (20,993,107) 332,346,061 355,620,865 (23,274,804) 181,524,387 175,620,865 5,903,522 180,643,636 175,620,865 5,022,771 181,485,782 175,620,865 5,864,917 181,485,782 175,620,865 5,864,917 4,017,420 $ 3,596,900 $ 420,520 $ 4,017,420 $ 3,596,900 $ 420,520 1,983,773 $ 1,800,000 $ (183,773) $ 1,983,773 $ 1,800,000 $ (183,773) 11.03 $ 10.23 $ 0.80 $ 11.03 $ 10.23 $ 0.80 4.31% 49.4% 3.18 47.0% 4.50% 50.0% 3.05 50.6% 0.19% 0.6% 0.13 3.6% 4.31% 49.4% 3.13 47.0% 4.50% 50.0% 3.07 50.6% 0.19% 0.6% 0.06 3.6% 20,358,120 18,887,158 1,470,962 20,358,120 18,887,158 1,470,962 99.9% 99.9% – 99.9% 99.9% – 1 Non-GAAP key performance indicators. Refer to Part IX for further information. 2 Total Units consists of REIT Units and Class B LP Units outstanding. 3 Diluted Units used in calculating non-GAAP measures include restricted and deferred units issued under various plans and exclude the effect of assuming that all of the Class C LP Units will be settled with Class B LP Units. 4 Diluted Units determined in accordance with IFRS includes restricted and deferred units issued under various plans and the effect of assuming that all of the Class C LP Units will be settled with Class B LP Units. Refer to Part VI. 5 Gross leaseable area refers to retail, mixed-use and distribution properties and excludes development lands. 6 Refers to retail, mixed-use and distribution properties and excludes development lands. 7 Refer to Part VI for further information. 22 CT REIT 2014 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS Financial Results for the Three Months and Year Ended December 31, 2014 (in thousands of Canadian dollars) Property revenue Property expense General and administrative expense Interest income Interest and other financing charges Fair value adjustment on investment properties Q4 2014 Q4 2014 Forecast Variance 2014 2014 Forecast Variance $ 89,212 $ 83,110 $ 6,102 $ 344,791 $ 333,510 $ 11,281 (19,338) (2,196) 21 (21,293) 7,305 (18,224) (2,009) – (20,582) (1,114) (187) 21 (711) – 7,305 (76,677) (8,433) 350 (82,991) 141,221 (74,349) (8,073) – (2,328) (360) 350 (81,663) (1,328) – 141,221 Net income and comprehensive income $ 53,711 $ 42,295 $ 11,416 $ 318,261 $ 169,425 $ 148,836 Property Revenue Property revenue includes all amounts earned from tenants pursuant to lease agreements including property taxes, operating costs and other recoveries. Many of CT REIT’s expenses are recoverable from tenants pursuant to their leases, with CT REIT absorbing these expenses to the extent of vacancies. Total revenue for CT REIT was $89,212 for the three months ended December 31, 2014 which was $6,102 or 7.3% higher than Forecast, mainly due to base rent related to properties acquired since the Offering which were not included in the Forecast and higher than Forecast common area maintenance (“CAM”) recoveries, partially offset by lower property tax recoveries than Forecast. Total revenue included expense recoveries in the amount of $17,946. Total revenue for the year ended December 31, 2014 was $344,791 which was $11,281 or 3.4% higher than Forecast, mainly due to base rent related to properties acquired since the Offering which were not included in the Forecast and higher than Forecast CAM recoveries, partially offset by lower property tax recoveries than Forecast. Total revenue included expense recoveries in the amount of $71,910. The total amount of minimum lease payments to be received from operating leases is recognized on a straight-line basis over the term of the lease. For the three months ended December 31, 2014, straight-line rent of $7,843 was included in total property revenue. For the year ended December 31, 2014, straight-line rent of $28,685 was included in total property revenue. Property Expense The major components of property expense consist of property taxes and costs associated with the Property Management Agreement, as well as other costs, the majority of which are recoverable from tenants, with CT REIT absorbing these expenses to the extent of vacancies. Property expenses were $19,338 which is $1,114 or 6.1% higher than Forecast in the fourth quarter of 2014, largely due to property expenses related to acquisitions, partially offset by lower property tax expense for the Initial Properties. Refer to Part VII for additional information on the Property Management Agreement. For the year ended December 31, 2014, property expenses were $76,677 which is $2,328 or 3.1% higher than Forecast, largely due to property expenses related to acquisitions, partially offset by lower property tax expense for the Initial Properties. Net Operating Income CT REIT defines NOI as property revenue less property expense, adjusted further for straight-line rent and land lease adjustments. Management believes that NOI is a useful key indicator of performance as it represents a measure over which management of property operations has control. NOI is also a key input in determining the value of the portfolio. (in thousands of Canadian dollars) Property revenue Less: Property expense Straight-line rent adjustment Add: Q4 2014 Q4 2014 Forecast Variance 2014 2014 Forecast Variance $ 89,212 $ 83,110 $ 6,102 $ 344,791 $ 333,510 $ 11,281 (19,338) (7,843) (18,224) (7,015) (1,114) (828) (76,677) (28,685) (74,349) (28,093) (2,328) (592) Straight-line land lease expense adjustment 84 32 52 219 128 91 Net operating income1 $ 62,115 $ 57,903 $ 4,212 $ 239,648 $ 231,196 $ 8,452 1 Non-GAAP key performance measure. Refer to Part IX in this MD&A for further information. For the three months and year ended December 31, 2014, there are two principal reasons for the variance in NOI: ‰ Acquisitions made to-date contributed $4,500 to NOI in Q4 2014 and $8,217 to NOI on a year-to-date basis. The Forecast did not assume any acquisitions in 2014. CT REIT 2014 ANNUAL REPORT 23 MANAGEMENT’S DISCUSSION AND ANALYSIS ‰ There is a negative variance of approximately $200 in both the fourth quarter and full year results resulting from the timing of recoverable capital expenditures, partially offsetting the benefit of acquisitions. The Forecast assumed that the capital improvements would be largely completed in the second and third quarter of 2014 and that the run rate of recoveries during the fourth quarter would be close to a full rate of recovery. The actual results reflect the expenditure of recoverable capital amounts in the third and fourth quarter, thereby delaying a full run rate of recovery revenue until the first quarter of 2015. General and Administrative Expense CT REIT has two broad categories of general and administrative expenses: i) public entity costs, and ii) outsourcing costs. The public entity costs reflect the expenses related to ongoing operations of CT REIT which will fluctuate depending on when such expenses are incurred. The outsourcing costs are largely related to the services provided by CTC pursuant to the Services Agreement. The Services Agreement provides for services to the REIT to be on a cost- recovery basis with a fixed maximum fee for the first two calendar years. As such, costs did not fluctuate materially from quarter to quarter during 2014 and are not expected to materially fluctuate in 2015. Refer to Part VII for additional information on the Services Agreement. (in thousands of Canadian dollars) Services Agreement Public entity costs General and administrative expense As a percent of property revenue Q4 2014 $ 816 1,380 $ 2,196 2.5% Q4 2014 Forecast $ 822 1,187 $ 2,009 Variance $ 6 (193) $ (187) 2.4% (0.1%) 2014 $ 3,288 5,145 $ 8,433 2.4% 2014 Forecast $ 3,288 4,785 $ 8,073 2.4% Variance $ – (360) $ (360) – General and administrative expenses amounted to $2,196 or 2.5% of property revenue in Q4 2014 which is $187 or 9.3% higher than the Forecast mainly due to higher legal and consulting costs, which were not included in the Forecast; partially offset by income resulting from the recognition of a deferred tax asset, which was not included in the Forecast. General and administrative expenses amounted to $8,433 or 2.4% of property revenue on a year-to-date basis which is $360 or 4.5% higher than Forecast mainly due to higher legal and consulting costs and a fair value adjustment of equity awards, which were not included in the Forecast; partially offset by income resulting from the recognition of a deferred tax asset, which was not included in the Forecast. Interest Income Interest income of $21 in Q4 2014 and $350 on a year-to-date basis is attributable to the interest earned from investing the REIT’s available cash in short- term marketable securities. Interest Expense The Partnership has issued 1,847,279 Class C LP Units with a face value of $1,847,279 and bearing a weighted average distribution rate of 4.44% per annum. The Class C LP Units are subject to redemption rights. Accordingly, the Class C LP Units are classified as financial liabilities and distributions on the Class C LP Units are presented in interest expense in the consolidated statement of income and comprehensive income. (in thousands of Canadian dollars) Interest on Class C LP Units1 Mortgage interest Bank Credit Facility interest Bank Credit Facility costs Less: capitalized interest Q4 2014 Q4 2014 Forecast Variance 2014 2014 Forecast Variance $ 20,515 $ 20,416 $ (99) $ 81,643 $ 81,000 $ 407 246 162 21,330 (37) – – 166 20,582 – (407) (246) 4 (748) 37 652 355 674 83,324 (333) – – 663 81,663 – (643) (652) (355) (11) (1,661) 333 Interest and other financing charges $ 21,293 $ 20,582 $ (711) $ 82,991 $ 81,663 $ (1,328) 1 CTC elected to defer receipt of distributions on the Series 2-12 Class C LP Units for the three months and year ended December 31, 2014 in the amount of $18,765 and $68,425, respectively, until the first business day following the end of the fiscal year and receive a loan in lieu thereof, which has been netted against interest payable on Class C LP Units and is included under the heading “other liabilities” on the consolidated balance sheets. CT REIT recognized interest expense of $21,293 and $82,991 during the three months and year ended December 31, 2014, respectively, which is $711 and $1,328, respectively, higher than Forecast largely due to mortgages assumed, draws on the bank credit facility (“Bank Credit Facility”), and the issuances of 47,279 Class C LP Units during the first and second quarters, all in connection with acquisitions completed during the year, which were not included in the Forecast. These variances were partially offset by the capitalization of interest in respect of development properties, which was also not included in the Forecast. During the fourth quarter of 2014, CT REIT recorded $41 to amortize the facility fee and agency fee and $121 in standby fees on the REIT’s committed Bank Credit Facility. The standby fee is incurred at a rate of 0.24% per annum on the full amount of the Bank Credit Facility. Refer to Part V for additional information on CT REIT’s Bank Credit Facility. 24 CT REIT 2014 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS Fair Value Adjustment on Investment Properties During the quarter, CT REIT recorded a fair value gain of $7,305 on the portfolio of investment properties as a result of increased cash flows during the time frame of the valuation models partially offset by the deduction of transaction costs incurred in connection with the acquisition of investment properties. For the year ended December 31, 2014, CT REIT recorded a fair value gain of $141,221 on the portfolio of investment properties. Management’s determination of fair value as at March 31, 2014 incorporated valuation parameters used by the independent appraisers, which gave rise to a fair value adjustment of $126,959; management had previously placed greater weight on the valuations implied by the Offering. Fair value gains of $14,262 were recorded in the remaining three quarters during 2014 as a result of increased cash flows during the time frames of the valuation models partially offset by the deduction of transaction costs incurred in connection with the acquisition of investment properties. Income Tax Expense Management operates CT REIT in a manner that enables CT REIT to continue to qualify as a REIT pursuant to the Income Tax Act (Canada) (“ITA”). CT REIT distributes 100% of its taxable income to Unitholders and therefore does not incur income tax expense in relation to its activities. If CT REIT fails to distribute the required amount of income to Unitholders or if CT REIT fails to qualify as a REIT under the ITA, substantial adverse tax consequences may occur. Refer to Part X for additional information on CT REIT’s enterprise risk management program. Leasing Activities The future financial performance of CT REIT will be impacted by occupancy rates, trends in rental rates achieved on leasing or renewing currently leased space, and contractual increases in rent. There was no new significant leasing activity with tenants not related to CTC during the year ended December 31, 2014. Recoverable Capital Costs Many of the capital items that will be incurred by CT REIT are recoverable from tenants pursuant to the terms of their leases. The recoveries will occur either in the year in which such expenditures are incurred or, in the case of a major item of repair, maintenance or replacement, on a straight-line basis over the expected useful life together with an imputed rate of interest on the unrecovered balance at any point in time. From time to time, as a result of specific lease terms which limit the recovery of expenses, CT REIT is unable to recover these costs from certain tenants. Capital expenditures of $6,188 and $17,052 were incurred during the three months and year ended December 31, 2014, respectively. Management expects that most of the REIT’s recoverable capital expenditures should relate to parking lots, roofs and heating, ventilation and air conditioning (“HVAC”), activities that are typically seasonal. PART V LIQUIDITY AND FINANCIAL CONDITION Liquidity CT REIT intends to fund capital expenditures for acquisitions and development activities through (i) cash on hand, (ii) issuances of Units, Class B LP Units and Class C LP Units (iii) draws on the Bank Credit Facility, and/or (iv) other long-term financing. (in thousands of Canadian dollars) Cash and cash equivalents Unused portion of Bank Credit Facility Liquidity As at December 31, 2014 As at December 31, 2013 $ 2,710 122,000 $ 124,710 $ 46,999 200,000 $ 246,999 Cash flow generated from operating the property portfolio represents the primary source of liquidity to service debt and to fund planned maintenance expenditures, leasing costs, general and administrative expenses and distributions to Unitholders and distributions on Class B LP Units (other sources being interest income as well as cash on hand). (in thousands of Canadian dollars) Cash generated from operating activities2 Cash used for investing activities2 Cash (used for) generated from financing activities Cash (used) generated in the period 1 Based on operations beginning October 23, 2013. 2 Prior year figures have been restated. Refer to note 25 of the consolidated financial statements. 2014 20131 $ 233,789 $ 39,775 (157,543) (120,535) (250,437) 257,661 $ (44,289) $ 46,999 CT REIT 2014 ANNUAL REPORT 25 MANAGEMENT’S DISCUSSION AND ANALYSIS Discussion of Cash Flows During the Year Cash used during the year ended December 31, 2014 in the amount of $44,289 is primarily the result of investing activity exceeding retained cash flow. Cash generated during the period ended December 31, 2013 of $46,999 primarily related to retained cash flow and net proceeds from the Offering offset by 2013 acquisition activity. Credit Ratings CT REIT is rated by two independent credit rating agencies: DBRS Limited (“DBRS”) and Standard & Poor’s Financial Services LLC (“S&P”) which provide credit ratings of debt securities for commercial entities. A credit rating generally provides an indication of the risk that the borrower will not fulfill its full obligations in a timely manner with respect to both interest and principal commitments. Rating categories range from highest credit quality (generally “AAA”) to default in payment (generally “D”). CT REIT’s ratings are related to and currently equivalent to those of CTC, CT REIT’s most significant tenant for the forseeable future. This ratings equivalence is largely based on CTC’s significant ownership position in CT REIT and the strategic relationship between and integration of CT REIT and CTC. The following table sets out the current credit ratings of CT REIT: Credit Ratings (Canadian Standards) Issuer rating Debt and Capital Structure CT REIT’s debt and capital structure as at December 31 is as follows: (in thousands of Canadian dollars) Class C LP Units Mortgages payable Bank Credit Facility Total indebtedness Unitholders’ equity Non-controlling interests DBRS S&P Credit Rating Trend Credit Rating BBB (high) Stable BBB+ Trend Stable As at December 31, 2014 As at December 31, 2013 $ 1,847,279 $ 1,800,000 58,494 78,000 1,983,773 982,588 1,019,601 – – 1,800,000 880,199 900,187 Total capital under management $ 3,985,962 $ 3,580,386 CT REIT’s total indebtedness at December 31, 2014 is higher than the period ended December 31, 2013 due to the assumption of mortgages, the issuance of the additional Class C LP Units, and draws on its Bank Credit Facility in connection with its 2014 investment activities. CT REIT’s Unitholders’ equity and non-controlling interest at December 31, 2014 increased as compared to December 31, 2013 as a result of retained cash flow exceeding distributions. Future payments are as follows: (in thousands of Canadian dollars) For the period ending December 31: 2015 2016 2017 2018 2019 2020 and thereafter Total contractual obligation Unamortized portion of mark to market interest rates on liabilities assumed in connection with the acquisition of properties Unamortized debt financing cost 26 CT REIT 2014 ANNUAL REPORT Mortgages Payable Principal Amortization Maturities Class C LP Units Bank Credit Facility Total $ 200,000 $ 78,000 $ 279,158 $ 1,158 $ 1,199 1,241 422 – – – – – 16,661 37,625 200,000 47,279 – – – 1,400,000 – – – – – 201,199 48,520 17,083 37,625 1,400,000 4,020 54,286 1,847,279 78,000 1,983,585 – – 381 (193) – – – – 381 (193) $ 4,020 $ 54,474 $ 1,847,279 $ 78,000 $ 1,983,773 MANAGEMENT’S DISCUSSION AND ANALYSIS Interest rates on CT REIT’s indebtedness range from 1.28% to 5.00%. The maturity dates on the indebtedness range from May 2015 to May 2038. Indebtedness at December 31, 2014 has a weighted average interest rate of 4.31%. At December 31, 2014, floating rate and fixed rate indebtedness were $109,133 and $1,874,640, respectively. (in thousands of Canadian dollars) Variable rate debt Total debt Variable rate debt / total debt The following table presents the contractual maturities of CT REIT’s financial liabilities: As at December 31, 2014 As at December 31, 2013 $ 109,133 $ – $ 1,983,773 $ 1,800,000 5.50% – (in thousands of Canadian dollars) Class C LP Units1 Payments on Class C LP Units1 Other liabilities Payable on Class C LP Units, net of loans receivable Distributions payable2 Mortgages payable Bank Credit Facility 1 Assumes redemption on maturity of initial fixed rate period for each series . 2 On Units and Class B LP Units . Payments Due By Period Total 1 year 2-3 years 4-5 years After 5 years $ 1,847,279 $ 200,000 $ 247,279 $ – $ 1,400,000 $ 1,066,314 $ 77,977 $ 138,419 $ 134,000 $ $ $ $ $ 14,593 6,838 10,027 58,306 78,000 $ 14,033 $ 6,838 $ 10,027 $ 1,158 $ 78,000 $ $ $ $ $ 560 – – $ $ $ – – – 2,440 $ 54,708 – $ – $ $ $ $ $ $ 715,918 – – – – – The table below presents CT REIT’s interest in assets at fair value that are available to it to finance and/or refinance its debt as at December 31, 2014: (in thousands of Canadian dollars, except percentage amounts) Unencumbered investment property assets Unencumbered development property assets Unencumbered assets Encumbered assets Total Number of Properties 266 2 268 5 273 The table below presents CT REIT’s secured debt as a percentage of total debt: (in thousands of Canadian dollars) Secured debt Total debt Secured debt / total debt The table below presents CT REIT’s debt to EBITFV ratio: (in thousands of Canadian dollars) Total debt EBITFV2 Total debt / EBITFV 1 CT REIT’s debt to EBITFV ratio normalized for 70 operating days in 2013 is 7.33. 2 Non-GAAP key performance indicator. Refer to Part IX for further information. Fair Value of Income Properties $ 3,874,371 3,984 3,878,355 121,489 Percentage of Total Assets Mortgages Payable Debt to Book Value Ratio 96.4% 0.1% $ – – – 3.0% 58,494 – – – 0.48 0.01 $ 3,999,844 99.5% $ 58,494 As at December 31, 2014 As at December 31, 2013 $ 58,494 $ – $ 1,983,773 $ 1,800,000 2.95% – As at December 31, 2014 As at December 31, 20131 $ 1,983,773 $ 1,800,000 $ 260,031 $ 47,113 7.63 38.21 CT REIT 2014 ANNUAL REPORT 27 MANAGEMENT’S DISCUSSION AND ANALYSIS The following section contains forward-looking information and users are cautioned that actual results may vary. Class C LP Units At December 31, 2014 there were 1,847,279 Class C LP Units outstanding, all of which were held by CTC. The Class C LP Units are designed to provide CTC with an interest in the Partnership that entitles holders to a fixed cumulative monthly payment during the initial fixed rate period for each Series of Class C LP Units (the “Initial Fixed Rate Period”) equal to a weighted average of 4.44% of the aggregate capital amount ascribed to the Class C LP Units, in priority to distributions made to holders of the Class A LP Units, Class B LP Units and CT REIT GP Corp. (“GP”) Units (subject to certain exceptions), if, as and when declared by the Board of Directors of the GP, payable monthly at an annual distribution rate for each series as set out in the table below. In addition, the Class C LP Units are entitled to receive Special Voting Units in certain limited circumstances. During the five-year period beginning immediately following the completion of the Initial Fixed Rate Period, and each five-year period thereafter, the fixed payment rate for Class C LP Units will be reset, and the holders of Class C LP Units will be entitled, subject to certain conditions, to elect either a fixed rate or floating rate option. On expiry of the Initial Fixed Rate Period applicable to each series of Class C LP Units, and every five years thereafter, each such series of Class C LP Units is redeemable at par (together with all accrued and unpaid payments thereon) at the option of the Partnership or the holder, upon giving at least 120 days’ notice. The Partnership further has the ability to redeem any of the Class C LP Units at any time after January 1, 2019 at a price equal to the greater of par and a price to provide a yield equal to the then equivalent Government of Canada bond yield plus a spread, so long as such redemption is in connection with a sale of properties. Such redemptions of Class C LP Units (other than upon a change of control at CT REIT) can be settled, at the option of the Partnership, in cash or Class B LP Units of equal value. The following table presents the details of the Class C LP Units: Series of Class C LP Units Series 1 Series 2 Series 3 Series 4 Series 5 Series 6 Series 7 Series 8 Series 9 Series 10 Series 11 Series 12 Total / weighted average Current Non-current Total Annual Distribution Rate During Initial Fixed Rate Period Expiry of Initial Fixed Rate Period % of Total Class C LP Units1 3.50% 3.50% 4.50% 4.50% 4.50% 5.00% 5.00% 5.00% 5.00% 2.38% 2.20% 2.23% 4.44% May 31, 2015 (0.4 years) May 31, 2016 (1.4 years) May 31, 2020 (5.4 years) May 31, 2024 (9.4 years) May 31, 2028 (13.4 years) May 31, 2031 (16.4 years) May 31, 2034 (19.4 years) May 31, 2035 (20.4 years) May 31, 2038 (23.4 years) May 31, 2017 (2.4 years) May 31, 2017 (2.4 years) May 31, 2017 (2.4 years) 10.8% 10.8% 10.8% 10.8% 10.8% 10.8% 10.8% 10.8% 10.8% 0.4% 1.1% 1.1% 12.0 years 100% Initial Subscription Price ($000) $ 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 7,130 20,685 19,464 $ 1,847,279 $ 200,000 1,647,279 $ 1,847,279 1 This column adds to 100%, the percentages of individual series have been rounded. Assuming a future economic environment that is substantially similar to the current environment, management does not foresee any material impediments to refinancing a redemption request. 28 CT REIT 2014 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS Mortgages Payable Mortgages payable, secured by certain of CT REIT’s investment properties, include the following: (in thousands of Canadian dollars) Current Non-current Total As at December 31, 2014 As at December 31, 2013 Face value Carrying amount Face value Carrying amount $ 1,158 $ 1,275 57,148 57,219 $ 58,306 $ 58,494 $ – – $ – $ – – $ – The REIT’s one-third interest in a mixed-use commercial property in Toronto, ON, was refinanced in Q4 2014 with no change in the loan amount and a decrease in the credit spread from 3% per annum to 1.65% per annum. Bank Credit Facility The Partnership has a $200,000, revolving Bank Credit Facility, which is available to the Partnership until October 2017, with an option to increase it by an additional $100,000. The Bank Credit Facility bears interest at a rate based on the bank’s prime rate of interest or bankers’ acceptances plus a margin. A stand-by fee is charged on the Bank Credit Facility. As at December 31, 2014, $78,000 (2013 – nil) of cash advances had been drawn on the Bank Credit Facility. The unamortized balance of transaction costs incurred in connection with the arrangement of the Bank Credit Facility of $434 is recorded in other assets on the consolidated balance sheets. For the year ended December 31, 2014, amortization of the transaction costs of $182, as well as the standby fee of $492 are included in interest and other financing charges on the consolidated statement of income and comprehensive income. The table below summarizes the details of the Bank Credit Facility as at December 31, 2014: (in thousands of Canadian dollars) Bank Credit Facility Maximum Loan Amount $ 200,000 Cash Advances $ 78,000 Letters of Credit Available to be Drawn $ – $ 122,000 The Bank Credit Facility is subject to the maintenance of certain financial covenants and as at December 31, 2014 CT REIT was in compliance with all such financial covenants. The following section contains forward-looking information and users are cautioned that actual results may vary. Capital Strategy Management expects the REIT’s future debt will be in the form of: ‰ Class C LP Units (treated as debt for accounting purposes); ‰ funds drawn on the Bank Credit Facility; ‰ unsecured public debt; and ‰ limited use of secured debt assumed upon acquisition of properties. Management’s objectives are to access the lowest cost of capital with the most flexible terms, to have a maturity/redemption schedule (for fixed term obligations) spread over a time horizon so as to manage refinancing risk, and to be in a position to finance acquisition opportunities when they become available. The Declaration of Trust limits the REIT’s overall indebtedness ratio to 60% of total assets, excluding convertible debentures, and 65% including convertible debentures. This limitation is in relation to the assets of CT REIT in aggregate. CT REIT’s indebtedness ratio was 49.4% as at December 31, 2014. Refer to Part IX for the definition and calculation of CT REIT’s indebtedness ratio. At December 31, 2014 CT REIT was in compliance with all investment guidelines and operating policies contained in the Declaration of Trust. CT REIT has also adopted interest coverage guidelines which provide an indication of the ability to service or pay the interest charges relating to the underlying debt. CT REIT will generally operate its affairs and manage its capital structure so that its interest coverage ratio is in a range of 2.4 to 3.8 times. For the year ended December 31, 2014, CT REIT’s interest coverage ratio was 3.1 times. Refer to Part IX for the definition and calculation of CT REIT’s interest coverage ratio. CT REIT 2014 ANNUAL REPORT 29 MANAGEMENT’S DISCUSSION AND ANALYSIS The following section contains forward-looking information and users are cautioned that actual results may vary. Commitments and Contingencies CT REIT has committed to expansion or development expenditures representing approximately $18,530 in payments primarily to CTC, which are expected to be incurred in 2015. CT REIT has sufficient liquidity to fund these future commitments as a result of (i) its conservative use of leverage on the balance sheet, (ii) liquidity on hand, (iii) its Bank Credit Facility, (iv) an investment grade credit rating, (v) unencumbered assets, and (vi) sufficient operating cash flow retained in the business. Subsequent Events A redemption notice was submitted by CT REIT to CTC, the holder of Series 1 of the Class C LP Units, which have a maturity date of May 31, 2015. As a result, this series of Class C LP Units will either be redeemed or will have their rate reset, in either case effective May 31, 2015. During February 2015, CT REIT completed five investment property acquisitions from CTC including two retail properties in Ontario, two in Quebec and one in Alberta. The total purchase price of approximately $62,000 was satisfied by an issuance of 4,799,539 Class B LP Units. The following section contains forward-looking information and users are cautioned that actual results may vary. Base Shelf Prospectus CT REIT intends to file a base shelf prospectus in Q1 2015 under which it may raise up to $1.5 billion of debt and equity capital. The shelf also qualifies the sale of CT REIT Units by CTC. PART VI EQUITY Authorized Capital and Outstanding Units CT REIT is authorized to issue an unlimited number of Units. As of December 31, 2014, CT REIT had a total of 90,188,210 Units outstanding, 59,711,094 of which were held by CTC and 91,297,572 Class B LP Units outstanding (together with a corresponding number of Special Voting Units), all of which were held by CTC. Class B LP Units are economically equivalent to Units, are accompanied by a Special Voting Unit and are exchangeable at the option of the holder for Units (subject to certain conditions). Holders of the Class B LP Units are entitled to receive distributions when declared by the Partnership equal to the per unit amount of distributions payable on the Units. However, Class B LP Units have limited voting rights over the Partnership. The following table summarizes the total number of Units issued: Total outstanding at beginning of year Issued Total outstanding at end of period Total outstanding at beginning of year Issued Total outstanding at end of period As at December 31, 2014 Units Class B LP Units Total 90,026,773 89,559,871 179,586,644 161,437 1,737,701 1,899,138 90,188,210 91,297,572 181,485,782 As at December 31, 2013 Units – Class B LP Units – Total – 90,026,773 89,559,871 179,586,644 90,026,773 89,559,871 179,586,644 Each Unit is transferable and represents an equal, undivided beneficial interest in the REIT and any distributions from the REIT. Each Unit entitles the holder to one vote at all meetings of Unitholders. Special Voting Units are only issued in tandem with Class B LP Units, or in limited circumstances, to holders of the Class C LP Units and are not transferable separately from the Class B LP Units or Class C LP Units to which they relate. Each Special Voting Unit entitles the holder thereof to one vote at all meetings 30 CT REIT 2014 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS of Unitholders or with respect to any written resolution of Unitholders. Except for the right to attend meetings and vote on resolutions, Special Voting Units do not confer upon the holders thereof any other rights. Net income attributable to Unitholders and weighted average Units outstanding used in determining basic and diluted net income per Unit are calculated as follows: Net income attributable to Unitholders – basic Income effect of settling Class C LP Units with Class B LP Units Net income attributable to Unitholders – diluted Weighted average Units outstanding – basic Dilutive effect of other Unit plans Dilutive effect of settling Class C LP Units with Class B LP Units Weighted average Units outstanding – diluted Net income attributable to Unitholders – basic Income effect of settling Class C LP Units with Class B LP Units Net income attributable to Unitholders – diluted Weighted average Units outstanding – basic Dilutive effect of other Unit plans Dilutive effect of settling Class C LP Units with Class B LP Units Weighted average Units outstanding – diluted Year ended December 31, 2014 Units Class B LP Units $ 159,282 $ 158,979 Total 318,261 81,643 399,904 $ $ 90,110,919 90,488,232 180,599,151 44,485 151,702,425 332,346,061 Period ended December 31, 2013 Units Class B LP Units $ 15,269 $ 15,727 Total 30,996 15,534 46,530 $ $ 89,339,035 89,559,871 178,898,906 25,148 168,299,232 347,223,286 The calculation of diluted per Unit amounts is determined on a combined basis for the Units and the Class B LP Units given that the Class B LP Units are exchangeable into Units on a one for one basis and are entitled to an equivalent amount of net income per Class B LP Unit as the Units, and to reflect the dilutive effect of potentially settling Class C LP Units with Class B LP Units. Equity Equity – beginning of the period Issuance of Trust Units, net of issue costs Issuance of Class B LP Units, net of issue costs Net income and comprehensive income for the year Issuance of Units under Distribution Reinvestment Plan Distributions to non-controlling interests Distributions to Unitholders Equity – end of the period 2014 $ 1,780,386 $ – 19,406 318,261 1,781 (58,971) (58,674) 2013 – 875,988 895,599 30,996 136 (11,139) (11,194) $ 2,002,189 $ 1,780,386 The following section contains forward-looking information and users are cautioned that actual results may vary. Distributions CT REIT’s primary business goal is to accumulate a portfolio of high-quality real estate assets and deliver the benefits of such real estate ownership to Unitholders. The primary benefit to Unitholders is expected to be reliable, durable and growing distributions, over time. In determining the amount of the monthly distributions paid to Unitholders, the Board applies discretionary judgment to forward-looking cash flow information, such as forecasts and budgets, and many other factors including provisions in the Declaration of Trust, the macro-economic and industry- specific environment, debt maturities and covenants and taxable income. CT REIT 2014 ANNUAL REPORT 31 MANAGEMENT’S DISCUSSION AND ANALYSIS The Board regularly reviews CT REIT’s rate of distributions to ensure an appropriate level of distributions. On November 3, 2014, the Board reviewed the then current rate of distributions of $0.650 per Unit per year and approved an increase in the annual rate of distribution to $0.663 effective with the first distribution paid in 2015. On December 15, 2014, CT REIT’s Board declared a distribution of $0.05525 per Unit paid on January 15, 2015 to holders of Units and Class B LP Units of record as of December 31, 2014. On January 15, 2015, CT REIT’s Board declared a distribution of $0.05525 per Unit which was paid on February 13, 2015 to holders of Units and Class B LP Units of record as of January 30, 2015. On February 13, 2015, CT REIT’s Board declared a distribution of $0.05525 per Unit payable on March 13, 2015 to holders of Units and Class B LP Units of record as of February 27, 2015. Net income prepared in accordance with IFRS recognizes certain revenues and expenses at time intervals that do not match the receipt or payment of cash. Therefore, in applying judgment, consideration is given to AFFO (which is the product of the cash generated from, and required for, operating activities) and other factors when establishing distributions to Unitholders. (in thousands of Canadian dollars, except per Unit amounts) Distributions before distribution reinvestment – paid Distribution reinvestment Distributions paid net of distribution reinvestment Distributions per Unit – paid 1 Based on operations beginning October 23, 2013. 2014 20131 $ 117,346 $ 22,333 1,781 136 $ 115,565 $ 22,197 $ 0.650 $ 0.124 The distributions per unit for the year are higher than 2013 because 2013 reflected a partial period with only 70 days of operations. The distributions match the Forecast. CT REIT’s distributions are less than the REIT’s cash generated from operating activities, cash generated from operations reduced by interest expense and AFFO. (in thousands of Canadian dollars, except per Unit amounts) AFFO2 Distributions paid before distribution reinvestment Excess of AFFO over distributions paid 1 Based on operations beginning October 23, 2013. 2 Non-GAAP key performance indicator. Refer to Part IX for further information. PART VII RELATED PARTY TRANSACTIONS 2014 20131 $ 132,866 $ 23,467 117,346 22,333 $ 15,520 $ 1,134 CT REIT’s controlling Unitholder is CTC, which, on December 31, 2014, held an approximate 83.2% effective interest in the REIT, through ownership of 59,711,094 Units and all of the issued and outstanding Class B LP Units and Class C LP Units. In addition to its ownership interest, CTC is CT REIT’s largest tenant representing approximately 96.4% of the annual base minimum rent earned by CT REIT and approximately 97.9% of its GLA as at December 31, 2014. In the normal course of its operations, CT REIT enters into various transactions with related parties that have been valued at amounts agreed to between the parties and recognized in the consolidated financial statements. Investment property transactions with CTC amounted to $31,880 and $130,102 for the three months and year ended December 31, 2014. Refer to note 4 to the consolidated financial statements for additional information. Services Agreement Under the Services Agreement, CTC provides the Partnership and CT REIT with certain administrative, legal, financial, information technology, internal audit and other support services as may be reasonably required from time to time (the “Services”). CTC provides these Services to CT REIT on a cost-recovery basis pursuant to which CT REIT reimburses CTC for all costs and expenses incurred by CTC in connection with providing the Services, plus applicable taxes, with a fixed maximum fee not to exceed $3,288 for the year ended December 31, 2014 with adjustments to such fee based on the Consumer Price 32 CT REIT 2014 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS Index (“CPI”) for the following year. The CPI factor for 2015 is 1.4%. The Services Agreement’s initial term ends on December 31, 2015 and is renewable for further one year terms thereafter, unless otherwise terminated. The Services Agreement has been renewed for 2016. Property Management Agreement Under the Property Management Agreement, CTC provides the Partnership with customary property management services (the ‘‘Property Management Services’’). CTC agreed to provide Property Management Services to the Partnership on a cost-recovery basis pursuant to which the Partnership reimburses CTC for all costs and expenses incurred by CTC in connection with providing the Property Management Services, plus applicable taxes, with a fixed maximum fee not to exceed $2,333 for the year ended December 31, 2014, with adjustments to such fee based on the CPI for the following year, which is 1.4% for 2015. The Property Management Agreement’s initial term ends on December 31, 2015 and is renewable for further one year terms thereafter, unless otherwise terminated. The Property Management Agreement has been renewed for 2016. Development Agreement CT REIT, the Partnership and CTC entered into the Development Agreement for a term expiring on the later of: (i) 10 years from the Closing; (ii) the time when CTC ceases to hold, directly or indirectly, a majority of the Voting Units comprising any combination of Units and Special Voting Units. Pursuant to the Development Agreement CT REIT has a preferential right to participate in property developments that meet CT REIT’s investment and other criteria, an option to purchase development properties and an option to provide mezzanine financing for development properties. The Agreement requires CTC to present, in certain circumstances, new shopping centre acquisition opportunities in Canada to the REIT. Refer to CT REIT’s AIF for additional information on related party agreements and arrangements with CTC. CT REIT’s policy is to conduct all transactions and settle all balances with related parties on market terms and conditions. The following table summarizes CT REIT’s related party transactions as at December 31, 2014: (in thousands of Canadian dollars) Rental revenue Property Management and Services Agreement expense Distributions on Units Distributions on Class B LP Units Interest expense on Class C LP Units 1 Based on operations beginning October 23, 2013. 2 Excludes acquisition activity. See Part III for further information. The net balance due to CTC is comprised of the following: (in thousands of Canadian dollars) Tenant and other receivables Class C LP Units Interest payable on Class C LP Units Loans receivable in lieu of payments on Class C LP Units Other liabilities Loans receivable in lieu of distributions on Class B LP Units Distributions payable on Units and Class B LP Units Net due to CTC PART VIII ACCOUNTING POLICIES AND ESTIMATES Significant Areas of Estimation 20142 20131 2 $ 332,212 $ 61,342 5,621 38,877 58,971 81,643 1,090 7,426 11,139 15,534 2014 $ (8,505) $ 2013 (554) 1,847,279 1,800,000 75,263 (68,425) 6,023 (565) 8,908 14,778 (7,991) 2,503 – 8,086 $ 1,859,978 $ 1,816,822 The preparation of the consolidated financial statements requires management to apply judgments, and to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Estimates are based upon historical experience and on various other assumptions that are reasonable under the circumstances. The result of ongoing evaluation of these estimates forms the basis for applying judgment with regards to the carrying values of assets and liabilities and the reported amounts of revenues and expenses. Actual results may differ from estimates. CT REIT’s significant accounting policies are described in note 3 to the annual consolidated financial statements, the most significant of which is the fair value of investment properties. CT REIT 2014 ANNUAL REPORT 33 MANAGEMENT’S DISCUSSION AND ANALYSIS Fair Value of Investment Properties To determine fair value, CT REIT uses the income approach. Fair value is estimated by capitalizing the cash flows that a property can reasonably be expected to produce over its remaining economic life. The income approach is derived from two methods: the overall capitalization rate (“OCR”) method, whereby the net operating income is capitalized at the requisite OCR, or the discounted cash flow (“DCF”) method, in which the cash flows are projected over the anticipated term of the investment plus a terminal value discounted using an appropriate discount rate. Properties under development are measured using a DCF method, net of costs to complete, as of the balance sheet date. Development sites in the planning phases are measured using comparable market prices for similar assets. New standards implemented Financial instruments presentation: Asset and liability offsetting In December 2011, the IASB amended IAS 32 – Financial Instruments: Presentation (“IAS 32”) to clarify the requirements which permit offsetting a financial asset and liability in the financial statements. The IAS 32 amendments were effective for annual periods beginning on or after January 1, 2014 and were applied retrospectively. The implementation of the IAS 32 amendments did not have an impact on CT REIT. Financial instruments: Novation of derivatives and continuation of hedge accounting In June 2013, the IASB issued Novation of Derivatives and Continuation of Hedge Accounting – Amendments to IAS 39. This amendment to IAS 39 – Financial Instruments: Recognition and Measurement provides an exception to the requirement to discontinue hedge accounting in situations where over- the-counter derivatives designated in hedging relationships are directly or indirectly novated to a central counterparty as a consequence of laws or regulations, or the introduction of laws or regulations. The IAS 39 amendments were effective for annual periods beginning on or after January 1, 2014 and were applied retrospectively. The implementation of the IAS 39 amendments did not have an impact on CT REIT. Levies In May 2013, the IASB issued IFRS Interpretation Committee (“IFRIC”) 21 – Levies (“IFRIC 21”), which is an interpretation of IAS 37 – Provisions, Contingent Liabilities and Contingent Assets. IFRIC 21 clarifies that the obligating event that gives rise to a liability to pay a levy is the activity described in the relevant legislation that triggers the payment of the levy. IFRIC 21 was effective for annual periods beginning on or after January 1, 2014 and was applied retrospectively. The implementation of IFRIC 21 did not have an impact on CT REIT. Standards, amendments and interpretations issued and not yet adopted The following new standards, amendments and interpretations have been issued but are not effective for the fiscal year ended December 31, 2014, and, accordingly, have not been applied in preparing these consolidated financial statements. Financial instruments In July 2014, the IASB issued the final version of IFRS 9 – Financial Instruments (“IFRS 9”), which brings together the classification and measurement, impairment and hedge accounting phases of the IASB’s project to replace IAS 39. Classification and measurement – Financial assets are classified and measured based on the business model under which they are managed and the contractual cash flow characteristics of the financial assets. Financial liabilities are classified in a similar manner as under IAS 39, except that financial liabilities measured at fair value will have fair value changes resulting from changes in the entity’s own credit risk recognized in Other Comprehensive Income instead of net income, unless this would create an accounting mismatch. Impairment – The measurement of impairment of financial assets is based on an expected credit loss model. It is no longer necessary for a triggering event to have occurred before credit losses are recognized. IFRS 9 also includes new disclosure requirements about expected credit losses and credit risk. Hedge accounting—The new general hedge accounting model more closely aligns hedge accounting with risk management activities undertaken by entities when hedging their financial and non-financial risk exposures. It will provide more opportunities to apply hedge accounting to reflect actual risk management activities. IFRS 9 will be applied retrospectively for annual periods beginning on or after January 1, 2018. Early adoption is permitted. CT REIT is assessing the potential impact of this standard. Revenue from Contracts with Customers In May 2014, the IASB issued IFRS 15 – Revenue from Contracts with Customers (“IFRS 15”), which replaces IAS 11 – Construction Contracts, IAS 18 – Revenue and IFRIC 13 – Customer Loyalty Programmes (“IFRIC 13”), as well as various other interpretations regarding revenue. IFRS 15 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers, except for contracts that are within the scope of the standards on leases, insurance contracts and financial instruments. IFRS 15 also contains enhanced disclosure requirements. IFRS 15 will be applied retrospectively for annual periods beginning on or after January 1, 2017. Early adoption is permitted. CT REIT is assessing the potential impact of this standard. 34 CT REIT 2014 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS Disclosure Initiative In December 2014, the IASB issued Disclosure Initiative – Amendments to IAS 1 as part of the IASB’s Disclosure Initiative. These amendments encourage entities to apply professional judgment regarding disclosures and presentation in their financial statements. These amendments are effective for annual periods beginning on or after January 1, 2016. Earlier application is permitted. CT REIT is assessing the potential impact of these amendments. PART IX NON-GAAP AND OPERATIONAL KEY PERFORMANCE INDICATORS CT REIT uses non-GAAP key performance indicators including NOI, FFO, FFO per Unit, AFFO, AFFO per Unit, EBITFV, interest coverage ratio, indebtedness ratio, debt to enterprise value ratio and book value per Unit. CT REIT believes these non-GAAP measures and ratios provide useful supplemental information to both management and investors in measuring the financial performance of CT REIT in meeting its principle objective of the creation of Unitholder value by generating reliable, durable and growing monthly distributions. When calculating diluted FFO and AFFO per Unit, management excludes the effect of settling the Class C LP Units with Class B LP Units, which is required when calculating diluted Units in accordance with IFRS. These measures and ratios do not have a standardized meaning prescribed by GAAP and therefore they may not be comparable to similarly titled measures and ratios presented by other publicly traded entities, and should not be construed as an alternative to other financial measures determined in accordance with GAAP. Net Operating Income CT REIT defines NOI as property revenue less property expense and is adjusted further for straight-line rent and land lease adjustments. Management believes that NOI is a useful key indicator of performance as it represents a measure over which management of property operations has control. NOI is also a key input in determining the value of the portfolio. Refer to Part IV for the calculation of NOI. Funds From Operations FFO is a non-GAAP financial measure of operating performance widely used by the real estate industry, particularly by those publicly traded entities that own and operate income-producing properties. FFO should not be considered as an alternative to net income or cash flows provided by operating activities determined in accordance with IFRS. CT REIT calculates its FFO in accordance with the Real Property Association of Canada White Paper on FFO for IFRS issued in April 2014. The purpose of the White Paper was to provide reporting issuers and investors with greater guidance on the definition of FFO and to help promote more consistent disclosure amongst reporting issuers. The use of FFO, combined with the required IFRS presentations, has been included for the purpose of improving the understanding of the operating results of CT REIT. Management believes that FFO provides an operating performance measure that, when compared period-over-period, reflects the impact on operations of trends in occupancy levels, rental rates, operating costs and property taxes, acquisition activities and interest costs, and provides a perspective of the financial performance that is not immediately apparent from net income determined in accordance with IFRS. FFO adds back to net income items that do not arise from operating activities, such as fair value adjustments. FFO, however, still includes non-cash revenues related to accounting for straight-line rent and makes no deduction for the recurring capital expenditures necessary to sustain the existing earnings stream. Adjusted Funds From Operations AFFO is a supplemental measure of operating performance widely used in the real estate industry to assess an entity’s ability to pay distributions. Management believes that AFFO is an effective measure of the cash generated from operations, after providing for operating capital requirements which are referred to as “productive capacity maintenance expenditures”. CT REIT calculates AFFO by adjusting FFO for non-cash income and expense items such as amortization of straight-line rents. FFO is also adjusted for a reserve for maintaining productive capacity required for sustaining property infrastructure and revenue from real estate properties and direct leasing costs. Property capital expenditures do not occur evenly during the fiscal year or from year to year. The property capital reserve in the AFFO calculation is intended to reflect an average annual spending level. The reserve is based on a 15-year average expenditure as determined by building condition reports prepared during 2013 by an independent consultant. The amount is also consistent with actual average amounts spent by CTC prior to October 2013. There is currently no standard industry-defined measure of AFFO. As such, CT REIT’s method of calculating AFFO may differ from that of other real estate entities and, accordingly, may not be comparable to such amounts reported by other issuers. CT REIT 2014 ANNUAL REPORT 35 MANAGEMENT’S DISCUSSION AND ANALYSIS A reconciliation of the IFRS term “Cash Generated from Operating Activities” (refer to the consolidated statement of cash flow for the year ended December 31, 2014) to AFFO is as follows: (in thousands of Canadian dollars) Cash generated from operating activities Changes in working capital and other3 Deferred taxes Fair value adjustment of equity awards Interest and other financing charges Straight-line rental income Straight-line land lease expense FFO Less: Straight-line rent adjustment Straight-line land lease expense adjustment Capital expenditure reserve2 AFFO 1 Based on operations beginning October 23, 2013. 2014 20131 $ 233,789 $ 39,775 (2,224) 2,184 (527) 285 – – (82,991) (15,649) 28,685 (219) 5,185 (30) $ 176,798 $ 31,465 (28,685) (5,185) 219 30 (15,466) (2,843) $ 132,866 $ 23,467 2 Normalized 2014 maintenance capital expenditure is approximately $15,466. In 2014, $14,963 of actual sustaining capital expenditures were paid. 3 Prior year figures have been restated. Refer to note 25 of the consolidated financial statements. The following table reconciles FFO and AFFO to GAAP net income and comprehensive income: (in thousands of Canadian dollars, except per unit amounts) Q4 2014 Q4 2014 Forecast Variance 2014 2014 Forecast Variance Net Income and comprehensive income $ 53,711 $ 42,295 $ 11,416 $ 318,261 $ 169,425 $ 148,836 Fair value adjustment of investment property Deferred taxes Fair value adjustment of equity awards Funds from operations Properties straight-line rent adjustment Land lease straight-line expense adjustment Capital expenditure reserve1 Adjusted funds from operations FFO per Unit – basic FFO per Unit – diluted (non-GAAP)2 AFFO per Unit – basic AFFO per Unit – diluted (non-GAAP)2 AFFO payout ratio3 Distribution per Unit – paid (7,305) (163) 285 46,528 (7,843) 84 (4,112) 34,657 0.256 0.256 0.191 0.191 85% 0.163 $ $ $ $ $ $ – – – 42,295 (7,015) 32 (3,656) (7,305) (141,221) (163) 285 4,233 (828) 52 (456) (527) 285 176,798 (28,685) 219 (15,466) $ $ $ $ $ $ 31,656 $ 3,001 $ 132,866 0.241 $ 0.015 $ 0.241 $ 0.015 $ 0.180 $ 0.011 $ 0.180 $ 0.011 $ 90% 5% 0.163 $ – $ 0.979 0.979 0.736 0.736 88% 0.650 $ $ $ $ $ $ – – – 169,425 (28,093) 128 (14,624) 126,836 0.965 0.965 0.722 0.722 90% 0.650 (141,221) (527) 285 7,373 (592) 91 (842) 6,030 0.014 0.014 0.014 0.014 2% – $ $ $ $ $ $ Weighted average units outstanding – basic 181,468,432 175,620,865 180,599,151 175,620,865 Weighted average units outstanding – diluted (non-GAAP)2 181,524,387 175,620,865 180,643,636 175,620,865 Number of units outstanding, end of period 181,485,782 175,620,865 181,485,782 175,620,865 1 Normalized Q4 2014 and 2014 maintenance capital expenditures are approximately $4,112 and $15,466, respectively. In Q4 2014 and 2014, $9,038 and $14,963, respectively, of actual sustaining capital expenditures were paid. 2 For the purposes of calculating diluted FFO and AFFO per Unit, diluted Units includes restricted and deferred units issued under various plans and excludes the effects of settling the Class C LP Units with Class B LP Units. 3 Calculated as Distributions per Unit divided by AFFO per Unit - diluted (non-GAAP). FFO for the three months and year ended December 31, 2014 amounted to $46,528 or $0.256 per unit and $176,798 or $0.979 per unit, respectively. FFO for the three months and year ended December 31, 2014 was $4,233 and $7,373 higher than Forecast largely due to the impact of NOI variances discussed earlier, differing assumptions in the Forecast for general and administrative expenses and interest income earned on investing the REIT’s existing cash balances which are higher than Forecast, all partially offset by higher interest expense. 36 CT REIT 2014 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS AFFO for the three months and year ended December 31, 2014 amounted to $34,657 or $0.191 per unit and $132,866 or $0.736 per unit, respectively. AFFO for the three months and year ended December 31, 2014 was $3,001 and $6,030 higher than Forecast largely due to the reasons noted above. The AFFO payout ratio for the three months and year ended December 31, 2014 was 85% and 88% which is better than the REIT’s forecasted AFFO payout ratio of approximately 90% during 2014. Earnings Before Interest and other Financing Costs, Taxes and Fair Value Adjustments EBITFV is a non-GAAP measure of a REIT’s operating cash flow and it is used in place of IFRS net income because it excludes major non-cash items (including fair value adjustments on investment properties), interest expense and other financing costs, income tax expense, losses or gains on disposition of property, and other non-recurring items that may occur under IFRS that management considers non-operating in nature. EBITFV should not be considered as an alternative to net income or cash flows provided by operating activities determined in accordance with IFRS EBITFV is used as an input in some of CT REIT’s debt metrics, providing information with respect to certain financial ratios that CT REIT uses in measuring its debt profile and assessing the REIT’s ability to satisfy its obligations, including servicing its debt. For the three months and year ended December 31, 2014, EBITFV was calculated as follows: (in thousands of Canadian dollars) Q4 2014 Q4 2014 Forecast Variance 2014 2014 Forecast Variance Net Income and comprehensive income $ 53,711 $ 42,295 $ 11,416 $ 318,261 $ 169,425 $ 148,836 Fair value adjustment on investment properties Interest expense and other financing charges (7,305) 21,293 – (7,305) (141,221) – (141,221) 20,582 711 82,991 81,663 1,328 EBITFV $ 67,699 $ 62,877 $ 4,822 $ 260,031 $ 251,088 $ 8,943 Interest Coverage Ratio Interest coverage ratios are used to measure an entity’s ability to service its debt, including construction financing or development debt. Generally, the higher the ratio is, the lower the risk of default on debt. EBITFV is a generally accepted proxy for operating cash flow. The ratio is calculated as follows: (in thousands of Canadian dollars) EBITFV (A) Interest and other financing charges (B) Interest coverage (A)/(B) Interest coverage normalized for one-time start-up costs2 1 Based on operations beginning October 23, 2013. 2 One-time start-up costs were $822 and expensed in 2013. 2014 20131 $ 260,031 $ 47,113 $ 82,991 $ 15,649 3.13 3.13 3.01 3.06 The interest coverage for the year ended December 31, 2014 is comparable against the period ended December 31, 2013. Indebtedness Ratio CT REIT has adopted an indebtedness ratio guideline which management uses as a measure to evaluate its leverage and the strength of its equity position, expressed as a percentage of financing provided by debt. CT REIT’s Declaration of Trust limits its indebtedness (plus the aggregate par value of the Class C LP Units) to a maximum of 60% of the gross book value, excluding convertible debentures, and 65% including convertible debentures. Gross book value is defined as total assets as reported on the latest consolidated balance sheet. CT REIT calculates its indebtedness ratio as follows: (in thousands of Canadian dollars) Total assets1 (A) Total indebtedness2 (B) Indebtedness ratio (B)/(A) As at December 31, 2014 As at December 31, 2013 $ 4,017,420 $ 1,983,773 $ 3,603,252 $ 1,800,000 49.4% 50.0% 1 Prior year figures have been restated. Refer to note 25 of the consolidated financial statements . 2 Total indebtedness as at December 31, 2014 and December 31, 2013 reflects the value of the Class C LP Units, the mortgages payable and the Bank Credit Facility. The indebtedness ratio calculation for the year ended December 31, 2014 is lower than for the period ended December 31, 2013 as the 2014 balance reflects a higher total asset balance due to the fair value adjustments made to the investment property portfolio and the 2014 investing activities, partially offset by an increase in indebtedness during the year. CT REIT 2014 ANNUAL REPORT 37 MANAGEMENT’S DISCUSSION AND ANALYSIS Debt to Enterprise Value Ratio CT REIT’s debt to enterprise value ratio is a non-GAAP measure and is calculated as total debt divided by enterprise value which is the sum of: i) total debt and ii) period-end Units and Class B LP Units outstanding multiplied by the period end Unit closing price (“Equity Value”). Enterprise value is an economic measure reflecting the market value of an entity. CT REIT’s debt to enterprise value ratio is an indicator of how indebted it is relative to its enterprise value. (in thousands of Canadian dollars, except for per Unit amounts) Total debt (A) Equity value Period-end Units and Class B LP Units outstanding Unit closing price Equity value (B) Enterprise value (A + B) Debt / Enterprise value (A / (A + B)) As at December 31, 2014 As at December 31, 2013 $ 1,983,773 $ 1,800,000 181,485,782 179,586,644 $ $ $ 12.31 2,234,090 4,217,863 47.0% $ $ $ 10.92 1,961,086 3,761,086 47.9% CT REIT’s debt to enterprise value ratio at December 31, 2014 decreased slightly as compared to December 31, 2013 as a result of an increase in total debt due to acquisitions made during the year, offset by an increase in equity value as a result of an increased closing Unit price. Book Value per Unit Book value per Unit is a non-GAAP measure and represents Total Equity from the consolidated balance sheets divided by the sum of the period end Units and Class B LP Units outstanding. It is an indication of the residual book value available to Unitholders. As well, book value per Unit is compared to the REIT’s Unit trading price in order to assess a premium or discount. (in thousands of Canadian dollars, except for per Unit amounts) Total Equity (A) Period-end Units and Class B LP Units outstanding (B) Book value per Unit (A / B) As at December 31, 2014 As at December 31, 2013 $ 2,002,189 $ 1,780,386 181,485,782 179,586,644 $ 11.03 $ 9.91 CT REIT’s book value per Unit for the year ended December 31, 2014 increased from December 31, 2013 largely due to net income exceeding distributions. This excess is principally the result of fair value adjustments on the property portfolio. Selected Quarterly Consolidated Information (in thousands of Canadian dollars, except per Unit amounts) 2014 As at and for the quarter ended Property revenue Net income Net income per Unit – basic – diluted FFO – diluted, non-GAAP2 AFFO – diluted, non-GAAP2 Total assets3 Total debt and Class C LP Units payable Total distributions to unitholders – paid Total distributions to unitholders per Unit – paid Book value per Unit2 Market price per Unit – high – low – close Q4 89,212 53,711 0.296 0.222 0.256 0.191 $ $ $ $ $ $ Q3 89,535 49,197 0.271 0.202 0.247 0.185 $ $ $ $ $ $ Q2 83,364 45,689 0.254 0.200 0.238 0.179 $ $ $ $ $ $ Q1 82,680 169,664 0.944 0.550 0.238 0.180 $ $ $ $ $ $ 2013 Q41 63,026 30,996 0.173 0.134 0.176 0.131 $ $ $ $ $ $ $ 4,017,420 $ 3,974,736 $ 3,842,218 $ 3,757,682 $ 1,983,773 $ 1,950,346 $ 1,847,279 $ 1,807,130 $ 3,603,252 $ 1,800,000 $ $ $ $ $ $ 29,078 0.163 11.03 12.55 10.50 12.31 $ $ $ $ $ $ 29,081 0.162 10.90 11.96 11.00 11.02 $ $ $ $ $ $ 28,576 0.163 10.79 11.63 10.81 11.40 $ $ $ $ $ $ 28,830 0.162 10.70 11.58 10.61 11.16 $ $ $ $ $ $ 22,197 0.124 9.91 11.10 10.00 10.92 1 Based on operations beginning October 23, 2013. 2 Non-GAAP key performance indicators. Refer to Part IX for further information. 3 Prior year figures have been restated. Refer to note 25 of the consolidated financial statements . 38 CT REIT 2014 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS PART X The following section contains forward-looking information and users are cautioned that actual results may vary. ENTERPRISE RISK MANAGEMENT To preserve and enhance Unitholder value over the long term, CT REIT approaches the management of risk strategically through its enterprise risk management program (“ERM Program”). The ERM Program provides an integrated approach to the management of risks, through a disciplined manner that: ‰ aligns key strategies, imperatives, and objectives and related risks; ‰ considers all forms of risk, specifically strategic, financial and operational risks; ‰ requires the evaluation of risk mitigation practices which are designed to help support and optimize risk/reward related decisions; and ‰ integrates with the strategic, planning and reporting processes. The REIT’s ERM Program continues to further enhance risk reporting through developing and refining underlying processes and tools aimed at supporting risk identification and risk monitoring. Risk Governance The mandate of the Board includes the responsibility to monitor the REIT’s ERM Program and oversee management’s implementation of appropriate systems to effectively identify, monitor, manage, and mitigate the impact of risks inherent in the REIT’s business and operations. The Board has delegated primary responsibility to the Audit Committee to: ‰ consider the Principal Risks of the REIT as identified by management and ensure appropriate policies and systems have been implemented to manage these risks; ‰ review the REIT’s ERM Program, including its policies and processes with respect to risk identification, assessment, and management of the REIT’s risks; ‰ receive periodic reports from the head of the risk management function; and ‰ periodically report to the Board on any major issues arising from the ERM Program. Principal Risks A key element of the REIT’s ERM Program is the periodic review, identification and assessment of Principal Risks. The REIT defines a Principal Risk as one that, alone or in combination with other interrelated risks, can have a significant adverse impact on the REIT’s brand, reputation, strategies, objectives, financial performance, or ability to service its stakeholders and has, in the absence of controls, a credible probability of occurring. These Principal Risks are enterprise-wide in scope and represent strategic, financial and operational risks. Management has completed its formal review of its Principal Risks, which has been presented to the Audit Committee and approved by the Board. The mitigation and management of Principal Risks is approached holistically with a view to ensuring all risk exposures associated with a Principal Risk are considered. The following table provides a high-level perspective on each of the identified eight Principal Risks and describes the main strategy that the REIT has in place to mitigate the potential impacts of these risks on its business objectives. Information on the REIT’s risk factors is presented in the REIT’s AIF. Principal Risks Marketplace Risk Management Strategy Risk due to fluctuations or fundamental changes in the external business The REIT regularly monitors and analyzes external economic, political, environment resulting in financial loss. Fluctuations or fundamental shifts in demographic, consumer behaviour and competitive developments in the market place could include: ‰ Changes in macroeconomic conditions (including recession, depression, increased unemployment, and increased interest rates) high inflation, Canada. Results are shared with the REIT executives, who are accountable for any necessary amendments to the strategic and operational plans and for on-going investment decisions in order to resulting in a reduction in consumer spending; respond to evolving market and economic trends. ‰ Changes in the competitive landscape in the retail or real estate sectors impacting the attractiveness and the value of real estate holdings; ‰ Changes in the domestic or international political environments (including new legislation) impacting the ability to do business; and ‰ Shifts in the demographics of the Canadian population reducing the relevance of the products and services offered by key tenants, which may result in a negative impact on the valuation of the REIT or the ability to achieve its strategic objectives. CT REIT 2014 ANNUAL REPORT 39 MANAGEMENT’S DISCUSSION AND ANALYSIS Interest Rate Risk associated with fundamental changes in the economic environment, The indebtedness of the REIT is predominantly at fixed rates and its or significant events or volatility in the financial markets resulting in floating interest rate exposure is minimal. The weighted average term to changes in interest rates that affect: the value of real estate, the value of maturity of the REIT’s debt portfolio is managed to align with or be greater the REIT’s Units, the economics of acquisition activity and the availability than the weighted average term to maturity of the REIT’s assets. The REIT of capital; resulting in financial loss and resulting in a decrease in or the manages refinancing risk by maintaining a diversified debt maturity elimination of distributions to Unitholders. schedule to limit the amount of debt maturing in any one year. The REIT may use interest rate hedges from time to time to manage interest rate risk and to provide more certainty regarding the FFO available to Unitholders, subject to the REIT’s investment guidelines and operating policies. Tenant Concentration The REIT’s revenues are dependent on the ability of its key tenant, CTC, The REIT benefits from the stability offered by CTC businesses including to meet its rent obligations and renew its tenancies. The future financial Canadian Tire retail, one of Canada’s most shopped general merchandise performance and operating results of CTC’s business are subject to retailers with high recognition and a strong reputation throughout the inherent risks and uncertainties, such as general economic conditions, communities it serves. The Canadian Tire retail leases have a weighted changing consumer preferences, and other strategic, financial, and average remaining lease term of 14.5 years, which provides the REIT with operational risk factors. A downturn in CTC’s business could have a reliable, durable, and growing monthly distributions. Management regularly material effect on the financial performance of the REIT, its cash flows, monitors the operating results and credit ratings of CTC. and the ability to make distributions to Unitholders. Significant Ownership by CTC CTC holds the majority interest in the REIT. In situations where the Appropriate governance structures, including policies, processes and interests of CTC and the REIT are in conflict, CTC may utilize its other management activities and practices are in place to maintain and ownership interest in, and contractual rights with the REIT, to further monitor the relationship between the REIT and CTC. CTC’s own interest which may not be the same as the REIT’s interest in all cases, causing the REIT not to be able to operate in a manner that is to its favour, which could adversely affect the REIT’s cash flows, operating results, valuation, and overall financial condition. Operations The risk that a direct or indirect loss may result from internal or outsourced The REIT has appropriate governance structures, including policies, business activities, business disruptions, inadequate or failed operations processes, contracts, service agreements and other management processes (property management, development, redevelopment, and activities in place to maintain the operational performance of the REIT, acquisitions), people, and systems to support the REIT’s key business comply with legal and regulatory requirements, and to support the REIT’s objectives. Failed processes in terms of design, integration, and/or business and strategic objectives. execution may result in incremental financial expenditures, theft or fraud, legal or regulatory issues, and materially adversely impact the REIT’s financial position and results of operation. Tax Risk related to changes in income tax laws applicable to the REIT such Management of the REIT ensures that the REIT satisfies the conditions to that the REIT would not qualify as a mutual fund trust for purposes of the qualify as a closed-end mutual fund trust by complying with the Tax Act, including the treatment of real estate investment trusts, mutual restrictions in the Tax Act as they are interpreted and applied by the fund trusts, or the REIT Exception for a taxation year under the Tax Act, Canada Revenue Agency. No assurance can be given that the REIT will which could have a material and adverse impact on the value of the Units, be able to comply with these restrictions at all times. There can be no and on distributions to Unitholders. assurance that income tax laws applicable to the REIT, including the treatment of real estate investment trusts and mutual fund trusts under the Tax Act, will not be changed in a manner which adversely affects the REIT or the Unitholders. 40 CT REIT 2014 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS Environmental Matters The REIT is subject to various federal, provincial, territorial and municipal The REIT has allocated the necessary capital and operating expenditures laws relating to environmental matters. Changes in legislation may result in to comply with environmental laws and address any material the REIT bearing the risk of cost-intensive assessment, removal of environmental issues. Additionally, the REIT has limited environmental contamination, hazardous or other regulated substances causing an liability coverage under its general liability insurance policy for third-party adverse effect on the REIT’s financial condition, results of operation, and bodily injury and property damage claims arising from unexpected and cash available for distribution to Unitholders. unintentional pollution incidents (commonly referred to as “sudden and accidental” coverage) that are discovered and reported quickly. It also has more extensive coverage under a separate environmental liability insurance policy which adds coverage for certain gradual pollution conditions and first party clean ups. Pursuant to the Canadian Tire Leases, CTC has indemnified the REIT for any environmental issues existing on the initial properties. Furthermore, the REIT’s operating policy includes a Phase I environmental site assessment conducted by an independent and experienced environmental consultant prior to acquiring a property. Financial Reporting Risk of restatement and reissue of CT REIT’s financial statements due to: ‰ Failure to adhere to financial accounting and presentation standards and Internal controls which include policies, processes and procedures, provide reasonable assurance regarding the reliability of financial reporting securities regulations relevant to financial reporting; and the preparation of financial statements and other disclosure ‰ Fraudulent activity and/or failure to maintain an effective system of documents. This includes monitoring and responding to changing internal controls; and/or regulations and standards governing accounting and financial ‰ Inadequate explanation of the REITs operating performance, financial presentation. condition, and future prospects, which may result in regulatory related issues or decrease in Unit price. PART XI DISCLOSURE AND INTERNAL CONTROL OVER FINANCIAL REPORTING Management is responsible for establishing and maintaining a system of controls and procedures over the public disclosure of financial and non-financial information regarding CT REIT. Such controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported, on a timely basis, to senior management, including the Chief Executive Officer and the Chief Financial Officer, so that they can make appropriate decisions regarding public disclosure. CT REIT’s system of disclosure controls and procedures includes, but is not limited to, its Disclosure Policy, its Code of Business Conduct, the effective functioning of its Disclosure Committee, procedures in place to systematically identify matters warranting consideration of disclosure by the Disclosure Committee, verification processes for individual financial and non-financial metrics and information contained in annual and interim filings, including the consolidated financial statements, MD&As, AIF and other documents and external communications. As required by CSA National Instrument 52-109 (“NI 52-109”), Certification of Disclosure in Issuers’ Annual and Interim Filings, an evaluation of the effectiveness of the design and operation of CT REIT’s disclosure controls and procedures was conducted, under the supervision of management, including the CEO and CFO, as of December 31, 2014. The evaluation included documentation review, enquiries and other procedures considered by management to be appropriate in the circumstances. Based on that evaluation, the CEO and the CFO have concluded that the design and operation of the system of disclosure controls and procedures was effective as at December 31, 2014. Internal control over financial reporting Management is also responsible for establishing and maintaining appropriate internal controls over financial reporting. CT REIT’s internal controls over financial reporting include, but are not limited to, detailed policies and procedures related to financial accounting and reporting and controls over systems that process and summarize transactions. CT REIT’s procedures for financial reporting also include the active involvement of qualified financial professionals, senior management and its Audit Committee. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. CT REIT 2014 ANNUAL REPORT 41 MANAGEMENT’S DISCUSSION AND ANALYSIS As required by NI 52-109, management, including the CEO and CFO, evaluated the design and operation of CT REIT’s internal control over financial reporting as defined in NI 52-109 as at December 31, 2014. In making this assessment, management, including the CEO and CFO, used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework (2013). This evaluation included review of the documentation of controls, evaluation of the design and testing the operating effectiveness of controls and a conclusion about this evaluation. Based on their evaluation, the CEO and the CFO have concluded that, as at December 31, 2014, CT REIT’s internal control over financial reporting is effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with GAAP. Changes in internal control over financial reporting During the quarter and year ended December 31, 2014, there have been no changes in CT REIT’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, CT REIT’s internal control over financial reporting. PART XII FORWARD LOOKING INFORMATION This MD&A, and the documents incorporated by reference herein, contain forward-looking statements that involve a number of risk and uncertainties, including statements regarding the outlook for CT REIT’s business results of operations. Forward-looking statements are provided for the purposes of providing information about CT REIT’s future outlook and anticipated events or results and may include statements regarding known and unknown risks and uncertainties and other factors that may cause the actual results to differ materially from those indicated. Such factors include, but are not limited to, general economic conditions, financial position, business strategy, availability of acquisition opportunities, budgets, capital expenditures, financial results, taxes, plans and objectives of or involving CT REIT. Particularly, statements regarding future acquisitions, developments, distributions, results, performance, achievements, prospects or opportunities for CT REIT or the real estate industry are forward-looking statements. In some cases, forward-looking information can be identified by such terms such as “may”, “might”, “will”, “could”, “should”, “would”, “occur”, “expect”, “plan”, “anticipate”, “believe”, “intend”, “estimate”, “predict”, “potential”, “continue”, “likely”, “schedule”, “resolved to”, or the negative thereof or other similar expressions concerning matters that are not historical facts. Some of the specific forward-looking statements in this document include, but are not limited to, statements with respect to the following: ‰ CT REIT’s growth strategy and objectives under Part II; ‰ CT REIT’s ability to refinance a redemption under Part V; ‰ CT REIT’s capital strategy under Part V; ‰ CT REIT’s commitments and contingencies under Part V; ‰ CT REIT’s base shelf prospectus under Part V; ‰ CT REIT’s distributions under Part VI; ‰ CT REIT’s access to available sources of debt and/or equity financing; ‰ the expected tax treatment of CT REIT and its distributions to Unitholders; ‰ CT REIT’s ability to expand its asset base, make accretive acquisitions, develop or intensify its property and participate with CTC in the development or intensification of the properties; ‰ the ability of CT REIT to qualify as a “mutual fund trust”, as defined in the Tax Act, and as a “real estate investment trust”, as defined in the SIFT Rules; and ‰ CT REIT’s enterprise risk management under Part X. CT REIT has based these forward-looking statements on factors and assumptions about future events and financial trends that it believes may affect its financial condition, results of operations, business strategy and financial needs, including that the Canadian economy will remain stable over the next 12 months, that inflation will remain relatively low, that tax laws remain unchanged, that conditions within the real estate market, including competition for acquisitions, will be consistent with the current climate, that the Canadian capital markets will provide CT REIT with access to equity and/or debt at reasonable rates when required and that CTC will continue its involvement with CT REIT on the basis described in its AIF. Although the forward-looking statements contained in this MD&A are based upon assumptions that management of CT REIT believes are reasonable based on information currently available to management, there can be no assurance that actual results will be consistent with these forward-looking statements. Forward-looking statements necessarily involve known and unknown risks and uncertainties, many of which are beyond the REIT’s control, that may cause CT REIT’s or the industry’s actual results, performance, achievements, prospects and opportunities in future periods to differ materially from those expressed or implied by such forward-looking statements. These risks and uncertainties include, among other things, the factors discussed under “Risk Factors” section of the AIF and also in Part X of this MD&A. For more information on the risks, uncertainties and assumptions that could cause CT REIT’s actual results to differ from current expectations, please also refer to CT REIT’s public filings available on SEDAR at www.sedar.com and at www.ctreit.com. 42 CT REIT 2014 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS CT REIT cautions that the foregoing list of important factors and assumptions is not exhaustive and other factors could also adversely affect its results. Investors and other readers are urged to consider the foregoing risks, uncertainties, factors and assumptions carefully in evaluating the forward-looking information and are cautioned not to place undue reliance on such forward-looking information. Statements that include forward-looking information do not take into account the effect that transactions or non-recurring or other special items announced or occurring after the statements are made have on CT REIT’s business. For example, they do not include the effect of any dispositions, acquisitions, asset write-downs or other charges announced or occurring after such statements are made. The forward-looking information in this MD&A is based on certain factors and assumptions made as of the date hereof or the date of the relevant document incorporated herein by reference, as applicable. CT REIT does not undertake to update the forward-looking information, whether written or oral, that may be made from time to time by it or on its behalf, to reflect new information, future events or otherwise, except as required by applicable securities laws. Information contained in or otherwise accessible through the websites referenced in this MD&A or the documents incorporated by reference herein (other than CT REIT’s profile on SEDAR at www.sedar.com) does not form part of this MD&A or the documents incorporated by reference herein and is not incorporated by reference into this MD&A. All references to such websites are inactive textual references and are for information only. Commitment to disclosure and investor communication The Investor Relations section of the REIT’s website www.ctreit.com includes the following documents and information of interest to investors: ‰ Annual Information Form; ‰ Management Information Circular; ‰ the Prospectus; ‰ quarterly reports; and ‰ conference call webcasts (archived for one year). Additional information about the REIT has been filed electronically with various securities regulators in Canada through SEDAR and is available online at www.sedar.com. If you would like to contact the Investor Relations department directly, call Andrea Orzech at (416) 480-3195 or email investor.relations@ctreit.com. February 23, 2015 CT REIT 2014 ANNUAL REPORT 43 45 46 47 48 49 50 51 51 53 56 58 58 58 58 59 60 60 61 61 63 63 64 65 65 65 65 65 66 67 68 69 69 70 INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets Consolidated Statements of Income and Comprehensive Income Consolidated Statements of Changes in Equity Consolidated Statements of Cash Flows NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Note 1 Nature of CT Real Estate Investment Trust Note 2 Basis of presentation Note 3 Significant accounting policies Note 4 Investment properties Note 5 Tenant and other receivables Note 6 Other assets Note 7 Cash and cash equivalents Note 8 Class C LP Units Note 9 Mortgages payable Note 10 Bank Credit Facility Note 11 Other liabilities Note 12 Distributions on Units and Class B LP Units Note 13 Equity Note 14 Unit based compensation plans Note 15 Non-controlling interests Note 16 Revenue and expenses Note 17 General and administrative expenses Note 18 Interest and other financing charges Note 19 Changes in working capital and other Note 20 Segmented information Note 21 Commitments and contingencies Note 22 Related-party transactions Note 23 Financial instruments and risk management Note 24 Capital management and liquidity Note 25 Comparative figures Note 26 Subsequent events GLOSSARY OF TERMS 44 CT REIT 2014 ANNUAL REPORT Management’s Responsibility for Financial Statements The management of CT Real Estate Investment Trust is responsible for the accompanying consolidated financial statements. The financial statements have been prepared by management in accordance with International Financial Reporting Standards, which recognize the necessity of relying on some best estimates and informed judgements. All financial information in our Management’s Discussion and Analysis is consistent with the consolidated financial statements. To discharge its responsibilities for financial reporting and safeguarding of assets, management depends on CT REIT’s systems of internal accounting control. These systems are designed to provide reasonable assurance that the financial records are reliable and form a proper basis for the timely and accurate preparation of financial statements. Management meets the objectives of internal accounting control on a cost effective basis through the prudent selection and training of personnel, adoption and communication of appropriate policies, and employment of an internal audit program. The Board of Trustees oversees management’s responsibilities for the consolidated financial statements primarily through the activities of its Audit Committee, which is composed solely of trustees who are neither officers nor employees of CT REIT. This Committee meets with management and CT REIT’s independent auditors, Deloitte LLP, to review the consolidated financial statements and recommend approval by the Board of Trustees. The Audit Committee is also responsible for making recommendations with respect to the appointment of and for approving remuneration and the terms of engagement of CT REIT’s auditors. The Audit Committee also meets with the auditors, without the presence of management, to discuss the results of their audit, their opinion on internal accounting controls, and the quality of financial reporting. The consolidated financial statements have been audited by Deloitte LLP. Their report is presented below. Kenneth Silver Chief Executive Officer February 23, 2015 Louis Forbes Chief Financial Officer CT REIT 2014 ANNUAL REPORT 45 Independent Auditor’s Report To the Unitholders of CT Real Estate Investment Trust We have audited the accompanying consolidated financial statements of CT Real Estate Investment Trust, which comprise the consolidated balance sheets as at December 31, 2014 and December 31, 2013, and the consolidated statements of income and comprehensive income, consolidated statements of changes in equity and consolidated statements of cash flows for the year ended December 31, 2014 and the period from July 15, 2013 (date of formation) to December 31, 2013 and 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 audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of CT Real Estate Investment Trust as at December 31, 2014 and December 31, 2013, and its financial performance and its cash flows for the year ended December 31, 2014 and the period from July 15, 2013 (date of formation) to December 31, 2013 in accordance with International Financial Reporting Standards. Chartered Professional Accountants, Chartered Accountants Licensed Public Accountants February 23, 2015 Toronto, Ontario 46 CT REIT 2014 ANNUAL REPORT Consolidated Balance Sheets As at (C$ in thousands) ASSETS Non-current assets Investment properties Other assets Current assets Tenant and other receivables Other assets Cash and cash equivalents Total assets LIABILITIES Non-current liabilities Class C LP Units Mortgages payable Other liabilities Current liabilities Class C LP Units Mortgages payable Bank credit facility Other liabilities Distributions payable Total liabilities EQUITY Unitholders’ equity Non-controlling interests Total equity Total liabilities and equity Note December 31, 2014 December 31, 2013 (Note 25) 4 6 5 6 7 8 9 11 8 9 10 11 12 $ 3,999,844 $ 3,547,864 2,526 638 4,002,370 3,548,502 10,349 1,991 2,710 15,050 696 7,055 46,999 54,750 $ 4,017,420 $ 3,603,252 $ 1,647,279 $ 1,800,000 57,219 560 – 275 1,705,058 1,800,275 200,000 1,275 78,000 20,871 10,027 310,173 – – – 12,864 9,727 22,591 2,015,231 1,822,866 13 13,15 982,588 1,019,601 2,002,189 880,199 900,187 1,780,386 $ 4,017,420 $ 3,603,252 The related notes form an integral part of these consolidated financial statements. David Laidley Trustee Anna Martini Trustee CT REIT 2014 ANNUAL REPORT 47 Consolidated Statements of Income and Comprehensive Income (C$ in thousands, except per unit amounts) Property revenue Property expense General and administrative expense Interest income Interest and other financing charges Fair value adjustment on investment properties Net income and comprehensive income Net income and comprehensive income attributable to: Unitholders Non-controlling interests Net income per unit – basic Net income per unit – diluted The related notes form an integral part of these consolidated financial statements. For the year ended December 31, 2014 Note For the period from July 15, 2013 (date of formation) to December 31, 2013 16 16 17 18 4 13 13 $ 344,791 $ 63,026 (76,677) (8,433) 350 (82,991) 141,221 (13,773) (2,223) 83 (15,649) (468) $ 318,261 $ 30,996 $ 159,282 158,979 $ 318,261 $ $ 1.76 1.20 $ 15,269 15,727 $ 30,996 $ $ 0.17 0.13 48 CT REIT 2014 ANNUAL REPORT Consolidated Statements of Changes in Equity (C$ in thousands) Balance at December 31, 2013 Net income and comprehensive income for the year Issuance of Class B LP Units, net of issue costs Distributions Issuance of Units under Distribution Reinvestment Plan Note Units Retained Earnings Unitholders’ equity Non-controlling interests Total Equity $ 876,124 $ 4,075 $ 880,199 $ 900,187 $ 1,780,386 4 12 12 – – – 159,282 159,282 – – (58,674) (58,674) 1,781 – 1,781 158,979 19,406 (58,971) – 318,261 19,406 (117,645) 1,781 Balance at December 31, 2014 $ 877,905 $ 104,683 $ 982,588 $ 1,019,601 $ 2,002,189 (C$ in thousands) Balance at July 15, 2013 Net income and comprehensive income for the period Issuance of Units, net of issue costs Issuance of Class B LP Units Distributions Issuance of Units under Distribution Reinvestment Plan Note Units Retained Earnings Unitholders’ equity Non-controlling interests Total Equity $ – – 875,988 – – 136 4 12 12 $ – $ – $ – $ – 15,269 – – 15,269 875,988 – (11,194) (11,194) – 136 15,727 – 895,599 (11,139) – 30,996 875,988 895,599 (22,333) 136 Balance at December 31, 2013 $ 876,124 $ 4,075 $ 880,199 $ 900,187 $ 1,780,386 The related notes form an integral part of these consolidated financial statements. CT REIT 2014 ANNUAL REPORT 49 Consolidated Statements of Cash Flows For the year ended December 31, 2014 Note For the period from July 15, 2013 (date of formation) to December 31, 2013 (Note 25) $ 318,261 $ 30,996 19 12 12 8 10 9 (141,221) (28,685) 219 82,991 2,224 233,789 (106,684) (35,896) (14,963) (157,543) – – (58) (56,786) (58,779) (81,591) 78,000 (31,133) 31,133 (314) (1,007) (120,535) (44,289) 46,999 468 (5,185) 30 15,649 (2,183) 39,775 (241,426) (9,011) – (250,437) 303,025 (24,149) – (6,182) (6,286) (8,747) – – – – – 257,661 46,999 – $ 2,710 $ 46,999 (C$ in thousands) Cash generated from (used for): Operating activities Net income Add (deduct): Fair value adjustment on investment properties Straight-line rental income Straight-line land lease expense Interest and other financing charges Changes in working capital and other Cash generated from operating activities Investing activities Acquisition of investment properties Land acquisitions and development activities Capital expenditures recoverable from tenants Cash used for investing activities Financing activities Proceeds from issuance of Units Unit issue costs Class B LP Unit issue costs Unit distributions Class B LP Unit distributions paid or loaned Payments on Class C LP Units Bank Credit Facility draws Mortgage repayment – Canada Square Mortgage borrowing – Canada Square Mortgage principal repayments Interest paid Cash (used for) generated from financing activities Cash (used) generated in the year Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period The related notes form an integral part of these consolidated financial statements. 50 CT REIT 2014 ANNUAL REPORT Notes to the Consolidated Financial Statements For the year ended December 31, 2014 and the period from July 15, 2013 (date of formation) to December 31, 2013 (All dollar amounts are in thousands, except per unit amounts) 1. Nature of CT Real Estate Investment Trust CT Real Estate Investment Trust is an unincorporated, closed-end real estate investment trust. CT Real Estate Investment Trust and its subsidiaries, unless the context requires otherwise, are together referred to in these consolidated financial statements as “CT REIT”. CT REIT commenced operations on October 23, 2013, and was formed to own income-producing commercial properties located primarily in Canada. The principal and registered head office of CT REIT is located at 2180 Yonge Street, Toronto, Ontario M4P 2V8. Canadian Tire Corporation, Limited (“CTC”) owns an 83.2 per cent effective interest in CT REIT as of December 31, 2014, consisting of 59,711,094 of the issued and outstanding units of CT REIT (“Units”), all of the issued and outstanding Class B limited partnership units (“Class B LP Units”) of CT REIT Limited Partnership (the “Partnership”), which are economically equivalent to and exchangeable for Units, and all of the issued and outstanding Class C limited partnership units (“Class C LP Units”) of the Partnership (see Note 8). CT REIT Units are listed on the Toronto Stock Exchange (the “TSX”) under the symbol CRT.UN. CT REIT has one segment, which comprises the ownership and operation of primarily retail investment properties located in Canada. 2. Basis of Presentation (a) Fiscal Year The fiscal years for the consolidated financial statements and the notes presented for 2014 are for the year ended December 31, 2014 and for 2013 are for the period from July 15, 2013 (date of formation) to December 31, 2013. CT REIT did not carry on operations prior to October 23, 2013. (b) 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”) using the accounting policies that are described herein. These consolidated financial statements were authorized for issuance by CT REIT’s Board of Trustees (the “Board”) on February 23, 2015. (c) Basis of presentation These consolidated financial statements have been prepared on the historical cost basis except for investment properties and liabilities for unit-based compensation plans, which are measured at fair value. These financial statements are presented in Canadian dollars (“C$”) rounded to the nearest thousand, except per unit amounts. (d) Critical judgments in applying significant accounting policies The following are the critical judgments that have been made in applying CT REIT’s accounting policies and that have the most significant effect on the amounts in the consolidated financial statements: (i) Leases CT REIT’s policy for revenue recognition is described in Note 3(e). In applying this policy, judgments are made with respect to whether tenant improvements provided in connection with a lease enhance the value of the leased property, which determines whether such amounts are treated as additions to investment property as well as the point in time at which revenue recognition under the lease commences. In addition, where a lease allows a tenant to elect to take all or a portion of any unused tenant improvement allowance as rent abatement, CT REIT must exercise judgment in determining the extent to which the allowance represents an inducement that is amortized as a reduction of lease revenue over the term of the lease. CT REIT also makes judgments in assessing the classification of its leases with tenants as operating leases, in particular long-term leases in single tenant properties. CT REIT has determined that all of its leases are operating leases. (ii) Investment properties CT REIT applies judgment in determining whether the properties it acquires are considered to be asset acquisitions or business combinations. CT REIT considers all properties acquired to date to be asset acquisitions. Judgment is applied in determining whether certain costs are additions to the carrying amount of the investment property. CT REIT 2014 ANNUAL REPORT 51 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At each reporting period, internal valuations are prepared by management for all investment properties. In determining the fair value of investment properties, judgment is applied in selecting the extent and frequency of independent appraisals. Independent valuations are obtained on properties such that substantially all of the properties will be independently appraised over a four-year period. (iii) Income taxes CT REIT makes judgments that, with the exception of transactions involving CT REIT GP Corp., deferred income taxes are not recognized in CT REIT’s financial statements on the basis that CT REIT can deduct distributions paid such that its liability for income taxes is substantially reduced or eliminated for the period, and CT REIT intends to continue to distribute its taxable income and continue to qualify as a real estate investment trust for the foreseeable future. (iv) Consolidation of the Partnership CT REIT makes judgments in the application of IFRS 10 – Consolidated Financial Statements in its assessment of control over the Partnership, including the purpose for which the Partnership was created, the power to direct the relevant activities of the Partnership, its exposure or rights to the variable returns of the Partnership and its ability to use its power to affect its returns. (v) Proportionate consolidation of interest in Canada Square CT REIT makes judgments in the application of IFRS 11 – Joint Arrangements in its assessment of joint control over the interest held in Canada Square, a mixed-use commercial property in Toronto (the “Co-ownership”), and its rights to the assets and obligations for the liabilities related to the Co- ownership. (e) Critical accounting estimates and assumptions CT REIT makes estimates and assumptions that affect the carrying amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amount of earnings for the period. Actual results may differ from estimates. The estimates and assumptions underlying the valuation of investment properties, as set out in Note 4, are considered critical. (f) New standards implemented (i) Financial instruments presentation: Asset and liability offsetting In December 2011, the IASB amended IAS 32 – Financial Instruments: Presentation (“IAS 32”) to clarify the requirements which permit offsetting a financial asset and liability in the financial statements. The IAS 32 amendments were effective for annual periods beginning on or after January 1, 2014 and were applied retrospectively. The implementation of the IAS 32 amendments did not have a significant impact on CT REIT. (ii) Financial instruments: Novation of derivatives and continuation of hedge accounting In June 2013, the IASB issued Novation of Derivatives and Continuation of Hedge Accounting – Amendments to IAS 39. This amendment to IAS 39 – Financial Instruments: Recognition and Measurement provides an exception to the requirement to discontinue hedge accounting in situations where over-the-counter derivatives designated in hedging relationships are directly or indirectly novated to a central counterparty as a consequence of laws or regulations, or the introduction of laws or regulations. The IAS 39 amendments were effective for annual periods beginning on or after January 1, 2014 and were applied retrospectively. The implementation of the IAS 39 amendments did not have an impact on CT REIT. (iii) Levies In May 2013, the IASB issued IFRS Interpretation Committee (“IFRIC”) 21 – Levies (“IFRIC 21”), which is an interpretation of IAS 37 – Provisions, Contingent Liabilities and Contingent Assets. IFRIC 21 clarifies that the obligating event that gives rise to a liability to pay a levy is the activity described in the relevant legislation that triggers the payment of the levy. IFRIC 21 was effective for annual periods beginning on or after January 1, 2014 and was applied retrospectively. The implementation of IFRIC 21 did not have an impact on CT REIT. (f) Standards, amendments and interpretations issued but not yet adopted The following new standards, amendments and interpretations have been issued but are not effective for the fiscal year ended December 31, 2014, and, accordingly, have not been applied in preparing these consolidated financial statements. (i) Financial instruments In July 2014, the IASB issued the final version of IFRS 9 – Financial Instruments (“IFRS 9”), which brings together the classification and measurement, impairment and hedge accounting phases of the IASB’s project to replace IAS 39. Classification and measurement – Financial assets are classified and measured based on the business model under which they are managed and the contractual cash flow characteristics of the financial assets. Financial liabilities are classified in a similar manner as under IAS 39, except that financial liabilities measured at fair value will have fair value changes resulting from changes in the entity’s own credit risk recognized in Other Comprehensive Income instead of net income, unless this would create an accounting mismatch. 52 CT REIT 2014 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Impairment – The measurement of impairment of financial assets is based on an expected credit loss model. It is no longer necessary for a triggering event to have occurred before credit losses are recognized. IFRS 9 also includes new disclosure requirements about expected credit losses and credit risk. Hedge accounting – The new general hedge accounting model more closely aligns hedge accounting with risk management activities undertaken by entities when hedging their financial and non-financial risk exposures. It will provide more opportunities to apply hedge accounting to reflect actual risk management activities. IFRS 9 will be applied retrospectively for annual periods beginning on or after January 1, 2018. Early adoption is permitted. CT REIT is assessing the potential impact of this standard. (ii) Revenue from Contracts with Customers In May 2014, the IASB issued IFRS 15 – Revenue from Contracts with Customers (“IFRS 15”), which replaces IAS 11 – Construction Contracts, IAS 18 – Revenue and IFRIC 13 – Customer Loyalty Programmes, as well as various other interpretations regarding revenue. IFRS 15 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers, except for contracts that are within the scope of the standards on leases, insurance contracts and financial instruments. IFRS 15 also contains enhanced disclosure requirements. IFRS 15 will be applied retrospectively for annual periods beginning on or after January 1, 2017. Early adoption is permitted. CT REIT is assessing the potential impact of this standard. (iii) Disclosure initiative In December 2014, the IASB issued Disclosure Initiative – Amendments to IAS 1 as part of the IASB’s Disclosure Initiative. These amendments encourage entities to apply professional judgment regarding disclosures and presentation in their financial statements. These amendments are effective for annual periods beginning on or after January 1, 2016. Earlier application is permitted. CT REIT is assessing the potential impact of these amendments. 3. Significant Accounting Policies The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements. (a) Basis of consolidation These consolidated financial statements include the accounts of CT REIT and its consolidated subsidiaries consisting of the Partnership and CT REIT GP Corp., which are the entities over which CT REIT has control. Control exists when CT REIT has the ability to direct the relevant activities of an entity, has exposure or rights to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. CT REIT reassesses whether or not it controls an entity if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when CT REIT obtains control over the subsidiary and ceases when CT REIT loses control of the subsidiary. All intra- group assets and liabilities, equity, income, expenses and cash flows relating to transactions between CT REIT and its subsidiaries, and among subsidiaries of CT REIT, are eliminated on consolidation. Net income and comprehensive income are attributed to the Unitholders of CT REIT and to the non-controlling interest even if this results in the non- controlling interest having a deficit balance. CT REIT holds all of the Class A limited partnership units (“Class A LP Units”) of the Partnership, which are the sole class of Partnership units that carry voting rights. In addition, CT REIT holds all of the shares of CT REIT GP Corp. (the “GP”), the general partner of the Partnership, which has the power to direct the relevant activities of the Partnership. Accordingly, CT REIT is exposed to variable returns from its interest in the Partnership and has the ability to direct the relevant activities thereof to affect its returns. Therefore CT REIT consolidates the Partnership. Non-controlling interests in the equity of the Partnership, which consists of Class B LP Units held by a wholly owned subsidiary of CTC, is shown separately in equity on the consolidated balance sheet. (b) Joint arrangements A joint arrangement is an arrangement in which two or more parties have joint control. Joint control is the contractually agreed sharing of control whereby decisions about relevant activities require unanimous consent of the parties sharing control. A joint arrangement is classified as a joint operation when the parties that have joint control of the arrangement have rights to the assets and obligations for the liabilities related to the arrangement. A joint arrangement is classified as a joint venture when the parties that have joint control of the arrangement have rights to the net assets of the arrangement. A party to a joint operation records its interest in the assets, liabilities, revenue and expenses of the joint operation. CT REIT 2014 ANNUAL REPORT 53 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CT REIT acquired a one-third interest in the Co-ownership, pursuant to a co-ownership arrangement. The Co-ownership is a joint arrangement as the material decisions about relevant activities require unanimous consent of the co-owners. This joint arrangement is a joint operation as each co-owner has rights to the assets and obligations for the liabilities related to the Co-ownership. Accordingly, CT REIT recognizes its proportionate share of the assets, liabilities, revenue and expenses of the Co-ownership in its financial statements. (c) Investment properties Investment properties include income-producing properties and properties under development that are held by CT REIT to earn rental income. CT REIT accounts for its investment properties in accordance with IAS 40 – Investment Property (‘‘IAS 40’’). For acquired investment properties that meet the definition of a business, the acquisition is accounted for as a business combination in accordance with IFRS 3 – Business Combinations (‘‘IFRS 3’’), otherwise they are initially measured at cost including directly attributable acquisition costs. Subsequent to acquisition, investment properties are carried at fair value, which is determined based on available market evidence at the balance sheet date including, among other things, rental revenue from current leases and reasonable and supportable assumptions that represent what knowledgeable, willing parties would assume about rental revenue from future leases less future cash outflows in respect of capital expenditures. Gains and losses arising from changes in fair value are recognized in net income in the period of change. The initial cost of properties under development includes the acquisition cost of the properties, direct development costs, realty taxes and borrowing costs attributable to properties under development. Borrowing costs associated with direct expenditures on properties under development are capitalized. The amount of capitalized borrowing costs is determined first by reference to property-specific borrowings, where relevant, and otherwise by applying a weighted average cost of borrowings to eligible expenditures after adjusting for borrowings associated with other specific developments. Where borrowings are associated with specific developments, the amount capitalized is the gross cost incurred on those borrowings less any investment income arising on their temporary investment. Borrowing costs are capitalized from the commencement of the development until the date of practical completion. The capitalization of borrowing costs is suspended if there are prolonged periods when development activity is interrupted. Practical completion is when the property is capable of operating in the manner intended by management. Generally, this occurs on completion of construction and receipt of all necessary occupancy and other material permits. If considered reliably measurable, properties under development are carried at fair value. Properties under development are measured at cost if fair value is not reliably measurable. In determining the fair value of properties under development, management considers, among other things, the development risk of the property, the provisions of the construction contract, the stage of completion and the level of reliability of cash inflows after completion. Leasing costs incurred by CT REIT in negotiating and arranging tenant leases are added to the carrying amount of investment properties. Payments to tenants under lease contracts are characterized as either capital expenditures in the form of tenant improvements that enhance the value of the property or lease inducements. Tenant improvements are capitalized as part of investment properties. Lease inducements are capitalized as a component of investment properties and are amortized over the term of the lease as a reduction of revenue. When an investment property is sold, the gain or loss is determined as the difference between the net disposal proceeds and the carrying amount of the property and is recognized in net income in the period of disposal. (d) Business combinations CT REIT accounts for investment property acquisitions as a business combination if the particular assets and set of activities acquired can be operated and managed as a business in its current state. CT REIT applies the acquisition method to account for business combinations. The consideration transferred for a business combination is the fair value of the assets transferred, the liabilities incurred of the former owners of the acquiree and the equity interests issued by CT REIT. The total consideration includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired as well as liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. Acquisition related costs incurred in a business combination are expensed as incurred. CT REIT recognizes any non-controlling interest in the acquiree on an acquisition-by-acquisition basis, either at fair value or at the non-controlling interest’s proportionate share of the recognized amounts of the acquiree’s identifiable net assets. (e) Revenue recognition CT REIT has retained substantially all of the risks and benefits of ownership of its investment properties and therefore accounts for leases with its tenants as operating leases. Revenue recognition under a lease commences when the tenant has a right to use the leased asset. Generally, this occurs on the lease inception date or, where CT REIT is required to make additions to the property in the form of tenant improvements that enhance the value of the property, upon substantial completion of those improvements. Property revenue includes all amounts earned from tenants related to lease agreements including property tax, operating cost and other recoveries. 54 CT REIT 2014 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The total amount of minimum lease payments to be received from operating leases is recognized on a straight-line basis over the term of the lease. A straight-line rent receivable, which is included in the carrying amount of investment properties, is recorded for the difference between the rental revenue recorded and the contractual amount of minimum base rent received or receivable. (f) Income taxes CT REIT is a “mutual fund trust” under the Income Tax Act (Canada). The Trustees intend to distribute or designate all taxable income directly earned by CT REIT to Unitholders and to deduct such distributions for income tax purposes. Legislation relating to the federal income taxation of Specified Investment Flow Through (“SIFT”) trusts or partnerships provide that certain distributions from a SIFT will not be deductible in computing the SIFT’s taxable income and that the SIFT will be subject to tax on such distributions at a rate that is substantially equivalent to the general tax rate applicable to Canadian corporations. However, distributions paid by a SIFT as a return of capital should generally not be subject to tax. Under the SIFT rules, the taxation regime will not apply to a real estate investment trust that meets prescribed conditions relating to the nature of its assets and revenue (the “REIT Conditions”). CT REIT has reviewed the SIFT rules and has assessed their interpretation and application to CT REIT’s assets and revenue. While there are uncertainties in the interpretation and application of the SIFT rules, CT REIT believes that it meets the REIT Conditions. Accordingly, with the exception of transactions with CT REIT GP Corp., no net current income tax expense or deferred income tax assets or liabilities have been recorded in the consolidated statements of net income and comprehensive income. (g) Class C LP Units Each series of the Class C LP Units are redeemable, at the option of the holder, at a specified future date and can be settled at the option of the Partnership in cash or a variable number of Class B LP Units. Accordingly, the Class C LP Units are classified as financial liabilities and fixed payments on the Class C LP Units are presented as interest expense in the consolidated statement of income and comprehensive income in the period using the effective interest method. (h) Non-controlling interests Class B LP Units are classified as non-controlling interests and are presented as a component of equity as they represent equity interests in the Partnership not attributable, directly or indirectly, to CT REIT. (i) Provisions A provision is a liability of uncertain timing or amount. Provisions are recognized when CT REIT has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and the amount can be reliably estimated. Provisions are not recognized for future operating losses. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a discount rate that reflects current market assessments of the time value of money and the risks specific to the obligation. Provisions are remeasured at each balance sheet date using the current discount rate. The increase in the provision due to the passage of time is recognized as interest expense. (j) Unit based compensation plans CT REIT offers a Deferred Unit Plan (the “DU Plan”) for trustees who are not employees or officers of CT REIT or its affiliates, whereby such trustees may elect to receive all or a portion of their annual compensation in deferred units (“DUs”). CT REIT has a Restricted Unit Plan (the “RU Plan”) for executives, whereby the executives of CT REIT may elect to receive all or a portion of their annual short-term incentive plan awards in restricted units (“RUs”), and a Performance Unit Plan (the “PU Plan”) whereby the Board grants performance units (“PUs”) to executives of CT REIT as part of their long-term incentive plan. DUs, RUs and PUs are recorded as liabilities and expensed as compensation expense over the vesting period based upon the fair value of the respective units granted. (k) Cash and cash equivalents Cash and cash equivalents include cash and short-term investments with original maturities of three months or less. (l) Financial instruments and derivatives Financial instruments are classified, at the time of initial recognition, according to their characteristics and management’s classifications and intentions related thereto for the purposes of ongoing measurement. Classification choices are: (i) held-to-maturity, (ii) loans and receivables, (iii) fair value through profit or loss (“FVTPL”), (iv) available for sale, or (v) other financial liabilities. Financial assets and liabilities classified as FVTPL are measured at fair value with gains and losses recognized in the consolidated statements of income and comprehensive income. Financial instruments classified as held-to-maturity, loans and receivables or other liabilities are measured at amortized cost, using the effective interest method. Available-for-sale financial instruments are measured at fair value and any unrealized gains and losses will be recognized in other comprehensive income. CT REIT does not hold any held-to-maturity, FVTPL or available for sale financial instruments. CT REIT 2014 ANNUAL REPORT 55 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The following summarizes CT REIT’s classification and measurement of financial instruments: Financial assets and liabilities Cash and cash equivalents Other assets Tenant and other receivables Mortgages payable Class C LP Units Accounts payable and other liabilities Distributions payable Classification Measurement Loans and receivables Amortized cost Loans and receivables Amortized cost Loans and receivables Amortized cost Loans and receivables Amortized cost Other liabilities Amortized cost Other liabilities Amortized cost Other liabilities Amortized cost Transaction costs, other than those related to financial instruments classified as FVTPL, which are expensed as incurred, are capitalized to the carrying amount of the instrument and amortized using the effective interest method. These costs include interest, discounts or premiums relating to borrowings, fees and commissions paid to agents, brokers and advisers and transfer taxes and duties incurred in connection with the arrangement of borrowings. 4. Investment Properties Balance at beginning of year Acquisitions of investment properties (including acquisition costs)1 Development land acquisitions Developments Intensifications Recoverable capital expenditures Capitalized interest and property taxes Straight-line rent Fair value adjustment on investment properties Balance at end of year 1 Net of post-closing adjustments December 31, 2014 December 31, 2013 $ 3,547,864 $ – 228,684 3,982 19,963 11,951 17,052 442 28,685 141,221 3,534,136 9,011 – – – – 5,185 (468) $ 3,999,844 $ 3,547,864 To determine fair value, CT REIT uses the income approach. Fair value is estimated by capitalizing the cash flows that the property can reasonably be expected to produce over its remaining economic life. The income approach is derived from two methods: the overall capitalization rate (“OCR”) method, whereby the net operating income is capitalized at the requisite OCR, or the discounted cash flow (“DCF”) method, in which the cash flows are projected over the anticipated term of the investment plus a terminal value discounted using an appropriate discount rate. Properties under development are measured using a DCF model, net of costs to complete, as of the balance sheet date. Development sites in the planning phases are measured using comparable market prices for similar assets. Investment properties were subject to independent appraisals when initially acquired in 2013. At December 31, 2014, management’s determination of fair value was updated for current market assumptions, utilizing market capitalization rates provided by independent valuation professionals. CT REIT also obtained independent valuations for certain properties based on a four-year rotation cycle during which substantially all of its properties will be independently valued. During 2014, independent appraisals were obtained on a total of 68 properties, 34 were completed in Q2 having a fair value of $615,360 effective June 30, 2014 and 34 were completed in Q4 having a fair value of $560,890 effective December 31, 2014. The fair value of investment properties is based on Level 3 inputs (see Note 23(a) for definition of levels). There have been no transfers during the period between levels. 56 CT REIT 2014 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The significant inputs used to determine the fair value of CT REIT’s investment properties are as follows: Number of properties Value as at December 31, 2014 Discount rate Terminal capitalization rate Overall capitalization rate Hold period (years) Properties valued by the OCR method Properties valued by the DCF method 227 44 $ 3,127,673 $ 851,137 – – 6.34% – 6.91% 6.50% – 11 Valuations determined by the OCR method are most sensitive to changes in capitalization rates. Valuations determined by the DCF method are most sensitive to changes in discount rates. The following table summarizes the sensitivity of the fair value of investment properties to changes in the capitalization rate: Rate sensitivity + 75 basis points + 50 basis points + 25 basis points Base rate – 25 basis points – 50 basis points – 75 basis points 2014 Acquisition Activity OCR Sensitivity DCF Sensitivity Fair value Change in fair value Fair value Change in fair value $ 2,810,215 $ (317,458) $ 809,752 $ (41,385) 2,908,248 3,013,768 3,127,673 3,251,006 3,384,994 3,531,086 (219,425) (113,905) – 123,333 257,321 403,413 823,222 837,022 851,137 865,647 880,491 895,704 (27,915) (14,115) – 14,510 29,354 44,567 For the year ended December 31, 2014, thirteen investment property acquisitions and two development land acquisitions were completed at a total cost of $228,684 and $3,982 respectively. In addition, two development and six intensification projects were completed at a total cost of $19,963 and $11,951 respectively. The costs for these acquisitions were funded as follows: Funded with working capital to CTC1 Funded with working capital to third parties Issuance of Class B LP Units to CTC Issuance of Class C LP Units to CTC Mortgages assumed Total Costs 1 Net of post-closing adjustments. 2013 Acquisition Activity 2014 Acquisition Activity Acquisitions of investment properties Development land acquisitions Developments Intensifications $ 31,479 $ – $ 19,929 $ 11,951 71,267 19,464 47,279 59,195 3,982 – – – 34 – – – – – – – $ 228,684 $ 3,982 $ 19,963 $ 11,951 CT REIT acquired a portfolio of 256 properties (the “Initial Properties”) from CTC in exchange for a combination of Class B LP Units (which are accompanied by an equivalent number of special voting units in CT REIT (the ‘‘Special Voting Units’’), Class A LP Units, which were immediately acquired by CT REIT using the net proceeds from the Offering, and Class C LP Units. The purchase price of the Initial Properties was $3,533,668 and was supported by independent appraisals. CT REIT incurred costs on the acquisition of the Initial Properties of $468, which was added to the carrying value of the Initial Properties upon their recognition. The purchase of the Initial Properties was accounted for as an asset acquisition. CT REIT 2014 ANNUAL REPORT 57 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The purchase price was satisfied as follows: Cash1 Units acquired by CTC Class B LP Units Class C LP Units $ 240,958 597,111 895,599 1,800,000 $ 3,533,668 1 Represents proceeds from the Offering less issuance costs of $22,074 and property acquisition costs of $468. Development properties represent $3,984 (2013 – $9,011) of the total value of investment properties including capitalized interest of $2 (2013 – nil). Investment properties with a fair value of approximately $127,926 (2013 – $60,658) are situated on land held under leases with remaining initial terms of between 4 and 41 years, and an average initial term of 17 years. 5. Tenant and Other Receivables The components of tenant and other receivables were as follows: Rent and other receivables1 Allowance for doubtful accounts Tenant and other receivables 1 Includes $8,505 receivable from CTC (2013 – $554). 6. Other Assets Prepaid expenses and deposits Deferred assets Less: non-current portion of other assets Other assets December 31, 2014 December 31, 2013 $ 10,429 (80) $ 10,349 $ 696 – $ 696 December 31, 2014 December 31, 2013 $ 3,420 1,097 (2,526) $ 1,991 $ 6,859 834 (638) $ 7,055 Deferred assets include the costs incurred in connection with the arrangement of the Bank Credit Facility, which are being amortized over 48 months (see Note 10). 7. Cash and Cash Equivalents At December 31, 2014, CT REIT did not have any short-term deposits (2013 – $44,065). For the year ended December 31, 2014, interest income of $350 (2013 – $83) was earned on cash and cash equivalents and is recorded as interest income in the statements of income and comprehensive income. 8. Class C LP Units The Class C LP Units entitle the holder to a fixed cumulative monthly payment during the initial fixed rate period for each Series of Class C LP Units (the “Initial Fixed Rate Period”) equal to a weighted average of 4.44 per cent of the aggregate capital amount ascribed to the Class C LP Units, in priority to distributions made to holders of the Class A LP Units, Class B LP Units and GP Units, subject to certain exceptions. During the five-year period beginning immediately following the completion of the Initial Fixed Rate Period, and each five-year period thereafter, the fixed payment rate for Class C LP Units will be reset, and the holders of Class C LP Units will be entitled, subject to certain conditions, to elect either a fixed rate or floating rate option. On expiry of the Initial Fixed Rate Period applicable to each series of Class C LP Units, and every five years thereafter, each such series of Class C LP Units is redeemable at par (together with all accrued and unpaid payments thereon) at the option of the Partnership or the holder, upon giving at least 120 days’ notice. The Partnership further has the ability to settle any of the Class C LP Units at any time after January 1, 2019 at a price equal to the greater of par and a price to provide a yield equal to the then equivalent Government of Canada bond yield plus a spread, so long as such redemption is in connection with a sale of properties. 58 CT REIT 2014 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Such redemptions of Class C LP Units (other than upon a change of control at CT REIT) can be settled at the option of the Partnership, in cash or Class B LP Units of equal value. The following table presents the details of the Class C LP Units: Series Series 1 Series 2 Series 3 Series 4 Series 5 Series 6 Series 7 Series 8 Series 9 Series 10 Series 11 Series 12 Weighted average / Total Current Non-current Total Expiry of initial fixed rate period Annual distribution rate during initial fixed par value Carrying amount at December 31, 2014 Carrying amount at December 31, 2013 May 31, 2015 May 31, 2016 May 31, 2020 May 31, 2024 May 31, 2028 May 31, 2031 May 31, 2034 May 31, 2035 May 31, 2038 May 31, 2017 May 31, 2017 May 31, 2017 3.50% 3.50% 4.50% 4.50% 4.50% 5.00% 5.00% 5.00% 5.00% 2.38% 2.20% 2.23% 4.44% $ 200,000 $ 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 7,130 20,685 19,464 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 – – – $ 1,847,279 $ 1,800,000 $ 200,000 $ – 1,647,279 1,800,000 $ 1,847,279 $ 1,800,000 There are no principal payments on the Class C LP Units during the Initial Fixed Rate Period. For the year ended December 31, 2014, interest expense of $81,643 (2013 – $15,534) was recognized in respect of the Class C LP Units (see Note 18). The holders of the Class C LP Units may elect to defer receipt of all or a portion of payments declared by CT REIT until the first day following the end of the fiscal year. If the holder so elects to defer receipt of payments, CT REIT will loan the holder the amount equal to the deferred payment without interest, and the loan will be due and payable in full on the first business day following the end of the fiscal year the loan was advanced, the holder having irrevocably directed that any payment of the deferred payments be applied to repay such loans. At the election of the holder, payments on the Class C LP Units for the year ended December 31, 2014 of $68,425 (2013 – $7,991) were deferred until the first day following the end of the fiscal year and non-interest bearing loans equal to the deferred payments were advanced in lieu thereof. The net amount of payments due in respect of the Class C LP Units at December 31, 2014 of $6,838 (2013 – $6,787) is included in other liabilities on the consolidated balance sheet (see Note 11). These loans were settled on January 2, 2015. 9. Mortgages Payable Mortgages payable, secured by certain of CT REIT’s investment properties, include the following: Current Non-current Total December 31, 2014 December 31, 2013 Face value Carrying amount Face value Carrying amount $ 1,158 $ 1,275 57,148 57,219 $ 58,306 $ 58,494 $ – – $ – $ – – $ – CT REIT 2014 ANNUAL REPORT 59 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Future repayments are as follows: For the period ending December 31: 2015 2016 2017 2018 2019 2020 and thereafter Total contractual obligation Unamortized portion of mark to market interest rates on liabilities assumed at the acquisition of properties Unamortized debt financing cost Principal Amortization Maturities Total $ 1,158 1,199 1,241 422 – – – – – 16,661 37,625 – 1,158 1,199 1,241 17,083 37,625 – 4,020 54,286 58,306 381 (193) 58,494 Mortgages payable have interest rates that range from 2.95% to 3.60%, and have maturity dates that range from January 2018 to December 2019. Mortgages payable at December 31, 2014 had a weighted average interest rate of 3.19% (2013 – nil). At December 31, 2014, floating rate and fixed rate mortgages were $31,133 (2013 – nil) and $27,173 (2013 – nil), respectively. Investment properties having a fair value of $121,489 have been pledged as security for mortgages payable. 10. Bank Credit Facility The Partnership has a $200,000, revolving credit facility (the “Bank Credit Facility”), which is available to the Partnership until October 2017, with an option to increase it by an additional $100,000. The Bank Credit Facility bears interest at a rate based on the bank’s prime rate of interest or bankers’ acceptances plus a margin. A standby fee is charged on the Bank Credit Facility. As at December 31, 2014, $78,000 (2013 – nil) of cash advances had been drawn on the Bank Credit Facility. The unamortized balance of transaction costs incurred in connection with the arrangement of the Bank Credit Facility of $434 (2013 – $616) is recorded in other assets on the consolidated balance sheets. For the year ended December 31, 2014, amortization of the transaction costs of $182 (2013 – $35), as well as the standby fee of $492 (2013 – $80) are included in interest and other financing charges on the consolidated statement of income and comprehensive income (see Note 18). The following table summarizes the details of Bank Credit Facility as at December 31, 2014: Bank Credit Facility Maximum Loan Amount $ 200,000 Cash Advances $ 78,000 Letters of Credit Available to be Drawn $ – $ 122,000 11. Other Liabilities Other liabilities are comprised of the following: Property operating costs1 Recoverable capital expenditures Construction holdbacks2 Interest on Class C LP Units3 Deferred revenue4 Other5 Less: non-current portion of other liabilities Other liabilities 1 Includes $496 payable to CTC (2013 – $2,483). 2 Includes $3,188 payable to CTC (2013 – nil). 3 Net of loans receivable of $68,425 (2013 – $7,991). See Note 22. 4 Prepaid rent from CTC. 5 Includes $101 payable to CTC (2013 – $20). 60 CT REIT 2014 ANNUAL REPORT December 31, 2014 December 31, 2013 $ 3,188 2,089 3,515 6,838 2,238 3,563 (560) $ 20,871 $ 2,751 – – 6,787 – 3,601 (275) $ 12,864 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 12. Distributions on Units and Class B LP Units The following table presents total distributions declared on Units and Class B LP Units: Units1 Class B LP Units2 1 Includes $38,877 (2013 – $7,426) paid or payable to CTC. 2 Paid or payable to CTC. For the year ended December 31, 2014 For the period from July 15, 2013 to December 31, 2013 Total Distributions Distributions per Unit Total Distributions Distributions per Unit $ 58,674 $ 58,971 $ 0.65 $ 0.65 $ 11,194 $ 11,139 $ 0.12 $ 0.12 CT REIT has adopted a distribution reinvestment plan (“DRIP”), which allows certain Canadian resident Unitholders to elect to have all or a portion of their cash distributions reinvested in additional Units (at a price per unit calculated by reference to the five-day volume weighted average for the Units on the TSX for the five business days immediately preceding the distribution payment date). No brokerage commissions or service charges are payable in connection with the purchase of Units under the DRIP and CT REIT will pay all administrative costs. The automatic reinvestment of distributions under the DRIP does not relieve holders of Units of any income tax applicable to such distributions. Unitholders who participate in the DRIP receive an additional distribution of units equal to 3.0% of each distribution that was reinvested by them. For the year ended December 31, 2014 161,437 (2013 – 13,179) Units were issued under the DRIP for $1,781 (2013 – $136). On November 3, 2014, the Board approved an increase in the annual rate of distribution to $0.663 effective with the first distribution paid in 2015. On December 15, 2014, CT REIT’s Board declared a distribution of $0.05525 per Unit paid on January 15, 2015 to holders of Units and Class B LP Units of record as of December 31, 2014. On January 15, 2015, CT REIT’s Board declared a distribution of $0.05525 per Unit paid on February 13, 2015 to holders of Units and Class B LP Units of record as of January 30, 2015. On February 13, 2015, CT REIT’s Board declared a distribution of $0.05525 per Unit payable on March 13, 2015 to holders of Units and Class B LP Units of record as of February 27, 2015. The holders of the Class B LP Units may elect to defer receipt of all or a portion of distributions declared by CT REIT until the first day following the end of the fiscal year. If the holder so elects to defer receipt of distributions, CT REIT will loan the holder the amount equal to the deferred distribution without interest, and the loan will be due and payable in full on the first business day following the end of the fiscal year the loan was advanced, the holder having irrevocably directed that any payment of the deferred distributions be applied to repay such loans. For the year ended December 31, 2014, the holders of the Class B LP Units elected to defer distributions in the amount of $565 (2013 – nil). See Note 22(b). These loans were settled on January 2, 2015. 13. Equity Authorized and outstanding units CT REIT is authorized to issue an unlimited number of Units. As of December 31, 2014, CT REIT had 90,188,210 (2013 – 90,026,773) Units outstanding, 59,711,094 (2013 – 59,711,094) of which were held by CTC and 91,297,572 (2013 – 89,559,871) Class B LP Units outstanding (together with a corresponding number of Special Voting Units), all of which were held by CTC. The following tables summarize the changes in Units and Class B LP Units: Total outstanding at beginning of year Issued Total outstanding at end of period Total outstanding at beginning of period Issued Total outstanding at end of period For the year ended December 31, 2014 Units Class B LP Units Total 90,026,773 89,559,871 179,586,644 161,437 1,737,701 1,899,138 90,188,210 91,297,572 181,485,782 For the period from July 15, 2013 to December 31, 2013 Units Class B LP Units – – Total – 90,026,773 89,559,871 179,586,644 90,026,773 89,559,871 179,586,644 CT REIT 2014 ANNUAL REPORT 61 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Net income attributable to Unitholders and weighted average units outstanding used in determining basic and diluted net income per unit for the year ended December 31, 2014 and period from July 15, 2013 to December 31, 2013, are calculated as follows, respectively: Net income attributable to unitholders – basic Income effect of settling Class C LP Units with Class B LP Units Net income attributable to unitholders – diluted Weighted average Units outstanding – basic Dilutive effect of other Unit plans Dilutive effect of settling Class C LP Units with Class B LP Units Weighted average Units outstanding – diluted Net income attributable to unitholders – basic Income effect of settling Class C LP Units with Class B LP Units Net income attributable to unitholders – diluted Weighted average Units outstanding – basic Dilutive effect of other Unit plans Dilutive effect of settling Class C LP Units with Class B LP Units Weighted average Units outstanding – diluted For the year ended December 31, 2014 Units Class B LP Units $ 159,282 $ 158,979 Total 318,261 81,643 399,904 $ $ 90,110,919 90,488,232 180,599,151 44,485 151,702,425 332,346,061 For the period from July 15, 2013 to December 31, 2013 Units Class B LP Units $ 15,269 $ 15,727 Total 30,996 15,534 46,530 $ $ 89,339,035 89,559,871 178,898,906 25,148 168,299,232 347,223,286 The calculation of diluted per unit amounts is determined on a combined basis for the Units and Class B LP Units as the Class B LP Units are exchangeable into Units on a one-for-one basis and are entitled to an equivalent amount of net income per unit as the Units. Units Each Unit is transferable and represents an equal, undivided, beneficial interest in CT REIT and any distributions, whether of net income, net realized capital gains, or other amounts, and in the event of the termination or winding-up of CT REIT, in CT REIT’s net assets remaining after satisfaction of all liabilities. All Units rank among themselves equally and ratably without discrimination, preference or priority. Each Unit entitles the holder thereof to one vote at all meetings of Unitholders or with respect to any written resolution of Unitholders. The Units have no conversion, retraction or redemption rights. Non-controlling interests The Class B LP Units are exchangeable on a one-for-one basis (subject to customary anti-dilution provisions) for Units at the option of the holder. Each Class B LP Unit is accompanied by a Special Voting Unit. The holders of Class B LP Units are entitled to receive distributions when declared by the Partnership equal to the per unit amount of distributions payable to each holder of Units. However, the Class B LP Units have limited voting rights over the Partnership. Special Voting Units Special Voting Units are only issued (i) in tandem with Class B LP Units of the Partnership or (ii) in limited circumstances to holders of the Class C LP Units and are not transferable separately from the Class B LP Units or Class C LP Units, as the case may be, to which they relate. Upon any transfer of Class B LP Units or Class C LP Units, as the case maybe, such Special Voting Units will automatically be transferred to the transferee of the Class B LP Units. As Class B LP Units are exchanged for Units or purchased for cancellation, the corresponding Special Voting Units will be cancelled for no consideration. Each Special Voting Unit entitles the holder thereof to one vote at all meetings of Unitholders or with respect to any resolution in writing of Unitholders. Except for the right to attend and vote at meetings of the Unitholders or with respect to written resolutions of the Unitholders, Special Voting Units do not confer upon the holders thereof any other rights. A Special Voting Unit does not entitle its holder to any economic interest in CT REIT, or to any interest or share in CT REIT, or to any interest in any distributions (whether of net income, net realized capital gains, or other amounts), or to any interest in any net assets in the event of termination or winding-up. CT REIT’s Board retains full discretion with respect to the timing and quantum of distributions. Declared distributions are paid to Unitholders of record at the close of business on the last day of the month on or about the 15th day of the following month. 62 CT REIT 2014 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 14. Unit Based Compensation Plans Deferred Unit Plan for Trustees Under the DU Plan, trustees who are eligible to participate in the DU Plan may elect to receive all or a portion of their annual compensation, which is paid quarterly, in DUs. The number of DUs to be issued is determined by dividing the quarterly compensation amount the trustee has elected to receive in DUs by the weighted average price at which Units trade on the TSX during the five trading days immediately preceding the end of the calendar quarter. The DU account of each trustee includes the value of distributions, if any, which are reinvested in additional DUs. DUs represent a right to receive an equivalent number of Units or, at the trustee’s election, the cash equivalent thereof, upon the trustee’s departure from the Board. DUs that are converted to cash will be equivalent to the market value of Units at the time the conversion takes place pursuant to the terms of the DU Plan. As at December 31, 2014, accrued Trustee compensation costs relating to the DU Plan totaled $440 (2013 – $79). The fair value of DUs is equal to the trading price of Units. Compensation expense recorded for the year ended December 31, 2014 was $51 (2013 – $1) for DUs issued to Trustees and is included in general and administrative expense. Performance Unit Plan Each PU award entitles the executive to receive a cash payment equal to the weighted average price of Units traded on the TSX during the 10 calendar day period commencing the first business day following the end of the performance period, multiplied by a factor determined by specific performance-based criteria, as set out in the performance unit plan. The performance period of each PU award is approximately three years from the date of issuance. As at December 31, 2014, the accrued compensation costs relating to the PU Plan totaled $232 (2013 – nil). Compensation expense recorded for the year ended December 31, 2014 for PUs granted to executive officers was $232 (2013 – nil), and is included in general and administrative expense. Restricted Unit Plan for Executives Under the RU Plan executives may elect to receive all or a portion of their short-term incentive plan (“STIP”) award for any fiscal year in restricted units (“RUs”) which entitle the executive to receive an equivalent number of Units, or, at the executive’s election, the cash equivalent thereof, at the end of the vesting period, which is generally five years from the STIP payment date. The number of RUs to be issued is determined by dividing the STIP amount the executive has elected to receive in RUs by the volume weighted average price at which Units trade on the TSX during the five business days immediately prior to the tenth business day following the release of CT REIT’s financial statements for the year in respect of which the STIP was earned. The RU Plan also provides for discretionary grants of RUs which entitle the executive to receive an equivalent number of Units or, at the executive’s election, the cash equivalent thereof, at the end of the vesting period which is generally three years from the date of issuance. RUs that are converted to cash will be equivalent to the market value of Units on the conversion date pursuant to the terms of the RU Plan. The RU account for each executive includes the value of distributions, if any, which are reinvested in additional RUs. As at December 31, 2014, accrued RU compensation costs relating to the RU Plan totaled $328 (2013 – $275). The fair value of RUs is equal to the trading price of Units. Compensation expense recorded for the year ended December 31, 2014 for RUs issued to executive officers was $53 (2013 – $275), and is included in general and administrative expense. 15. Non-Controlling Interests Details of non-wholly owned subsidiaries of CT REIT that have material non-controlling interests are as follows: Proportion of ownership interests held by non-controlling interests Net income and comprehensive income allocated to non-controlling interests Accumulated non-controlling interests Name of subsidiary December 31, 2014 December 31, 2013 For the year ended December 31, 2014 For the period ended December 31, 2013 December 31, 2014 December 31, 2013 CT REIT Limited Partnership 50.31% 49.87% $ 158,979 $ 15,727 $ 1,019,601 $ 900,187 The following is a continuity of non-controlling interests: Balance at beginning of year Non-controlling interests arising on the issuance of Class B LP Units, net of issue costs Share of net income and comprehensive income Distributions Balance at end of period For the year ended December 31, 2014 For the period ended December 31, 2013 $ 900,187 $ – 19,406 158,979 (58,971) 895,599 15,727 (11,139) $ 1,019,601 $ 900,187 CT REIT 2014 ANNUAL REPORT 63 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS There are no restrictions on CT REIT’s ability to access or use the assets and settle the liabilities of its subsidiaries and there are no contractual arrangements that could require CT REIT to provide financial support. 16. Revenue and Expenses (a) Property revenue CT REIT leases income-producing commercial properties to tenants under operating leases. The CTC leases have staggered initial terms ranging from 5.8 to 20.1 years, with a weighted average remaining initial term of approximately 14.5 years. Annual base minimum rent for CTC leases will have weighted average annual rent escalations of approximately 1.5% per year, commencing January 1, 2015. The components of revenue are as follows: Base minimum rent Straight-line rental Subtotal base rent Property tax and operating expense recoveries Capital expenditure and interest recovery charge Other revenues Property revenue Base minimum rent Straight-line rental Subtotal base rent Property tax and operating expense recoveries Property revenue Future base minimum rental commitments on non-cancellable tenant operating leases are as follows: Less than one year Between one and five years More than five years Total (b) Property expense The major components of operating costs consist of realty taxes and other recoverable costs: Property taxes Property management1 Other recoverable operating costs Other non-recoverable costs Ground rent Property insurance Property expense 1 Includes $2,333 (2013 – $405) with CTC. See Note 22. 64 CT REIT 2014 ANNUAL REPORT CTC Other For the year ended December 31, 2014 $ 235,851 $ 7,867 $ 243,718 28,104 263,955 68,092 165 – 581 8,448 3,818 – 313 28,685 272,403 71,910 165 313 $ 332,212 $ 12,579 $ 344,791 CTC Other For the period from July 15, 2013 to December 31, 2013 $ 43,881 $ 1,172 $ 45,053 5,134 49,015 12,327 51 1,223 461 5,185 50,238 12,788 $ 61,342 $ 1,684 $ 63,026 December 31, 2014 $ 258,453 1,063,500 2,767,588 $ 4,089,541 For the year ended December 31, 2014 For the period from July 15, 2013 to December 31, 2013 $ 68,615 $ 12,644 2,515 3,225 80 2,147 95 463 303 – 347 16 $ 76,677 $ 13,773 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 17. General and Administrative Expenses General and administrative expenses are comprised of the following: Services Agreement with CTC1 Personnel expense Other General and administrative expenses 1 See Note 22. 18. Interest and Other Financing Charges Interest and other financing charges are comprised of the following: Interest on Class C LP Units Interest on Mortgages Payable Interest on Bank Credit Facility Standby fees – Bank Credit Facility Amortization of financing costs – Bank Credit Facility Amortization of agency fees – Bank Credit Facility Capitalized interest Interest and other financing charges 19. Changes in Working Capital and Other Changes in working capital are comprised of the following: Changes in working capital and other Tenant and other receivables Other assets Other liabilities Changes in working capital and other 20. Segmented Information For the year ended December 31, 2014 For the period from July 15, 2013 to December 31, 2013 $ 3,288 2,134 3,011 $ 8,433 $ 627 809 787 $ 2,223 For the year ended December 31, 2014 For the period from July 15, 2013 to December 31, 2013 $ 81,643 $ 15,534 652 355 492 153 29 83,324 (333) – – 80 28 7 15,649 – $ 82,991 $ 15,649 For the year ended December 31, 2014 For the period from July 15, 2013 to December 31, 2013 $ (9,653) 3,176 8,701 $ 2,224 $ (696) (7,728) 6,241 $ (2,183) CT REIT has one segment, which comprises the ownership and operation of primarily retail investment properties located in Canada. 21. Commitments and Contingencies CT REIT has agreed to indemnify, in certain circumstances, the trustees and officers of CT REIT and its subsidiaries. CT REIT has committed to development expenditures representing approximately $18,530 (2013 – $19,997) in future payments. CT REIT 2014 ANNUAL REPORT 65 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 22. Related-Party Transactions In the normal course of operations, CT REIT enters into various transactions with related parties that have been measured at amounts agreed to between the parties and are recognized in the consolidated financial statements. (a) Arrangements with CTC Services Agreement Under the Services Agreement, CTC provides CT REIT with certain administrative, legal, financial, information technology, internal audit and other support services as may be reasonably required from time to time (the “Services”). CTC provides these Services to CT REIT on a cost recovery basis pursuant to which CT REIT reimburses CTC for all costs and expenses incurred by CTC in connection with providing the Services, plus applicable taxes, with a fixed maximum fee not to exceed $3,288 for the year ended December 31, 2014 with adjustments to such fee based on the Consumer Price Index (“CPI”), for the following year. The CPI factor for 2015 is 1.4%. The Services Agreement’s initial term ends on December 31, 2015 and is renewable for further one year terms thereafter, unless otherwise terminated. The Services Agreement has been renewed for 2016. Property Management Agreement Under the Property Management Agreement, CTC provides the Partnership with customary property management services (the ‘‘Property Management Services’’). CTC agreed to provide Property Management Services to the Partnership on a cost recovery basis pursuant to which the Partnership reimburses CTC for all costs and expenses incurred by CTC in connection with providing the Property Management Services, plus applicable taxes, with a fixed maximum fee not to exceed $2,333 for the year ended December 31, 2014, with adjustments to such fee based on the CPI for the following year, which is 1.4% for 2015. The Property Management Agreement’s initial term ends on December 31, 2015 and is renewable for further one year terms thereafter, unless otherwise terminated. The Property Management Agreement has been renewed for 2016. Development Agreement CT REIT, the Partnership and CTC entered into the Development Agreement for a term expiring on the later of: (i) 10 years from the Closing; (ii) the time when CTC ceases to hold, directly or indirectly, a majority of the Voting Units comprising any combination of Units and Special Voting Units. Pursuant to the Development Agreement CT REIT has a preferential right to participate in property developments that meet CT REIT’s investment and other criteria, an option to purchase development properties and an option to provide mezzanine financing for developments. The Agreement requires CTC to present, in certain circumstances, new shopping centre acquisition opportunities in Canada to CT REIT. (b) Transactions and balances with related parties Transactions with CTC are comprised of the following: Rental revenue Property Management and Services Agreement expense Distributions on Units Distributions on Class B LP Units Interest expense on Class C LP Units 1 Excludes acquisition activity. See Note 4. The net balance due to CTC is comprised of the following: Tenant and other receivables Class C LP Units Interest payable on Class C LP Units Loans receivable in lieu of distributions on Class C LP Units Other liabilities Loans receivable in lieu of distributions on Class B LP Units Distributions payable on Units and Class B LP Units Net due to CTC 66 CT REIT 2014 ANNUAL REPORT For the year ended December 31, 20141 For the period from July 15, 2013 to December 31, 20131 $ 332,212 $ 61,342 5,621 38,877 58,971 81,643 1,090 7,426 11,139 15,534 December 31, 2014 December 31, 2013 $ (8,505) $ (554) 1,847,279 1,800,000 75,263 (68,425) 6,023 (565) 8,908 14,778 (7,991) 2,503 – 8,086 $ 1,859,978 $ 1,816,822 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (c) Compensation of executives and independent trustees The remuneration of management personnel including the chief executive officer, chief financial officer and the trustees who were not employees or officers of the REIT or any of its affiliates was as follows: Salaries and short-term employee benefits Unit-based awards Total For the year ended December 31, 2014 For the period from July 15, 2013 to December 31, 2013 $ 2,226 336 $ 2,562 $ 603 276 $ 879 The remuneration of management consists principally of base salary, short-term cash incentives and long-term incentives (in the form of Unit-based awards). The remuneration is determined by CT REIT’s Board of Trustees, on the recommendation of the Governance, Compensation and Nominating Committee. The compensation of trustees, excluding employees and officers of the REIT or any of its affiliates, consists of annual retainer and meeting fees. 23. Financial Instruments and Risk Management (a) Fair value of financial instruments For financial reporting purposes, fair value measurements are categorized into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows: ‰ Level 1 inputs: Are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date; ‰ Level 2 inputs: Are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and ‰ Level 3 inputs: Are unobservable inputs for the asset or liability. The fair value of the Class C LP Units is determined by discounting contractual principal and interest payments at estimated current market interest rates for the instrument. Current market interest rates are determined with reference to current benchmark rates for a similar term and current credit spreads for debt with similar terms and risks. The fair value of the Class C LP Units and mortgages payable at December 31, 2014, was $1,931,316 and $59,452 respectively (2013 – $1,691,100 and nil, respectively). The fair value measurement of the Class C LP Units and mortgages payables was based on Level 2 inputs. The significant inputs used to determine the fair value of the Class C LP Units and mortgages payable are interest rates, interest rate volatility, and credit spreads. There have been no transfers during the period between levels. Current financial assets consist of cash and cash equivalents and tenant and other receivables and loans receivable, which are classified as loans and receivables and carried at amortized cost. Current financial liabilities consist of accounts payable, Bank Credit Facility, other liabilities and distributions payable, which are classified as other liabilities and carried at amortized cost. The carrying amounts approximate their fair value due to their short-term nature. (b) Financial risk management In the normal course of business, CT REIT has exposure to risks from its use of financial instruments. CT REIT is exposed to liquidity and credit risk in connection with its financial instruments. Financial risk management policies are established for CT REIT to identify and analyze the risks faced by CT REIT, to set acceptable risk tolerance limits and controls and to monitor risks and adherence to limits. CT REIT is not exposed to significant currency or market risk arising from financial instruments. Additionally, CT REIT currently does not have any significant direct exposure to interest rate risk in respect of the Class C LP Units during the Initial Fixed Rate Term, the earliest of which expires on May 31, 2015 (see Note 8). Liquidity risk Liquidity risk is the risk that CT REIT will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. CT REIT’s approach to managing liquidity is to ensure that it has sufficient liquidity available through cash, assets readily convertible to cash and committed bank lines of credit to support its monthly cash distributions to Unitholders, meet operating and strategic plan requirements and meet unexpected financial challenges. CT REIT has in place a leverage and liquidity policy to manage its exposure to liquidity risk. Management has identified key financial credit metric ratios and calculates these ratios in a manner to approximate the methodology of debt rating agencies. Management monitors these metrics against industry-accepted targets to maintain investment-grade ratings from two credit rating agencies. CT REIT uses a detailed consolidated cash flow forecast model to regularly monitor its near-term and longer-term cash flow requirements, which assists in optimizing its cash distributions to Unitholders and evaluating longer-term funding strategies. CT REIT 2014 ANNUAL REPORT 67 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CT REIT has access to the following financing sources to ensure that the appropriate level of liquidity is available to meet its monthly distributions and strategic objectives: committed bank lines totaling $200,000, direct access to debt and equity markets subject to consent from CTC, and contributions from CTC to the extent cash flows from property operations are not sufficient. Credit risk Credit risk is the risk of financial loss if a counterparty to a financial instrument fails to meet its contractual obligations and arises principally from CT REIT’s tenants and from investment securities counterparties. Credit risk arises from the possibility that CT REIT’s tenants may experience financial difficulty and be unable to meet their lease obligations. CTC is CT REIT’s most significant tenant and will be for the foreseeable future with Canadian Tire Retail stores and the distribution centre. CT REIT’s revenues will be dependent on the ability of CTC to meet its rent obligations and CT REIT’s ability to collect rent from CTC. CT REIT has a Securities and Counterparty Risk Management Policy in place for management of counterparty risk related to investing activity. The overall credit risk compliance mechanisms established in this policy include credit rating requirements, approval authorities, counterparty limits, notional limits, term to maturity and portfolio diversification requirements. CT REIT limits its exposure to credit risk by investing only in highly liquid and rated term deposits, bankers’ acceptances or other approved securities and only with highly rated financial institutions and government counterparties. Interest rate risk Interest rate risk is the potential for financial loss arising from increases in interest rates. CT REIT has minimal exposure to interest rate changes as the initial rate on the Class C LP units is at fixed interest rates and CT REIT currently has $78,000 (2013 – nil) in short-term borrowings outstanding under its Bank Credit Facility. 24. Capital Management and Liquidity CT REIT’s objectives when managing capital are to ensure access to capital and sufficient liquidity is available to support ongoing property operations, developments and acquisitions while generating reliable, durable and growing monthly cash distributions on a tax-efficient basis to maximize long-term Unitholder value. The definition of capital varies from entity to entity, industry to industry and for different purposes. CT REIT’s strategy and process for managing capital is driven by requirements established under the Declaration of Trust and the Bank Credit Facility. The following schedule details the capitalization of CT REIT: Liabilities Class C LP Units Mortgages payable Bank Credit Facility Equity Unitholders’ equity Non-controlling interest Total December 31, 2014 December 31, 2013 $ 1,847,279 $ 1,800,000 58,494 78,000 982,588 1,019,601 – – 880,199 900,187 $ 3,985,962 $ 3,580,386 CT REIT’s Class C LP Units have a fixed, cumulative, preferential cash distribution, if, as and when declared by the board of directors of the GP, beginning on October 23, 2013 and ending, for each series, on the date set out in the Initial Fixed Rate Period for such series, which is payable monthly at an annual distribution rate for each series. Under the Declaration of Trust and the syndicated bank credit agreement, key financial covenants are reviewed on an ongoing basis by management to monitor compliance with the agreements. The key financial covenants for CT REIT are as follows: ‰ a requirement to maintain, at all times: ‰ a specified maximum ratio of total indebtedness of CT REIT (plus the aggregate par value of the Class C LP Units) to gross book value ‰ a specified maximum ratio of total secured indebtedness of CT REIT (plus the aggregate par value of the Class C LP Units) to gross book value ‰ a minimum Unitholders’ equity ‰ a ratio of unencumbered assets to unconsolidated unsecured indebtedness ‰ a specified minimum debt service coverage ratio defined as earnings before interest and taxes as a percentage of interest expense, which for greater clarity includes payments on the Class C LP Units As at December 31, 2014, CT REIT was in compliance with all of its financial covenants. Under these financial covenants, CT REIT has sufficient flexibility to fund business growth and maintain or amend distribution rates within its existing distribution policy. 68 CT REIT 2014 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CT REIT’s strategy is to satisfy its liquidity needs using cash flows generated from operating activities and cash provided by financing activities. Rental income, recoveries from tenants, interest and other income, draws on the Bank Credit Facility and further issuance of debt and equity are CT REIT’s principal sources of liquidity used to pay operating expenses, distributions, debt service, and recurring capital and leasing costs in its investment property portfolio. The principal liquidity needs for periods beyond the next year are for unit distributions, scheduled debt maturities and capital expenditures. CT REIT’s strategy is to meet these needs through cash flows generated from operating activities and further issuance of debt and equity. The following table presents the contractual maturities of CT REIT’s financial liabilities: Total 1 year 2-3 years 4-5 years After 5 years $ 1,847,279 $ 200,000 $ 247,279 $ – $ 1,400,000 Payments Due By Period 1,066,314 14,593 6,838 10,027 58,306 78,000 77,977 14,033 6,838 10,027 1,158 78,000 138,419 134,000 715,918 560 – – 2,440 – – – – 54,708 – – – – – – Class C LP Units1 Payments on Class C LP Units1 Other liabilities Payable on Class C LP Units, net of loans receivable Distributions payable2 Mortgages payable Bank Credit Facility 1 Assumes redemption on expiry of initial fixed rate period for each series. 2 On Units and Class B LP Units. 25. Comparative Figures Certain of the prior period’s figures have been restated to correspond to the current period presentation. 26. Subsequent Events A redemption notice was submitted by CT REIT to CTC, the holders of Series 1 of the Class C LP Units, which have a maturity date of May 31, 2015. As a result, this series of Class C LP Units will either be redeemed or will have their rate reset, in either case effective May 31, 2015. During February 2015, CT REIT completed five investment property acquisitions from CTC including two retail properties in Ontario, two in Quebec and one in Alberta. The total purchase price of approximately $62,000 was satisfied by an issuance of 4,799,539 Class B LP Units. CT REIT 2014 ANNUAL REPORT 69 GLOSSARY OF TERMS CT REIT Glossary of Terms “AFFO” is funds from operation (“FFO”) subject to certain adjustments to (a) remove the impact of: (i) adjusting for any differences resulting from recognizing property rental revenues or expenses on a straight-line basis; and (ii) initial one-time costs to establish the REIT; and (b) deduct a reserve for normalized maintenance capital expenditures, tenant inducements and leasing commissions. “Atlantic Canada” means the provinces of New Brunswick, Newfoundland and Labrador, Nova Scotia and Prince Edward Island. “Board” means the Board of Trustees of the REIT. “Capitalization Rate” refers to a rate of return calculated by dividing the expected net operating income of a property by its total value. “Development Lands” means, collectively, the property located on 22 Avenue NE in Swift Current, Saskatchewan, acquired by the REIT on December 1, 2014 and the property located on the southeast corner of 5th Street and 12th Avenue in High River, Alberta acquired by the REIT on December 22, 2014. “EBITFV” represents earnings before interest expense and other financing costs, income tax expense, fair value adjustments on investment properties, losses or gains on disposition of property, and excludes other non-recurring items that may occur under IFRS. “FFO” has the meaning given in the white paper on funds from operations prepared by the Real Property Association of Canada (“REALpac”), and is calculated as net income in accordance with GAAP, adjusted by removing the impact of (i) fair value adjustments on investment properties; (ii) other fair value adjustments; (iii) gains and losses on the sale of investment properties; (iv) change in fair value of non cash compensation incentive plans; and (v) amortization of tenant incentives. “GAAP” means generally accepted accounting principles in Canada (which for Canadian reporting issuers is IFRS) as in effect from time to time and as “Change of Control” means the acquisition by a person, or group of adopted by the REIT from time to time for the purposes of its public persons acting jointly or in concert, directly or indirectly, other than CTC or financial reporting. any of its Subsidiaries, of more than 50% of the aggregate voting rights attached to the Units and Special Voting Units of the REIT (taking into account (i) full dilution from the exchange of all then-outstanding Class B LP Units into Units of the REIT; and (ii) in respect of any other securities that are convertible or exchangeable into Units of the REIT, only dilution resulting from the conversion or exercise of such other convertible or exchangeable securities held by such person or group of persons). “GLA” means gross leasable area. “Gross Book Value” means at any time the total assets of the REIT as shown in its then most recent consolidated balance sheet. “IFRS” means International Financial Reporting Standards as issued by the International Accounting Standards Board and as adopted by the Chartered Professional Accountants of Canada in Part I of The CPA Canada Handbook – Accounting, as amended from time to time. “Class A LP Units” means, collectively, the Class A limited partnership “Indebtedness” of any person means (without duplication) (i) any units of the Partnership. “Class B LP Units” means, collectively, the Class B limited partnership units of the Partnership, and “Class B LP Unit” means any one of them. obligation of such person for borrowed money (including, for greater certainty, the full principal amount of convertible debt, notwithstanding its presentation under GAAP), (ii) any obligation of such person incurred in connection with the acquisition of property, assets or businesses, (iii) any “Class C LP Units” means, collectively, the Class C limited partnership obligation of such person issued or assumed as the deferred purchase units of the Partnership, and “Class C LP Unit” means any one of them. “Closing” means the closing of the REIT’s Initial Public Offering, Acquisition and other related transactions on October 23, 2013. “Competitor” is a person who carries on business, or any person who controls or is controlled by such person, in one or more of the following categories: hardware, automotive, sporting goods, apparel and housewares. price of property, (iv) any capital lease obligation of such person, and (v) any obligations of the type referred to in clauses (i) through (iv) of another person the payment of which such person has guaranteed or for which such person is responsible or liable; provided that, (A) for the purpose of clauses (i) through (v) (except in respect of convertible debt, as described above), an obligation will constitute Indebtedness of such person only to the extent that it would appear as a liability on the consolidated balance sheet of such person in accordance with GAAP, (B) obligations referred to in clauses (i) through (iii) exclude trade accounts payable, distributions “CTC” means Canadian Tire Corporation, Limited together with its payable to Unitholders, accrued liabilities arising in the ordinary course of subsidiaries (excluding the REIT and the REIT’s subsidiaries), or, as the business which are not overdue or which are being contested in good faith, context requires, any of them. “CTC Banner” means a CTC name or trademark, including the Canadian Tire®, SportChek and Marks, name and trademark. deferred revenues, intangible liabilities, deferred income taxes, deferred financing costs, tenant deposits and indebtedness with respect to the unpaid balance of installment receipts where such indebtedness has a term not in excess of 12 months, and (C) Units, Class A LP Units, Class B “Development Agreement” means the development agreement among LP Units, Class C LP Units and exchangeable securities do not constitute the REIT, the Partnership, CTREL and CTC entered into at Closing, as Indebtedness. described under “Arrangements with CTC — Commercial Agreements with “Initial Public Offering” refers to the distribution to the public of the Units CTC” of this AIF. pursuant to the Prospectus. 70 CT REIT 2014 ANNUAL REPORT GLOSSARY OF TERMS “Intensification” means the development of a property, site or area at a “Straight-Line Rent” refers to the recognition of rental revenue on a higher density than currently exists, through development, redevelopment, straight-line basis over the lease term in accordance with IAS 17, Leases. infill and expansion or conversion of existing buildings. “Unitholders” means holders of Units, and “Unitholder” means any one of “Investment Properties” means the portfolio of properties owned by CT them. REIT. “Net Income Per Unit – Basic” is calculated by dividing net income attributable to the Unitholders and Class B LP Unitholders by the weighted average number of Units and Class B LP Units outstanding during the reporting period. “Net Income Per Unit – Diluted” is calculated by adjusting net income attributable to the Unitholders and the weighted average numbers of units outstanding for the effects of all dilutive potential equity instruments, which comprises settling the Class C LP Units with Class B LP Units, as well as restricted and deferred Units issued under various plans. “NOI” means property revenue less property expense (including property management fees). “Non-Controlling Interest” refers to the classification of Class B LP Units, which are presented as a component of equity as they represent equity interests in the Partnership not attributable to CT REIT. “Operating Leases” refers to the lease agreements of the Investment Properties treated in accordance with IAS 17, Leases. “Property Management Agreement” means the property management agreement among the Partnership and CTC entered into at Closing, pursuant to which CTC provides the Partnership with customary Property Management Services. “Prospectus” means the prospectus filed in respect of the REIT’s initial public offering dated October 10, 2013. “REIT Exception” means the exclusion from the definition of “SIFT trust” in the Tax Act for a trust qualifying as a “real estate investment trust” under the Tax Act. “ROFO Agreement” means the right of first offer agreement among the REIT, the Partnership and CTC entered into at Closing. Pursuant to the agreement, CTC has provided the REIT with a right of first offer to acquire any interest of CTC in the properties it owns after Closing, which meet the REIT’s investment criteria, prior to the disposition of any such property to third parties, on terms no less favourable to the REIT than those offered by or to such third party. “Services Agreement” means the services agreement among the REIT, the Partnership and CTC entered into at Closing pursuant to which CTC or certain of its Subsidiaries provide the REIT with certain administrative, legal, financial, information technology, human resources and ancillary services. The Services are provided to the REIT on a cost-recovery basis only, pursuant to which the REIT reimburses CTC for all costs and expenses incurred by CTC in connection with providing the Services. “SIFT Rules” means the rules applicable to SIFT trusts and SIFT partnerships in the Tax Act. “Special Voting Units” means, collectively, special voting units of the REIT, and “Special Voting Unit” means any one of them. “Units” means trust units in the capital of the REIT, other than Special Voting Units, and “Unit” means any one of them. “Western Canada” means the provinces of British Columbia, Alberta, Saskatchewan and Manitoba, and the Northwest Territories and Yukon Territory. CT REIT 2014 ANNUAL REPORT 71 DISCLOSURE DOCUMENTS Corporate governance disclosure and other investor information are available online on CT REIT’s website at www.ctreit.com. Additional copies of the Annual Report and other disclosure documents, such as CT REIT’s Management Information Circular, the Annual Information Form and quarterly reports, can be downloaded or requested in print form from the same website. VERSION FRANÇAISE DU RAPPORT Pour télécharger la version française du rapport annuel de CT Real Estate Investment Trust ou demander un exemplaire, veuillez consulter le site Web de la fiducie, à l’adresse www.ctreit.com/fr. CORPORATE INFORMATION HOME OFFICE CT REIT 2180 Yonge Street P.O. Box 770, Station K Toronto, Ontario M4P 2V8 Canada Telephone: 416-480-2029 Toll-free: 1-855-770-7348 (REIT) Website: www.ctreit.com INVESTOR RELATIONS CONTACTS Andrea Orzech Associate Vice-President, Investor Relations andrea.orzech@cantire.com Investor Relations email: investor.relations@ctreit.com MEDIA CONTACT Sandra Buckler Vice-President, Communications sandra.buckler@cantire.com ANNUAL MEETING OF UNITHOLDERS Famous Players Canada Square 2190 Yonge Street Toronto, Ontario Tuesday, May 12, 2015 10:00 a.m. (EDT) EXCHANGE LISTINGS The Toronto Stock Exchange (CRT.UN) AUDITORS Deloitte LLP Chartered Accountants BANKERS Bank of Montreal Caisse Central Desjardins Canadian Imperial Bank of Commerce National Bank of Canada Royal Bank of Canada The Bank of Nova Scotia The Toronto-Dominion Bank REGISTRAR AND TRANSFER AGENT Computershare Trust Company of Canada 100 University Avenue, 8th Floor Toronto, Ontario M5J 2Y1 Canada Telephone: 514-982-7555 Toll-free: 1-877-982-8768 Fax: 1-866-249-7775 Email: service@computershare.com For Unitholder inquiries related to participation in the distribution reinvestment plan, electronic delivery of Unitholder documents, distribution payments or direct deposit of distributions into your Canadian bank account, change of address, transfer of Units, consolidation of multiple mailings to one Unitholder, estate settlements or for other Unitholder account inquiries, please contact the principal offices of Computershare Trust Company of Canada in Halifax, Montreal, Toronto, Calgary or Vancouver. 72 CT REIT 2014 ANNUAL REPORT CHARLOTTETOWN, PRINCE EDWARD ISLAND OAKVILLE, ONTARIO THUNDER BAY, ONTARIO COTEAU-DU-LAC, QUEBEC y e l l e n n o D R R : g n i t n i r P s t e k r a M l a t i p a C y e l l e n n o D R R : g n i t t e s e p y T l a i c n a n F i m o c . n g I I . i s e d s k r o w w w w S N O T A C N U M M O C N G S E D S K R O W E H T I : i n g s e D d n a t p e c n o C CT REIT 2014 ANNUAL REPORT 15 LOCATION LOCATION LOCATION + STRATEGIC FOCUS Canadian Tire Corporation always recognized the strategic importance and value of real estate. Guided by this insight, the company developed an exceptional in-house real estate team and, over decades, created a portfolio of real estate assets that would be impossible to replicate today. In 2013, CT REIT acquired most of those assets for our portfolio and we are uniquely positioned to extend CTC’s legacy of strategic real estate investing. Part of the Canadian Tire Family of Companies, CT REIT is entirely dedicated to real estate, to enhancing the value of our assets, to leveraging our access to CTC’s market insight and development pipeline and to delivering reliable, durable and growing distributions to our Unitholders. If location is the key to value in real estate, strategic focus is the key to value in real estate companies. www.ctreit.com C T R E I T 2 0 1 4 A n n u a l R e p o r t TORONTO, ONTARIO I C T R E T 2 0 1 4 A n n u a l R e p o r t 

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