CT Real Estate Investment Trust
Annual Report 2015

Plain-text annual report

C T R E I T 2 0 1 5 A N N U A L R E P O R T 2015 ANNUAL REPORT RELIABLE DURABLE GROWING ABOUT CT REIT CT Real Estate Investment Trust (CT REIT) (TSX: CRT.UN) is an unincorporated, closed-end real estate investment trust formed to own income producing commercial properties, primarily located in Canada. Its portfolio consists of 287 properties* totalling over 21.5 million square feet of gross leasable area (GLA), consisting primarily of retail properties located across Canada. Canadian Tire Corporation, Limited (CTC) is CT REIT’s most significant tenant. CT REIT aims to create long-term value by generating reliable and durable growth in adjusted funds from operations (AFFO) per Unit, and we benefit from our relationship with CTC, our principal tenant and largest Unitholder. This close alignment with one of Canada’s most respected, recognized and durable brands brings a competitive advantage to CT REIT’s growth strategy for our Unitholders. This alignment extends to the other CTC banners, including Sport Chek and Mark’s, and allows Unitholders to participate, together with CTC, in the successful real estate strategy that CTC has been pursuing and continually refining for many decades. * As of December 31, 2015. Diversified by Market Size1 Diversified by Geography1 % of annualized base minimum rent % of annualized base minimum rent 18% 8% 14% 68% 23% 42% Large urban (pop. >100,000) Medium (pop. 20,000 –100,000) Small (pop. <20,000) 27% 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, 2015. $0.68 Increased distributions to $0.68 per Unit 2, our second increase since our initial public offering (IPO) in 2013. Together with the first increase, this represents a cumulative increase of 4.6%. 2 On an annualized basis. 9.8% Delivered 9.8% growth in AFFO per Unit compared to 2014. 21.5 MILLION SQ. FT. Increased GLA to over 21.5 million square feet. BOWMANVILLE, ONTARIO WATERDOWN, ONTARIO WATERDOWN, ONTARIO STABILITY AND GROWTH CT REIT’s strategy for our Unitholders combines stability with growth. Stability comes through the strength of our structure, portfolio and balance sheet, and also our close alignment with our primary tenant. This strong foundation provides us with a distinct competitive advantage in pursuing growth. Reliable: CT REIT can provide reliable cash flows and monthly distributions because predictability is built into our operations. We have a 99 per cent occupancy rate, low lease turnover with a weighted average remaining lease term of 13.4 years, long-term average term to maturity on our debt of 11.2 years, and triple-net lease agreements, which help us easily forecast our performance for the vast majority of our portfolio. Our leases also include an annual average 1.5 per cent rent increase, so every year starts with contractual baseline growth. Durable: Our portfolio features exceptionally well- located retail properties across Canada, diversified by market size and geography, which helps mitigate risk and market volatility. Our durability is enhanced by our investment grade anchor tenant, CTC, which generated $12.3 billion in revenue in 2015 and accounts for 96.7 per cent of our annualized base minimum rents. Growing: CT REIT delivers growth in several ways: through contractual annual rate escalations; further acquisitions from CTC pursuant to our contractual right of first offer on any CTC real estate; acquisitions from third parties; intensification and redevelopment at existing properties; and development of new properties. The broad range of options in our ability to generate growth is one of CT REIT’s defining strengths. DEAR FELLOW UNITHOLDERS, We are pleased to share with you that in 2015, CT REIT kept its promise of providing an investment that is reliable, durable and growing. CT REIT delivered strong performance in a year marked by Target’s departure from Canada, volatile commodity prices and relatively weak economic conditions. At CT REIT, we keep a close eye on such events, but, as our results show, we were essentially unaffected by them. This speaks to the fundamental strengths of CT REIT: a predictable, low risk business model complemented by a compelling growth strategy; the alignment of interest we enjoy with our largest Unitholder and investment grade anchor tenant, Canadian Tire Corporation; a strong balance sheet; and a low cost structure – all supported by a strong governance framework. These strengths were demonstrated over the course of a year in which we successfully completed development initiatives, made accretive and strategic acquisitions, and delivered significant growth in our AFFO per Unit. The year 2015 also reinforced the advantages we enjoy through our relationship with CTC. After 94 years in business, CTC remains a market-leading innovator. It is successfully navigating the challenges and opportunities of an evolving multi-channel retail world, and real estate is an essential part of its strategy. CT REIT provides investors with an opportunity to participate in this strategy – and the market clearly sees this opportunity as well. A further recognition of CT REIT’s underlying strengths came in November, when our Board authorized the second increase in our annualized distribution, to $0.68 per Unit, which represents a cumulative 4.6% increase in distributions since our IPO. CT REIT was designed to deliver performance and stability across a wide range of economic circumstances. We look forward to 2016, anticipating exciting future developments – and with the constant aim that we will continue to reward our Unitholders for their confidence in us. EDMONTON, ALBERTA KEN SILVER Chief Executive Officer DAVID H. LAIDLEY, FCPA, FCA Independent Chairman of the Board Management’s Discussion and Analysis CT REIT Fourth Quarter and Full Year 2015 TABLE OF CONTENTS FORWARD-LOOKING DISCLAIMER 1.0 PREFACE 1.1 Basis of Presentation 1.2 Definitions 1.3 Accounting Estimates and Assumptions 1.4 Quarterly and Annual Comparisons in this MD&A 1.5 Non-GAAP and Operational Key Performance Indicators 1.6 Review and Approval by the Board of Trustees 1.7 Nature and Formation 2.0 GROWTH STRATEGY AND OBJECTIVES 3.0 OVERVIEW OF PROPERTY PORTFOLIO 3.1 Property Profile 3.2 Six Largest Urban Markets 3.3 Revenue by Region 3.4 Fair Value of Property Portfolio 3.5 2015 Investment Activities 3.6 Development Activities 3.7 Investment and Development Funding 3.8 Lease Maturities 3.9 Top 10 Tenants Excluding CTC Banners 4.0 RESULTS OF OPERATIONS 4.1 Summary of Selected Financial and Operational Information 4.2 Financial Results for the Three Months and Year Ended December 31, 2015 4.3 Property Revenue 4.4 Property Expense 4.5 Net Operating Income 4.6 General and Administrative Expense 4.7 Interest Income 4.8 Interest and Other Financing Charges 4.9 Fair Value Adjustment on Investment Properties 4.10 Income Tax Expense 4.11 Net Income 4.12 Leasing Activities 4.13 Recoverable Capital Costs 5.0 LIQUIDITY AND FINANCIAL CONDITION 5.1 Liquidity 5.2 Discussion of Cash Flows 5.3 Credit Ratings 3 4 4 4 4 4 4 4 4 5 5 5 6 7 7 9 10 10 11 12 13 13 14 14 14 14 15 16 16 16 17 17 17 17 17 17 18 18 CT REIT 2015 ANNUAL REPORT 1 18 20 20 21 21 21 22 22 22 22 22 23 23 24 25 25 26 26 27 27 27 27 29 29 29 29 30 30 31 33 34 TABLE OF CONTENTS (continued) 5.4 Debt and Capital Structure 5.5 Class C LP Units 5.6 Debentures Payable 5.7 Mortgages Payable 5.8 Bank Credit Facility 5.9 Capital Strategy 5.10 Commitments and Contingencies 5.11 Subsequent Events 5.12 Base Shelf Prospectus 6.0 EQUITY 6.1 Authorized Capital and Outstanding Units 6.2 Equity 6.3 Distributions 7.0 RELATED PARTY TRANSACTIONS 8.0 ACCOUNTING POLICIES AND ESTIMATES 8.1 Significant Areas of Estimation 8.2 New Standards Implemented 8.3 Standards, Amendments and Interpretations Issued and Not Yet Adopted 9.0 NON-GAAP AND OPERATIONAL KEY PERFORMANCE INDICATORS 9.1 Net Operating Income 9.2 Funds From Operations 9.3 Adjusted Funds From Operations 9.4 Earnings Before Interest and Other Financing Costs, Taxes and Fair Value Adjustments 9.5 Interest Coverage Ratio 9.6 Indebtedness Ratio 9.7 Debt to Enterprise Value Ratio 9.8 Book Value per Unit 9.9 Selected Quarterly Consolidated Information 10.0 ENTERPRISE RISK MANAGEMENT 11.0 INTERNAL CONTROLS AND PROCEDURES 12.0 FORWARD-LOOKING INFORMATION 2 CT REIT 2015 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS 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. CT REIT cannot provide any assurance that any forecasted financial or operational performance will actually be achieved or, if achieved, that it will result in an increase in the price of CT REIT’s units. See section 12.0 in this MD&A for a more detailed discussion of the REIT’s use of forward-looking statements. CT REIT 2015 ANNUAL REPORT 3 MANAGEMENT’S DISCUSSION AND ANALYSIS 1.0 Preface 1.1 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, 2015 (also referred to as “2015”) and should be read in conjunction with the REIT’s audited consolidated financial statements (“consolidated financial statements”) and accompanying notes for 2015 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 forward-looking information found in section 12.0 of this MD&A. Information about CT REIT, including the 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 by a link at ctreit.com. 1.2 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 terms refer to the glossary of terms in CT REIT’s Annual Report. 1.3 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 section 8.0 in this MD&A for further information. Financial data included in this MD&A includes material information as of February 16, 2016. Disclosure contained in this document is current to that date, unless otherwise noted. 1.4 Quarterly and Annual Comparisons in this MD&A Unless otherwise indicated, all comparisons of results for Q4 2015 (three months ended December 31, 2015) are against results for Q4 2014 (three months ended December 31, 2014) and comparisons of results for the year ended 2015 are against results for the year ended 2014. 1.5 Non-GAAP and Operational Key Performance Indicators Net operating income (“NOI”), same store NOI, same property 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. 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 section 9.0. 1.6 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 16, 2016. 1.7 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 83.8% effective interest in CT REIT as of December 31, 2015, 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. 4 CT REIT 2015 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS 2.0 Growth Strategy and Objectives The following section contains forward-looking information and users are cautioned that actual results may vary. 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 focused 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 13.6 years; 2. CT REIT has contractual arrangements with CTC whereby CT REIT has a right of first offer1 (“ROFO”) on all 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 continue to seek to use its relationship with CTC to obtain insights into potential real estate acquisitions and development opportunities in markets across Canada. 1 The initial term under the ROFO Agreement is 10 years and thereafter will continue in effect until such time as CTC ceases to hold a majority of the voting units, being the Units and Special Voting Units. 3.0 Overview of the Property Portfolio 3.1 Property Profile The property portfolio as at December 31, 2015 consists of 282 retail properties, two distribution centres, one mixed-use commercial property and two development properties acquired for future development (the “Properties”). The Properties are located in each of the provinces and in two territories across Canada. The retail properties, distribution centres and mixed-use commercial property contain approximately 21.5 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, 2015, CTC represented 98.0% of total operating GLA (December 31, 2014 – 97.9%) and 96.7% of annualized base minimum rent (December 31, 2014 – 96.4%). Occupancy of the REIT’s property portfolio, excluding properties under development, is as follows: (in square feet) Canadian Tire stores Distribution centres Mixed-use property Third party tenants Other CTC Banners1 Total 1 Includes Mark’s and various FGL Sports banners, including Sport Chek, Sports Experts and Atmosphere (referred to herein as “Other CTC Banners”). (in square feet) Canadian Tire stores Distribution centres Mixed-use property Third party tenants Other CTC Banners Total As at December 31, 2015 GLA Occupied GLA Occupancy 18,711,312 18,711,312 1,859,580 1,859,580 281,304 295,816 364,041 274,422 287,148 364,041 21,512,053 21,496,503 100% 100% 97.6% 97.1% 100% 99.9% As at December 31, 2014 GLA Occupied GLA Occupancy 17,642,796 17,642,796 1,859,580 1,859,580 281,304 293,956 280,484 270,594 281,513 280,484 20,358,120 20,334,967 100% 100% 96.2% 95.8% 100% 99.9% CT REIT 2015 ANNUAL REPORT 5 MANAGEMENT’S DISCUSSION AND ANALYSIS The REIT’s property portfolio consists of: As at Stand-alone 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 As at Gas bars at retail properties December 31, 2015 December 31, 2014 247 32 3 2 1 285 2 287 238 27 3 2 1 271 2 273 December 31, 2015 December 31, 2014 91 87 CT REIT’s properties, excluding properties under development, by region, as a percentage of total GLA as at December 31, 2015 are as follows: Properties by Region (% of Total GLA) 9.1% Ontario Quebec Western Atlantic 23.8% 27.4% 39.7% 3.2 Six Largest Urban Markets As at December 31, 2015, a significant portion of CT REIT’s properties, excluding those under development, are located in the following large urban December 31, 2015 December 31, 2014 19.1% 13.3% 3.9% 5.0% 1.6% 4.7% 47.6% 19.1% 13.0% 4.1% 5.3% 1.7% 3.9% 47.1% markets: As at Toronto Montreal Vancouver Ottawa Calgary Edmonton Percentage of Annualized Base Minimum Rent 6 CT REIT 2015 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS 3.3 Revenue by Region CT REIT’s Properties, excluding properties under development, are located across Canada with approximately 65.3% of annualized base minimum rent received in respect of properties in Ontario and Quebec. Properties by Region (% of Annualized Base Minimum Rent) 7.6% 27.1% 22.8% 42.5% Ontario Quebec Western Atlantic 3.4 Fair Value of Property Portfolio The fair value of the Properties represents 99.3% of the total assets of CT REIT as at December 31, 2015. Balance, beginning of year $3,995,860 $ 3,984 $3,999,844 $3,538,853 $ 9,011 $3,547,864 December 31, 2015 December 31, 2014 Income producing properties Properties under development Total investment properties Income producing properties Properties under development Total investment properties Property acquisitions (including transaction costs) 174,430 – 174,430 228,684 Intensifications Developments Development land Capitalized interest and property taxes Transfers Fair value adjustment on investment properties Straight-line rent Recoverable capital expenditures Dispositions Balance, end of year – – – – 53,840 39,910 26,131 14,834 (167) 28,939 25,983 8,767 390 (53,840) – – – – 28,939 25,983 8,767 390 – 39,910 26,131 14,834 (167) 11,951 – – – 29,414 141,221 28,685 17,052 – – – 19,963 3,982 442 (29,414) – – – – 228,684 11,951 19,963 3,982 442 – 141,221 28,685 17,052 – $4,304,838 $ 14,223 $4,319,061 $3,995,860 $ 3,984 $3,999,844 Properties under development (“PUD”) include: ‰ the development of vacant land and building construction, ‰ intensification activities consisting of the construction of additional buildings on existing assets, and modifications to existing stores, and ‰ the redevelopment of a property. At December 31, 2015, management’s determination of fair value was updated for current market assumptions, utilizing market capitalization rates provided by independent valuation professionals. On a periodic basis, CT REIT obtains independent valuations such that substantially all of the properties will be externally appraised over a four-year period. During 2015, independent appraisals were completed on 68 properties (2014 – 68 properties) having a fair value of $999,830. CT REIT 2015 ANNUAL REPORT 7 MANAGEMENT’S DISCUSSION AND ANALYSIS The significant inputs used to determine the fair value of CT REIT’s income producing investment properties are as follows: Number of properties Value at December 31, 2015 Discount rate Terminal capitalization rate Overall capitalization rate Hold period (years) Properties valued by the OCR method Properties valued by the DCF method 264 3,635,620 – – 6.36% – 21 640,680 6.70% 6.34% – 9 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 and discount rate, respectively: Rate sensitivity + 75 basis points + 50 basis points + 25 basis points Base rate - 25 basis points - 50 basis points - 75 basis points OCR Sensitivity DCF Sensitivity Fair value Change in fair value Fair value Change in fair value $ 3,271,687 $ (363,933) $ 574,670 $ (66,010) 3,384,182 3,505,130 (251,438) (130,490) 595,056 616,983 (45,624) (23,697) $ 3,635,620 $ – $ 640,680 $ – 3,777,035 3,930,573 141,415 294,953 666,398 694,317 25,718 53,637 $ 4,097,895 $ 462,275 $ 724,846 $ 84,166 Included in CT REIT’s investment properties are eight buildings which are situated on ground leases with remaining initial terms of between 3 and 40 years, and an average initial term of 16 years. Assuming all extension periods are exercised, the ground leases have terms between 26 and 51 years with an average remaining lease term of 37 years. 8 CT REIT 2015 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS 3.5 2015 Investment Activities The following table presents properties acquired, intensified or developed during 2015. (in thousands of Canadian dollars, except for GLA amounts) Property Location London, ON1 Prescott, ON1 Val-d’Or, QC1 Chambly, QC1 Strathmore, AB1 Dawson Creek, BC2 Edmonton, AB2 Kamloops, BC2 Aylmer, ON2 Miramichi, NB2 St. Paul, AB2 Hawkesbury, ON1 Montreal (Lasalle), QC1 Montreal (Pointe-aux-Trembles), QC1 South Edmonton Common, AB1, 3 Wallaceburg, ON1 Yarmouth, NS1 Dryden, ON2 Kemptville, ON2 Peace River, AB2 Roberval, QC2 St. John, NB2 Swift Current, SK2 Saskatoon, SK2 Martensville, SK4 High River, AB4 Selkirk, MB2 Waterdown, ON2 Vaughan, ON1 Total Total Investment Cost Transaction Date February 2015 February 2015 February 2015 February 2015 February 2015 March 2015 March 2015 March 2015 April 2015 April 2015 April 2015 June 2015 June 2015 June 2015 June 2015 June 2015 June 2015 June 2015 June 2015 June 2015 June 2015 June 2015 August 2015 September 2015 October 2015 October 2015 November 2015 November 2015 December 2015 GLA 105,075 37,731 90,225 51,322 39,271 21,487 20,464 10,529 3,132 5,173 5,436 65,848 88,382 78,464 185,997 27,852 54,236 2,783 5,030 1,452 3,003 3,699 22,504 5,953 48,611 54,142 16,003 22,000 92,602 1,168,406 $ 228,270 1 Acquisition of income producing property. 2 Intensification of existing asset; rent commences on the first day of the month, following the transaction date. 3 Located on ground lease. 4 Development project. In Q1 2015, CT REIT completed the acquisition of a stand-alone Canadian Tire store in each of Strathmore, Alberta, Prescott, Ontario and in Chambly and Val-d’Or, Quebec, a multi-tenant property anchored by a Canadian Tire store in London, Ontario and development lands in Martensville, Saskatchewan from CTC. The total cost of the six acquisitions, including transaction costs, was approximately $66.1 million. The REIT also completed the intensification of an existing Canadian Tire store in each of Dawson Creek and Kamloops, British Columbia and in Edmonton, Alberta. The total cost of the three intensifications was approximately $9.7 million. In Q2 2015, CT REIT completed the assignment of a ground lease in Edmonton, Alberta with a newly constructed stand-alone Canadian Tire store, the acquisition of a stand-alone Canadian Tire store in each of Hawkesbury and Wallaceburg, Ontario, Montreal (Lasalle), and Montreal (Pointe-aux-Trembles), Quebec and Yarmouth, Nova Scotia from CTC. The total cost of the six acquisitions, including transaction costs, was approximately $86.9 million. The REIT also completed the intensification of a Canadian Tire store in each of Peace River and St. Paul, Alberta, Aylmer, Dryden and Kemptville, Ontario, Roberval, Quebec and in Miramichi and St. John, New Brunswick. The total cost of the eight intensifications was approximately $3.9 million. In Q3 2015, CT REIT completed the acquisition of a redevelopment property in Arnprior, Ontario from a third party vendor, development lands in Innisfil, Ontario from CTC and lands adjoining an existing REIT owned retail property in each of Kelowna, British Columbia and Terrebonne, Quebec from a third CT REIT 2015 ANNUAL REPORT 9 MANAGEMENT’S DISCUSSION AND ANALYSIS party. The total cost of the four acquisitions, including transaction costs, was approximately $11.9 million. The REIT also completed the construction of two Other CTC Banner stores on an existing REIT owned property in Swift Current, Saskatchewan and the intensification of an existing Canadian Tire store in Saskatoon, Saskatchewan. The total cost of the two intensifications was approximately $6.0 million. In Q4 2015, CT REIT completed the acquisition of a Canadian Tire store in Vaughan, Ontario from CTC and lands adjoining an existing REIT owned retail property in St. Paul, Alberta from a third party. The total cost of the two acquisitions, including transaction costs, was approximately $25.3 million. The REIT also completed the development of a Canadian Tire store and Other CTC Banner store in High River, Alberta and a Canadian Tire store in Martensville, Saskatchewan. The expansion of an existing Other CTC Banner store and construction of a new Other CTC Banner store on an existing REIT owned property in Selkirk, Manitoba and the construction of two Other CTC Banner stores on an existing REIT owned property in Waterdown, Ontario were also completed by the REIT. The total cost of the two developments and two intensifications was $26.2 million. 3.6 Development Activities The following table provides details of the REIT’s development activities as at December 31, 2015. The total building area represents the maximum anticipated area of the developments. The “Not Committed to Lease” column includes area which may be under construction but not committed to lease, depending on site specific circumstances. The “Committed Additional Investment” column represents the financial commitment required to complete the “Committed to Lease” area and related site works. The “Potential Future Investment” column is an estimate and represents the remaining costs to complete the entire development assuming the “Not Committed to Lease” area is leased and fully constructed. Building Area (in square feet) Total investment (in thousands of Canadian dollars) Anticipated Date of Completion Committed to Lease Not Committed to Lease Total Incurred To-date Committed Additional Investment Potential Future Investment Total Q1 2016 4,000 Q2 2016 49,000 – – 4,000 49,000 Q4 2016 Q4 2016 – – 19,000 19,000 10,000 10,000 Q4 2016 124,000 9,000 133,000 177,000 38,000 215,000 $ 14,223 $ 16,770 $ 8,759 $ 39,752 Property Repentigny, QC2 Innisfil, ON1 Martensville, SK2 High River, AB2 Arnprior, ON3 TOTAL 1 Development of vacant land. 2 Intensification of an existing income producing property. 3 Redevelopment property. Arnprior Mall is a redevelopment property, with an existing GLA of 114,022 square feet and an occupancy rate of 57.0% including third party tenants and Other CTC banners of 58,671 square feet and 5,841 square feet, respectively, as at December 31, 2015. Arnprior Mall is being redeveloped to include a 43,222 square foot Canadian Tire store which will significantly improve the occupancy rate of this property. The third party leasing at Martensville, High River and Arnprior is ongoing and CT REIT is currently in discussions with prospective tenants. As at December 31, 2015, CT REIT had intensification and development activities occurring at five investment properties representing 177,000 square feet, of which 56% has been leased to CTC. A total of $14,223 has been expended on these developments and CT REIT anticipates investing an additional $16,770 to complete the development of the 177,000 square feet. 3.7 Investment and Development Funding Funding for the Q4 2015 investment and development activities was as follows: (in thousands of Canadian dollars) Funded with working capital to CTC Funded with working capital to third parties1 Issuance of Class B LP Units to CTC Issuance of Class C LP Units to CTC Mortgages assumed Total costs 1 Includes $3.7 million for the construction of stores for Other CTC Banners. 10 CT REIT 2015 ANNUAL REPORT Q4 2015 Investment and Development Activity Property investments Development land Developments Intensifications Total $ 8,000 $ – $ 14,060 $ 460 $ 22,520 780 – 16,550 – 32 – – – 1,741 2,348 – – – – – – 4,901 – 16,550 – $ 25,330 $ 32 $ 15,801 $ 2,808 $ 43,971 MANAGEMENT’S DISCUSSION AND ANALYSIS Funding for the year ended December 31, 2015 of investment and development activities was as follows: (in thousands of Canadian dollars) Funded with working capital to CTC Funded with working capital to third parties1 Issuance of Class B LP Units to CTC Issuance of Class C LP Units to CTC Mortgages assumed Total costs 2015 Investment and Development Activity Development Property investments $ 41,955 $ 1,095 99,830 31,550 – land Developments Intensifications Total 1 627 – 8,139 – $ 14,060 $ 15,103 $ 71,119 8,966 13,836 – – 2,957 – – – 24,524 99,830 39,689 2,957 $ 174,430 $ 8,767 $ 25,983 $ 28,939 $ 238,119 1 Includes $17.7 million for the construction of stores for Other CTC Banners. Funding for the year ended December 31, 2014 of investment and development activities was 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 3.8 Lease Maturities 2014 Investment and Development Activity Property investments Development land Developments Intensifications Total $ 31,479 $ – $ 19,929 $ 11,951 $ 63,359 71,267 19,464 47,279 59,195 3,982 – – – 34 – – – – – – – 75,283 19,464 47,279 59,195 $ 228,684 $ 3,982 $ 19,963 $ 11,951 $ 264,580 CTC is CT REIT’s largest tenant. As at December 31, 2015 CTC, including all CTC Banners, had leased over 21.1 million square feet of GLA, with approximately 89% 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 13.6 years, excluding the exercise of any renewals. The weighted average term of the Canadian Tire store leases is 13.6 years, with a weighted average rental rate of $13.20 per square foot. The weighted average lease term of the distribution centres, which are both leased by CTC, is 14.2 years. The weighted average lease term of all tenants in the REIT’s portfolio, excluding those in development properties, is 13.4 years. The following graph presents as of December 31, 2015, the lease maturity profile from 2016 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 ANNUALIZED MINIMUM RENT AND GLA1,2,3 Annualized Base Minimum Rent 18.0% 16.5% Square Feet (millions) 5.0 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 6.6% 5.3% 2.0% 0.4% 0.3% 0.3% 0.4% 1.3% 0.1% 0.3% 11.8% 7.7% 9.6% 7.7% 7.6% 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 .5 .0 8.7% 7.4% 5.1% 1.0% 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 Notes: 1 Excludes development properties 2 Total base minimum rent excludes contractual escalation 3 Canada Square is included at the REIT’s one-thid share of leasehold interest CT REIT 2015 ANNUAL REPORT 11 MANAGEMENT’S DISCUSSION AND ANALYSIS 3.9 Top 10 Tenants Excluding CTC Banners As at December 31, 2015, CT REIT’s 10 largest tenants, excluding CTC Banners and those located in properties under development, as represented by the percentage of total annualized base rental revenue, are: Percentage of Total Annualized Base Rental Revenue 0.33% 0.28% 0.24% 0.24% 0.20% 0.18% 0.17% 0.16% 0.16% 0.14% 2.1% 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 Boston Pizza 12 CT REIT 2015 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS 4.0 Results of Operations 4.1 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 sections 1.0 and 9.0. (in thousands of Canadian dollars, except per Unit, Unit and square footage amounts) Three Months Ended Year Ended For the periods ended December 31, 2015 2014 Change 2015 2014 Change Property revenue Income before interest and other financing charges, taxes and fair value adjustments1 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 – paid2,7 AFFO payout ratio1 Excess of AFFO over distributions: Cash retained from operations before distribution reinvestment6 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 Total indebtedness1 Book value per Unit1,2 Market price per Unit – Close (end of period) OTHER DATA Weighted average interest rate Indebtedness ratio1 Interest coverage (times)1 Debt / enterprise value ratio1 Gross leaseable area5 Occupancy rate5 $ $ $ $ $ $ $ $ $ $ $ $ $ 96,599 $ 89,212 8.3% $ 378,180 72,225 $ 68,130 $ 62,824 $ 0.331 $ 0.257 $ 50,027 $ 0.264 $ 38,995 $ 0.206 $ 0.166 $ 81% 67,699 62,115 53,711 0.296 0.222 46,528 0.256 34,657 0.191 0.163 85% 6.7% $ 9.7% $ 17.0% $ 11.8% $ 15.8% $ 7.5% $ 3.1% $ 281,904 265,350 234,480 1.251 0.972 194,711 1.038 12.5% $ 151,660 7.9% $ 2.0% $ (4.7)% 0.808 0.663 82% 7,572 $ 0.040 $ 5,170 0.028 46.5% $ 42.9% $ 27,588 0.147 $ $ $ $ $ $ $ $ $ $ $ $ $ 344,791 9.7% 260,031 239,648 8.4% 10.7% 318,261 (26.3)% 1.762 1.203 176,798 0.979 132,866 0.736 0.650 88% (29.0)% (19.2)% 10.1% 6.0% 14.1% 9.8% 2.0% (6.8)% 15,520 0.086 77.8% 70.9% 189,582,380 181,468,432 318,214,711 334,627,758 189,674,625 181,524,387 4.5% (4.9)% 4.5% 3.26 3.18 2.5% 187,511,930 180,599,151 321,729,709 332,346,061 187,607,169 180,643,636 189,600,687 181,485,782 $ $ $ $ 4,350,903 2,095,045 11.67 13.00 $ $ $ $ 4,017,420 1,983,773 11.03 12.31 4.22% 48.2% 3.23 45.9% 4.31% 49.4% 3.13 47.0% 21,512,053 20,358,120 99.9% 99.9% 3.8% (3.2)% 3.9% 4.5% 8.3% 5.6% 5.8% 5.6% (2.1)% (2.4)% 3.2% (2.3)% 5.7% —% 1 Non-GAAP key performance indicators. Refer to section 9.0 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 section 6.0. 5 Refers to retail, mixed-use commercial and distribution centre properties and excludes properties under development. 6 Refer to section 6.0 for further information. 7 Period-over-period percentage change is calculated based on exact fractional amounts rather than rounded fractional amounts. CT REIT 2015 ANNUAL REPORT 13 MANAGEMENT’S DISCUSSION AND ANALYSIS 4.2 Financial Results for the Three Months and Year Ended December 31, 2015 (in thousands of Canadian dollars) For the periods ended December 31, Property revenue Property expense General and administrative expense Interest income Interest and other financing charges Fair value adjustment on investment properties Three Months Ended Year Ended 2015 2014 Change 2015 2014 $ 96,599 $ 89,212 (21,789) (2,671) 86 (22,132) 12,731 (19,338) (2,196) 8.3% 12.7% 21.6% 21 309.5% (21,293) 7,305 3.9% 74.3% $ 378,180 $ 344,791 (86,856) (9,652) 232 (87,334) 39,910 (76,677) (8,433) 350 (82,991) 141,221 Net income and comprehensive income $ 62,824 $ 53,711 17.0% $ 234,480 $ 318,261 Change 9.7% 13.3% 14.5% (33.7)% 5.2% (71.7)% (26.3)% 4.3 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 the three months ended December 31, 2015 increased $7,387 (8.3%) compared to the same period in the prior year primarily due to base rent related to properties acquired and intensification activities completed during 2015 and 2014. Total revenue included expense recoveries in the amount of $20,861 (Q4 2014 – $17,946). Total revenue for the year ended December 31, 2015 was $378,180 which was $33,389 (9.7%) higher compared to the same period in the prior year primarily due to base rent related to properties acquired and intensification activities completed during 2015 and 2014. Total revenue included expense recoveries in the amount of $82,083 (2014 – $71,910). The total amount of base rent 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, 2015, straight-line rent of $6,702 (Q4 2014 – $7,843) was included in total property revenue. For the year ended December 31, 2015, straight-line rent was $26,131 (2014 – $28,685). 4.4 Property Expense The major components of property expense consist of property taxes and costs associated with the outsourcing of property management services pursuant to the Property Management Agreement as well as other costs. The majority of expenses are recoverable from tenants, with CT REIT absorbing these expenses to the extent of vacancies. The Property Management Agreement provides for services to the REIT to be on a cost recovery basis with a fixed maximum fee not to exceed $2,336 for the year ended December 31, 2015. Refer to section 7.0 for additional information on the Property Management Agreement. Property expenses for the three months ended December 31, 2015 increased $2,451 (12.7%) compared to the same period in the prior year primarily due to property acquisitions. Property expenses for the year ended December 31, 2015 increased $10,179 (13.3%) compared to the same period in the prior year primarily due to property acquisitions. 4.5 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 has control. NOI is also a key input in determining the value of the portfolio. (in thousands of Canadian dollars) For the periods ended December 31, Property revenue Less: Property expense Straight-line rent adjustment Add: Three Months Ended Year Ended 2015 2014 Change 2015 2014 $ 96,599 $ 89,212 8.3% $ 378,180 $ 344,791 (21,789) (6,702) (19,338) (7,843) 12.7% (14.5)% (86,856) (26,131) (76,677) (28,685) Straight-line land lease expense 22 84 (73.8)% 157 219 Net operating income1 $ 68,130 $ 62,115 9.7% $ 265,350 $ 239,648 1 Non-GAAP key performance measure. Refer to section 9.1 in this MD&A for further information. 14 CT REIT 2015 ANNUAL REPORT Change 9.7% 13.3% (8.9)% (28.3)% 10.7% MANAGEMENT’S DISCUSSION AND ANALYSIS (in thousands of Canadian dollars) For the periods ended December 31, Three Months Ended Year Ended 2015 2014 Change2 2015 2014 Change2 Same store Intensifications 2015 2014 Same property Acquisitions 2015 2014 $ 63,779 $ 61,678 3.4% $ 237,423 $ 231,395 260 244 — 110 NM 121.8% 713 966 — — $ 64,283 $ 61,788 4.0% $ 239,102 $ 231,395 3,342 505 — 327 NM 54.4% 7,717 18,531 — 8,253 Net operating income1 $ 68,130 $ 62,115 9.7% $ 265,350 $ 239,648 1 Non-GAAP key performance measure. Refer to section 9.1 in this MD&A for further information. 2 NM–not meaningful. 2.6% NM NM 3.3% NM 124.5% 10.7% NOI for the three months ended December 31, 2015 increased $6,015 (9.7%) compared to the same period in the prior year primarily due to the acquisition of income producing properties completed in 2015 and 2014, which contributed $3,520 to NOI growth. Same store NOI and same property NOI for the three months ended December 31, 2015 increased $2,101 (3.4%) and $2,495 (4.0%), respectively, when compared to the prior year for the following reasons: ‰ contractual rent escalations of 1.5% per year, on average, contained within the Canadian Tire store leases, which are generally effective January 1st, contributed $842 to NOI growth; ‰ increase in the recovery of operating expenses which increased NOI by $673; ‰ recovery of capital expenditures and interest earned on the unrecovered balance contributed $546 to NOI growth; and ‰ intensifications completed in 2015 and 2014 contributed $394 to NOI growth. NOI for the year ended December 31, 2015 increased $25,702 (10.7%) compared to the same period in the prior year primarily due to acquisition of income producing properties completed in 2015 and 2014, which contributed $17,995 to NOI growth. Same store NOI and same property NOI for the year ended December 31, 2015 increased $6,028 (2.6%) and $7,707 (3.3%), respectively, when compared to the prior year for the following reasons: ‰ contractual rent escalations of 1.5% per year, on average, contained within the Canadian Tire store leases, which are generally effective January 1st, contributed $3,235 to NOI growth; ‰ recovery of capital expenditures and interest earned on the unrecovered balance contributed $2,124 to NOI growth; ‰ intensifications completed in 2015 and 2014 contributed $1,679 to NOI growth; and ‰ increase in the recovery of operating expenses which increased NOI by $440. 4.6 General and Administrative Expense CT REIT has two broad categories of general and administrative expenses: i) personnel and public entity costs, and ii) outsourced costs. The personnel and public entity costs reflect the expenses related to ongoing operations of CT REIT which will fluctuate depending on when such expenses are incurred. The outsourced 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 not to exceed $3,334 for the year ended December 31, 2015. Refer to section 7.0 for additional information on the Services Agreement. (in thousands of Canadian dollars) For the periods ended December 31, Services Agreement with CTC Personnel expense Other General and administrative expense $ 2,671 $ 2,196 As a percent of property revenue 2.8% 2.5% Three Months Ended Year Ended 2015 $ 834 $ 1,099 738 2014 816 618 762 Change 2.2% 77.8% (3.1)% 21.6% 12.0% 2015 2014 Change $ 3,334 $ 3,288 3,908 2,410 2,134 3,011 $ 9,652 $ 8,433 2.6% 2.4% 1.4% 83.1% (20.0)% 14.5% 8.3% General and administrative expenses amounted to $2,671 or 2.8% of property revenue for the three months ended December 31, 2015 which is $475 (21.6%) higher compared to the same period in the prior year primarily due to: ‰ increased compensation costs; and ‰ the recognition of a deferred tax asset in 2014 in connection with CT REIT GP Corp’s (“GP’) activities, partially offset by: ‰ lower transfer agency and filing fees. CT REIT 2015 ANNUAL REPORT 15 MANAGEMENT’S DISCUSSION AND ANALYSIS General and administrative expenses amounted to $9,652 or 2.6% of property revenue for the year ended December 31, 2015 which is $1,219 (14.5%) higher compared to the same period in the prior year primarily due to: ‰ increased compensation costs; and ‰ income tax expense recorded in 2015 in connection with CT REIT GP Corp’s (“GP”) activities which resulted in a drawdown of the REIT’s deferred tax asset; partially offset by: ‰ lower transfer agency and filing fees, and ‰ decreased due diligence costs. 4.7 Interest Income Interest income for the three months ended December 31, 2015 increased by $65 as compared to the same period in the prior year due to an increase in cash available to be invested in short-term deposits. Interest income for the year ended December 31, 2015 decreased by $118 (33.7%) as compared to the prior year due to a decrease in the average cash balance available to be invested in short-term deposits. 4.8 Interest and Other Financing Charges The Partnership has issued 1,686,968 Class C LP Units with a face value of $1,686,968 and bearing a weighted average distribution rate of 4.50% 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 and other financing charges in the consolidated statements of income and comprehensive income. (in thousands of Canadian dollars) For the periods ended December 31, Interest on Class C LP Units1 Interest on debentures payable Interest on mortgages payable Interest on Bank Credit Facility Bank Credit Facility costs Amortization of debentures payable financing cost Less: capitalized interest Three Months Ended Year Ended 2015 2014 Change 2 2015 2014 Change 2 $ 18,864 $ 20,515 2,833 406 – 130 56 22,289 (157) – 407 246 162 – 21,330 (8.0)% NM (0.2)% (100.0)% (19.8)% NM 4.5% (37) 324.3% $ 78,318 $ 81,643 6,359 1,631 647 638 131 87,724 (390) – 652 355 674 – 83,324 (333) (4.1)% NM 150.2% 82.3% (5.3)% NM 5.3% 17.1% 5.2% Interest and other financing charges $ 22,132 $ 21,293 3.9% $ 87,334 $ 82,991 1CTC elected to defer receipt of distributions on the Series 2-12 Class C LP Units for the three months and year ended December 31, 2015 in the amount of $18,765 (Q4 2014 - $18,765) and $68,805 (YTD 2014 – $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. 2NM–not meaningful Interest and other financing charges for the three months ended December 31, 2015 was $839 (3.9%) higher compared to the same quarter in the prior year largely due to the debentures issued in June 2015 and mortgages assumed, partially offset by the redemption of Series 1 Class C LP Units. Interest and other financing charges for the year ended December 31, 2015 was $4,343 (5.2%) higher compared to the prior year largely due to the debentures issued in June 2015, timing of mortgages assumed in 2014 and draws on the $200 million revolving credit facility (“Bank Credit Facility”) partially offset by the redemption of Series 1 Class C LP Units. 4.9 Fair Value Adjustment on Investment Properties CT REIT recorded a fair value gain on investment properties of $12,731 for the three months ended December 31, 2015 principally due to increased future cash flows and market updates, such as capitalization rate changes. The fair value gain for the year ended December 31, 2015 of $39,910 relates to increased future cash flows and the preceding factors impacting the fourth quarter fair value gain partially offset by transaction costs incurred in connection with the acquisition of investment properties. During 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 external appraisers, which gave rise to a fair value adjustment of $123,099 in Q1 2014; management had previously placed greater weight on the valuations implied by the initial public offering which closed on October 23, 2013. In addition, fair value gains of $7,305 and $141,221 for the three months and year ended December 31, 2014, respectively, were recorded as a result of increased cash flows partially offset by transaction costs incurred in connection with the acquisition of investment properties. 16 CT REIT 2015 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS 4.10 Income Tax Expense Management operates CT REIT in a manner that enables the REIT to continue to qualify as a real estate investment trust 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 section 10.0 for additional information on CT REIT’s Enterprise Risk Management Program (“ERM Program”). 4.11 Net Income (in thousands of Canadian dollars) For the periods ended December 31, Three Months Ended Year Ended 2015 2014 % Change 2015 2014 % Change Net income and comprehensive income $ 62,824 $ 53,711 17.0% $ 234,480 $ 318,261 Net income per Unit – basic Net income per Unit – diluted $ 0.331 $ 0.257 $ 0.296 $ 0.222 11.8% 15.8% $ $ 1.251 0.972 $ $ 1.762 1.203 (26.3)% (29.0)% (19.2)% Net income increased by $9,113 (17.0%) and net income per Unit – diluted increased $0.035 (15.8%) for the three months ended December 31, 2015 compared to the same period in the prior year primarily due to increased NOI due to acquisitions and an increased fair value adjustment on investment properties. Full year net income decreased $83,781 (26.3%) and net income per Unit – diluted decreased $0.23 (19.2%) over the prior year primarily due to a reduced fair value adjustment on investment properties in 2015 partially offset by increased NOI due to acquisitions. 4.12 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 significant leasing activity with tenants not related to CTC during the year ended December 31, 2015. 4.13 Recoverable Capital Costs Many of the capital costs 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 thereof 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 $3,591 and $14,834 (Q4 2014 – $6,188 and YTD 2014 – $17,052) were incurred during the three months and year ended December 31, 2015, respectively. Most of the REIT’s recoverable capital expenditures relates to parking lots, roofs and heating, ventilation and air conditioning activities that are typically seasonal. 5.0 Liquidity and Financial Condition The following section contains forward-looking information and users are cautioned that actual results may vary. 5.1 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 (iv) assumption of existing debt, and/or (v) other long-term financing. (in thousands of Canadian dollars) As at Cash and cash equivalents Unused portion of Bank Credit Facility Liquidity December 31, 2015 December 31, 2014 $ 24,680 199,689 $ 2,710 122,000 $ 224,369 $ 124,710 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 (other sources being interest income as well as cash on hand). (in thousands of Canadian dollars) For the periods ended December 31, Cash generated from operating activities Cash used for investing activities Cash used for financing activities Cash generated/(used) in the year Year Ended 2015 2014 Change $ 265,400 $ 233,789 13.5% (102,830) (157,543) (34.7)% (140,600) (120,535) 16.6% $ 21,970 $ (44,289) NM CT REIT 2015 ANNUAL REPORT 17 MANAGEMENT’S DISCUSSION AND ANALYSIS 5.2 Discussion of Cash Flows Cash generated during the year ended December 31, 2015 of $21,970, is primarily the result of: ‰ cash generated from operating activities exceeding distributions and interest paid; and ‰ proceeds from the issuance of debentures payable was more than offset by the redemption of the Class C LP Units, the repayment of the Bank Credit Facility and the funding of investing activities. 5.3 Credit Ratings CT REIT and the Partnership are rated by Standard & Poor’s Financial Services LLC (“S&P”) and DBRS Limited (“DBRS”), respectively, two independent credit rating agencies 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 and the Partnership’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 CT REIT and CTC. The following table sets out the current credit ratings of CT REIT and the Partnership: Credit Ratings (Canadian Standards) Issuer rating 5.4 Debt and Capital Structure CT REIT’s debt and capital structure is as follows: (in thousands of Canadian dollars) As at Class C LP Units Mortgages payable Debentures payable Bank Credit Facility Total indebtedness Unitholders’ equity Non-controlling interests Total capital under management DBRS S&P Credit Rating BBB (high) Trend Credit Rating Stable BBB+ Trend Stable December 31, 2015 December 31, 2014 $ 1,686,968 $ 1,847,279 60,129 347,948 – 58,494 – 78,000 $ 2,095,045 $ 1,983,773 1,037,209 1,176,154 982,588 1,019,601 $ 4,308,408 $ 3,985,962 CT REIT’s total indebtedness at December 31, 2015 is higher than at December 31, 2014 primarily due to the issuance of $350,000 of senior unsecured debentures (the “Debentures”), partially offset by the repayment of the REIT’s Series 1 Class C LP Units of $200,000 and its Bank Credit Facility by $78,000. CT REIT’s Unitholders’ equity and non-controlling interests at December 31, 2015 increased as compared to December 31, 2014 primarily as a result of net income exceeding distributions and due to the issuance of Class B LP Units. Future payments in respect of CT REIT’s indebtedness are as follows: (in thousands of Canadian dollars) For the period ending December 31: 2016 2017 2018 2019 2020 2021 and thereafter Total contractual obligation Unamortized portion of mark to market on mortgages payable assumed in connection with the acquisition of properties Unamortized transaction costs 18 CT REIT 2015 ANNUAL REPORT Mortgages Payable Principal Amortization Maturities Class C LP Units Debentures Payable Bank Credit Facility Total $ 1,199 $ 2,875 $ 200,000 $ 1,240 422 – – – – 70,418 – – 216,550 16,661 37,626 – – 1,200,000 350,000 – – – – – $ – $ 204,074 – – – – – 71,658 17,083 37,626 216,550 1,550,000 $ 2,861 $ 57,162 $ 1,686,968 $ 350,000 $ – $ 2,096,991 – – 282 (176) – – – (2,052) – – 282 (2,228) $ 2,861 $ 57,268 $ 1,686,968 $ 347,948 $ – $ 2,095,045 MANAGEMENT’S DISCUSSION AND ANALYSIS Interest rates on CT REIT’s indebtedness range from 1.65% to 5.00%. The maturity dates on the indebtedness range from May 31, 2016 to May 31, 2038. Total indebtedness at December 31, 2015 has a weighted average interest rate of 4.22%, which is consistent with the rate as at September 30, 2015. At December 31, 2015, floating rate and fixed rate indebtedness were $31,133 and $2,063,912, respectively. As at Variable rate debt Total indebtedness Variable rate debt / total indebtedness December 31, 2015 December 31, 2014 $ 31,133 $ 109,133 $ 2,095,045 $ 1,983,773 1.49% 5.50% CT REIT’s variable rate debt to total indebtedness ratio at December 31, 2015, decreased as compared to December 31, 2014 due to the repayment of the Bank Credit Facility and the increase in long term debt due to the issuance of the Debentures, partially offset by the redemption of $200,000 Class C LP Units. The following table presents the contractual obligations of CT REIT’s financial liabilities: Class C LP Units1 Payments on Class C LP Units1 Debentures payable Interest on debentures payable Mortgages payable Ground lease payments Other Liabilities Interest on mortgages payable Distributions payable2 Payable on Class C LP Units, net of loans receivable Payments Due by Period Total 2016 2017 2018 2019 2020 2021 and thereafter $ 1,686,968 $ 200,000 $ 70,418 $ – $ – $ 216,550 $ 1,200,000 71,772 68,007 67,401 67,401 61,917 990,665 350,000 94,820 60,023 54,592 24,636 11,497 10,745 6,288 – – 11,332 11,332 4,074 3,680 23,155 3,318 10,745 6,288 1,240 3,704 1,481 3,246 – – – 11,332 17,083 3,704 – – 11,332 37,626 3,477 – 2,701 2,232 – – – – – 11,332 – 654,167 350,000 38,160 – 3,423 36,604 – – – – – – – – TOTAL $ 3,290,234 $ 334,364 $ 159,428 $ 102,221 $ 122,068 $ 293,222 $ 2,278,931 1 Assume redemption on expiry of initial fixed rate period for each series. 2 On Units and Class B LP Units. 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, 2015: (in thousands of Canadian dollars, except percentage amounts) Unencumbered assets Encumbered assets Total Number of Properties 281 6 287 Fair Value of Investment Properties $ 4,186,062 132,999 Percentage of Total Assets 96.2% 3.1% Mortgages Payable $ – 60,129 $ 4,319,061 99.3% $ 60,129 Loan to Value Ratio – 45.2% 1.4% The table below presents CT REIT’s secured debt as a percentage of total indebtedness: (in thousands of Canadian dollars) As at Secured debt Total indebtedness Secured debt / total indebtedness The table below presents CT REIT’s indebtedness to EBITFV ratio: (in thousands of Canadian dollars) As at Total indebtedness EBITFV1 Total indebtedness / EBITFV 1 Non-GAAP key performance indicator. Refer to section 9.0 for further information. December 31, 2015 December 31, 2014 $ 60,129 $ 58,494 2,095,045 1,983,773 2.87% 2.95% December 31, 2015 December 31, 2014 $ 2,095,045 $ 1,983,773 281,904 260,031 7.43 7.63 CT REIT 2015 ANNUAL REPORT 19 MANAGEMENT’S DISCUSSION AND ANALYSIS 5.5 Class C LP Units At December 31, 2015 there were 1,686,968 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 4.50% of the aggregate capital amount ascribed to the Class C LP Units, in priority to distributions made to holders of Class B LP Units and 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. 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’ prior 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. 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. During the five-year period beginning immediately following the completion of the Initial Fixed Rate Period, and each five-year period thereafter, if not redeemed, 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. The following table presents the details of the Class C LP Units: Series of Class C LP Units Series 2 Series 3 Series 4 Series 5 Series 6 Series 7 Series 8 Series 9 Series 10 Series 11 Series 12 Series 13 Series 14 Series 15 Series 16 Total / weighted average Current Non-current Total 5.6 Debentures Payable Series Series A, 2.85%, June 9, 2022 Series B, 3.53%, June 9, 2025 Annual Distribution Rate During Initial Fixed Rate Period 3.50% 4.50% 4.50% 4.50% 5.00% 5.00% 5.00% 5.00% 2.38% 2.20% 2.23% 1.65% 1.71% 1.77% 2.42% 4.50% Expiry of Initial Fixed Rate Period May 31, 2016 (0.4 years) May 31, 2020 (4.4 years) May 31, 2024 (8.4 years) May 31, 2028 (12.4 years) May 31, 2031 (15.4 years) May 31, 2034 (18.4 years) May 31, 2035 (19.4 years) May 31, 2038 (22.4 years) May 31, 2017 (1.4 years) May 31, 2017 (1.4 years) May 31, 2017 (1.4 years) May 31, 2017 (1.4 years) May 31, 2017 (1.4 years) May 31, 2017 (1.4 years) May 31, 2020 (4.4 years) % of Total Class C LP Units 11.9% 11.9% 11.9% 11.9% 11.9% 11.9% 11.9% 11.9% 0.4% 1.2% 1.1% 0.2% 0.8% 0.2% 0.9% 12.1 years 100% Initial Subscription Price ($000) $ 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 7,130 20,685 19,464 3,789 15,000 4,350 16,550 $ 1,686,968 $ 200,000 1,486,968 $ 1,686,968 December 31, 2015 December 31, 2014 Face Value Carrying Amount Face Value Carrying Amount $ 150,000 $ 149,159 200,000 198,789 $ 350,000 $ 347,948 $ – – $ – $ – – $ – On June 9, 2015, CT REIT issued $350,000 aggregate principal amount of Debentures. The proceeds, net of issuance costs of $2,184, were used to indirectly redeem the Series 1 Class C LP Units held by CTC, to pay down certain amounts then outstanding under the Bank Credit Facility, and the balance of the proceeds was retained for general business purposes. 20 CT REIT 2015 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS For the three months and year ended December 31, 2015, amortization of the transaction costs of $56 and $131 (Q4 2014 – $nil and 2014 – $nil) is included in interest and other financing charges on the consolidated statement of income and comprehensive income (see Note 19). The Debentures have been rated “BBB+” by S&P and “BBB (high)” by DBRS. The Debentures are direct senior unsecured obligations of CT REIT. 5.7 Mortgages Payable Mortgages payable, secured by certain of CT REIT’s investment properties, include the following: (in thousands of Canadian dollars) As at Current Non-current Total December 31, 2015 December 31, 2014 Face value Carrying amount Face value Carrying amount $ 4,074 $ 4,176 $ 1,158 $ 1,275 55,949 55,953 57,148 57,219 $ 60,023 $ 60,129 $ 58,306 $ 58,494 During the third quarter 2015, the REIT assumed a mortgage payable, due in May 2016, totaling $2,955 with an annual interest rate of 2.50%. 5.8 Bank Credit Facility The Partnership has a $200,000, revolving Bank Credit Facility with an option to request an increase of an additional $100,000. The Bank Credit Facility is available to the Partnership until July 2020. 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, 2015, there were no cash advances under the Bank Credit Facility (December 31, 2014 – $78,000). The unamortized balance of transaction costs incurred in connection with the arrangement of the Bank Credit Facility of $283 (December 31, 2014 – $434) is recorded in other assets on the condensed consolidated balance sheets. The table below summarizes the details of the Bank Credit Facility as at December 31, 2015: (in thousands of Canadian dollars) Bank Credit Facility Maximum Loan Amount $ 200,000 Cash Advances Letters of Credit Available to be Drawn $ – $ 311 $ 199,689 The following section contains forward-looking information and users are cautioned that actual results may vary. 5.9 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 and the Trust Indenture limit the REIT’s overall indebtedness ratio to 60% of total aggregate assets, excluding convertible debentures, and 65% including convertible debentures. CT REIT’s indebtedness ratio was 48.2% as at December 31, 2015. Refer to section 9.0 for the definition and calculation of CT REIT’s indebtedness ratio. At December 31, 2015, CT REIT was in compliance with the financial and non-financial covenants contained in the Declaration of Trust, and the Trust Indenture dated June 9, 2015 pursuant to which the Debentures were issued, the Bank Credit Facility agreement and the mortgages payable agreements. CT REIT has also adopted interest coverage guidelines which provide an indication of the REIT’s 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 three months ended December 31, 2015, CT REIT’s interest coverage ratio was 3.3 times. Refer to section 9.0 for the definition and calculation of CT REIT’s interest coverage ratio. CT REIT 2015 ANNUAL REPORT 21 MANAGEMENT’S DISCUSSION AND ANALYSIS Assuming a future economic environment that is substantially similar to the current environment, management does not foresee any material impediments to refinancing future debt maturities. The following section contains forward-looking information and users are cautioned that actual results may vary. 5.10 Commitments and Contingencies As at December 31, 2015, CT REIT has obligations for approximately $63,070 (December 31, 2014 – $18,530) in future payments for the committed acquisitions and the completion of developments which are expected to be incurred in 2016. Included in the commitments are $58,208 due to CTC. 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. 5.11 Subsequent Events The Initial Fixed Rate Period of the Series 2 Class C LP Units expires on May 31, 2016. CT REIT has delivered a notice of redemption to CTC, the holder of such Class C LP Units. 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, 2016. During February 2016, CT REIT completed three investment property acquisitions from CTC. The total purchase price of approximately $45,450 was fully satisfied by issuances of Class B and Class C LP Units. 5.12 Base Shelf Prospectus CT REIT filed a base shelf prospectus in Q1 2015 under which it may raise up to $1.5 billion of debt and equity capital over the 25 month period ending April 4, 2017. In Q2 2015, the REIT issued $350,000 of senior unsecured debentures payable. The shelf also qualifies the sale of CT REIT Units by CTC. 6.0 Equity 6.1 Authorized Capital and Outstanding Units CT REIT is authorized to issue an unlimited number of Units. As of December 31, 2015, CT REIT had a total of 90,337,358 Units outstanding, 59,711,094 of which were held by CTC and 99,263,329 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 tables summarize the total number of Units issued: Total outstanding at beginning of year Issued Total outstanding at end of year Total outstanding at beginning of year Issued Total outstanding at end of year As at December 31, 2015 Units Class B LP Units Total 90,188,210 91,297,572 181,485,782 149,148 7,965,757 8,114,905 90,337,358 99,263,329 189,600,687 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 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 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. 22 CT REIT 2015 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS 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, 2015 Units Class B LP Units $ 112,775 $ 121,705 Total 234,480 78,318 312,798 $ $ 90,262,679 97,249,251 187,511,930 95,239 134,122,540 321,729,709 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 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. 6.2 Equity (in thousands of Canadian dollars) As at Equity – beginning of the year Net income and comprehensive income for the year Issuance of Class B LP Units, net of issue costs Distributions to non-controlling interests Distributions to Unitholders Issuance of Units under Distribution Reinvestment Plan Equity – end of the year 6.3 Distributions December 31, 2015 December 31, 2014 $ 2,002,189 $ 1,780,386 234,480 99,661 (64,813) (59,976) 1,822 318,261 19,406 (58,971) (58,674) 1,781 $ 2,213,363 $ 2,002,189 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, covenants and taxable income. The Board regularly reviews CT REIT’s rate of distributions to ensure an appropriate level of distributions. CT REIT 2015 ANNUAL REPORT 23 MANAGEMENT’S DISCUSSION AND ANALYSIS On November, 9, 2015, the Board approved an increase in the annual rate of distribution to $0.68 per Unit per year, commencing with the December 31, 2015 record date. On December 15, 2015, CT REIT’s Board declared a distribution of $0.05667 per Unit paid on January 15, 2016 to holders of Units and Class B LP Units of record as of December 31, 2015. On January 15, 2016, CT REIT’s Board declared a distribution of $0.05667 per Unit payable on February 16, 2016 to holders of Units and Class B LP Units of record as of January 31, 2016. On February 16, 2016, CT REIT’s Board declared a distribution of $0.05667 per Unit payable on March 15, 2016 to holders of Units and Class B LP Units of record as of February 29, 2016. 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, financing and operating activities) and other factors when establishing distributions to Unitholders. (in thousands of Canadian dollars, except per Unit amounts) For the periods ended December 31, Distributions before distribution reinvestment – paid Distribution reinvestment Distributions net of distribution reinvestment – paid Distributions per Unit – paid Year Ended 2015 2014 $ 124,072 $ 117,346 1,822 1,781 $ 122,250 $ 115,565 $ 0.663 $ 0.650 Distributions for the year ended December 31, 2015 are higher than the prior year due to the increase in the annual rate of distributions, effective with the first distribution paid in 2015, and higher weighted average number of Units outstanding in 2015. CT REIT’s distributions for the year ended December 31, 2015 are less than the REIT’s cash generated from operating activities, cash generated from operating activities reduced by interest expense, and less than AFFO which is an indicator of the source of funding for and sustainability of distributions. (in thousands of Canadian dollars) For the periods ended December 31, AFFO1 Distributions before distribution reinvestment – paid Excess of AFFO over distributions paid 1 Non-GAAP key performance indicator. Refer to section 9.0 for further information. 7.0 Related Party Transactions Related Party Transactions Year Ended 2015 2014 $ 151,660 $ 124,072 $ 132,866 $ 117,346 $ 27,588 $ 15,520 CT REIT’s controlling Unitholder is CTC, which, on December 31, 2015, held an approximate 83.8% effective interest in the REIT, through ownership of 59,711,094 Units and all of the issued and outstanding Class B LP Units. In addition to its ownership interest, CTC is CT REIT’s largest tenant representing approximately 96.7% of the annualized base minimum rent earned by CT REIT and approximately 98.0% of its GLA as at December 31, 2015. 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 $39,070 (Q4 2014 – $31,880) for the three months ended December 31, 2015 and $210,638 (YTD 2014 – $130,102) for the year ended December 31, 2015. Refer to Note 4 to the consolidated financial statements for additional information. CT REIT and CTC are parties to a number of commercial agreements which govern the relationships among such parties, including the Service Agreement and the Property Management Agreement which are described below. Services Agreement Under the Services Agreement, CTC provides the 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 the 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. There was a 24 CT REIT 2015 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS fixed maximum fee not to exceed $3,334 for the year ended December 31, 2015. The Services Agreement’s initial term ended on December 31, 2015 and is renewable for further one year terms thereafter, unless otherwise terminated. The Services Agreement has been renewed for 2016, and CTC will provide such Services on a cost recovery basis. Property Management Agreement Under the Property Management Agreement, CTC provides the REIT with customary property management services (the ‘‘Property Management Services’’). CTC agreed to provide Property Management Services to the REIT on a cost recovery basis pursuant to which the REIT reimburses CTC for all costs and expenses incurred by CTC in connection with providing the Property Management Services, plus applicable taxes. There was a fixed maximum fee not to exceed $2,336 for the year ended December 31, 2015. The Property Management Agreement’s initial term ended 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, and CTC will provide such Services on a cost recovery basis. Refer to CT REIT’s 2015 Annual Information Form available on SEDAR at www.sedar.com 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, 2015: (in thousands of Canadian dollars) For the periods ended December 31, Rental revenue Property Management and Services Agreement expense Distributions on Units Distributions on Class B LP Units Interest expense on Class C LP Units The net balance due to CTC is comprised of the following: (in thousands of Canadian dollars) As at Tenant and other receivables Class C LP Units Amounts payable on Class C LP Units Loans receivable in lieu of payments on Class C LP Units Other liabilities Distributions payable on Units and Class B LP Units Loans receivable in lieu of distributions on Class B LP Units Net due to CTC 8.0 Accounting Policies and Estimates 8.1 Significant Areas of Estimation Year Ended 2015 2014 $ 361,873 $ 332,212 5,670 39,673 64,813 78,318 5,621 38,877 58,971 81,643 December 31, 2015 December 31, 2014 $ (893) $ (8,505) 1,686,968 1,847,279 75,093 (68,805) 4,396 11,115 (2,106) 75,263 (68,425) 6,023 8,908 (565) $ 1,705,768 $ 1,859,978 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 critical judgments in applying significant accounting policies are described in Note 2 of the consolidated financial statements, the most significant of which is the fair value of investment properties. 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 recorded at cost and are adjusted to fair value at each balance sheet date with the fair value adjustment recognized in earnings. CT REIT 2015 ANNUAL REPORT 25 MANAGEMENT’S DISCUSSION AND ANALYSIS 8.2 New Standards Implemented There were no new standards implemented for the year ended December 31, 2015. 8.3 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, 2015, 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 – Financial Instruments: Recognition and Measurement (“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. 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, 2018. Early adoption is permitted. CT REIT is assessing the potential impact of this standard. 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. The implementation of these amendments will not have a significant impact on CT REIT. In January 2016, the IASB issued Disclosure Initiative Amendments to IAS 7 also as part of the IASB’s Disclosure Initiative. These amendments require entities to provide additional disclosures that will enable financial statements users to evaluate changes in liabilities arising from financing activities, including changes arising from cash flows and non-cash changes. These amendments are effective for annual periods beginning on or after January 1, 2017. Earlier application is permitted. CT REIT is currently assessing the potential impact of these amendments. Leases In January 2016, the IASB issued IFRS 16 – Leases (“IFRS 16”), which replaces IAS 17 – Leases (“IAS 17”) and related interpretations. IFRS 16 provides a single lessee accounting model, requiring the recognition of assets and liabilities for all leases, unless the lease term is 12 months or less or the underlying asset has a low value. IFRS 16 substantially carries forward the lessor accounting in IAS 17 with the distinction between operating leases and finance leases being retained. IFRS 16 will be applied retrospectively for annual periods beginning on or after January 1, 2019. Early adoption is permitted if IFRS 15 has also been applied. CT REIT is assessing the potential impact of this standard. 26 CT REIT 2015 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS Income Taxes In January 2016, the IASB issued Recognition of Deferred Tax Assets for Unrealised Losses as an amendment to IAS 12–Income Taxes. These amendments address the accounting for deferred tax assets for unrealized losses on debt instruments measured at fair value. These amendments are effective for annual periods beginning on or after January 1, 2017. Earlier application is permitted. CT REIT is currently assessing the potential impact of these amendments. 9.0 Non-GAAP and Operational Key Performance Indicators CT REIT uses non-GAAP key performance indicators including NOI, same store NOI, same property 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. 9.1 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 section 4.0 for the calculation of NOI. 9.1.1 Same Store NOI Same store NOI is a non-GAAP financial measure which reports the period-over-period performance of the same asset base having consistent gross leaseable area in both periods. To calculate same store NOI growth, NOI is further adjusted to remove the impact of lease cancellation fees and other non- recurring items. Refer to section 4.0 for the calculation of same store NOI. 9.1.2 Same Property NOI Same property NOI is a non-GAAP financial measure that is consistent with the definition of same store NOI above, except that same property includes the NOI impact of intensifications. Refer to section 4.0 for the calculation of same property NOI. 9.2 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. 9.3 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 CT REIT 2015 ANNUAL REPORT 27 MANAGEMENT’S DISCUSSION AND ANALYSIS 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. A reconciliation of the IFRS term “Cash Generated from Operating Activities” (refer to the consolidated statements of cash flow for the year ended December 31, 2015) to AFFO is as follows: (in thousands of Canadian dollars) For the periods ended December 31, Cash generated from operating activities Changes in working capital and other Deferred taxes Fair value adjustment of unit based compensation Interest and other financing charges Normalized capital expenditure reserve AFFO Year Ended 2015 2014 Change $ 265,400 $ 233,789 (9,470) 64 77 (87,334) (17,077) (2,224) (527) 285 (82,991) (15,466) $ 151,660 $ 132,866 13.5% 325.8% (112.1)% (73.0)% 5.2% 10.4% 14.1% The following table reconciles GAAP net income and comprehensive income to FFO and further reconciles FFO to AFFO: (in thousands of Canadian dollars, except per unit amounts) Three Months Ended Year Ended For the periods ended December 31, 2015 2014 Change 2015 2014 Change3 Net Income and comprehensive income $ 62,824 $ 53,711 17.0% $ 234,480 $ 318,261 Fair value adjustment of investment property (12,731) (7,305) 74.3% (39,910) (141,221) Deferred taxes Fair value adjustment of unit based compensation (88) 22 (163) (46.0)% 285 (92.3)% 64 77 (527) 285 Funds from operations Properties straight-line rent Straight-line land lease expense Normalized capital expenditure reserve Adjusted funds from operations FFO per Unit – basic FFO per Unit – diluted (non-GAAP)1 AFFO per Unit – basic AFFO per Unit – diluted (non-GAAP)1 AFFO payout ratio2 Distribution per Unit – paid $ 50,027 $ 46,528 7.5% $ 194,711 $ 176,798 (6,702) 22 (4,352) (7,843) (14.5)% 84 (73.8)% (4,112) 5.8% (26,131) 157 (17,077) (28,685) 219 (15,466) 38,995 $ 34,657 12.5% $ 151,660 $ 132,866 0.264 $ 0.264 $ 0.206 $ 0.206 $ 81% 0.256 0.256 0.191 0.191 3.1% $ 3.1% $ 7.9% $ 7.9% $ 85% (4.7)% 1.038 $ 1.038 $ 0.809 $ 0.808 $ 82% 0.166 $ 0.163 2.0% $ 0.663 $ 0.979 0.979 0.736 0.736 88% 0.650 $ $ $ $ $ $ Weighted average units outstanding – basic 189,582,380 181,468,432 Weighted average units outstanding – diluted (non-GAAP)1 189,674,625 181,524,387 Number of units outstanding, end of period 189,600,687 181,485,782 4.5% 4.5% 4.5% 187,511,930 180,599,151 187,607,169 180,643,636 189,600,687 181,485,782 (26.3)% (71.7)% (112.1)% (73.0)% 10.1% (8.9)% (28.3)% 10.4% 14.1% 6.0% 6.0% 9.9% 9.8% (6.8)% 2.0% 3.8% 3.9% 4.5% 1 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. 2 Calculated as Distributions per Unit divided by AFFO per Unit–diluted (non-GAAP). FFO for the three months ended December 31, 2015 amounted to $50,027 or $0.264 per Unit (diluted non-GAAP) and was $3,499 (7.5%) higher than the same period in 2014 largely due to the impact of NOI variances discussed earlier. FFO for the year ended December 31, 2015 amounted to $194,711 or $1.038 per Unit (diluted non-GAAP) and was $17,913 (10.1%) higher than the same period in 2014 largely due to the impact of NOI variances discussed earlier. AFFO for the three months ended December 31, 2015 amounted to $38,995 or $0.206 per Unit (diluted non-GAAP) and was $4,338 (12.5%) higher than the same period in 2014 largely due to the impact of NOI variances discussed earlier. AFFO for the year ended December 31, 2015 amounted to $151,660 or $0.808 per Unit (diluted non-GAAP) and was $18,794 (14.1%) higher than the same period in 2014 largely due to the impact of NOI variances discussed earlier. 28 CT REIT 2015 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS 9.4 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 addition to 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, 2015, EBITFV was calculated as follows: (in thousands of Canadian dollars) For the periods ended December 31, Three Months Ended 2015 2014 Net Income and comprehensive income $ 62,824 $ 53,711 Fair value adjustment on investment properties Interest expense and other financing charges (12,731) 22,132 (7,305) 21,293 Change 17.0% 74.3% 3.9% Year Ended 2015 2014 $ 234,480 $ 318,261 (39,910) 87,334 (141,221) 82,991 EBITFV $ 72,225 $ 67,699 6.7% $ 281,904 $ 260,031 Change (26.3)% (71.7)% 5.2% 8.4% 9.5 Interest Coverage Ratio Interest coverage ratios are used to measure an entity’s ability to service its 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) For the periods ended December 31, EBITFV (A) Interest and other financing charges (B) Interest coverage ratio (A)/(B) Three Months Ended Year Ended 2015 2014 2015 2014 $ 72,225 $ 67,699 $ 281,904 $ 260,031 $ 22,132 $ 21,293 $ 87,334 $ 82,991 3.26 3.18 3.23 3.13 The interest coverage ratio for the year ended December 31, 2015 increased compared to the same period in the prior year due to higher EBITFV in 2015 partially offset by increased interest and other financing charges. Both EBITFV and interest and other financing charges increased due to acquisition and intensification activities completed during 2015 and 2014. 9.6 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) As at Total assets (A) Total indebtedness1 (B) Indebtedness ratio (B)/(A) December 31, 2015 December 31, 2014 $ 4,350,903 $ 4,017,420 $ 2,095,045 $ 1,983,773 48.2% 49.4% 1 Total indebtedness reflects the value of the Class C LP Units, mortgages payable, debentures payable and draws on the Bank Credit Facility, if any. The indebtedness ratio at December 31, 2015 has decreased compared to the indebtedness ratio at December 31, 2014 primarily due to the 2015 fair value adjustments made to the investment property portfolio and the 2015 investing activities, partially offset by an increase in indebtedness during 2015. 9.7 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. CT REIT 2015 ANNUAL REPORT 29 MANAGEMENT’S DISCUSSION AND ANALYSIS (in thousands of Canadian dollars, except for per Unit amounts) As at Total indebtedness (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)) December 31, 2015 December 31, 2014 $ 2,095,045 $ 1,983,773 189,600,687 181,485,782 $ $ $ 13.00 2,464,809 4,559,854 $ $ $ 12.31 2,234,090 4,217,863 45.9% 47.0% CT REIT’s debt to enterprise value ratio at December 31, 2015 decreased compared to the debt to enterprise value ratio at December 31, 2014 as a result of an increased closing Unit price and an increase in equity value due to additional Units and Class B LP Units issued, partially offset by an increase in indebtedness. 9.8 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 measure a premium or discount. (in thousands of Canadian dollars, except for per Unit amounts) As at Total Equity (A) Period-end Units and Class B LP Units outstanding (B) Book value per Unit (A / B) December 31, 2015 December 31, 2014 $ $ 2,213,363 189,600,687 11.67 $ $ 2,002,189 181,485,782 11.03 CT REIT’s book value per Unit at December 31, 2015 increased from the book value per Unit at December 31, 2014 primarily due to net income exceeding distributions. 9.9 Selected Quarterly Consolidated Information (in thousands of Canadian dollars, except per Unit amounts) As at and for the quarter ended Q4 2015 Q3 Q2 Q1 $ $ $ $ $ $ 96,599 $ 95,916 $ 93,217 $ 62,824 $ 58,885 $ 57,205 $ 92,448 55,566 0.331 $ 0.257 $ 0.264 $ 0.206 $ 0.311 $ 0.242 $ 0.260 $ 0.203 $ 0.306 $ 0.233 $ 0.256 $ 0.199 $ 0.302 0.226 0.258 0.200 Q4 89,212 53,711 0.296 0.222 0.256 0.191 $ $ $ $ $ $ $ $ $ $ $ $ 2014 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 $ $ $ $ $ $ $ 4,350,903 $ 4,324,229 $ 4,291,153 $ 4,113,322 $ 4,017,420 $ 3,974,736 $ 3,842,218 $ 3,757,682 $ 2,095,045 $ 2,078,826 $ 2,071,737 $ 1,984,131 $ 1,983,773 $ 1,950,346 $ 1,847,279 $ 1,807,130 Property revenue Net income Net income per Unit – basic – diluted FFO – diluted, non-GAAP1 AFFO – diluted, non-GAAP1 Total assets2 Total indebtedness Total distributions to Unitholders – paid $ 30,947 $ 30,946 $ 30,450 $ 29,907 Total distributions to Unitholders per Unit – paid $ $ Book value per Unit1 0.166 $ 11.67 $ 0.166 $ 11.51 $ 0.166 $ 11.36 $ Market price per Unit – high – low – close (end of period) $ $ $ 13.45 $ 12.50 $ 13.00 $ 13.40 $ 11.26 $ 12.86 $ 12.96 $ 11.75 $ 12.10 $ 0.166 11.21 13.50 11.70 12.90 $ $ $ $ $ $ 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 1 Non-GAAP key performance indicators. Refer to section 9.0 for further information. 2 Prior year figures have been restated. Refer to note 25 of the annual consolidated financial statements contained in CT REIT’s 2014 Annual Report. 30 CT REIT 2015 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS Refer to the applicable MD&A and the quarterly financial statements for discussion and analysis relating to the first three quarters of 2015 and the four quarters in 2014. 10.0 Enterprise Risk Management Enterprise Risk Management To preserve and enhance Unitholder value over the long term, CT REIT approaches the management of risk strategically through its ERM Program. The ERM Program provides an integrated approach to the management of risks, through a disciplined manner that: ‰ aligns key strategies, 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. The following section contains forward-looking information and users are cautioned that actual results may vary. 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 financial position, and/or ability to achieve its strategic objectives 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 annual review of its Principal Risks, which has been presented to the Audit Committee and approved by the Board of Trustees. 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. More information on the REIT’s risk factors is presented in the REIT’s AIF. Principal Risks Risk Management Strategy Marketplace Risk due to fluctuations or fundamental changes in the external business environment resulting in financial loss. Fluctuations or fundamental shifts in the market place could include: ‰ Changes in macroeconomic conditions (including recession, depression, increased unemployment, and increased interest rates) high inflation, resulting in a reduction in consumer spending; ‰ 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. The REIT regularly monitors and analyzes external economic, political, demographic, consumer behaviour and competitive developments in 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 respond to evolving market and economic trends. CT REIT 2015 ANNUAL REPORT 31 MANAGEMENT’S DISCUSSION AND ANALYSIS Interest Rate Risk associated with fundamental changes with CTC businesses, the economic environment, or significant events or volatility in the financial markets resulting in changes in interest rates that affect: the value of real estate, the value of the REIT’s Units, the economics of acquisition activity and the availability of capital; resulting in financial loss and resulting in a decrease in or the elimination of distributions to Unitholders. Tenant Concentration The REIT’s revenues are dependent on the ability of its key tenant, CTC, to meet its rent obligations and renew its tenancies. The future financial performance and operating results of CTC’s business are subject to inherent risks and uncertainties, such as general economic conditions, changing consumer preferences, and other strategic, financial, and operational risk factors. A downturn in CTC’s business could have a material effect on the financial performance of the REIT, its cash flows, and the ability to make distributions to Unitholders. in the REIT. Significant Ownership by CTC CTC holds the majority interest In situations where the interests of CTC and the REIT are in conflict, CTC may utilize its ownership interest in, and contractual rights with the REIT, to further 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 business activities, business disruptions, inadequate or failed operations processes (property management, development, redevelopment, and acquisitions), people, and systems to support the REIT’s key business integration, and/or objectives. Failed processes in terms of design, 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 that the REIT would not qualify as a mutual fund trust for purposes of the Tax Act, including the treatment of real estate investment trusts, mutual fund trusts, or the REIT Exception for a taxation year under the Tax Act, which could have a material and adverse impact on the value of the Units, and on distributions to Unitholders. The indebtedness and Class C LP Units of the REIT are predominantly at fixed rates and its floating interest rate exposure is minimal. The weighted average term to redemption/maturity of the REIT’s debt portfolio is managed to align with or be greater than the weighted average term to maturity of the REIT’s assets. The REIT manages refinancing risk by maintaining a diversified debt redeeming/maturity 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. The REIT benefits from the stability offered by CTC businesses including Canadian Tire retail, one of Canada’s most shopped general merchandise retailers with high recognition and a strong reputation throughout the leases have a weighted communities it serves. The Canadian Tire retail average remaining lease term of 13.6 years, which provides the REIT with reliable, durable, and growing monthly distributions. Management regularly monitors the operating results and credit ratings of CTC. Appropriate governance structures, including policies, processes and other management activities and practices are in place to maintain and monitor the relationship between the REIT and CTC. including policies, The REIT has appropriate governance structures, processes, contracts, service agreements and other management activities in place to maintain the operational performance of the REIT, comply with legal and regulatory requirements, and to support the REIT’s business and strategic objectives. Management of the REIT ensures that the REIT satisfies the conditions to qualify as a closed-end mutual fund trust by complying with the restrictions in the Tax Act as they are interpreted and applied by the Canada Revenue Agency. No assurance can be given that the REIT will be able to comply with these restrictions at all times. There can be no 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. 32 CT REIT 2015 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS Environmental Matters The REIT is subject to various federal, provincial, territorial and municipal laws relating to environmental matters. Changes in legislation may result in the REIT bearing the risk of cost-intensive assessment, removal of contamination, hazardous or other regulated substances causing an adverse effect on the REIT’s financial condition, results of operation, and cash available for distribution to Unitholders. 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 securities regulations relevant to financial reporting; ‰ Fraudulent activity and/or failure to maintain an effective system of internal controls; and/or ‰ Inadequate explanation of the REITs operating performance, financial condition, and future prospects, which may result in regulatory related issues or decrease in Unit price. 11.0 Internal Controls and Procedures The REIT has allocated the necessary capital and operating expenditures and address any material to comply with environmental laws the REIT has limited environmental environmental issues. Additionally, liability coverage under its general liability insurance policy for third-party bodily injury and property damage claims arising from unexpected and 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 to the Canadian Tire conditions and first party clean ups. Pursuant issues Leases, CTC has indemnified the REIT for any environmental 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. Internal controls which include policies, processes and procedures, provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements and other disclosure documents. This includes monitoring and responding to changing regulations financial governing presentation. accounting standards and and 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, 2015. 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, 2015. 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 2015 ANNUAL REPORT 33 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, 2015. 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, 2015, 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 IFRS. Changes in internal control over financial reporting During the quarter and year ended December 31, 2015, 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. 12.0 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 including fair value adjustments and cash flow assumptions upon which they are based, cash, 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 section 2.0; ‰ CT REIT’s fair value of property portfolio under section 3.4; ‰ CT REIT’s fair value adjustment on investment properties under section 4.9; ‰ CT REIT’s capital expenditures to fund acquisitions and development activities under section 5.1; ‰ CT REIT’s capital strategy under section 5.9; and ‰ CT REIT’s commitments and contingencies under section 5.10; ‰ CT REIT’s access to available sources of debt and/or equity financing; ‰ CT REIT’s principal risks under section 10.0 principal risks; ‰ 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; and ‰ 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. 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 the “Risk Factors” section of the AIF. 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 by a link at www.ctreit.com. 34 CT REIT 2015 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 by a link at 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 16, 2016 CT REIT 2015 ANNUAL REPORT 35 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 Debentures payable Note 11 Bank Credit Facility Note 12 Other liabilities Note 13 Distributions on Units and Class B LP Units Note 14 Equity Note 15 Unit based compensation plans Note 16 Non-controlling interests Note 17 Revenue and expenses Note 18 General and administrative expenses Note 19 Interest and other financing charges Note 20 Changes in working capital and other Note 21 Segmented information Note 22 Commitments and contingencies Note 23 Related-party transactions Note 24 Financial instruments and risk management Note 25 Capital management and liquidity Note 26 Subsequent events GLOSSARY OF TERMS 37 38 39 40 41 42 43 43 45 48 49 50 50 50 51 52 52 53 53 54 55 56 56 57 57 57 58 58 58 59 60 61 62 CT REIT 2015 ANNUAL REPORT 36 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, who were appointed by unitholder vote at the annual unitholders’ meeting. Their report is presented below. Kenneth Silver Chief Executive Officer February 16, 2016 Louis Forbes Chief Financial Officer CT REIT 2015 ANNUAL REPORT 37 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, 2015 and December 31, 2014, and the consolidated statements of income and comprehensive income, consolidated statements of changes in equity and consolidated statements of cash flows for the years then ended, 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, 2015 and December 31, 2014, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards. Chartered Professional Accountants Licensed Public Accountants February 16, 2016 Toronto, Ontario 38 CT REIT 2015 ANNUAL REPORT Consolidated Balance Sheets As at December 31, (Canadian dollars, 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 Debentures 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 2015 2014 4 6 5 6 7 8 9 10 12 8 9 11 12 13 $ 4,319,061 $ 3,999,844 2,541 2,526 4,321,602 4,002,370 2,511 2,110 24,680 29,301 10,349 1,991 2,710 15,050 $ 4,350,903 $ 4,017,420 $ 1,486,968 $ 1,647,279 55,953 347,948 1,481 57,219 — 560 1,892,350 1,705,058 200,000 4,176 — 30,269 10,745 245,190 200,000 1,275 78,000 20,871 10,027 310,173 2,137,540 2,015,231 14 14, 16 1,037,209 1,176,154 2,213,363 982,588 1,019,601 2,002,189 $ 4,350,903 $ 4,017,420 The related notes form an integral part of these consolidated financial statements. David Laidley Trustee Anna Martini Trustee CT REIT 2015 ANNUAL REPORT 39 Consolidated Statements of Income and Comprehensive Income (Canadian dollars, in thousands, except per unit amounts) For the year ended December 31, 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. Note 2015 2014 17 17 18 19 4 14 14 $ 378,180 $ 344,791 (86,856) (9,652) 232 (87,334) 39,910 (76,677) (8,433) 350 (82,991) 141,221 $ 234,480 $ 318,261 $ 112,775 121,705 $ 234,480 $ $ 1.25 0.97 $ 159,282 158,979 $ 318,261 $ $ 1.76 1.20 40 CT REIT 2015 ANNUAL REPORT Consolidated Statements of Changes in Equity (Canadian dollars, in thousands) Balance at December 31, 2014 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 $ 877,905 $ 104,683 $ 982,588 $ 1,019,601 $ 2,002,189 4 13 13 – – – 1,822 112,775 112,775 – (59,976) – – (59,976) 1,822 121,705 99,661 (64,813) – 234,480 99,661 (124,789) 1,822 Balance at December 31, 2015 $ 879,727 $ 157,482 $ 1,037,209 $ 1,176,154 $ 2,213,363 Note Units Retained Earnings Unitholders’ Equity Non-controlling interests Total Equity Balance at December 31, 2013 $ 876,124 $ 4,075 $ 880,199 $ 900,187 $ 1,780,386 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 – – – 1,781 159,282 159,282 – (58,674) – – (58,674) 1,781 158,979 19,406 (58,971) – 318,261 19,406 (117,645) 1,781 13 13 Balance at December 31, 2014 $ 877,905 $ 104,683 $ 982,588 $ 1,019,601 $ 2,002,189 The related notes form an integral part of these consolidated financial statements. CT REIT 2015 ANNUAL REPORT 41 Consolidated Statements of Cash Flows Note 2015 2014 $ 234,480 $ 318,261 20 10 10 8 13 13 8 11 9 (39,910) (26,131) 157 87,334 9,470 265,400 (43,050) (49,523) (10,424) 167 (141,221) (28,685) 219 82,991 2,224 233,789 (106,684) (35,896) (14,963) – (102,830) (157,543) 350,000 (2,052) (200,000) (58,018) (64,232) (78,232) (78,000) (1,244) – (8,718) (104) (140,600) 21,970 2,710 – – – (56,786) (58,779) (81,591) 78,000 (31,447) 31,133 (1,007) (58) (120,535) (44,289) 46,999 $ 24,680 $ 2,710 (Canadian dollars, in thousands, except per unit amounts) For the year ended December 31, 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 Property investments Land investments and development activities Capital expenditures recoverable from tenants Proceeds of disposition Cash used for investing activities Financing activities Proceeds from issuance of debentures payable Debenture issue costs Redemption of Class C LP Units Unit distributions Class B LP Unit distributions paid or loaned Payments on Class C LP Units paid or loaned Bank Credit Facility draws (repayments) Mortgage principal repayments Mortgage borrowing Interest paid Class B LP Unit issue costs Cash used for financing activities Cash generated/(used) in the year Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year The related notes form an integral part of these consolidated financial statements. 42 CT REIT 2015 ANNUAL REPORT Notes to the Consolidated Financial Statements For the years ended December 31, 2015 and 2014 (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 83.8% effective interest in CT REIT as of December 31, 2015, 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 issued and outstanding Class C limited partnership units (“Class C LP Units”) of the Partnership (see Note 8). The 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 2015 are for the years ended December 31, 2015 and 2014. (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 16, 2016. (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 2015 ANNUAL REPORT 43 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) 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, 2015, 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 – Financial Instruments: Recognition and Measurement (“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. 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, 2018. 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. The implementation of these amendments will not have a significant impact on CT REIT. 44 CT REIT 2015 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS In January 2016, the IASB issued Disclosure Initiative Amendments to IAS 7 also as part of the IASB’s Disclosure Initiative. These amendments require entities to provide additional disclosures that will enable financial statements users to evaluate changes in liabilities arising from financing activities, including changes arising from cash flows and non-cash changes. These amendments are effective for annual periods beginning on or after January 1, 2017. Earlier application is permitted. CT REIT is currently assessing the potential impact of these amendments. (iv) Leases In January 2016, the IASB issued IFRS 16 – Leases (“IFRS 16”), which replaces IAS 17 – Leases (“IAS 17”) and related interpretations. IFRS 16 provides a single lessee accounting model, requiring the recognition of assets and liabilities for all leases, unless the lease term is 12 months or less or the underlying asset has a low value. IFRS 16 substantially carries forward the lessor accounting in IAS 17 with the distinction between operating leases and finance leases being retained. IFRS 16 will be applied retrospectively for annual periods beginning on or after January 1, 2019. Early adoption is permitted if IFRS 15 has also been applied. CT REIT is assessing the potential impact of this standard. (v) Income taxes In January 2016, the IASB issued Recognition of Deferred Tax Assets for Unrealised Losses as an amendment to IAS 12 – Income Taxes. These amendments address the accounting for deferred tax assets for unrealized losses on debt instruments measured at fair value. These amendments are effective for annual periods beginning on or after January 1, 2017. Earlier application is permitted. CT REIT is currently 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, are 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 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’’), CT REIT 2015 ANNUAL REPORT 45 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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 as 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 assumed from or incurred to 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. 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. 46 CT REIT 2015 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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 financial statements. (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 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 then 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. Accrued compensation costs under the plans are adjusted to the fair value of the vested units at each reporting date. (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. The following summarizes CT REIT’s classification and measurement of financial instruments: Financial assets and liabilities Cash and cash equivalents Other assets1 Tenant and other receivables Mortgages payable Debentures payable Class C LP Units Other liabilities2 Distributions payable 1 Financial instruments included in other assets consist of deposits. 2 Except for DUs, RUs and PUs which are carried at fair value. Classification Measurement Loans and receivables Amortized cost 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 CT REIT 2015 ANNUAL REPORT 47 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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, beginning of year $ 3,995,860 $ 3,984 $ 3,999,844 $ 3,538,853 $ 9,011 $ 3,547,864 December 31, 2015 December 31, 2014 Income producing properties Properties under development Total investment properties Income producing properties Properties under development Total investment properties Property acquisitions (including transaction costs) 174,430 – 174,430 Intensifications Developments Development land Capitalized interest and property taxes Transfers Fair value adjustment on investment properties Straight-line rent Recoverable capital expenditures Dispositions Balance, end of year – – – – 53,840 39,910 26,131 14,834 (167) 28,939 25,983 8,767 390 (53,840) – – – – 28,939 25,983 8,767 390 – 39,910 26,131 14,834 (167) 228,684 11,951 – – – 29,414 141,221 28,685 17,052 – – – 19,963 3,982 442 (29,414) – – – – 228,684 11,951 19,963 3,982 442 – 141,221 28,685 17,052 – $ 4,304,838 $ 14,223 $ 4,319,061 $ 3,995,860 $ 3,984 $ 3,999,844 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. As at December 31, 2015, management’s determination of fair value was updated for current market assumptions, utilizing market capitalization rates provided by independent valuation professionals. On a periodic basis, CT REIT obtains independent valuations such that substantially all of the properties will be externally appraised over a four-year period. During 2015, independent appraisals were completed on 68 properties (2014 – 68 properties) having a fair value of $999,830. The fair value of investment properties is based on Level 3 inputs (see Note 24(a)). There have been no transfers during the period between levels. The significant inputs used to determine the fair value of CT REIT’s income producing investment properties are as follows: Number of properties Value at December 31, 2015 Discount rate Terminal capitalization rate Overall capitalization rate Hold period (years) Properties valued by the OCR method Properties valued by the DCF method 264 21 $ 3,635,620 $ 640,680 —% —% 6.36% — 6.70% 6.34% —% 9 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. 48 CT REIT 2015 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes the sensitivity of the fair value of investment properties to changes in the capitalization rate and discount rate, respectively: Rate sensitivity + 75 basis points + 50 basis points + 25 basis points Base rate - 25 basis points - 50 basis points - 75 basis points OCR Sensitivity DCF Sensitivity Fair value Change in fair value Fair value Change in fair value $ 3,271,687 $ (363,933) $ 574,670 $ (66,010) 3,384,182 3,505,130 (251,438) (130,490) 595,056 616,983 (45,624) (23,697) $ 3,635,620 $ – $ 640,680 $ – 3,777,035 3,930,573 141,415 294,953 666,398 694,317 25,718 53,637 $ 4,097,895 $ 462,275 $ 724,846 $ 84,166 2015 Investment and Development Activity Funding of investment and development activities for the year ended December 31, 2015 was as follows: Funded with working capital to CTC 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 2014 Investment and Development Activity 2015 Investment and Development Activity Property investments Development land $ 41,955 $ 1,095 99,830 31,550 – 1 627 – 8,139 – Developments Intensifications $ 14,060 $ 15,103 8,966 13,836 – – 2,957 – – – $ 174,430 $ 8,767 $ 25,983 $ 28,939 Funding of investment and development activities for the year ended December 31, 2014 was 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. 2014 Investment and Development Activity Property investments Development land 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 Included in CT REIT’s investment properties are eight buildings which are situated on ground leases with remaining initial terms of between 3 and 40 years, and an average initial term of 16 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 $893 receivable from CTC (2014 – $8,505). December 31, 2015 December 31, 2014 $ 2,665 (154) $ 2,511 $ 10,429 (80) $ 10,349 CT REIT 2015 ANNUAL REPORT 49 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 6. OTHER ASSETS Prepaid expenses and deposits Deferred assets Other assets Current Non-current Other assets December 31, 2015 December 31, 2014 $ 3,481 1,170 $ 4,651 $ 2,110 2,541 $ 4,651 $ 3,420 1,097 $ 4,517 $ 1,991 2,526 $ 4,517 Deferred assets include the costs incurred in connection with the arrangement of the Bank Credit Facility, which are being amortized over 60 months (see Note 11). 7. CASH AND CASH EQUIVALENTS At December 31, 2015, CT REIT had short-term deposits of $19,988 (2014 – $Nil). For the year ended December 31, 2015, interest income of $232 (2014 – $350) 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 4.50% of the aggregate capital amount ascribed to the Class C LP Units, in priority to distributions made to holders of the Class B LP Units and CT REIT GP Corp. (the “GP”) Units, subject to certain exceptions. 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’ prior 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. 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. During the five-year period beginning immediately following the completion of the Initial Fixed Rate Period, and each five-year period thereafter, if not redeemed, 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. 50 CT REIT 2015 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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 Series 13 Series 14 Series 15 Series 16 Weighted average / Total Current Non-current Total Expiry of initial fixed rate period Annual distribution rate during initial fixed rate period Carrying amount at December 31, 2015 Carrying amount at December 31, 2014 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 May 31, 2017 May 31, 2017 May 31, 2017 May 31, 2020 3.50% 3.50% 4.50% 4.50% 4.50% 5.00% 5.00% 5.00% 5.00% 2.38% 2.20% 2.23% 1.65% 1.71% 1.77% 2.42% 4.50% $ – $ 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 7,130 20,685 19,464 3,789 15,000 4,350 16,550 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 7,130 20,685 19,464 – – – – $ 1,686,968 $ 1,847,279 $ 200,000 $ 200,000 1,486,968 1,647,279 $ 1,686,968 $ 1,847,279 For the year ended December 31, 2015, interest expense of $78,318 (2014 – $81,643) was recognized in respect of the Class C LP Units (see Note 19). 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 an 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, 2015 of $68,805 (2014 – $68,425), respectively, 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, 2015 of $6,288 (2014 – $6,838) is included in other liabilities on the consolidated balance sheet (see Note 12). These loans were settled on January 4, 2016. On June 1, 2015, the Series 1 Class C LP Units was redeemed by payment of $200,000. 9. MORTGAGES PAYABLE Mortgages payable, secured by certain of CT REIT’s investment properties, include the following: Current Non-current Total December 31, 2015 December 31, 2014 Face value Carrying amount Face value Carrying amount $ 4,074 $ 4,176 $ 1,158 $ 1,275 55,949 55,953 57,148 57,219 $ 60,023 $ 60,129 $ 58,306 $ 58,494 CT REIT 2015 ANNUAL REPORT 51 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Future repayments are as follows: Principal Amortization Maturities Total 2016 2017 2018 2019 2020 2021 and thereafter Total contractual obligation Unamortized portion of mark to market on mortgages payable assumed at the acquisition of properties Unamortized transaction costs $ 1,199 $ 2,875 $ 4,074 1,240 422 – – – – 16,661 37,626 – – 1,240 17,083 37,626 – – $ 2,861 $ 57,162 $ 60,023 282 (176) $ 60,129 Mortgages payable have interest rates that range from 2.50% to 3.60%, and have maturity dates that range from May 2016 to December 2019. Mortgages payable at December 31, 2015 had a weighted average interest rate of 3.15% (December 31, 2014 – 3.19%). At December 31, 2015, floating rate and fixed rate mortgages were $31,133 (December 31, 2014 – $31,133) and $28,890 (December 31, 2014 – $27,173), respectively. Investment properties having a fair value of $132,999 (December 31, 2014 – $121,489), have been pledged as security for mortgages payable. 10. DEBENTURES PAYABLE Series Series A, 2.85%, June 9, 2022 Series B, 3.53%, June 9, 2025 December 31, 2015 December 31, 2014 Face Value Carrying Amount Face Value Carrying Amount $ 150,000 $ 149,159 200,000 198,789 $ 350,000 $ 347,948 $ – – $ – $ – – $ – On June 9, 2015, CT REIT issued $350,000 aggregate principal amount of senior unsecured debentures (the “Debentures”). The proceeds, net of issuance costs of $2,184, were used to indirectly redeem the Series 1 Class C LP Units held by CTC, to pay down certain amounts then outstanding under the Bank Credit Facility, and the balance of the proceeds were retained for general business purposes. For the year ended December 31, 2015, amortization of the transaction costs of $131 (2014 – $nil) is included in interest and other financing charges on the consolidated statement of income and comprehensive income (see Note 19). 11. BANK CREDIT FACILITY The Partnership has a $200,000 revolving credit facility (the “Bank Credit Facility”), with an option to request an increase of an additional $100,000. The Bank Credit Facility is available to the Partnership until July 2020. 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, 2015, there were no cash advances under the Bank Credit Facility (2014 – $78,000) and $311 (2014 – $nil) of letters of credit 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 $283 (2014 – $434) is recorded in other assets on the consolidated balance sheets. For the year ended December 31, 2015, amortization of the transaction costs of $151 (2014 – $182), as well as the standby fee of $487 (2014 – $492) are included in interest and other financing charges on the consolidated statement of income and comprehensive income (see Note 19). 52 CT REIT 2015 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 12. OTHER LIABILITIES Other liabilities are comprised of the following: Interest on Class C LP Units1 Property operating costs2 Capital expenditures payable Deferred revenue3 Other4 Other liabilities Current Non-current Other liabilities 1 Net of loans receivable of $68,805 (2014 – $68,425). See Note 23(b). 2 Includes $507 payable to CTC (2014 – $496). 3 Prepaid rent from CTC. 4 Includes $2,588 payable to CTC (2014 – $3,289). December 31, 2015 December 31, 2014 $ 6,288 $ 6,838 2,899 9,630 1,301 11,632 $ 31,750 $ 30,269 1,481 $ 31,750 3,188 2,089 2,238 7,078 $ 21,431 $ 20,871 560 $ 21,431 13. DISTRIBUTIONS ON UNITS AND CLASS B LP UNITS The following table presents total distributions declared on Units and Class B LP Units: For the year ended December 31, Units1 Class B LP Units2 1 Includes $39,673 (2014 – $38,877) paid or payable to CTC. 2 Paid or payable to CTC. 2015 2014 Total Distributions Distributions per Unit Total Distributions Distributions per Unit $ 59,976 $ 64,813 $ 0.66 $ 0.66 $ 58,674 $ 58,971 $ 0.65 $ 0.65 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 pays 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, 2015, 149,148 (2014 – 161,437) Units, were issued under the DRIP for $1,822 (2014 – $1,781). On November, 9, 2015, the Board approved an increase in the annual rate of distribution to $0.68 per Unit per year, commencing with the December 31, 2015 record date. On December 15, 2015, CT REIT’s Board declared a distribution of $0.05667 per Unit paid on January 15, 2016 to holders of Units and Class B LP Units of record as of December 31, 2015. On January 15, 2016, CT REIT’s Board declared a distribution of $0.05667 per Unit payable on February 16, 2016 to holders of Units and Class B LP Units of record as of January 31, 2016. On February 16, 2016, CT REIT’s Board declared a distribution of $0.05667 per Unit payable on March 15, 2016 to holders of Units and Class B LP Units of record as of February 29, 2016. 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, 2015, the holders of the Class B LP Units elected to defer distributions in the amount of $2,106 (2014 – $565). See Note 23(b). These loans were settled on January 4, 2016. CT REIT 2015 ANNUAL REPORT 53 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 14. EQUITY Authorized and outstanding units CT REIT is authorized to issue an unlimited number of Units. 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 year Total outstanding at beginning of year Issued Total outstanding at end of year As at December 31, 2015 Units Class B LP Units Total 90,188,210 91,297,572 181,485,782 149,148 7,965,757 8,114,905 90,337,358 99,263,329 189,600,687 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 Net income attributable to Unitholders and weighted average units outstanding used in determining basic and diluted net income per unit for the years ended December 31, 2015 and 2014, 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, 2015 Units Class B LP Units Total $ 112,775 $ 121,705 $ 234,480 78,318 $ 312,798 90,262,679 97,249,251 187,511,930 95,239 134,122,540 321,729,709 For the year ended December 31, 2014 Units Class B LP Units Total $ 159,282 $ 158,979 $ 318,261 81,643 $ 399,904 90,110,919 90,488,232 180,599,151 44,485 151,702,425 332,346,061 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. 54 CT REIT 2015 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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 may be, 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. 15. UNIT BASED COMPENSATION PLANS Deferred Unit Plan for Trustees CT REIT offers a DU Plan for members of its Board of Trustees who are not employees or officers of CT REIT or its affiliates. Under this plan, trustees 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 defer by the volume weighted average price at which Units of CT REIT trade on the Toronto Stock Exchange 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 the right to receive an equivalent number of Units issued by CT REIT 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 fair market value of Units of CT REIT at the time the conversion takes place pursuant to the terms of the DU Plan. As at December 31, 2015, accrued Trustee compensation costs, which is included in other liabilities, totaled $726 (2014 – $440). Compensation expense recorded for the year ended December 31, 2015 was $57 (2014 – $51). The fair value of DUs is equal to the trading price of Units, which is a Level 1 input (see Note 24(a)). Performance Unit Plan CT REIT granted PUs to its executives. Each PU entitles the executive to receive a cash payment equal to the volume weighted average trading price of a Unit of CT REIT on the TSX during the 10-calendar day period commencing on 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 PU Plan. The performance period of each PU award is approximately three years from the date of issuance. As at December 31, 2015, the accrued compensation costs, which is included in other liabilities, totaled $917 (2014 – $232). Compensation expense recorded for the year ended December 31, 2015 for PUs granted to executive officers was $685 (2014 – $232). The fair value of PUs is equal to the trading price of Units, which is a Level 1 input (see Note 24(a)). Restricted Unit Plan for Executives CT REIT offers a RU Plan for its executives. Under this plan, executives of CT REIT may elect to receive all or a portion of their annual bonus in RUs which entitle the executive to receive an equivalent number of Units issued by CT REIT or, at the executive’s election, the cash equivalent thereof, at the end of the vesting period which is generally five years from the annual bonus payment date. The number of RUs to be issued is determined by dividing the annual bonus amount the executive has elected to defer by the volume weighted average price at which Units of CT REIT trade on the Toronto Stock Exchange during the five trading days immediately prior to the tenth business day following the release of CT REIT’s financial statements for the year in which the annual bonus was earned. The RU Plan also provides for discretionary grants of RUs which entitle the executive to receive an equivalent number of Units of CT REIT 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 of CT REIT 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, 2015, the accrued compensation costs, which is included in other liabilities, totaled $537 (2014 – $328). Compensation expense for the year ended December 31, 2015 was $41 (2014 – $53). The fair value of RUs is equal to the trading price of Units, which is a Level 1 input (see Note 24(a)). CT REIT 2015 ANNUAL REPORT 55 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 16. NON-CONTROLLING INTERESTS Details of non-wholly owned subsidiaries of CT REIT that have material non-controlling interests are as follows: Name of subsidiary CT REIT Limited Partnership Proportion of ownership interests held by non-controlling interests Net income and comprehensive income allocated to non-controlling interests December 31, 2015 December 31, 2014 2015 2014 52.35% 50.31% $ 121,705 $ 158,979 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. 17. 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 1 to 20 years, with a weighted average remaining initial term of approximately 13.6 years. Annual base minimum rent for CTC leases had weighted average annual rent escalations of approximately 1.5% per year commencing January 1, 2015. The components of revenue are as follows: For the year ended December 31, 2015 Base minimum rent Straight-line rent Subtotal base rent Property tax and operating expense recoveries Capital expenditure and interest recovery charge Other revenues Property revenue For the year ended December 31, 2014 Base minimum rent Straight-line rent Subtotal base rent Property tax and operating expense recoveries Capital expenditure and interest recovery charge Other revenues 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 56 CT REIT 2015 ANNUAL REPORT CTC Other Total $ 257,458 $ 9,688 $ 267,146 25,703 428 26,131 283,161 76,421 2,289 2 10,116 5,662 77 452 293,277 82,083 2,366 454 $ 361,873 $ 16,307 $ 378,180 CTC Other Total $ 235,851 $ 7,867 $ 243,718 28,104 581 28,685 263,955 68,092 165 – 8,448 3,818 – 313 272,403 71,910 165 313 $ 332,212 $ 12,579 $ 344,791 December 31, 2015 $ 277,915 1,140,866 2,670,136 $ 4,088,917 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (b) Property expense The major components of property expense consist of property taxes and other recoverable costs: For the year ended December 31, Property taxes Other recoverable operating costs Ground lease Property management1 Property insurance Other non-recoverable costs Property expense 1 Includes $2,336 (2014 – $2,333) with CTC. See Note 23. 18. GENERAL AND ADMINISTRATIVE EXPENSE General and administrative expense is comprised of the following: For the year ended December 31, Services Agreement with CTC1 Personnel expense Other General and administrative expense 1 See Note 23. 19. INTEREST AND OTHER FINANCING CHARGES Interest and other financing charges are comprised of the following: For the year ended December 31, Interest on Class C LP Units1 Interest on debentures payable Interest on mortgages payable Interest on Bank Credit Facility Standby fees – Bank Credit Facility Amortization of financing costs – Bank Credit Facility Amortization of debentures payable financing cost Capitalized interest Interest and other financing charges 1 Paid or payable to CTC. 20. CHANGES IN WORKING CAPITAL AND OTHER Changes in working capital are comprised of the following: For the year ended December 31, Changes in working capital and other Tenant and other receivables Other assets Other liabilities Changes in working capital and other 2015 2014 $ 74,876 $ 68,615 5,592 3,345 2,729 144 170 3,225 2,147 2,515 95 80 $ 86,856 $ 76,677 2015 2014 $ 3,334 $ 3,288 3,908 2,410 2,134 3,011 $ 9,652 $ 8,433 2015 2014 $ 78,318 $ 81,643 6,359 1,631 647 487 151 131 87,724 (390) – 652 355 492 182 – 83,324 (333) $ 87,334 $ 82,991 2015 2014 $ 7,838 $ (9,653) 1,972 (340) 3,176 8,701 $ 9,470 $ 2,224 CT REIT 2015 ANNUAL REPORT 57 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 21. SEGMENTED INFORMATION CT REIT has one reportable segment, which comprises the ownership and operation of primarily retail investment properties located in Canada. 22. COMMITMENTS AND CONTINGENCIES CT REIT has agreed to indemnify, in certain circumstances, the trustees and officers of CT REIT and its subsidiaries. As at December 31, 2015, CT REIT has obligations for approximately $63,070 (December 31, 2014 – $18,530) in future payments for the committed acquisitions and the completion of developments which are expected to be incurred in 2016. Included in the commitments are $58,208 to CTC. 23. 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 the 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 the 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. There was a fixed maximum fee not to exceed $3,334 for the year ended December 31, 2015. The Services Agreement’s initial term ended on December 31, 2015 and is renewable for further one year terms thereafter, unless otherwise terminated. The Services Agreement has been renewed for 2016, and CTC will provide such Services on a cost recovery basis. Property Management Agreement Under the Property Management Agreement, CTC provides the REIT with customary property management services (the ‘‘Property Management Services’’). CTC agreed to provide Property Management Services to the REIT on a cost recovery basis pursuant to which the REIT reimburses CTC for all costs and expenses incurred by CTC in connection with providing the Property Management Services, plus applicable taxes. There was a fixed maximum fee not to exceed $2,336 for the year ended December 31, 2015. The Property Management Agreement’s initial term ended 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, and CTC will provide such Services on a cost recovery basis. (b) Transactions and balances with related parties Transactions with CTC are comprised of the following, excluding acquisition and intensification activities with CTC which are contained in Note 3: For the year ended December 31, Rental revenue Property Management and Services Agreement expense Distributions on Units Distributions on Class B LP Units1 Interest expense on Class C LP Units2 1 Includes distributions deferred at the election of the holders of the Class B LP Units 2015 2014 $ 361,873 $ 332,212 5,670 39,673 64,813 78,318 5,621 38,877 58,971 81,643 2 Includes interest of $125 (2014 – $nil) for the bridge loan received for the period from date that the Series 1 Class C LP Units was redeemed (June 1, 2015) to date of the issuance of the debentures (June 9, 2015). The net balance due to CTC is comprised of the following: Tenant and other receivables Class C LP Units Amounts payable on Class C LP Units Loans receivable in lieu of payments on Class C LP Units Other liabilities Distributions payable on Units and Class B LP Units1 Loans receivable in lieu of distributions on Class B LP Units Net due to CTC 1 Includes distributions deferred at the election of the holders of the Class B LP Units. 58 CT REIT 2015 ANNUAL REPORT December 31, 2015 December 31, 2014 $ (893) $ (8,505) 1,686,968 1,847,279 75,093 (68,805) 4,396 11,115 (2,106) 75,263 (68,425) 6,023 8,908 (565) $ 1,705,768 $ 1,859,978 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (c) Compensation of executives and independent trustees The remuneration of key 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, is as follows: For the year ended December 31, Salaries and short-term employee benefits Unit-based awards1 Total 2015 $ 3,595 783 $ 4,378 2014 $ 2,226 336 $ 2,562 1 Unit-based awards, as described in Note 15, includes (gain) loss adjustments as a result of the change in the fair market value of the Units of $77 (2014 – $285). 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, who were not employees or officers of CT REIT or any of its affiliates, consists of an annual retainer and meeting fees. 24. 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, debentures payable and mortgages payable at December 31, 2015, is $1,747,717, $346,120 and $60,940 respectively. The fair value measurement of the Class C LP Units, debentures payable and mortgages payable is based on Level 2 inputs. The significant inputs used to determine the fair value of the Class C LP Units, debentures payable and mortgages payable are interest rates, interest rate volatility, and credit spreads. There have been no transfers during the period between levels. Financial assets consist of cash and cash equivalents, tenant and other receivables, and deposits, which are classified as loans and receivables and carried at amortized cost. Financial liabilities, other than those discussed in the preceding paragraph, consist of other liabilities and distributions payable, which are classified as other liabilities and carried at amortized cost, except for DUs, RUs and PUs which are included in other liabilities and carried at fair value. 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’s exposure to interest rate changes is limited as a significant portion of its indebtedness is at fixed interest rates. Exposure to interest rate changes is dependent on the extent to which CT REIT has short term borrowings under its Bank Credit Facility, any new debt is issued or assumed on acquisitions, new series of Class C LP Units are issued to finance future real estate transactions or any existing Class C LP Units being re-priced or redeemed, as all are market dependent (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 2015 ANNUAL REPORT 59 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 centres. 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 $nil (2014 – $78,000) in short-term borrowings outstanding under its Bank Credit Facility. 25. 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, the Trust Indenture dated June 9, 2015 pursuant to which the Series A and B unsecured debentures were issued, and the Bank Credit Facility. The following schedule details the capitalization of CT REIT: Liabilities Class C LP Units Mortgages payable Debentures payable Bank Credit Facility Equity Unitholders’ equity Non-controlling interests Total December 31, 2015 December 31, 2014 $ 1,686,968 $ 1,847,279 60,129 347,948 – 58,494 – 78,000 1,037,209 1,176,154 982,588 1,019,601 $ 4,308,408 $ 3,985,962 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, the Trust Indenture 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 of assets ‰ 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 of assets ‰ 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 60 CT REIT 2015 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As at December 31, 2015, 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. 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 expiry of the initial fixed rate period on Class C LP Units 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: Class C LP Units1 Payments on Class C LP Units1 Debentures payable Interest on debentures payable Mortgages payable Other liabilities Interest on mortgages payable Distributions payable2 Payable on Class C LP Units, net of loans receivable Total 2016 2017 2018 2019 2020 2021 and thereafter $ 1,686,968 $ 200,000 $ 70,418 $ – $ – $ 216,550 $ 1,200,000 Payments Due by Period 990,665 350,000 94,820 60,023 24,636 11,497 10,745 6,288 71,772 68,007 67,401 67,401 61,917 – 11,332 4,074 23,155 3,318 10,745 6,288 – 11,332 1,240 1,481 3,246 – – – 11,332 17,083 – 2,701 – – – 11,332 37,626 – 2,232 – – – 11,332 – – – – – 654,167 350,000 38,160 – – – – – TOTAL $ 3,235,642 $ 330,684 $ 155,724 $ 98,517 $ 118,591 $ 289,799 $ 2,242,327 1 Assume redemption on expiry of initial fixed rate period for each series. 2 On Units and Class B LP Units. 26. SUBSEQUENT EVENTS The Initial Fixed Rate Period of the Series 2 Class C LP Units expires on May 31, 2016. CT REIT has delivered a notice of redemption to CTC, the holder of such Class C LP Units. 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, 2016. During February 2016, CT REIT completed three investment property acquisitions from CTC. The total purchase price of approximately $45,450 was fully satisfied by issuances of Class B and Class C LP Units. CT REIT 2015 ANNUAL REPORT 61 GLOSSARY OF TERMS CT REIT Glossary of Terms “AFFO” is 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. “Change of Control” means the acquisition by a person, or group of persons acting jointly or in concert, directly or indirectly, other than CTC or 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 “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 adopted by the REIT from time to time for the purposes of its public financial reporting. “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. LP Units into Units of the REIT; and (ii) in respect of any other securities “IFRS” means International Financial Reporting Standards as issued by the that are convertible or exchangeable into Units of the REIT, only dilution International Accounting Standards Board and as adopted by the resulting from the conversion or exercise of such other convertible or Chartered Professional Accountants of Canada in Part I of The CPA exchangeable securities held by such person or group of persons). 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 A LP Unit” means any one of them. “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. “Class C LP Units” means, collectively, the Class C limited partnership units of the Partnership, and “Class C 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 obligation of such Person issued or assumed as the deferred purchase price of property, (iv) any Capital Lease Obligation of such Person, and “Closing” means the closing of the REIT’s Initial Public Offering, Acquisition (v) any obligations of the type referred to in clauses (i) through (iv) of another and other related transactions on October 23, 2013. Person the payment of which such Person has guaranteed or for which “Competitor” means 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. “CTC” means Canadian Tire Corporation, Limited together with its Subsidiaries (excluding the REIT and the REIT’s Subsidiaries), or, as the context requires, any of them. “CTC Banner” means a CTC name or trademark, including the Canadian Tire, Mark’s and FGL Sports banners, including Sport Chek, Sports Experts and Atmosphere, names or trademarks. “CTREL” means Canadian Tire Real Estate Limited, a wholly-owned subsidiary of CTC. 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 a 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 payable to holders of the Units, accrued liabilities arising in the ordinary course of business which are not overdue or which are being contested in good faith, 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 is presented as a current liability on the balance sheet, and C) Units, Class A LP Units, Class B LP Units, Class C LP Units, Class D Units and exchangeable securities do not constitute Indebtedness. Furthermore, “Development Agreement” means the development agreement among obligations referred to in clauses (i) through (v) shall be adjusted, as and to the REIT, the Partnership, CTREL and CTC entered into at Closing, as the extent applicable, for (a) any adjustments which correspond to those described under “Arrangements with CTC — Commercial Agreements with made in accordance with the definition of Consolidated EBITDA, and CTC” of the AIF. (b) Proportionate Consolidation Adjustments. 62 CT REIT 2015 ANNUAL REPORT GLOSSARY OF TERMS “Initial Public Offering” refers to the distribution to the public of the Units “Services Agreement” means the services agreement among the REIT, pursuant to the Prospectus. “Intensification” means the development of a property, site or area at a higher density than currently exists, through development, redevelopment, infill and expansion or conversion of existing buildings. 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 “Investment Properties” means the portfolio of properties owned by incurred by CTC in connection with providing the Services. CT REIT. “SIFT Rules” means the rules applicable to SIFT trusts and SIFT “Net Income Per Unit – Basic” is calculated by dividing net income partnerships in the Tax Act. 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 “Special Voting Units” means, collectively, special voting units of the REIT, and “Special Voting Unit” means any one of them. “Straight-Line Rent” refers to the recognition of rental revenue on a straight-line basis over the lease term in accordance with IAS 17, Leases. outstanding for the effects of all dilutive potential equity instruments, which “Unitholders” means holders of Units, and “Unitholder” means any one of comprises settling the Class C LP Units with Class B LP Units, as well as them. restricted and deferred Units issued under various plans. “Units” means trust units in the capital of the REIT, other than Special “NOI” means property revenue less property expense (including property Voting Units, and “Unit” means any one of them. management fees). “Western Canada” means the provinces of British Columbia, Alberta, “Non-Controlling Interest” refers to the classification of Class B LP Units, Saskatchewan and Manitoba, and the Northwest Territories and Yukon which are presented as a component of equity as they represent equity Territory. interests in the Partnership not attributable to CT REIT. “Operating Leases” refers to the lease agreements of the Investment Properties treated in accordance with International Accounting Standard (“IAS 17”), Leases. “Property Management Agreement” means the property management agreement among the Partnership, CTC and CTREL entered into at Closing, pursuant to which CTC provides the Partnership with customary Property Management Services. “Prospectus” means the final 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. The initial term under the ROFO Agreement is 10 years and thereafter will continue in effect until such time as CTC ceases to hold a majority of the voting units, being the Units and Special Voting Units. CT REIT 2015 ANNUAL REPORT 63 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 FRANC¸ AISE DU RAPPORT Pour te´ le´ charger la version franc¸ aise du rapport annuel de CT Real Estate Investment Trust ou demander un exemplaire, veuillez consulter le site Web de la fiducie, a` www.ctreit.com/fr. l’adresse 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 Jane Shaw Associate Vice-President, Corporate & External Communications jane.shaw@cantire.com ANNUAL MEETING OF UNITHOLDERS St. Andrew’s Club & Conference Centre 150 King Street West 16th Floor Toronto, Ontario Tuesday, May 10, 2016 10:00 a.m. (EDT) EXCHANGE LISTINGS The Toronto Stock Exchange (CRT.UN) AUDITORS Deloitte LLP Chartered Professional 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. 64 CT REIT 2015 ANNUAL REPORT LEVERAGING OUR STRENGTHS CT REIT benefits from a national portfolio featuring many of Canada’s best-located retail properties and from our close alignment with CTC. We have direct insights into CTC’s real estate needs and long-term planning, which, in turn, guide us in shaping our plans. In 2015, we built upon this foundation and created value for our Unitholders through successful execution across a range of strategic initiatives. Among them was the completion of development projects at Martensville, Saskatchewan, where a new Canadian Tire store was built, and at High River, Alberta, where new Canadian Tire and Mark’s stores were completed. Another highlight was our acquisition of Arnprior Mall, a redevelopment opportunity to be anchored by new Canadian Tire and Mark’s stores. Our investments in these high-potential properties demonstrate the strategic thinking and careful execution that enable CT REIT to create long- term value for our Unitholders. KEY ACHIEVEMENTS FOR 2015 $238.1 MILLION Invested $238.1 million in acquisitions, intensifications and developments. 1,168,000 SQ. FT. Completed 18 acquisitions, two developments and 15 intensification projects, adding 1,168,000 square feet of GLA to the portfolio. $350 MILLION Raised $350 million in unsecured debt through two series of debentures that set record-low rates: $150 million at 2.852 per cent, due 2022, and $200 million at 3.527 per cent, due 2025. 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 WATERDOWN, ONTARIO C T R E I T 2 0 1 5 A N N U A L R E P O R T Built to perform in a multi-channel retail world. Change is part of retail, and that’s a good thing. Meeting changing customer needs and expectations with new products and services is what keeps the retail sector dynamic and productive. No company understands this like Canadian Tire Corporation (CTC). CTC has been growing and evolving to serve customers better for nearly 94 years. That’s still true – perhaps now more than ever – as the Corporation uses its unsurpassed knowledge of the Canadian market to keep meeting customer needs in a multi-channel retail environment. High-quality real estate continues to provide CT REIT’s largest tenant with a strong competitive edge. The combination of national scale, prime locations, flexible properties and a dynamic anchor tenant with an iconic brand helps give CT REIT an edge when it comes to providing Unitholders with an investment that is strongly positioned to deliver reliable, durable and growing performance – today and tomorrow. www.ctreit.com CHARLOTTETOWN, PEI 

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