2017 Annual Report
Management's Discussion and Analysis
CT REIT
Fourth Quarter and Full Year 2017
TABLE OF CONTENTS
Forward-looking Disclaimer
1.0
Preface
1.1
1.2
1.3
1.4
1.5
1.6
1.7
2.0
3.0
4.0
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
Basis of Presentation
Definitions
Accounting Estimates and Assumptions
Quarterly and Annual Comparisons in this MD&A
Key Operating Performance Measures and Additional Non-GAAP Measures
Review and Approval by the Board of Trustees
Nature and Formation
Growth Strategy and Objectives
Summary of Selected Financial and Operational Information
Overview of the Property Portfolio
Property Profile
Six Largest Urban Markets
Revenue by Region
Fair Value of Property Portfolio
2017 Investment Activities
Development Activities
Investment and Development Funding
Lease Maturities
Top 10 Tenants Excluding CTC Banners
Leasing Activities
Recoverable Capital Costs
5.0
Results of Operations
5.1
5.2
Financial Results for the Three Months and Year Ended December 31, 2017
Non-GAAP Measures
6.0
Liquidity and Financial Condition
6.1
6.2
6.3
6.4
6.5
Liquidity
Discussion of Cash Flows
Credit Ratings
Debt and Capital Structure
Interest Coverage Ratio
3
4
4
4
4
4
4
5
5
5
6
7
7
9
9
10
11
13
14
15
16
16
16
17
17
20
22
22
23
23
23
26
CT REIT 2017 ANNUAL REPORT 1
TABLE OF CONTENTS (continued)
6.6
6.7
6.8
6.9
6.10
6.11
6.12
6.13
Indebtedness Ratio
Class C LP Units
Debentures
Mortgages Payable
Credit Facilities
Capital Strategy
Commitments and Contingencies
Base Shelf Prospectus
7.0
Equity
7.1
7.2
7.3
7.4
8.0
9.0
9.1
9.2
9.3
Authorized Capital and Outstanding Units
Equity
Distributions
Book Value per Unit
Related Party Transactions
Accounting Policies and Estimates
Significant Areas of Estimation
Standards, Amendments and Interpretations Issued and Adopted
Standards, Amendments and Interpretations Issued but Not Yet Adopted
10.0
Non-GAAP Measures
10.1
10.2
10.3
10.4
10.5
10.6
10.7
Net Operating Income
Funds From Operations and Adjusted Funds From Operations
AFFO Payout Ratio
Diluted Non-GAAP per Unit Calculations
Adjusted Cashflow From Operations
Earnings Before Interest and Other Financing Costs, Taxes and Fair Value Adjustments
Selected Quarterly Consolidated Information
11.0
Enterprise Risk Management
12.0
Internal Controls and Procedures
13.0
Forward-looking Information
2 CT REIT 2017 ANNUAL REPORT
26
27
28
28
28
29
30
30
30
30
31
32
33
33
35
35
35
35
37
37
38
40
41
41
41
42
42
45
45
MANAGMENT'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,
(referred to herein as "CT REIT", the "Trust" or the "REIT", unless the context requires otherwise), 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 13.0 in this MD&A for a more detailed discussion of the REIT’s use of forward-looking statements.
CT REIT 2017 ANNUAL REPORT 3
MANAGMENT'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, 2017 (also referred
to as "2017") and should be read in conjunction with the REIT’s audited consolidated financial statements (“consolidated financial statements”) and
accompanying notes for 2017 which have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the
International Accounting Standards Board ("IASB"). In addition, the following MD&A should be read in conjunction with CT REIT’s forward-looking information
found in section 13.0 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 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 judgments 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 9.0 in this MD&A for
further information.
Financial data included in this MD&A includes material information as of February 12, 2018. 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 2017 (three months ended December 31, 2017) are against results for Q4 2016 (three months
ended December 31, 2016) and comparisons of results for the year ended 2017 are against results for the year ended 2016. Certain of the prior period
figures have been aligned to management's current view of CT REIT's operations.
All amounts in this MD&A are in thousands of Canadian dollars, except per unit, unit, square foot amounts or unless otherwise indicated. Rounded numbers
are used in this MD&A and, as such, totals may not add up to 100 percent.
1.5 Key Operating Performance Measures and Additional Non-GAAP Measures
The key operating performance measures 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.
Net operating income (“NOI”), same store NOI, same property NOI, funds from operations (“FFO”), FFO per unit - basic, FFO per unit - diluted (non-GAAP),
adjusted funds from operations (“AFFO”), AFFO per unit - basic, AFFO per unit - diluted (non-GAAP), AFFO payout ratio, adjusted cashflow from operations
("ACFO") and earnings before interest and other financing costs, taxes and fair value adjustments (“EBITFV”) are measures used by management to track
and assess CT REIT’s performance in meeting its principle objective of creating Unitholder value (referred to as "non-GAAP measures"). These non-GAAP
measures are not defined by IFRS, also referred to as generally accepted accounting principles ("GAAP"), and therefore should not be construed as
alternatives to net income or cash flow from operating activities calculated in accordance with IFRS.
For further information on the non-GAAP measures used by management and for reconciliations to the nearest GAAP measures, refer to section 10.0.
4 CT REIT 2017 ANNUAL REPORT
MANAGMENT'S DISCUSSION AND ANALYSIS
1.6 Review and Approval by the Board of Trustees
The Board of Trustees (the "Board”), on the recommendation of its Audit Committee, approved for issuance the contents of this MD&A on
February 12, 2018.
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 owned an 85.5%
effective interest in CT REIT as of December 31, 2017, 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.
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 AFFO1 per unit.
Future growth is expected to continue to be achieved from a number of sources including:
1.
The portfolio of Canadian Tire store leases generally contains contractual rent escalations of approximately 1.5% per year, on average, over the
initial term of the leases and have a weighted average remaining lease term of 11.7 years;
2. CT REIT has contractual arrangements with CTC whereby CT REIT has a right of first offer2 (“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 Non-GAAP measure. Refer to section 10.0 for further information.
2 The ROFO Agreement shall continue in effect until the later of October 2023 and such time as CTC ceases to hold a majority of the voting units, being the Units and Special Voting Units (as defined
in section 7.0).
CT REIT 2017 ANNUAL REPORT 5
MANAGMENT'S DISCUSSION AND ANALYSIS
3.0 Summary of Selected Financial and Operational Information
Summary of Selected Financial and Operational Information
Readers are reminded that certain key performance measures may not have standardized meanings under GAAP. For further information on the REIT’s
operating measures and non-GAAP measures, refer to sections 1.0 and 10.0.
The following table provides selected annual consolidated financial and operational information for the last three fiscal periods completed.
(in thousands of Canadian dollars, except unit, per unit and square footage amounts)
For the year ended December 31,
Property revenue
Income before interest and other financing charges, taxes and fair value adjustments 1
Net operating income 1
Net income
Net income per unit (basic) 2
Net income per unit (diluted) 4
Funds from operations 1
FFO per unit (diluted, non-GAAP) 1,2,3
Adjusted funds from operations 1
AFFO per unit (diluted, non-GAAP) 1,2,3
Distributions per unit - paid 2
AFFO payout ratio 1
Excess of AFFO over distributions:
Cash retained from operations before distribution reinvestment 6
Per unit (diluted, non-GAAP) 1,2,3
Adjusted cashflow from operations1,7
Weighted average number of units outstanding 2
Basic
Diluted 4
Diluted (non-GAAP) 1,3
Period-end units outstanding 2
Total assets
Total indebtedness
Book value per unit 2
Market price per Unit - Close (end of period)
OTHER DATA
Weighted average interest rate8
Indebtedness ratio
Interest coverage (times)
Weighted average term to debt maturity (in years)8
Gross leasable area (square feet)5
Occupancy rate5,9
1 Non-GAAP measure. Refer to section 10.0 for further information.
2 Total units means Units and Class B LP Units outstanding.
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Year Ended
2017
2016
443,303
334,193
322,253
317,277
1.501
1.232
237,617
1.124
194,371
0.919
0.700
76%
46,795
0.221
195,723
$
$
$
$
$
$
$
$
$
$
$
$
$
$
407,165
300,275
287,089
259,079
1.293
1.079
214,877
1.071
172,794
0.862
0.680
79%
37,449
0.187
176,355
$
$
$
$
$
$
$
$
$
$
$
$
$
2015
378,180
281,968
265,350
234,480
1.251
0.972
194,711
1.038
151,660
0.808
0.663
82%
27,588
0.147
N/A
211,310,245
200,439,916
187,511,930
313,338,770
307,219,806
321,729,709
211,456,486
200,558,552
187,607,169
213,738,161
206,846,799
189,600,687
5,455,398
2,544,972
13.39
14.50
$
$
$
$
5,014,601
2,383,123
12.52
15.00
$
$
$
$
4,350,903
2,095,045
11.67
13.00
4.08%
46.7%
3.46
10.0
4.06%
47.5%
3.49
10.6
4.24%
48.2%
3.23
11.2
25,849,773
24,659,316
21,512,053
98.6%
99.7%
99.9%
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 7.0.
5 Refers to retail, mixed-use commercial and distribution centre properties and excludes properties under development.
6 Refer to section 7.0 for further information.
7 New non-GAAP measure adopted in 2017. Refer to section 10.0 for further information.
8 Excludes the credit facilities.
9 Occupancy and other leasing key performance measures have been prepared on a committed basis which includes the impact of existing lease
agreements contracted on or before December 31, 2017, December 31, 2016 and December 31, 2015.
6 CT REIT 2017 ANNUAL REPORT
MANAGMENT'S DISCUSSION AND ANALYSIS
4.0 Overview of the Property Portfolio
4.1 Property Profile
The property portfolio as at December 31, 2017 consists of 319 properties, four distribution centres ("DC"), one mixed-use commercial property and seven
properties under development (collectively, the "Properties"). The Properties are located in each of the provinces and in two territories across Canada. The
properties, DC's and mixed-use commercial property contain approximately 25.8 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, Ontario. CTC is CT REIT’s largest tenant. At December 31, 2017, CTC represented 95.3% of total GLA
(December 31, 2016 - 94.2%) and 93.2% of annualized base minimum rent (December 31, 2016 - 93.8%).
CT REIT's property portfolio's occupancy, excluding properties under development, is as follows:
(in square feet)
Property Type
Canadian Tire stores
Distribution centres
Mixed-use property
Third party tenants
Other CTC Banners 1
Total
As at December 31, 2017
GLA
Occupied GLA Occupancy rate 2
20,016,117
20,016,117
3,914,871
3,682,834
281,280
274,921
1,189,102
1,074,854
448,403
448,403
25,849,773
25,497,129
100%
94.1%
97.7%
90.4%
100%
98.6%
1 Includes Mark’s Work Wearhouse® and L’Équipeur® and various FGL Sports® stores, including Sport Chek, Sports Experts and Atmosphere (referred to herein as "Other CTC Banners").
2 Occupancy and other leasing key performance measures have been prepared on a committed basis which includes the impact of existing lease agreements contracted on or before December 31, 2017.
(in square feet)
Property Type
Canadian Tire stores
Distribution centres
Mixed-use property
Third party tenants
Other CTC Banners 1
Total
As at December 31, 2016
GLA
Occupied GLA Occupancy rate 2
19,329,513
19,329,513
3,920,269
3,920,269
281,199
705,491
422,844
275,781
629,453
422,844
24,659,316
24,577,860
100%
100%
98.1%
89.2%
100%
99.7%
1 Includes Mark’s Work Wearhouse® and L’Équipeur® and various FGL Sports® stores, including Sport Chek, Sports Experts and Atmosphere (referred to herein as "Other CTC Banners").
2 Occupancy and other leasing key performance measures have been prepared on a committed basis which includes the impact of existing lease agreements contracted on or before December 31, 2016.
The occupancy rate as at December 31, 2017 declined by 1.1% compared to December 31, 2016 primarily as a result of changes in existing lease
arrangements at CT REIT's DCs located in Calgary, Alberta. Refer to section 4.10 - Leasing Activities, for further details.
CT REIT 2017 ANNUAL REPORT 7
MANAGMENT'S DISCUSSION AND ANALYSIS
The REIT's property portfolio consists of:
As at
Canadian Tire single tenant properties
Other single tenant 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
December 31, 2017 ¹
December 31, 2016
254
12
49
4
4
1
324
7
331
254
—
37
4
4
1
300
3
303
1Included in the Canadian Tire single tenant properties is one income-producing property subject to a ground lease.
As at
Gas bars at retail properties
December 31, 2017
December 31, 2016
99
96
CT REIT’s Properties by region, as a percentage of total GLA as at December 31, 2017 are as follows:
1 Excluding properties under development.
2 Occupancy and other leasing key performance measures have been prepared on a committed basis which includes the impact of existing lease agreements contracted
on or before December 31, 2017.
8 CT REIT 2017 ANNUAL REPORT
MANAGMENT'S DISCUSSION AND ANALYSIS
4.2 Six Largest Urban Markets
A significant portion of CT REIT’s Properties, excluding properties under development, are located in the following large urban markets:
As at
Vancouver
Calgary
Edmonton
Toronto
Ottawa
Montreal
Percentage of Annualized Base Minimum Rent 1
December 31, 2017
December 31, 2016
3.3%
2.4%
4.1%
22.5%
4.3%
11.9%
48.5%
3.4%
2.9%
4.2%
22.6%
4.5%
12.2%
49.8%
1 Occupancy and other leasing key performance measures have been prepared on a committed basis which includes the impact of existing lease agreements contracted on or before December 31, 2017
and December 31, 2016.
4.3 Revenue by Region
CT REIT’s Properties are located across Canada with approximately 65.4% of annualized base minimum rent in respect of properties in Ontario and Quebec.
1 Excluding properties under development.
2 Occupancy and other leasing key performance measures have been prepared on a committed basis which includes the impact of existing lease agreements contracted
on or before December 31, 2017.
CT REIT 2017 ANNUAL REPORT 9
MANAGMENT'S DISCUSSION AND ANALYSIS
4.4 Fair Value of Property Portfolio
The fair value of the Properties represents 99.7% of the total assets of CT REIT as at December 31, 2017.
(in thousands of Canadian dollars)
December 31, 2017
December 31, 2016
Income-
producing
properties
Properties
under
development
Total
investment
properties
Income-
producing
properties
Properties
under
development
Total
investment
properties
Balance, beginning of period
$
4,979,231 $
21,124 $
5,000,355 $
4,304,838 $
14,223 $
4,319,061
Property acquisitions (including transaction costs)
209,677
—
209,677
214,225
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 period 1
—
—
—
—
27,154
79,687
22,822
18,962
(18)
24,893
64,882
13,380
1,957
24,893
64,882
13,380
1,957
—
—
—
—
—
10,852
356,943
8,744
6,895
(27,154)
—
376,533
(376,533)
—
—
—
—
79,687
22,822
18,962
44,549
23,774
15,570
(18)
(258)
—
—
—
—
214,225
10,852
356,943
8,744
6,895
—
44,549
23,774
15,570
(258)
$
5,337,515 $
99,082 $
5,436,597 $
4,979,231 $
21,124 $
5,000,355
1 Includes purchased lands for $9,209 ( December 31, 2016 - $6,505) held for development.
Properties under development 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, 2017, 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 2017 independent appraisals were completed on 71 properties (2016 - 65 properties) having a fair value of $1,612,230 (2016 - $880,630).
Valuations determined by the overall capitalization rate ("OCR") method are most sensitive to changes in capitalization rates. Valuations determined by the
discounted cash flow ("DCF") method are most sensitive to changes in discount rates.
The significant inputs used to determine the fair value of CT REIT’s income-producing properties are as follows:
Properties valued by
the OCR method
Properties valued by
the DCF method
271
53
$
3,970,673
$
1,310,843
—%
—%
6.18%
—
6.96%
6.52%
—%
10
Number of properties
Value at December 31, 2017
Discount rate
Terminal capitalization rate
Overall capitalization rate
Hold period (years)
10 CT REIT 2017 ANNUAL REPORT
MANAGMENT'S DISCUSSION AND ANALYSIS
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
December 31, 2017
- 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
3,544,119 $
(426,554) $
1,188,649 $
(122,194)
3,675,416
3,817,117
(295,257)
(153,556)
1,226,451
1,267,045
3,970,673 $
— $
1,310,843 $
4,137,243
4,318,875
166,569
348,202
1,358,324
1,409,895
(84,393)
(43,799)
—
47,480
99,052
4,517,559 $
546,886 $
1,466,122 $
155,278
$
$
$
Included in CT REIT's Properties are nine buildings which are situated on ground leases with remaining initial terms of between one and 38 years, and an
average remaining initial term of 16 years. Assuming all extensions are exercised, the ground leases have remaining terms between 25 and 73 years with
an average remaining lease term of 40 years.
4.5 2017 Investment Activities
The following table presents income-producing properties acquired, intensified or developed during the year ended December 31, 2017.
(in thousands of Canadian dollars, except for GLA amounts)
Transaction
date
GLA
Total
investment cost
Property Location
Martensville, SK 1
Cambridge, ON 2
Sainte-Agathe-des-Monts, QC 2
Victoria (View Royal), BC 2
Dartmouth, NS 2
Bradford, ON 1
Athabasca, AB 1
Picton, ON 4
Edmundston, NB 1
Marathon, ON 1
Maniwaki, QC 2
Elmira, ON 3
Victoria (Langford), BC 2
CIBC Portfolio 2
Quesnel, BC 1
Martensville, SK 1
New Liskeard, ON 1
Oliver, BC 2
Hamilton, ON 2
Sudbury, ON 2
Yorkton, SK 2
Miscellaneous free standing retail buildings
Total
1 Intensification of an existing income-producing property.
2 Acquisition of income-producing property(ies).
3 Development project.
4 Acquisition of an income-producing property subject to a ground lease.
January 2017
February 2017
February 2017
February 2017
March 2017
April 2017
April 2017
April 2017
June 2017
June 2017
June 2017
June 2017
June 2017
August 2017
December 2017
December 2017
December 2017
December 2017
December 2017
December 2017
December 2017
December 2017
10,380
90,862
77,541
49,707
62,565
14,539
7,249
-
2,885
3,770
27,131
34,784
67,687
89,453
2,500
8,000
17,584
73,052
126,252
147,885
264,045
9,240
1,187,111 $
236,831
CT REIT 2017 ANNUAL REPORT 11
MANAGMENT'S DISCUSSION AND ANALYSIS
In Q1 2017, CT REIT completed the acquisition from CTC of one single tenant property with a Canadian Tire store located in Dartmouth, Nova Scotia and
three multi-tenant properties which are anchored by existing Canadian Tire stores located in Cambridge, Ontario, Sainte-Agathe-des-Monts, Quebec and
Victoria (View Royal), British Columbia. During Q1 2017, CT REIT also completed a third party tenant intensification at an existing income-producing property
in Martensville, Saskatchewan.
In Q2 2017, CT REIT completed intensifications of existing Canadian Tire stores in Bradford and Marathon, Ontario, Athabasca, Alberta and Edmundston,
New Brunswick and completed the development of a single tenant Canadian Tire store in Elmira, Ontario. During Q2 2017, the REIT also acquired, from a
third party, a property in Picton, Ontario that is subject to a ground lease with Canadian Tire. It is expected that the Canadian Tire store in Picton, Ontario
will be expanded and once completed will also be acquired by CT REIT. In Q2 2017, CT REIT also completed the acquisition from CTC of two single tenant
Canadian Tire stores in Maniwaki, Quebec and Victoria (Langford), British Columbia.
In Q3 2017 CT REIT completed the acquisition, from a third party, of an income-producing real estate portfolio consisting of 12 free standing Canadian
Imperial Bank of Commerce bank branches ("CIBC") located across Canada.
In Q4 2017, CT REIT completed the intensifications of existing Canadian Tire stores in Quesnel, British Columbia and New Liskeard, Ontario and the
development of a free standing building for a CTC Banner store at an existing income-producing property in Martensville, Sasketchewan. During Q4 2017,
the REIT also acquired, from a third party, four multi-tenant properties which are anchored by existing Canadian Tire stores located in Oliver, British
Columbia, Hamilton and Sudbury, Ontario and Yorkton, Saskatchewan.
During 2017, CT REIT completed the development of four free standing buildings comprised of 9,240 square feet of GLA and one land lease. The developments
occurred at CT REIT’s existing retail properties in Winnipeg, Manitoba, High River and Lethbridge, Alberta and Leamington, Ontario. These new retail units
are primarily occupied by third party tenants in the quick service restaurant industry.
12 CT REIT 2017 ANNUAL REPORT
MANAGMENT'S DISCUSSION AND ANALYSIS
The following section contains forward-looking information and users are cautioned that actual results may vary.
4.6 Development Activities
The following table provides details of the REIT's development activities as at December 31, 2017. 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. The "Committed
additional investment" column represents the approximate 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)
Property
La Sarre, QC 1, 6
Listowel, ON 1
Amos, QC 2
Antigonish, NS 3
Sudbury, ON 3
High River, AB 1
Martensville, SK 1
Bradford, ON 1, 6
Hamilton Rymal, ON 1, 6
Arnprior, ON 1
Toronto (Leslie Lakeshore), ON 1
Sherwood Park North, AB 2
Calgary, AB 3
Orillia, ON 4
Calgary, AB 7
Toronto (Canada Square), ON 4
TOTAL
Anticipated
date of
completion
Committed
to lease
Not
committed
to lease
Incurred
to-date 5
Committed
additional
investment 5
Potential
future
investment 5
Total
Total
—
20,000
73,000
179,000
—
—
24,000
28,500
Q1 2018
Q1 2018
Q1 2018
Q2 2018
Q3 2018
Q3 2018
Q3 2018
Q3 2018
Q4 2018
Q4 2018
Q4 2018
Q4 2018
Q1 2019
—
20,000
49,000
150,500
82,800
—
—
—
—
—
20,000
93,000
47,000
—
82,800
5,900
4,800
—
—
18,000
—
5,900
4,800
—
—
18,000
20,000
20,000
113,000
—
47,000
Q4 2020
193,000
125,000
318,000
TBD
TBD
TBD
TBD
TBD
TBD
TBD
TBD
655,300
226,200
881,500 $
99,082 $
39,227 $
12,890 $
151,199
1 Intensification of an existing income-producing property.
2 Development property.
3 Redevelopment property.
4 Redevelopment property. Potential building area and investment costs to be determined ("TBD").
5 Includes amounts related to projects in early stages of development.
6 Land lease.
7 Development land. Potential building area and investment costs to be determined ("TBD").
As at December 31, 2017, CT REIT had committed lease agreements for 655,300 square feet, of which 50% has been leased to CTC. A total of $99,082
has been expended to date on the developments described above, and CT REIT anticipates investing an additional $39,227 to complete the committed
developments. Included in the commitment is $31,372 due to CTC. These commitments exclude the redevelopment at the Canada Square and Orillia,
Ontario and Calgary, Alberta properties.
In Q1 2017, CT REIT acquired development lands in New Liskeard, Ontario for the expansion of an existing Canadian Tire store. During Q1 2017, CT REIT
also incurred its proportionate share of the costs to improve property development rights for the Canada Square property. The potential building area and
investment costs for the Canada Square property are still to be determined.
In Q2 2017, CT REIT acquired a redundant Canadian Tire store from CTC located in Calgary, Alberta for redevelopment, which is expected to be completed
by Q1 2019.
CT REIT 2017 ANNUAL REPORT 13
MANAGMENT'S DISCUSSION AND ANALYSIS
In Q3 2017, CT REIT acquired development lands in Sherwood Park North, Alberta from CTC on which a 93,000 square foot Canadian Tire store is expected
to be constructed by Q4 2018. During Q3 2017, CT REIT also acquired two redundant properties from CTC located in Sudbury and Arnprior, Ontario for
redevelopment. The Sudbury redevelopment property is expected to be completed by Q3 2018.
In Q4 2017, CT REIT acquired an enclosed shopping centre, from a third party, located in Orillia, Ontario with an existing GLA of approximately 318,000
square feet and an occupancy rate of 61% including third party tenants and a CTC store of approximately 131,000 square feet and 62,000 square feet,
respectively. CT REIT is assessing potential future development opportunities for this property. CT REIT also acquired, from a third party, development
lands in Calgary, Alberta adjacent to industrial properties owned by CT REIT.
4.7 Investment and Development Funding
Funding of investment and development activities for the three months and year ended December 31, 2017 was as follows:
Q4 2017 Investment and Development Activity
(in thousands of Canadian dollars)
Property
investments
Development
land
Developments
Intensifications
Funded with working capital to CTC
$
— $
— $
2,425 $
10,296 $
Funded with working capital to third parties 1
Funded with Bridge Facility
Capitalized interest and property taxes
Issuance of Class B LP Units to CTC
Mortgages payable
Total costs
1 Includes $870 for the construction of Other CTC Banner stores.
7,547
102,382
—
—
—
4,719
—
—
—
—
3,481
23,618
837
—
—
4,752
—
—
—
—
$
109,929 $
4,719 $
30,361 $
15,048 $
160,057
2017 Investment and Development Activity
(in thousands of Canadian dollars)
Property
investments
Development
land
Developments
Intensifications
Funded with working capital to CTC
$
28,800 $
6,640 $
14,623 $
16,453 $
Funded with working capital to third parties 1
Funded with Bridge Facility
Capitalized interest and property taxes
Issuance of Class B LP Units to CTC
Mortgages payable
Total costs
1 Includes $1,839 for the construction of Other CTC Banner stores.
40,907
102,382
—
37,588
—
4,980
—
—
1,760
—
7,566
23,618
1,957
13,075
6,000
8,253
—
—
187
—
$
209,677 $
13,380 $
66,839 $
24,893 $
314,789
Total
12,721
20,499
126,000
837
—
—
Total
66,516
61,706
126,000
1,957
52,610
6,000
Funding of investment and development activities for the year ended December 31, 2016 was as follows:
2016 Investment and Development Activity
(in thousands of Canadian dollars)
Property
investments
Development
land
Developments
Intensifications
Funded with working capital to CTC
$
5,790 $
1,184 $
328,039 $
Funded with working capital to third parties 1
Capitalized interest and property taxes
Issuance of Class B LP Units to CTC
Issuance of Class C LP Units to CTC
135,265
—
53,070
20,100
2,660
—
—
4,900
18,904
6,895
—
10,000
6,442 $
4,410
—
—
—
Total
341,455
161,239
6,895
53,070
35,000
Total costs
$
214,225 $
8,744 $
363,838 $
10,852 $
597,659
1Includes $2,000 for the construction of Other CTC Banner stores.
14 CT REIT 2017 ANNUAL REPORT
MANAGMENT'S DISCUSSION AND ANALYSIS
4.8 Lease Maturities
CTC is CT REIT’s largest tenant. As at December 31, 2017, CTC, including Canadian Tire stores and Other CTC Banners, had leased 24.3 million square
feet of GLA, with approximately 84.8% and 15.2% of the GLA attributable to retail and office, and DC properties, respectively. The weighted average term
of the retail leases with CTC, including Canadian Tire stores and Other CTC Banners, was 11.6 years, excluding the exercise of any renewals. The weighted
average term of the Canadian Tire store leases was 11.7 years, with a weighted average rental rate of $13.41 per square foot. The weighted average lease
term for CTC DC's was 15.8 years. The weighted average lease term of all tenants in the REIT's portfolio, excluding those in development properties, was
11.5 years.
The following graph presents the lease maturity profile from 2017 to 2037 (assuming tenants do not exercise renewal options or termination rights, if any)
as a percentage of annualized base minimum rent and GLA as of the time of the lease expiry.
CT REIT 2017 ANNUAL REPORT 15
MANAGMENT'S DISCUSSION AND ANALYSIS
4.9 Top 10 Tenants Excluding CTC Banners
CT REIT’s 10 largest tenants, excluding all CTC Banners and those located in properties under development, as represented by the percentage of total
annualized base rental revenue, are:
Rank
Tenant Name
1
2
3
4
5
6
7
8
9
Canadian Imperial Bank of Commerce
Shoppers Drug Mart
Metro
Overwaitea Foods
Best Buy
Precise Parklink
Marshalls
Royal Bank of Canada
Winners
10
Dollarama
Percentage of total
annualized base
minimum rent 1
0.52%
0.37%
0.34%
0.28%
0.26%
0.20%
0.20%
0.18%
0.17%
0.14%
2.7%
1 Occupancy and other leasing key performance measures have been prepared on a committed basis which includes the impact of existing lease agreements contracted on or before December 31, 2017.
4.10 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. At December 31, 2017, the REIT's occupancy rate was 98.6% (Q4 2016 - 99.7%), excluding properties under
development, refer to section 4.1 - Property Profile for further details. The REIT continues to actively pursue tenants for occupancy of development properties.
Distribution Centres: 11 and 25 Dufferin Place SE, Calgary
In 2016, the REIT completed a sale and leaseback transaction with Sears Canada Inc. ("Sears") for its DC in Calgary , which included – a 625,000 square
foot distribution centre located at 25 Dufferin Place SE ("25 Dufferin Place SE") and a 30,000 square foot ancillary building located at 5500 Dufferin Boulevard
SE ("5500 Dufferin Boulevard SE")(the "Sears Lease"). On June 22, 2017 Sears obtained creditor protection under the Companies' Creditors' Arrangement
Act (Canada). In January 2018, the court extended Sears' creditor protection until April 27, 2018 and approved the liquidation of the Sears business. The
REIT has received a notice to disclaim the Sears Lease effective as of February 3, 2018.
In December 2017, CT REIT entered into a 10-year lease with CTC for 25 Dufferin Place SE commencing May 1, 2018. CTC also currently leases 11 Dufferin
Place SE, a 201,000 square foot building, next to 25 Dufferin Place SE, from the REIT. As a condition of CTC entering into the new lease for 25 Dufferin
Place SE, CTC required that the lease for 11 Dufferin Place SE be terminated. 11 Dufferin Place SE will be available for lease. In February 2018, CT REIT
entered into an offer to lease with a third party for the premise located at 5500 Dufferin Boulevard SE.
4.11 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. Capital expenditures of
$4,862 and $18,962 were incurred during the three months and year ended December 31, 2017, (Q4 2016 - $1,862 and YTD 2016 - $15,570) respectively.
Most of the REIT’s recoverable capital expenditures relate to parking lots, roofs and heating, ventilation and air conditioning, activities that are
typically seasonal.
16 CT REIT 2017 ANNUAL REPORT
MANAGMENT'S DISCUSSION AND ANALYSIS
5.0 Results of Operations
5.1 Financial Results for the Three Months and Year Ended December 31, 2017
CT REIT's financial results for the three months and year ended December 31, 2017 and December 31, 2016 are summarized below:
(in thousands of Canadian dollars)
Three Months Ended
Year Ended
For the periods ended December 31,
2017
2016
Change 1
2017
2016
Change
Property revenue
Property expense
$
111,264 $
104,230
6.7 % $
443,303 $
407,165
General and administrative expense
(2,722)
(2,496)
(23,724)
(24,537)
(3.3)%
9.1 %
(98,290)
(96,388)
(11,045)
(10,332)
Net interest and other financing charges
(24,425)
(20,620)
18.5 %
(96,378)
(85,915)
Fair value adjustment on investment properties
36,701
8,878
NM
79,687
44,549
Net income and comprehensive income
Net income per unit - basic
Net income per unit - diluted
1 NM - Not meaningful.
Property Revenue
$
$
$
97,094 $
65,455
48.3 % $
317,277 $
259,079
0.454 $
0.364 $
0.317
0.269
43.2 % $
1.501 $
35.3 % $
1.232 $
1.293
1.079
8.9%
2.0%
6.9%
12.2%
78.9%
22.5%
16.1%
14.2%
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 that
vacancies exist.
Total revenue for the three months ended December 31, 2017 increased $7,034 (6.7%) compared to the same period in the prior year primarily due to base
rent related to properties acquired and intensification activities completed during 2017 and 2016. Total revenue included expense recoveries in the amount
of $21,769 (Q4 2016 - $22,678).
Total revenue for the year ended December 31, 2017 was $443,303 which was $36,138 (8.9%) higher compared to the same period in the prior year primarily
due to base rent related to properties acquired and intensification activities completed during 2017 and 2016. Total revenue included expense recoveries
in the amount of $90,376 (2016 - $89,438).
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, 2017, straight-line rent of $5,648 (Q4 2016 - $6,036) was included in total property revenue. For the year ended December 31, 2017,
straight-line rent of $22,822 (2016 - $23,774) was included in total property revenue.
Property Expense
The components of property expense consist primarily of property taxes, other recoverable operating expenses, property management (including the
outsourcing of property management services pursuant to the Property Management Agreement) and ground rent. The majority of expenses are recoverable
from tenants, with CT REIT absorbing these expenses to the extent that vacancies exist. Refer to section 8.0 for additional information on the Property
Management Agreement.
Property expenses for the three months ended December 31, 2017 decreased $813 (3.3%) compared to the same period in the prior year primarily due to
reduced property taxes partially offset by property acquisitions completed during 2017 and 2016.
Property expenses for the year ended December 31, 2017 increased $1,902 (2.0%) compared to the same period in the prior year primarily due to property
acquisitions completed during 2017 and 2016 partially offset by reduced property taxes.
CT REIT 2017 ANNUAL REPORT 17
MANAGMENT'S DISCUSSION AND ANALYSIS
General and Administrative Expense
CT REIT has two broad categories of general and administrative expenses: (i) personnel and public entity and other costs, including external audit fees,
trustee compensation expense, legal and professional fees, travel, income tax expense (recovery) related to CT REIT GP Corp.'s ("GP") activities, and land
transfer tax; and (ii) outsourced costs, which may fluctuate depending on when such costs are incurred. The personnel, public entity and other costs reflect
the expenses related to ongoing operations of CT REIT. The outsourced costs are largely related to the services provided by CTC pursuant to the Services
Agreement. Under the Services Agreement, CTC provides the REIT with certain administrative, 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.
The Services Agreement is automatically renewable for one year terms, unless otherwise terminated in accordance with its terms. The Services Agreement
was automatically renewed for 2018 and CTC will continue to provide such Services on a cost recovery basis. Refer to section 8.0 for additional information
on the Services Agreement.
(in thousands of Canadian dollars)
For the periods ended December 31,
Personnel expense
Services Agreement with CTC
Public entity and other
Three Months Ended
Year Ended
2017
2016
Change
2017
2016
Change
$
1,435
$
1,165
23.2 % $
5,291
$
763
524
779
552
(2.1)%
(5.1)%
3,014
2,740
4,539
3,116
2,677
16.6 %
(3.3)%
2.4 %
6.9 %
General and administrative expense
$
2,722
$
2,496
9.1 % $
11,045
$
10,332
As a percent of property revenue
2.4%
2.4%
2.5%
2.5%
General and administrative expenses amounted to $2,722 or 2.4% of property revenue for the three months ended December 31, 2017 which is $226
(9.1%) higher compared to the same period in the prior year primarily due to:
•
increased personnel expense due to the variable components of compensation awards.
General and administrative expenses amounted to $11,045 or 2.5% of property revenue for the year ended December 31, 2017 which is $713 (6.9%) higher
compared to the same period in the prior year primarily due to:
•
•
•
•
•
increased personnel expense due to the variable component of compensation awards and increased headcount;
increased income tax expense recorded in connection with GP's activities which resulted in a drawdown of the REIT's deferred tax assets;
partially offset by
decreased compensation costs due to the fair value adjustment on unit based awards; and
decreased land transfer tax expense; and
decreased trustee fees as a result of the fair value adjustments on unit awards.
Net Interest and Other Financing Charges
As at December 31, 2017 the Partnership had 1,451,550 Class C LP Units outstanding with a face value of $1,451,550 and bearing a weighted average
distribution rate of 4.7% 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 the net interest and other financing charges in the consolidated statements of income
and comprehensive income.
18 CT REIT 2017 ANNUAL REPORT
MANAGMENT'S DISCUSSION AND ANALYSIS
(in thousands of Canadian dollars)
Three Months Ended
Year Ended
For the periods ended December 31,
2017
2016
Change 3
2017
2016
Change
Interest on Class C LP Units 1
$
17,055 $
17,419
(2.1)% $
68,826 $
72,405
Interest and financing costs - debentures
7,010
5,453
Interest and financing costs - Bank Credit Facility
Interest on mortgages payable
Interest costs - Bridge Facility 2
317
511
126
459
391
—
28.6 %
(30.9)%
30.7 %
— %
25,207
17,641
1,972
1,777
126
1,242
1,591
—
(4.9)%
42.9 %
58.8 %
11.7 %
— %
5.4 %
Less: capitalized interest
Interest and other financing charges less
capitalized interest
Less: interest income
Net interest and other financing charges
$
$
$
25,019 $
23,722
5.5 % $
97,908 $
92,879
(562)
(3,088)
(81.8)%
(1,365)
(6,752)
(79.8)%
24,457 $
20,634
18.5 % $
96,543 $
86,127
12.1 %
(32)
(14)
NM
(165)
(212)
(22.2)%
24,425 $
20,620
18.5 % $
96,378 $
85,915
12.2 %
1 CTC elected to defer receipt of distributions on the Series 3-12 and Series 16 and Series 19 Class C LP Units for the three months and year ended December 31, 2017 in the amount of $16,917 (Q4 2016 -
$17,181) and $62,380 (YTD 2016 - $65,807), respectively, until the first business day following the end of the fiscal year and receive a loan in lieu thereof. The deferred distributions have been netted against
interest payable on Class C LP Units and are included under the heading "other liabilities" on the consolidated balance sheets.
2 Paid or payable to CTC.
3 NM - not meaningful.
Net interest and other financing charges for the three months ended December 31, 2017 was $3,805 (18.5%) higher compared to the same period in the
prior year largely due to decreased interest capitalization as a result of the completion of the Bolton Distribution Centre located in the town of Caledon,
Ontario ("Bolton DC") in 2016, increased interest on the debentures issued in June 2017 which replaced draws on the Bank Credit Facility, partially offset
by the redemption of Series 10-15 Class C LP Units in May 2017 which were partially replaced with new equity.
Net interest and other financing charges for the year ended December 31, 2017 was $10,463 (12.2%) higher compared to the same period in the prior year
largely due to increased interest on the debentures issued in June 2017 and May 2016, decreased interest capitalization as a result of the completion of
the Bolton DC in 2016 and increased utilization on the Bank Credit Facility, partially offset by the redemption of Series 10-15 Class C LP Units in May 2017
and the redemption of Series 2 Class C LP Units in June 2016.
Fair Value Adjustment on Investment Properties
The fair value gain on investment properties for the three months ended December 31, 2017 increased by $27,823 compared to the same period in the
prior year. There was an increase in value of the Bolton DC as a result of a decrease in the capitalization rate used in the valuation. This increase was
partially offset by a decrease in value of the REIT's two distribution centres located in Calgary, Alberta due to changes in existing lease arrangements, as
discussed in Section 4.10 - Leasing Activities.
The fair value gain on investment properties for the year ended December 31, 2017 increased by $35,138 compared to the same period in the prior year
primarily due to the fair value gain recorded for the Bolton DC and an industrial property in Montreal, Quebec.
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 taxable 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 11.0 for further information.
CT REIT 2017 ANNUAL REPORT 19
MANAGMENT'S DISCUSSION AND ANALYSIS
Net Income
(in thousands of Canadian dollars)
For the periods ended December 31,
Net income and comprehensive income
Net income per unit - basic
Net income per unit - diluted
Three Months Ended
Year Ended
2017
2016
Change
2017
2016
Change
$
$
$
97,094 $
65,455
48.3% $
317,277 $
259,079
0.454 $
0.364 $
0.317
0.269
43.2% $
1.501 $
35.3% $
1.232 $
1.293
1.079
22.5%
16.1%
14.2%
Net income increased by $31,639 (48.3%) for the three months ended December 31, 2017 compared to the same period in the prior year for the reasons
discussed above.
Net income increased by $58,198 (22.5%) for the year ended December 31, 2017 compared to the same period in the prior year for the reasons
discussed above.
Net income per unit - basic increased by $0.137 (43.2%) for the three months ended December 31, 2017 compared to the same period in the prior year
primarily due to increased net income, as discussed above, partially offset by an increase in the weighted average number of units outstanding - basic.
For the year ended December 31, 2017 the net income per unit - basic increased by $0.208 (16.1%) compared to the same period in the prior year primarily
due to increased net income, as discussed above, partially offset by an increase in the weighted average number of units outstanding - basic.
Net income per unit - diluted increased by $0.095 (35.3%) for the three months ended December 31, 2017 compared to the same period in the prior year
primarily due to increased net income, as discussed above, partially offset by an increase in the weighted average number of units outstanding - basic. For
the year ended December 31, 2017 net income per unit - diluted increased by $0.153 (14.2%) compared to the same period in the prior year. The increase
is primarily due to increased net income, as discussed above, partially offset by an increase in the weighted average number of units outstanding - basic.
5.2 Non-GAAP Measures
In addition to the GAAP measures already described, CT REIT management uses non-GAAP measures in assessing the financial performance of CT REIT.
Refer to section 1.0 and 10.0 in this MD&A for further information.
(in thousands of Canadian dollars, except per unit amounts)
Three Months Ended
Year Ended
For the periods ended December 31,
2017
2016
Change
2017
2016
Change
Net operating income
Same store NOI
Same property NOI
Funds from operations
FFO per unit - basic
FFO per unit - diluted (non-GAAP)
Adjusted funds from operations
AFFO per unit - basic
AFFO per unit - diluted (non-GAAP)
AFFO payout ratio
ACFO 1
EBITFV
$
$
$
$
$
$
$
$
$
$
$
81,908
74,145
74,318
60,441
0.283
0.283
49,636
0.232
0.232
75%
53,119
84,674
$
$
$
$
$
$
$
$
$
$
$
73,675
72,660
72,710
56,765
0.274
0.274
46,006
0.222
0.222
11.2 % $
322,253
2.0 % $
281,916
2.2 % $
282,520
6.5 % $
237,617
3.3 % $
3.3 % $
1.124
1.124
7.9 % $
194,371
4.5 % $
4.5 % $
0.920
0.919
77%
(2.6)%
76%
47,179
77,168
12.6 % $
195,723
9.7 % $
334,193
$
$
$
$
$
$
$
$
$
$
$
287,089
276,607
276,702
214,877
1.072
1.071
12.2 %
1.9 %
2.1 %
10.6 %
4.9 %
4.9 %
172,794
12.5 %
0.862
0.862
79%
176,355
300,275
6.7 %
6.6 %
(3.8)%
11.0 %
11.3 %
1 New non-GAAP measure adopted for 2017. Refer to section 10.0 for further information.
Net Operating Income
NOI for the three months ended December 31, 2017 increased $8,233 (11.2%) compared to the same period in the prior year primarily due to the acquisition
of income-producing properties and properties under development completed in 2017 and 2016, which contributed $6,625 to NOI growth. NOI for properties
under development for the three months ended December 31, 2017 was $485.
20 CT REIT 2017 ANNUAL REPORT
MANAGMENT'S DISCUSSION AND ANALYSIS
Same store NOI and same property NOI for the three months ended December 31, 2017 increased $1,485 (2.0%) and $1,608 (2.2%), respectively, when
compared to the prior year primarily due to the following reasons:
•
•
•
contractual rent escalations of approximately 1.5% per year, on average, contained within the Canadian Tire store and CTC's DC leases, which
are generally effective January 1st, contributed $1,163 to NOI growth;
recovery of capital expenditures and interest earned on the unrecovered balance contributed $397 to NOI growth; and
intensifications completed in 2017 and 2016 contributed $123 to NOI growth.
NOI for the year ended December 31, 2017 increased $35,164 (12.2%) compared to the same period in the prior year primarily due to the acquisition of
income-producing properties and properties under development completed in 2017 and 2016, which contributed $29,346 to NOI growth. NOI for properties
under development during the year ended December 31, 2017 was $3,374.
Same store NOI and same property NOI for the year ended December 31, 2017 increased $5,309 (1.9%) and $5,818 (2.1%), respectively, when compared
to the prior year for the following reasons:
•
•
•
•
contractual rent escalations of approximately1.5% per year, on average, contained within the Canadian Tire store and CTC's DC leases, which
are generally effective January 1st, contributed $4,046 to NOI growth;
recovery of capital expenditures and interest earned on the unrecovered balance contributed $1,759 to NOI growth; and
intensifications completed in 2017 and 2016 contributed $509 to NOI growth, partially offset by
an increase in property management service expenses, pursuant to the Property Management Services Agreement, which decreased NOI
by $258.
Funds From Operations
FFO for the three months ended December 31, 2017 amounted to $60,441 or $0.283 per unit (diluted non-GAAP) which was $3,676 (6.5%) and $0.009
(3.3%), respectively, higher than the same period in 2016 primarily due to the impact of NOI variances, partially offset by higher interest expense,
discussed earlier.
FFO for the year ended December 31, 2017 amounted to $237,617 or $1.124 per unit (diluted non-GAAP) which was $22,740 (10.6%) and $0.053 (4.9%),
respectively, higher than the same period in 2016 primarily due to the impact of NOI variances, partially offset by higher interest expense, discussed earlier.
Adjusted Funds From Operations
AFFO for the three months ended December 31, 2017 amounted to $49,636 or $0.232 per unit (diluted non-GAAP) which was $3,630 (7.9%) and $0.010
(4.5%), respectively, higher than the same period in 2016 primarily due to the impact of NOI variances, partially offset by higher interest expense,
discussed earlier.
AFFO for the year ended December 31, 2017 amounted to $194,371 or $0.919 per unit (diluted non-GAAP) which was $21,577 (12.5%) and $0.057 (6.6%),
respectively, higher than the same period in 2016 primarily due to the impact of NOI variances, as discussed earlier, partially offset by higher interest expense
and an increase in the normalized capital expenditure reserve.
Adjusted Funds From Operations Payout Ratio
The AFFO payout ratio for the three months ended December 31, 2017 decreased by 2.6% compared to the same period in 2016 primarily due to an
increase in AFFO per unit diluted (non-GAAP) resulting from NOI variances, discussed earlier, partially offset by higher interest expense and an increase
in the monthly distribution rate which commenced January 1, 2017.
The AFFO payout ratio for the year ended December 31, 2017 decreased by 3.8% compared to the same period in 2016 primarily due to an increase in
AFFO per unit diluted (non-GAAP) resulting from NOI variances, discussed earlier, partially offset by higher interest expense, an increase in the normalized
capital expenditure reserve and an increase in the monthly distribution rate which commenced January 1, 2017.
CT REIT 2017 ANNUAL REPORT 21
MANAGMENT'S DISCUSSION AND ANALYSIS
Adjusted Cashflow From Operations
ACFO for the three months ended December 31, 2017 increased by $5,940 or 12.6% over the same period in 2016 primarily due to the impact of NOI
variances, discussed earlier, partially offset by higher interest expense.
ACFO for the year ended December 31, 2017 increased by $19,368 or 11.0% over the same period in 2016 primarily due to the impact of NOI variances,
discussed earlier, partially offset by higher interest expense and an increase in the normalized capital expenditure reserve.
Earnings Before Interest and Other Financing Costs, Taxes and Fair Value Adjustments
EBITFV for the three months ended December 31, 2017 increased by $7,506 or 9.7% over the same period in 2016 primarily due to the impact of NOI
variances, discussed earlier.
EBITFV for the year ended December 31, 2017 increased by $33,918 or 11.3% over the same period in 2016 primarily due to the impact of NOI variances,
discussed earlier.
6.0 Liquidity and Financial Condition
The following section contains forward-looking information and users are cautioned that actual results may vary.
6.1 Liquidity
CT REIT intends to fund capital expenditures for acquisitions and development activities through a combination of (i) cash on hand, (ii) issuances of Class
B LP Units and/or Class C LP Units, (iii) draws on the Bank Credit Facility and the Bridge Facility, (iv) assumption of existing debt, and/or (v) new public
debt or equity financings.
(in thousands of Canadian dollars)
As at
Cash and cash equivalents
Unused portion of credit facilities 1, 2
Liquidity
1 See section 6.10 for details on credit facilities.
December 31, 2017
December 31, 2016
$
$
10,902 $
267,994
278,896 $
6,369
188,949
195,318
2 The Bridge Facility is for the sole purpose of acquiring, from a third party, a portfolio of certain investment properties.
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)/generated from financing activities
Cash generated from/(used for) the period
1 NM - not meaningful.
22 CT REIT 2017 ANNUAL REPORT
Year Ended
2017
2016
Change 1
$
$
317,154 $
275,584
(279,163)
(33,458)
(522,061)
228,166
4,533 $
(18,311)
15.1 %
(46.5)%
NM
NM
MANAGMENT'S DISCUSSION AND ANALYSIS
6.2 Discussion of Cash Flows
Cash generated for the year ended December 31, 2017 is primarily the result of cash generated from operating activities, the issuance of Debentures and
borrowings drawn on the credit facilities, partially offset by cash used in investing activities and distributions.
6.3 Credit Ratings
The senior unsecured debt of CT REIT is rated by S&P Global Ratings acting through Standard and Poor's Rating Services (Canada), a business unit of
S&P Global Canada Corp. (“S&P”) and by DBRS Limited (“DBRS”), 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”).
These ratings are related to and currently equivalent to those of CTC, as CTC holds a significant ownership position in CT REIT and has a strategic
relationship with CT REIT. CTC is expected to continue to be CT REIT’s most significant tenant for the foreseeable future.
The following table sets out the current credit ratings of CT REIT's senior unsecured debt:
Credit Ratings (Canadian Standards)
6.4 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
Credit facilities
Total indebtedness
Unitholders' equity
Non-controlling interests
Total capital under management
DBRS
S&P
Credit Rating
BBB (high)
Trend
Stable
Credit Rating
BBB+
Trend
Stable
December 31, 2017
December 31, 2016
1,451,550 $
1,521,968
44,010
869,471
179,941
2,544,972 $
1,168,777
1,692,664
5,406,413 $
55,995
695,336
109,824
2,383,123
1,094,207
1,496,377
4,973,707
$
$
$
CT REIT’s total indebtedness at December 31, 2017 was higher than at December 31, 2016 primarily due to the issuance of Series E debentures in June
2017, an increase in borrowings drawn on the credit facilities partially offset by the the redemption of Series 10-15 Class C LP Units and the repayment of
CT REIT's maturing mortgages.
CT REIT’s Unitholders’ equity and non-controlling interests at December 31, 2017 increased as compared to December 31, 2016 primarily as a result of
net income exceeding distributions and due to the issuance of Class B LP Units during the period.
CT REIT 2017 ANNUAL REPORT 23
MANAGMENT'S DISCUSSION AND ANALYSIS
Future payments in respect of CT REIT’s indebtedness are as follows:
(in thousands of Canadian dollars)
For the period ending December 31:
2018
2019
2020
2021
2022
2023 and thereafter
Mortgages payable
Principal
amortization
Maturities
Class C LP
Units
Debentures
Credit
facilities
Total
$
422 $
— $
36
—
—
—
—
43,590
—
—
—
—
— $
—
251,550
—
—
1,200,000
— $
179,941 $
180,363
—
—
150,000
150,000
575,000
—
—
—
—
—
43,626
251,550
150,000
150,000
1,775,000
Total contractual obligation
$
458 $
43,590 $
1,451,550 $
875,000 $
179,941 $
2,550,539
Unamortized portion of mark to market on
mortgages payable assumed in connection with
the acquisition of properties
Unamortized transaction costs
—
—
31
(69)
—
—
—
(5,529)
—
—
31
(5,598)
$
458 $
43,552 $
1,451,550 $
869,471 $
179,941 $
2,544,972
Interest rates on CT REIT’s indebtedness range from 2.16% to 5.00%. The maturity dates on the indebtedness range from January 2019 to May 2038. Total
indebtedness at December 31, 2017 had a weighted average interest rate of 4.08% and a weighted average term to maturity of 10.0 years, excluding the
credit facilities, which is consistent with the rate and term as at December 31, 2016. At December 31, 2017, floating rate and fixed rate indebtedness were
$217,074 and $2,327,898, respectively.
As at
Variable rate debt
Total indebtedness
Variable rate debt / total indebtedness
December 31, 2017
December 31, 2016
$
217,074
$
2,544,972
8.53%
140,957
2,383,123
5.91%
CT REIT's variable rate debt to total indebtedness ratio at December 31, 2017 increased as compared to December 31, 2016 primarily due to the an increase
in the borrowings drawn on the credit facilities, partially offset by the issuance of Series E debentures in 2017.
24 CT REIT 2017 ANNUAL REPORT
MANAGMENT'S DISCUSSION AND ANALYSIS
The following table presents the contractual obligations of CT REIT:
Class C LP Units 1
Debentures
Payments on Class C LP Units 1
Interest on debentures
Credit facilities 2
Obligation for the acquisition of two
investment properties
Operating ground lease commitments
Mortgages payable
Obligations for the completion of
developments
Other liabilities
Distributions payable 3
Payable on Class C LP Units, net of loans
receivable
Interest on Bank Credit Facility
Interest on mortgages payable
Interest on Bridge Facility
Total
Total
2018
2019
2020
2021
2022
2023 and
thereafter
Payments Due by Period
$ 1,451,550 $
875,000
852,862
197,076
— $
—
68,219
27,219
179,941
126,000
66,500
66,500
47,193
44,048
39,227
28,558
12,967
5,685
5,329
5,303
3,276
3,704
422
39,227
25,148
12,967
5,685
1,122
2,762
3,276
— $
251,550 $
— $
— $ 1,200,000
—
68,219
27,219
—
—
3,474
43,626
—
3,410
—
—
1,122
2,541
—
—
150,000
150,000
575,000
62,258
27,219
—
—
58,000
25,600
—
—
58,000
538,166
21,842
53,941
—
67,977
—
—
3,421
3,123
2,846
30,625
—
—
—
—
—
—
—
—
—
—
1,122
1,122
—
—
—
—
—
—
—
—
—
841
—
—
—
—
—
—
—
—
—
—
$ 3,814,515 $
382,251 $
149,611 $
345,570 $
237,845 $
287,470 $ 2,411,768
1 Assume redemption on Initial Fixed Rate Period for each series.
2 The Bank Credit Facility matures in September 2022. However, the borrowings drawn against the Bank Credit Facility as at December 31, 2017 of $53,941 is classified as a current liability as management
expects to repay this amount within the next twelve months.
3 On Units and Class B LP Units.
The table below presents CT REIT’s interest in investment properties at fair value that are available to it to finance and/or refinance its debt as at
December 31, 2017:
(in thousands of Canadian dollars, except
percentage amounts)
Unencumbered investment properties
Encumbered investment properties
Total
Number of
Properties
Fair Value of
Investment
Properties
329 $
5,340,892
2
95,704
331 $
5,436,596
Percentage of
Total Assets
Mortgages
Payable
Loan to Value
Ratio
97.9% $
1.8%
99.7% $
—
44,010
44,010
—
46.0%
0.8%
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
December 31, 2017
December 31, 2016
$
44,010
$
2,544,972
1.73%
55,995
2,383,123
2.35%
CT REIT's secured debt to total indebtedness ratio at December 31, 2017 decreased as compared to December 31, 2016, primarily due to the repayment
of its maturing mortgages of approximately$16,600, partially offset by the issuance of Series E debentures in 2017.
CT REIT 2017 ANNUAL REPORT 25
MANAGMENT'S DISCUSSION AND ANALYSIS
The table below presents CT REIT’s indebtedness to EBITFV ratio:
(in thousands of Canadian dollars)
As at
Total indebtedness
EBITFV 1
Total indebtedness / EBITFV
1 Non-GAAP measure. Refer to section 10.0 for further information.
December 31, 2017
December 31, 2016
$
2,544,972 $
334,193
7.62
2,383,123
300,275
7.94
CT REIT's indebtedness to EBITFV ratio at December 31, 2017 improved as compared to the indebtedness to EBITFV ratio at December 31, 2016 primarily
due to the growth of EBITFV exceeding the growth of CT REIT's total indebtedness. The growth in EBITFV was primarily due to increased NOI, as
discussed earlier.
6.5 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. The
ratio is calculated as follows:
(in thousands of Canadian dollars)
For the periods ended December 31,
EBITFV 1 (A)
Interest and other financing charges (B)
Interest coverage ratio (A)/(B)
1 Non-GAAP measure. Refer to section 10.0 for further information.
Three Months Ended
Year Ended
$
$
2017
84,674 $
24,457 $
3.46
2016
2017
77,168 $
334,193 $
20,634 $
96,543 $
3.74
3.46
2016
300,275
86,127
3.49
The fluctuations in the interest coverage ratios for the three months and year ended December 31, 2017, as compared to the same periods in 2016, are
primarily due to the capitalization of interest on the Bolton DC development property in 2016 and the recognition of NOI on the Bolton DC in 2017.
6.6 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 indebtedness 1 (A)
Total assets (B)
Indebtedness ratio (A)/(B)
December 31, 2017
December 31, 2016
$
$
2,544,972
5,455,398
$
$
2,383,123
5,014,601
46.7%
47.5%
1 Total indebtedness reflects the value of the Class C LP Units, mortgages payable, debentures and draws on the credit facilities.
The indebtedness ratio at December 31, 2017 decreased compared to the indebtedness ratio at December 31, 2016 primarily due to CT REIT's 2017
acquisition, intensification and development activities and fair value adjustments made to its investment property portfolio in 2017, partially offset by the
issuance of Series E debentures.
26 CT REIT 2017 ANNUAL REPORT
MANAGMENT'S DISCUSSION AND ANALYSIS
6.7 Class C LP Units
At December 31, 2017 there were 1,451,550 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 rate of 4.70% of the aggregate capital amount ascribed to the Class C LP
Units. Such payments are made 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 and are 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 each five-year period 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
Initial
subscription
price ($000)
Annual
distribution rate
during initial fixed
rate period
Expiry of initial
fixed rate period
% of Total
Class C LP
Units
Series 3
Series 4
Series 5
Series 6
Series 7
Series 8
Series 9
Series 16
Series 17
Series 18
Series 19
Total / weighted average
Current
Non-current
Total
4.50%
4.50%
4.50%
5.00%
5.00%
5.00%
5.00%
2.42%
2.39%
2.28%
2.28%
4.70%
May 31, 2020 (2.4 years)
May 31, 2024 (6.4 years)
May 31, 2028 (10.4 years)
May 31, 2031 (13.4 years)
May 31, 2034 (16.4 years)
May 31, 2035 (17.4 years)
May 31, 2038 (20.4 years)
May 31, 2020 (2.4 years)
May 31, 2020 (2.4 years)
May 31, 2020 (2.4 years)
May 31, 2020 (2.4 years)
13.78%
13.78%
13.78%
13.78%
13.78%
13.78%
13.78%
1.14%
1.27%
0.34%
0.80%
12.1 years
100.0%
$
$
$
$
200,000
200,000
200,000
200,000
200,000
200,000
200,000
16,550
18,500
4,900
11,600
1,451,550
—
1,451,550
1,451,550
On May 31, 2017, Series 10-15 Class C LP Units were redeemed through the issuance to CTC of $47,279 of Class B LP Units and the payment of $23,139
in cash.
CT REIT 2017 ANNUAL REPORT 27
MANAGMENT'S DISCUSSION AND ANALYSIS
6.8 Debentures
Series
A, 2.85%, June 9, 2022
B, 3.53%, June 9, 2025
C, 2.16%, June 1, 2021
D, 3.29%, June 1, 2026
E, 3.47%, June 16, 2027
December 31, 2017
December 31, 2016
Face value
Carrying
amount
Face value
$
150,000 $
149,277 $
150,000 $
200,000
150,000
200,000
175,000
198,739
149,270
198,717
173,468
200,000
150,000
200,000
—
Carrying
amount
149,123
198,588
149,058
198,567
—
$
875,000 $
869,471 $
700,000 $
695,336
Debentures at December 31, 2017 had a weighted average interest rate of 3.11% (December 31, 2016 - 3.02%).
On June 16, 2017, CT REIT issued $175,000 aggregate principal amount of senior unsecured debentures, with an interest rate of 3.47%, under CT REIT's
short form base shelf prospectus dated April 5, 2017. The proceeds, net of issuance costs of $1,150, were used to pay down certain amounts outstanding
under the Bank Credit Facility and the balance of the proceeds was retained for general business purposes.
For the three months and year ended December 31, 2017, amortization of the transaction costs of $205 (Q4 2016 - $166) and $756 (YTD 2016 - $548) is
included in net interest and other financing charges on the consolidated statement of income and comprehensive income (refer to Note 14 to the interim
consolidated financial statements).
The debentures have been rated "BBB+" by S&P and "BBB (high)" by DBRS, both with a stable outlook. The debentures are direct senior unsecured
obligations of CT REIT, refer to section 6.3 for further details.
On February 7, 2018, CT REIT issued $200,000 aggregate principal amount of senior unsecured debentures. The debentures have a coupon rate of
3.865%, were priced at a yield to maturity of 3.866%, and have a maturity date of December 7, 2027. The proceeds, net of issuance costs of $1,330, were
used to pay down certain amounts outstanding under the credit facilities and the balance of the proceeds were retained for general business purposes.
6.9 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, 2017
December 31, 2016
Face value
Carrying
amount
Face value
$
$
422 $
415 $
1,241 $
43,626
43,595
54,708
44,048 $
44,010 $
55,949 $
Carrying
amount
1,318
54,677
55,995
Mortgages payable at December 31, 2017 had a weighted average interest rate of 3.07% (December 31, 2016 – 3.16%). During December 2017, CT REIT
repaid maturing mortgages of approximately $16,600.
6.10 Credit Facilities
Bank Credit Facility
CT REIT has a $300 million unsecured revolving credit facility with a syndicate of major Canadian third party banks ("Bank Credit Facility") available until
September 2022. 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.
28 CT REIT 2017 ANNUAL REPORT
MANAGMENT'S DISCUSSION AND ANALYSIS
As at December 31, 2017, $53,941 (December 31, 2016 - $109,824) of borrowings were drawn on the Bank Credit Facility. At December 31, 2017, the
Bank Credit Facility had a weighted average interest rate of 2.33% (December 31, 2016 - 1.88%).
Bridge Facility
In Q4 2017, CT REIT entered into a loan agreement with CTC for a maximum amount of $150 million and a term of one year ("Bridge Facility"). The use
of proceeds from the Bridge Facility is for the sole purpose of acquiring, from a third party, a portfolio of certain investment properties. The unsecured
Bridge Facility bears interest at a rate based on bankers' acceptance rate and is repayable on or before December 2018.
As at December 31, 2017, $126,000 of borrowings were drawn on the Bridge Facility. At December 31, 2017, the Bridge Facility had a weighted average
interest rate of 2.6%.
The table below summarizes the details of the credit facilities as at December 31, 2017:
(in thousands of Canadian dollars)
Credit facility
Bank Credit Facility
Bridge Facility
Total
Maximum loan
amount Cash advances Letters of credit
Available to be
drawn
$
$
300,000 $
53,941 $
2,065 $
150,000
126,000
—
450,000 $
179,941 $
2,065 $
243,994
24,000
267,994
The following section contains forward-looking information and users are cautioned that actual results may vary.
6.11 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;
funds drawn on the Bridge Facility;
unsecured public debt; and
limited use of secured debt.
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 and development opportunities when
they become available. The Declaration of Trust and the Trust Indenture, dated June 9, 2015, as supplemented by supplemental indentures thereto (the
"Trust Indenture") pursuant to which the debentures were issued, 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 46.7% as at December 31, 2017. Refer to section 6.6 for the definition and calculation of CT REIT’s indebtedness ratio.
At December 31, 2017, CT REIT was in compliance with the financial and non-financial covenants contained in the Declaration of Trust, the Trust Indenture,
the Bank Credit Facility, the Bridge Facility 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, 2017, CT REIT’s interest coverage ratio was 3.5 times. Refer to section 6.5 for the definition and calculation of CT REIT’s
interest coverage ratio.
CT REIT 2017 ANNUAL REPORT 29
MANAGMENT'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.
6.12 Commitments and Contingencies
As at December 31, 2017, CT REIT had obligations of $39,227 (December 31, 2016 - $30,470) in future payments for the completion of developments,
which are expected to be incurred in 2018, as described in section 4.6. Included in the commitment is $31,372 due to CTC.
CT REIT has an obligation of $66,500 (December 31, 2016 - $nil) to a third party for the acquisition of two investment properties which is expected to be
settled in Q1 2018.
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 and the Bridge Facility, (iv) an investment grade credit rating, (v) unencumbered assets, and (vi) sufficient operating cash
flow retained in the business.
6.13 Base Shelf Prospectus
During Q2 2017, CT REIT renewed its short form base shelf prospectus under which it may raise up to $2.0 billion of debt and equity capital over the 25
month period ending May 3, 2019 (the "Base Shelf Prospectus"). The Base Shelf Prospectus also qualifies the sale of Units by CTC. In Q2 2017, the REIT
issued $175,000 of debentures and in Q1 2018 the REIT issued a further $200,000 of debentures, as described in section 6.8.
7.0 Equity
7.1 Authorized Capital and Outstanding Units
CT REIT is authorized to issue an unlimited number of Units. As of December 31, 2017, CT REIT had a total of 90,645,295 Units outstanding, 59,711,094
of which were held by CTC and 123,092,866 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 the year
1 166,193 issued pursuant to the REIT's distribution reinvestment plan.
Total outstanding at beginning of year
Issued
Total outstanding at end of year
1 141,744 issued pursuant to the REIT's distribution reinvestment plan.
30 CT REIT 2017 ANNUAL REPORT
As at December 31, 2017
Units 1
Class B LP
Units
Total
90,479,102
116,367,697
206,846,799
166,193
6,725,169
6,891,362
90,645,295
123,092,866
213,738,161
As at December 31, 2016
Units 1 Class B LP Units
Total
90,337,358
99,263,329
189,600,687
141,744
17,104,368
17,246,112
90,479,102
116,367,697
206,846,799
MANAGMENT'S DISCUSSION AND ANALYSIS
Each Unit is transferable and represents an equal, undivided beneficial interest in the REIT and in 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.
Net income attributable to Unitholders and weighted average units outstanding used in determining basic and diluted net income per unit are calculated
as follows:
Year ended December 31, 2017
(in thousands of Canadian dollars, except unit amounts)
Units
Class B LP
Units
Net income attributable to Unitholders - basic
$
135,822 $
181,455 $
(in thousands of Canadian dollars, except unit amounts)
Units Class B LP Units
Net income attributable to Unitholders - basic
$
116,625 $
142,454 $
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
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
7.2 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 period
90,561,829
120,748,416
211,310,245
146,241
101,882,284
313,338,770
Year ended December 31, 2016
Total
317,277
68,826
386,103
Total
259,079
72,405
331,484
$
$
90,409,304
110,030,612
200,439,916
118,636
106,661,254
307,219,806
December 31, 2017
December 31, 2016
$
2,590,584 $
2,213,363
317,277
99,705
(84,873)
(63,606)
2,354
259,079
252,799
(75,030)
(61,636)
2,009
$
2,861,441 $
2,590,584
CT REIT 2017 ANNUAL REPORT 31
MANAGMENT'S DISCUSSION AND ANALYSIS
The following section contains forward-looking information and users are cautioned that actual results may vary.
7.3 Distributions
CT REIT’s primary business goal is to accumulate a portfolio of high-quality real estate assets and deliver the benefits of such real estate ownership to
Unitholders. The primary benefit to Unitholders is expected to be reliable, durable and growing distributions over time.
In determining the amount of the monthly distributions paid to Unitholders, the Board applies discretionary judgment to forward-looking cash flow information,
such as forecasts and budgets, and many other factors including provisions in the Declaration of Trust, the macro-economic and industry-specific environment,
debt maturities, covenants and taxable income.
The Board regularly reviews CT REIT’s rate of distributions to ensure an appropriate level of distributions.
On November 6, 2017 the Board reviewed the current rate of distribution of $0.700 per Unit per year and approved an increase in the annual rate of
distribution to $0.728 per Unit per year, or $0.06067 per Unit monthly, commencing with the December 31, 2017 record date.
On December 15, 2017, CT REIT's Board declared a distribution of $0.06067 per Unit paid on January 15, 2018 to holders of Units and Class B LP Units
of record as of December 31, 2017.
On January 15, 2018, CT REIT’s Board declared a distribution of $0.06067 per Unit payable on February 15, 2018 to holders of Units and Class B LP Units
of record as of January 31, 2018.
One of CT REIT's objectives is to grow monthly distributions. The distribution payments and increases since December 31, 2014 are as follows:
Year ended December 31,
2018 2
2017
2016
2015
2014
1 The Board has discretion over the determination of monthly and annual distributions.
2 Approved by the Board on November 6, 2017.
Monthly
distribution
per Unit 1
% increase
Annualized
distribution
per Unit
Annualized
increase
per Unit
$
$
$
$
$
0.06070
0.05833
0.05667
0.05525
0.05417
4.0% $
2.9% $
2.6% $
2.0% $
— $
0.728 $
0.700 $
0.680 $
0.663 $
0.650 $
0.0280
0.0200
0.0170
0.0130
—
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 (a non-GAAP measure of recurring economic earnings used to assess distribution
capacity, refer to section 10.0) and other factors when establishing distributions to Unitholders.
(in thousands of Canadian dollars, except per unit amounts)
Three Months Ended
Year Ended
For the periods ended December 31,
2017
2016
2017
2016
Distributions before distribution reinvestment - paid
Distribution reinvestment
Distributions net of distribution reinvestment - paid
Distributions per unit - paid
$
$
$
37,397 $
35,162 $
147,576 $
135,345
592
527
2,354
2,009
36,805 $
34,635 $
145,222 $
133,336
0.175 $
0.170 $
0.700 $
0.680
Distributions for the three months and year ended December 31, 2017 are higher than the same period in the prior year due to the increase in the annual
rate of distributions effective with the first distribution paid in 2017 and higher weighted average number of units outstanding in 2017.
32 CT REIT 2017 ANNUAL REPORT
MANAGMENT'S DISCUSSION AND ANALYSIS
CT REIT’s distributions for the three months and year ended December 31, 2017 are less than the REIT’s cash generated from operating activities, cash
generated from operating activities reduced by net interest and other financing charges, and AFFO, a non-GAAP measure which is an indicator of CT
REIT's distribution capacity.
(in thousands of Canadian dollars, except per unit amounts)
Three Months Ended
Year Ended
For the periods ended December 31,
AFFO 1
Distributions before distribution reinvestment - paid
Excess of AFFO over distributions paid (A)
Weighted average units outstanding - diluted (non-GAAP)1(B)
Excess of AFFO over distributions paid per unit (A)/(B) 1
1 Non-GAAP measure. Refer to section 10.0 for further information.
7.4 Book Value per Unit
2017
2016
2017
49,636 $
46,006 $
194,371 $
37,397
35,162
147,576
12,239 $
10,844 $
46,795 $
2016
172,794
135,345
37,449
213,879,775
206,949,852
211,456,486
200,558,552
0.057 $
0.052 $
0.221 $
0.187
$
$
$
Book value per unit 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, 2017
December 31, 2016
$
$
2,861,441 $
2,590,584
213,738,161
206,846,799
13.39 $
12.52
CT REIT’s book value per unit at December 31, 2017 increased from the book value per unit at December 31, 2016 primarily due to net income exceeding
distributions and the issuance of new equity at a price exceeding the book value per unit.
8.0 Related Party Transactions
CT REIT’s controlling Unitholder is CTC, which, on December 31, 2017, held an 85.5% effective interest in the REIT, through the 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 93.2% of the annualized base minimum rent earned by
CT REIT and occupying 95.3% of its GLA as at December 31, 2017.
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 $245,126 (2016 - $377,693)
for the year ended December 31, 2017. 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 Services Agreement
and the Property Management Agreement which are described below.
Services Agreement
Under the Services Agreement, CTC provides the REIT with certain administrative, 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. The
CT REIT 2017 ANNUAL REPORT 33
MANAGMENT'S DISCUSSION AND ANALYSIS
Services Agreement is automatically renewable for one year terms, unless otherwise terminated in accordance with its terms. The Services Agreement
was automatically renewed for 2018 and CTC will continue to provide such Services on a cost recovery basis.
Property Management Agreement
Under the Property Management Agreement, CTC provides the REIT with certain customary property management services (the ‘‘Property Management
Services’’). CTC provides 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. The Property Management Agreement
is automatically renewable for one year terms, unless earlier terminated in accordance with its terms. The Property Management Agreement was automatically
renewed for 2018 and CTC will continue to provide such Services on a cost recovery basis.
Refer to CT REIT’s 2017 AIF 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. Pursuant to the Declaration of
Trust all related party transactions are subject to the approval of the Independent Trustees of CT REIT.
The following table summarizes CT REIT’s related party transactions as of December 31, 2017, excluding acquisition, intensification and development
activities which are contained in section 4.0:
(in thousands of Canadian dollars)
For the periods ended December 31,
Rental revenue
Property Management and Services Agreements expense
Distributions on Units
Distributions on Class B LP Units 1
Interest expense on Class C LP Units
Interest expense on the Bridge Facility
1 Includes distributions deferred at the election of the holders of the Class B 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 1
Loans receivable in lieu of distributions on Class B LP Units
Bridge Facility
Net balance due to CTC
1 Includes distributions deferred at the election of the holders of the Class B LP Units.
34 CT REIT 2017 ANNUAL REPORT
$
$
$
$
$
$
$
Year Ended
2017
408,487 $
5,666 $
41,935 $
84,873 $
68,826 $
126 $
2016
382,278
5,510
40,705
75,030
72,405
—
December 31, 2017
December 31, 2016
(1,758) $
(404)
1,451,550
1,521,968
68,065
(62,380)
6,556
26,551
(15,460)
126,000
71,613
(65,807)
5,199
18,581
(8,311)
—
$
1,599,124 $
1,542,839
MANAGMENT'S DISCUSSION AND ANALYSIS
9.0 Accounting Policies and Estimates
9.1 Significant Areas of Estimation
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
and estimates 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, a non-GAAP measure, 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.
9.2 Standards, Amendments and Interpretations Issued and Adopted
The following amendments have been issued and are effective for the fiscal year ended December 31, 2017, and accordingly, have been applied in preparing
these consolidated financial statements.
Disclosure initiative (IAS 7)
In January 2016, the IASB issued Disclosure Initiative Amendments to IAS 7 - Statement of Cash Flows 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 were effective for annual periods beginning on or after January 1, 2017. The implementation of these amendments has not had a
significant impact on CT REIT other than increased disclosure in the annual financial statements.
Income taxes (IAS 12)
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 were effective for annual periods beginning on or after January 1, 2017. The implementation of these amendments did not have an
impact on CT REIT.
9.3 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, 2017, 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
CT REIT 2017 ANNUAL REPORT 35
MANAGMENT'S DISCUSSION AND ANALYSIS
liabilities measured at fair value will have fair value changes resulting from changes in a company's own credit risk recognized in other comprehensive
income instead of net income, unless this would create an accounting mismatch.
Impairment - The measurement of impairment of financial assets is based on an expected credit loss model. It is no longer necessary for a triggering event
to have occurred before credit losses are recognized. IFRS 9 also includes new disclosure requirements about expected credit losses and credit risk.
Hedge accounting - The new general hedge accounting model more closely aligns hedge accounting with risk management activities undertaken by entities
when hedging their financial and non-financial risk exposures. It will provide more opportunities to apply hedge accounting to reflect actual risk management
activities.
In October 2017, the IASB issued “Prepayment Features with Negative Compensation (Amendments to IFRS 9)” with an effective date of January 1, 2019.
The component of the amendments relevant to CT REIT relates to clarifying the accounting for the modification of financial liabilities and requires CT REIT
to recognize any adjustments to the amortized cost of the financial liability arising from a modification or exchange in profit or loss at the date of the
modification or exchange, regardless of whether the changes are substantial and result in derecognition of the financial liability. CT REIT expects to adopt
these amendments together with other IFRS 9 requirements for the 2018 annual fiscal period.
The implementation of IFRS 9 will be applied for annual periods beginning on or after January 1, 2018 and is not expected to have a significant impact on
CT REIT.
Revenue from Contracts with Customers
In May 2014, the IASB issued IFRS 15 - Revenue from Contracts with Customers (“IFRS 15”), which will replace IAS 11 - Construction Contracts, and IAS
18 - Revenue, 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.
In April 2016, the IASB published clarifications to IFRS 15 which addressed three topics (identifying performance obligations, principal versus agent
considerations, and licensing) and provide some transition relief for modified contracts and completed contracts.
The implementation of IFRS 15 will be applied for annual periods beginning on or after January 1, 2018 and is not expected to have a significant impact on
CT REIT.
Leases
In January 2016, the IASB issued IFRS 16 - Leases (“IFRS 16”), which will replace 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. CT REIT is the lessee for certain ground leases, disclosed in Note 17, which are in scope for IFRS 16. IFRS 16 substantially carries
forward the lessor accounting in IAS 17 with the distinction between operating leases and finance leases being retained.
IFRS 16 is effective for annual periods beginning on or after January 1, 2019. CT REIT is assessing the potential impact of this standard.
IASB Annual Improvements
In December 2017, the IASB issued amendments aimed at clarifying four standards, including IFRS 3 - Business Combinations, IFRS 11 - Joint Arrangements,
IAS 12 - Income Taxes and IAS 23 - Borrowing Costs.
These amendments will be effective for annual periods beginning on or after January 1, 2019. CT REIT is currently assessing the potential impacts of these
amendments.
36 CT REIT 2017 ANNUAL REPORT
MANAGMENT'S DISCUSSION AND ANALYSIS
10.0 Non-GAAP Measures
CT REIT uses non-GAAP measures including NOI, same store NOI, same property NOI, FFO, FFO per unit - basic, FFO per unit - diluted (non-GAAP),
AFFO, AFFO per unit - basic, AFFO per unit - diluted (non-GAAP), AFFO payout ratio, ACFO and EBITFV. 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.
10.1 Net Operating Income
CT REIT defines NOI as property revenue less property expense adjusted further for straight-line rent and land lease expense. Management believes that
NOI is a useful key indicator of performance as it represents a measure of property operations over which management has control. NOI is also a key
input in determining the value of the portfolio.
(in thousands of Canadian dollars)
Three Months Ended
Year Ended
For the periods ended December 31,
2017
2016
Change
2017
2016
Change
$
111,264 $
104,230
6.7 % $
443,303 $
407,165
8.9 %
Property revenue
Less:
Property expense
Property straight-line rent revenue
Add:
Straight-line ground lease expense
16
18
(11.1)%
62
86
Net operating income
$
81,908 $
73,675
11.2 % $
322,253 $
287,089
(23,724)
(24,537)
(5,648)
(6,036)
(3.3)%
(6.4)%
(98,290)
(22,822)
(96,388)
(23,774)
2.0 %
(4.0)%
(27.9)%
12.2 %
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
leasable 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. CT REIT management uses this measure to gauge the change in asset productivity and asset value.
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. CT REIT management uses the measure to gauge the change in asset productivity and asset value, as well as measure
the additional return earned by incremental capital investments in existing assets.
CT REIT 2017 ANNUAL REPORT 37
Same store
Intensifications
2017
2016
MANAGMENT'S DISCUSSION AND ANALYSIS
The following table summarizes the same store and same property components of NOI:
(in thousands of Canadian dollars)
Three Months Ended
Year Ended
For the periods ended December 31,
2017
2016
Change 1
2017
2016
Change 1
$
74,145 $
72,660
2.0% $
281,916 $
276,607
1.9%
NM
NM
2.1%
—%
NM
102
71
—
50
NM
42.0%
261
343
—
95
Same property
$
74,318 $
72,710
2.2% $
282,520 $
276,702
Acquisitions and developments
2017
2016
1,952
5,638
—
965
—%
NM
4,392
35,341
—
10,387
Net operating income
$
81,908 $
73,675
11.2% $
322,253 $
287,089
12.2%
1 NM - not meaningful.
10.2 Funds From Operations and Adjusted Funds From Operations
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,
2017
2016
Change 1
2017
2016
Change 1
Net Income and comprehensive income
$
97,094 $
65,455
48.3 % $
317,277 $
259,079
Fair value adjustment on investment property
(36,701)
(8,878)
Deferred taxes
Fair value adjustment of unit based compensation
(176)
224
(43)
231
NM
NM
(3.0)%
(79,687)
(44,549)
60
(33)
(382)
729
Funds from operations
$
60,441 $
56,765
6.5 % $
237,617 $
214,877
Property straight-line rent revenue
(5,648)
(6,036)
(6.4)%
(22,822)
(23,774)
22.5 %
78.9 %
NM
NM
10.6 %
(4.0)%
Straight-line ground lease expense
16
18
(11.1)%
62
86
(27.9)%
Normalized capital expenditure reserve
(5,173)
(4,741)
9.1 %
(20,486)
(18,395)
Adjusted funds from operations
FFO per unit - basic
FFO per unit - diluted (non-GAAP) 2
AFFO per unit - basic
AFFO per unit - diluted (non-GAAP) 2
$
$
$
$
$
49,636 $
46,006
7.9 % $
194,371 $
172,794
0.283 $
0.283 $
0.232 $
0.232 $
0.274
0.274
0.222
0.222
3.3% $
3.3% $
4.5% $
4.5% $
1.124 $
1.124 $
0.920 $
0.919 $
1.072
1.071
0.862
0.862
Weighted average units outstanding - basic
213,717,596
206,829,040
3.3% 211,310,245
200,439,916
Weighted average units outstanding - diluted (non-
GAAP)
213,879,775
206,949,852
3.3% 211,456,486
200,558,552
Number of units outstanding, end of period
213,738,161
206,846,799
3.3% 213,738,161
206,846,799
11.4 %
12.5 %
4.9%
4.9%
6.7%
6.6%
5.4%
5.4%
3.3%
1 NM - not meaningful.
2 For the purposes of calculating diluted per unit amounts, 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.
10.2(i) Funds From Operations
FFO is a non-GAAP financial measure of operating performance 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 Real Property Association of Canada's ("REALPAC") "White Paper on Funds
From Operations & Adjusted Funds From Operations for IFRS" ("White Paper on FFO & AFFO") issued in February 2017 which replaced REALPAC's "White
Paper on FFO" issued in April 2014. The White Paper on FFO & AFFO did not impact the calculation of FFO for CT REIT. The purpose of the White Paper
38 CT REIT 2017 ANNUAL REPORT
MANAGMENT'S DISCUSSION AND ANALYSIS
on FFO & AFFO is 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, together 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.
10.2(ii) Adjusted Funds From Operations
AFFO is a non-GAAP measure of recurring economic earnings used in the real estate industry to assess an entity’s distribution capacity. AFFO 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 AFFO in accordance with REALPAC's White Paper on FFO & AFFO. The White Paper on FFO & AFFO did not impact the calculation of AFFO for
CT REIT.
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.
As property capital expenditures do not occur evenly during the fiscal year or from year to year, the property capital reserve in the AFFO calculation is
intended to reflect an average annual spending level. The reserve is primarily based on a 15-year average expenditure as initially determined by building
condition reports prepared during 2013 by an independent consultant for Canadian Tire stores and Other CTC Banners.
CT REIT 2017 ANNUAL REPORT 39
MANAGMENT'S DISCUSSION AND ANALYSIS
The following table compares capital expenditures during the period 2014-2017 to the normalized capital expenditure reserve used in the calculation
of AFFO:
(in thousands of Canadian dollars)
For the quarter ended and year to date
2014
Q1
Q2
Q3
Q4
YTD
2015
Q1
Q2
Q3
Q4
YTD
2016
Q1
Q2
Q3
Q4
YTD
2017
Q1
Q2
Q3
Q4
YTD
Normalized
capital
expenditure
reserve
Capital
expenditures
Variance
$
$
$
$
$
$
$
$
3,661 $
110 $
3,703
3,989
4,112
866
9,888
6,188
15,465 $
17,052 $
4,168 $
1,025 $
4,230
4,327
4,352
2,834
7,384
3,591
17,077 $
14,834 $
4,407 $
259 $
4,581
4,666
4,741
4,898
8,551
1,862
18,395 $
15,570 $
5,065 $
348 $
5,109
5,139
5,173
5,445
8,307
4,862
20,486 $
18,962 $
3,551
2,837
(5,899)
(2,076)
(1,587)
3,143
1,396
(3,057)
761
2,243
4,148
(317)
(3,885)
2,879
2,825
4,717
(336)
(3,168)
311
1,524
The normalized capital expenditure reserve varies from the capital expenditures incurred due to the seasonal nature of the expenditures. As such, CT REIT
views the normalized capital expenditure reserve as a more meaningful measure. Refer to section 4.11 for additional information.
10.3 AFFO Payout Ratio
The AFFO payout ratio is a non-GAAP measure of the sustainability of the REIT's distribution payout. CT REIT uses this metric to provide transparency
on performance and the overall management of the existing portfolio assets. Management considers the AFFO payout ratio the best measure of the REIT's
distribution capacity.
Three Months Ended
Year Ended
For the periods ended December 31,
2017
2016
Change
2017
2016
Change
Distribution per unit - paid (A)
AFFO per unit - diluted (non-GAAP) 1 (B)
$
$
0.175
0.232
$
$
0.170
0.222
2.9 % $
0.700
4.5 % $
0.919
$
$
0.680
0.862
2.9 %
6.6 %
AFFO payout ratio (A)/(B)
75%
77%
(2.6)%
76%
79%
(3.8)%
1 For the purposes of calculating diluted per unit amounts, 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.
40 CT REIT 2017 ANNUAL REPORT
MANAGMENT'S DISCUSSION AND ANALYSIS
10.4 Diluted Non-GAAP per Unit Calculations
Management views the diluted non-GAAP per unit measure as a meaningful measure as the full conversion of the Class C LP Units with Class B LP Units
is not considered a likely scenario. As such, management calculates the REIT's fully diluted per unit FFO and AFFO amounts excluding the effects of
settling the Class C LP Units with Class B LP Units.
The following table reconciles the calculation of the weighted average diluted units non-GAAP:
For the periods ended December 31,
2017
2016
2017
2016
Weighted average units outstanding - diluted (non-GAAP)
213,879,775
206,949,852
211,456,486
200,558,552
Dilutive effect of settling Class C LP Units with Class B LP Units
99,877,790
101,739,744
101,882,284
106,661,254
Weighted average units outstanding - diluted
313,757,565
308,689,596
313,338,770
307,219,806
Three Months Ended
Year Ended
10.5 Adjusted Cashflow From Operations
ACFO is a new non-GAAP financial measure developed by REALPAC for use by the real estate industry as a sustainable economic cash flow metric. ACFO
should not be considered as an alternative to cash flows provided by operating activities determined in accordance with IFRS. CT REIT calculates its ACFO
in accordance with REALPAC's "White Paper on Adjusted Cashflow from Operations for IFRS" issued in February 2017. The purpose of this white paper
is to provide guidance on the definition of ACFO to promote consistent disclosure amongst reporting issuers. Management believes that the use of ACFO,
combined with the required IFRS presentations, improves the understanding of the operating cash flow of CT REIT.
CT REIT calculates ACFO from cash flow generated from operating activities adjusting for non-operating adjustments to changes in working capital and
other, net interest and other financing charges and normalized capital expenditure reserve.
A reconciliation from the IFRS term “Cash Generated from Operating Activities” (refer to the consolidated statements of cash flow for the year ended
December 31, 2017 and December 31, 2016) to ACFO is as follows:
(in thousands of Canadian dollars)
Three Months Ended
Year Ended
For the periods ended December 31,
2017
2016
Change 1
2017
2016
Change 1
Cash generated from operating activities
$
85,472 $
68,618
24.6% $
317,154 $
275,584
Non-operating adjustments to changes in
working capital and other
(2,755)
3,922
Net interest and other financing charges
(24,425)
(20,620)
Normalized capital expenditure reserve
(5,173)
(4,741)
NM
18.5%
9.1%
(4,567)
(96,378)
(20,486)
5,081
(85,915)
(18,395)
Adjusted cashflow from operations
$
53,119 $
47,179
12.6% $
195,723 $
176,355
15.1%
NM
12.2%
11.4%
11.0%
1 NM - not meaningful.
The non-operating adjustments to changes in working capital and other for three months ended and year ended December 31, 2017 is primarily due to an
increase in liabilities as a result of a reduction in property taxes and related commodity taxes payable.
10.6 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.
CT REIT 2017 ANNUAL REPORT 41
MANAGMENT'S DISCUSSION AND ANALYSIS
For the three months and year ended December 31, 2017, EBITFV was calculated as follows:
(in thousands of Canadian dollars)
Three Months Ended
Year Ended
For the periods ended December 31,
2017
2016
Change 1
2017
2016
Change 1
Net income and comprehensive income
$
97,094 $
65,455
48.3% $
317,277 $
259,079
Fair value adjustment on investment properties
Interest expense and other financing charges
Deferred taxes
EBITFV
1 NM - Not meaningful
(36,701)
24,457
(176)
(8,878)
20,634
(43)
NM
(79,687)
(44,549)
18.5%
96,543
86,127
NM
60
(382)
$
84,674 $
77,168
9.7% $
334,193 $
300,275
22.5%
78.9%
12.1%
NM
11.3%
10.7 Selected Quarterly Consolidated Information
(in thousands of Canadian dollars, except
per unit amounts)
2017
2016
As at and for the quarter ended
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Property revenue
Net income
Net income per unit
- basic
- diluted
FFO per unit- diluted, non-GAAP 1
AFFO per unit - diluted, non-GAAP 1
Total assets
Total indebtedness
Total distributions, net of distribution
reinvestment, to Unitholders - paid
Total distributions per unit - paid
Book value per unit
Market price per unit
- high
- low
- close (end of period)
$ 111,264 $ 109,290 $ 111,609 $ 111,140 $ 104,230 $ 102,932 $ 101,507 $
98,496
$
$
$
$
$
97,094 $
70,562 $
74,299 $
75,322 $
65,455 $
72,124 $
60,347 $
61,153
0.454 $
0.330 $
0.354 $
0.362 $
0.317 $
0.349 $
0.306 $
0.364 $
0.275 $
0.292 $
0.300 $
0.269 $
0.290 $
0.256 $
0.283 $
0.279 $
0.283 $
0.279 $
0.274 $
0.273 $
0.263 $
0.232 $
0.229 $
0.231 $
0.227 $
0.222 $
0.222 $
0.210 $
0.321
0.260
0.260
0.206
$ 5,455,398 $ 5,265,077 $ 5,213,930 $ 5,109,718 $ 5,014,601 $ 4,915,172 $ 4,874,626 $ 4,433,104
$ 2,544,972 $ 2,394,785 $ 2,381,895 $ 2,393,983 $ 2,383,123 $ 2,290,422 $ 2,288,626 $ 2,112,726
$
$
$
$
$
$
36,805 $
36,767 $
35,940 $
35,710 $
34,635 $
34,657 $
32,190 $
31,854
0.175 $
0.175 $
0.175 $
0.175 $
0.170 $
0.170 $
0.170 $
13.39 $
13.11 $
12.95 $
12.73 $
12.52 $
12.38 $
12.20 $
14.96 $
14.70 $
15.19 $
15.60 $
15.65 $
15.76 $
15.60 $
13.68 $
13.61 $
14.01 $
14.55 $
14.54 $
14.55 $
14.17 $
14.50 $
13.89 $
14.38 $
15.04 $
15.00 $
15.40 $
14.80 $
0.170
11.84
14.76
12.46
14.45
1 Non-GAAP measure. Refer to 10.0 section for further information.
Refer to CT REIT's respective annual and interim MD&A's issued for a discussion and analysis relating to those periods.
11.0 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 enterprise risk
management program ("ERM Program"). The ERM Program provides an integrated approach to the management of risks, through a disciplined
manner that:
•
•
•
•
aligns key strategies, objectives and related risks;
considers all forms of risk, specifically strategic, financial and operational risks;
requires the application 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 continues to further develop and refine processes and tools underlying the ERM Program.
42 CT REIT 2017 ANNUAL REPORT
MANAGMENT'S DISCUSSION AND ANALYSIS
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, manage, mitigate and monitor 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 reporting from the head of the risk management function; and
periodically report to the Board on any major issues arising from the ERM Program.
Principal Risks
A key element of the REIT’s ERM Program is the periodic review, identification and assessment of Principal Risks. The REIT defines a Principal Risk as
one that, alone or in combination with other interrelated risks, could have a significant adverse impact on the REIT’s financial position, and/or ability to
achieve its strategic objectives. 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. For further disclosure of the REIT's financial instruments, their impact on
financial statements, and determination of fair value refer to Note 19 of the REIT`s consolidated financial statements. 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,
high inflation, increased unemployment, and increased interest rates)
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.
Financial
The REIT has a variety of financial risk exposures arising directly or indirectly
in the conduct of its business. Financial risks include those related to
fluctuations in capital market liquidity, interest rates, access to capital, and
the price of the REIT’s Units. Failure to develop, implement, and execute
effective strategies to monitor and manage these risks may result in
insufficient capital to absorb unexpected losses and/or changes in asset
value, negatively affecting the REIT’s financial position and its 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.
The REIT has a Board-approved financial risk management policy in place
that governs the management of capital, funding, and other financial risks.
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.
CT REIT 2017 ANNUAL REPORT 43
MANAGMENT'S DISCUSSION AND ANALYSIS
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.
Significant Ownership by CTC
CTC holds the majority interest in the REIT. 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
objectives. Failed processes in terms of design, integration, and/or 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 Income
Tax Act ("ITA"), including the treatment of real estate investment trusts and
mutual fund trusts, or the exclusion from the definition of "SIFT TRUST" for
a trust qualifying as a "real estate investment trust" (the "REIT Exception"),
for a taxation year under the ITA, which could have a material and adverse
impact on the value of the Units, and on distributions to Unitholders.
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 REIT's operating performance, financial
condition, and future prospects, which may result in regulatory related issues
or decrease in Unit price.
44 CT REIT 2017 ANNUAL REPORT
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
communities it serves. The Canadian Tire retail leases have a weighted
average lease term of 11.7 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.
The REIT has appropriate governance structures, including policies,
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 ensures that the REIT satisfies the conditions to qualify as a
closed-end mutual fund trust by complying with the restrictions in the ITA
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 ITA, will not be changed in a manner
which adversely affects the REIT or the Unitholders.
The REIT has allocated the necessary capital and operating expenditures
to comply with environmental laws and address any material environmental
issues. Additionally, the REIT has limited environmental 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 conditions and first party clean up
costs. Pursuant to the Canadian Tire Leases, CTC has indemnified the REIT
for certain environmental issues 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 and standards
governing accounting and financial presentation.
MANAGMENT'S DISCUSSION AND ANALYSIS
12.0 Internal Controls and Procedures
12.1 Disclosure Controls and Procedures
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 ("CEO") and the Chief Financial Officer ("CFO"), so that they can
make appropriate decisions regarding public disclosure.
CT REIT’s system of disclosure controls and procedures include, but are 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&A, Annual Information Form 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 adequacy
of the design (quarterly) and effective operation (annually) of CT REIT’s disclosure controls and procedures was conducted, under the supervision of
management, including the CEO and CFO, as at December 31, 2017. 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 were effective as at December 31, 2017.
12.2 Internal Control Over Financial Reporting
Management is also responsible for establishing and maintaining appropriate internal control over financial reporting. CT REIT’s internal control over financial
reporting include, but are not limited to, detailed policies and procedures related to financial accounting, 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.
As also required by NI 52-109, management, including the CEO and CFO, evaluated the adequacy of the design (quarterly) and effective operation (annually)
of CT REIT’s internal control over financial reporting as defined in NI 52-109, as at December 31, 2017. 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 that evaluation, the CEO and the CFO have concluded that the design and operation of the
internal controls over financial reporting were effective as at December 31, 2017, in providing reasonable assurance regarding the reliability of financial
reporting and the preparation of consolidated financial statements for external purposes in accordance with IFRS.
12.3 Changes in Internal Control Over Financial Reporting
During the quarter and year ended December 31, 2017, 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.
13.0 Forward-looking Information
This MD&A, and the documents incorporated by reference herein, contain forward-looking statements that involve a number of risks 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
CT REIT 2017 ANNUAL REPORT 45
MANAGMENT'S DISCUSSION AND ANALYSIS
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 4.4;
CT REIT's development activities under section 4.6;
CT REIT's leasing activities under section 4.10;
CT REIT's fair value adjustment on investment properties under section 5.1;
CT REIT's capital expenditures to fund acquisitions and development activities under section 6.1;
CT REIT's capital strategy under section 6.11;
CT REIT's 2017 Investment Activities - Commitments as at December 31, 2017 under section 6.12;
CT REIT's distributions under section 7.3;
CT REIT’s access to available sources of debt and/or equity financing;
the expected tax treatment of CT REIT and its distributions to Unitholders;
CT REIT’s ability to expand its asset base, make accretive acquisitions, develop or intensify its Properties and participate with CTC in the
development or intensification of the Properties; and
the ability of CT REIT to continue to qualify as a “real estate investment trust”, as defined pursuant to the ITA.
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 2017 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 2017 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.
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.
46 CT REIT 2017 ANNUAL REPORT
MANAGMENT'S DISCUSSION AND ANALYSIS
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 Investors 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 Base Shelf 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 Marina Davies (416) 544-6134 or email investor.relations@ctreit.com.
February 12, 2018
CT REIT 2017 ANNUAL REPORT 47
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
Class C LP Units
Note 6
Mortgages Payable
Note 7
Debentures
Note 8
Credit Facilities
Note 9
Equity
Note 10 Unit Based Compensation Plans
Note 11 Non-Controlling Interests
Note 12 Revenue and Expenses
Note 13 General and Administrative Expense
Note 14 Net Interest and Other Financing Charges
Note 15 Changes in Working Capital and Other
Note 16
Segmented Information
Note 17 Commitments and Contingencies
Note 18 Related-Party Transactions
Note 19
Financial Instruments and Risk management
Note 20 Capital Management and Liquidity
Note 21 Comparative Figures
Note 22 Subsequent Events
Glossary of Terms
48 CT REIT 2017 ANNUAL REPORT
49
50
51
52
53
54
55
55
58
61
63
65
66
66
67
69
70
70
71
72
72
72
72
73
75
76
78
78
79
Management's Responsibility for Financial Statements
The management of CT Real Estate Investment Trust ("CT REIT") is responsible for the integrity and reliability of the accompanying consolidated financial
statements. These consolidated financial statements have been prepared by management in accordance with International Financial Reporting Standards,
and include amounts based on judgments and estimates. All financial information in our Management's Discussion and Analysis is consistent with these
consolidated financial statements.
Management is responsible for establishing and maintaining adequate systems of internal control over financial reporting. 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 has assessed the effectiveness of CT REIT's internal control over financial reporting based on the framework in Internal Control - Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and concluded that CT REIT's internal
control over financial reporting was effective as at the date of these consolidated statements.
The Board of Trustees oversees management’s responsibilities for the consolidated financial statements primarily through the activities of its Audit
Committee, which is comprised 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 to the Board of Trustees. The Audit
Committee is responsible for making recommendations to the Board of Trustees with respect to the appointment of and, subject to the approval of the
Unitholders authorizing the Board of Trustees to do so, approving the remuneration and 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.
The consolidated financial statements have been audited by Deloitte LLP, in accordance with Canadian generally accepted auditing standards. Their report
is presented below.
Kenneth Silver
Chief Executive Officer
February 12, 2018
Louis Forbes
Chief Financial Officer
CT REIT 2017 ANNUAL REPORT 49
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, 2017 and December 31, 2016, 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, as issued by the International Accounting Standards Board, 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, 2017 and December 31, 2016, and its financial performance and its cash flows for the years then ended in accordance with International
Financial Reporting Standards.
/s/ Deloitte LLP
Chartered Professional Accountants
Licensed Public Accountants
February 12, 2018
Toronto, Ontario
50 CT REIT 2017 ANNUAL REPORT
Consolidated Balance Sheets
(Canadian dollars, in thousands)
As at
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
Other liabilities
Current liabilities
Class C LP Units
Mortgages payable
Credit facilities
Other liabilities
Distributions payable
Total liabilities
Equity
Unitholders’ equity
Non-controlling interests
Total equity
Total liabilities and equity
Note
December 31, 2017
December 31, 2016
4 $
5,436,597 $
5,000,355
2,929
5,439,526
3,101
5,003,456
1,966
3,004
10,902
15,872
2,407
2,369
6,369
11,145
$
5,455,398 $
5,014,601
5 $
1,451,550 $
1,451,550
6
7
5
6
8
9
9
9, 11
43,595
869,471
3,410
54,677
695,336
3,198
2,368,026
2,204,761
—
415
179,941
32,608
12,967
225,931
2,593,957
1,168,777
1,692,664
2,861,441
$
5,455,398 $
70,418
1,318
109,824
25,631
12,065
219,256
2,424,017
1,094,207
1,496,377
2,590,584
5,014,601
The related notes form an integral part of these consolidated financial statements.
David Laidley
Trustee
Anna Martini
Trustee
CT REIT 2017 ANNUAL REPORT 51
Consolidated Statements of Income and Comprehensive Income
(Canadian dollars, in thousands, except per unit amounts)
For the year ended December 31,
Note
2017
2016
Property revenue
Property expense
General and administrative expense
Net 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.
12 $
443,303 $
12
13
14
4
$
$
$
9 $
9 $
(98,290)
(11,045)
(96,378)
79,687
317,277 $
135,822 $
181,455
317,277 $
1.501 $
1.232 $
407,165
(96,388)
(10,332)
(85,915)
44,549
259,079
116,625
142,454
259,079
1.293
1.079
52 CT REIT 2017 ANNUAL REPORT
Consolidated Statements of Changes in Equity
(Canadian dollars, in thousands)
Note
Units
Retained
Earnings
Unitholders'
Equity
Non-
controlling
interests Total Equity
Balance at December 31, 2016
$
881,736 $
212,471 $ 1,094,207 $ 1,496,377 $ 2,590,584
Net income and comprehensive income for the period
Issuance of Class B LP Units, net of issue costs
Distributions
Issuance of Units under Distribution Reinvestment Plan
4, 5
9
9
—
—
—
135,822
135,822
181,455
317,277
—
—
99,705
99,705
(63,606)
(63,606)
(84,873)
(148,479)
2,354
—
2,354
—
2,354
Balance at December 31, 2017
$
884,090 $
284,687 $ 1,168,777 $ 1,692,664 $ 2,861,441
Note
Units
Retained
Earnings
Unitholders'
Equity
Non-
controlling
interests Total Equity
Balance at December 31, 2015
$
879,727 $
157,482 $ 1,037,209 $ 1,176,154 $ 2,213,363
Net income and comprehensive income for the period
Issuance of Class B LP Units, net of issue costs
Distributions
Issuance of Units under Distribution Reinvestment Plan
4, 5
9
9
—
—
—
116,625
116,625
—
—
142,454
252,799
259,079
252,799
(61,636)
(61,636)
(75,030)
(136,666)
2,009
—
2,009
—
2,009
Balance at December 31, 2016
$
881,736 $
212,471 $ 1,094,207 $ 1,496,377 $ 2,590,584
The related notes form an integral part of these consolidated financial statements.
CT REIT 2017 ANNUAL REPORT 53
Consolidated Statements of Cash Flows
(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
Property straight-line rent revenue
Deferred income tax
Straight-line ground lease expense
Net interest and other financing charges
Changes in working capital and other
Cash generated from operating activities
Investing activities
Income-producing property
Development activities and land investments
Capital expenditures recoverable from tenants
Proceeds of disposition
Cash used for investing activities
Financing activities
Proceeds from issuance of debentures
Debenture issuance 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
Credit facilities draws (repayments), net
Mortgage principal repayments
Mortgage borrowing
Net interest paid
Class B LP Unit issue costs
Cash (used for)/generated from financing activities
Cash generated from/(used for) the period
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
The related notes form an integral part of these consolidated financial statements.
54 CT REIT 2017 ANNUAL REPORT
Note
2017
2016
$
317,277 $
259,079
15
$
(79,687)
(22,822)
60
62
96,378
5,886
317,154 $
(172,485)
(90,196)
(16,500)
18
(44,549)
(23,774)
(382)
86
85,915
(791)
275,584
(141,351)
(361,383)
(19,585)
258
$
(279,163) $
(522,061)
7
5
5
8
6
6
$
$
$
175,000
(1,156)
(23,139)
(61,029)
(84,193)
(68,947)
70,117
(17,901)
6,000
(28,026)
(184)
(33,458) $
4,533 $
6,369
10,902 $
350,000
(1,954)
—
(59,468)
(73,868)
(72,888)
109,824
(4,074)
—
(19,135)
(271)
228,166
(18,311)
24,680
6,369
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
(All dollar amounts are in thousands, except unit and 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” or "the 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”) owned an 85.5% effective interest in CT REIT as of December 31, 2017, 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 5). The Units are listed on the Toronto Stock Exchange (the “TSX”) under the
symbol CRT.UN.
2. BASIS OF PRESENTATION
(a) Fiscal year
The fiscal years for the consolidated financial statements and the notes presented for 2017 are for the years ended December 31, 2017 and 2016.
(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 approved for issuance by CT REIT’s Board of Trustees (the “Board”) on February 12, 2018.
(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$”), which is CT REIT's functional currency, 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 as a lessor
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 2017 ANNUAL REPORT 55
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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.
CT REIT as a lessee
Judgment is applied to determine whether a lease is classified as either a finance lease or an operating lease. A lease that transfers substantially
all the risks and rewards incidental to ownership to CT REIT is classified as a finance lease. CT REIT does not have any finance leases.
An operating lease is a lease other than a finance lease. Operating lease payments are recognized as an operating expense in the statement
of income on a straight-line basis over the lease term (see Note 17).
(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.
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. ( the "GP"), 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, Ontario (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 and adopted
The following amendments have been issued and are effective for the fiscal year ended December 31, 2017, and accordingly, have been applied in preparing
these consolidated financial statements.
(i) Disclosure initiative (IAS 7)
In January 2016, the IASB issued Disclosure Initiative Amendments to IAS 7 - Statement of Cash Flows 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.
56 CT REIT 2017 ANNUAL REPORT
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
These amendments were effective for annual periods beginning on or after January 1, 2017. The implementation of these amendments has not
had a significant impact on CT REIT other than increased disclosure in the annual financial statements.
(ii) Income taxes (IAS 12)
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 were effective for annual periods beginning on or after January 1, 2017. The implementation of these amendments did not
have an impact on CT REIT.
(g) 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, 2017, 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 a company's own credit risk recognized in
other comprehensive income instead of net income, unless this would create an accounting mismatch.
Impairment - The measurement of impairment of financial assets is based on an expected credit loss model. It is no longer necessary for a
triggering event to have occurred before credit losses are recognized. IFRS 9 also includes new disclosure requirements about expected credit
losses and credit risk.
Hedge accounting - The new general hedge accounting model more closely aligns hedge accounting with risk management activities undertaken
by entities when hedging their financial and non-financial risk exposures. It will provide more opportunities to apply hedge accounting to reflect
actual risk management activities.
In October 2017, the IASB issued “Prepayment Features with Negative Compensation (Amendments to IFRS 9)” with an effective date of January
1, 2019. The component of the amendments relevant to CT REIT relates to clarifying the accounting for the modification of financial liabilities
and requires CT REIT to recognize any adjustments to the amortized cost of the financial liability arising from a modification or exchange in profit
or loss at the date of the modification or exchange, regardless of whether the changes are substantial and result in derecognition of the financial
liability. CT REIT expects to adopt these amendments together with other IFRS 9 requirements for the 2018 annual fiscal period.
The implementation of IFRS 9 will be applied for annual periods beginning on or after January 1, 2018 and is not expected to have a significant
impact on CT REIT.
(ii) Revenue from contracts with customers
In May 2014, the IASB issued IFRS 15 - Revenue from Contracts with Customers (“IFRS 15”), which will replace IAS 11 - Construction Contracts,
and IAS 18 - Revenue, 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.
In April 2016, the IASB published clarifications to IFRS 15 which addressed three topics (identifying performance obligations, principal versus
agent considerations, and licensing) and provide some transition relief for modified contracts and completed contracts.
CT REIT 2017 ANNUAL REPORT 57
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The implementation of IFRS 15 will be applied for annual periods beginning on or after January 1, 2018 and is not expected to have a significant
impact on CT REIT.
(iii) Leases
In January 2016, the IASB issued IFRS 16 - Leases (“IFRS 16”), which will replace 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. CT REIT is the lessee for certain ground leases, disclosed in Note 17, which are in scope for
IFRS 16. IFRS 16 substantially carries forward the lessor accounting in IAS 17 with the distinction between operating leases and finance leases
being retained.
IFRS 16 is effective for annual periods beginning on or after January 1, 2019. CT REIT is assessing the potential impact of this standard.
(iv) IASB annual improvements
In December 2017, the IASB issued amendments aimed at clarifying four standards, including IFRS 3 - Business Combinations, IFRS 11 - Joint
Arrangements, IAS 12 - Income Taxes and IAS 23 - Borrowing Costs.
These amendments will be effective for annual periods beginning on or after January 1, 2019. CT REIT is currently assessing the potential
impacts 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 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
58 CT REIT 2017 ANNUAL REPORT
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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’’), 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 2017 ANNUAL REPORT 59
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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.
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 Exception”). 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 Exception. Accordingly,
with the exception of transactions with the GP, 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,
60 CT REIT 2017 ANNUAL REPORT
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 performance units (“PUs”) are granted to employees 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 REIT measures all financial instruments at amortized cost, excluding DUs, RUs, and PUs which are carried at fair value.
Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial
liabilities classified as FVTPL) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition.
Transaction costs directly attributable to the acquisition of financial assets or financial liabilities classified as FVTPL are recognized immediately in
net income.
4.
INVESTMENT PROPERTIES
The following table summarizes CT REIT's investment property portfolio holdings:
December 31, 2017
December 31, 2016
Income-
producing
properties
Properties
under
development
Total
investment
properties
Income-
producing
properties
Properties
under
development
Total
investment
properties
Balance, beginning of period
$
4,979,231 $
21,124 $
5,000,355 $
4,304,838 $
14,223 $
4,319,061
Property acquisitions (including transaction costs)
209,677
—
209,677
214,225
—
214,225
Intensifications
Developments
Development land
Capitalized interest and property taxes
Transfers
Fair value adjustment on investment properties
Straight-line rent
Recoverable capital expenditures
Dispositions
—
—
—
—
27,154
79,687
22,822
18,962
(18)
24,893
64,882
13,380
1,957
24,893
64,882
13,380
1,957
—
—
—
—
10,852
10,852
356,943
356,943
8,744
6,895
(27,154)
—
376,533
(376,533)
—
—
—
—
79,687
22,822
18,962
44,549
23,774
15,570
(18)
(258)
—
—
—
—
8,744
6,895
—
44,549
23,774
15,570
(258)
Balance, end of period 1
$
5,337,515 $
99,082 $
5,436,597 $
4,979,231 $
21,124 $
5,000,355
1 Includes purchased lands for $9,209 ( December 31, 2016 - $6,505) held for development.
CT REIT 2017 ANNUAL REPORT 61
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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, 2017, 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 2017 independent appraisals were completed on 71 properties (2016 - 65 properties) having a fair value of $1,612,230 (2016 - $880,630).
The fair value of investment properties is based on Level 3 inputs (see Note 19.(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 properties are as follows:
Number of properties
Value at December 31, 2017
Discount rate
Terminal capitalization rate
Overall capitalization rate
Hold period (years)
Properties valued by the
OCR method
Properties valued by the
DCF method
271
$
3,970,673
$
—%
—%
6.18%
—
53
1,310,843
6.96%
6.52%
—%
10
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
December 31, 2017
- 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
3,544,119 $
(426,554) $
1,188,649 $
(122,194)
3,675,416
3,817,117
(295,257)
(153,556)
1,226,451
1,267,045
3,970,673 $
— $
1,310,843 $
4,137,243
4,318,875
166,569
348,202
1,358,324
1,409,895
(84,393)
(43,799)
—
47,480
99,052
4,517,559 $
546,886 $
1,466,122 $
155,278
$
$
$
62 CT REIT 2017 ANNUAL REPORT
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2017 Investment and Development Activity
Funding of investment and development activities for the year ended December 31, 2017 was as follows:
2017 Investment and Development Activity
Funded with working capital to CTC
$
28,800 $
6,640 $
14,623 $
16,453 $
Property
investments
Development
land
Developments
Intensifications
40,907
102,382
—
37,588
—
4,980
—
—
1,760
—
7,566
23,618
1,957
13,075
6,000
8,253
—
—
187
—
$
209,677 $
13,380 $
66,839 $
24,893 $
314,789
Total
66,516
61,706
126,000
1,957
52,610
6,000
Funded with working capital to third parties
Funded with Bridge Facility
Capitalized interest and property taxes
Issuance of Class B LP Units to CTC
Mortgages payable
Total costs
2016 Investment and Development Activity
Funding of investment and development activities for the year ended December 31, 2016 was as follows:
Property
investments
Development
land
Developments
Intensifications
Funded with working capital to CTC
$
5,790 $
1,184 $
328,039 $
Funded with working capital to third parties
Capitalized interest and property taxes
Issuance of Class B LP Units to CTC
Issuance of Class C LP Units to CTC
135,265
—
53,070
20,100
2,660
—
—
4,900
18,904
6,895
—
10,000
6,442 $
4,410
—
—
—
Total
341,455
161,239
6,895
53,070
35,000
Total costs
$
214,225 $
8,744 $
363,838 $
10,852 $
597,659
2016 Investment and Development Activity
Included in CT REIT's investment properties are nine (2016 - eight) buildings which are situated on ground leases with remaining initial terms of between
1 and 38 years (2016 - 2 and 39 years), and an average remaining initial term of 16 years (2016 - 16 years).
5. 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 rate of 4.70% 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 the GP shares, subject to certain exceptions.
On expiry of the Initial Fixed Rate Period applicable to each series of Class C LP Units, and each five-year period 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.
CT REIT 2017 ANNUAL REPORT 63
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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
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
Series 17
Series 18
Series 19
Expiry of initial
fixed rate period
Annual distribution
rate during initial
fixed rate period
Carrying amount at
December 31, 2017
Carrying amount at
December 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
May 31, 2020
May 31, 2020
May 31, 2020
4.50% $
200,000 $
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%
2.39%
2.28%
2.28%
200,000
200,000
200,000
200,000
200,000
200,000
—
—
—
—
—
—
16,550
18,500
4,900
11,600
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
18,500
4,900
11,600
Weighted average / Total
4.70% $
1,451,550 $
1,521,968
Current
Non-current
Total
$
$
— $
1,451,550
1,451,550 $
70,418
1,451,550
1,521,968
For the year ended December 31, 2017, interest expense of $68,826 (2016 - $72,405) was recognized in respect of the Class C LP Units (see Note 14).
The holders of the Class C LP Units may elect to defer receipt of all or a portion of distributions declared by CT REIT until the first business 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, 2017 of $62,380 (2016 – $65,807), were deferred until the first business 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, 2017 of $5,685 (2016 – $5,806) is included in other liabilities on the consolidated balance sheets. The loans deferred
as at December 31, 2017 were settled on January 2, 2018.
On May 31, 2017, Series 10-15 Class C LP Units were redeemed through the issuance to CTC of $47,279 of Class B LP Units and the payment of $23,139
in cash.
64 CT REIT 2017 ANNUAL REPORT
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following table reconciles the change in the balance of Class C LP Units from cash and non-cash activities:
Balance, beginning of year
Cash flow activities:
Redemption of Class C LP Units in cash
Non-cash activities:
Redemption of Class C LP Units with Class B LP Units
Balance, end of year
6. MORTGAGES PAYABLE
Year ended
December 31, 2017
1,521,968
(23,139)
(47,279)
1,451,550
$
$
Mortgages payable, secured by certain of CT REIT’s investment properties, include the following:
December 31, 2017
December 31, 2016
Current
Non-current
Total
Future repayments are as follows:
2018
2019
2020
2021
2022
2023 and thereafter
Total contractual obligation
Face
value
Carrying
amount
Face
value
$
$
422 $
415 $
1,241 $
43,626
43,595
54,708
44,048 $
44,010 $
55,949 $
Carrying
amount
1,318
54,677
55,995
Total
422
43,626
—
—
—
—
Principal
amortization
Maturities
422 $
— $
36
—
—
—
—
43,590
—
—
—
—
$
$
458 $
43,590 $
44,048
31
(69)
$
44,010
Unamortized portion of mark to market on mortgages payable assumed at the acquisition
of properties
Unamortized transaction costs
Mortgages payable have interest rates that range from 2.97% to 3.60%, and have maturity dates that range from January 2019 to December 2019. Mortgages
payable at December 31, 2017 had a weighted average interest rate of 3.07% (December 31, 2016 – 3.16%). At December 31, 2017, floating rate and fixed
rate mortgages were $37,133 (December 31, 2016 – $31,133) and $6,915 (December 31, 2016 – $24,816), respectively.
During December 2017, CT REIT repaid maturing mortgages of approximately $16,600.
Investment properties having a fair value of $95,704 (December 31, 2016 – $126,300) have been pledged as security for mortgages payable.
CT REIT 2017 ANNUAL REPORT 65
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
7. DEBENTURES
Series
A, 2.85%, June 9, 2022
B, 3.53%, June 9, 2025
C, 2.16%, June 1, 2021
D, 3.29%, June 1, 2026
E, 3.47%, June 16, 2027
December 31, 2017
December 31, 2016
Face value
Carrying
amount
Face value
$
150,000 $
149,277 $
150,000 $
200,000
150,000
200,000
175,000
198,739
149,270
198,717
173,468
200,000
150,000
200,000
—
Carrying
amount
149,123
198,588
149,058
198,567
—
$
875,000 $
869,471 $
700,000 $
695,336
Debentures at December 31, 2017, had a weighted average interest rate of 3.11% (December 31, 2016 - 3.02%).
On June 16, 2017, CT REIT issued $175,000 aggregate principal amount of senior unsecured debentures under CT REIT's short form base shelf prospectus
dated April 5, 2017.
On May 31, 2016, CT REIT issued $350,000 aggregate principal amount of senior unsecured debentures under CT REIT's short form base shelf prospectus
dated March 5, 2015.
For the year ended December 31, 2017, amortization of the transaction costs of $756 (2016 - $548) are included in net interest and other financing charges
on the consolidated statements of income and comprehensive income (see Note 14).
8. CREDIT FACILITIES
CT REIT's credit facilities are comprised of the following:
Bank Credit Facility
Bridge Facility
(a) Bank credit facility
December 31, 2017
December 31, 2016
$
$
53,941 $
126,000
179,941 $
109,824
—
109,824
CT REIT has a $300 million unsecured revolving credit facility with a syndicate of major Canadian third party banks ("Bank Credit Facility") available until
September 2022. 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, 2017, $53,941 (December 31, 2016 - $109,824) of borrowings were drawn on the Bank Credit Facility and $2,065 (December 31, 2016
– $1,227) of letters of credit were outstanding under the Bank Credit Facility. At December 31, 2017, the Bank Credit Facility had a weighted average interest
rate of 2.33% (December 31, 2016 - 1.88%).
(b) Bridge facility
In Q4 2017, CT REIT entered into a loan agreement with CTC for a maximum amount of $150 million and a term of one year ("Bridge Facility"). The use
of proceeds from the Bridge Facility is for the sole purpose of acquiring, from a third party, a portfolio of certain investment properties. The unsecured
Bridge Facility bears interest at a rate based on bankers' acceptance rate and is repayable on or before December 2018.
66 CT REIT 2017 ANNUAL REPORT
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at December 31, 2017, $126,000 of borrowings were drawn on the Bridge Facility. At December 31, 2017, the Bridge Facility had a weighted average
interest rate of 2.60%.
9. 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 the year
Total outstanding at beginning of year
Issued
Total outstanding at end of year
As at December 31, 2017
Units
Class B LP
Units
Total
90,479,102
116,367,697
206,846,799
166,193
6,725,169
6,891,362
90,645,295
123,092,866
213,738,161
As at December 31, 2016
Units
Class B LP
Units
Total
90,337,358
99,263,329
189,600,687
141,744
17,104,368
17,246,112
90,479,102
116,367,697
206,846,799
Net income attributable to Unitholders and weighted average units outstanding used in determining basic and diluted net income per unit for the year ended
December 31, 2017 and 2016, are calculated as follows, respectively:
For the year ended December 31, 2017
Net income attributable to Unitholders - basic
$
135,822 $
181,455 $
Units
Class B LP
Units
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
Total
317,277
68,826
386,103
$
90,561,829
120,748,416
211,310,245
146,241
101,882,284
313,338,770
CT REIT 2017 ANNUAL REPORT 67
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2016
Net income attributable to Unitholders - basic
$
116,625 $
142,454 $
Units
Class B LP
Units
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
Distributions on Units and Class B LP Units
The following table presents total distributions paid on Units and Class B LP Units:
For the year ended December 31,
Units
Class B LP Unit
Total
259,079
72,405
331,484
$
90,409,304
110,030,612
200,439,916
118,636
106,661,254
307,219,806
2017
2016
Distributions
per unit
Distributions
per unit
$
$
0.700 $
0.700 $
0.680
0.680
On November 6, 2017, the Board reviewed and approved the current rate of distribution of $0.700 per Unit per year and approved an increase in the annual
rate of distribution to $0.728 per Unit per year, or monthly distribution rate of $0.06067 per Unit, when declared, commencing with the December 31, 2017
record date.
On December 15, 2017, CT REIT's Board declared a distribution of $0.06067 per Unit paid on January 15, 2018 to holders of Units and Class B LP Units
of record as of December 31, 2017.
On January 15, 2018, CT REIT’s Board declared a distribution of $0.06067 per Unit payable on February 15, 2018 to holders of Units and Class B LP Units
of record as of January 31, 2018.
Units
Each Unit is transferable and represents an equal, undivided, beneficial interest in CT REIT and any distributions from the REIT, whether of net income,
net realized capital gains, or other amounts, and in the event of the termination or winding-up of CT REIT, in CT REIT’s net assets remaining after satisfaction
of all liabilities. All Units rank among themselves equally and ratably without discrimination, preference or priority. Each Unit entitles the holder thereof to
one vote at all meetings of Unitholders or with respect to any written resolution of Unitholders. The Units have no conversion, retraction or redemption rights.
Non-controlling interests
The Class B LP Units are exchangeable on a one-for-one basis (subject to customary anti-dilution provisions) for Units at the option of the holder. Each
Class B LP Unit is accompanied by a Special Voting Unit. The holders of Class B LP Units are entitled to receive distributions when declared by the
Partnership equal to the per Unit amount of distributions payable to each holder of Units. However, the Class B LP Units have limited voting rights over
the Partnership.
Special Voting Units
Special Voting Units are only issued (i) in tandem with Class B LP Units of the Partnership or (ii) in limited circumstances to holders of the Class C LP
Units and are not transferable separately from the Class B LP Units or Class C LP Units, as the case may be, to which they relate. Upon any transfer of
68 CT REIT 2017 ANNUAL REPORT
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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.
10. UNIT BASED COMPENSATION PLANS
Deferred Unit Plan for Trustees
CT REIT offers a Deferred Unit ("DU") Plan for certain members of its Board of Trustees. Under this plan, eligible trustees may elect to receive all or a
portion of their annual trustee fees in DUs. DUs are paid out in equivalent Units of CT REIT or, at the election of the trustee, in cash, following the trustee's
departure from the Board.
As at December 31, 2017, accrued DU compensation costs, which are included in other liabilities, totaled $1,515 (2016 – $1,193). Compensation expense
recorded related to DU's for the year ended December 31, 2017 was $15 (2016 - $162). The fair value of DUs is equal to the trading price of Units, which
is a Level 1 input (see Note 19.(a)).
Performance Unit Plan for Employees
CT REIT offers Performance Units ("PUs") to certain employees that generally vest after three years. Each PU entitles the employee to receive a cash
payment equal to the fair market value of Units of CT REIT, multiplied by a factor determined by specific performance-based criteria, as set out in the
Performance Unit Plan.
As at December 31, 2017, accrued PU compensation costs, which are included in other liabilities, totaled $2,290 (2016 - $2,390). Compensation expense
recorded for the year ended December 31, 2017 for PUs granted to employees was $1,309 (2016 - $1,473). The fair value of PUs is equal to the trading
price of Units, which is a Level 1 input (see Note 19.(a)).
Restricted Unit Plan for Executives
CT REIT offers a Restricted Unit ("RU") Plan for its executives. RUs may be issued as discretionary grants or executives may elect to receive all or a
portion of their short term incentive plan in RUs. At the end of the vesting period which is generally three years from the date of grant (in the case of
discretionary grants) or five years from the short term incentive plan bonus payment date (in the case of deferred bonus), the executives will receive an
equivalent number of Units issued by CT REIT or, at the executive's election, the cash equivalent thereof.
As at December 31, 2017, accrued RU compensation costs, which are included in other liabilities, totaled $867 (2016 - $509). Compensation expense for
the year ended December 31, 2017 was $34 (2016 - $166). The fair value of RUs is equal to the trading price of Units, which is a Level 1 input (see Note
19.(a)).
CT REIT 2017 ANNUAL REPORT 69
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
11. 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
As at
December 31, 2017
As at
December 31, 2016
For the year
ended
December 31, 2017
For the year
ended
December 31, 2016
57.59%
56.26% $
181,455 $
142,454
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 to its subsidiaries.
12. 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 11.9 years. Annual base minimum rent for CTC leases have weighted average
annual rent escalations of approximately 1.5% per year.
The components of property revenue are as follows:
Base minimum rent
Straight-line rent
Subtotal base rent
Property operating expense recoveries
Capital expenditure and interest recovery charge
Other revenues
Property revenue
Base minimum rent
Straight-line rent
Subtotal base rent
Property operating expense recoveries
Capital expenditure and interest recovery charge
Other revenues
Property revenue
70 CT REIT 2017 ANNUAL REPORT
CTC
300,724 $
21,945
322,669 $
80,331
5,483
4
Other
23,286 $
877
24,163 $
10,045
79
529
For the year ended
December 31, 2017
324,010
22,822
346,832
90,376
5,562
533
408,487 $
34,816 $
443,303
CTC
273,083 $
23,102
296,185 $
82,334
3,756
3
Other
16,524 $
672
17,196 $
7,104
74
513
382,278 $
24,887 $
For the year ended
December 31, 2016
289,607
23,774
313,381
89,438
3,830
516
407,165
$
$
$
$
$
$
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Future base minimum rental revenue commitments on non-cancellable tenant operating leases are as follows:
Less than one year
Between one and five years
More than five years
Total
(b) Property expense
The major components of property expense consist of property taxes and other recoverable costs:
For the year ended December 31,
Property taxes
Other recoverable operating costs
Property management 1
Ground rent
Property insurance
Property expense
1 Includes $2,652 (2016 - $2,394) with CTC. See Note 18.
13. GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense is comprised of the following:
For the year ended December 31,
Personnel expense 1
Services Agreement with CTC 2
Public entity and other 1
General and administrative expense
$
$
$
$
December 31, 2017
$
$
331,174
1,318,280
2,456,276
4,105,730
2017
79,987 $
9,598
4,479
4,037
189
98,290 $
2017
5,291 $
3,014
2,740
11,045 $
2016
81,250
7,312
3,630
4,037
159
96,388
2016
4,539
3,116
2,677
10,332
1 Includes unit-based awards, including (gain) loss adjustments as a result of the change in the fair market value of the Units of $(33) (2016 - $729) for the year ended December 31, 2017.
2 See Note 18.
CT REIT 2017 ANNUAL REPORT 71
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
14. NET INTEREST AND OTHER FINANCING CHARGES
Net interest and other financing charges are comprised of the following:
For the year ended December 31,
Interest on Class C LP Units 1
Interest and financing costs - debentures
Interest and financing costs - Bank Credit Facility
Interest on mortgages payable
Interest costs - Bridge Facility 1
Less: capitalized interest
Interest and other financing charges less capitalized interest
Less: interest income
Net interest and other financing charges
1 Paid or payable to CTC.
15. 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
Other
Changes in working capital and other
16. SEGMENTED INFORMATION
$
$
$
$
$
$
2017
68,826 $
25,207
1,972
1,777
126
97,908 $
(1,365)
96,543 $
(165)
96,378 $
2016
72,405
17,641
1,242
1,591
—
92,879
(6,752)
86,127
(212)
85,915
2017
2016
441 $
(112)
5,688
(131)
5,886 $
104
28
(957)
34
(791)
CT REIT has one reportable segment, which comprises the ownership and operation of primarily retail investment properties located in Canada.
17. 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, 2017, CT REIT had obligations of $39,227 (December 31, 2016 – $30,470) in future payments for the completion of developments,
which are expected to be incurred in 2018. Included in the commitments is $31,372 due to CTC. CT REIT has an obligation of $66,500 (December 31,
2016 - $nil) to a third party for the acquisition of two investment properties which is expected to be settled in Q1 2018.
72 CT REIT 2017 ANNUAL REPORT
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Operating ground lease commitments
CT REIT has entered into various ground leases with third parties, which are accounted for as operating leases. The remaining non-cancellable initial terms
of the ground leases are between one and 38 years, with an average remaining initial term of 16 years. The majority of the ground lease agreements are
renewable at the end of the current lease term. Assuming all extensions are exercised, the ground leases have remaining terms between 25 and 73 years
with an average remaining lease term of 40 years.
The ground rent expense charged to the statement of income and comprehensive income during the year is disclosed in Note 12.
The future aggregate minimum ground lease payments under the non-cancellable operating leases terms are as follows:
Less than one year
Between one and five years
More than five years
Total
18. RELATED-PARTY TRANSACTIONS
December 31, 2017
December 31, 2016
$
$
3,704 $
12,864
30,625
47,193 $
3,704
13,726
33,470
50,900
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, 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. The
Services Agreement is automatically renewable for one year terms, unless otherwise terminated in accordance with its terms. The Services Agreement
was automatically renewed for 2018 and CTC will continue to provide such Services on a cost recovery basis.
Property Management Agreement
Under the Property Management Agreement, CTC provides the REIT with certain customary property management services (the ‘‘Property Management
Services’’). CTC provides 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. The Property Management Agreement
is automatically renewable for one year terms, unless earlier terminated in accordance with its terms. The Property Management Agreement was automatically
renewed for 2018 and CTC will continue to provide such Services on a cost recovery basis.
CT REIT 2017 ANNUAL REPORT 73
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(b) Transactions and balances with related parties
Transactions with CTC are comprised of the following, excluding acquisition, intensification and development activities with CTC which are contained in
Note 4:
For the year ended December 31,
Rental revenue
Property Management and Services Agreement expense
Distributions on Units
Distributions on Class B LP Units 1
Interest expense on Class C LP Units
Interest expense on the Bridge Facility
1 Includes distributions deferred at the election of the holders of the Class B LP Units.
The net balance due to CTC is comprised of the following:
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 1
Loans receivable in lieu of distributions on Class B LP Units
Bridge Facility
Net balance due to CTC
1 Includes distributions deferred at the election of the holders of the Class B LP Units.
(c) Compensation of executives and independent trustees
Note
12
14
14
$
$
$
$
$
$
$
2017
408,487 $
5,666 $
41,935 $
84,873 $
68,826 $
126 $
2016
382,278
5,510
40,705
75,030
72,405
—
December 31, 2017
December 31, 2016
(1,758) $
(404)
1,451,550
1,521,968
68,065
(62,380)
6,556
26,551
(15,460)
126,000
71,613
(65,807)
5,199
18,581
(8,311)
—
$
1,599,124 $
1,542,839
The remuneration of the chief executive officer, chief financial officer, senior vice president 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 awards 1
Total
$
$
2017
2,588 $
1,067
3,655 $
2016
2,421
1,609
4,030
1 Unit-based awards, as described in Note 10, includes (gain) loss adjustments as a result of the change in the fair market value of the Units
of $(33) (2016 - $729).
The remuneration of the chief executive officer, chief financial officer and senior vice president consist 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 are not employees or officers of CT REIT or any of its affiliates, consists of an annual retainer and meeting fees.
74 CT REIT 2017 ANNUAL REPORT
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
19. 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 and mortgages payable at December 31, 2017, is $1,564,939, $866,117 and $44,565 respectively. The
fair value measurement of the Class C LP Units and mortgages payable is based on Level 2 inputs. The significant inputs used to determine the fair value
of the Class C LP Units and mortgages payable are interest rates, term to maturity, and credit spreads. The debentures are actively traded on the secondary
market and the fair value is determined using Level 1 inputs. 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, Bank Credit Facility, Bridge Facility
and distributions payable, which are classified as other liabilities and carried at amortized cost, except for liabilities for unit based compensation plans which
are included in other liabilities and are carried at fair value, equivalent to the trading price of Units, which is a Level 1 input. The carrying amounts of the
liabilities for the unit based compensation plans 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 credit facilities,
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 5).
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 2017 ANNUAL REPORT 75
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 Credit Facility totaling $300,000, 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 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 Financial Risk Management Board 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, debentures and certain mortgages payable are at fixed interest rates and CT REIT currently has $179,941 (2016 -
$109,824) in short-term borrowings outstanding under its credit facilities.
20. 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 its Declaration of Trust and the Trust Indenture dated June 9, 2015, as supplemented by supplemental indentures,
pursuant to which the debentures were issued, and the Bank Credit Facility.
The following schedule details the capitalization of CT REIT:
As at
Liabilities
Class C LP Units
Mortgages payable
Debentures
Credit facilities
Equity
Unitholders' equity
Non-controlling interests
Total
December 31, 2017
December 31, 2016
$
1,451,550 $
1,521,968
44,010
869,471
179,941
1,168,777
1,692,664
$
5,406,413 $
55,995
695,336
109,824
1,094,207
1,496,377
4,973,707
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.
76 CT REIT 2017 ANNUAL REPORT
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Under the Declaration of Trust, the trust indenture as supplemented (the "Trust Indenture"), and the credit facilities, 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
As at December 31, 2017, 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:
Payments Due by Period
Total
2018
2019
2020
2021
2022
2023 and
thereafter
— $
251,550 $
— $
— $ 1,200,000
Class C LP Units 1
Debentures
Payments on Class C LP Units 1
Interest on debentures
Credit facilities 2
Mortgages payable
Other liabilities
Distributions payable 3
Payable on Class C LP Units, net of loans
receivable
Interest on Bank Credit Facility
Interest on mortgages payable
Interest on Bridge Facility
$ 1,451,550 $
875,000
852,862
197,076
— $
—
68,219
27,219
179,941
126,000
—
68,219
27,219
—
44,048
28,558
12,967
5,685
5,329
5,303
3,276
422
43,626
25,148
12,967
5,685
1,122
2,762
3,276
3,410
—
—
1,122
2,541
—
—
150,000
150,000
575,000
62,258
27,219
58,000
25,600
—
—
—
—
—
—
—
—
—
—
1,122
1,122
—
—
—
—
58,000
538,166
21,842
53,941
—
—
—
—
841
—
—
67,977
—
—
—
—
—
—
—
—
TOTAL
$ 3,661,595 $
272,820 $
146,137 $
342,149 $
234,722 $
284,624 $ 2,381,143
1 Assume redemption on Initial Fixed Rate Period for each series.
2 The Bank Credit Facility matures in September 2022. However, the borrowings drawn against the Bank Credit Facility as at December 31, 2017 of $53,941 is classified as a current liability as management
expects to repay this amount within the next twelve months.
3 On Units and Class B LP Units.
CT REIT 2017 ANNUAL REPORT 77
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
21. COMPARATIVE FIGURES
Certain of the prior period figures have been aligned to management’s current view of CT REIT's operations.
22. SUBSEQUENT EVENTS
On February 7, 2018, CT REIT issued $200,000 aggregate principal amount of senior unsecured debentures. The debentures have a coupon rate of
3.865%, were priced at a yield to maturity of 3.866%, and have a maturity date of December 7, 2027. The proceeds, net of issuance costs of $1,330, were
used to pay down certain amounts outstanding under the credit facilities and the balance of the proceeds were retained for general business purposes.
78 CT REIT 2017 ANNUAL REPORT
GLOSSARY OF TERMS
Glossary of Terms
“AFFO” is a non-GAAP financial measure and has the meaning given to that term in Real Property Association of Canada’s white paper titled “White Paper
on Funds From Operations & Adjusted Funds from Operations for IFRS” (the “White Paper on FFO & AFFO”) issued in February 2017. It is calculated as
FFO subject to certain adjustments to remove the impact of recognizing property rental revenues or expenses on a straight-line basis, and the deduction
of 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.
“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 LP Units into Units of the REIT; and (ii) in respect of any other securities that are convertible or exchangeable
into Units of the REIT, only dilution resulting from the conversion or exercise of such other convertible or exchangeable securities held by such person or
group of persons).
“Class A LP Units” means, collectively, the Class A limited partnership 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.
“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 banners stores, including Sport Chek, Sports Experts and
Atmosphere, names or trademarks.
“CTREL” means Canadian Tire Real Estate Limited, a wholly-owned Subsidiary of CTC.
“Development Agreement” means the development agreement among the REIT, the Partnership, CTREL and CTC entered into on October 23, 2013, as
further described under “Arrangements with CTC - Commercial Agreements with CTC - Development Agreement” of the AIF.
“EBITFV” is a non-GAAP measure of operating cash flow. It is calculated as net income in accordance with GAAP, adjusted by removing the impact of; (i)
non-cash adjustments including fair value adjustments on investment properties; (ii) interest expense and other financing costs; (iii) income tax expense;
(iv) gains or losses the sale of investment properties; and (v) non-recurring items that may occur under IFRS.
“FFO” is a non-GAAP financial measure and has the meaning given to it in the White Paper on FFO & AFFO. It 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.
CT REIT 2017 ANNUAL REPORT 79
GLOSSARY OF TERMS
“Gross Book Value” means at any time the total assets of the REIT as shown in its then most recent consolidated balance sheet.
“IFRS” means International Financial Reporting Standards as issued by the International Accounting Standards Board and as adopted by the Chartered
Professional Accountants of Canada in Part I of The CPA Canada Handbook - Accounting, as amended from time to time.
“Initial Public Offering” means the distribution to the public of Units pursuant to the REIT’s final prospectus dated October 10, 2013, which closed on
October 23, 2013.
“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.
“Investment Properties” means the portfolio of properties owned by CT REIT.
“NOI” means property revenue less property expense and is further adjusted for straight-line rent and land lease adjustments.
“Property Management Agreement” means the property management agreement among the Partnership, CTC and CTREL entered into on October 23,
2013, as further described under “Arrangements with CTC - Commercial Agreements with CTC - Property Management Agreement” of the AIF.
“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 on October 23, 2013, as described
under “Arrangements with CTC - Commercial Agreements with CTC” of the AIF.
“Services Agreement” means the services agreement among the REIT, the Partnership and CTC entered into on October 23, 2013 pursuant to which CTC
or certain of its Subsidiaries provide the Services, as further described under “Arrangements with CTC - Commercial Agreements with CTC - Services
Agreement” of the AIF.
“SIFT Rules” means the specified investment flow-through rules applicable to SIFT trusts and SIFT partnerships in the Tax Act.
“Special Voting Units” means special voting units of the REIT, and “Special Voting Unit” means any one of them.
“Unitholders” means holders of Units, and “Unitholder” means any one of them.
“Units” means trust units in the capital of the REIT, other than Special Voting Units, and “Unit” means any one of them.
“Western Canada” means the provinces of British Columbia, Alberta, Saskatchewan and Manitoba, and the Northwest Territories and Yukon Territory.
80 CT REIT 2017 ANNUAL REPORT
CT Real Estate Investment Trust
2180 Yonge Street, P.O. Box 770, Station K
Toronto, Ontario, Canada M4P 2V8
Visit our website at
www.ctreit.com